EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: The Company provides global logistics services, including international freight forwarding (air and ocean), customs brokerage, and value-added distribution. It operates as a non-asset-based carrier, consolidating shipments to negotiate favorable rates from direct carriers.

Key Financial Metrics

Note: Net Revenue is considered a better measure of performance than Total Revenue as it excludes carrier charges passed through to customers.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 24% year-over-year, driven by higher volumes in airfreight (11% net revenue increase) and ocean freight (19% net revenue increase). Customs brokerage net revenues also rose 19%.
• Profitability: Operating income increased 15% to $37.5 million. Net earnings rose 13% to $25.1 million. The effective income tax rate decreased slightly from 37% to 36%.
• Expense Management: Salaries and related costs increased 16%, consistent with revenue growth, maintaining a constant 55% ratio to net revenues. Other operating expenses increased 17% but remained at 23% of net revenues due to leverage over fixed costs.
• Cash Flow: Operating cash flow improved significantly by $20.3 million, primarily due to a $27.5 million decrease in accounts receivable compared to an increase in the prior year.
• Investing Activities: Net cash used in investing activities increased to $4.3 million (from $1.6 million), largely due to capital expenditures of $4.5 million and the absence of the $3.5 million gain from the sale of the Dublin facility recorded in Q1 2002.

Outlook, Risks, and Management Commentary

• Seasonality: Management notes that Q1 is traditionally the weakest quarter, with Q3 and Q4 being the strongest. Future results may be impacted by consumer demand and just-in-time production schedules.
• Growth Strategy: The Company focuses on organic growth supplemented by strategic acquisitions. One new office opened in Austin, Texas, in Q1 2003. "Same store" net revenue growth was 16% for Q1 2003.
• Liquidity: The Company maintains strong liquidity with $272.3 million in cash and short-term investments. It has no long-term debt and expects to fund 2003 capital expenditures (approx. $35 million) with cash.
• Market Risks:
  • Foreign Exchange: A 10% weakening of the U.S. Dollar would increase operating income by approx. $2.6 million; a 10% strengthening would decrease it by $2.1 million. The Company does not use derivatives but accelerates currency settlements.
  • Interest Rates: Exposure is immaterial due to low short-term debt levels.
• Accounting Policies: The Company adopted SFAS No. 143, 146, and FIN 45 in Q1 2003 with no material impact on financial condition. Stock-based compensation is accounted for under APB Opinion No. 25; pro forma EPS under SFAS No. 123 would be $0.19 (diluted).

Investor Verification Checklist

• Accounts Receivable Turnover: Verify the sustainability of the $27.5 million decrease in accounts receivable, which significantly boosted operating cash flow.
• Net Revenue Margins: Monitor the stability of the 22% operating margin on net revenues amidst rising salary costs and competitive pricing pressures.
• Foreign Currency Exposure: Assess the impact of currency fluctuations on the $136.1 million held in non-U.S. subsidiaries.
• Capital Expenditures: Confirm that the projected $35 million in 2003 capital expenditures aligns with organic growth targets and technology investments.
• Seasonal Trends: Evaluate Q2 and Q3 performance to confirm the historical trend of stronger performance in the second half of the year.