EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: The Company provides global logistics services, including air and ocean freight forwarding/consolidation, customs brokerage, and distribution management. It operates as a non-asset-based carrier, meaning it does not own aircraft or steamships. The Company operates in 56 countries with a network of full-service offices, international service centers, and independent agents.

Key Financial Metrics (Year Ended Dec 31, 2003)

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% to $2.62 billion, driven by a 10% increase in net revenues.
  • Airfreight: Net revenues decreased 2% due to declining yields, despite comparable tonnage to 2002. The Company absorbed carrier rate increases to maintain customer relationships.
  • Ocean Freight: Net revenues increased 16% while volumes rose 23%. Yields declined 252 basis points as the Company chose not to pass on full carrier rate increases to gain market share.
  • Customs Brokerage: Net revenues increased 20% due to market consolidation and demand for sophisticated computerized capabilities.
• Profitability: Net earnings increased 8% to $121.9 million. Operating income increased 9% to $186.8 million.
  • Expenses: Salaries and related costs increased 11% (53% of net revenues), consistent with historical compensation models tied to operating profit. Other operating expenses remained constant as a percentage of net revenues (22%).
• Taxation: The effective tax rate was 36.4%. This included a one-time $9.5 million tax expense in Q4 2003 to provide full U.S. taxation on foreign earnings accumulated through 1992. This was partially offset by the elimination of $8 million in previously accrued state taxes deemed not owed.
• Liquidity: Working capital increased significantly to $370 million. Cash and short-term investments rose to $296 million. The Company had no long-term debt.

Guidance, Outlook, Risks, and Unusual Items

• Guidance: The Company does not issue financial forecasts or projections. Management expects to spend approximately $33 million on capital expenditures in 2004, financed with cash.
• Outlook: Management focuses on organic growth and maintaining a global culture of superior service. The Company anticipates continued industry consolidation.
• Risks:
  • International Trade: Business is sensitive to currency fluctuations, government policies, terrorism, and natural disasters.
  • Third-Party Vendors: As a non-asset-based carrier, the Company relies on airlines and steamship lines; changes in carrier policies or space availability impact operations.
  • Seasonality: Q1 is traditionally the weakest quarter; Q3 and Q4 are the strongest.
  • Foreign Operations: Majority of revenue comes from outside the U.S., exposing the Company to foreign currency and political risks.
• Unusual Items:
  • Tax Provision: $9.5 million additional tax expense recorded in Q4 2003 regarding unremitted foreign earnings.
  • Tax Elimination: $8 million of previously accrued state taxes eliminated in Q4 2003.
  • Inter-company Technology: Q4 2003 results included a $0.03 per share increase in operating income due to the elimination of accruals for inter-company differences following technology enhancements.

Investor Verification Checklist

• Yield Trends: Verify the sustainability of air and ocean freight yields, which declined in 2003 despite volume growth in ocean freight.
• Tax Position: Confirm the impact of the $9.5 million tax provision on future repatriation of foreign earnings and the validity of the $8 million tax elimination.
• Accounts Receivable: Review the increase in accounts receivable ($66 million increase in cash flow impact) attributed to slower collections on large technology accounts.
• Capital Expenditures: Monitor the $33 million planned capex for 2004 against cash flow generation.
• Contingent Liabilities: Note the $51.9 million in standby letters of credit and guarantees related to foreign subsidiaries and carrier obligations.