EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: The Company provides global logistics services, including international freight forwarding (air and ocean), customs brokerage, and value-added distribution. It does not own aircraft or steamships. The Company operates through geographic segments including the United States, Far East, Europe, and others.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 27% for the three months and 15% for the nine months ended September 30, 2002, compared to the same periods in 2001. Net revenues increased 13% (quarterly) and 7% (year-to-date).
• Profitability: Net earnings rose 12% for the quarter and 9% for the nine-month period. Operating income increased 12% (quarterly) and 10% (year-to-date).
• Segment Performance:
  • Airfreight: Net revenues increased 7% (quarterly) and 1% (year-to-date). Management noted pressure on yields due to supply/demand imbalances and carrier rate increases.
  • Ocean Freight: Net revenues increased 16% for both periods, driven by aggressive marketing on eastbound lanes from the Far East.
  • Customs Brokerage: Net revenues increased 17% (quarterly) and 7% (year-to-date).
• Cash Flow: Operating cash flow decreased $48 million year-to-date compared to 2001, primarily due to a $65 million increase in accounts receivable offset by a $50 million increase in accounts payable.
• Accounting Changes: The Company adopted EITF D-103, requiring certain reimbursements to be reported on a gross basis rather than net. This reclassified 2001 amounts but had no impact on net revenues, operating income, or net earnings.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company expects to spend approximately $120 million on property and equipment for the full year 2002, funded by cash. This includes a building project in Egypt.
• Liquidity: Management believes current cash ($287.4 million), bank lines ($50 million U.S. facility, $10.2 million international), and operating cash flows are sufficient for foreseeable needs. No long-term debt exists.
• Seasonality: The business is seasonal, with Q1 traditionally weakest and Q3/Q4 strongest. Cash flow fluctuates due to the timing of customer billings versus collections.
• Risk Factors:
  • Currency Risk: Operations involve multiple currencies. A 10% weakening of the U.S. Dollar would have increased operating income by ~$7.4 million for the nine months ended Sep 30, 2002; a 10% strengthening would have reduced it by ~$6.1 million.
  • Market Conditions: Results are influenced by global economic conditions, trade restrictions, and carrier capacity. Airfreight yields remain under pressure.
  • Repatriation: Approximately $142.5 million in cash is held by non-U.S. subsidiaries. Repatriation of certain undistributed earnings (approx. $41.9 million) could incur additional U.S. taxes of approx. $10.1 million, though the Company intends to reinvest these earnings.
• Unusual Items: Other income decreased due to lower interest rates, partially offset by a $1.5 million gain on the sale of the former Dublin, Ireland facility.

Investor Verification Checklist

• Accounts Receivable: Verify the $65 million increase in accounts receivable year-to-date and its impact on working capital and cash flow.
• Airfreight Yields: Monitor management's commentary on airfreight yield pressures and the ability to pass carrier rate increases to customers.
• Capital Expenditure Plan: Confirm the $120 million full-year capex budget, specifically the Egypt building project, and funding sources.
• Foreign Currency Exposure: Assess the impact of currency fluctuations on operating income given the sensitivity analysis provided.
• Stock Repurchases: Review the timing and volume of stock repurchases versus proceeds from stock option exercises.