EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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. Operations are organized into geographic segments including the United States, Far East, Europe, and others.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20% for the three months and 9% for the six months ended June 30, 2002, compared to 2001. This was driven by a 16% increase in ocean freight net revenues and a 6% increase in customs brokerage net revenues for the quarter.
• Airfreight Yields: Despite marked increases in airfreight tonnage, airfreight net revenues remained flat for the quarter and decreased 2% for the six months. Management attributes this to a decline in yields due to supply/demand imbalances where carrier rate increases outpaced the Company's ability to pass costs to customers.
• Profitability: Operating income increased 12% for the quarter and 9% for the six months. Net earnings rose 10% for the quarter and 7% for the six months.
• Cash Flow: Net cash provided by operating activities decreased significantly ($32M for the quarter, $51M for six months) compared to 2001. This was primarily due to a $43M increase in accounts receivable for the quarter, offset partially by a $37M increase in accounts payable.
• Capital Structure: The Company executed a 2-for-1 stock split in June 2002. Short-term debt was reduced from $1.7M to $0.3M during the period.

Guidance, Outlook, and Risks

• Outlook: Management expects to spend approximately $40 million on property and equipment in 2002, funded by cash. No new offices were opened in Q2 2002. The Company anticipates continued industry consolidation.
• Seasonality: The business is seasonal, with Q1 traditionally the weakest and Q3/Q4 the strongest. Cash flow fluctuates accordingly, often requiring short-term borrowings during peak seasons to cover receivables growth.
• Market Risks:
  • Currency: The Company is exposed to foreign exchange risk. A 10% weakening of the U.S. Dollar would have increased operating income by approximately $4.3M for the six-month period, while a 10% strengthening would have reduced it by $3.5M.
  • Interest Rates: Exposure to variable short-term interest rates is considered immaterial due to low debt levels.
• Accounting Changes: The Company adopted EITF D-103 in Q1 2002, requiring certain reimbursements to be reported on a gross basis rather than net. This increased reported revenues and costs but had no impact on net revenue or earnings.

Investor Verification Checklist

• Accounts Receivable Growth: Verify the sustainability of the $43M increase in receivables and its impact on future cash flow, given the seasonal nature of the business.
• Airfreight Yield Trends: Monitor if the decline in airfreight yields persists or if the Company can successfully pass carrier rate increases to customers.
• Foreign Currency Exposure: Assess the impact of U.S. Dollar fluctuations on operating income, particularly given the significant portion of non-U.S. operations.
• Capital Expenditures: Track the $40M planned CapEx for 2002, specifically the building project in Egypt, to ensure it aligns with cash generation.
• Goodwill and Intangibles: Review the impact of SFAS No. 142 (non-amortization of goodwill) on future earnings, though management stated no material impact in 2002.