Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
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
All figures in thousands, except per share data.
| Metric | 3 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2001 |
|---|---|---|
| Total Revenues | $427,088 | $1,223,048 |
| Net Revenues (Revenues less transportation expenses) | $157,819 | $451,272 |
| Operating Income | $42,134 | $105,347 |
| Net Earnings | $27,369 | $70,126 |
| Diluted EPS | $0.50 | $1.27 |
| Cash and Cash Equivalents (Sep 30, 2001) | $256,183 | |
| Short-term Debt (Sep 30, 2001) | $1,848 | |
| Working Capital (Sep 30, 2001) | $275,553 | |
| Operating Cash Flow (9 Months) | $137,722 |
Material Changes vs. Prior Period
- Revenue Trends: Total revenues decreased slightly for the nine months ended September 30, 2001 ($1.223B) compared to 2000 ($1.229B). However, Net Revenues increased significantly by 14% year-over-year for the nine-month period ($451.3M vs. $394.9M).
- Profitability: Net earnings increased 23% for the nine months ended September 30, 2001 ($70.1M) compared to the same period in 2000 ($57.1M). Operating income rose 19% to $105.3M.
- Segment Performance:
- Airfreight: Net revenues increased 20% year-over-year (9 months) despite volume decreases, driven by market "disconnects" between customer sell rates and carrier buy rates following the September 11 terrorist attacks, which reduced belly space capacity and allowed carriers to raise rates.
- Ocean Freight: Net revenues increased 20% year-over-year (9 months) due to aggressive marketing of competitive rates on eastbound lanes from the Far East.
- Customs Brokerage: Net revenues increased 5% year-over-year (9 months) due to market consolidation and the growing importance of distribution services.
- Expenses: Salaries and related costs increased 14% year-over-year (9 months) due to hiring and compensation levels, though they remained consistent as a percentage of net revenues. Other operating expenses increased 11% year-over-year (9 months) due to rent, communications, and training costs.
- Liquidity: Cash and cash equivalents increased from $169.0M at December 31, 2000, to $256.2M at September 30, 2001. Short-term debt decreased from $4.7M to $1.8M.
Guidance, Outlook, Risks, and Unusual Items
- Impact of September 11 Attacks: The airfreight business was most impacted by the attacks. While flight operations returned to normal, reduced belly space capacity led to higher carrier rates, which the Company passed on to customers, expanding margins in key markets.
- Capital Expenditures: The Company expects to spend approximately $35-40 million on property and equipment for the full year 2001, primarily for technology, office furniture, and building projects in Egypt, Ireland, and Malaysia. These are expected to be financed with cash.
- Stock Repurchases: In September 2001, the Board authorized the repurchase of 1,000,000 shares. As of September 30, 2001, 208,800 shares had been repurchased. The repurchase was completed on October 11, 2001, at an average price of $45.12.
- Foreign Exchange Risk: The Company is exposed to currency fluctuations. A hypothetical 10% weakening of the U.S. Dollar would have increased operating income by approximately $7.2 million for the nine months ended September 30, 2001. Conversely, a 10% strengthening would have reduced it by $5.9 million. The Company does not use derivative instruments to hedge this risk.
- Accounting Changes: The Company adopted SFAS No. 133 (Derivatives) in January 2001 with no impact. It plans to adopt SFAS No. 141 (Business Combinations) and SFAS No. 142 (Goodwill) in 2002, which will stop the amortization of goodwill but require annual impairment tests. No material effect is expected.
- Legal Proceedings: No significant legal proceedings are currently pending that would materially affect financial position.
Investor Verification Checklist
- Sustainability of Airfreight Margins: Verify if the expanded margins in airfreight due to post-9/11 capacity constraints are sustainable as the market stabilizes.
- Working Capital Management: Confirm the continued effectiveness of initiatives to reduce accounts receivable, which drove the $26 million increase in operating cash flow.
- Capital Expenditure Execution: Monitor the $35-40 million planned capital spend for 2001, specifically the building projects in Egypt, Ireland, and Malaysia.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations on earnings, given the Company's policy of not using derivatives to hedge intercompany transactions.
- Stock Repurchase Completion: Note that the authorized 1,000,000 share repurchase program was completed in October 2001, shortly after the reporting period.