EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: The Company provides global logistics services, including air and ocean freight forwarding, customs brokerage, and distribution management. It operates as a non-asset-based carrier, meaning it does not own aircraft or steamships. The Company maintains a global network of full-service offices and international service centers, supplemented by independent agents.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22% to $2.30 billion, driven by a 12% increase in airfreight net revenues and an 18% increase in ocean freight net revenues. Customs brokerage net revenues rose 9%.
• Profitability: Net earnings increased 16% to $112.5 million. Operating income grew 17% to $171.0 million. The operating margin improved from 24% to 25% of net revenues.
• Cash Flow: Net cash provided by operating activities decreased by $51 million to $116.5 million. This decline was primarily due to a $99 million increase in accounts receivable, partially offset by higher net earnings and increased accounts payable.
• Capital Expenditures: Investing cash outflows increased significantly, with capital expenditures rising to $81.4 million (from $37.4 million in 2001). This included $59 million for real estate acquisitions in New Jersey and the United Kingdom, and $31.3 million paid into escrow for a facility near San Francisco (closed Jan 2003).
• Impairment: A $3.5 million impairment loss on other assets was recorded in the fourth quarter of 2002.

Guidance, Outlook, and Risks

Management Commentary:

• Market Conditions: Airfreight rates remained strong, particularly on Far East to North American lanes, despite carrier rate increases in late 2002 due to West Coast port disruptions. Ocean freight rates fell due to overcapacity, but volumes increased.
• Cost Management: Salaries and related costs decreased as a percentage of net revenues (53% vs 54% in 2001) due to the Company's incentive-based compensation model. Other operating expenses remained constant as a percentage of net revenues.
• Outlook: Management expects to finance 2003 capital expenditures (approx. $35 million) with cash. The Company continues to pursue organic growth supplemented by strategic acquisitions.

Risks and Contingencies:

• Seasonality: Results are subject to seasonal trends, with Q1 traditionally the weakest and Q3/Q4 the strongest.
• Foreign Operations: The majority of revenues and operating income come from outside the U.S., exposing the Company to currency fluctuations, political instability, and regulatory changes.
• Third-Party Dependence: As a non-asset-based carrier, the Company relies on airlines and steamship lines; changes in carrier policies or capacity can impact operations.
• Legal: The Company is involved in routine claims and lawsuits, none of which management believes will have a significant effect on financial position.

Investor Verification Checklist

• Accounts Receivable: Verify the $99 million increase in accounts receivable and its impact on future cash flow collections.
• Real Estate Investments: Confirm the status and integration of the $59 million in real estate acquisitions (New Jersey, UK) and the $31.3 million San Francisco facility escrow.
• Impairment Details: Review the nature of the $3.5 million asset impairment recorded in Q4 2002.
• Stock Repurchase Plan: Note that the discretionary stock repurchase plan (targeting 100 million shares) had no further repurchases in 2002 after the 2 million shares retired in late 2001.
• Foreign Currency Exposure: Assess the impact of a 10% strengthening of the U.S. Dollar, which management estimates would reduce operating income by approximately $10.4 million.