Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
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 business is organized into geographic operating segments, with a significant presence in the Far East, North America, and Europe.
Key Financial Metrics
| Metric (in thousands) | Q3 1999 | Q3 1998 | YTD 9 Months 1999 | YTD 9 Months 1998 |
|---|---|---|---|---|
| Total Revenues | $406,139 | $289,675 | $1,021,832 | $754,994 |
| Net Revenues | $119,719 | $92,890 | $318,362 | $251,028 |
| Operating Income | $28,397 | $22,273 | $63,812 | $51,291 |
| Net Earnings | $17,839 | $14,217 | $40,589 | $33,331 |
| Diluted EPS | $0.33 | $0.27 | $0.75 | $0.63 |
| Cash & Equivalents | $60,606 | $45,937 | $60,606 | $45,937 |
| Short-term Borrowings | $17,203 | $12,245 | $17,203 | $12,245 |
| Working Capital | $137,131 | $94,601 | $137,131 | $94,601 |
Note: Net Revenues represent total revenues less consolidation expenses (carrier charges). Management considers this a better measure of service profitability.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 40% for the quarter and 35% year-to-date compared to 1998. Net revenues grew 29% for the quarter and 27% year-to-date.
- Segment Performance:
- Airfreight: Net revenues increased 27% (Q3) and 30% (YTD) due to increased tonnage.
- Ocean Freight: Net revenues increased 34% (Q3 and YTD) driven by aggressive marketing of eastbound freight from the Far East.
- Customs Brokerage: Net revenues increased 28% (Q3) and 21% (YTD) due to expansion in border brokerage and distribution services.
- Profitability: Operating income increased 27% for the quarter and 24% year-to-date. Net earnings increased 25% for the quarter and 22% year-to-date.
- Cost Structure: Salaries and related costs increased in absolute terms but remained constant as a percentage of net revenues (53-55%), reflecting the Company's profit-sharing compensation model.
- Cash Flow: Net cash provided by operating activities was $13.2 million for the quarter and $31.0 million year-to-date, compared to a use of $4.0 million and provision of $27.3 million in the prior year periods, respectively.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company expects to spend approximately $25 million on property and equipment in 1999, financed by cash or borrowings. Approximately $19 million had been spent through September 30, 1999.
- Liquidity: The Company maintains $50.9 million in unsecured bank lines of credit, with $17.2 million drawn. Management believes current cash and financing are sufficient for foreseeable needs.
- Market Risks:
- Foreign Exchange: A 10% weakening of the U.S. Dollar would have increased operating income by approximately $4.2 million for the nine months ended September 30, 1999. The Company manages risk by accelerating currency settlements rather than using derivatives.
- Interest Rates: A 10% change in interest rates would have an insignificant impact on earnings.
- Operational Risks:
- Year 2000: Remediation is complete; costs incurred were immaterial. The primary risk remains third-party compliance (airlines, customs agencies).
- Euro Conversion: The Company is converting systems to accommodate the Euro by the end of 2001; costs are not expected to be material.
- Legal: An investigation regarding the Shipping Act of 1984 was settled satisfactorily with no material financial impact.
- Seasonality: The third quarter is traditionally the strongest, while the first quarter is the weakest.
Investor Verification Checklist
- Organic Growth Quality: Verify the "same store" growth metrics (26% net revenue growth for Q3 1999) to confirm growth is driven by existing operations rather than acquisitions.
- Working Capital Efficiency: Monitor the increase in accounts receivable ($78.2 million increase YTD) relative to revenue growth to ensure collection periods remain stable.
- Debt Utilization: Track the utilization of the $50.9 million credit line, currently at $17.2 million, against future capital expenditure plans.
- Third-Party Dependencies: Assess the potential impact of Year 2000 failures in air traffic control and customs agencies on logistics operations.
- Compensation Model: Confirm that the profit-sharing compensation structure continues to align employee costs with revenue growth as described in management commentary.