Business Context and Reporting Period
Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: The Company provides global logistics management, including international air and ocean freight forwarding, consolidation, and customs brokerage. It does not own aircraft or steamships. Operations are subject to seasonal trends, with the third quarter traditionally being the strongest.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1998 | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|---|
| Total Revenues | $241,970 | $465,319 | $421,544 |
| Net Revenues (Revenues less consolidation expenses) | $82,374 | $158,138 | $125,887 |
| Operating Income | $16,319 | $29,018 | $21,397 |
| Net Earnings | $11,080 | $19,114 | $13,772 |
| Diluted EPS | $0.42 | $0.72 | $0.53 |
| Operating Cash Flow (Six Months) | N/A | $31,238 | $20,100 |
| Cash & Equivalents (End of Period) | $39,651 | $39,651 | $44,586 |
| Working Capital | $80,717 | $80,717 | $87,252 |
| Short-Term Debt | $1,090 | $1,090 | $2,145 |
Note: All figures in thousands except per share data. Net revenues are considered a better measure of service importance by management as they exclude carrier charges included in total revenues for consolidation services.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.3% for the quarter and 10.4% for the six-month period compared to 1997. Net revenues grew 20.8% (quarter) and 25.7% (six months).
- Segment Performance:
- Airfreight: Net revenues increased 7% (quarter) and 14% (six months) due to increased tonnage.
- Ocean Freight: Net revenues surged 27% (quarter) and 25% (six months), driven by aggressive marketing of eastbound freight from the Far East.
- Customs Brokerage: Net revenues rose 33% (quarter) and 39% (six months), aided by entry into truck/rail border brokerage and market consolidation.
- Profitability: Net earnings increased 35.6% for the quarter and 38.8% for the six-month period. Operating margins on net revenues improved slightly to 20% for the quarter and 18% for the six months.
- Expenses: Salaries and related costs increased due to hiring and compensation levels but remained stable as a percentage of net revenues (55-56%). Other operating expenses decreased as a percentage of net revenues due to economies of scale.
- Unusual Items: Other income, net, included a $928,000 gain from the sale of a real estate asset.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to spend approximately $40 million on property and equipment in 1998, financed by cash or borrowings. The Company is actively seeking facilities near airports.
- Growth Strategy: Focus remains on organic growth supplemented by strategic acquisitions. Three new offices were opened in Q2 1998 (McAllen, TX; Florence, Italy; Prague, Czech Republic).
- Liquidity: The Company maintains $40.1 million in unsecured bank lines of credit. At June 30, 1998, only $0.1 million was drawn. Management believes current cash and financing are sufficient for foreseeable needs.
- Risks:
- Currency: Exposure to international currency markets and foreign exchange controls, though gains/losses were immaterial in the period.
- Competition: Intense competition based on price and service quality; industry trend toward consolidation.
- Seasonality: Results are subject to seasonal trends and external factors like consumer demand and political conditions.
- Accounting Changes: Adopted SFAS No. 130 for comprehensive income reporting. Evaluating SOP 98-1 regarding internal use software costs (effective Jan 1, 1999), with no significant impact expected.
Investor Verification Checklist
- Verify the sustainability of the 25-39% growth rates in Ocean Freight and Customs Brokerage segments.
- Confirm the impact of the $928,000 real estate gain on "Other income" to assess core operating performance.
- Monitor the execution of the planned $40 million capital expenditure program and its effect on cash flow.
- Review the "same store" growth metrics (19% net revenue growth for Q2 1998) to validate organic expansion quality.
- Assess the Company's ability to maintain operating expense ratios as a percentage of net revenue amidst continued expansion.