EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: The Company is a global logistics management provider specializing in international freight forwarding (air and ocean) and customs brokerage. It operates as a non-asset-based carrier, purchasing transportation services from direct carriers and reselling them to customers. Operations span 58 countries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 17.5% for the quarter and 20.9% for the nine-month period compared to 2005. Net revenues grew 20.4% (quarter) and 24.3% (nine months).
• Profitability: Operating income rose 30.8% for the quarter and 47.6% for the nine-month period. Net earnings increased 31.8% (quarter) and 48.5% (nine months).
• Segment Performance:
  • Airfreight: Net revenues increased 21% (quarter) and 24% (nine months), driven by tonnage increases of 17% and 21% respectively.
  • Ocean Freight: Net revenues increased 18% (quarter) and 29% (nine months). Volume (FEUs) grew 23% (quarter) and 19% (nine months).
  • Customs Brokerage: Net revenues increased 21% (quarter) and 22% (nine months).
• Expense Management: Salaries and related costs increased 18% (quarter) and 19% (nine months) due to hiring and stock-based compensation, but declined as a percentage of net revenue (54.2% vs 55.1% for the quarter) due to operational leverage.
• Accounting Changes: The Company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, restating prior periods to include stock compensation expense. This increased reported operating expenses and reduced net earnings for the comparable 2005 periods.

Guidance, Outlook, and Risks

• Capital Expenditures: Total capital expenditures for 2006 are expected to exceed $140 million, including approximately $27 million for ongoing operations and significant real estate acquisitions (e.g., $67 million spent in Q2 for Miami facilities).
• Liquidity: The Company maintains a strong cash position with approximately $500 million in cash and short-term investments. It has no long-term debt and utilizes unsecured bank lines of credit ($50 million U.S., $15 million international, $13 million U.K.) which were undrawn at period end.
• Stock Repurchases: The Company continues a policy of repurchasing shares to offset dilution from stock option exercises. In Q3 2006, 1,091,051 shares were repurchased.
• Risk Factors:
  • Currency Risk: Operations in 58 countries expose the Company to foreign exchange fluctuations. A 10% weakening of the U.S. dollar would have increased operating income by approximately $21 million for the nine-month period.
  • Seasonality: The business is seasonal, with Q1 typically weakest and Q3/Q4 strongest.
  • Regulatory/Security: Changes in customs regulations, tariffs, and security requirements (e.g., post-9/11 measures) can impact operations.
• Unusual Items: The third quarter included a one-time credit of $5.0 million to minority interest due to increased ownership in joint ventures. Income tax expense included a $2.3 million true-up of estimated foreign tax credits.

Investor Verification Checklist

• Stock-Based Compensation Impact: Verify the specific impact of SFAS 123R adoption on the restated 2005 figures to ensure accurate year-over-year comparisons of operating margins.
• Capital Expenditure Utilization: Monitor the deployment of the projected $140 million in 2006 capital expenditures, particularly the real estate acquisitions, to ensure they generate expected returns.
• Foreign Exchange Exposure: Assess the Company's hedging strategy (or lack thereof) given the significant exposure to currency fluctuations in 58 countries.
• Seasonal Cash Flow: Confirm that cash flow management strategies are sufficient to handle the cyclical increase in accounts receivable during peak seasons (Q3/Q4).
• Minority Interest Fluctuations: Review the nature of the $5.0 million one-time credit to minority interest to understand its impact on net earnings attributable to common shareholders.