EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: The Company is a global logistics provider offering air and ocean freight forwarding, customs brokerage, and distribution management services. It operates as a non-asset-based carrier, meaning it does not own aircraft or vessels but consolidates shipments to negotiate favorable rates from direct carriers. The Company operates in 60 countries with a network of full-service offices, international service centers, and agents.

Key Financial Metrics (Year Ended Dec 31, 2006)

Note: All share and per-share data have been adjusted for a 2-for-1 stock split effected in June 2006. Prior year amounts have been restated to reflect the adoption of SFAS 123R (Share-Based Payment).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.6% and Net Revenues increased 21.1% compared to 2005. This was driven by volume increases in airfreight (18% tonnage increase) and ocean freight (20% FEU increase).
• Profitability: Operating income rose 38.4% to $375.1 million. The operating margin on net revenues improved from 25.6% in 2005 to 29.2% in 2006, attributed to leveraging increased volumes and improved productivity.
• Segment Performance:
  • Airfreight: Net revenues increased 20% to $470.6 million (37% of total net revenues).
  • Ocean Freight: Net revenues increased 24% to $322.6 million (25% of total net revenues), with yields increasing 2% to 21%.
  • Customs Brokerage: Net revenues increased 20% to $489.7 million (38% of total net revenues).
• Tax Rate: The consolidated effective income tax rate increased to 40.6% in 2006 from 31.2% in 2005. The 2005 rate was artificially lowered by a one-time $22 million tax benefit under IRC 965 related to repatriated foreign earnings.
• Capital Expenditures: Increased significantly to $141.2 million (from $90.8 million in 2005), primarily due to $67 million in real estate acquisitions in Miami and $22 million in development projects in Seattle and Houston.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Management expects total capital expenditures in 2007 to be approximately $106 million, including normal expenditures of $43 million plus additional real estate acquisitions. These are expected to be financed with cash.
• Seasonality: The business is seasonal, with the first quarter traditionally being the weakest and the third and fourth quarters the strongest. Revenue timing is heavily influenced by consumer demand and just-in-time production schedules.
• Key Risks:
  • International Trade: Results are sensitive to global economic conditions, currency fluctuations, and government policies (tariffs, trade restrictions).
  • Third-Party Vendors: As a non-asset-based carrier, the Company relies on airlines and steamship lines. Changes in carrier pricing or capacity can impact margins.
  • Regulatory Environment: Increasing cargo security regulations (post-9/11) may require further investment in technology and screening procedures, potentially increasing costs.
  • Foreign Operations: The majority of revenues and operating income are generated outside the U.S., exposing the Company to currency risks and political instability in various jurisdictions.
• Management Commentary: Management emphasizes organic growth supplemented by strategic acquisitions. They attribute success to a unique corporate culture, incentive-based compensation, and sophisticated technology systems that provide real-time visibility to customers.

Investor Verification Checklist

• Debt-Free Status: Verify the Company's continued ability to fund significant capital expenditures ($106M projected for 2007) and stock repurchases without long-term debt.
• Stock-Based Compensation: Review the impact of SFAS 123R adoption on reported earnings and the $103 million in unrecognized compensation cost related to unvested options.
• Geographic Concentration: Assess exposure to the People's Republic of China and Hong Kong, which represented 21% and 15% of total revenues, respectively, in 2006.
• Working Capital Management: Monitor accounts receivable and payable cycles, as the Company acts as a customs broker and makes cash advances for duties, impacting cash flow timing.
• Real Estate Investments: Evaluate the return on the significant real estate acquisitions made in 2006 (Miami, Seattle, Houston) and future development commitments.