EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 21.7% for the three months and 22.9% for the six months ended June 30, 2006, compared to the same periods in 2005. Net revenues grew 25.1% (QTD) and 26.7% (YTD).
• Profitability: Operating income rose 51.2% (QTD) and 59.6% (YTD). Net earnings increased 53.5% (QTD) and 60.4% (YTD).
• Volume Drivers: Airfreight tonnage increased 22% (QTD) and 24% (YTD). Ocean freight volumes (FEUs) increased 17% (QTD) and 18% (YTD).
• Expense Management: Salaries and related costs increased 18% (QTD) and 20% (YTD) due to hiring and higher compensation levels, but decreased as a percentage of net revenue (55.0% vs. 58.1% QTD) due to operational leverage and reduced stock compensation expense ratios.
• Capital Expenditures: Significant increase in investing cash outflows, with $100.3 million spent in Q2 2006 compared to $14.2 million in Q2 2005, driven largely by a $67 million real estate acquisition in Miami, Florida.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Total capital expenditures for 2006 are estimated at $165 million, including ongoing technology/infrastructure costs and real estate acquisitions under IRC 965. The Company expects to fund these with cash.
• Dividends: A semi-annual cash dividend of $0.11 per share was declared and paid in June 2006. A 2-for-1 stock split was effected in June 2006.
• Stock Repurchases: The Company continues a policy of repurchasing shares to offset dilution from stock option exercises. Approximately 1.77 million shares were repurchased in Q2 2006.
• Accounting Changes: The Company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, restating prior periods to include stock compensation expense. This impacted reported salaries and net earnings for 2005 comparisons.
• 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 $14 million for the six-month period.
  • Seasonality: Historically, Q1 is the weakest quarter, while Q3 and Q4 are strongest. Cash flow fluctuates with seasonality.
  • Regulatory/Security: Dependence on relationships with carriers and government agencies; changes in security regulations or trade policies could impact operations.

Investor Verification Checklist

• Real Estate Acquisition: Verify the strategic rationale and expected ROI for the $67 million Miami facility acquisition.
• Stock Compensation Impact: Review the specific impact of SFAS 123R adoption on future earnings guidance and the remaining unrecognized compensation cost ($124.5 million as of June 30, 2006).
• Capital Allocation: Monitor the balance between the aggressive $165 million CapEx plan and the Company's dividend and share repurchase programs.
• Foreign Exchange Exposure: Assess the Company's hedging strategy (currently minimal) given the significant exposure to non-U.S. currencies.
• Debt Position: Confirm the Company maintains its zero long-term debt status while funding significant growth initiatives.