EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company provides global logistics services, including international freight forwarding (air and ocean), customs brokerage, and import services. It operates as a non-asset-based carrier, purchasing transportation services from direct carriers and reselling them to customers. The Company does not own aircraft or steamships.

Key Financial Metrics

Note: Net revenues are considered a better measure of the relative importance of services than total revenues, as total revenues include carrier charges passed through to customers.

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total revenues increased 14.7% for the three months and 17.9% for the nine months ended September 30, 2003, compared to the same periods in 2002.
  • Ocean Freight: Net revenues increased 20% (three months) and 20% (nine months), driven by aggressive marketing of competitive rates and expansion of market share.
  • Customs Brokerage: Net revenues increased 16% (three months) and 17% (nine months), consistent with a focus on profitable business.
  • Airfreight: Net revenues remained constant for the three months and increased 6% for the nine months. Global airfreight tonnages decreased due to a return of traffic to ocean freight that had been diverted to air in the prior year due to labor disruptions.
• Operating Expenses: Salaries and related costs increased 12% (three months) and 15% (nine months) due to hiring to accommodate business growth and increased compensation levels. Other operating expenses increased 15% (three months) and 13% (nine months), partly due to costs associated with closing the Rotterdam distribution center.
• Profitability: Operating income increased 4.3% (three months) and 10.5% (nine months). Net earnings increased 6.3% (three months) and 11.8% (nine months).
• Liquidity: Cash and cash equivalents increased from $211.9 million at December 31, 2002, to $293.0 million at September 30, 2003. Short-term debt decreased from $1.3 million to $0.05 million.

Guidance, Outlook, and Risks

• Outlook: Management expects the trend toward industry consolidation to continue. The Company plans to finance capital expenditures (estimated at $20 million for 2003) with cash. No specific earnings guidance was provided in this filing.
• Seasonality: The business is seasonal, with the first quarter traditionally being the weakest and the third and fourth quarters the strongest. Cash flow fluctuates accordingly.
• Foreign Exchange Risk: The Company is exposed to currency fluctuations. A hypothetical 10% weakening of the U.S. Dollar would have increased operating income by approximately $8.5 million for the nine months ended September 30, 2003. The Company does not use derivative instruments to hedge but accelerates currency settlements.
• Interest Rate Risk: The Company has significant cash balances subject to variable rates. A 10% change in interest rates would have no material impact on earnings.
• Legal Proceedings: The Company is involved in ordinary claims and lawsuits, none of which are expected to have a significant effect on financial position.
• Accounting Policies: The Company adopted SFAS No. 143, 146, FIN 45, and EITF 00-21 with no material impact on financial results. The Company continues to apply APB Opinion No. 25 for stock-based compensation, though pro forma EPS under SFAS No. 123 would be lower.

Investor Verification Checklist

• Net Revenue vs. Total Revenue: Verify the distinction between total revenue (including pass-through carrier costs) and net revenue (the actual yield), as net revenue is the primary driver of profitability.
• Airfreight Volume Trends: Confirm that the decrease in airfreight tonnage is due to the normalization of ocean freight volumes rather than a loss of market share.
• Working Capital Management: Review the timing of accounts receivable and payable, as the Company's cash flow is heavily influenced by the "pass-through" nature of customs duties and the seasonal cycle of billings vs. collections.
• Foreign Currency Exposure: Assess the impact of the U.S. Dollar strength on future operating income, given the sensitivity analysis provided.
• Capital Expenditures: Monitor the $20 million capital expenditure plan for 2003, primarily for technology and facilities, to ensure it aligns with cash flow generation.