8-KRegulation FD

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report, Regulation FD Disclosure (Mar 1, 2005)

Filed March 1, 2005For Securities:EXPD

Summary

This 8-K filing from Expeditors International of Washington, Inc. (EXPD), dated February 28, 2005, provides responses to selected questions regarding its fourth quarter 2004 results and outlook. A key takeaway for investors is the company's positive outlook for growth in China, despite the existence of WTO "safeguards" (formerly quotas) on textiles, indicating that exports are expected to continue growing. The company also addresses concerns about EPS performance, explaining that while Q4 operating income was slightly lower than Q3, net income was higher due to increased non-operating income and a lower tax rate. They acknowledge that consensus EPS estimates were too high at the start of the quarter. The filing also details the company's operational strategies and financial management. Expeditors expects continued office expansion in 2005, particularly in China, North America, and Europe, often through the conversion of satellite offices to full-service locations. They discuss capacity and pricing trends in air and ocean freight, anticipating capacity tightening in airfreight later in the year and increased capacity in ocean freight due to larger vessels. A significant portion of the filing is dedicated to explaining the impact of Sarbanes-Oxley compliance costs and the company's approach to capital expenditures, including a notable plan for significant real estate investments in the U.S. driven by new tax code provisions (Section 965).

Key Highlights

  • 1Expeditors does not expect WTO "safeguards" (formerly quotas) to slow export growth from China, believing that exports will continue to increase over the long run.
  • 2Despite a slightly lower operating income in Q4 2004 compared to Q3, net income was higher due to increased non-operating income and a lower effective tax rate.
  • 3The company plans to open new offices in 2005, with a focus on the People's Republic of China, North America, and Europe, many of which will be conversions of existing satellite offices.
  • 4Airfreight capacity is expected to tighten throughout 2005, while ocean freight will see increased capacity due to larger container vessels, though West Coast port infrastructure may mute efficiency gains.
  • 5Sarbanes-Oxley compliance, particularly Section 404, incurred direct cash outlays estimated between $1.5 and $2.0 million, a cost expected to continue.
  • 6Significant capital expenditures are planned for 2005, potentially exceeding $100 million, driven in part by a new tax provision (Section 965) encouraging U.S. real estate investments for tax benefits.
  • 7The company anticipates a significant one-time tax benefit from repatriated earnings invested in capital improvements under Section 965, contrasting with potential tax expenses for other companies.

Frequently Asked Questions

Expeditors believes that the "safeguards" implemented under the WTO, which replaced "quotas" after December 31, 2004, will not slow their rate of growth for goods produced for export from China. They view these safeguards as a transition mechanism and expect Chinese exports to continue growing, with the government's voluntary measures aimed at managing the accelerating growth rate rather than halting it.

While the Earnings Per Share (EPS) for Q4 2004 matched Q3 2004, the operating income was slightly lower in Q4. However, net income was higher in Q4 due to increased non-operating income and a lower effective tax rate. The company acknowledged that consensus EPS estimates at the beginning of the quarter were too high, and they were correct in their assessment that the consensus was unachievable, despite their initial forecasts in November proving too conservative.

The direct cash outlays for SOX compliance, particularly Section 404 (internal controls), are estimated to be between $1.5 and $2.0 million. A significant portion of this cost is a direct payment to independent auditors and is expected to continue. The company also noted the considerable drain on existing internal resources during the compliance process.

Expeditors anticipates capital expenditures well over $100 million in 2005. This includes normal expenditures for relocations, replacements, and the redevelopment of their San Francisco property. A significant driver will be a plan to make additional capital expenditures in the U.S. to take advantage of Section 965 of the Internal Revenue Code, which allows for an 85% exclusion on repatriated earnings if invested in specific tax-favored activities, primarily real estate in key U.S. locations. This provision is expected to result in a significant one-time tax benefit for Expeditors.