EXPEDITORS INTERNATIONAL OF WASHINGTON INC - 10-Q Quarterly Report

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In thousands, except share data)

(Unaudited)

	March 31, 2005		December 31, 2004
Assets

Current assets:
Cash and cash equivalents	$	457,390	$	408,983
Short-term investments	749		109
Accounts receivable, less allowance for doubtful accounts of $12,586 at March 31, 2005 and $12,842 at December 31, 2004	568,468		614,044
Other current assets	20,475		22,724

Total current assets	1,047,082		1,045,860

Property and equipment, less accumulated depreciation and amortization of $152,471 at March 31, 2005 and $150,766 at December 31, 2004	306,003		287,379
Goodwill, less accumulated amortization of $765 at March 31, 2005 and December 31, 2004	7,774		7,774
Other intangibles, net	10,319		10,839
Other assets, net	14,210		12,201

	$	1,385,388	$	1,364,053

Liabilities and Shareholders’ Equity

Current liabilities:
Short-term debt	—		2,250
Accounts payable	402,210		410,251
Accrued expenses, primarily salaries and related costs	88,892		84,778
Deferred Federal and state income taxes	7,043		6,369
Federal, state and foreign income taxes	20,700		20,668

Total current liabilities	518,845		524,316

Deferred Federal and state income taxes	26,291		24,861

Minority interest	8,309		7,472

Shareholders’ equity:
Preferred stock, par value $.01 per share.
Authorized 2,000,000 shares; none issued	—		—

Common stock, par value $.01 per share.
Authorized 320,000,000 shares; issued and outstanding 106,618,156 shares at March 31, 2005, and 106,643,953 shares at December 31, 2004	1,066		1,066
Additional paid-in capital	35,462		44,678
Retained earnings	787,718		749,974
Accumulated other comprehensive income	7,697		11,686

Total shareholders’ equity	831,943		807,404

Commitments and contingencies

	$	1,385,388	$	1,364,053

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings
(In thousands, except share data)

(Unaudited)

	Three months ended March 31,
	2005			2004

Revenues:
Airfreight	$	372,885		$	324,859
Ocean freight and ocean services	297,144			233,046
Customs brokerage and other services	155,135			128,945

Total revenues	825,164			686,850

Operating expenses:
Airfreight consolidation	284,438			246,652
Ocean freight consolidation	243,970			186,819
Customs brokerage and other services	66,073			50,883
Salaries and related costs	124,554			111,041
Rent and occupancy costs	13,748			12,751
Depreciation and amortization	7,339			6,259
Selling and promotion	7,546			6,510
Other	19,939			17,127

Total operating expenses	767,607			638,042

Operating income	57,557			48,808

Interest expense	(29		)	(5		)
Interest income	2,147			1,006
Other, net	1,196			1,157

Other income, net	3,314			2,158

Earnings before income taxes and minority interest	60,871			50,966
Income tax expense	22,074			18,160

Net earnings before minority interest	38,797			32,806

Minority interest	(1,053		)	(962		)

Net earnings	37,744			31,844

Basic earnings per share	$	.35		$	.30

Diluted earnings per share	$	.34		$	.29

Weighted average basic shares outstanding	106,728,418			105,131,114

Weighted average diluted shares outstanding	112,151,805			109,613,044

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

	Three months ended March 31,
	2005			2004
Operating activities:
Net earnings	$	37,744		$	31,844
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for losses on accounts receivable	36			682
Deferred income tax expense	4,259			4,847
Tax benefits from employee stock plans	2,936			1,922
Depreciation and amortization	7,339			6,259
Loss (gain) on sale of property and equipment	(19		)	13
Other	(927		)	729
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	43,670			(12,578		)
Decrease in other current assets	2,793			723
Increase in minority interest	837			962
Increase (decrease) in accounts payable and other current liabilities	(2,958		)	40,572

Net cash provided by operating activities	95,710			75,975

Investing activities:
Decrease (increase) in short-term investments	(643		)	31
Purchase of property and equipment	(29,017		)	(8,638		)
Proceeds from sale of property and equipment	142			52
Other	(666		)	(681		)

Net cash used in investing activities	(30,184		)	(9,236		)

Financing activities:
Repayments of short-term debt, net	(2,173		)	(215		)
Proceeds from issuance of common stock	2,375			1,427
Repurchases of common stock	(14,527		)	(1,537		)

Net cash used in financing activities	(14,325		)	(325		)

Effect of exchange rate changes on cash	(2,794		)	2,080

Increase in cash and cash equivalents	48,407			68,494
Cash and cash equivalents at beginning of period	408,983			295,832
Cash and cash equivalents at end of period	$	457,390		$	364,326

Interest and taxes paid:
Interest	$	20		$	10
Income taxes	10,116			8,465

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Note 1. Summary of Significant Accounting Policies

The attached condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on or about March 16, 2005.

The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option and its employee stock purchase rights plans. Accordingly, no compensation cost has been recognized for its fixed stock option or employee stock purchase rights plans. Had compensation cost for the Company’s three stock based compensation and employee stock purchase rights plans been determined consistent with SFAS No. 123, the Company’s net earnings, basic earnings per share and diluted earnings per share would have been reduced to the pro forma amounts indicated below:

	Three Months Ended March 31,
	2005			2004
Net earnings - as reported	$	37,744		31,844
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(6,510		)	(5,967	)
Net earnings - pro forma	$	31,234		25,877

Basic earnings per share — as reported	$	.35		.30
Basic earnings per share — pro forma	$	.29		.25

Diluted earnings per share — as reported	$	.34		.29
Diluted earnings per share — pro forma	$	.28		.24

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans, to be recognized in the financial statements based on their fair values. The Company is required to adopt SFAS No. 123R in the first quarter of 2006. The Company is evaluating the requirements of SFAS No. 123R and expects the adoption of SFAS No. 123R will have a material impact on the consolidated results of operations, earnings per share and consolidated statement of cash flows.

Note 2. Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting shareholders’ equity that, under generally accepted accounting principles in the United States, are excluded from net income. For the Company, these consist of foreign currency translation gains and losses and unrealized gains and losses on securities, net of related income tax effects.

The components of total comprehensive income for interim periods are presented in the following table:

	Three months ended March 31,
	2005			2004
Net earnings	$	37,744		$	31,844

Foreign currency translation adjustments net of tax of: $2,127 and $(1,241)	(3,951		)	2,306
Unrealized loss on securities net of tax of $27 and $17	(38		)	(32		)

Total comprehensive income	$	33,755		$	34,118

Note 3. Business Segment Information

Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosure about Segments of an Enterprise and Related Information” establishes standards for the way that public companies report selected information about segments in their financial statements.

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.

Financial information regarding the Company’s operations by geographic area for the three months ended March 31, 2005 and 2004 are as follows:

(in thousands)	UNITED STATES		OTHER NORTH AMERICA	FAR EAST	EUROPE	AUSTRALIA / NEW ZEALAND	LATIN AMERICA	MIDDLE EAST	ELIMI-NATIONS		CONSOLI-DATED
Three months ended March 31, 2005:

Revenues from unaffiliated customers	$	168,671	20,209	442,013	126,840	11,740	13,104	42,587	—		825,164
Transfers between geographic areas	16,394		1,169	2,722	5,415	1,222	1,559	1,857	(30,338	)	—

Total revenues	$	185,065	21,378	444,735	132,255	12,962	14,663	44,444	(30,338	)	825,164

Net revenues	$	94,069	11,356	60,657	42,170	6,715	5,658	10,058	—		230,683
Operating income	$	18,288	2,236	27,635	5,387	1,658	953	1,400	—		57,557
Identifiable assets at quarter end	$	653,209	46,554	302,033	288,449	24,603	21,591	43,332	5,617		1,385,388
Capital expenditures	$	25,972	305	1,076	1,210	68	191	195	—		29,017
Depreciation and amortization	$	3,509	367	1,170	1,513	154	261	365	—		7,339
Equity	$	897,165	18,920	226,108	88,662	14,147	7,026	19,511	(439,596	)	831,943

Three months ended March 31, 2004:

Revenues from unaffiliated customers	$	136,556	17,132	367,660	112,229	9,818	11,577	31,878	—		686,850
Transfers between geographic areas	14,496		805	2,356	4,008	1,109	1,580	1,338	(25,692	)	—

Total revenues	$	151,052	17,937	370,016	116,237	10,927	13,157	33,216	(25,692	)	686,850

Net revenues	$	80,863	9,555	55,713	37,707	5,655	4,882	8,121	—		202,496
Operating income	$	13,193	1,990	24,665	5,567	1,235	673	1,485	—		48,808
Identifiable assets at quarter end	$	567,459	35,353	192,442	250,360	19,733	18,675	32,117	5,913		1,122,052
Capital expenditures	$	3,125	505	1,984	2,156	110	166	592	—		8,638
Depreciation and amortization	$	3,309	283	846	1,214	149	175	283	—		6,259
Equity	$	726,342	13,364	138,746	67,794	13,035	3,864	14,809	(296,523	)	681,431

Note 4. Basic and Diluted Earnings per Share

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings per share for the three months ended March 31, 2005 and 2004:

	Three months ended March 31,

(Amounts in thousands, except share and per share amounts)	Net Earnings		Weighted Average Shares	Earnings Per Share

2005

Basic earnings per share	$	37,744	106,728,418	$	.35
Effect of dilutive potential common shares	—		5,423,387	—

Diluted earnings per share	$	37,744	112,151,805	$	.34

2004

Basic earnings per share	$	31,844	105,131,114	$	.30
Effect of dilutive potential common shares	—		4,481,930	—

Diluted earnings per share	$	31,844	109,613,044	$	.29

There were no antidilutive shares for the three months ended March 31, 2005 and 2004.

Note 5. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period of the Company's first fiscal year beginning after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense related to unvested options granted prior to the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. The Company is required to adopt SFAS No. 123R in the first quarter of 2006, beginning January 1, 2006. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include prospective and retrospective adoption methods. Under the retrospective methods, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards as of the beginning of the first quarter of adoption of SFAS No. 123R, while the retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated. The Company is evaluating the requirements of SFAS No. 123R and expects the adoption of SFAS No. 123R will have a material impact on the consolidated results of operations, earnings per share and consolidated statement of cash flows. The Company has not determined the method of adoption or the effect of adopting SFAS No. 123R.

In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”, which provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax expense and deferred tax liability. The Jobs Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret certain provisions in the Act. As such, the Company is not yet in a position to determine to what extent the Company will repatriate foreign earnings that have not yet been remitted to the U.S. and, as provided for in FSP No. 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act. The Company will complete its evaluation and quantification in 2005. Since the Company has provided U.S. taxes on all unremitted foreign earnings, the repatriation of foreign earnings in accordance with the repatriation provisions of the Jobs Act would result in a reduction of the Company’s tax expense and deferred tax liability.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS

Certain portions of this report on Form 10-Q including the section entitled “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements, which must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified elsewhere in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on or about March 16, 2005.

EXECUTIVE SUMMARY

Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The Company acts as a customs broker in all domestic offices, and in many of its international offices. The Company also provides additional services for its customers including value-added distribution, purchase order management, vendor consolidation and other logistics solutions. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships.

International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the affects adoption of any such proposal will have on the Company’s business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies concerning international trade, the Company’s business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business.

The Company derives its revenues from three principal sources: airfreight, ocean freight and customs brokerage and other services and these are the revenue categories presented in the financial statements.

As a non-asset based carrier, the Company does not own transportation assets. Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers. The difference between the rate billed to customers (the sell rate), and the rate paid to the carrier (the buy rate) is termed “Net Revenue” or “yield.” By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery. This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.

The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies. The significance of maintaining acceptable working relationships with governmental agencies and asset-based providers involved in global trade has gained increased importance as a result of ongoing concern over terrorism. As each carrier labors to comply with governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade to some degree. A good reputation helps to develop, to the degree possible, practical working understandings that will effectively meet security requirements while minimizing potential international trade obstacles. The Company considers its current working relationships with these entities to be satisfactory. However, changes in space allotments available from carriers, governmental deregulation efforts, “modernization” of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Company’s business in unpredictable ways.

Historically, the Company’s operating results have been subject to a seasonal trend when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.

A significant portion of the Company’s revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company’s revenues are, to a large degree, impacted by factors out of the Company’s control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company’s stock.

As further discussed under liquidity and capital resources, total capital expenditures in 2005 are expected to exceed $100 million.

In terms of the opportunities, challenges and risks that management is focused on in 2005, the Company operates in 57 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy. From the inception of the Company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. The Company’s greatest challenge is now and always has been perpetuating a consistent global culture which demands:

• Total dedication, first and foremost, to providing superior customer service;

• Aggressive marketing of all of the Company’s service offerings;

• Ongoing development of key employees and management personnel via formal and informal means;

• Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;

• Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and

• Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.

The Company has reinforced these values with a compensation system that rewards employees for profitably managing the things they can control. There is no limit to how much a key manager can be compensated for success. The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions. At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.

Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company, provides a greater threat to the Company’s continued success than any external force, which would be largely beyond our control. Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also building systems and taking preventative action to reduce exposure to negative events. The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations. As a result our focus is on building and maintaining a global culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.

Critical Accounting Estimates

Management believes that the nature of the Company’s business is such that there are few, if any, complex challenges in accounting for operations.

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s statement of earnings:

• accounts receivable valuation,

• the useful lives of long-term assets,

• the accrual of costs related to ancillary services the Company provides,

• establishment of adequate insurance liabilities for the portion of the freight related exposure which the Company has self-insured, and

• accrual of tax expense on an interim basis.

Management believes that the methods utilized in all of these areas are non-aggressive in approach and consistent in application. Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

Results of Operations

The following table shows the consolidated net revenues (revenues less transportation expenses) attributable to the Company’s principal services and the Company’s expenses for the three-month periods ended March 31, 2005 and 2004, expressed as percentages of net revenues. Management believes that net revenues are a better measure than total revenues of the relative importance of the Company’s principal services since total revenues earned by the Company as a freight consolidator include the carriers’ charges to the Company for carrying the shipment whereas revenues earned by the Company in its other capacities include only the commissions and fees actually earned by the Company.

The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto which appear elsewhere in this Quarterly Report.

	Three months ended March 31,
	2005					2004
	Amount			Percent of net revenues		Amount			Percent of net revenues
	(Amounts in thousands)

Net Revenues:
Airfreight	$	88,447		38	%	$	78,207		39	%
Ocean freight and ocean services	53,174			23		46,227			23
Customs brokerage and other services	89,062			39		78,062			38

Net revenues	230,683			100		202,496			100

Operating expenses:
Salaries and related costs	124,554			54		111,041			55
Other	48,572			21		42,647			21

Total operating expenses	173,126			75		153,688			76

Operating income	57,557			25		48,808			24
Other income, net	3,314			1		2,158			1

Earnings before income taxes and minority interest	60,871			26		50,966			25
Income tax expense	22,074			10		18,160			9

Net earnings before minority interest		38,797		16			32,806		16
Minority interest		(1,053	)	—			(962	)	—

Net earnings	$	37,744		16	%	$	31,844		16	%

Airfreight net revenues increased 13% for the three-month period ended March 31, 2005, as compared with the same period for 2004. The increase in airfreight net revenues was due primarily to an increase in airfreight tonnages handled by the Company during the first quarter of 2005 as compared with the same period of 2004.

Ocean freight volumes, measured in terms of forty-foot container equivalent units (FEUs), increased 28% in the first quarter 2005 as compared with the same period for 2004 while ocean freight and ocean services net revenues increased only 15% during the same period. The difference in these two growth rates is a result of a 194 basis point decline in ocean freight yields caused primarily by a reduction in pricing for certain fee based services.

The Company continued its focus of offering competitive rates to customers at the retail level, while leveraging freight volumes to obtain favorable rates from carriers at the wholesale level. The Company’s North American ocean freight net revenues increased 15% in the first quarter of 2005 as compared with the same period for 2004. This increase was a result of the Company handling more ocean shipments moving to and from North America and the Far East. Ocean freight net revenues for the Far East and for Europe increased 11% and 22%, respectively, for the three months ended March 31, 2005, as compared with the same period for 2004.

Customs brokerage and other services net revenues increased 14% for the three-month period ended March 31, 2005, as compared with the same period for 2004. This is a result of the Company’s growing reputation for providing high quality service and consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program. In addition, increased emphasis on regulatory compliance has benefited the Company’s customs brokerage offerings.

Salaries and related costs increased 12% during the three-month period ended March 31, 2005, as compared with the same period in 2004 as a result of (1) the Company’s increased, albeit limited, hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity, and (2) increased compensation levels. Salaries and related costs as a percentage of net revenues decreased 84 basis points for the three-month period ended March 31, 2005, as compared with the same period in 2004. The relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits. Management believes that the growth in revenues, net revenues and net earnings for the three-month period ended March 31, 2005 are a result of the incentives inherent in the Company’s compensation program.

This trend may not continue in future years with the adoption of SFAS 123R, which requires the expensing of the fair value of employee stock options, effective in the first quarter of 2006. When SFAS No. 123R becomes effective, a significant non-cash fixed compensation expense will be added to salaries and related costs. The inclusion of this fixed expense will increase salaries and related costs as a percentage of net revenue above historical levels.

Other operating expenses increased 14% for the three-month period ended March 31, 2005, as compared with the same period in 2004 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company’s growing operations. Other operating expenses as a percentage of net revenues remained constant for the three-month period ended March 31, 2005, as compared with the same period in 2004.

Other income, net, increased 54% for the three-month period ended March 31, 2005, as compared with the same period in 2004. Due to higher interest rates on higher average cash balances and short-term investments during the first quarter of 2005, interest income increased by $1.1 million. Net foreign currency gains in the first quarter of 2005 increased $247 as compared with the same period in 2004. Rental income, net of applicable depreciation, of $607 for the three months ended March 31, 2005 and $888 for the three months ended March 31, 2004, is included in other income. The rental income is derived from two of the Company’s properties, one located near Heathrow airport in London, England and an office and warehouse facility near the San Francisco, California International Airport. In conjunction with the scheduled remodeling of the San Francisco, California office and warehouse facility, rental income from that property ceased at the end of the first quarter of 2004.

The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations. The Company’s consolidated effective income tax rate during the three-month period ended March 31, 2005, of 36.3% increased when compared with the 35.6% rate in the same period in 2004. The higher tax rate in the first quarter of 2005 is the result of the increased state tax expense caused by a decrease in the taxable income sourced outside the U.S. If the Company adopts a plan under Internal Revenue Code (IRC) 965 the Company’s 2005 tax rate will be lower than prior years. This lower tax rate will only affect 2005.

Currency and Other Risk Factors

International air/ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry; however, the Company’s primary competition is confined to a relatively small number of companies within this group. While there is currently a marked trend within the industry toward consolidation into large firms with multinational offices and agency networks, regional and local broker/forwarders remain a competitive force.

Historically, the primary competitive factors in the international logistics industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with those of others in the industry. Recently, customers have exhibited a trend towards more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers.

Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short- to medium-term.

The nature of the Company’s worldwide operations necessitates the Company dealing with a multitude of currencies other than the U.S. Dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Some of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company’s ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among its offices or agents. The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company’s ability to move money freely or the short-term financial outlook is such that hedging is the way to avoid short-term

exchange losses. Any such hedging activity during the three months ended March 31, 2005 and 2004 was insignificant. The Company had approximately $458 and $211 in foreign exchange gains on a net basis for the three months ended March 31, 2005 and 2004, respectively. The Company had no foreign currency derivatives outstanding at March 31, 2005 and 2004.

Sources of Growth

During the first quarter of 2005, the Company opened five full-service offices (•) and two satellite offices (+), as follows:

Far East	Europe	Latin America	North America	Middle East
• Dongguan, PRC	• Warsaw, Poland	• Porto Alegre, Brazil	• Monterrey, Mexico	+ Tiruppur, India
• Nanjing, PRC	+ Malmoe, Sweden

Of these offices, the office in Warsaw, Poland was the result of the Company’s acquisition of the business and operating assets of its non-exclusive agent. All other office openings were startups.

Acquisitions

Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company’s competitors and typically involves the purchase of significant “goodwill”, the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired business. As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the “goodwill” recorded in the transaction.

Internal Growth

Management believes that a comparison of “same store” growth is critical in the evaluation of the quality and extent of the Company’s internally generated growth. This “same store” analysis isolates the financial contributions from offices that have been included in the Company’s operating results for at least one full year. The table below presents “same store” comparisons for the first quarter of 2005 (which is the measure of any increase from the same period of 2004) and for the first quarter of 2004 (which measures growth over 2003).

	For the three months ended March 31,
	2005		2004

Net revenue	13	%	18	%
Operating income	18	%	30	%

Liquidity and Capital Resources

The Company’s principal source of liquidity is cash generated from operating activities. Net cash provided by operating activities for the three months ended March 31, 2005, was approximately $96 million, as compared with $76 million for the same period of 2004. This $20 million increase is principally due to increased collections of accounts receivable offset by decreased accounts payable, accrued expenses and taxes payable. Business volumes were more evenly distributed throughout the first quarter of 2005 compared with the same period of 2004, where a significant portion of the business occurred in the month of March. As a result of this large spike in volume in 2004, a much higher percentage of accounts receivable was not due for collection at March 31, 2004. Also, the accounts payable related to the end of quarter spike was not due for payment.

The Company’s business is subject to seasonal fluctuations. Cash flow fluctuates as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with peak season (typically commencing late second or early third quarter) causes an excess of customer billings over customer collections. In the past, the Company has utilized short-term borrowings to satisfy normal operating expenditures when temporary cash outflows exceed cash inflows. These short-term borrowings have been repaid when the trend reverses and customer collections exceed customer billings. During the three months ended March 31, 2005, short-term borrowings were not required.

As a customs broker, the Company makes significant 5-10 business day cash advances for certain of its customers’ obligations such as the payment of duties to the Bureau of Customs and Border Protection. These advances are made as an accommodation for a select group of credit-worthy customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable to the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency.

Cash used in investing activities for the three months ended March 31, 2005, was $30 million, as compared with $9 million during the same period of 2004. The largest use of cash in investing activities is cash paid for capital expenditures. As a non-asset based provider of integrated logistics services, the Company does not own any physical means of transportation (i.e., airplanes, ships, trucks, etc.). However, the Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight. The Company routinely invests in technology, office furniture and equipment and leasehold improvements. In the first quarter of 2005, the Company made capital expenditures of $29 million as compared with $9 million for the same period in 2004. Capital expenditures in the first quarter of 2005 included $21 million for the acquisition of real estate and an office facility in Seattle, Washington. Other capital expenditures in the first quarter of 2005 and 2004 related primarily to investments in technology and office furniture and equipment. The Company currently expects to spend approximately $30 million for normal capital expenditures in 2005. In addition to property and equipment, normal capital expenditures include leasehold improvements, warehouse equipment, computer hardware and furniture and fixtures. Total capital expenditures in 2005 are expected to exceed $100 million if the Company adopts a plan calling for capital expenditures to meet the investment requirements of IRC 965. The Company expects to finance capital expenditures in 2005, with cash.

Cash used in financing activities during the first quarter of 2005 was $14 million as compared with $325 during the first quarter of 2004. The Company uses the proceeds from stock option exercises to repurchase the Company’s stock on the open market. The differences shown at the end of the first quarter of 2005 and 2004 between proceeds from the issuance of common stock and the amounts paid to repurchase common stock represent a timing difference in the receipt of proceeds and the subsequent repurchase of outstanding shares.

At March 31, 2005, working capital was $528 million, including cash and short-term investments of $458 million. The Company had no long-term debt at March 31, 2005. While the nature of its business does not require an extensive investment in property and equipment, the Company cannot eliminate the possibility that it could acquire an equity interest in property in certain geographic locations.

The Company maintains international and domestic unsecured bank lines of credit. At March 31, 2005, the U.S. facility totaled $50 million and international bank lines of credit totaled $11 million. In addition, the Company maintains bank facilities with its U.K. banks for $23 million. At March 31, 2005, the Company had no amounts outstanding on these lines of credit but was contingently liable for $61 million from standby letters of credit and guarantees related to these lines of credit and other obligations. The guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company were to be required to perform.

Management believes that the Company’s current cash position, bank financing arrangements, and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.

In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At March 31, 2005, cash and cash equivalent balances of $267 million were held by the Company’s non-U.S. subsidiaries, of which $17 million was held in banks in the United States.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of the Company’s exposure to these risks is presented below:

Foreign Exchange Risk

The Company conducts business in many different countries and currencies. The Company’s business often results in revenue billings issued in a country and currency, which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions. This brings a market risk to the Company’s earnings.

Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company’s earnings as a result of hypothetical changes in the value of the U.S. Dollar, the Company’s functional currency, relative to the other currencies in which the Company transacts business. All other things being equal, an average 10% weakening of the U.S. Dollar, throughout the three months ended March 31, 2005, would have had the effect of raising operating income approximately $4 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately $3 million.

The Company has approximately $5 million of net unsettled intercompany transactions at any one point in time. The Company currently does not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict the Company’s ability to move money

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management’s opinion, will have a significant effect on the Company’s financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2005	913	$	56.14	913	7,996,594
February 1-28, 2005	2,354	$	54.50	2,354	8,006,947
March 1-31, 2005	269,324	$	53.27	269,324	7,901,676
Total	272,591	$	53.29	272,591	7,901,676

In November 1993, the Company’s Board of Directors authorized a Non-Discretionary Stock Repurchase Plan. This plan was amended in February 2001 to increase the authorization to repurchase up to 10 million shares of the Company’s common stock. This authorization has no expiration date. This plan was disclosed in the Company’s report on Form 10-K filed March 31, 1995. In the first quarter of 2005, 44,684 shares were repurchased under the Non-Discretionary Stock Repurchase Plan.

In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of such shares as may be necessary to reduce the issued and outstanding stock to 100,000,000 shares of common stock. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increase. This authorization has no expiration date. This plan was announced on November 13, 2001. In the first quarter of 2005, 227,907 shares were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases were made to keep the number of issued and outstanding shares from growing as a result of stock option exercises.

Item 5. Other Information

(a) Not applicable.

(b) Not applicable.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K.

Exhibit Number		Description

Exhibit 31.1		Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32		Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Washington	91-1069248
(State or other jurisdiction of	(IRS Employer Identification Number)
incorporation or organization)

1015 Third Avenue, 12^th Floor, Seattle, Washington	98104
(Address of principal executive offices)	(Zip Code)

	EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

May 9, 2005	/s/ PETER J. ROSE
	Peter J. Rose, Chairman and Chief Executive Officer
	(Principal Executive Officer)

May 9, 2005	/s/ R. JORDAN GATES
	R. Jordan Gates, Executive Vice President- Chief Financial Officer
	(Principal Financial and Accounting Officer)

Note 2. Comprehensive Income

Note 3. Business Segment Information

Note 4. Basic and Diluted Earnings per Share

Note 5. Recent Accounting Pronouncements

EXECUTIVE SUMMARY

Critical Accounting Estimates

Evaluation of Controls and Procedures

Changes in Internal Controls

Exhibit Number		Description

31.1		Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002