UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

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

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

(206) 674-3400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o

At May 3, 2004, the number of shares outstanding of the issuer’s Common Stock was 105,246,004.

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, 2004		December 31, 2003
Assets

Current assets:
Cash and cash equivalents	$	364,326	$	295,832
Short-term investments	52		82
Accounts receivable, less allowance for doubtful accounts of $12,736 at March 31, 2004 and $11,978 at December 31, 2003	459,769		448,324
Deferred Federal and state income taxes	2,258		2,548
Other current assets	17,173		17,941

Total current assets	843,578		764,727

Property and equipment, less accumulated depreciation and amortization of $146,239 at March 31, 2004 and $140,066 at December 31, 2003	245,522		241,702
Goodwill, less accumulated amortization of $765 at March 31, 2004 and December 31, 2003	7,774		7,774
Other intangibles, net	10,774		11,163
Other assets, net	14,404		13,440

	$	1,122,052	$	1,038,806

Liabilities and Shareholders’ Equity

Current liabilities:
Short-term debt	—		217
Accounts payable	330,033		296,895
Accrued expenses, primarily salaries and related costs	78,340		74,905
Federal, state and foreign income taxes	14,367		10,141

Total current liabilities	422,740		382,158

Deferred Federal and state income taxes	13,670		7,923

Minority interest	4,211		3,224

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 105,216,967 shares at March 31, 2004, and 105,056,454 shares at December 31, 2003	1,052		1,051
Additional paid-in capital	27,302		25,491
Retained earnings	649,060		617,216
Accumulated other comprehensive income	4,017		1,743

Total shareholders’ equity	681,431		645,501

Commitments and contingencies

	$	1,122,052	$	1,038,806

See accompanying notes to condensed consolidated financial statements.

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

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

	Three months ended March 31,
	2004			2003

Revenues:
Airfreight	$	324,859		$	266,814
Ocean freight and ocean services	233,046			190,345
Customs brokerage and import services	128,945			99,187

Total revenues	686,850			556,346

Operating expenses:
Airfreight consolidation	246,652			201,340
Ocean freight consolidation	186,819			147,853
Customs brokerage and import services	50,883			37,127
Salaries and related costs	111,041			93,540
Rent and occupancy costs	12,751			10,995
Depreciation and amortization	6,259			5,779
Selling and promotion	6,510			5,307
Other	17,127			16,876

Total operating expenses	638,042			518,817

Operating income	48,808			37,529

Interest expense	(5		)	(48		)
Interest income	1,006			980
Other, net	1,157			1,060

Other income, net	2,158			1,992

Earnings before income taxes and minority interest	50,966			39,521
Income tax expense	18,160			14,132

Net earnings before minority interest	32,806			25,389

Minority interest	(962		)	(270		)

Net earnings	31,844			25,119

Basic earnings per share	$	.30		$	.24

Diluted earnings per share	$	.29		$	.23

Weighted average basic shares outstanding	105,131,114			104,318,328

Weighted average diluted shares outstanding	109,613,044			108,724,489

See accompanying notes to condensed consolidated financial statements.

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Three months ended March 31,
	2004			2003
Operating activities:
Net earnings	$	31,844		$	25,119
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for losses on accounts receivable	682			198
Deferred income tax expense	4,847			2,944
Tax benefits from employee stock plans	1,922			2,157
Depreciation and amortization	6,259			5,779
Loss (gain) on sale of property and equipment	13			(43		)
Other	729			983
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	(12,578		)	27,554
Decrease (increase) in other current assets	723			(1,027		)
Increase (decrease) in minority interest	962			(79		)
Increase in accounts payable and other current liabilities	40,572			393

Net cash provided by operating activities	75,975			63,978

Investing activities:
Decrease in short-term investments	31			34
Purchase of property and equipment	(8,638		)	(4,545		)
Proceeds from sale of property and equipment	52			6
Other	(681		)	213

Net cash used in investing activities	(9,236		)	(4,292		)

Financing activities:
Repayments of short-term debt, net	(215		)	(849		)
Proceeds from issuance of common stock	1,427			1,792
Repurchases of common stock	(1,537		)	(1,974		)

Net cash used in financing activities	(325		)	(1,031		)

Effect of exchange rate changes on cash	2,080			1,731

Increase in cash and cash equivalents	68,494			60,386
Cash and cash equivalents at beginning of period	295,832			211,859
Cash and cash equivalents at end of period	$	364,326		$	272,245

Interest and taxes paid:
Interest	$	10		$	46
Income taxes	8,465			14,041

See accompanying notes to condensed consolidated financial statements.

Non-Cash Investing Activities – Cash held in escrow of $30,954 was applied toward the purchase of land and a building in January 2003.

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

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. Certain 2003 amounts have been reclassified to conform to the 2004 presentation. 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 15, 2004.

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,
	2004			2003
Net earnings - as reported	$	31,844		25,119
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(5,967		)	(5,353	)
Net earnings - pro forma	$	25,877		19,766

Basic earnings per share — as reported	$	.30		.24
Basic earnings per share — pro forma	$	.25		.19

Diluted earnings per share — as reported	$	.29		.23
Diluted earnings per share — pro forma	$	.24		.19

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,
	2004			2003

Net earnings	$	31,844		$	25,119

Foreign currency translation adjustments net of tax of: $(1,241) and $(751)	2,306			1,396
Unrealized loss on securities net of tax of $17	(32		)	—

Total comprehensive income	$	34,118		$	26,515

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, 2004 and 2003 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, 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

Three months ended March 31, 2003:

Revenues from unaffiliated customers	$	122,293	15,991	285,880	89,495	6,389	7,886	28,412	—		556,346
Transfers between geographic areas	6,468		412	1,472	2,354	919	900	712	(13,237	)	—

Total revenues	$	128,761	16,403	287,352	91,849	7,308	8,786	29,124	(13,237	)	556,346

Net revenues	$	70,769	8,481	46,611	30,336	3,923	3,125	6,781	—		170,026
Operating income	$	10,988	1,754	19,055	3,424	667	590	1,051	—		37,529
Identifiable assets at quarter end	$	478,021	27,750	147,783	208,328	14,426	9,170	27,190	—		912,668
Capital expenditures	$	2,279	221	997	766	10	82	190	—		4,545
Depreciation and amortization	$	3,111	306	729	1,161	144	121	207	—		5,779
Equity	$	589,371	11,060	125,563	45,543	9,880	1,690	10,200	(241,005	)	552,302

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

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, 2004 and 2003:

	Three months ended March 31,
(Amounts in thousands, except share and per share amounts)	Net Earnings		Weighted Average Shares	Earnings Per Share

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

2003

Basic earnings per share	$	25,119	104,318,328	$	.24
Effect of dilutive potential common shares	—		4,406,161	—

Diluted earnings per share	$	25,119	108,724,489	$	.23

The following shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:

	For the three months ended March 31,
	2004	2003

Shares	—	10,000

Note 5. Recent Accounting Pronouncements

In December 2003, the FASB issued revised Interpretation No. 46, “Consolidation of Variable Interest Entities (Revised), an Interpretation of ARB No. 51,” (FIN 46R). FIN 46R addresses the consolidation by business enterprises of variable interest entities as defined in FIN 46R. The provisions of FIN 46R are generally effective for public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company adopted only the disclosure provisions of FIN 46R in the fourth quarter of 2003 and adopted the remaining provisions of FIN 46R in the first quarter of 2004. The adoption of the remaining provisions of FIN 46R did not have a material impact on the Company’s consolidated financial condition or results of operations.

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 15, 2004.

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 import 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 import 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.

In terms of the opportunities, challenges and risks that management is focused on in 2004, the Company operates in 56 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 Policies and 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. Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions.

Revenue Recognition

Airfreight revenues include the charges to the Company for carrying the shipments when the Company acts as a freight consolidator. Ocean freight revenues include the charges to the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier (NVOCC). In each case the Company is acting as an indirect carrier. When acting as an indirect carrier, the Company will issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, the Company receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. At this point, the risk of loss passes to the carrier, however, in order to claim for any such loss, the customer is first obligated to pay the freight charges.

Based upon the terms in the contract of carriage, revenues related to shipments where the Company issues an HAWB or an HOBL are recognized at the time the freight is tendered to the direct carrier at origin. Costs related to the shipments are also recognized at this same time.

Revenues realized in other capacities, for instance, when the Company acts as an agent for the shipper, and does not issue an HAWB or an HOBL, include only the commissions and fees earned for the services performed. These revenues are recognized upon completion of the services. Similarly, revenues related to customs brokerage and import services are recognized upon completion of the services.

Arranging international shipments is a complex task. Each actual movement can require multiple services. In some instances, the Company is asked to perform only one of these services. However, in most instances, the Company may perform multiple services. These services include destination breakbulk services and value added ancillary services such as local transportation, export customs formalities, distribution services and logistics management. Each of these services has an associated fee, which is recognized as revenue upon completion of the service.

Typically, the fees for each of these services are quoted as separate components, however, customers on occasion will request an all-inclusive rate for a set of services known in the industry as “door-to-door service.” This means that the customer is billed a single rate for all services from pickup at origin to delivery at destination. In these instances, the revenue for origin and destination services, as well as revenue that will be characterized as freight charges, is allocated to branches as set by preexisting Company policy perhaps supplemented by customer specific negotiations between the offices involved. Each of the Company’s branches are independent profit centers and the primary compensation for the branch management group comes in the form of incentive-based compensation calculated directly from the operating income of that branch. This compensation structure ensures that the allocation of revenue and expense among components of services, when provided under an all-inclusive rate, are done in an objective manner on a fair value basis, in accordance with Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.”

Estimates

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.

During the fourth quarter of 2003, the Company provided full U.S. taxation on approximately $41.9 million of foreign earnings accumulated through December 31, 1992, for which U.S. income taxes had not previously been provided, resulting in additional tax expense of $9.5 million. Income taxes had not previously been provided on these earnings as a result of the Company’s previous intent to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. The Company’s decision to provide U.S. taxes on all unremitted foreign earnings was made based upon the desire to be able to deploy capital globally without concern for the impact of associated U.S. tax obligations that might be incurred as a result of the repatriation of these earnings.

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, 2004 and 2003, 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,
	2004					2003
	Amount			Percent of net revenues		Amount			Percent of net revenues
	(Amounts in thousands)

Net Revenues:
Airfreight	$	78,207		39	%	$	65,474		39	%
Ocean freight and ocean services	46,227			23		42,492			25
Customs brokerage and import services	78,062			38		62,060			36

Net revenues	202,496			100		170,026			100

Operating expenses:
Salaries and related costs	111,041			55		93,540			55
Other	42,647			21		38,957			23

Total operating expenses	153,688			76		132,497			78

Operating income	48,808			24		37,529			22
Other income, net	2,158			1		1,992			1

Earnings before income taxes and minority interest	50,966			25		39,521			23
Income tax expense	18,160			9		14,132			8

Net earnings before minority interest	32,806			16		25,389			15
Minority interest	(962		)	—		(270		)	—

Net earnings	$	31,844		16	%	$	25,119		15	%

Airfreight net revenues increased 19% for the three-month period ended March 31, 2004, as compared with the same period for 2003. The increase in airfreight net revenues was due primarily to an increase in airfreight tonnages handled by the Company during the first quarter of 2004 as compared with the same period of 2003.

Ocean freight volumes, measured in terms of forty-foot container equivalent units (FEUs), increased 30% in the first quarter 2004 as compared with the same period for 2003 while ocean freight and ocean services net revenues increased only 9% during the same period. The difference in these two growth rates is a result of a 248 basis point decline in ocean freight yields. In May 2003, ocean freight carriers implemented substantial rate increases. In order to gain market share and maintain its focus on long-term customer relationships, the Company chose not to immediately pass on the full rate increases. The resulting increase in ocean freight volumes more than offset the revenue foregone by not implementing the full rate increases.

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. Expeditors Cargo Management Systems (ECMS), an ocean freight consolidation management and purchase order tracking service, continued to be instrumental in attracting new business. The Company’s North American ocean freight net revenues decreased 33% in the first quarter of 2004 as compared with the same period for 2003. This decrease was a result of the Company handling more ocean shipments moving from North America to the Far East, a market which has lower profit per container, and, to a lesser extent, from North America to Europe, a market which has higher profit per container. Ocean freight net revenues from the Far East and from Europe increased 30% and 13%, respectively, for the three months ended March 31, 2004, as compared with the same period for 2003.

Customs brokerage and import services net revenues increased 26% for the three-month period ended March 31, 2004, as compared with the same period for 2003 as 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.

Salaries and related costs increased 19% during the three-month period ended March 31, 2004, as compared with the same period in 2003 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 remained constant for the three-month period ended March 31, 2004, as compared with the same period in 2003. 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, 2004 are a result of the incentives inherent in the Company’s compensation program.

Other operating expenses increased 9% for the three-month period ended March 31, 2004, as compared with the same period in 2003 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 decreased for the three-month period ended March 31, 2004, as compared with the same period in 2003. Management believes that this was significant as it reflects the successful achievement of cost containment objectives initiated at the branch level. The ability to sustain these savings into future periods is contingent upon branch level management’s ability to adhere to these objectives.

Other income, net, increased 8% for the three-month period ended March 31, 2004, as compared with the same period in 2003. Due to lower interest rates on higher average cash balances and short-term investments during the first quarter of 2004, interest income increased by $26. Net foreign currency gains in the first quarter of 2004 increased $201 as compared with the same period in 2003. Rental income, net of applicable depreciation, of $888 for the three months ended March 31, 2004 and $967 for the three months ended March 31, 2003, 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.

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, 2004, of 35.6% is comparable to the 35.8% rate in the same period in 2003. In the fourth quarter of 2003, the Company recorded additional tax expense of $9.5 million in order to provide full U.S. taxation on approximately $41.9 million of foreign earnings accumulated through December 31, 1992, for which U.S. income taxes had not previously been provided. Income taxes had not previously been provided on these earnings as a result of the Company’s previous intent to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. Also during the fourth quarter of 2003, the Company eliminated $8 million of certain taxes which the Company had previously expected to pay. Upon recent analysis of the state tax implications of the Company’s pattern of remitting foreign earnings, the Company had determined that these taxes are not owed.

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 around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to avoid short-term exchange losses. Any such hedging activity during the three months ended March 31, 2004 and 2003 was insignificant. The Company had approximately $211 and $10 in foreign exchange gains on a net basis for the three months ended March 31, 2004 and 2003, respectively. The Company had no foreign currency derivatives outstanding at March 31, 2004 and 2003.

The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and import services. In light of the customer-driven trend to provide customer rates on a door-to-door basis, management foresees the potential, in the medium to long-term, for fees normally associated with customs house brokerage to be de-emphasized and included as a component of other services offered by the Company.

Sources of Growth

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.

During the first quarter of 2004, the Company opened one office in the Far East, in Hanoi, Vietnam. The Company closed its offices in Curitiba and Belo Horizonte, Brazil; these two offices were converted to non-exclusive agents.

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 2004 (which is the measure of any increase from the same period of 2003) and for the first quarter of 2003 (which measures growth over 2002).

	For the three months ended March 31,
	2004		2003

Net revenue	18	%	16	%
Operating income	30	%	15	%

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, 2004, was approximately $76 million, as compared with $64 million for the same period of 2003. This $12 million increase is principally due to increased net earnings. The increased accounts receivable is offset by increased accounts payable, accrued expenses and taxes payable. Increased accounts receivable is primarily due to slower collections on certain large accounts required to meet current market conditions. Increases in accounts payable and accrued expenses are a result of the Company’s attempts to manage cash flows by matching the timing of cash outflows for payments to vendors with cash inflows from collections of customer billings.

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. This trend did not hold true in the first quarter of 2004 as a result of the rapid acceleration of the Company’s business, particularly during the month of March. Due to the Company’s management of accounts payable and accrued expenses as described in the preceding paragraph, cash flow from operating activities remained positive. This cyclical growth in customer receivables consumes available cash. 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, 2004, short-term borrowings were not required in the United States despite the intense cash flow pressures in this market due to funds advanced in association with customs brokerage activity.

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, 2004, was $9.2 million, as compared with $4.3 million during the same period of 2003. 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 2004, the Company made capital expenditures of $8.6 million as compared with $4.5 million for the same period in 2003. Capital expenditures in the first quarter of 2004 and 2003 related primarily to investments in technology and office furniture and equipment. Cash of $31.3 million was paid into escrow during 2002 to acquire an office and warehouse facility near the San Francisco, California International Airport; the transaction closed on January 7, 2003. The Company currently expects to spend approximately $50 million for normal capital expenditures in 2004. In addition to property and equipment, normal capital expenditures include leasehold improvements, warehouse equipment, computer hardware and furniture and fixtures. The Company expects to finance capital expenditures in 2004, with cash.

Cash used in financing activities during the first quarter of 2004 was $0.3 million as compared with cash used in financing activities during the first quarter of 2003 of $1 million. 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 2004 and 2003 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, 2004, working capital was $421 million, including cash and short-term investments of $364 million. The Company had no long-term debt at March 31, 2004. 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 borrows internationally and domestically under unsecured bank lines of credit. At March 31, 2004, the U.S. facility totaled $50 million and international bank lines of credit totaled $14.7 million. In addition, the Company maintains bank facilities with its U.K. banks for $22.1 million. At March 31, 2004, the Company had no amounts outstanding on these lines of credit but was contingently liable for $55.2 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, 2004, cash and cash equivalent balances of $173.5 million were held by the Company’s non-U.S. subsidiaries, of which $33.6 million was held in banks in the United States. During the fourth quarter of 2003, the Company provided full U.S. taxation on approximately $41.9 million of foreign earnings accumulated through December 31, 1992, for which U.S. income taxes had not previously been provided, resulting in additional tax expense of $9.5 million. Income taxes had not previously been provided on these earnings as a result of the Company’s previous intent to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. The Company’s decision to provide U.S. taxes on all unremitted foreign earnings was made based upon the desire to be able to deploy capital globally without concern for the impact of associated U.S. tax obligations that might be incurred as a result of the repatriation of these earnings.

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, 2004, would have had the effect of raising operating income approximately $4.4 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately $3.6 million.

The Company has approximately $7 million of intercompany transactions unsettled 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 freely around the world. Any such hedging activity during the three months ended March 31, 2004, was insignificant. The Company had no foreign currency derivatives outstanding at March 31, 2004 and 2003. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. The majority of intercompany billings are resolved within 30 days and intercompany billings arising in the normal course of business are fully settled within 90 days.

Interest Rate Risk

At March 31, 2004, the Company had cash and cash equivalents and short-term investments of $364.4 million, all subject to variable short-term interest rates. The Company had no short-term borrowings at March 31, 2004. A hypothetical change in the interest rate of 10% would have an immaterial impact on the Company’s earnings.

In management’s opinion, there has been no material change in the Company’s market risk exposure in the first quarter of 2004.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

As of March 31, 2004, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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, 2004	213	$	38.55	213	9,252,946
February 1-29, 2004	11,057	$	39.58	11,057	9,312,294
March 1-31, 2004	29,936	$	36.42	29,936	9,360,579
Total	41,206	37.31		41,206	9,360,579

In November 1993, under a Non-Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized, and subsequently amended in February 2001, the repurchase of 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 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.

Item 6. Exhibits and Reports on Form 8-K

(a) 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

(b) Reports on Form 8-K

During the three-month period ended March 31, 2004, the Company furnished:

(1)		one Current Report on Form 8-K under Item 12 — Results of Operations and Financial Condition:
		(i) Report dated February 16, 2004 and furnished February 18, 2004, regarding fourth quarter 2003 financial results.
(2)		four Current Reports on Form 8-K under Item 9 — Regulation FD Disclosure:
		(i) Report dated January 2, 2004 and furnished January 5, 2004, regarding selected inquiries received through January 2, 2004.
		(ii) Report dated February 3, 2004 and furnished February 4, 2004, regarding selected inquiries received through February 3, 2004.
		(iii) Report dated February 16, 2004 and furnished February 18, 2004, regarding selected inquiries regarding fourth quarter 2003 results.
		(iv) Report dated March 25, 2004 and furnished March 26, 2004, regarding selected inquiries received through March 25, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

May 7, 2004	/s/ PETER J. ROSE
	Peter J. Rose, Chairman and Chief Executive Officer
	(Principal Executive Officer)

May 7, 2004	/s/ R. JORDAN GATES
	R. Jordan Gates, Executive Vice President- Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

Form 10-Q Index and Exhibits

March 31, 2004

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

Note 4. Basic and Diluted Earnings per Share

Note 5. Recent Accounting Pronouncements

EXECUTIVE SUMMARY

Critical Accounting Policies and Estimates

Estimates

Evaluation of Controls and Procedures

Changes in Internal Controls

PURSUANT TO SECTION 302 OF THE

EXHIBIT 32

/s/ PETER J. ROSE
Peter J. Rose
Chairman and Chief Executive Officer

/s/ R. JORDAN GATES
R. Jordan Gates
Executive Vice President-Chief Financial Officer and Treasurer

	/s/ Peter J. Rose
	Peter J. Rose
	Chairman and Chief Executive Officer


	/s/ R. Jordan Gates
	R. Jordan Gates
	Executive Vice President-Chief Financial Officer
	and Treasurer