management's
discussion and analysis
of financial condition
and results of operations

general

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 overseas 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 offers domestic forwarding services only in conjunction with international shipments. 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 effects 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 affected 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'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 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 quarter has 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.



results of operations

The following table shows the consolidated net revenues (revenues less consolidation expenses) attributable to the Company's principal services and the Company's expenses for 1997, 1996 and 1995, expressed as percentages of net revenues. With respect to the Company's services other than consolidation, net revenues are identical to 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.

1997 compared with 1996

Airfreight net revenues in 1997 increased 31% compared with 1996 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe. The Company's North American export airfreight net revenues increased 34% in 1997 compared to 1996. Airfreight net revenues from the Far East and from Europe increased 25% and 40%, respectively, for 1997 compared with 1996.

Ocean freight net revenues increased 35% in 1997 compared to 1996. During the first two quarters of 1997, the ocean freight market to North America from the Far East continued to be impacted by overcapacity experienced by direct ocean carriers. During the last two quarters of 1997, freight volumes between North America and the Far East somewhat reduced the overcapacity situation. As a result, freight rates, which had steadily fallen over the previous two years, stabilized. Management was still able to expand market share, increase ocean tonnage, expand margins and increase net ocean freight revenues while offering competitive market rates to its customers. In addition to increases in the traditional NVOCC (Non-Vessel Operating Common Carrier) and ocean forwarding business, E.C.M.S. (Expeditors Cargo Management Systems), a PC-based ocean freight consolidation management and purchase order tracking service, continued to be instrumental in attracting new business. The Company’s North American export ocean freight net revenues increased 41% in 1997 compared to 1996. This increase was a result of the Company handling more ocean shipments moving from North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 26% and 57%, respectively, for 1997 compared with 1996.

Customs brokerage and import services revenue increased 65% in 1997 as compared with 1996 as a result of (1) the Company’s entry into the truck and rail border brokerage business in the United States, (2) the Company’s growing reputation for providing high quality service, (3) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (4) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers. Distribution services accounted for nearly 16% of the increase in customs brokerage and import services revenues for 1997 compared with 1996.

Salaries and related costs increased in 1997 compared to 1996 as a result of (1) the Company’s increased 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 decreased approximately 1% as a percentage of net revenues – a measure that management believes is significant in assessing the effectiveness of corporate cost containment objectives. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel costs. 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 1997, (and 1996 and 1995) are a result of the incentives inherent in the Company’s compensation program.

Other operating expenses increased in 1997 as compared with 1996 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 1% in 1997 as compared with 1996 due to increased revenues in both new and existing offices and the realization of certain economies of scale.

Other income, net, increased in 1997 as compared to 1996 primarily due to foreign exchange gains. Interest income was lower in 1997 as a result of cash being used for the acquisitions of real estate and of the Company’s Irish agent.

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 remained virtually constant at 38.6% for 1997 and 38.7% in 1996.



1996 compared with 1995

Airfreight net revenues in 1996 increased 33% compared with 1995 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe. The Company’s North American export airfreight net revenues increased 32% in 1996 compared to 1995. Airfreight net revenues from the Far East and from Europe increased 46% and 6%, respectively, for 1996 compared with 1995.

Ocean freight net revenues increased 38% in 1996 compared to 1995. During the first three quarters of 1996, the ocean freight market to North America from the Far East was severely impacted by extreme overcapacity on the part of direct ocean carriers. This overcapacity situation was largely the result of new vessels being placed into service. As a result, ocean freight rates during this period dropped precipitously. However, due to aggressive marketing and its relations with direct ocean carriers, management was able to expand market share, increase ocean tonnage, expand margins and increase net ocean freight revenues while still being able to offer competitive market rates to its customers. E.C.M.S. (Expeditors Cargo Management Systems) was instrumental in providing new business. The Company’s North American export ocean freight net revenues increased 31% in 1996 compared to 1995. This increase was a result of the Company handling more ocean shipments moving from North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 54% and 10%, respectively, for 1996 compared with 1995.

Customs brokerage and import services revenue increased 26% in 1996 as compared with 1995 as a result of (1) the Company’s growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers - distribution services accounted for nearly 12% of the increase in customs brokerage and import services revenues for 1996 compared with 1995.

Salaries and related costs increased annually as a result of (1) the Company’s increased 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 decreased approximately 1% as a percentage of net revenues. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel cost.

Other operating expenses increased in 1996 as compared with 1995 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 1% in 1996 as compared with 1995 due to increased revenues in both new and existing offices and the realization of certain economies of scale.

Other income, net, increased in 1996 as compared to 1995 primarily due to higher interest income earned, as a result of higher positive cash flow during 1996 and resulting in higher interest income on the Company’s invested cash balances. In addition, due to the change in the Company’s tax policy effected January 1, 1993, line of credit borrowings in the United States were kept at a minimum level by repatriating cash from overseas subsidiaries. This is very significant to the Company’s U.S. operations where the Company is most active in its role as a customs broker and regularly advances duties on behalf of customers.

The Company’s consolidated effective income tax rate remained constant at 38.7% for both 1996 and 1995.



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 global 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 office 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. This trend has made having sophisticated computerized customer service capabilities and a stable worldwide network 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 necessitate 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. Many 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 pricing as much of its business as possible in U.S. Dollars and by accelerating international currency settlements among its offices or agents. During the third and fourth quarters of 1997, the currencies in Thailand, Malaysia, Indonesia and South Korea devalued significantly. The currencies of Taiwan, Singapore and other Far East countries were also weakened by events in these other Asian countries. A large percentage of the billings from these countries are denominated in U.S. Dollars. The Company also utilizes an internal clearing house to reduce exposure from foreign exchange rate fluctuations.

Net foreign currency gains realized during 1997 were approximately $1.065 million. Foreign currency gains and losses realized during 1996 and 1995 were immaterial.

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.

Management believes that the Company has sufficiently addressed any “Year 2000” issues related to its information systems.



sources of growth

Historically, growth through aggressive acquisition 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 transactions.



office additions

The Company added 22 offices – 19 start-ups and 3 acquisitions (indicated below with an asterisk) during 1997.

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 year ended December 31, 1997, relative to the same period of 1996, and for the year ended December 31, 1996, relative to the same period of 1995.

liquidity and capital resources

The Company's principal source of liquidity is cash generated from operations. At December 31, 1997, working capital was $87 million, including cash and short-term investments of $42 million. The Company had no long-term debt at December 31, 1997. In 1996, the Company purchased a corporate office building located in Seattle, Washington, a portion of which will house the Company's corporate offices. Total anticipated costs approximate $40 million of which $15.5 million had been incurred as of December 31, 1997. 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 facilities and/or property at or near airports. The Company currently expects to spend approximately $35 million on property and equipment in 1998, which is expected to be financed with cash, short-term floating rate, and/or long-term fixed-rate borrowings.

The Company borrows internationally and domestically under unsecured bank lines of credit totaling $31.2 million. At December 31, 1997, the Company was directly liable for $1.1 million drawn on these lines of credit and was contingently liable for an additional $16.5 million of standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.3 million. The Company was contingently liable at December 31, 1997 for the entire $8.3 million.

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.

In some cases, the Company's ability to repatriate funds from foreign operations is subject to foreign exchange controls. These matters, at the current time, do not have a significant impact on the Company's operations. The repatriation of certain undistributed earnings of the Company's subsidiaries would, under most circumstances, require the Company to pay some additional Federal and state income tax. The Company has not provided for this additional tax on undistributed earnings accumulated through December 31, 1992 because the Company intends to reinvest such earnings to fund the expansion of its foreign activities, or to distribute them in a manner in which no significant additional taxes would be incurred. At December 31, 1997, the total of such pre-1993 undistributed earnings was approximately $41.9 million and the associated Federal and state tax that would be payable on any hypothetical repatriation of these earnings approximates $10.1 million.



impact of inflation

To date, the Company's business has not been adversely affected by inflation, nor has the Company experienced significant difficulty in passing carrier rate increases on to its customers by means of price increases. Direct carrier rate increases could occur over the short- to medium-term period. Due to the high degree of competition in the market place, these rate increases might lead to an erosion in the Company's margins. However, as the Company is not required to purchase or maintain extensive property and equipment and has not otherwise incurred substantial interest rate-sensitive indebtedness, the Company currently has no direct exposure to increased costs resulting from increases in interest rates.

The forward looking statements contained in this document involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from these statements include: risks associated with foreign operations, elimination of intercompany transactions, matching of expenses with the associated revenue, seasonality, shifts in consumer demand, other accounting estimates, and other risk factors disclosed from time to time in the Company's public reports.