Item 7.01. Regulation
FD Disclosure.
The
following information is included in this document as a result of Expeditors
policy regarding public disclosure of corporate information. Answers to additional inquiries, if any, that
comply with this policy are scheduled to become available on or about March 24,
2008.
SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT
OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this
document including the answers to questions 1, 2, 4, 5, 6, 8, 9, 10, 11, 14, 15,
17, 18, 19, 20, 21, 22, 23, 24 and 25 contain forward-looking statements which
are based on certain assumptions and expectations of future events that are
subject to risks and uncertainties.
Actual future results and trends may differ materially from historical
results or those projected in any forward-looking statements depending on a
variety of factors including, but not limited to, changes in customer demand
for Expeditors services caused by a general economic slow-down, inventory
build-up, decreased consumer confidence, volatility in equity markets, energy
prices, political changes, or the unpredictable acts of competitors.
SELECTED INQUIRIES
RECEIVED THROUGH FEBRUARY 14, 2008
1.
In your 4
th
quarter 2007 earnings press release, you
mentioned that legal fees and record-keeping requirements related to complying
with the Department of Justices (DOJs) subpoena in its ongoing industry investigation
cost Expeditors nearly $4 million during the quarter. Why did this amount get so large? What were theses costs for and going forward
what do you plan to accrue or expense for legal fees? Are all these costs one-time in nature or do
you expect to see additional costs related to this investigation carry over
into future quarters? If so, do you
anticipate the expenses in future quarters to be at a similar level with those
recorded in the 2007 fourth quarter, or have the majority of the expenses
already been incurred? What related
costs, if any, have you incurred thus far in the first quarter of 2008? Could you please break out the costs incurred
in the 4
th
quarter 2007 by geographic region? How much of the $4 million in legal fees
recorded in the 4
th
quarter of 2007 was related to the plaintiffs
civil class action lawsuit and how much to the DOJ case?
The record keeping requirements
associated with this kind of a subpoena can be rather onerous in ways that you
would not (at least we did not) intuitively anticipate. With the subpoena comes a requirement that no
relevant records can be deleted until such time as the DOJ determines which
information is relevant. Also, the
records must be delivered in a prescribed electronic format that we can only
assume is compatible with whatever search engines or data-warehousing
applications are in use at the DOJ. The
vendors that can manage these conversions are rather few, and accordingly,
their scarcity impacts the price it takes to get this done. Getting the relevant data to be archived and
produced took about 30 days to define and get in place before a soft
retention cutoff date, for the record-retention portion of the subpoena, was
granted. We say soft retention cutoff
date, because even after the 30 days passed and the relevant period was agreed
upon, many kinds of files that would customarily be deleted in the normal
course of business were still required to be kept. This requirement necessitated our purchasing
additional backup tapes (not cheap on a unitary basis by any means). These are consumable items, but when you have
180 offices with multiple servers and disk drives to back up, even a few days
without being able to delete redundant files stretches the capacity of any
system. Ours was no exception. As we came to grips with keeping this data
around and also providing it in a format that was stipulated in the subpoena,
there were additional costs that had to be incurred. So, it wasnt all lawyers fees. These costs are ongoing until such time as we
have complied with the informational requests that were outlined in the DOJs
subpoena. It appears another $855,000
was incurred in January 2008.
At this point, we really cant
say how much longer this will take. But then
again, since we dont make projections about things we understand
like the
global logistics industry, wed be more than a
2
little stupid to make one here
about future legal fees and the length of this investigation. Wed rather not say how much were expecting
to pay in legal fees
our attorneys read these 8-K responses, and now is no time
to either disappoint or overly stimulate your attorneys. In all seriousness, however, we think that we
have a very competent legal team, both internal and external, assisting us on
this investigation. No, it is not cheap,
but then quality service isnt necessarily supposed to be. We are doing our utmost to control costs while
at the same time, make the very best effort we can to do what needs to be
done. When the bills show up, as they
inevitably do, there isnt much left to do but, to borrow an old poker adage, read
em and weepand of course pay them when due.
As for breaking these costs out
regionally, there really isnt any point in doing that. This is an investigation done by the United
States Department of Justice. Accordingly,
we feel the costs incurred so far are corporate costs. Provided the probe doesnt go beyond its
originally stated scope, we will not be charging these costs out to the
operating units. Should the course of
the investigation become more specifically focused on any one geographic area
or branch, that policy could of course change.
On a final point, you requested a
break-out of the 4
th
quarter 2007 legal fees between the DOJ
investigation and the civil class action lawsuit in which we were named, among
other large logistics providers. Since the
class action suit was not filed until January 2008, none of the $4 million
was directly related to this figure.
2.
There was a very small
year-over-year compression in your airfreight yields in 4
th
quarter 2007. In your Regulation FD Disclosure filed in November 2007,
when asked if you expect the year-over-year increase in airfreight yields to
continue into the fourth quarter, you had replied that because of backlogs and
market conditions, we expect that there will NOT be an increase in our
airfreight yields continuing into the 4th quarter.... The markets are much
tighter out of Asia, with backlogs emerging regularly. Did the actual reported airfreight yield come
in higher, lower, and about in line with what you had been expecting based on
market conditions at that point in 4
th
quarter 2007? How would you describe current market
conditions in airfreight and any implications for yields in 1
st
quarter 2008?
We thought being proven correct
when we said in November that we didnt expect a 4
th
quarter 2007 yield increase, a directional comment
at best, was about as good as anyone could have expected of us. That was, after all, as close to a projection
as weve come. In thinking back to when
we made our original comment, we dont recall a specific yield number about
which we were
guestimating
. Knowing the dynamics of the market at that
point in time and recalling the dynamics that existed in the market the year
before, we could not fathom that there would be a yield increase
and in fact, there
was none.
Current market conditions were somewhat
tight for January in a lot of major markets. Global airfreight tonnage in January, for us
anyway, was up 12%. I guess if we were
doing the Goldilocks thing, wed be declaring things through January as just
right +.
3.
What percentage of your total gross revenues and what percentage of
your Customs Brokerage and Other Services gross revenues did your domestic U.S.
freight forwarding product represent in 2007?
If it were over 10% of total gross revenue, or
more than, we would have had to disclose this amount separately in accordance
with the SEC disclosure rules. Since it
wasnt disclosed separately, you can conclude that it was less than $523
million. Customs brokerage is still the
vast majority of this figure.
4.
I am working for Xxxxxx [a customer] in {location of office}, doing
market price trend analysis for a couple of categories, one of which is air
freight. I went through your SEC filings
for quarterly reports and got a lot of information from them. However, I wonder whether the revenues stated
in the reports always include currency effects or not since I am trying to
extract these effects out of the revenues in order
3
to come up with more accurate market prices. Therefore, it would be very grateful of you to
provide me with any information on the currency effects for the air freight
business, or anything that can help me with my analysis?
Your question gave us much cause for reflection - and
actually shocked us a little bit. Before
we launch into a polemical commentary about the base motivation of your question,
let us explain why you wont find what youre looking for in our quarterly SEC filings. Hopefully you will be able to deduce from the
context of the remainder of our answer why you wont find what youre looking
for in this response.
First off, lets have a fundamental discussion about
the two kinds of foreign exchange exposure that effect the financial statements
of a multi-national company such as ours.
The first is called foreign exchange
transaction
exposure and the second is called foreign exchange
translation
exposure.
The first kind of foreign exchange exposure,
transaction
exposure, occurs whenever
an Expeditors business unit has a receivable or payable on their books, which
is denominated in a currency other than the local currency of the country in
which the business unit is domiciled and registered. These transactions are recorded on one date
at the exchange rate in effect between the currencies in question (the local
currency and the other currency) at that date. Those receivables or payables can be from or
to customers or service providers or they can be to or from other Expeditors
offices. These recorded transactions will
be settled at some point in time during the ordinary course of business, the
timing depending on the nature of the transaction. Settlement is made when money, in whatever
currency it might be, changes hands (i.e. when it is either paid or received). Unless you have been very lucky (or the two
currencies in question are somehow pegged in value to each other as in the
Hong Kong Dollar or the Chinese Renminbi and the U.S. Dollar) and the laws of
the Cosmos have smiled very favorably upon you, there will be a difference
between the foreign exchange rates of the two currencies at the date the
transaction was recorded and the foreign exchange rates at the date of
settlement. This difference will be recorded
as either a gain or a loss in the financial statements. We typically have not had material amounts of
these kinds of gains or losses. We do,
however, disclose these gains or losses as required.
The second kind of foreign exchange exposure,
translation
exposure, occurs when we
prepare consolidated financial statements of all of our operating units around
the world and translate the foreign currency financial statements of each
subsidiary into U.S. Dollars
the functional currency in which our consolidated
financial statements are reported. The
balances in the Statement of Earnings (the P&L) are translated into U.S. Dollars
at the average rate in effect over the accounting period. The Balance Sheet is translated at the spot
rate as of the end of the accounting period.
After the foreign exchange translations are completed, the venerable accounting
formula of Asset - Liabilities = Equity is not complete. The adjustment to record the effect of the
change in the translation rates from the prior period end is recorded as a
separate component of Equity, euphemistically known as Other Comprehensive
Income. This will balance the Balance
Sheet. As foreign currencies strengthen
against the U.S. Dollar, translated revenues and expenses increase, as do
translated profits. As foreign
currencies weaken against the U.S. Dollar, translated revenues and expenses
decrease, as do translated profits. A
statement detailing out the degree to which the variation of aggregate exchange
ranges impacts revenues, expenses or profits, is not something that you will
find in our financial statements.
Were sure that you are aware that Xxxxxx is an
airfreight customer of Expeditors. Even
though we use a certain amount of your products in our business, we dont have
a financial analyst who sits around here reading your financial filings trying
to figure out ways to negate the currency impacts on those rates we pay to you
for your products to enable us to calculate a more accurate market rate.
4
Please consider the following:
1.
You profess to be looking for
information on the impact of currency effects on revenues in order to come up
with more accurate market prices. We
would counter that any currency effects are part, or should be part of, the
market price.
2.
From an accounting perspective,
if the currency impact isnt reflected in pricing and, therefore, in gross
revenues, we are at a loss as to where it would be included.
3.
We obviously have a different
perspective on the role currency variations should play in market pricing. Your view certainly appears desirable if you
are limiting your analysis of market pricing to a purchasing perspective. Were curious as to whether you follow this
same methodology with the prices you charge your customers?
Since we disagree at a very fundamental level, there
is really not a lot more we can say. Some
things in a good business partnership, just like some things in a good marriage,
are best experienced separately. As
Jerry Seinfeld says, Some times the road less traveled is less traveled for a
reason.
5.
Salaries and related costs as a
percentage of net revenue improved again sequentially as well as versus the
year ago. Are you still focusing your
attention on reducing labor costs in 2008 based upon the current environment
and your near-term expectations?
To be more specific and to make
sure that we are not misunderstood, we do anticipate growing our business in
2008 - all apparent hopes for a [
r-word
deleted]
not withstanding. This means that well
anticipate increasing, as opposed to decreasing, our real labor costs in
2008. Our goal however, is to increase
productivity at the same time. By
focusing on that objective, our expectation is that we will be able to handle
more incremental business with less incremental increases in employee head
count. Ideally, done well, the salaries
and related costs as a percentage of net revenue will be lower in 2008 than was
experienced in 2007.
6.
Rental and occupancy costs as a
percentage of net revenue increased in 4
th
quarter 2007 versus the easy comparison a year
ago but is consistent with the past few quarters, has Expeditors significantly
increased the number of facilities it rents/occupies and could you provide some
directional guidance for how we should think of this expense line item going
forward in terms of absolute costs or as a % of net revenue?
This would depend on how granular
one would expect to get on analyzing this number. Given the relative fixed nature of the
costs reported on this line item, we would point out that being consistent over
the past few quarters is as good an indicator of a normalized number as one
could hope for. If one were to apply
last years (2006) rental occupancy costs as a percentage of this years (2007)
net revenue, one could extrapolate that we spent $957,130 more in 2007 on rent
and occupancy than we should have, assuming the 2006 percentages were constant
in 2007. That is nearly a 5% variance as
per the line item, but its less that .5% of total overhead costs. Its not that we want to appear to be blasé
about this
we arent. We just know that
since our branch managers compensation is directly affected by what they pay
for rent, the number is as good a number as 180 of our district managers out
there managing the heck out of our numbers can make it. We have great confidence in them. Accordingly, for that kind of a variance, were
not concerned at all. Given that these
costs are more fixed than variable, we would expect there to be less variation
in this line item than in other line items. We would say the sequential growth on fixed
pattern is more accurate than assuming an unvarying percentage
even though the
percentage of net revenue variations, in our opinion, are not that great.
7.
Even excluding the $4 million in
legal costs, other expense was elevated as a % of revenue, were there any other
additional costs that you consider not on-going in that expense line item? Were
there any other unusual expenses that flowed through the other operating
expense line which grew approximately 27% even excluding the ~$4 million in
legal fees and record keeping requirements?
5
While Other, even excluding the
impact of the 4
th
quarter 2007 legal expenses, did grow on a
year-over-year comparison, if you look at the sequential trend in these other expenses
youll see that, adjusted for the approximate $4 million, the costs seem to be
in line, in fact, maybe a little less, than was reported in the 3
rd
quarter of 2007. A summary of Other through the last 5
quarters is shown below.
4
th
Quarter
2007
|
|
3
rd
Quarter
2007
|
|
2
nd
Quarter
2007
|
|
1
st
Quarter
2007
|
|
4
th
Quarter
2006
|
|
$
|
26,861
|
|
$
|
23,752
|
|
$
|
19,843
|
|
$
|
21,512
|
|
$
|
18,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most of the components of Other are of a fixed-variable
nature. However, there are other
components, like
Bad Debt Expense
,
Other Business Taxes
(Sales and Use Tax, Business and
Occupation Tax, etc. - taxes other than income tax), where adjustments are made
from time to time to reflect the best information available. These items individually are insignificant,
but in the aggregate, while still insignificant to the income statement as a
whole, can be noteworthy for their impact on the Other line item in any one
quarter.
8.
Can you provide capital
expenditures guidance for 2008?
Right now, things look very
similar to the capital expenditures made in 2007 and, according to our capital
budget, we estimate our 2008 capital budget will be approximately $85 million.
9.
What trends in year-over-year net
revenue and operating income growth did you see sequentially throughout the
quarter from October through December? Did those trends continue in January? Can you also please provide your monthly
airfreight and ocean freight tonnage growth rates for the fourth quarter as
well as January if available?
Year-over-year increases per
category are shown below.
|
|
October 2007
|
|
November 2007
|
|
December 2007
|
|
January 2008
|
|
Net
Revenue
|
|
16
|
%
|
13
|
%
|
11
|
%
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
14
|
%
|
10
|
%
|
5
|
%
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
Airfreight
tonnage
|
|
17
|
%
|
13
|
%
|
1
|
%
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
Ocean
Freight container count
|
|
12
|
%
|
14
|
%
|
8
|
%
|
12
|
%
|
10.
Please provide an update on
volume and capacity trends along the U.S. to Asia, Asia to U.S., Asia to Europe
and Intra-Asia trade lanes.
·
U.S. to Asia has ample
capacity
and typically does as a result of the Asia to U.S. outbound to inbound
ratio. For the market in general, this
ratio is between 4:1 and 5:1 (4 to 5 kilos of freight inbound FROM Asia for
every 1 kilo that moves outbound TO Asia.)
·
Asia to U.S. is busy, as noted
above. Freight volumes in January grew
12% for both air and ocean.
·
Asia to Europe is very similar to
Asia to U.S
in fact, that lane might be a bit more advanced at this stage.
6
·
Intra-Asia business is very
robust, albeit these are small yield markets.
11.
Have the backlogs out of Asia improved? Do you anticipate Airfreight yields will be
impacted by this again in 1
st
quarter 2008?
We did have some backlogs in
December
however, January was a pretty good month. Our air freight tonnage was up 12% year-over-year
in January 2008 versus January 2007.
When you start handling freight through some of the larger airports in
Asia in the volumes that we experience, it is difficult not to have
intermittent backlogs. To view the
absence of backlogs as an indication that there is no pressure in the system is
like saying the water isnt hot since although your skin is red, it isnt blistered. Time becomes the true test, since the longer
your hand is in hot water, the more apparent is the elevated temperature.
We would anticipate that air
freight yields would expand somewhat sequentially from the 4
th
quarter 2007, but dont expect they will
increase year-over-year for the 1
st
quarter 2008 versus the 1
st
quarter 2007.
We would hasten to point out, however, that expressing what we think might
or might not happen with respect to airfreight yield trends, particularly in
this context, is much closer to a random musing than it is a formal projection. This means that were not going to take any
responsibility for expressing this random musing if things turn out differently.
12.
On a regional basis, gross yields in the Far East
and Australia/New Zealand declined notably on a year-over-year basis despite
the fairly easy comparisons, what was this attributable to?
Were not absolutely sure that we
agree with the part about easy comparisons.
Australia/New Zealand yields were impacted by currency fluctuations and
both Australia/New Zealand and the Asia offices were impacted by fuel price
increases, particularly in December, which were implemented by the carriers in
such a way that we had too little time to implement them with the customers
before the end of the year.
13.
What was then FTE headcount for
the 4
th
quarter 2007?
|
|
31-Dec-07
|
|
31-Dec-06
|
|
Diff
|
|
% Diff
|
|
North America
|
|
4,520
|
|
4,276
|
|
244
|
|
5.7
|
%
|
Asia
|
|
3,364
|
|
3,054
|
|
310
|
|
10.2
|
%
|
Europe and Africa
|
|
1,908
|
|
1,840
|
|
68
|
|
3.7
|
%
|
Middle East
|
|
989
|
|
894
|
|
95
|
|
10.6
|
%
|
South America
|
|
611
|
|
579
|
|
32
|
|
5.5
|
%
|
South Pacific
|
|
214
|
|
220
|
|
(6
|
)
|
-2.7
|
%
|
Information Systems
|
|
546
|
|
510
|
|
36
|
|
7.1
|
%
|
Corporate
|
|
169
|
|
165
|
|
4
|
|
2.4
|
%
|
Total
|
|
12,321
|
|
11,538
|
|
783
|
|
6.8
|
%
|
14.
How has the recent series of snow
storms in China impacted your ocean forwarding business there? How do you expect those snow storms might
impact freight timing going forward especially in the context the Lunar New Year
holiday beginning February 7
th
2006?
Have the storms provided any opportunities?
While there were some temporary interruptions
caused by fog and snow storms, except for several isolated instances, things
seemed to have rationalized by the beginning of Chinese New Year. Were not sure we looked for any
opportunities. Were primarily about
servicing the needs of our existing
7
customers in these trying circumstances, not
trying to impress a bunch of people who havent used us before, and may not use
us once the crisis is over, particularly at the expense of existing loyal customers.
15.
Please discuss the timing of the Lunar
New Year versus last year and any associated impact.
In 2008, the Lunar New Year (or Chinese New Year
Gung Hay Fat Choi!)
began on February 7th. Last year, it was nearly two weeks later,
beginning on February 19
th
, 2007.
Because the Lunar New Year is so universally
observed in Asia, it impacts all of mainland Asia. The fact that both the 2008 and the 2007 Lunar
New Year fell entirely in February in both years, were hard pressed to
see any extraordinary impact on freight flows.
We would add our annual caveat that for us internally, because of the
Lunar New Year, we tend to consider January and February as one month
for comparison purposes.
16.
I am an investor in your
company. As I look through the Boston
Yellow Pages under Freight Forwarding, I do not see a listing for
Expeditors International. Im sure you
handle your business exceptionally well, however wouldnt having a listing in
the Yellow Pages be good for bringing in business? I would be very happy to hear from you as it
interests me immensely. By the way, I
love Expeditors and all I know about it.
We would regard paying money for listings in the
Yellow Pages as a colossal waste of money, regardless of how modest a
Yellow Page listing might be. It is
not our style to wait for someone to discover our name in the Yellow Pages and
give us a call. Quite the opposite. We have an active sales program. We believe that we need to seek out and
define customer and potential customer business needs by face to face
contact. We do this by earning it the
good old fashioned way
rolling up our sleeves and selling.
17.
Please comment on recent volumes
and pricing trends?
This is a rather open-ended question the way it is
written. Weve noted the percentage increases
in volumes in both air and ocean freight in our response to question # 9 above.
18.
Please comment on the impact of
currency movements on revenues / profitability?
Currency did play an impact, but it is difficult
to quantify just how much. For instance,
a weak U.S. Dollar spurs exports of U.S. manufactured goods, but tends to slow
the consumption of foreign imports into the U.S. Expeditors is a global company and the
impacts of currency fluctuations on our profitability is not always a zero sum
game.
19.
Please discuss the reasons for
the yield compression in airfreight and ocean freight forwarding. Qualitatively, how much of the compression
was related to a lag of passing though rising fuel prices and how much to tighter
capacity conditions?
Ocean freight forwarding yield compressions were
primarily a result of supply and demand situations in the ocean markets. You will observe that the ocean yields have
been compressing all year.
Airfreight yield compressions were a result of fuel
price increases being implemented without enough forewarning to allow us to be
able to pass these increases on before the end of the year.
20.
Excluding the costs related to
the DOJ investigation, were there any particular cost pressures that led to 4
th
quarter operating margin contraction? Was Expeditors able to fully pass on the
spike in fuel surcharge costs to its customers or was margin impacted by the
lag in fuel surcharge recovery?
8
If you exclude the costs related to the DOJ
investigations, there really wasnt much of a 4
th
quarter operating margin contraction
at least
based on how we calculate this ratio. If
you divide operating income, even including the DOJ investigation related
costs, by net revenue, the operating margin contraction is only about 131 basis
points. If you were to exclude the costs
of the DOJ investigation, youd find that this contraction, particularly on a
ratio that is substantially higher than any other logistics company wed
consider a comparable competitor, is negligible to our way of thinking.
We were certainly unable to pass through some of
the rate increases that occurred during the month of December to the
extent that we would have liked, and that, to a degree, did impact our
operating margins. Also impacting our
operating margins was the fact that the year-over-year growth in airfreight
tonnages in December was basically flat when compared with 2006.
21.
To what extent does Expeditors or
its customers feel the effect of inflationary costs in the major Chinese cities
such as Shanghai?
Just like we do in any other major city in the
world. This is one of the reasons that
weve moved to purchase real estate in three key markets in China - Hong Kong,
Shanghai and Beijing. We did this to stabilize
the second largest expense item we have after salaries, the rent and occupancy
costs, far into the future.
22.
What percentage of Expeditors
business is project cargo or breakbulk?
While it is not a large percentage of our total
revenue, given we did over $5.2 billion in revenue in 2007, even a small
percentage of that number can represent a lot of business. Our real entrée to this business was as an
adjunct to our oil and energy business.
It wasnt too long, however, that we determined that project cargo,
separate and apart from the oil and energy business presented a great growth
opportunity. While this project business
is not yet a major product offering, over the past several years we have made
significant investments in successfully building the foundations of this
program. We have attracted key personnel
and have begun to implement a strategy that is consistent and compatible with
the Expeditors culture. This foundation
has allowed us to gain market share and create an organization that will help
this product become an increasingly important part of our existing, and more
importantly, our future overall service offerings.
23.
Do you expect the seasonal
shipping pattern out of China to be altered given the Olympics - i.e., due to
the potential congestion and potential production restrictions in Northern
China in late summer.
This topic certainly seems to be getting a lot of
play, albeit were not sure why. The
Chinese government, true to form, has taken a very systematized approach to
this situation. New terminals will be
opened in Beijing to accommodate the passengers expected to arrive for the
Olympics and freight operations will be moved temporarily to Tianjin
a port
city about 120 kilometers from Beijing.
The Chinese government does not seem to be concerned
about this situation. They have
anticipated the problem and designed a plan to manage it. If they arent concerned, we dont think we need
to be concerned either.
24. The
reported operating earnings growth rate for the fourth quarter was 8%. Adding back the $4 million in DOJ subpoena
related costs to 4
th
quarter 2007, results in an adjusted operating
earning growth of 12%. Looking back at
the comparison 4
th
quarter 2006, Other Expenses of $18 million appeared
unusually low relative to the $20 million, $21million and $22 million reported
for the first three quarters of 2006 and
the $21.5 million reported for 1
st
quarter of 2007. Adjusting the $18 million to a normalized
expense of $21 million would yield a core normalized growth of 15% for the 4
th
quarter 2007, much better
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than the reported 8%. Were there unusually low expenses or one-time
gains imbedded in 4
th
quarter 2006 Other Expenses that would be
helpful in assessing a core normalized growth rate?
We would refer you to our response to question # 7
above. As weve noted above, however, Other
doesnt grow linearly, although we do applaud the time you took thinking
through this question. We think its
pointless to calculate a core normalized growth rate to use for the Other
line items but then again, we only work here.
25.
As a long
term shareholder, Id like your thoughts as to why the stock markets treat you
so poorly? Your third quarter was a
record, the stock hit 53 and then ever so quickly goes to 40 before climbing
back up to 46. Your fourth quarter was
also good despite the DOJ expense and you get punished again. You did beat many other stalwarts, and
everyone knows who they are, and yet you get pummeled again. In fact, in looking on Yahoo, I see 2007 net
earnings were up 14% following 2006 net earnings up 23%that is a combined
growth rate of nearly 40% over that period of time and yet, if the historical
stock prices listed out on Yahoo are reliable, the stock hasnt risen
appreciably since May of 2006 and only 10% since February 2006. I guess its because the street doesnt like
good news?
The vagaries of why the stock market does what it
does are lost on us as well. We have any
number of institutional investors tell us how much they like the company and
how well their investment has done while offering up paeans like Your company
is just wonderful, were never going to sell our shares. When the institutional ownership reports show
up, their erstwhile names have disappeared and we find ourselves asking
ourselves Whats changed?
Basically we have found some solace in recognizing
that there is a difference between pursuing a more noble objective of striving to be a best in class company and,
on the other hand, desiring to be a best in class investment. Good companies have staying power and the
achievement of that status is primarily an internally controlled process. Good investments, on the other hand, are amazingly
like good football coaches. They are
basically only as good as what they may have done for you lately. Hero last year when they won the Superbowl,
goat this year when they were eliminated in the conference championship game,
out in the cold next year if they dont win the Superbowl again, regardless of
whether or not they have a winning record. The key difference being that the title of Good
Investment is externally bestowed, often by those who have limited, if any,
understanding of the businesses they follow.
Because of that, there is a certain amount of superficiality that can
permeate the process.
Over time, however, we do believe strong
consistent performance is recognized by the market. As long as we do more of the same, even if our
accomplishments seemed unrecognized at the moment, we understand that the worst
thing we can do is to morph the Company, or our culture, to try to influence
its external perception in order to gain acceptance by those for whom, at best,
we will only be a passing dalliance.
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