10-Q 1 a10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [X] 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 of other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1015 Third Avenue, 12th 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 X No At August 9, 2000, the number of shares outstanding of the issuer's Common Stock was 51,266,563. Page 1 of 16 pages. The Exhibit Index appears on page 15. 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except share data)
June 30, December 31, ASSETS 2000 1999 --------- --------- (Unaudited) Current assets: Cash and cash equivalents $ 128,603 $ 71,183 Short-term investments 243 1,171 Accounts receivable, less allowance for doubtful accounts of $10,632 at June 30, 2000 and $10,266 at December 31, 1999 305,200 314,789 Other current assets 20,424 15,566 --------- --------- Total current assets 454,470 402,709 Property and equipment, less accumulated depreciation and amortization of $75,704 at June 30, 2000 and $67,684 at December 31, 1999 104,695 105,905 Deferred Federal and state income taxes 7,090 5,584 Other assets, net 22,868 21,263 --------- --------- $ 589,123 $ 535,461 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings 2,603 19,442 Accounts payable 214,197 184,805 Federal, state and foreign income taxes 12,509 11,081 Deferred Federal and state income taxes 6,021 3,232 Other current liabilities 38,860 34,516 --------- --------- Total current liabilities 274,190 253,076 Shareholders' equity: Preferred stock, par value $.01 per share. Authorized 2,000,000 shares; none issued -- -- Common stock, par value $.01 per share. Authorized 160,000,000 shares; issued and outstanding 51,227,913 shares at June 30, 2000, and 50,644,407 shares at December 31, 1999 512 507 Additional paid-in capital 36,643 29,729 Retained earnings 285,070 257,198 Accumulated other comprehensive loss (7,292) (5,049) --------- --------- Total shareholders' equity 314,933 282,385 --------- --------- $ 589,123 $ 535,461 ========= =========
See accompanying notes to condensed consolidated financial statements. Certain 1999 amounts have been reclassified to conform to the 2000 presentation. 2 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (In thousands, except share data) (Unaudited)
Three months ended Six months ended June 30, June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues: Airfreight $ 236,472 $ 207,190 $ 444,653 $ 389,306 Ocean freight 117,246 84,233 212,214 149,307 Customs brokerage and import services 50,778 40,557 96,673 77,080 ------------ ------------ ------------ ------------ Total revenues 404,496 331,980 753,540 615,693 ------------ ------------ ------------ ------------ Operating expenses: Airfreight consolidation 186,192 164,407 348,588 306,434 Ocean freight consolidation 90,190 63,343 161,366 110,616 Salaries and related costs 69,578 57,508 135,684 112,006 Selling and promotion 4,912 4,184 9,375 7,845 Depreciation and amortization 5,563 5,101 11,138 9,873 Rent 4,759 4,388 9,308 8,678 Other 15,573 12,353 29,442 24,826 ------------ ------------ ------------ ------------ Total operating expenses 376,767 311,284 704,901 580,278 ------------ ------------ ------------ ------------ Operating income 27,729 20,696 48,639 35,415 ------------ ------------ ------------ ------------ Interest expense (6) (218) (112) (406) Interest income 1,374 602 2,120 1,135 Other, net (99) 204 (224) 256 ------------ ------------ ------------ ------------ Other income, net 1,269 588 1,784 985 ------------ ------------ ------------ ------------ Earnings before income taxes 28,998 21,284 50,423 36,400 Income tax expense 10,899 8,055 18,968 13,650 ------------ ------------ ------------ ------------ Net earnings $ 18,099 $ 13,229 $ 31,455 $ 22,750 ============ ============ ============ ============ Basic earnings per share $ .35 $ .26 $ .62 $ .46 ============ ============ ============ ============ Diluted earnings per share $ .33 $ .25 $ .58 $ .42 ============ ============ ============ ============ Weighted average basic shares outstanding 51,069,135 50,047,632 50,889,454 49,965,265 ============ ============ ============ ============ Weighted average diluted shares outstanding 54,598,481 53,796,404 54,554,334 53,609,273 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 3 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Operating activities: Net earnings $ 18,099 $ 13,229 $ 31,455 $ 22,750 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable 694 168 826 1,139 Deferred income tax expense (benefit) 1,031 (1,528) 2,545 (388) Tax benefits from employee stock plans 3,797 2,572 6,815 7,459 Depreciation and amortization 5,563 5,101 11,138 9,873 Other 212 288 491 394 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (25,723) (30,782) 8,700 (30,053) Increase in other current assets (3,919) (6,928) (5,051) (11,485) Increase in accounts payable and other current liabilities 23,829 12,956 34,626 18,057 --------- --------- --------- --------- Net cash provided (used) by operating activities 23,583 (4,924) 91,545 17,746 --------- --------- --------- --------- Investing activities: Decrease in short-term investments 744 34 933 217 Purchase of property and equipment (6,361) (7,307) (11,339) (12,673) Other (295) (1,601) (1,654) (3,290) --------- --------- --------- --------- Net cash used by investing activities (5,912) (8,874) (12,060) (15,746) --------- --------- --------- --------- Financing activities: Short-term borrowings, net 903 16,000 (16,752) 20,088 Proceeds from issuance of common stock 2,535 852 3,605 3,134 Repurchases of common stock (2,624) (974) (3,501) (3,279) Dividends paid (3,583) (2,503) (3,583) (2,503) --------- --------- --------- --------- Net cash provided (used) by financing activities (2,769) 13,375 (20,231) 17,440 Effect of exchange rate changes on cash (1,110) (226) (1,834) (1,973) --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents 13,792 (649) 57,420 17,467 Cash and cash equivalents at beginning of period 114,811 67,545 71,183 49,429 Cash and cash equivalents at end of period $ 128,603 $ 66,896 $ 128,603 $ 66,896 ========= ========= ========= ========= Interest and taxes paid: Interest $ 47 $ 207 $ 157 $ 377 Income taxes 8,947 11,867 11,948 13,985
See accompanying notes to condensed consolidated financial statements. Certain 1999 amounts have been reclassified to conform to the 2000 presentation. 4 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 generally accepted accounting principles 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 1999 amounts have been reclassified to conform to the 2000 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 29, 2000. Note 2. Comprehensive Income Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles, are excluded from net income. For the Company, these consist of foreign currency translation gains and losses, net of related income tax effects. The components of total comprehensive income for interim periods are presented in the following table:
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) Net earnings $ 18,099 $ 13,229 $ 31,455 $ 22,750 Foreign currency translation adjustments net of tax of: $539 and $265 for 3 months ended June 30, 2000 and 1999, and $1,208 and $733 for the 6 months ended June 30, 2000 and 1999 (1,001) (492) (2,243) (1,362) -------- -------- -------- -------- Total comprehensive income $ 17,098 $ 12,737 $ 29,212 $ 21,388 ======== ======== ======== ========
5 Note 3. Business Segment Information Statement of Financial Accounting Standards 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 by or allocated to each of these geographical areas when evaluating effectiveness of geographic management. Financial information regarding the Company's operations by geographic area for the three and six months ended June 30, 2000 are as follows:
OTHER AUSTRA- UNITED NORTH LIA/NEW LATIN MIDDLE ELIMI- CONSOLI- (in thousands) STATES AMERICA FAR EAST EUROPE ZEALAND AMERICA EAST NATIONS DATED -------- -------- -------- -------- -------- -------- -------- -------- -------- Three months ended June 30, 2000: Revenues from unaffiliated customers $104,821 7,652 217,123 50,957 3,239 3,494 17,210 404,496 Transfers between geographic areas $ 5,159 287 958 2,235 794 648 776 (10,857) -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $109,980 7,939 218,081 53,192 4,033 4,142 17,986 (10,857) 404,496 ======== ======== ======== ======== ======== ======== ======== ======== ======== Net revenues $ 57,826 5,770 30,314 24,586 2,811 1,936 4,871 128,114 Operating income $ 7,344 667 12,401 5,328 566 382 1,041 27,729 Identifiable assets at quarter end $309,206 18,597 113,896 98,778 9,004 9,801 18,447 11,394 589,123 Capital expenditures $ 3,229 467 951 1,147 144 168 255 6,361 Depreciation and amortization $ 3,114 269 907 784 134 78 277 5,563 Equity $314,933 3,392 93,078 25,525 6,690 231 4,163 (133,079) 314,933 -------- -------- -------- -------- -------- -------- -------- -------- -------- Three months ended June 30, 1999: Revenues from unaffiliated customers $ 85,602 6,015 185,075 40,271 3,131 1,247 10,639 331,980 Transfers between geographic areas $ 4,200 206 830 1,702 783 427 321 (8,469) -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $ 89,802 6,221 185,905 41,973 3,914 1,674 10,960 (8,469) 331,980 ======== ======== ======== ======== ======== ======== ======== ======== ======== Net revenues $ 49,355 4,220 22,984 20,382 2,708 1,097 3,484 104,230 Operating income $ 7,033 683 8,022 3,890 543 76 449 20,696 Identifiable assets at quarter end $256,030 13,411 87,809 87,478 8,116 4,547 13,386 20,539 491,316 Capital expenditures $ 4,383 389 1,087 917 118 40 373 7,307 Depreciation and amortization $ 2,811 162 843 798 159 55 273 5,101 Equity $243,398 2,021 71,138 19,049 5,864 (501) 2,190 (99,761) 243,398 -------- -------- -------- -------- -------- -------- -------- -------- -------- Six months ended June 30, 2000: Revenues from unaffiliated customers $202,122 14,579 395,781 96,419 6,658 6,607 31,374 753,540 Transfers between geographic areas $ 9,868 546 1,804 4,306 1,544 1,276 1,528 (20,872) -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $211,990 15,125 397,585 100,725 8,202 7,883 32,902 (20,872) 753,540 ======== ======== ======== ======== ======== ======== ======== ======== ======== Net revenues $112,043 11,022 54,124 47,901 5,555 3,616 9,325 243,586 Operating income $ 13,194 1,118 20,545 10,024 1,178 649 1,931 48,639 Identifiable assets at quarter end $309,206 18,597 113,896 98,778 9,004 9,801 18,447 11,394 589,123 Capital expenditures $ 5,809 879 1,916 1,809 254 241 431 11,339 Depreciation and amortization $ 6,263 522 1,788 1,603 270 148 544 11,138 Equity $314,933 3,392 93,078 25,525 6,690 231 4,163 (133,079) 314,933 -------- -------- -------- -------- -------- -------- -------- -------- -------- Six months ended June 30, 1999: Revenues from unaffiliated customers $164,789 10,837 333,582 78,039 5,708 2,937 19,801 615,693 Transfers between geographic areas $ 7,681 416 1,590 3,283 1,456 833 679 (15,938) -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $172,470 11,253 335,172 81,322 7,164 3,770 20,480 (15,938) 615,693 ======== ======== ======== ======== ======== ======== ======== ======== ======== Net revenues $ 92,626 7,745 44,176 40,484 4,974 2,146 6,492 198,643 Operating income $ 10,165 1,074 14,848 7,554 881 107 786 35,415 Identifiable assets at quarter end $256,030 13,411 87,809 87,478 8,116 4,547 13,386 20,539 491,316 Capital expenditures $ 7,082 663 1,507 1,905 263 162 1,091 12,673 Depreciation and amortization $ 5,507 288 1,582 1,586 299 116 495 9,873 Equity $243,398 2,021 71,138 19,049 5,864 (501) 2,190 (99,761) 243,398 -------- -------- -------- -------- -------- -------- -------- -------- --------
The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. 6 Note 4. Basic and Diluted Earnings per Share The following table reconciles the numerator and denominator of the basic and diluted per share computations for the three months and six months ended June 30, 2000 and 1999:
Three months ended June 30, ----------------------------------- Weighted (in thousands, except share Net Average Earnings and per share amounts) Earnings Shares Per Share --------------------------- ---------- ---------- --------- 2000 ---- Basic earnings per share $ 18,099 51,069,135 $ .35 Effect of dilutive potential common shares -- 3,529,346 -- ---------- ---------- -------- Diluted earnings per share $ 18,099 54,598,481 $ .33 ========== ========== ======== 1999 ---- Basic earnings per share $ 13,229 50,047,632 $ .26 Effect of dilutive potential common shares -- 3,748,772 -- ---------- ---------- -------- Diluted earnings per share $ 13,229 53,796,404 $ .25 ========== ========== ========
Six months ended June 30, ---------------------------------- Weighted (in thousands, except share Net Average Earnings and per share amounts) Earnings Shares Per Share --------------------------- ---------- ---------- --------- 2000 ---- Basic earnings per share $ 31,455 50,889,454 $ .62 Effect of dilutive potential common shares -- 3,664,880 -- ---------- ---------- -------- Diluted earnings per share $ 31,455 54,554,334 $ .58 ========== ========== ======== 1999 ---- Basic earnings per share $ 22,750 49,965,265 $ .46 Effect of dilutive potential common shares -- 3,644,008 -- ---------- ---------- -------- Diluted earnings per share $ 22,750 53,609,273 $ .42 ========== ========== ========
Note 5. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting standards for derivative and hedging transactions. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company follows a policy of accelerating international currency settlements to manage its foreign exchange exposure. The Company does not use derivative instruments 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 each of the first two quarters of 2000 was insignificant. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", to be effective the fourth quarter of 2000. The Company does not anticipate that compliance with SAB No. 101 will result in any material change to the Company's revenue recognition policies. Financial Accounting Standards Board (FAS) Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for certain issues. The Interpretation is effective July 1, 2000. The Company does not anticipate that implementation of FAS Interpretation No. 44 will result in a significant impact on the Company's financial condition or results of operation. 7 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 Company's report on Form 10-K filed on or about March 29, 2000. GENERAL Expeditors International of Washington, Inc. is engaged in the business of providing global logistics services, 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 service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines, and governmental agencies. The Company considers its current working relationships with these entities to be good. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, 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 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 shifting 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 the three and six-month periods ended June 30, 2000 and 1999, 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. 8 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 June 30, Six months ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- Percent Percent Percent Percent of net of net of net of net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- -------- -------- -------- -------- -------- -------- (Amounts in thousands) Net Revenues: Airfreight $ 50,280 39% $ 42,783 41% $ 96,065 39% $ 82,872 42% Ocean freight 27,056 21 20,890 20 50,848 21 38,691 19 Customs brokerage and import services 50,778 40 40,557 39 96,673 40 77,080 39 -------- -------- -------- -------- -------- -------- -------- -------- Net revenues 128,114 100 104,230 100 243,586 100 198,643 100 -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Salaries and related costs 69,578 54 57,508 55 135,684 56 112,006 56 Other 30,807 24 26,026 25 59,263 24 51,222 26 -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses 100,385 78 83,534 80 194,947 80 163,228 82 -------- -------- -------- -------- -------- -------- -------- -------- Operating income 27,729 22 20,696 20 48,639 20 35,415 18 Other income, net 1,269 1 588 1 1,784 1 985 -- -------- -------- -------- -------- -------- -------- -------- -------- Earnings before income taxes 28,998 23 21,284 21 50,423 21 36,400 18 Income tax expense 10,899 9 8,055 8 18,968 8 13,650 7 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings $ 18,099 14% $ 13,229 13% $ 31,455 13% $ 22,750 11% ======== ======== ======== ======== ======== ======== ======== ========
Airfreight net revenues increased 18% and 16% for the three and six-month periods ended June 30, 2000 as compared with the same periods for 1999. These increases were primarily due to increased airfreight tonnage handled by the Company's expanding global network. Ocean freight net revenues increased 30% and 31% for the three and six-month periods ended June 30, 2000 as compared with the same periods for 1999. The Company continued to aggressively market competitive ocean freight rates primarily on freight moving eastbound from the Far East. The ocean forwarding business and ECMS (Expeditors Cargo Management Systems), the Company's ocean freight consolidation management and purchase order tracking service, were again instrumental in helping the Company to expand market share. Customs brokerage and import services increased 25% for each of the three and six-month periods ended June 30, 2000 as compared with the same periods for 1999. These increases were the result of 1) the Company's growing reputation for providing high quality service, 2) consolidation within the customs brokerage market as customers seek out brokers with 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, which is included in this category. Salaries and related costs increased during the three and six-month periods ended June 30, 2000 compared with the same periods in 1999 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 have, however, remained relatively constant as a percentage of net revenues--a measure that management believes is significant in assessing the effectiveness of corporate cost containment objectives. 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 organic growth in revenues, net revenues and net earnings for the three and six-month periods ended June 30, 2000 and 1999 are a direct result of the incentives inherent in the Company's compensation program. Other operating expenses increased for the three and six-month periods ended June 30, 2000 as compared with the same periods in 1999 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 and six-month periods ended June 30, 2000 as compared with the same periods in 1999. The Company pays income taxes in the United States and other jurisdictions. In addition, the Company pays various other taxes, which are typically included in costs of operations. Effective income tax rates during the three and six-month periods ended June 30, 2000 remained virtually constant as compared with the same periods in 1999. 9 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 toward the 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. 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 accelerating international currency settlements among these offices or agents. Foreign currency gains and losses recognized during the second quarter and for the first six months of 2000 and 1999 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. On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and a new common currency - the Euro. The Euro trades on currency exchanges and may be used in business transactions. The conversion to the Euro eliminates currency exchange rate risk between the member countries. Beginning in January 2002, new Euro-denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Company has established plans to address the issues raised by the Euro currency conversion including the need to adapt computer systems and business processes to accommodate Euro-denominated transactions. Since existing financial systems currently accommodate multiple currencies, the plans contemplate full conversion by the end of 2001. The Company does not expect the conversion costs to be material. Due to numerous uncertainties, the Company is evaluating the effects one common European currency will have on pricing. The Company is unable to predict the resulting impact, if any, on the Company's consolidated financial statements. Prior to December 31, 1999, the Company incurred costs to assess any potential Year 2000 issues. These amounts were immaterial and the Company has experienced no significant problems related to Year 2000 in doing business in early 2000. 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. Office Openings - The Company opened five start-up offices during the second quarter of 2000, as follows: EUROPE ASIA LATIN AMERICA ------ ---- ------------- Budapest, Hungary Ho Chi Minh City, Vietnam Manaus, Brazil Huizen, The Netherlands Phnom Penh, Cambodia 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 10 included in the Company's operating results for at least one full year. The table below presents same store comparisons for the quarter and for the six months ended June 30, 2000 (which is the measure of any increase from the same period of 1999) and for the quarter and the six months ended June 30, 1999 (which measures growth over 1998).
For the three months For the six months ended June 30, ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net revenue 22% 23% 22% 22% Operating income 34% 24% 38% 20%
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 six months ended June 30, 2000 was approximately $91.5 million, as compared with $17.7 million for the same period of 1999. This $73.8 million increase is principally due to a decrease in accounts receivable ($38.7 million) and an increase in accounts payable ($16.6 million). As stated elsewhere, 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 cyclical growth in customer receivables consumes available cash. In this situation, the Company has utilized short-term borrowings to satisfy normal operating expenditures. These short-term borrowings have been repaid when the trend reverses and customer collections exceed customer billings. As a customs broker, the Company makes significant 5-10 business day cash advances for the payment of duties and freight. 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, but are accounted for as a direct increase in accounts receivable. 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 six months ended June 30, 2000 was $12 million, as compared with $15.7 million during the same period of 1999. The largest use of cash in investing activities is cash paid for capital expenditures. In the first six months of 2000, the Company made capital expenditures of $11.3 million as compared with $12.7 million for the same period in 1999. Capital expenditures in 2000 and in 1999 related primarily to investments in technology and office furniture and equipment. Cash used in financing activities during the first six months of 2000 was $20.2 million as compared with cash provided by financing activities of $17.4 million for same period in 1999. In 2000, the Company paid down $16.8 million on short-term borrowings, as compared with an increase in short-term borrowings of $20.1 million that occurred during the same period of 1999. 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 second quarter of 2000 and 1999 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 June 30, 2000, working capital was $180 million, including cash and short-term investments of $129 million. The Company had no long-term debt at June 30, 2000. 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 currently expects to spend approximately $30 million on property and equipment in 2000, 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 $53.5 million. At June 30, 2000, the Company was directly liable for $2.6 million drawn on these lines of credit and was contingently liable for an additional $11.7 million from standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $7.6 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 may be subject to foreign exchange controls. In addition, certain undistributed earnings of the Company's subsidiaries accumulated through December 31, 1992 would, under most circumstances, be subject to some additional United States income tax if distributed to the Company. The Company has not provided for this additional tax 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. 11 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 six months ended June 30, 2000, would have had the effect of raising operating income approximately $3.3 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately $2.7 million. The Company has approximately $70 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 each of the first two quarters of 2000 was insignificant. 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 June 30, 2000, the Company had cash and cash equivalents and short-term investments of $128.8 million and short-term borrowings of $2.6 million, all subject to variable short-term interest rates. 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 second quarter of 2000. 12 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of the Shareholders was held on May 3, 2000. (b) The following directors were elected to the Board of Directors to serve a term of one year and until their successors are elected and qualified: For Withheld --- -------- P.J. Rose 39,999,693 910,030 J.L.K. Wang 40,001,001 908,722 R.J. Gates 40,909,496 227 J.J. Casey 39,999,920 909,803 D.P. Kourkoumelis 40,001,145 908,578 M.J. Malone 39,948,018 961,705 J.W. Meisenbach 40,001,145 908,578 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description ------- ----------- Exhibit 10.38 Loan Modification Agreement between the Company and Bank of America, N.A. dated June 30, 2000 amending the net worth to $250,000,000, amending the maturity date to the Note and extending the termination date, as defined in the Credit Agreement to June 29, 2001. Exhibit 27.1 Financial Data Schedule, Edgar Filing Only (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended June 30, 2000. 13 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. August 14, 2000 /s/ Peter J. Rose ------------------------------------------- Peter J. Rose, Chairman and Chief Executive Officer (Principal Executive Officer) August 14, 2000 /s/ R. Jordan Gates ------------------------------------------- R. Jordan Gates, Executive Vice President- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 14 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Form 10-Q Index and Exhibits June 30, 2000 Exhibit Number Description ------- ----------- 10.38 Loan Modification Agreement between the Company and Bank of America, N.A. dated June 30, 2000 amending the net worth to $250,000,000, amending the maturity date to the Note and extending the termination date, as defined in the Credit Agreement to June 29, 2001. 27.1 Financial Data Schedule (Filed Electronically Only) 15