-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wo2kriJfKAzfrotopSqf2uJIAgQH9cvtIP2lMnt3jD/yV71DnTRYxhPziAmWGR6A ZRdpd3rqopF9SsbxHauK3w== 0000912057-99-006301.txt : 19991117 0000912057-99-006301.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPEDITORS INTERNATIONAL OF WASHINGTON INC CENTRAL INDEX KEY: 0000746515 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 911069248 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13468 FILM NUMBER: 99756892 BUSINESS ADDRESS: STREET 1: 19119 16TH AVE S STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98188 BUSINESS PHONE: 206-246-3711 MAIL ADDRESS: STREET 1: 19119 16TH AVENUE SOUTH STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98168-9620 10-Q 1 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 September 30, 1999 OR [ ] 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 incorporation or organization) (IRS Employer Identification Number) 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 November 9, 1999, the number of shares outstanding of the issuer's Common Stock was 50,446,035. Page 1 of 19 pages. The Exhibit Index appears on page 18. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except share data)
September 30, December 31, 1999 1998 ------------ ----------- (Unaudited) Assets - ------ Current assets: Cash and cash equivalents ............................................. $ 60,606 $ 49,429 Short term investments ................................................ 1,108 394 Accounts receivable, less allowance for doubtful accounts of $9,153 at September 30, 1999 and $8,198 at December 31, 1998 ................ 301,589 222,598 Deferred Federal and state income taxes ............................... 3,609 2,427 Other current assets .................................................. 15,416 9,151 --------- --------- Total current assets .............................................. 382,328 283,999 Property and equipment, less accumulated depreciation and amortization of $63,017 at September 30, 1999 and $50,307 at December 31, 1998 ................... 105,573 103,030 Deferred Federal and state income taxes .................................... 2,905 2,183 Other assets, net .......................................................... 21,788 17,384 --------- --------- $ 512,594 $ 406,596 ========= ========= Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Short term borrowings ................................................. $ 17,203 $ 12,245 Accounts payable ...................................................... 187,581 143,523 Income taxes .......................................................... 10,741 8,304 Other current liabilities ............................................. 29,672 25,326 --------- --------- Total current liabilities ......................................... 245,197 189,398 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 50,544,995 shares at September 30, 1999, and 49,363,682 shares at December 31, 1998 ................................................. 505 493 Additional paid-in capital ............................................ 30,717 17,274 Retained earnings ..................................................... 241,135 203,050 Cumulative other comprehensive loss ................................... (4,960) (3,619) --------- --------- Total shareholders' equity ............................................ 267,397 217,198 --------- --------- $ 512,594 $ 406,596 ========= =========
See accompanying notes to condensed consolidated financial statements. 2 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (In thousands, except share data) (Unaudited)
Three months ended Nine months ended September 30, September 30, ------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Airfreight .................. $ 248,215 $ 182,798 $ 637,521 $ 481,962 Ocean freight ............... 111,365 70,595 260,672 170,510 Customs brokerage and import services ................ 46,559 36,282 123,639 102,522 ----------- ----------- ----------- ----------- Total revenues .......... 406,139 289,675 1,021,832 754,994 ----------- ----------- ----------- ----------- Operating expenses: Airfreight consolidation .... 200,846 145,379 507,280 381,454 Ocean freight consolidation . 85,574 51,406 196,190 122,512 Salaries and related costs .. 64,019 49,958 176,025 137,516 Selling and promotion ....... 4,399 3,762 12,244 10,742 Depreciation and amortization 5,359 3,993 15,232 10,867 Rent ........................ 4,560 4,158 13,238 11,164 Other ....................... 12,985 8,746 37,811 29,448 ----------- ----------- ----------- ----------- Total operating expenses 377,742 267,402 958,020 703,703 ----------- ----------- ----------- ----------- Operating income ............ 28,397 22,273 63,812 51,291 Other income, net ................ 145 311 1,130 1,925 ----------- ----------- ----------- ----------- Earnings before income taxes ..... 28,542 22,584 64,942 53,216 Income tax expense ............... 10,703 8,367 24,353 19,885 ----------- ----------- ----------- ----------- Net earnings ................ $ 17,839 $ 14,217 $ 40,589 $ 33,331 =========== =========== =========== =========== Basic earnings per share .... $ .35 $ .29 $ .81 $ .67 =========== =========== =========== =========== Diluted earnings per share .. $ .33 $ .27 $ .75 $ .63 =========== =========== =========== =========== Weighted average basic common shares outstanding ... 50,381,950 49,849,276 50,014,832 49,387,984 Weighted average diluted common shares outstanding ... 54,095,025 52,942,864 53,761,888 53,098,392
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 Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Operating activities: Net earnings ................................... $ 17,839 $ 14,217 $ 40,589 $ 33,331 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Provision for losses on accounts receivable ................... 400 681 1,539 1,170 Deferred income tax expense ................ 903 2,188 7,974 3,950 Depreciation and amortization .............. 5,359 3,993 15,232 10,867 Other ...................................... 121 183 515 (470) Changes in operating assets and liabilities: Accounts receivable ........................ (48,166) (44,089) (78,219) (35,151) Other current assets ....................... 5,080 140 (6,405) (4,503) Accounts payable and other current liabilities ............. 31,709 18,719 49,766 18,076 -------- -------- -------- -------- Net cash provided (used) by operating activities ................................. 13,245 (3,968) 30,991 27,270 -------- -------- -------- -------- Investing activities: Increase in short-term investments ............. (963) (1) (746) (198) Purchase of property and equipment ............. (5,955) (13,740) (18,628) (44,673) Other .......................................... (1,840) (1,780) (5,130) (256) -------- -------- -------- -------- Net cash used in investing activities .......... (8,758) (15,521) (24,504) (45,127) -------- -------- -------- -------- Financing activities: Short-term borrowings, net ..................... (15,545) 25,153 4,543 24,155 Proceeds from issuance of common stock ......... 4,758 3,868 7,892 4,475 Repurchases of common stock .................... (308) (3,938) (3,587) (4,464) Dividends paid ................................. -- -- (2,503) (1,722) -------- -------- -------- -------- Net cash (used) provided by financing activities (11,095) 25,083 6,345 22,444 Effect of exchange rate changes on cash ........ 318 692 (1,655) (744) -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents (6,290) 6,286 11,177 3,843 Cash and cash equivalents at beginning of period ........................ 66,896 39,651 49,429 42,094 Cash and cash equivalents at end of period .................................. $ 60,606 $ 45,937 $ 60,606 $ 45,937 ======== ======== ======== ======== Interest and taxes paid: Interest ................................... 324 17 701 53 Income taxes ............................... 3,251 6,283 17,236 18,190
See accompanying notes to condensed consolidated financial statements. 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 1998 amounts have been reclassified to conform to the 1999 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 31, 1999. 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 Nine months ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in thousands) Net Income ............................. $ 17,839 $ 14,217 $ 40,589 $ 33,331 Foreign currency translation adjustments net of tax of: $11 and $885 for the three months ended September 30, 1999 and 1998, and $722 and $509 for the nine months ended September 30, 1999 and 1998 ..... 21 1,506 (1,341) (863) -------- -------- -------- -------- Total comprehensive income ............. $ 17,860 $ 15,723 $ 39,248 $ 32,468 ======== ======== ======== ========
5 Note 3. Business Segment Information 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 months ended September 30, 1999 and 1998 and nine months ended September 30, 1999 and 1998 are as follows:
OTHER UNITED NORTH FAR AUSTRALIA/ LATIN MIDDLE ELIMI- CONSOLI- (Dollars in thousands) STATES AMERICA EAST EUROPE NEW ZEALAND AMERICA EAST NATIONS DATED ------ ------- ---- ------ ----------- ------- ------ -------- -------- Three months ended September 30, 1999: Revenues from unaffiliated customers ............. $ 91,296 6,175 242,252 46,931 3,546 2,155 13,784 406,139 Transfers between geographic areas ...... $ 5,352 309 859 1,947 876 549 626 (10,518) -- -------- ----- ------- ------ ----- ----- ------ ------- ------- Total revenues ........... $ 96,648 6,484 243,111 48,878 4,422 2,704 14,410 (10,518) 406,139 ======== ===== ======= ====== ===== ===== ====== ======= ======= Net revenues ............. $ 54,691 4,503 28,058 24,030 2,933 1,299 4,205 119,719 Operating income ......... $ 9,434 671 11,385 5,354 608 123 822 28,397 Identifiable assets at quarter end......... $277,390 17,155 94,804 93,175 9,518 5,625 14,927 512,594 Capital expenditures ..... $ 2,986 361 613 848 219 84 844 5,955 Depreciation and amortization .......... $ 2,946 154 914 843 158 66 278 5,359 Equity ................... $267,397 2,467 70,875 22,798 6,095 (365) 2,608 (104,478) 267,397 Three months ended September 30, 1998: Revenues from unaffiliated customers ............. $ 77,564 3,606 161,456 37,748 2,455 924 5,922 289,675 Transfers between geographic areas ...... $ 3,823 220 926 1,044 683 465 290 (7,451) -- -------- ----- ------- ------ ----- ----- ------ ------ ------- Total revenues ........... $ 81,387 3,826 162,382 38,792 3,138 1,389 6,212 (7,451) 289,675 ======== ===== ======= ====== ===== ===== ===== ====== ======= Net revenues ............. $ 43,726 2,743 22,530 19,058 2,215 1,083 1,535 92,890 Operating income ......... $ 8,937 288 8,389 3,795 369 109 386 22,273 Identifiable assets at quarter end......... $231,499 11,155 79,405 79,563 7,658 3,593 7,137 420,010 Capital expenditures ..... $ 10,238 245 2,019 707 376 122 33 13,740 Depreciation and amortization .......... $ 2,031 108 728 766 131 65 164 3,993 Equity ................... $203,813 1,018 77,441 15,018 4,453 (939) 1,368 (98,359) 203,813 Nine months ended September 30, 1999: Revenues from unaffiliated customers ............. $256,085 17,012 575,834 124,970 9,254 5,092 33,585 1,021,832 Transfers between geographic areas ....... $ 13,033 725 2,449 5,230 2,332 1,382 1,304 (26,455) -- -------- ----- ------- ------ ----- ----- ------ ------- --------- Total revenues ........... $269,118 17,737 578,283 130,200 11,586 6,474 34,889 (26,455) 1,021,832 ======== ====== ======= ======= ====== ===== ====== ======= ========= Net revenues ............. $147,317 12,248 72,234 64,514 7,907 3,445 10,697 318,362 Operating income ......... $ 19,599 1,745 26,233 12,908 1,489 230 1,608 63,812 Identifiable assets at quarter end......... $277,390 17,155 94,804 93,175 9,518 5,625 14,927 512,594 Capital expenditures ..... $ 10,068 1,024 2,120 2,753 482 246 1,935 18,628 Depreciation and amortization .......... $ 8,452 442 2,496 2,429 457 182 774 15,232 Equity ................... $267,397 2,467 70,875 22,798 6,095 (365) 2,608 (104,478) 267,397 Nine months ended September 30, 1998: Revenues from unaffiliated customers ............. $223,240 10,036 391,669 106,353 7,246 2,269 14,181 754,994 Transfers between geographic areas ....... $ 9,469 531 2,704 2,910 1,664 1,084 708 (19,070) -- -------- ----- ------- ------ ----- ----- ------ -------- ------- Total revenues ........... $232,709 10,567 394,373 109,263 8,910 3,353 14,889 (19,070) 754,994 ======== ====== ======= ======= ===== ===== ====== ======== ======= Net revenues ............. $118,843 7,524 58,958 53,080 6,154 2,609 3,860 251,028 Operating income ......... $ 18,572 589 20,916 9,622 948 (91) 735 51,291 Identifiable assets at quarter end......... $231,499 11,155 79,405 79,563 7,658 3,593 7,137 420,010 Capital expenditures ..... $ 35,738 468 4,523 2,780 586 409 169 44,673 Depreciation and amortization .......... $ 5,686 357 1,677 2,176 366 180 425 10,867 Equity ................... $203,813 1,018 77,441 15,018 4,453 (939) 1,368 (98,359) 203,813
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 nine months ended September 30, 1999 and 1998:
Three months ended September 30, ----------------------------------- Weighted (Amounts in thousands, except Net Average Earnings share and per share amounts) Earnings Shares Per Share - ---------------------------- -------- ------ --------- 1999 - ---- Basic earnings per share ....... $17,839 50,381,950 $ .35 Effect of dilutive stock options -- 3,713,075 -- ------- ---------- ------ Diluted earnings per share ..... $17,839 54,095,025 $ .33 ======= ========== ====== 1998 - ---- Basic earnings per share ....... $14,217 49,849,276 $ .29 Effect of dilutive stock options -- 3,093,588 -- ------- ---------- ------ Diluted earnings per share ..... $14,217 52,942,864 $ .27 ======= ========== ======
Nine months ended September 30, ------------------------------------ Weighted (Amounts in thousands, except Net Average Earnings share and per share amounts) Earnings Shares Per Share - ---------------------------- -------- ------- --------- 1999 - ---- Basic earnings per share $40,589 50,014,832 $ .81 Effect of dilutive stock options -- 3,747,056 -- ------- ---------- ------ Diluted earnings per share $40,589 53,761,888 $ .75 ======= ========== ====== 1998 - ---- Basic earnings per share $33,331 49,387,984 $ .67 Effect of dilutive stock options -- 3,710,408 -- ------- ---------- ------ Diluted earnings per share $33,331 53,098,392 $ .63 ======= ========== =====
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 three quarters of 1999 was insignificant. 7 Note 6. Stock Dividend On May 5, 1999, the Board of Directors declared a 2-for-1 stock split, effected in the form of a stock dividend of one share of common stock for every share outstanding, and increased the authorized common stock to 160 million shares. The stock dividend was distributed on June 1, 1999 to shareholders of record on May 17, 1999. All share and per share information, except par value, has been adjusted for all periods to reflect the stock split. 8 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 31, 1999. 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 also 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 dependant 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 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 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 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. 9 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 nine-month periods ended September 30, 1999 and 1998, 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. 10 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 September 30, Nine months ended September 30, 1999 1998 1999 1998 ----------------- ----------------- ------------------ ------------------- 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 .................. $ 47,369 40% $37,419 40% $130,241 41% $100,508 40% Ocean freight ............... 25,791 21 19,189 21 64,482 20 47,998 19 Customs brokerage and import services ........ 46,559 39 36,282 39 123,639 39 102,522 41 -------- --- ------- --- -------- --- -------- --- Net revenues ........... 119,719 100 92,890 100 318,362 100 251,028 100 -------- --- ------- --- -------- --- -------- --- Operating expenses: Salaries and related costs .. 64,019 53 49,958 54 176,025 55 137,516 55 Other ....................... 27,303 23 20,659 22 78,525 25 62,221 25 -------- --- ------- --- -------- --- -------- --- Total operating expenses . 91,322 76 70,617 76 254,550 80 199,737 80 -------- --- ------- --- -------- --- -------- --- Operating income ............ 28,397 24 22,273 24 63,812 20 51,291 20 Other income, net ........... 145 -- 311 -- 1,130 -- 1,925 1 -------- --- ------- --- -------- --- -------- --- Earnings before income taxes 28,542 24 22,584 24 64,942 20 53,216 21 Income tax expense .......... 10,703 9 8,367 9 24,353 7 19,885 8 -------- --- ------- --- -------- --- -------- --- Net earnings ........... $ 17,839 15% $14,217 15% $ 40,589 13% $ 33,331 13% ======== === ======= === ======== === ======== ===
Airfreight net revenues increased 27% and 30% for the three and nine-month periods ended September 30, 1999 as compared with the same periods for 1998. This increase was primarily due to increased airfreight tonnage handled by the Company's expanding global network. Ocean freight net revenues increased 34% for each of the three and nine-month periods ended September 30, 1999 as compared with the same periods for 1998. 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 28% and 21% for the three and nine-month periods ended September 30, 1999 as compared with the same periods for 1998. This increase is the result of 1) the Company's expansion in the truck and rail border brokerage business on the southern border of 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 brokers with sophisticated computerized capabilities critical to an overall logistics management program, and 4) the growing importance of distribution services as a separate and distinct service which is included in this category. Salaries and related costs increased during the three and nine-month periods ended September 30, 1999 compared with the same periods in 1998 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 virtually constant as a percentage of net revenues - -- a measure 11 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 nine-month periods ended September 30, 1999 and 1998 are a direct result of the incentives inherent in the Company's compensation program. Other operating expenses increased for the three and nine-month periods ended September 30, 1999 as compared with the same periods in 1998 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues remained virtually constant for the three and nine-month periods ended September 30, 1999 as compared with the same periods in 1998. Other income, net, decreased for the three-month period ended September 30, 1999, as compared with the same period in 1998. This decrease can be primarily attributed to an increase in interest expense in 1999. Interest incurred of $193,000 in 1998 was capitalized as a cost of constructing the Seattle corporate office building. Other income, net, decreased for the nine-month period ended September 30, 1999, as compared with the same period in 1998 primarily attributed to a $928,000 gain realized on the sale of one of the Company's real estate assets in 1998. 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 nine-month periods ended September 30, 1999 remained virtually constant as compared with the same periods in 1998. 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 third quarter and for the first nine months of 1999 and 1998 were insignificant. The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and import 12 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. Throughout 1998, macroeconomic conditions in Brazil, Mexico and across the Far East impacted the global economy and, to some degree, impacted the Company's business. The Company has a very strong presence in the Far East, where it is most active in arranging exports to North America and Europe. Because of this strong export bias, and also due to the fact that a large volume of the Company's business is transacted in U.S. Dollars, the devaluation of various Asian and other currencies over the past year has not severely impacted the Company's earnings. The Company continues to evaluate what actions may need to be taken in these markets in response to the global economic events in order to safeguard, to the extent possible, the ongoing profitability of the Company's operations. 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 adopt 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. Year 2000 The Company has established teams to identify and correct Year 2000 compliance issues. Information systems with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. The teams are also charged with investigating the Year 2000 readiness of suppliers, customers, agents and other third parties and with developing contingency plans where necessary. Key systems have been inventoried and assessed for compliance, and detailed plans are in place for required system modifications or replacements. Remediation and testing activities have been completed. Because the Company's systems were developed from the late 1980's forward, the substantial Year 2000 concerns inherent in hardware and software systems placed into service by many companies at earlier dates are not a primary concern. Management does not believe that future costs directly related to Year 2000 issues will be material. Costs incurred through 1998 and during the first nine months of 1999 were immaterial. The Company has identified critical suppliers, customers and other third parties and is in the process of surveying their Year 2000 remediation programs. Contingency plans for Year 2000-related interruptions are being developed and are expected to include the development of emergency recovery procedures, replacing electronic applications with manual processes and identification of alternate suppliers. Risk assessments and contingency plans, where necessary, have been finalized. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. It should be noted that uninterrupted operations depend upon the ability of third parties, especially airlines, air traffic control and governmental customs organizations to be Year 2000 compliant. The Company has no direct ability to influence the compliance actions of customers, suppliers, agents and other third parties. Accordingly, it is unable to eliminate or estimate the ultimate effect of third party Year 2000 risks on the Company's operating results. The Company's greatest risk is a potential temporary inability of air traffic control and government customs agencies to track flights or transact normal procedures on a timely basis. Should this actually happen, management anticipates that restoring normal commerce would be a global priority. 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 13 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 one office and acquired the office of an existing agent during the third quarter of 1999, as follows: Port Luis, Mauritius Beirut, Lebanon (agent acquisition) 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 quarter and for the nine months ended September 30, 1999 (which is the measure of any increase from the same quarter of 1998) and for the quarter and for the nine months ended September 30, 1998 (which measures growth over 1997).
For the three months For the nine months ended September 30, ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net revenues 26% 15% 23% 17% Operating income 25% 18% 22% 25%
Liquidity and Capital Resources The Company's principal source of liquidity is cash generated from operations. At September 30, 1999, working capital was $137 million, including cash and short-term investments of $62 million. The Company had no long-term debt at September 30, 1999. While the nature of its business does not require an extensive investment in property and equipment, the Company is actively looking for suitable facilities and/or property to acquire at or near airports in certain cities in North America and overseas. The Company expects to spend approximately $25 million on property and equipment in 1999, which is expected to be financed with cash, short-term floating rate and/or long-term fixed-rate borrowings. Through September 30, 1999, the Company has purchased approximately $19 million of property and equipment. The Company maintains foreign and domestic borrowings under unsecured bank lines of credit totaling $50.9 million. At September 30, 1999, the Company was directly liable for $17.2 million drawn on these lines of credit and was contingently liable for an additional $12.3 million from standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $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 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. 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: 14 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 nine months ended September 30, 1999, would have had the effect of raising operating income approximately $4.2 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately $3.4 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. 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 September 30, 1999, the Company had cash and cash equivalents and short-term investments of $61.7 million and short-term borrowings of $17.2 million, all subject to variable short-term interest rates. A hypothetical change in the interest rate of 10% would have an insignificant impact on the Company's earnings. 15 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The order of investigation and hearing concerning potential violations of the Shipping Act of 1984 referenced in the Company's Form 10-Q as filed with the Securities and Exchange Commission on or about August 16, 1999, was settled in a satisfactory manner by the Company and the Federal Maritime Commission. There was no material impact on the Company's financial statements and the Company issued a press release on October 18, 1999 announcing the terms of the settlement. 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K. Exhibit Number Description ------- ----------- 10.37 Loan Modification Agreement between the Company and Bank of America National Trust and Savings Association dated September 30, 1999 amending the credit limit to $50,000,000, amending the maturity date of the Note and extending the termination date, as defined in the Credit Agreement to June 30, 2000. 27 Financial Data Schedule, Edgar Filing Only (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended September 30, 1999. 16 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. November 15, 1999 /s/ PETER J. ROSE ---------------------------------------------- Peter J. Rose, Chairman and Chief Executive Officer (Principal Executive Officer) November 15, 1999 /s/ R. JORDAN GATES ---------------------------------------------- R. Jordan Gates, Senior Vice President- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 17 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Form 10-Q Index and Exhibits September 30, 1999 Exhibit Number Description ------- ----------- 10.37 Loan Modification Agreement between the Company and Bank of America National Trust and Savings Association dated September 30, 1999 amending the credit limit to $50,000,000, amending the maturity date of the Note and extending the termination date, as defined in the Credit Agreement to June 30, 2000. 27 Financial Data Schedule (Filed Electronically Only) EX-10.37 2 EX-10.37 EXHIBIT 10.37 [Bank Logo] LOAN MODIFICATION AGREEMENT This agreement amends the Revolving Note dated March 31, 1997 ("Note") and Credit Agreement dated March 31, 1997 ("Credit Agreement"), each executed by EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. ("Borrower") in favor of BANK OF AMERICA, N.A. ("Bank"), regarding a loan in the maximum principal amount of $30,000,000 (the "Loan"), which currently has a maximum principal amount of $40,000,000. For mutual consideration, Borrower and Bank agree to amend the above loan documents as follows: 1. CREDIT LIMIT. Section 1.7 of the Credit Agreement is amended to increase the "Credit Limit" to $50,000,000. Borrower's maximum liability for principal under the Note is also changed to $50,000,000. 2. MATURITY DATE. The maturity date of the Note is changed to JUNE 30, 2000. Section 1.31 of the Credit Agreement is amended to change the "Termination Date" to June 30, 2000. 3. TANGIBLE NET WORTH. Section 6.2 of the Credit Agreement is amended to increase the required minimum Tangible Net Worth, determined as of each quarter end, to $200,000,000. 4. OTHER TERMS. Except as specifically amended by this agreement or any prior amendment, all other terms, conditions, and definitions of the Note, Credit Agreement, and all other security agreements, guaranties, deeds of trust, mortgages, and other instruments or agreements entered into with regard to the Loan shall remain in full force and effect. DATED September 30, 1999 Bank: Borrower: BANK OF AMERICA, N.A. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ STAN DIDDAMS By: /s/ R. JORDAN GATES -------------------- --------------------------------------------- Title: VICE PRESIDENT Title: SVP-CHIEF FINANCIAL OFFICER AND TREASURER ----------------- ------------------------------------------ By: /S/ CHARLES J. LYNCH --------------------------------------------- Title: VP-CORPORATE CONTROLLER ------------------------------------------ EX-27 3 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1999 AND THE CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE RELATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THAT ARE CONTAINED IN THE COMPANY'S 1999 3RD QUARTER 10-Q. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 60,606 1,108 310,742 9,153 0 382,328 168,590 63,017 512,594 245,197 0 0 0 505 266,892 512,594 0 1,021,832 0 703,470 254,550 0 0 64,942 24,353 0 0 0 0 40,589 .81 .75
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