-----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, Olbw+5Cxjlj5mq3XwFv6oefZcbfNHtZucUyvFkYp8VPMRPJW/aTjDQccJ/yoNzZd N4Tjsz5jkb5hwmJouaOXNA== 0001047469-98-031272.txt : 19980817 0001047469-98-031272.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98687230 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 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, 1998 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) 999 Third Avenue, Suite 2500, 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 July 31, 1998, the number of shares outstanding of the issuer=s Common Stock was 24,617,017. Page 1 of ___ pages. The Exhibit Index appears on page __. 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 1998 1997 - ------ ----------- ----------- (Unaudited) Current assets: Cash and cash equivalents $ 39,651 $ 42,094 Short term investments 433 214 Accounts receivable, less allowance for doubtful accounts of $6,330 at June 30, 1998 and $6,449 at December 31, 1997 195,937 206,501 Deferred Federal and state taxes 3,425 4,296 Other current assets 10,935 6,399 ----------- ----------- Total current assets 250,381 259,504 Property and equipment, less accumulated depreciation and amortization of $42,532 at June 30, 1998 and $36,475 at December 31, 1997 89,872 66,550 Deferred Federal and state taxes 2,279 1,930 Other assets, net 14,984 16,122 ----------- ----------- $357,516 $344,106 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term borrowings $ 1,090 $ 2,145 Accounts payable 136,814 143,980 Income taxes 7,336 7,181 Other current liabilities 24,424 18,946 ----------- ----------- Total current liabilities 169,664 172,252 Shareholders' equity: Preferred stock, par value $.01 per share. Authorized 2,000,000 shares; none issued -- -- Common stock, par value $.01 per share. Authorized 80,000,000 shares; issued and outstanding 24,607,867 shares at June 30, 1998, and 24,546,380 at December 31, 1997 246 245 Additional paid-in capital 16,508 15,534 Retained earnings 176,617 159,225 Accumulated other comprehensive income (5,519) (3,150) Total shareholders' equity 187,852 171,854 ----------- ----------- $357,516 $344,106 ----------- ----------- ----------- -----------
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 Six months Ended June 30, June 30, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues: Airfreight $152,017 $156,974 $299,164 $291,902 Ocean freight 54,586 42,068 99,915 81,878 Customs brokerage and import services 35,367 26,533 66,240 47,764 -------- -------- -------- -------- Total revenues 241,970 225,575 465,319 421,544 -------- -------- -------- -------- Operating expenses: Airfreight consolidation 120,433 127,446 236,075 236,750 Ocean freight consolidation 39,163 29,960 71,106 58,907 Salaries and related costs 45,102 36,939 87,558 69,269 Selling and promotion 3,562 3,228 6,980 6,108 Depreciation and amortization 3,610 2,662 6,874 5,044 Rent 3,527 2,584 7,006 4,995 Other 10,254 9,940 20,702 19,074 -------- -------- -------- -------- Total operating expenses 225,651 212,759 436,301 400,147 -------- -------- -------- -------- Operating income 16,319 12,816 29,018 21,397 Other income, net 1,289 568 1,614 1,029 -------- -------- -------- -------- Earnings before income taxes 17,608 13,384 30,632 22,426 Income tax expense 6,528 5,210 11,518 8,654 -------- -------- -------- -------- Net earnings $ 11,080 $ 8,174 $ 19,114 $ 13,772 -------- -------- -------- -------- -------- -------- -------- -------- Basic earnings per share $ .45 $ .34 $ .78 $ .57 -------- -------- -------- -------- -------- -------- -------- -------- Diluted earnings per share $ .42 $ .31 $ .72 $ .53 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average basic common shares outstanding 24,592,225 24,319,723 24,576,758 24,279,477 Weighted average diluted common shares outstanding 26,618,738 26,179,131 26,588,105 26,087,778
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, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Operating Activities: Net earnings $ 11,080 $ 8,174 $ 19,114 $ 13,772 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable (26) 193 489 966 Deferred income tax (benefit) expense 1,832 (773) 1,762 (662) Depreciation and amortization 3,610 2,662 6,873 5,044 Other (863) 227 (652) 378 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (18,462) (14,671) 8,938 (12,006) Increase in other current assets (5,443) (1,711) (4,643) (1,950) Increase (decrease) in accounts payable and other current liabilities 10,191 7,591 (643) 14,558 -------- -------- -------- -------- Net cash provided by operating activities 1,919 1,692 31,238 20,100 -------- -------- -------- -------- Investing Activities: Increase in short-term investments (109) (2,077) (197) (2,072) Purchase of property and equipment (16,725) (1,299) (30,933) (12,855) Acquisitions, net of cash acquired -- (7,076) -- (7,076) Other 1,332 (253) 1,524 292 -------- -------- -------- -------- Net cash used in investing activities (15,502) (10,705) (29,606) (21,711) -------- -------- -------- -------- Financing Activities: Short-term borrowings, net 7 11,206 (998) 10,657 Proceeds from issuance of common stock 336 376 607 883 Repurchases of common stock (255) (147) (526) (153) Dividends paid (1,722) (1,217) (1,722) (1,217) -------- -------- -------- -------- Net cash (used) provided by financing activities (1,634) 10,218 (2,639) 10,170 Effect of exchange rate changes on cash (1,069) (296) (1,436) (939) -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents (16,286) 909 (2,443) 7,620 Cash and cash equivalents at beginning of period 55,937 43,677 42,094 36,966 Cash and cash equivalents at end of period $ 39,651 $ 44,586 $ 39,651 $ 44,586 -------- -------- -------- -------- -------- -------- -------- --------
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 1997 amounts have been reclassified to conform to the 1998 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, 1998. Deferred income taxes of $1,930, related to equity adjustments from foreign currency translation at December 31, 1997, have been reclassified from previously reported amounts. Certain other 1997 amounts have been reclassified to conform with the 1998 presentation. Note 2. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting of comprehensive income and its components in financial statements. 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, 1998 1997 1998 1997 ------- ------ ------- ------- (Dollars in thousands) Net Income $11,080 $8,174 $19,114 $13,772 Foreign currency translation adjustments net of tax of: $1,142 and $169 for 3 months ended June 30, 1998 and 1997, and $1,427 and $506 for the six months ended June 30, 1998 and 1997. (1,832) (277) (2,369) (825) ------- ------ ------- ------- Total comprehensive income $ 9,248 $7,897 $16,745 $12,947 ------- ------ ------- ------- ------- ------ ------- -------
5 Note 3. Earnings per Share The following table is a reconciliation of the numerators and denominators used in computing earnings per share for the three months and six months ended June 30, 1998 and 1997:
Three months ended June 30, --------------------------- Weighted (Amounts in thousands, except Net Average Earnings share and per share amounts) Earnings Shares Per Share - ----------------------------- -------- ------ --------- 1998 - ---- Basic earnings per share $ 11,080 24,592,225 $.45 Effect of dilutive stock options -- 2,026,513 -- -------- ---------- ---- Diluted earnings per share $ 11,080 26,618,738 $.42 -------- ---------- ---- -------- ---------- ---- 1997 - ---- Basic earnings per share $ 8,174 24,319,723 $.34 Effect of dilutive stock options -- 1,859,408 -- -------- ---------- ---- Diluted earnings per share $8,174 26,179,131 $.31 -------- ---------- ---- -------- ---------- ----
Six months ended June 30, ------------------------- Weighted (Amounts in thousands, except Net Average Earnings Share and Per Share amounts) Earnings Shares Per Share - ----------------------------- -------- ------ --------- 1998 - ---- Basic earnings per share $ 19,114 24,576,758 $.78 Effect of dilutive stock options -- 2,011,347 -- -------- ---------- ---- Diluted earnings per share $ 19,114 26,588,105 $.72 -------- ---------- ---- -------- ---------- ---- 1997 - ---- Basic earnings per share $ 13,772 24,279,477 $.57 Effect of dilutive stock options -- 1,808,301 -- -------- ---------- ---- Diluted earnings per share $13,772 26,087,778 $.53 -------- ---------- ---- -------- ---------- ----
6 Note 4. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statements of Position No. 98-1, "Accounting for the Costs of Computer Sofware Developed or Obtained for Internal Use," (SOP 98-1). The Company will be required to adopt SOP 98-1 effective January 1, 1999. SOP 98-1 provides, among other things, guidance for determining whether computer software is for internal use and when the cost related to such software should be expensed as incurred or capitalized and amortized. Management is currently evaluating the provisions of SOP 98-1 but does not expect that the adoption of this pronouncement will significantly impact the Company's future results of operations. In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," was issued. SFAS No. 131 establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that such companies report selected information about segments in interim reports to shareholders. SFAS No. 131 is effective for financial statements issued for periods beginning after December 15, 1997. This statement is not required to be applied to interim financial statements in the initial year of its application. The Company has not yet determined the effects, if any, that SFAS No. 131 will have on the disclosures in its consolidated financial statements. 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 of Form 10-Q including the section entitled "Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain forward-looking statements which must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified elsewhere in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on or about March 31, 1998. GENERAL Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The Company also acts as a customs broker in all the domestic offices, and in many of its overseas offices. The Company also provides additional services for its customers including value added distribution, purchase order management, vendor consolidation and other logistics solutions. The Company offers domestic forwarding services only in conjunction with international shipments. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted. Nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business. The Company's ability to provide services to its customers is highly 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 satisfactory. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways. Historically, the Company's operating results have been subject to a seasonal trend when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third quarter has traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company's international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor 8 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 a sudden change in consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock. RESULTS OF OPERATIONS The following table shows the consolidated net revenues (revenues less consolidation expenses) attributable to the Company's principal services and the Company's expenses for the three and six-month periods ended June 30, 1998 and 1997, 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. 9 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, 1998 1997 1998 1997 ---- ---- ---- ---- Percent Percent Percent Percent Amount revenues Amount revenues Amount revenues Amount revenues ------ -------- ------ -------- ------ -------- ------ -------- (Amounts in thousands) Net Revenues: Airfreight $ 31,584 38% $ 29,528 43% $ 63,089 40% $ 55,152 44% Ocean freight 15,423 19 12,108 18 28,809 18 22,971 18 Customs brokerage and import services 35,367 43 26,533 39 66,240 42 47,764 38 -------- -------- -------- -------- --------- -------- -------- -------- Net revenues 82,374 100 68,169 100 158,138 100 125,887 100 -------- -------- -------- -------- --------- -------- -------- -------- Operating expenses: Salaries and related costs 45,102 55 36,939 54 87,558 56 69,269 55 Other 20,953 25 18,414 27 41,562 26 35,221 28 -------- -------- -------- -------- --------- -------- -------- -------- Total operating expenses 66,055 80 55,353 81 129,120 82 104,490 83 -------- -------- -------- -------- --------- -------- -------- -------- Operating income 16,319 20 12,816 19 29,018 18 21,397 17 Other income, net 1,289 1 568 1 1,614 1 1,029 1 -------- -------- -------- -------- --------- -------- -------- -------- Earnings before income taxes 17,608 21 13,384 20 30,632 19 22,426 18 Income tax expense 6,528 8 5,210 8 11,518 7 8,654 7 -------- -------- -------- -------- --------- -------- -------- -------- Net earnings $ 11,080 13% $ 8,174 12% $ 19,114 12% $ 13,772 11% -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- --------
Airfreight net revenues increased 7% and 14% for the three and six-month periods ended June 30, 1998 as compared with the same periods for 1997. This increase was primarily due to increased airfreight tonnage handled by the Company's expanding global network. Ocean freight net revenues increased 27% and 25% for the three and six-month periods ended June 30, 1998 as compared with the same periods for 1997. 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 its market share. 10 Customs brokerage and import services increased 33% and 39% for the three and six-month periods ended June 30, 1998 as compared with the same periods for 1997. This increase is the result of 1) the Company's entry into the truck and rail border brokerage business in the United States, 2) the Company's growing reputation for providing high quality service, 3) consolidation within the customs brokerage market as customers seek out 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 six-month periods ended June 30, 1998 compared with the same period in 1997 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 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 revenue and net earnings for the three and six-month periods ended June 30, 1998 and 1997 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, 1998 as compared with the same periods in 1997 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 approximately 2% in the three and six-month periods ended June 30, 1998 as compared with the same periods in 1997. This decrease is primarily due to economies of scale realized as the Company's semi-variable other operating expenses were spread over increased net revenues. Other income, net, increased for the three month and six month periods ended June 30, 1998 as compared with the same periods of 1997, due primarily to a $928,000 gain realized on the sale of one of the Company's real estate assets. 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 per financial statements during the three and six-month periods ended June 30, 1998 remained virtually constant as compared with the same periods in 1997. 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. 11 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 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 1998 and 1997 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. 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 3 start-up offices during the second quarter of 1998.
North Indian America Europe Sub-continent - ------- ------ ------------- McAllen, TX Florence, Italy Prague, Czech Republic
12 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 second quarter of 1998 (which is the measure of any increase from the same quarter of 1997) and for the second quarter of 1997 (which measures growth over 1996).
For the three months ended June 30, 1998 1997 ---- ---- Net revenue 19% 29% Operating income 30% 44%
Liquidity and Capital Resources The Company's principal source of liquidity is cash generated from operations. At June 30, 1998, working capital was $82 million, including cash and short-term investments of $40 million. The Company had no long-term debt at June 30, 1998. 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 $40 million on property and equipment in 1998, which is expected to be financed with cash, short-term floating rate and/or long-term fixed-rate borrowings. The Company maintains foreign and domestic borrowings under unsecured bank lines of credit totaling $40.1 million. At June 30, 1998, the Company was directly liable for $.1 million drawn on these lines of credit and was contingently liable for an additional $19 million from standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.4 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. 13 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 7, 1998. (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 21,853,650 129,750 K.M. Walsh 21,853,410 129,990 J.L.K. Wang 21,853,259 130,141 J.J. Casey 21,930,627 52,773 D.P. Kourkoumelis 21,930,389 53,011 J.W. Meisenbach 21,930,729 52,671
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K.
Exhibit Number Description ------ ----------- 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, 1998. 14 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 __, 1998 /s/ PETER J. ROSE -------------------------------------------- Peter J. Rose, Chairman and Chief Executive Officer (Principal Executive Officer) August __, 1998 /s/ R. JORDAN GATES -------------------------------------------- R. Jordan Gates, Senior Vice President- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 15 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Form 10-Q Index and Exhibits June 30, 1998
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule (Filed Electronically Only)
16 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SET FORTH AS ITEM 1 OF FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 39,651 433 202,267 6,330 0 250,381 132,404 42,532 357,516 169,664 0 0 0 246 187,606 357,516 0 465,319 0 307,181 129,120 0 0 30,632 11,518 0 0 0 0 19,114 .78 .72
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