-----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, LPzJ3jsuS6ckqUNP3UYMfoF0JkSsFK8CkYfNxuyXJjHhDorKsQOI7ukglUb+1WwS iYA+qQtBQQZVIxfIZoAafA== 0001047469-98-041190.txt : 19981118 0001047469-98-041190.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752274 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 September 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 (IRS Employer incorporation or organization) 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 12, 1998, the number of shares outstanding of the issuer's Common Stock was 24,651,385. Page 1 of 17 pages. The Exhibit Index appears on page 17. 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, ASSETS 1998 1997 ------------- ------------ (Unaudited) Current assets: Cash and cash equivalents $ 45,937 $ 42,094 Short-term investments 450 214 Accounts receivable, less allowance for doubtful accounts of $6,087 at September 30, 1998 and $6,449 at December 31, 1997 241,682 206,501 Deferred Federal and state taxes 2,224 4,296 Other current assets 10,927 6,399 -------- -------- Total current assets 301,220 259,504 Property and equipment, less accumulated depreciation and amortization of $45,938 at September 30, 1998 and $36,475 at December 31, 1997 99,844 66,550 Deferred Federal and state taxes 2,395 1,930 Other assets, net 16,551 16,122 -------- -------- $420,010 $344,106 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term borrowings $ 26,365 $ 2,145 Accounts payable 153,363 143,980 Income taxes 8,706 7,181 Other current liabilities 27,763 18,946 -------- -------- Total current liabilities 216,197 172,252 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 24,634,441 shares at September 30, 1998, and 24,546,380 at December 31, 1997 246 245 Additional paid-in capital 16,746 15,534 Retained earnings 190,834 159,225 Accumulated other comprehensive loss (4,013) (3,150) -------- -------- Total shareholders' equity 203,813 171,854 -------- -------- $420,010 $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 Nine months ended September 30, September 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenues: Airfreight $182,798 $178,158 $481,962 $ 470,060 Ocean freight 70,595 52,128 170,510 134,006 Customs brokerage and import services 36,282 32,023 102,522 79,787 ---------- ---------- ---------- ---------- Total revenues 289,675 262,309 754,994 683,853 ---------- ---------- ---------- ---------- Operating expenses: Airfreight consolidation 145,379 145,357 381,454 382,107 Ocean freight consolidation 51,406 36,772 122,512 95,679 Salaries and related costs 49,958 41,733 137,516 111,002 Selling and promotion 3,762 3,506 10,742 9,614 Depreciation and amortization 3,993 2,878 10,867 7,922 Rent 4,158 2,654 11,164 7,649 Other 8,746 10,451 29,448 29,525 ---------- ---------- ---------- ---------- Total operating expenses 267,402 243,351 703,703 643,498 ---------- ---------- ---------- ---------- Operating income 22,273 18,958 51,291 40,355 Other income, net 311 95 1,925 1,124 ---------- ---------- ---------- ---------- Earnings before income taxes 22,584 19,053 53,216 41,479 Income tax expense 8,367 7,276 19,885 15,930 ---------- ---------- ---------- ---------- Net earnings $ 14,217 $ 11,777 $ 33,331 $ 25,549 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings per share $ .57 $ .48 $ 1.35 $ 1.05 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted earnings per share $ .54 $ .44 $ 1.26 $ .97 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average basic common shares outstanding 24,924,638 24,437,949 24,693,992 24,371,419 Weighted average diluted common shares outstanding 26,471,432 26,555,155 26,549,196 26,243,552
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, ----------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Operating Activities: Net earnings $ 14,217 $ 11,777 $ 33,331 $ 25,549 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable 681 325 1,170 1,291 Deferred income tax expense (benefit) 2,188 564 3,950 (98) Depreciation and amortization 3,993 2,878 10,867 7,922 Other 183 271 (470) 649 Changes in operating assets and liabilities: Increase in accounts receivable (44,089) (42,836) (35,151) (54,842) (Increase) decrease in other current assets 140 (1,448) (4,503) (3,398) Increase in accounts payable and other current liabilities 18,719 31,388 18,076 45,946 -------- -------- -------- -------- Net cash (used) provided by operating activities (3,968) 2,919 27,270 23,019 -------- -------- -------- -------- Investing Activities: (Increase) decrease in short-term investments (1) 1,985 (198) (87) Purchase of property and equipment (13,740) (13,800) (44,673) (26,655) Acquisitions, net of cash acquired -- -- -- (7,076) Other (1,780) 209 (256) 501 -------- -------- -------- -------- Net cash used in investing activities (15,521) (11,606) (45,127) (33,317) -------- -------- -------- -------- Financing Activities: Short-term borrowings, net 25,153 13,548 24,155 24,205 Proceeds from issuance of common stock 3,868 2,653 4,475 3,536 Repurchases of common stock (3,938) (2,821) (4,464) (2,974) Dividends paid -- -- (1,722) (1,217) -------- -------- -------- -------- Net cash provided by financing activities 25,083 13,380 22,444 23,550 Effect of exchange rate changes on cash 692 ( 1,863) (744) ( 2,802) -------- -------- -------- -------- Increase in cash and cash equivalents 6,286 2,830 3,843 10,450 Cash and cash equivalents at beginning of period 39,651 44,586 42,094 36,966 Cash and cash equivalents at end of period $ 45,937 $ 47,416 $ 45,937 $ 47,416 -------- -------- -------- -------- -------- -------- -------- --------
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. 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 Nine months ended September 30, September 30, --------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- (Dollars in thousands) Net Income $14,217 $11,777 $33,331 $25,549 ------- ------- ------- ------- Foreign currency translation adjustments net of tax of: $885 and $0 for 3 months ended September 30, 1998 and 1997, and $509 and $164 for the nine months ended September 30, 1998 and 1997. 1,506 (2,564) (863) (3,389) ------- ------- ------- ------- Total comprehensive income $15,723 $ 9,213 $32,468 $22,160 ------- ------- ------- ------- ------- ------- ------- -------
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 nine months ended September 30, 1998 and 1997:
Three months ended September 30, --------------------------------------- Weighted (Amounts in thousands, except Net Average Earnings share and per share amounts) Earnings Shares Per Share - ---------------------------- -------- ---------- --------- 1998 Basic earnings per share $14,217 24,924,638 $.57 Effect of dilutive stock options -- 1,546,794 -- ------- ---------- ---- Diluted earnings per share $14,217 26,471,432 $.54 ------- ---------- ---- ------- ---------- ---- 1997 Basic earnings per share $11,777 24,437,949 $.48 Effect of dilutive stock options -- 2,117,206 -- ------- ---------- ---- Diluted earnings per share $11,777 26,555,155 $.44 ------- ---------- ---- ------- ---------- ----
Nine months ended September 30, --------------------------------------- Weighted (Amounts in thousands, except Net Average Earnings share and per share amounts) Earnings Shares Per Share - ---------------------------- -------- ---------- --------- 1998 Basic earnings per share $33,331 24,693,992 $1.35 Effect of dilutive stock options -- 1,855,204 -- ------- ---------- ----- Diluted earnings per share $33,331 26,549,196 $1.26 ------- ---------- ----- ------- ---------- ----- 1997 Basic earnings per share $25,549 24,371,419 $1.05 Effect of dilutive stock options -- 1,872,133 -- ------- ---------- ----- Diluted earnings per share $25,549 26,243,552 $ .97 ------- ---------- ----- ------- ---------- -----
The impact of excluding anti-dilutive stock options was to increase the weighted average shares 109,350 and 36,450, respectively, for the three and nine months ended September 30, 1998. There were no anti-dilutive stock options in 1997. 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 Software 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. 6 In June 1997, the FASB issued Statement No. 131 (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. In June 1998, the FASB issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new statement effective January 1, 2000. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of any derivative's change in fair value will be immediately recognized in earnings. In certain situations, the Company uses hedging as an intermediary currency risk management tool and does not anticipate that the adoption of this statement will have a significant effect on 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 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, 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 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 nine-month periods ended September 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 September 30, Nine months ended September 30, ------------------------------------------ ----------------------------------------- 1998 1997 1998 1997 Percent Percent Percent Percent Amount Revenues Amount Revenues Amount Revenues Amount Revenues ------- -------- ------- -------- -------- -------- ------- -------- (Amounts in thousands) Net Revenues: Airfreight $37,419 40% $32,801 41% $100,508 40% $87,953 42% Ocean freight 19,189 21 15,356 19 47,998 19 38,327 19 Customs brokerage and import services 36,282 39 32,023 40 102,522 41 79,787 39 ------- --- ------- --- -------- --- ------- --- Net revenues 92,890 100 80,180 100 251,028 100 206,067 100 ------- --- ------- --- -------- --- ------- --- Operating expenses: Salaries and related costs 49,958 54 41,733 52 137,516 55 111,002 54 Other 20,659 22 19,489 24 62,221 25 54,710 26 ------- --- ------- --- -------- --- ------- --- Total operating expenses 70,617 76 61,222 76 199,737 80 165,712 80 ------- --- ------- --- -------- --- ------- --- Operating income 22,273 24 18,958 24 51,291 20 40,355 20 Other income, net 311 -- 95 -- 1,925 1 1,124 -- ------- --- ------- --- -------- --- ------- --- Earnings before income taxes 22,584 24 19,053 24 53,216 21 41,479 20 Income tax expense 8,367 9 7,276 9 19,885 8 15,930 8 ------- --- ------- --- -------- --- ------- --- Net earnings $14,217 15% $11,777 15% $ 33,331 13% $25,549 12% ------- --- ------- --- -------- --- ------- --- ------- --- ------- --- -------- --- ------- ---
Airfreight net revenues increased 14% for both the three and nine-month periods ended September 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 25% for both the three and nine-month periods ended September 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. Customs brokerage and import services increased 13% and 28% for the three and nine-month periods ended September 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 primarily during 1997, 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 which is included in this category. Salaries and related costs increased during the three and nine-month periods ended September 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 as a percentage of net 10 revenues have increased 2% and 1% respectively for the three and nine-months ended September 30, 1998 as compared with the same period of 1997. Management believes that the relationship between salaries and net revenues is significant in assessing the effectiveness of corporate cost containment objectives. The increases noted in this percentage are in large measure a reflection of management's hiring additional staff in anticipation of a peak season of a greater magnitude than was manifest during the third quarter of 1998. Management expects that salaries, measured as a percentage of net revenues will return to historic ranges in the near term. 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 nine-month periods ended September 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 nine-month periods ended September 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% and 1% for the three and nine-month periods ended September 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 period ended September 30, 1998, as compared with the same period in 1997 primarily due to higher interest income recorded in 1998 on higher average cash balances. Other income, net, increased for the nine-month period ended September 30, 1998 as compared with the same period in 1997 primarily due to a $928,000 gain realized on the sale of one of the Company's real estate assets during the second quarter of 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 per financial statements during the three and nine-month periods ended September 30, 1998 remained comparable 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. 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. 11 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 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. Throughout the year, macroeconomic conditions in Brazil, Mexico and across the Far East have impacted the global economy and, to some degree, have also 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 US 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 are scheduled to establish fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro will then trade on currency exchanges and may be used in business transactions. The conversion to the euro will eliminate 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. These issues include, among others, the need to adapt computer and financial systems, business processes and equipment to accommodate euro-denominated transactions and the impact of one common currency on pricing. Since existing financial systems and processes currently accommodate multiple currencies, the plans contemplate conversion by the end of 2001. The Company does not expect the system and equipment conversion costs to be material. Due to numerous uncertainties, the Company cannot reasonably estimate the effects one common currency will have on pricing and the resulting impact, if any, on the Company's consolidated financial statements. 12 Year 2000 The Company's Information Services (IS) group 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 IS systems have been inventoried and assessed for compliance, and detailed plans are in place for required system modifications or replacements. Remediation and testing activities are well underway, with approximately 60% of the systems already compliant. The Company expects to be fully compliant by the end of the second quarter of 1999. Inventories and assessments of non-IS systems are in progress and are also expected to be complete by the second quarter of 1999. The Company has identified critical suppliers, customers and other third parties and is in the process of surveying their Year 2000 remediation programs. Risk assessments and contingency plans, where necessary, will be finalized not later than the second quarter of 1999. Because the Company's IS systems were developed in the late 1980's and early 1990's, substantial infrastructure concerns inherent in hardware and software systems developed and placed into service at an earlier date are not a primary concern. As a result, management does not consider that the incremental costs directly related to Year 2000 issues will be material. Costs incurred prior to 1998 were also immaterial. The Company does not expect to incur significant Year 2000 related costs on behalf of its suppliers, customers, or other third parties. Contingency plans for Year 2000-related interruptions are being developed and will include the development of emergency recovery procedures, replacing electronic applications with manual processes and identification of alternate suppliers. All plans are expected to be completed by the end of the first half of 1999. The Company's most likely potential risk is a temporary inability of air traffic control and government customs agencies around the world to track flights or transact normal customer clearance procedures on a timely basis. 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, while the Company believes its actions will minimize the inherent uncertainty, it is unable to eliminate or estimate the ultimate effect Year 2000 risks on the Company's operating results. 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 13 supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the "goodwill" recorded in the transaction. Office Openings - The Company acquired 4 offices during the third quarter of 1998, all as a result of transactions with existing agents. In the case of Dubai, the Company acquired 75% with an irrevocable option to purchase the remaining 25% interest.
Far Middle East East - ---- ---- Manila, Philippines Dubai, U.A.E. Tokyo, Japan Osaka, Japan
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 third quarter of 1998 (which is the measure of any increase from the same quarter of 1997) and for the third quarter of 1997 (which measures growth over 1996).
For the three months ended September 30, -------------------- 1998 1997 ---- ---- Net revenue 15% 30% Operating income 18% 50%
Liquidity and Capital Resources The Company's principal source of liquidity is cash generated from operations. At September 30, 1998, working capital was $85 million, including cash and short-term investments of $46 million. The Company had no long-term debt at September 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 $50 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 $40.2 million. At September 30, 1998, the Company was directly liable for $.2 million drawn on these lines of credit and was contingently liable for an additional $20.5 million from standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.5 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. 14 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 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 September 30, 1998. 15 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 13, 1998 /s/ PETER J. ROSE ------------------------------ Peter J. Rose, Chairman and Chief Executive Officer (Principal Executive Officer) November 13, 1998 /s/ R. JORDAN GATES ------------------------------- R. Jordan Gates, Senior Vice President- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 16 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES Form 10-Q Index and Exhibits September 30, 1998
Exhibit Number Description - ------- ----------- 27.1 Financial Data Schedule (Filed Electronically Only)
17 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 SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 45,937 450 247,769 6,087 0 301,220 145,782 45,938 420,010 216,197 0 0 0 246 203,567 420,010 0 754,994 0 503,966 199,737 0 0 53,216 19,885 0 0 0 0 33,331 1.35 1.26
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