-----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, Sd6k9W7jiIL5Y9WjUDTVZGbQAzUmwY5wW5L1uLzsm3qltiFCVdygTsEoewJgL0fM qdsyWGUinkKCJN3cYm8EXw== 0001047469-99-020757.txt : 19990518 0001047469-99-020757.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-020757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99624942 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 March 31, 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 May 5, 1999, the number of shares outstanding of the issuer's Common Stock was 24,993,318. Page 1 of 18 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)
March 31, December 31, ASSETS 1999 1998 -------- ------------ (Unaudited) Current assets: Cash and cash equivalents 67,545 49,429 Short term investments 205 394 Accounts receivable, less allowance for doubtful accounts of $8,773 at March 31, 1999 and $8,198 at December 31, 1998 220,935 222,598 Deferred Federal and state income taxes 1,277 2,427 Other current assets 13,588 9,151 -------- -------- Total current assets 303,550 283,999 Property and equipment, less accumulated depreciation and amortization of $53,775 at March 31, 1999 and $50,307 at December 31, 1998 103,180 103,030 Deferred Federal and state income taxes 2,651 2,183 Other assets, net 18,805 17,384 -------- -------- 428,186 406,596 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term borrowings 16,259 12,245 Accounts payable 146,167 143,523 Income taxes 9,649 8,304 Other current liabilities 25,519 25,326 -------- -------- Total current liabilities 197,594 189,398 Shareholders' equity: Preferred stock, par value $.01 per share. Authorized 2,000,000 shares; none issued -- -- Common stock, par value $.01 per share Authorized 80,000,000 shares; issued and outstanding 24,977,558 shares at March 31, 1999, and 24,681,841 at December 31, 1998 250 247 Additional paid-in capital 22,261 17,520 Retained earnings 212,570 203,050 Accumulated other comprehensive loss (4,489) (3,619) -------- -------- Total shareholders' equity 230,592 217,198 -------- -------- 428,186 406,596 -------- -------- -------- --------
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 March 31, ------------------------------ 1999 1998 ----------- ----------- Revenues: Airfreight $ 182,117 $ 147,147 Ocean freight 65,073 45,329 Customs brokerage and import services 36,522 30,873 ----------- ----------- Total revenues 283,712 223,349 ----------- ----------- Operating expenses: Airfreight consolidation 142,027 115,642 Ocean freight consolidation 47,272 31,943 Salaries and related costs 54,499 42,703 Selling and promotion 3,661 3,418 Rent 4,289 3,479 Depreciation and amortization 4,771 3,264 Other 12,474 10,201 ----------- ----------- Total operating expenses 268,993 210,650 ----------- ----------- Operating income 14,719 12,699 Other income, net 397 325 ----------- ----------- Earnings before income taxes 15,116 13,024 Income tax expense 5,595 4,990 ----------- ----------- Net earnings $ 9,521 $ 8,034 ----------- ----------- ----------- ----------- Basic earnings per share $ .38 $ .33 ----------- ----------- ----------- ----------- Diluted earnings per share $ .36 $ .30 ----------- ----------- ----------- ----------- Weighted average basic common shares outstanding 24,803,196 24,561,119 ----------- ----------- ----------- ----------- Weighted average diluted common shares outstanding 26,664,552 26,557,418 ----------- ----------- ----------- -----------
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 March 31, ------------------------- 1999 1998 -------- -------- Operating Activities: Net earnings $ 9,521 $ 8,034 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable 971 515 Deferred income tax expense (benefit) 6,027 (70) Depreciation and amortization 4,771 3,264 Other 107 210 Changes in operating assets and liabilities: Decrease in accounts receivable 729 27,400 Decrease (Increase) in other current assets (4,557) 800 Increase (Decrease) in accounts payable and other current liabilities 5,101 (10,834) -------- -------- Net cash provided by operating activities 22,670 29,319 -------- -------- Investing Activities: Decrease (Increase) in short-term investments 183 (88) Purchase of property and equipment (5,366) (14,208) Other (1,689) 192 -------- -------- Net cash used in investing activities (6,872) (14,104) -------- -------- Financing Activities: Short-term borrowings, net 4,088 (1,005) Proceeds from issuance of common stock 2,282 271 Repurchases of common stock (2,305) (271) -------- -------- Net cash provided by and used in financing activities 4,065 (1,005) Effect of exchange rate changes on cash (1,747) (367) -------- -------- Increase in cash and cash equivalents 18,116 13,843 Cash and cash equivalents at beginning of period 49,429 42,094 Cash and cash equivalents at end of period $ 67,545 $ 55,937 -------- -------- -------- --------
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 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 March 31, (Dollars in thousands) 1999 1998 ------- ------- Net earnings $ 9,521 $ 8,034 Foreign currency translation adjustments net of deferred taxes of $468 and $329 (870) (537) ------- ------- Total comprehensive income $ 8,651 $ 7,497 ------- ------- ------- -------
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. 5 Financial information regarding the Company's operations by geographic area for the three months ended March 31, 1999 and 1998 are as follows:
United Far Australia/ Middle Latin Elimi- Consoli- States East New Zealand Canada Europe East America nations dated -------- -------- ----------- -------- -------- -------- -------- -------- -------- Three months ended March 31, 1999 Revenues from unaffiliated customers $ 79,771 148,507 2,577 1,276 37,768 9,161 4,652 -- 283,712 Transfers between geographic areas 3,481 760 673 70 1,581 358 545 (7,468) -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $ 83,252 149,267 3,250 1,346 39,349 9,519 5,197 (7,468) 283,712 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net revenues $ 43,855 21,192 2,266 980 20,102 3,009 3,009 -- 94,413 Operating income $ 3,135 6,826 338 219 3,664 337 200 -- 14,719 Identifiable assets at quarter end $222,367 80,067 8,284 5,227 86,019 12,711 13,511 -- 428,186 Capital expenditures $ 2,703 420 145 90 988 718 302 -- 5,366 Depreciation and amortization $ 2,700 740 140 39 788 221 143 -- 4,771 Equity $230,592 76,427 5,256 1,636 18,543 2,473 (940) (103,395) 230,592 -------- -------- -------- -------- -------- -------- -------- -------- -------- Three months ended March 31, 1998 Revenues from unaffiliated customers $ 72,161 108,764 2,315 1,143 33,376 3,552 2,038 -- 223,349 Transfers between geographic areas 2,766 920 438 53 957 210 410 (5,754) -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $ 74,927 109,684 2,753 1,196 34,333 3,762 2,448 (5,754) 223,349 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net revenues $ 36,617 17,145 1,873 709 16,678 1,053 1,689 -- 75,764 Operating income $ 4,071 5,437 245 91 2,946 117 (208) -- 12,699 Identifiable assets at quarter end $180,287 65,727 7,559 6,421 67,367 5,779 6,904 -- 340,044 Capital expenditures $ 12,260 301 112 27 1,160 81 267 -- 14,208 Depreciation and amortization $ 1,758 430 119 39 659 126 133 -- 3,264 Equity $179,791 61,640 4,478 1,233 11,135 1,082 (1,618) (77,950) 179,791 -------- -------- -------- -------- -------- -------- -------- -------- --------
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 first quarter of 1999 and 1998:
Weighted (Amounts in Thousands, except Net Average Earnings Share and Per Share Amounts) Earnings Shares Per Share - ---------------------------- -------- ------ --------- 1999 Basic earnings per share $9,521 24,803,196 $ .38 Effect of dilutive stock options -- 1,861,356 -- ------ ---------- -------- Diluted earnings per share $9,521 26,664,552 $ .36 ------ ---------- -------- ------ ---------- -------- 1998 Basic earnings per share $8,034 24,561,119 $ .33 Effect of dilutive stock options -- 1,996,299 -- ------ ---------- -------- Diluted earnings per share $8,034 26,557,418 $ .30 ------ ---------- -------- ------ ---------- --------
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, 1999. 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 the first quarter of 1999 was insignificant. Note 6. Stock Dividend On May 6, 1999, the Board of Directors authorized a 2-for-1 stock split in the form of a stock dividend to be issued to shareholders of record as of May 17, 1999. 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 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 7 services only in conjunction with international shipments. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business. The Company's ability to provide service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines, and governmental agencies. The Company considers its current working relationships with these entities to be good. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways. Historically, the Company's operating results have been subject to a seasonal trend when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third 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. 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-month periods ended March 31, 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. The table and the accompanying discussion and analysis should be read in 8 conjunction with the condensed consolidated financial statements and related notes thereto which appear elsewhere in this Quarterly Report.
Three months ended March 31, 1999 1998 --------------------------------------------------------- Percent Percent of Net of Net Amount Revenues Amount Revenues ------ -------- ------ -------- (Amounts in thousands) Net Revenues: Airfreight $40,090 42% $31,505 41% Ocean freight 17,801 19 13,386 18 Customs brokerage and import services 36,522 39 30,873 41 ------- --- ------- --- Net revenues 94,413 100 75,764 100 ------- --- ------- --- Operating expenses: Salaries and related costs 54,499 57 42,703 56 Other 25,195 27 20,362 27 ------- --- ------- --- Total operating expenses 79,694 84 63,065 83 ------- --- ------- --- Operating income 14,719 16 12,699 17 Other income, net 397 0 325 0 ------- --- ------- --- Earnings before income taxes 15,116 16 13,024 17 Income tax expense 5,595 6 4,990 6 ------- --- ------- --- Net earnings $ 9,521 10% $ 8,034 11% ------- --- ------- --- ------- --- ------- ---
Airfreight net revenues increased 27% for the three-month period ended March 31, 1999 as compared with the same period for 1998. This increase was primarily due to increased airfreight tonnage handled by the Company's expanding global network. Management also believes that the Company benefited from improving economic conditions in several Far Eastern countries. Ocean freight net revenues increased 33% for the three-month period ended March 31, 1999 as compared with the same period for 1998. The Company continued to aggressively market competitive ocean freight rates primarily on freight moving eastbound from the Far East. Management also has embarked on a strategy to improve market share on trade lanes other than 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, continued to be instrumental in helping the Company to expand its market share. Customs brokerage and import services increased 18% for the three-month period ended March 31, 1999 as compared with the same period for 1998. This increase is the result of 1) the Company's growing reputation for providing high quality service, 2)consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and 3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers. 9 Salaries and related costs increased during the first quarter of 1999 compared to the same period 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 increased approximately 1% as a percentage of net revenues. This 1% increase is largely attributable to management's decision to hire sufficient staff to address the requirements of the projected peak season during the third and fourth quarter of 1998. As a result of the 1998 peak season being somewhat below initial expectations, the Company began 1999 in a slightly over-staffed situation. Management expects this situation to be rectified over time through natural attrition and through the increase in business. 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 Company's historical growth in revenues, net revenues and net earnings are a result of the incentives inherent in the Company's compensation program. Other operating expenses increased for the three-month period ended March 31, 1999 as compared with the same period 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 constant in the three-month period ended March 31, 1999, as compared with the same period in 1998. Other income, net, increased for the three-month period ended March 31, 1999 as compared with the same period in 1998, principally due to higher interest income on a larger average balance of invested cash during the period. Cash balances increased towards the end of the first quarter of 1999, after the payment of peak season trade obligations and after the collection of accounts receivable outstanding as of December 31, 1998. The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations. The Company's consolidated effective annual income tax rate during the three-month period ended March 31, 1999 decreased slightly as compared with the same period 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 global logistics industry, however, the Company's primary competition is confined to a relatively small number of companies within this group. Historically, the primary competitive factors in the global logistics services 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 the prices of others in the industry. Recently, larger 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. This trend has made having sophisticated computerized customer service capabilities and a stable worldwide network significant factors in attracting and retaining customers. Developing these systems and a worldwide network has added a considerable 10 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. However, regional and local broker/forwarders will likely remain a competitive force. 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 first quarter of 1999 and 1998 were insignificant. 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 1998 and during the first quarter of 1999, 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 adapt computer systems and business processes to accommodate Euro-denominated transactions. Since existing financial systems currently accommodate multiple currencies, the plans contemplate full conversion by the end of 2001. The Company does not expect the conversion costs to be material. Due to numerous uncertainties, the Company is evaluating the effects one common European currency will have on pricing. The Company is unable to predict the resulting impact, if any, on the Company's consolidated financial statements. 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. 11 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 are underway, with the majority of the systems already compliant. The Company expects to be fully compliant by the end of the second quarter of 1999. 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 the first quarter 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, are expected to be finalized no later than the second quarter of 1999. 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. In management's opinion, 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 become 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 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. 12 Office Openings - The Company opened 7 start-up offices during the first quarter of 1999.
MIDDLE EAST EUROPE NORTH AMERICA - ----------- ------ ------------- GREECE: U.K.: MEXICO: Athens East Midlands Nogales TURKEY: Ankara Istanbul Izmir Mersin
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 first quarter of 1999 (which is the measure of any increase from the same quarter of 1998) and for the first quarter of 1998 (which measures growth over 1997).
For the three months ended March 31, 1999 1998 ---- ---- Net revenue 21% 22% Operating income 14% 39%
Liquidity and Capital Resources The Company's principal source of liquidity is cash generated from operations. At March 31, 1999, working capital was $106 million, including cash and short-term investments of $67.8 million. The Company had no long-term debt at March 31, 1999. While the nature of its business does not require an extensive investment in property and equipment, the Company cannot eliminate the possibility that it could acquire an equity interest in property in certain geographic locations. The Company expects to spend approximately $15 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. The Company borrows internationally and domestically under unsecured bank lines of credit totaling $40.8 million. At March 31, 1999, the Company was directly liable for $16.3 million drawn on these lines of credit and was contingently liable for an additional $12.1 million from standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.1 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. 13 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: 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 three months ended March 31, 1999, would have had the effect of raising operating income approximately $1.1 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately $0.9 million. The Company has approximately $50 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 March 31, 1999, the Company had cash and cash equivalents and short-term investments of $67.8 million and short-term borrowings of $16.3 million, all subject to variable short-term interest rates. A hypothetical change in the interest rate of 10% would have an immaterial impact on the Company's earnings. 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 ------ ----------- Exhibit 27.1 Financial Data Schedule, EDGAR filing only. (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended March 31, 1999. 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. May 14, 1999 /s/ PETER J. ROSE -------------------------------------------------- Peter J. Rose, Chairman and Chief Executive Officer (Principal Executive Officer) May 14, 1999 /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 March 31, 1999 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 BALANCE SHEET AT 3-31-99 AND CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 3 MONTHS ENDED 3-31-99 AND RELATED NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 1999 1ST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 67,545 205 229,708 8,773 0 303,550 156,995 53,775 428,186 197,594 0 0 0 250 230,342 428,186 0 283,712 0 268,993 397 0 0 15,116 5,595 0 0 0 0 9,521 .38 .36
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