10-Q 1 a04-12447_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2004

 

 

 

OR

 

 

 

o

 

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: 000-13468

 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

 

Washington

 

91-1069248

(State or 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  ý        No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  ý No  o

 

At November 4, 2004, the number of shares outstanding of the issuer’s Common Stock was 106,565,159.

 

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets
(In thousands, except share data)

(Unaudited)

 

 

 

September 30,
2004

 

December 31,
2003

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

377,621

 

$

295,832

 

Short-term investments

 

73

 

82

 

Accounts receivable, less allowance for doubtful accounts of $13,105 at September 30, 2004 and $11,978 at December 31, 2003

 

596,771

 

452,551

 

Deferred Federal and state income taxes

 

5,512

 

3,593

 

Other current assets

 

26,821

 

17,941

 

 

 

 

 

 

 

Total current assets

 

1,006,798

 

769,999

 

 

 

 

 

 

 

Property and equipment, less accumulated depreciation and amortization of $153,970 at September 30, 2004 and $140,066 at December 31, 2003

 

270,528

 

241,702

 

Goodwill, less accumulated amortization of $765 at September 30, 2004 and December 31, 2003

 

7,774

 

7,774

 

Other intangibles, net

 

9,976

 

11,163

 

Other assets, net

 

12,286

 

13,440

 

 

 

 

 

 

 

 

 

$

1,307,362

 

$

1,044,078

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

 

 

217

 

Accounts payable

 

406,606

 

301,122

 

Accrued expenses, primarily salaries and related costs

 

86,625

 

74,905

 

Federal, state and foreign income taxes

 

17,070

 

10,141

 

 

 

 

 

 

 

Total current liabilities

 

510,301

 

386,385

 

 

 

 

 

 

 

Deferred Federal and state income taxes

 

29,388

 

8,968

 

 

 

 

 

 

 

Minority Interest

 

6,003

 

3,224

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share

 

 

 

 

 

Authorized 2,000,000 shares; none issued

 

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share

 

 

 

 

 

Authorized 320,000,000 shares; issued and outstanding 106,358,953 shares at September 30, 2004, and 105,056,454 shares at December 31, 2003

 

1,064

 

1,051

 

Additional paid-in capital

 

39,788

 

25,491

 

Retained earnings

 

718,138

 

617,216

 

Accumulated other comprehensive income

 

2,680

 

1,743

 

 

 

 

 

 

 

Total shareholders’ equity

 

761,670

 

645,501

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,307,362

 

$

1,044,078

 

 

See accompanying notes to condensed consolidated financial statements.

 

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

 

2



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

 

Condensed Consolidated Statements of Earnings
(In thousands, except share data)

 

(Unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Airfreight

 

$

406,754

 

$

307,645

 

$

1,100,231

 

$

861,973

 

Ocean freight and ocean services

 

335,908

 

284,893

 

859,063

 

707,217

 

Customs brokerage and other services

 

154,526

 

118,931

 

423,410

 

324,338

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

897,188

 

711,469

 

2,382,704

 

1,893,528

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Airfreight consolidation

 

315,694

 

237,657

 

844,075

 

658,735

 

Ocean freight consolidation

 

276,886

 

229,601

 

703,018

 

564,102

 

Customs brokerage and other services

 

64,250

 

47,362

 

170,534

 

125,555

 

Salaries and related costs

 

124,744

 

103,274

 

353,716

 

294,828

 

Rent and occupancy costs

 

12,711

 

12,520

 

38,077

 

34,977

 

Depreciation and amortization

 

6,806

 

6,090

 

19,558

 

17,792

 

Selling and promotion

 

6,769

 

5,784

 

20,388

 

16,423

 

Other

 

21,908

 

19,801

 

58,864

 

52,902

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

829,768

 

662,089

 

2,208,230

 

1,765,314

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

67,420

 

49,380

 

174,474

 

128,214

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(6

)

(16

)

(34

)

(141

)

Interest income

 

1,436

 

1,106

 

3,700

 

3,360

 

Other, net

 

524

 

829

 

2,325

 

3,466

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

1,954

 

1,919

 

5,991

 

6,685

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

69,374

 

51,299

 

180,465

 

134,899

 

Income tax expense

 

24,688

 

18,311

 

64,220

 

48,141

 

 

 

 

 

 

 

 

 

 

 

Net earnings before minority interest

 

44,686

 

32,988

 

116,245

 

86,758

 

 

 

 

 

 

 

 

 

 

 

Minority Interest

 

(1,579

)

(430

)

(3,682

)

(1,171

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

43,107

 

$

32,558

 

$

112,563

 

$

85,587

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.39

 

$

.30

 

$

1.02

 

$

.79

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.41

 

$

.31

 

$

1.07

 

$

.82

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

111,206,168

 

109,190,930

 

110,480,254

 

108,927,724

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

106,255,293

 

105,042,210

 

105,663,441

 

104,636,462

 

 

See accompanying notes to condensed consolidated financial statements.

 

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

 

3



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows
(In thousands)

 

(Unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

43,107

 

$

32,558

 

$

112,563

 

$

85,587

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Provision for losses on accounts receivable

 

2,063

 

426

 

2,307

 

340

 

Deferred income tax expense

 

8,155

 

3,555

 

18,035

 

6,841

 

Tax benefits from employee stock plans

 

4,597

 

1,826

 

14,637

 

5,071

 

Depreciation and amortization

 

6,806

 

6,090

 

19,558

 

17,792

 

Gain on sale of property and equipment

 

(18

)

(64

)

(66

)

(146

)

Impairment write down of other assets

 

 

 

2,000

 

 

Other

 

860

 

1,049

 

2,408

 

2,734

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

(72,797

)

(76,911

)

(147,409

)

(64,226

)

Increase in other current assets

 

(409

)

(9,311

)

(8,974

)

(20,059

)

Increase in minority interest

 

931

 

430

 

2,750

 

234

 

Increase in accounts payable and other current liabilities

 

40,041

 

52,131

 

124,690

 

61,622

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

33,336

 

11,779

 

142,499

 

95,790

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

7

 

(46

)

8

 

(43

)

Purchase of property and equipment

 

(29,232

)

(4,301

)

(49,525

)

(13,194

)

Proceeds from sale of property and equipment

 

153

 

151

 

440

 

289

 

Other

 

(1

)

(380

)

227

 

(384

)

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(29,073

)

(4,576

)

(48,850

)

(13,332

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Borrowings (repayments) of short-term debt, net

 

3

 

(440

)

(210

)

(1,324

)

Proceeds from issuance of common stock

 

14,949

 

13,165

 

26,440

 

18,222

 

Repurchases of common stock

 

(14,984

)

(13,083

)

(26,768

)

(18,510

)

Dividends paid

 

 

 

(11,642

)

(8,368

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(32

)

(358

)

(12,180

)

(9,980

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

931

 

1,735

 

320

 

8,658

 

 

 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

5,162

 

8,580

 

81,789

 

81,136

 

Cash and cash equivalents at beginning of period

 

372,459

 

284,415

 

295,832

 

211,859

 

Cash and cash equivalents at end of period

 

$

377,621

 

$

292,995

 

$

377,621

 

$

292,995

 

 

 

 

 

 

 

 

 

 

 

Interest and taxes paid:

 

 

 

 

 

 

 

 

 

Interest

 

$

5

 

$

15

 

$

37

 

$

139

 

Income taxes

 

7,459

 

18,211

 

34,206

 

53,623

 

 

See accompanying notes to condensed consolidated financial statements.

 

Non-Cash Investing Activities – Cash held in escrow of $30,954 at December 31, 2002 was applied toward the purchase of land and a building in January 2003.

 

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

 

4



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

Note 1.  Summary of Significant Accounting Policies

 

The attached condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 2003 amounts have been reclassified to conform to the 2004 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 15, 2004.

 

The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option and its employee stock purchase rights plans.  Accordingly, no compensation cost has been recognized for its fixed stock option or employee stock purchase rights plans.  Had compensation cost for the Company’s three stock-based compensation and employee stock purchase rights plans been determined consistent with SFAS No. 123, the Company’s net earnings, basic earnings per share and diluted earnings per share would have been reduced to the pro forma amounts indicated below:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands, except share data)

 

2004

 

2003

 

2004

 

2003

 

Net earnings – as reported

 

$

43,107

 

32,558

 

112,563

 

85,587

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(6,584

)

(5,968

)

(20,483

)

(17,579

)

Net earnings – pro forma

 

$

36,523

 

26,590

 

92,080

 

68,008

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share – as reported

 

$

.41

 

.31

 

1.07

 

.82

 

Basic earnings per share – pro forma

 

$

.34

 

.25

 

.87

 

.65

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share – as reported

 

$

.39

 

.30

 

1.02

 

.79

 

Diluted earnings per share – pro forma

 

$

.33

 

.25

 

.84

 

.63

 

 

Note 2.  Comprehensive Income

 

Comprehensive income consists of net income and other gains and losses affecting shareholders’ equity that, under generally accepted accounting principles in the United States, are excluded from net income.  For the Company, these consist of foreign currency translation gains and losses and unrealized gains and losses on securities, net of related income tax effects.

 

The components of total comprehensive income for interim periods are presented in the following table:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

43,107

 

$

32,558

 

$

112,563

 

$

85,587

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments net of tax of: $(743) and $(786) for the 3 months ended September 30, 2004 and 2003, and $(535) and $(3,883) for the 9 months ended September 30, 2004 and 2003.

 

1,379

 

1,459

 

994

 

7,211

 

Unrealized gain (loss) on securities net of tax of $14 and $(194) for the 3 months ended September 30, 2004 and 2003 and $31 and $(194) for the 9 months ended September 30, 2004 and 2003.

 

(26

)

359

 

(57

)

359

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

44,460

 

$

34,376

 

$

113,500

 

$

93,157

 

 

5



 

Note 3.  Business Segment Information

 

Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosure about Segments of an Enterprise and Related Information” establishes standards for the way that public companies report selected information about segments in their financial statements.

 

The Company is organized functionally in geographic operating segments.  Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management.  The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis.  Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.

 

6



 

Financial information regarding the Company’s operations by geographic area for the three and nine months ended September 30, 2004 and 2003 are as follows:

 

(in thousands)

 

UNITED
STATES

 

OTHER
NORTH
AMERICA

 

FAR EAST

 

EUROPE

 

AUSTRALIA/
NEW
ZEALAND

 

LATIN
AMERICA

 

MIDDLE
EAST

 

ELIMI-
NATIONS

 

CONSOLI
-DATED

 

Three months ended September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

166,438

 

19,836

 

522,274

 

123,740

 

11,503

 

15,086

 

38,311

 

 

897,188

 

Transfers between geographic areas

 

19,254

 

1,267

 

3,000

 

4,778

 

1,366

 

1,569

 

1,753

 

(32,987

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

185,692

 

21,103

 

525,274

 

128,518

 

12,869

 

16,655

 

40,064

 

(32,987

)

897,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

96,495

 

11,215

 

68,925

 

41,288

 

6,636

 

5,673

 

10,126

 

 

240,358

 

Operating income

 

$

20,892

 

1,953

 

32,324

 

6,969

 

1,804

 

1,165

 

2,313

 

 

67,420

 

Identifiable assets at quarter end

 

$

660,037

 

43,787

 

251,407

 

265,921

 

21,517

 

19,004

 

35,973

 

9,716

 

1,307,362

 

Capital expenditures

 

$

23,516

 

354

 

3,570

 

854

 

165

 

480

 

293

 

 

29,232

 

Depreciation and amortization

 

$

3,383

 

307

 

1,084

 

1,290

 

173

 

195

 

374

 

 

6,806

 

Equity

 

$

827,659

 

16,548

 

180,835

 

75,683

 

13,769

 

5,010

 

16,112

 

(373,946

)

761,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

131,237

 

16,061

 

410,668

 

105,459

 

8,624

 

9,702

 

29,718

 

 

711,469

 

Transfers between geographic areas

 

12,584

 

621

 

1,778

 

2,880

 

1,001

 

1,085

 

849

 

(20,798

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

143,821

 

16,682

 

412,446

 

108,339

 

9,625

 

10,787

 

30,567

 

(20,798

)

711,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

80,094

 

9,070

 

56,792

 

34,602

 

5,026

 

3,594

 

7,671

 

 

196,849

 

Operating income

 

$

16,255

 

1,641

 

24,365

 

4,341

 

1,113

 

342

 

1,323

 

 

49,380

 

Identifiable assets at quarter end

 

$

526,857

 

30,535

 

195,111

 

229,081

 

17,615

 

14,862

 

26,746

 

 

1,040,807

 

Capital expenditures

 

$

2,100

 

175

 

740

 

900

 

27

 

92

 

267

 

 

4,301

 

Depreciation and amortization

 

$

3,061

 

321

 

792

 

1,317

 

169

 

143

 

287

 

 

6,090

 

Equity

 

$

650,269

 

10,793

 

145,826

 

54,755

 

11,940

 

2,231

 

11,295

 

(273,723

)

613,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

455,227

 

55,923

 

1,343,241

 

354,655

 

31,992

 

39,025

 

102,641

 

 

2,382,704

 

Transfers between geographic areas

 

50,536

 

3,014

 

8,187

 

13,098

 

3,799

 

4,668

 

4,595

 

(87,897

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

505,763

 

58,937

 

1,351,428

 

367,753

 

35,791

 

43,693

 

107,236

 

(87,897

)

2,382,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

266,206

 

31,180

 

188,474

 

118,332

 

18,275

 

15,569

 

27,041

 

 

665,077

 

Operating income

 

$

49,001

 

6,256

 

87,341

 

19,567

 

4,428

 

2,433

 

5,448

 

 

174,474

 

Identifiable assets at period end

 

$

660,037

 

43,787

 

251,407

 

265,921

 

21,517

 

19,004

 

35,973

 

9,716

 

1,307,362

 

Capital expenditures

 

$

31,013

 

1,405

 

8,211

 

5,175

 

741

 

1,205

 

1,775

 

 

49,525

 

Depreciation and amortization

 

$

10,054

 

876

 

2,877

 

3,737

 

474

 

530

 

1,010

 

 

19,558

 

Equity

 

$

827,659

 

16,548

 

180,835

 

75,683

 

13,769

 

5,010

 

16,112

 

(373,946

)

761,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

381,429

 

48,307

 

1,033,973

 

294,443

 

22,504

 

26,162

 

86,710

 

 

1,893,528

 

Transfers between geographic areas

 

26,221

 

1,405

 

4,842

 

7,662

 

2,864

 

3,019

 

2,354

 

(48,367

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

407,650

 

49,712

 

1,038,815

 

302,105

 

25,368

 

29,181

 

89,064

 

(48,367

)

1,893,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

223,358

 

26,067

 

151,886

 

98,473

 

13,577

 

10,057

 

21,718

 

 

545,136

 

Operating income

 

$

40,269

 

4,860

 

63,086

 

12,172

 

2,626

 

1,331

 

3,870

 

 

128,214

 

Identifiable assets at period end

 

$

526,857

 

30,535

 

195,111

 

229,081

 

17,615

 

14,862

 

26,746

 

 

1,040,807

 

Capital expenditures

 

$

5,646

 

888

 

2,825

 

2,360

 

179

 

330

 

966

 

 

13,194

 

Depreciation and amortization

 

$

9,279

 

944

 

2,289

 

3,685

 

475

 

400

 

720

 

 

17,792

 

Equity

 

$

650,269

 

10,793

 

145,826

 

54,755

 

11,940

 

2,231

 

11,295

 

(273,723

)

613,386

 

 

7



 

Note 4.  Basic and Diluted Earnings per Share

 

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings per share for the three months and nine months ended September 30, 2004 and 2003:

 

 

 

Three months ended September 30,

 

(Amounts in thousands, except
share and per share amounts)

 

Net
Earnings

 

Weighted
Average
Shares

 

Earnings
Per Share

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

43,107

 

106,255,293

 

$

.41

 

Effect of dilutive potential common shares

 

 

4,950,875

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

43,107

 

111,206,168

 

$

.39

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

32,558

 

105,042,210

 

$

.31

 

Effect of dilutive potential common shares

 

 

4,148,720

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

32,558

 

109,190,930

 

$

.30

 

 

 

 

Nine months ended September 30,

 

(Amounts in thousands, except
share and per share amounts)

 

Net
Earnings

 

Weighted
Average
Shares

 

Earnings
Per Share

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

112,563

 

105,663,441

 

$

1.07

 

Effect of dilutive potential common shares

 

 

4,816,813

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

112,563

 

110,480,254

 

$

1.02

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

85,587

 

104,636,462

 

$

.82

 

Effect of dilutive potential common shares

 

 

4,291,262

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

85,587

 

108,927,724

 

$

.79

 

 

The following shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

1,824,050

 

64,000

 

1,888,050

 

 

8



 

Note 5.  Recent Accounting Pronouncements

 

In December 2003, the FASB issued revised Interpretation No. 46, “Consolidation of Variable Interest Entities (Revised), an Interpretation of ARB No. 51,” (FIN 46R).  FIN 46R addresses the consolidation by business enterprises of variable interest entities as defined in FIN 46R.  The provisions of FIN 46R are generally effective for public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003.  Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004.  The Company adopted only the disclosure provisions of FIN 46R in the fourth quarter of 2003 and adopted the remaining provisions of FIN 46R in the first quarter of 2004.  The adoption of the remaining provisions of FIN 46R did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

Note 6. Stock and Cash Dividends

 

On May 6, 2004, the Board of Directors declared a semi-annual cash dividend of $.11 per share payable on June 15, 2004 to shareholders of record as of June 1, 2004.  The dividend of $11.6 million was paid on June 15, 2004.

 

On May 7, 2003, the Board of Directors declared a semi-annual cash dividend of $.08 per share payable on June 16, 2003 to shareholders of record as of June 2, 2003.  The dividend of $8.4 million was paid on June 16, 2003.

 

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 15, 2004.

 

EXECUTIVE SUMMARY

 

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 acts as a customs broker in all domestic offices, and in many of its international 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 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 affects 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 influenced 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 derives its revenues from three principal sources: airfreight, ocean freight and customs brokerage and other services and these are the revenue categories presented in the financial statements.

 

As a non-asset based carrier, the Company does not own transportation assets.  Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers.   The difference between the rate billed to customers (the sell rate), and the rate paid to the carrier (the buy rate) is termed “Net Revenue” or “yield.”  By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

 

Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery.   This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.

 

9



 

The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies.  The significance of maintaining acceptable working relationships with governmental agencies and asset-based providers involved in global trade has gained increased importance as a result of ongoing concern over terrorism.  As each carrier labors to comply with governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade to some degree.  A good reputation helps to develop, to the degree possible, practical working understandings that will effectively meet security requirements while minimizing potential international trade obstacles.  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 and fourth quarters have traditionally been the strongest.  This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces.  In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings.  The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.

 

A significant portion of the Company’s revenues are derived from customers in retail 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.

 

In terms of the opportunities, challenges and risks that management is focused on in 2004, the Company operates in 56 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy.  From the inception of the Company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel.  The Company’s greatest challenge is now and always has been perpetuating a consistent global culture which demands:

 

                           Total dedication, first and foremost, to providing superior customer service;

                           Aggressive marketing of all of the Company’s service offerings;

                           Ongoing development of key employees and management personnel via formal and informal means;

                           Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;

                           Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and

                           Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.

 

The Company has reinforced these values with a compensation system that rewards employees for profitably managing the things they can control.  There is no limit to how much a key manager can be compensated for success.   The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions.  At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.

 

Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company, provides a greater threat to the Company’s continued success than any external force, which would be largely beyond our control.  Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also building systems and taking preventative action to reduce exposure to negative events.   The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations.  As a result our focus is on building and maintaining a global culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.

 

10



 

Critical Accounting Policies and Estimates

 

Management believes that the nature of the Company’s business is such that there are few, if any, complex challenges in accounting for operations.  Revenue recognition is considered the critical accounting policy due to the complexity of arranging and managing global logistics and supply-chain management transactions.

 

Revenue Recognition

 

Airfreight revenues include the charges to the Company for carrying the shipments when the Company acts as a freight consolidator.  Ocean freight revenues include the charges to the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier (NVOCC).  In each case the Company is acting as an indirect carrier.  When acting as an indirect carrier, the Company will issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to customers as the contract of carriage.  In turn, when the freight is physically tendered to a direct carrier, the Company receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments.  At this point, the risk of loss passes to the carrier, however, in order to claim for any such loss, the customer is first obligated to pay the freight charges.

 

Based upon the terms in the contract of carriage, revenues related to shipments where the Company issues an HAWB or an HOBL are recognized at the time the freight is tendered to the direct carrier at origin.  Costs related to the shipments are also recognized at this same time.

 

Revenues realized in other capacities, for instance, when the Company acts as an agent for the shipper, and does not issue an HAWB or an HOBL, include only the commissions and fees earned for the services performed.  These revenues are recognized upon completion of the services.  Similarly, revenues related to customs brokerage and other services are recognized upon completion of the services.

 

Arranging international shipments is a complex task.  Each actual movement can require multiple services.  In some instances, the Company is asked to perform only one of these services.  However, in most instances, the Company may perform multiple services.  These services include destination breakbulk services and value added ancillary services such as local transportation, export customs formalities, distribution services and logistics management.  Each of these services has an associated fee, which is recognized as revenue upon completion of the service.

 

Typically, the fees for each of these services are quoted as separate components, however, customers on occasion will request an all-inclusive rate for a set of services known in the industry as “door-to-door service.”  This means that the customer is billed a single rate for all services from pickup at origin to delivery at destination.  In these instances, the revenue for origin and destination services, as well as revenue that will be characterized as freight charges, is allocated to branches as set by preexisting Company policy perhaps supplemented by customer specific negotiations between the offices involved.  Each of the Company’s branches are independent profit centers and the primary compensation for the branch management group comes in the form of incentive-based compensation calculated directly from the operating income of that branch.  This compensation structure ensures that the allocation of revenue and expense among components of services, when provided under an all-inclusive rate, are done in an objective manner on a fair value basis, in accordance with Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.”

 

Estimates

 

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s statement of earnings:

                  accounts receivable valuation,

                  the useful lives of long-term assets,

                  the accrual of costs related to ancillary services the Company provides,

                  establishment of adequate insurance liabilities for the portion of the freight related exposure which the Company has self-insured, and

                  accrual of tax expense on an interim basis.

 

Management believes that the methods utilized in all of these areas are non-aggressive in approach and consistent in application.  Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions.  While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

 

11



Results of Operations

 

The following table shows the consolidated net revenues (revenues less transportation expenses) attributable to the Company’s principal services and the Company’s expenses for the three and nine-month periods ended September 30, 2004 and 2003, expressed as percentages of net revenues.  Management focuses on net revenues rather than total revenues 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 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,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

Amount

 

Percent
of net
revenues

 

Amount

 

Percent
of net
revenues

 

Amount

 

Percent
of net
revenues

 

Amount

 

Percent
of net
revenues

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airfreight

 

$

91,060

 

38

%

$

69,988

 

36

%

$

256,156

 

39

%

$

203,238

 

37

%

Ocean freight and ocean services

 

59,022

 

24

 

55,292

 

28

 

156,045

 

23

 

143,115

 

26

 

Customs brokerage and other services

 

90,276

 

38

 

71,569

 

36

 

252,876

 

38

 

198,783

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

240,358

 

100

 

196,849

 

100

 

665,077

 

100

 

545,136

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and related costs

 

124,744

 

52

 

103,274

 

52

 

353,716

 

53

 

294,828

 

54

 

Other

 

48,194

 

20

 

44,195

 

23

 

136,887

 

21

 

122,094

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

172,938

 

72

 

147,469

 

75

 

490,603

 

74

 

416,922

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

67,420

 

28

 

49,380

 

25

 

174,474

 

26

 

128,214

 

24

 

Other income, net

 

1,954

 

1

 

1,919

 

1

 

5,991

 

1

 

6,685

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

69,374

 

29

 

51,299

 

26

 

180,465

 

27

 

134,899

 

25

 

Income tax expense

 

24,688

 

10

 

18,311

 

9

 

64,220

 

10

 

48,141

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings before minority interest

 

44,686

 

19

 

32,988

 

17

 

116,245

 

17

 

86,758

 

16

 

Minority interest

 

(1,579

)

(1

)

(430

)

 

(3,682

)

 

(1,171

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

43,107

 

18

%

$

32,558

 

17

%

$

112,563

 

17

%

$

85,587

 

16

%

 

Airfreight net revenues increased 30% and 26% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods for 2003.  These increases are primarily the result of increases in airfreight tonnage of 27% and 26% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods for 2003.

 

Ocean freight volumes, measured in terms of forty-foot container equivalent units (FEUs), increased 24% and 26% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods for 2003, while ocean freight and ocean services net revenues increased 7% and 9%, respectively, during the same periods. The difference in these two growth rates is a result of a decline in ocean freight yields of 184 basis points and 207 basis points, respectively, for the three and nine-month periods ended September 30, 2004.

 

The Company continued its focus of offering competitive rates to customers at the retail level, while leveraging freight volumes to obtain favorable rates from carriers at the wholesale level. Expeditors Cargo Management Systems (ECMS), an ocean freight consolidation management and purchase order tracking service, continued to be instrumental in attracting new business. The

 

12



 

Company’s North American ocean freight net revenues decreased 13% and 25% for the three and nine-month periods ended September 30, 2004, as compared with the same periods for 2003. This decrease was a result of the Company handling proportionately more ocean shipments moving from North America to the Far East, a market which has lower profit per container, than containers moving from North America to Europe, a market which has higher profit per container. Ocean freight net revenues from the Far East and from Europe increased 12% and 5%, respectively, for the three months ended September 30, 2004, and 23% and 8%, respectively, for the nine months ended September 30, 2004, as compared with the same periods for 2003.

 

Customs brokerage and other services net revenues increased 26% and 27% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods for 2003 as a result of the Company’s continuing reputation for providing high quality service and consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program.  These increases are in line with increases in underlying freight volumes.

 

Salaries and related costs increased 21% and 20% during the three and nine-month periods ended September 30, 2004, as compared with the same periods in 2003 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 revenues remained the same and decreased 1% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods in 2003.  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 growth in revenues, net revenues and net earnings for the three and nine-month periods ended September 30, 2004 are a result of the incentives inherent in the Company’s compensation program.

 

Other operating expenses increased 9% and 12% for the three and nine-month periods ended September 30, 2004, as compared with the same periods in 2003 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company’s growing operations.  In the nine-month period ended September 30, 2004, the Company evaluated the recoverability of an equity investment in a privately held technology company and determined that an impairment had occurred.  Accordingly, a $2 million loss was recorded as an operating expense.  Other operating expenses as a percentage of net revenues decreased 3% and 1% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods in 2003. Management believes that this was significant as it reflects the successful achievement of cost containment objectives initiated at the branch level. The ability to sustain these savings into future periods is contingent upon branch level management’s ability to adhere to these objectives.

 

Other income, net, increased 2% and decreased 10% for the three and nine-month periods ended September 30, 2004, respectively, as compared with the same periods in 2003.  Due to slightly higher interest rates on higher average cash balances and short-term investments during the third quarter of 2004, interest income increased by $330 and $340 for the three and nine months ended September 30, 2004, respectively, as compared with the same periods for 2003.  Net foreign currency losses in the third quarter of 2004 were $96 compared to net foreign currency losses of $89 in the third quarter of 2003.  Net foreign currency gains were $93 for the nine months ended September 30, 2004, compared to net foreign currency gains of $506 for the same period in 2003.  Rental income, net of applicable depreciation, of $578 and $2,043 for the three and nine months ended September 30, 2004 and $819 and $2,589 for the three and nine months ended September 30, 2003, is included in other income.  The rental income is derived from two of the Company’s properties, one located near Heathrow airport in London, England and an office and warehouse facility near the San Francisco, California International Airport.  In conjunction with the scheduled remodeling of the San Francisco, California office and warehouse facility, rental income from that property ceased at the end of the first quarter of 2004.

 

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 income tax rate during the three and nine-month periods ended September 30, 2004, of 35.59% is comparable to the 35.69% rate for the three and nine months in the same periods in 2003.

 

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 towards 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.

 

13



 

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.  Some 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 its offices or agents.  The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company’s ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to avoid short-term exchange losses.  Any such hedging activity during the three and nine months ended September 30, 2004 and 2003 was insignificant.  For the three and nine months ended September 30, 2004, the Company had an approximate $96 in foreign exchange losses and $93 in foreign exchange gains, respectively, on a net basis. For the same periods of 2003, respectively, the Company had an approximate $89 in foreign exchange losses and $506 in foreign exchange gains, on a net basis.

 

The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and other 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.

 

During the third quarter of 2004, the Company opened one office in North America, in Calgary, Canada.

 

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 three and nine months ended September 30, 2004 (which is the measure of any increase from the same period of 2003) and for the three and nine months ended September 30, 2003 (which measures growth over 2002).

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

21

%

11

%

21

%

13

%

Operating Income

 

36

%

5

%

36

%

11

%

 

Liquidity and Capital Resources

 

The Company’s principal source of liquidity is cash generated from operating activities.  Net cash provided by operating activities for the three and nine months ended September 30, 2004, was approximately $33.3 million and $142.5 million, as compared with $11.8 million and  $95.8 million for the same periods of 2003.  The $21.5 million increase for the three months and the $46.7 million increase for the nine months ended September 30, 2004, is principally due to increased net earnings.  The increased accounts receivable is offset by increased accounts payable and accrued expenses.  The increase in accounts receivable is primarily due to increases in total revenue and to a lesser extent to slower collections on certain large accounts.  Increases in accounts payable and accrued expenses are a result of the Company’s attempts to manage cash flows by matching the timing of cash outflows for payments to vendors with cash inflows from collection of customer billings.

 

14



 

The Company’s business is subject to seasonal fluctuations.  Cash flow fluctuates as a result of this seasonality.  Historically, the first quarter shows an excess of customer collections over customer billings.  This results in positive cash flow.  The increased activity associated with peak season (typically commencing late second or early third quarter) causes an excess of customer billings over customer collections.  This cyclical growth in customer receivables consumes available cash.  Due to the Company’s management of accounts payable and accrued expenses as described in the preceding paragraph, cash flow from operating activities remained positive.

 

As a customs broker, the Company makes significant 5-10 business day cash advances for its customers’ obligations such as the payment of duties to U.S. Customs.  These advances are made as an accommodation for a select group of credit-worthy customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense.  The billings of such advances to customers are accounted for as a direct increase in accounts receivable to the customer and a corresponding accounts payable to governmental customs authorities.  As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency.

 

Cash used in investing activities for the three and nine months ended September 30, 2004, was $29.1 million and $48.9 million, as compared with $4.6 million and $13.3 million during the same periods of 2003.  The largest use of cash in investing activities is cash paid for capital expenditures.  As a non-asset based provider of integrated logistics services, the Company does not own any physical means of transportation (i.e., airplanes, ships, trucks, etc.).  However, the Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight.  The Company routinely invests in technology, office furniture and equipment and leasehold improvements.  In the third quarter of 2004, the Company made capital expenditures of  $29.2 million as compared with  $4.3 million for the same period in 2003.  Capital expenditures in the third quarter of 2004 related primarily to investments in property.  On August 5, 2004, the Company paid $17.8 million into escrow to close on the purchase of a 135,000 square foot industrial building and an adjacent 4-acre parcel of land in Hawthorne, California.  Other capital expenditures in the third quarter of 2004 and 2003 related primarily to investments in technology and office furniture and equipment.  The Company currently expects to spend approximately $65 million for normal capital expenditures in 2004.  In addition to property and equipment, normal capital expenditures include leasehold improvements, warehouse equipment, computer hardware and furniture and fixtures.  The Company expects to finance capital expenditures in 2004, with cash.

 

Cash used in financing activities during the three and nine months ended September 30, 2004 was $.032 million and $12.2 million as compared with $0.4 million and $10 million for the same periods in 2003.  The Company uses the proceeds from stock option exercises to repurchase the Company’s stock on the open market.  The differences shown at the end of the third quarter of 2004 and 2003 between proceeds from the issuance of common stock and the amounts paid to repurchase common stock represent a timing difference in the receipt of proceeds and the subsequent repurchase of outstanding shares.

 

At September 30, 2004, working capital was $496 million, including cash and short-term investments of $378 million.  The Company had no long-term debt at September 30, 2004.  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 additional equity interests in property in certain geographic locations.

 

The Company maintains international and domestic unsecured bank lines of credit.   At September 30, 2004, the U.S. facility totaled  $50 million and international bank lines of credit totaled $11.8 million.  In addition, the Company maintains bank facilities with its U.K. banks for  $21.7 million.  At September 30, 2004 the Company had no amounts outstanding on these lines of credit but was contingently liable for $55.6 million from standby letters of credit and guarantees related to these lines of credit and other obligations.  The guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company were to be required to perform.

 

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, including meeting any contingent liabilities related to standby letters of credit and other obligations.

 

In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At September 30, 2004, cash and cash equivalent balances of $200 million were held by the Company’s non-U.S. subsidiaries, of which $92 million was held in banks in the United States.

 

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:

 

15



 

Foreign Exchange Risk

 

The Company conducts business in many different countries and currencies. The Company’s business often results in revenue billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions.  This brings a market risk to the Company’s earnings.

 

Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company’s earnings as a result of hypothetical changes in the value of the U.S. Dollar, the Company’s functional currency, relative to the other currencies in which the Company transacts business.  All other things being equal, an average 10% weakening of the U.S. Dollar, throughout the nine months ended September 30, 2004, would have had the effect of raising operating income approximately $13 million.  An average 10% strengthening of the U.S. Dollar, for the same period, would have had the effect of reducing operating income approximately  $11 million.

 

The Company has approximately $10 million of intercompany transactions unsettled at any one point in time.  The Company currently does not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict the Company’s ability to move money freely around the world. Any such hedging activity during the three and nine-months ended September 30, 2004, was insignificant. The Company had no foreign currency derivatives outstanding at September 30, 2004 and 2003.  The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings.  The majority of intercompany billings are resolved within 30 days and intercompany billings arising in the normal course of business are fully settled within 90 days.

 

Interest Rate Risk

 

At September 30, 2004, the Company had cash and cash equivalents and short-term investments of $378 million, the vast majority of which is subject to variable short-term interest rates.  The Company had no short-term borrowings at September 30, 2004.  A hypothetical change in the interest rate of 10% would have no material impact on the Company’s earnings.

 

In management’s opinion, there has been no material change in the Company’s market risk exposure in the third quarter of 2004.

 

Item 4.  Controls and Procedures

 

Evaluation of Controls and Procedures

 

As of September 30, 2004, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed.  Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

 

Changes in Internal Controls

 

There were no significant changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

16



 

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 position or results of operations.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

 

Maximum Number
of Shares that
May Yet Be Purchased
Under the Plans or
Programs

 

July 1-31, 2004

 

 

$

 

 

10,267,535

 

August 1-31, 2004

 

 

$

 

 

10,297,008

 

September 1-30, 2004

 

294,974

 

$

50.34

 

294,974

 

9,982,592

 

Total

 

294,974

 

$

50.34

 

294,974

 

9,982,592

 

 

In November 1993, under a Non-Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized, and subsequently amended in February 2001, the repurchase of up to 10 million shares of the Company’s common stock.  This authorization has no expiration date.  This plan was disclosed in the Company’s report on Form 10-K filed March 31, 1995.

 

In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of such shares as may be necessary to reduce the issued and outstanding stock to 100,000,000 shares of common stock.  The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increase.  This authorization has no expiration date.  This plan was announced on November 13, 2001.

 

Item 6.  Exhibits

 

Exhibits required by Item 601 of Regulation S-K.

 

Exhibit Number

 

Description

 

 

 

Exhibit 31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit 31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit 32

 

Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

17



 

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 5, 2004

/s/ PETER J. ROSE

 

Peter J. Rose, Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

November 5, 2004

/s/ R. JORDAN GATES

 

R. Jordan Gates, Executive Vice President-Chief Financial Officer
and Treasurer

 

(Principal Financial and Accounting Officer)

 

18



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES

 

Form 10-Q Index and Exhibits

 

September 30, 2004

 

Exhibit Number

 

Description

 

 

 

31.1

 

Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

 

Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

19