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, 1996
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)
19119 - 16th Avenue South, Seattle, Washington 98188
(Address of principal executive offices) (Zip Code)
(206) 246-3711
(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 7, 1996, the number of shares outstanding of the issuer's Common
Stock was 12,036,295.
Page 1 of 15 pages.
The Exhibit Index appears on page 14.
1
<PAGE>
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 1996 1995
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 42,528 36,142
Short term investments 197 457
Accounts receivable, net 123,780 123,793
Deferred Federal and state taxes 4,738 4,113
Other current assets 4,639 3,862
-------- --------
Total current assets $175,882 168,367
Property and equipment, net 27,886 28,242
Other assets, net 7,364 7,519
-------- --------
$211,132 204,128
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Short term borrowings 234 285
Accounts payable 73,504 72,238
Income taxes 5,249 3,284
Other current liabilities 10,888 11,129
-------- --------
Total current liabilities 89,875 86,936
Shareholders' equity:
Preferred stock, par value $.01
per share. Authorized 2,000,000
shares; none issued -- --
Common stock, par value $.01 per share
Authorized 40,000,000 shares; issued
and outstanding 12,029,455 shares at
March 31, 1996, and 12,010,663 at
December 31, 1995 120 120
Additional paid-in capital 13,276 13,129
Retained earnings 104,717 100,928
Equity adjustments from foreign
currency translation 3,144 3,015
-------- --------
Total shareholders' equity 121,257 117,192
-------- --------
$211,132 204,128
======== ========
2
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
Three months ended
March 31,
--------------------------------
1996 1995
---- ----
Revenues:
Airfreight $ 93,266 86,788
Ocean freight 29,384 23,953
Customs brokerage 15,020 12,137
----------- -----------
Total revenues 137,670 122,878
----------- -----------
Operating expenses:
Airfreight consolidation 74,454 71,289
Ocean freight consolidation 22,484 18,303
Salaries and related costs 23,075 18,880
Rent 1,783 1,574
Other 10,324 7,990
----------- -----------
Total operating expenses 132,120 118,036
----------- -----------
Operating income 5,550 4,842
Other income, net 603 469
----------- -----------
Earnings before income taxes 6,153 5,311
Income tax expense 2,364 2,093
----------- -----------
Net earnings $ 3,789 3,218
=========== ===========
Net earnings per share $ .30 $ .26
=========== ===========
Weighted average number of
common shares 12,715,566 12,448,626
=========== ===========
3
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three months ended
March 31,
----------------------
1996 1995
---- ----
Operating Activities:
Net earnings $ 3,789 3,218
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for losses on accounts receivable 368 189
Deferred income tax (benefit) expense (461) 287
Depreciation and amortization 1,887 1,531
Other 103 52
Changes in operating assets and liabilities:
Increase in accounts receivable (257) (7,388)
Increase in other current assets (778) (1,138)
Increase in accounts payable and other
current liabilities 2,999 12,073
-------- --------
Net cash provided by operating activities 7,650 8,824
-------- --------
Investing Activities:
Decrease in short-term
investments 260 135
Purchase of property and equipment (1,622) (1,662)
Other 130 (888)
-------- --------
Net cash used in investing activities (1,232) (2,415)
-------- --------
Financing Activities:
Short-term borrowings, net (54) --
Proceeds from issuance of common stock 443 109
-------- --------
Repurchases of common stock (506) (116)
Net cash used in financing activities (117) (7)
Effect of exchange rate changes on cash 85 354
-------- --------
Increase in cash and cash equivalents 6,386 6,756
Cash and cash equivalents at beginning
of period 36,142 21,427
-------- --------
Cash and cash equivalents at end of period $ 42,528 28,183
======== ========
4
<PAGE>
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 1995 amounts have been reclassified
to conform to the 1996 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 April 1, 1996.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Expeditors International of Washington, Inc. is engaged in the business of
global logistics management, including international freight forwarding and
consolidation, for both air and ocean freight. The Company also acts as a
customs broker in all domestic offices, and in many of its overseas offices. The
Company also provides additional services for its customers including value
added distribution, purchase order management, vendor consolidation and other
logistics solutions. The Company offers domestic forwarding services only in
conjunction with international shipments. The Company does not compete for
overnight courier or small parcel business. The Company does not own or operate
aircraft or steamships.
International trade is influenced by many factors, including economic and
political conditions in the United States and abroad, currency exchange rates,
and United States and foreign laws and policies relating to tariffs, trade
restrictions, foreign investments and taxation. Periodically, governments
consider a variety of changes to current tariffs and trade restrictions. The
Company cannot predict which, if any, of these proposals may be adopted. Nor can
the Company predict the effects adoption of any such proposal will have on the
Company's business. Doing business in foreign locations also subjects the
Company to a variety of risks and considerations not normally encountered by
domestic enterprises. In addition to being affected by governmental policies
concerning international trade, the Company's business may also be affected by
political developments and changes in government personnel or policies in the
nations in which it does business.
The Company's ability to provide services to its customers is highly
dependant on good working relationships with a variety of entities including
airlines, ocean steamship lines, and governmental agencies. The Company
considers its current working relationships with these entities to be
satisfactory. However, changes in space allotments available from carriers,
governmental deregulation efforts, "modernization" of the regulations governing
customs brokerage, and/or changes in governmental quota restrictions could
affect the Company's business in unpredictable ways.
Historically, the Company's operating results have been subject to a
seasonal trend when measured on a quarterly basis. The first quarter has
traditionally been the weakest and the third quarter has traditionally been the
strongest. This pattern is the result of, or is influenced by, numerous factors
including climate, national holidays, consumer demand, economic conditions and a
myriad of other similar and subtle forces. In addition, this historical
quarterly trend has been influenced by the growth and diversification of the
Company's international network and service offerings. The Company cannot
accurately forecast many of these factors nor can the Company estimate
accurately the relative influence of any particular factor 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-
6
<PAGE>
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.
7
<PAGE>
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, 1996 and 1995,
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.
<TABLE>
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.
<CAPTION>
Three months ended March 31, Year ended
1996 1995 December 31, 1995
------------------ -------------------- -------------------
Percent Percent Percent
of net of net of net
Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
Airfreight $ 18,812 46% $ 15,499 47% $ 71,643 47%
Ocean freight 6,900 17 5,650 17 27,767 18
Customs brokerage 15,020 37 12,137 36 54,663 35
------- --- ------- --- ------- ----
Net revenues 40,732 100 33,286 100 154,073 100
------- --- ------- --- ------- ---
Operating expenses:
Salaries and
related costs 23,075 56 18,880 56 84,272 55
Other 12,107 30 9,564 29 42,950 28
------- --- ------- --- ------- ----
Total operating
expenses 35,182 86 28,444 85 127,222 83
------- --- ------- -- ------- ----
Operating income 5,550 14 4,842 15 26,851 17
Other income, net 603 1 469 1 1,548 1
------- --- ------- --- ------- ----
Earnings before
income taxes 6,153 15 5,311 16 28,399 18
Income tax expense 2,364 6 2,093 6 11,004 7
------- --- ------- --- ------- ----
Net earnings $ 3,789 9% $ 3,218 10% $ 17,395 11%
======= === ======= === ======= ====
</TABLE>
Air freight net revenues increased 21% for the three-month period ended
March 31, 1996 as compared with the same period for 1995. This increase was
primarily due to (1) increased airfreight tonnage handled by the Company from
the Far East, North America and Europe and (2) increased prices charged by
airlines which were passed along to customers. Management also believes that the
Company was more efficient during the three-month period ended March 31, 1996 in
the handling and routing of shipments through key export gateway locations,
particularly in North America. To the extent that it is successful in increasing
its concentration of export freight in key export gateway locations, the Company
has been able to take advantage of the volume, weight and service related
incentives offered by the direct air carriers.
8
<PAGE>
Ocean freight net revenues increased 22% for the three-month period ended
March 31, 1996 as compared with the same period for 1995 as a result of a
Company decision to aggressively market extremely competitive ocean freight
rates to its customers, primarily on freight moving eastbound from the Far East.
During 1996, there has been severe pricing pressure on this lane. Despite
falling prices, the Company was able to substantially maintain margins and
expand market share, a development management believes to be significant in
assessing its strength in the highly competitive transpacific NVOCC (Non-Vessel
Operating Common Carrier) market. In addition to increases in the traditional
NVOCC and ocean forwarding business, ECMS (Expeditors Cargo Management Systems),
the Company's ocean freight consolidation management and purchase order tracking
service, was instrumental in providing new business.
Customs brokerage and import services increased 24% for the three-month period
ended March 31, 1996 as compared with the same period for 1995 as a 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 the 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.
Salaries and related costs increased during the three-month period ended March
31, 1996 compared with the same period in 1995 as a result of (1) the Company's
increased hiring of sales, operations, and administrative personnel in existing
and new offices to accommodate increases in business activity and (2) increased
compensation levels. Salaries and related costs have, however, remained
virtually constant as a percentage of net revenue--a measure that management
believes is significant in assessing the effectiveness of corporate cost
containment objectives. The relatively consistent relationship between salaries
and net revenues is the result of a compensation philosophy that has been
maintained since the inception of the Company: offer a modest base salary and
the opportunity to share in a fixed and determinable percentage of the operating
profit of the business unit controlled by each key employee. Using this
compensation model, changes in individual compensation will occur in proportion
to changes in Company profits. Management believes that the organic growth in
revenues, net revenue and net income for the three month periods ended March 31,
1996 and 1995 are a direct result of the incentives inherent in the Company's
compensation program.
Other operating expenses increased for the three-month period ended March 31,
1996 as compared with the same period in 1995 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 increased approximately 1% in the three-month period ended March
31, 1996, as compared with the same period in 1995. This increase was a result
primarily of (1)expenses related to the Company's national sales program and (2)
the increased costs of maintaining the company's worldwide network of computer
and communications systems.
Other income, net, increased for the three-month period ended March 31, 1996
as compared with the same period in 1995 primarily due to higher interest income
from increased cash flow. In addition, line of credit borrowings in the United
States were kept at a minimum level by repatriating cash from overseas
subsidiaries. This minimizes the Company's interest expense in North America
where the Company is most active in its role as a customs broker and must
therefore regularly advances duties on behalf of customers.
The Company pays income taxes in the United States and other jurisdictions. In
addition the Company pays various other taxes, which are typically included in
costs of operations. Effective income tax rates per financial statements
9
<PAGE>
during the three-month period ended March 31, 1996 decreased to 38.4% as
compared with 39.4% for the same period in 1995. This decrease is a result of
lower state taxes.
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 office and agency networks, regional and local broker/forwarders
remain a competitive force.
Historically, the primary competitive factors in the international logistics
industry have been price and quality of service, including reliability,
responsiveness, expertise, convenience, and scope of operations. The Company
emphasizes quality service and believes that its prices are competitive with
those of others in the industry. Recently customers have exhibited a trend
toward the more sophisticated and efficient procedures for the management of the
logistics supply chain by embracing strategies such as just-in-time inventory
management. Accordingly, sophisticated computerized customer service
capabilities and a stable worldwide network have become significant factors in
attracting and retaining customers.
Developing these systems and a worldwide network has added a considerable
indirect cost to the services provided to customers. Smaller and middle-tier
competitors, in general, do not have the resources available to develop
customized systems and 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. 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.
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 1996 and 1995
were immaterial.
The Company has traditionally generated revenues from air freight, 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.
10
<PAGE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from operations.
At March 31, 1996, working capital was $86 million, including cash and
short-term investments of $43 million. The Company had no long-term debt at
March 31, 1996. While the nature of its business does not require an extensive
investment in property and equipment, the Company is actively looking for
suitable facilities and/or property to acquire at or near airports in certain
cities in North America and overseas. As of the date of this report on Form
10-Q, the Company has entered into agreements to purchase land and a 150,000
square foot office and warehouse facility in Inwood, New York. In addition, the
Company contemplates entering into a lease-purchase agreement for a corporate
office building to be located in Seattle, Washington. Including these two
facilities, the Company expects to spend approximately $31 million on property
and equipment in 1996, which is expected to be financed with cash, short-term
floating rate and/or long-term fixed-rate borrowings.
The Company maintains foreign and domestic borrowings under unsecured bank
lines of credit totaling $15 million. At March 31, 1996, the Company was
directly liable for $234,000 drawn on these lines of credit and was contingently
liable for an additional $13 million of standby letters of credit. In addition,
the Company maintains a bank facility with its U.K. bank for $7.75 million of
which the Company was contingently liable for $7.4 million. Management believes
that the Company's current cash position, bank financing arrangements, and
operating cash flows will be sufficient to meet its capital and liquidity
requirements for the foreseeable future.
In some cases, the Company's ability to repatriate funds from foreign
operations may be subject to foreign exchange controls. In addition, certain
undistributed earnings of the Company's subsidiaries accumulated through
December 31, 1992 would, under most circumstances, be subject to some additional
United States income tax if distributed to the Company. The Company has not
provided for this additional tax because the Company intends to reinvest such
earnings to fund the expansion of its foreign activities, or to distribute them
in a manner in which no significant additional taxes would be incurred.
11
<PAGE>
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
------ -----------
11.1 Statement re computation of per share earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended March 31, 1996.
12
<PAGE>
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 7, 1996 /s/ PETER J. ROSE
----------------------------------------------------
Peter J. Rose, Chairman
and Chief Executive Officer
(Principal Executive Officer)
May 7, 1996 /s/ R. JORDAN GATES
----------------------------------------------------
R. Jordan Gates, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
13
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
March 31, 1996
Exhibit
Number Description Page Number
- ------ ----------- -----------
11.1 Statement re computation of per share earnings 15
14
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Exhibit 11.1 Statement re computation of per share earnings
Net earnings per weighted average common share is computed using the
weighted average number of common shares and common share equivalents
outstanding during each period presented. Common share equivalents represent
stock options. Fully diluted earnings per share do not differ materially from
primary earnings per share.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from
The Condensed Consolidated Financial Statements set forth as Item 1 of Form
10-Q for the quarterly period ended March 31, 1996 and is qualified in its
entirety by reference to such Financial Statement.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 42,528
<SECURITIES> 197
<RECEIVABLES> 123,780
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 175,882
<PP&E> 27,886
<DEPRECIATION> 0
<TOTAL-ASSETS> 211,132
<CURRENT-LIABILITIES> 89,875
<BONDS> 0
<COMMON> 120
0
0
<OTHER-SE> 121,137
<TOTAL-LIABILITY-AND-EQUITY> 211,132
<SALES> 0
<TOTAL-REVENUES> 137,670
<CGS> 0
<TOTAL-COSTS> 96,938
<OTHER-EXPENSES> 35,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,153
<INCOME-TAX> 2,364
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,789
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
