<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______________
Commission File Number: 0-13468
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1069248
(State of other jurisdiction of
incorporation or organization) (IRS Employer Identification Number)
999 Third Avenue, Suite 2500, Seattle, Washington 98104
(Address of principal executive offices) (Zip Code)
(206) 674-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At July 31, 1998, the number of shares outstanding of the issuer=s Common
Stock was 24,617,017.
Page 1 of ___ pages.
The Exhibit Index appears on page __.
1
<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)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
- ------ ----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,651 $ 42,094
Short term investments 433 214
Accounts receivable, less
allowance for doubtful accounts of
$6,330 at June 30, 1998 and $6,449 at
December 31, 1997 195,937 206,501
Deferred Federal and state taxes 3,425 4,296
Other current assets 10,935 6,399
----------- -----------
Total current assets 250,381 259,504
Property and equipment, less
accumulated depreciation and
amortization of $42,532 at June 30,
1998 and $36,475 at December 31, 1997 89,872 66,550
Deferred Federal and state taxes 2,279 1,930
Other assets, net 14,984 16,122
----------- -----------
$357,516 $344,106
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 1,090 $ 2,145
Accounts payable 136,814 143,980
Income taxes 7,336 7,181
Other current liabilities 24,424 18,946
----------- -----------
Total current liabilities 169,664 172,252
Shareholders' equity:
Preferred stock, par value $.01
per share. Authorized 2,000,000
shares; none issued -- --
Common stock, par value $.01 per share.
Authorized 80,000,000 shares; issued
and outstanding 24,607,867 shares at
June 30, 1998, and 24,546,380 at
December 31, 1997 246 245
Additional paid-in capital 16,508 15,534
Retained earnings 176,617 159,225
Accumulated other comprehensive income (5,519) (3,150)
Total shareholders' equity 187,852 171,854
----------- -----------
$357,516 $344,106
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Airfreight $152,017 $156,974 $299,164 $291,902
Ocean freight 54,586 42,068 99,915 81,878
Customs brokerage and import
services 35,367 26,533 66,240 47,764
-------- -------- -------- --------
Total revenues 241,970 225,575 465,319 421,544
-------- -------- -------- --------
Operating expenses:
Airfreight consolidation 120,433 127,446 236,075 236,750
Ocean freight consolidation 39,163 29,960 71,106 58,907
Salaries and related costs 45,102 36,939 87,558 69,269
Selling and promotion 3,562 3,228 6,980 6,108
Depreciation and
amortization 3,610 2,662 6,874 5,044
Rent 3,527 2,584 7,006 4,995
Other 10,254 9,940 20,702 19,074
-------- -------- -------- --------
Total operating expenses 225,651 212,759 436,301 400,147
-------- -------- -------- --------
Operating income 16,319 12,816 29,018 21,397
Other income, net 1,289 568 1,614 1,029
-------- -------- -------- --------
Earnings before income taxes 17,608 13,384 30,632 22,426
Income tax expense 6,528 5,210 11,518 8,654
-------- -------- -------- --------
Net earnings $ 11,080 $ 8,174 $ 19,114 $ 13,772
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ .45 $ .34 $ .78 $ .57
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ .42 $ .31 $ .72 $ .53
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average basic
common shares outstanding 24,592,225 24,319,723 24,576,758 24,279,477
Weighted average diluted
common shares outstanding 26,618,738 26,179,131 26,588,105 26,087,778
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Activities:
Net earnings $ 11,080 $ 8,174 $ 19,114 $ 13,772
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Provision for losses on
accounts receivable (26) 193 489 966
Deferred income tax (benefit)
expense 1,832 (773) 1,762 (662)
Depreciation and amortization 3,610 2,662 6,873 5,044
Other (863) 227 (652) 378
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (18,462) (14,671) 8,938 (12,006)
Increase in other current assets (5,443) (1,711) (4,643) (1,950)
Increase (decrease) in accounts
payable and other current
liabilities 10,191 7,591 (643) 14,558
-------- -------- -------- --------
Net cash provided by operating
activities 1,919 1,692 31,238 20,100
-------- -------- -------- --------
Investing Activities:
Increase in short-term investments (109) (2,077) (197) (2,072)
Purchase of property and equipment (16,725) (1,299) (30,933) (12,855)
Acquisitions, net of cash
acquired -- (7,076) -- (7,076)
Other 1,332 (253) 1,524 292
-------- -------- -------- --------
Net cash used in investing activities (15,502) (10,705) (29,606) (21,711)
-------- -------- -------- --------
Financing Activities:
Short-term borrowings, net 7 11,206 (998) 10,657
Proceeds from issuance of common
stock 336 376 607 883
Repurchases of common stock (255) (147) (526) (153)
Dividends paid (1,722) (1,217) (1,722) (1,217)
-------- -------- -------- --------
Net cash (used) provided by financing
activities (1,634) 10,218 (2,639) 10,170
Effect of exchange rate changes
on cash (1,069) (296) (1,436) (939)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (16,286) 909 (2,443) 7,620
Cash and cash equivalents at
beginning of period 55,937 43,677 42,094 36,966
Cash and cash equivalents at end
of period $ 39,651 $ 44,586 $ 39,651 $ 44,586
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 1997 amounts have been reclassified to conform to the
1998 presentation. These condensed consolidated financial statements should
be read in conjunction with the financial statements and related notes
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on or about March 31, 1998.
Deferred income taxes of $1,930, related to equity adjustments from
foreign currency translation at December 31, 1997, have been reclassified
from previously reported amounts. Certain other 1997 amounts have been
reclassified to conform with the 1998 presentation.
Note 2. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting of comprehensive income and its
components in financial statements. Comprehensive income consists of net
income and other gains and losses affecting shareholders' equity that, under
generally accepted accounting principles, are excluded from net income. For
the Company, these consist of foreign currency translation gains and losses,
net of related income tax effects.
The components of total comprehensive income for interim periods are
presented in the following table:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $11,080 $8,174 $19,114 $13,772
Foreign currency translation
adjustments net of tax of:
$1,142 and $169 for 3 months
ended June 30, 1998 and 1997,
and $1,427 and $506 for the
six months ended June 30,
1998 and 1997. (1,832) (277) (2,369) (825)
------- ------ ------- -------
Total comprehensive income $ 9,248 $7,897 $16,745 $12,947
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
5
<PAGE>
Note 3. Earnings per Share
The following table is a reconciliation of the numerators and denominators
used in computing earnings per share for the three months and six months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
Weighted
(Amounts in thousands, except Net Average Earnings
share and per share amounts) Earnings Shares Per Share
- ----------------------------- -------- ------ ---------
<S> <C> <C> <C>
1998
- ----
Basic earnings per share $ 11,080 24,592,225 $.45
Effect of dilutive stock options -- 2,026,513 --
-------- ---------- ----
Diluted earnings per share $ 11,080 26,618,738 $.42
-------- ---------- ----
-------- ---------- ----
1997
- ----
Basic earnings per share $ 8,174 24,319,723 $.34
Effect of dilutive stock options -- 1,859,408 --
-------- ---------- ----
Diluted earnings per share $8,174 26,179,131 $.31
-------- ---------- ----
-------- ---------- ----
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
Weighted
(Amounts in thousands, except Net Average Earnings
Share and Per Share amounts) Earnings Shares Per Share
- ----------------------------- -------- ------ ---------
<S> <C> <C> <C>
1998
- ----
Basic earnings per share $ 19,114 24,576,758 $.78
Effect of dilutive stock options -- 2,011,347 --
-------- ---------- ----
Diluted earnings per share $ 19,114 26,588,105 $.72
-------- ---------- ----
-------- ---------- ----
1997
- ----
Basic earnings per share $ 13,772 24,279,477 $.57
Effect of dilutive stock options -- 1,808,301 --
-------- ---------- ----
Diluted earnings per share $13,772 26,087,778 $.53
-------- ---------- ----
-------- ---------- ----
</TABLE>
6
<PAGE>
Note 4. Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statements of Position No. 98-1, "Accounting for the Costs of Computer
Sofware Developed or Obtained for Internal Use," (SOP 98-1). The Company will
be required to adopt SOP 98-1 effective January 1, 1999. SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. Management is currently evaluating
the provisions of SOP 98-1 but does not expect that the adoption of this
pronouncement will significantly impact the Company's future results of
operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that such companies
report selected information about segments in interim reports to
shareholders. SFAS No. 131 is effective for financial statements issued for
periods beginning after December 15, 1997. This statement is not required to
be applied to interim financial statements in the initial year of its
application. The Company has not yet determined the effects, if any, that
SFAS No. 131 will have on the disclosures in its consolidated financial
statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report of Form 10-Q including the section
entitled "Currency and Other Risk Factors" and "Liquidity and Capital
Resources" contain forward-looking statements which must be considered in
connection with the discussion of the important factors that could cause
actual results to differ materially from the forward-looking statements. In
addition to risk factors identified elsewhere in this report, attention
should be given to the factors identified and discussed in the report on Form
10-K filed on or about March 31, 1998.
GENERAL
Expeditors International of Washington, Inc. is engaged in the business
of global logistics management, including international freight forwarding
and consolidation, for both air and ocean freight. The Company also acts as
a customs broker in all the domestic offices, and in many of its overseas
offices. The Company also provides additional services for its customers
including value added distribution, purchase order management, vendor
consolidation and other logistics solutions. The Company offers domestic
forwarding services only in conjunction with international shipments. The
Company does not compete for overnight courier or small parcel business. The
Company does not own or operate aircraft or steamships.
International trade is influenced by many factors, including economic
and political conditions in the United States and abroad, currency exchange
rates, and United States and foreign laws and policies relating to tariffs,
trade restrictions, foreign investments and taxation. Periodically,
governments consider a variety of changes to current tariffs and trade
restrictions. The Company cannot predict which, if any, of these proposals
may be adopted. Nor can the Company predict the effects adoption of any such
proposal will have on the Company's business. Doing business in foreign
locations also subjects the Company to a variety of risks and considerations
not normally encountered by domestic enterprises. In addition to being
affected by governmental policies concerning international trade, the
Company's business may also be affected by political developments and changes
in government personnel or policies in the nations in which it does business.
The Company's ability to provide services to its customers is highly
dependant on good working relationships with a variety of entities including
airlines, ocean steamship lines, and governmental agencies. The Company
considers its current working relationships with these entities to be
satisfactory. However, changes in space allotments available from carriers,
governmental deregulation efforts, "modernization" of the regulations
governing customs brokerage, and/or changes in governmental quota
restrictions could affect the Company's business in unpredictable ways.
Historically, the Company's operating results have been subject to a
seasonal trend when measured on a quarterly basis. The first quarter has
traditionally been the weakest and the third quarter has traditionally been
the strongest. This pattern is the result of, or is influenced by, numerous
factors including climate, national holidays, consumer demand, economic
conditions and a myriad of other similar and subtle forces. In addition,
this historical quarterly trend has been influenced by the growth and
diversification of the Company's international network and service offerings.
The Company cannot accurately forecast many of these factors nor can the
Company estimate accurately the relative influence of any particular factor
8
<PAGE>
and, as a result, there can be no assurance that historical patterns, if any,
will continue in future periods.
A significant portion of the Company's revenues are derived from
customers in industries whose shipping patterns are tied closely to consumer
demand, and from customers in industries whose shipping patterns are
dependent upon just-in-time production schedules. Therefore, the timing of
the Company's revenues are, to a large degree, impacted by factors out of the
Company's control, such as a sudden change in consumer demand for retail
goods and/or manufacturing production delays. Additionally, many customers
ship a significant portion of their goods at or near the end of a quarter,
and therefore, the Company may not learn of a shortfall in revenues until
late in a quarter. To the extent that a shortfall in revenues or earnings
was not expected by securities analysts, any such shortfall from levels
predicted by securities analysts could have an immediate and adverse effect
on the trading price of the Company's stock.
RESULTS OF OPERATIONS
The following table shows the consolidated net revenues (revenues less
consolidation expenses) attributable to the Company's principal services and
the Company's expenses for the three and six-month periods ended June 30,
1998 and 1997, expressed as percentages of net revenues. With respect to the
Company's services other than consolidation, net revenues are identical to
revenues. Management believes that net revenues are a better measure than
total revenues of the relative importance of the Company's principal services
since total revenues earned by the Company as a freight consolidator include
the carriers' charges to the Company for carrying the shipment whereas
revenues earned by the Company in its other capacities include only the
commissions and fees actually earned by the Company.
9
<PAGE>
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.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Percent Percent Percent Percent
Amount revenues Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ -------- ------ --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Airfreight $ 31,584 38% $ 29,528 43% $ 63,089 40% $ 55,152 44%
Ocean freight 15,423 19 12,108 18 28,809 18 22,971 18
Customs brokerage and
import services 35,367 43 26,533 39 66,240 42 47,764 38
-------- -------- -------- -------- --------- -------- -------- --------
Net revenues 82,374 100 68,169 100 158,138 100 125,887 100
-------- -------- -------- -------- --------- -------- -------- --------
Operating expenses:
Salaries and
related costs 45,102 55 36,939 54 87,558 56 69,269 55
Other 20,953 25 18,414 27 41,562 26 35,221 28
-------- -------- -------- -------- --------- -------- -------- --------
Total operating
expenses 66,055 80 55,353 81 129,120 82 104,490 83
-------- -------- -------- -------- --------- -------- -------- --------
Operating income 16,319 20 12,816 19 29,018 18 21,397 17
Other income, net 1,289 1 568 1 1,614 1 1,029 1
-------- -------- -------- -------- --------- -------- -------- --------
Earnings before
income taxes 17,608 21 13,384 20 30,632 19 22,426 18
Income tax expense 6,528 8 5,210 8 11,518 7 8,654 7
-------- -------- -------- -------- --------- -------- -------- --------
Net earnings $ 11,080 13% $ 8,174 12% $ 19,114 12% $ 13,772 11%
-------- -------- -------- -------- --------- -------- -------- --------
-------- -------- -------- -------- --------- -------- -------- --------
</TABLE>
Airfreight net revenues increased 7% and 14% for the three and six-month
periods ended June 30, 1998 as compared with the same periods for 1997. This
increase was primarily due to increased airfreight tonnage handled by the
Company's expanding global network.
Ocean freight net revenues increased 27% and 25% for the three and
six-month periods ended June 30, 1998 as compared with the same periods for
1997. The Company continued to aggressively market competitive ocean freight
rates primarily on freight moving eastbound from the Far East. The ocean
forwarding business and ECMS (Expeditors Cargo Management Systems), the
Company's ocean freight consolidation management and purchase order tracking
service, were again instrumental in helping the Company to expand its market
share.
10
<PAGE>
Customs brokerage and import services increased 33% and 39% for the
three and six-month periods ended June 30, 1998 as compared with the same
periods for 1997. This increase is the result of 1) the Company's entry into
the truck and rail border brokerage business in the United States, 2) the
Company's growing reputation for providing high quality service, 3)
consolidation within the customs brokerage market as customers seek out
brokers with sophisticated computerized capabilities critical to an overall
logistics management program, and 4) the growing importance of distribution
services as a separate and distinct service which is included in this
category.
Salaries and related costs increased during the three and six-month
periods ended June 30, 1998 compared with the same period in 1997 as a result
of (1) the Company's increased hiring of sales, operations, and
administrative personnel in existing and new offices to accommodate increases
in business activity, and (2) increased compensation levels. Salaries and
related costs have, however, remained virtually constant as a percentage of
net revenues--a measure that management believes is significant in assessing
the effectiveness of corporate cost containment objectives. The relatively
consistent relationship between salaries and net revenues is the result of a
compensation philosophy that has been maintained since the inception of the
Company: offer a modest base salary and the opportunity to share in a fixed
and determinable percentage of the operating profit of the business unit
controlled by each key employee. Using this compensation model, changes in
individual compensation will occur in proportion to changes in Company
profits. Management believes that the organic growth in revenues, net revenue
and net earnings for the three and six-month periods ended June 30, 1998 and
1997 are a direct result of the incentives inherent in the Company's
compensation program.
Other operating expenses increased for the three and six-month periods
ended June 30, 1998 as compared with the same periods in 1997 as rent
expense, communications expense, quality and training expenses, and other
costs expanded to accommodate the Company's growing operations. Other
operating expenses as a percentage of net revenues decreased approximately 2%
in the three and six-month periods ended June 30, 1998 as compared with the
same periods in 1997. This decrease is primarily due to economies of scale
realized as the Company's semi-variable other operating expenses were spread
over increased net revenues.
Other income, net, increased for the three month and six month periods
ended June 30, 1998 as compared with the same periods of 1997, due primarily
to a $928,000 gain realized on the sale of one of the Company's real estate
assets.
The Company pays income taxes in the United States and other
jurisdictions. In addition, the Company pays various other taxes, which are
typically included in costs of operations. Effective income tax rates per
financial statements during the three and six-month periods ended June 30,
1998 remained virtually constant as compared with the same periods in 1997.
Currency and Other Risk Factors
International air/ocean freight forwarding and customs brokerage are
intensively competitive and are expected to remain so for the foreseeable
future. There are a large number of entities competing in the international
logistics industry, however, the Company's primary competition is confined to
a relatively small number of companies within this group. While there is
currently a marked trend within the industry toward consolidation into large
firms with multinational offices and agency networks, regional and local
broker/forwarders remain a competitive force.
11
<PAGE>
Historically, the primary competitive factors in the international
logistics industry have been price and quality of service, including
reliability, responsiveness, expertise, convenience, and scope of operations.
The Company emphasizes quality service and believes that its prices are
competitive with those of others in the industry. Recently, customers have
exhibited a trend toward the more sophisticated and efficient procedures for
the management of the logistics supply chain by embracing strategies such as
just-in-time inventory management. Accordingly, sophisticated computerized
customer service capabilities and a stable worldwide network have become
significant factors in attracting and retaining customers.
Developing these systems and a worldwide network has added a
considerable indirect cost to the services provided to customers. Smaller
and middle-tier competitors, in general, do not have the resources available
to develop customized systems and worldwide network. As a result, there is a
significant amount of consolidation currently taking place in the industry.
Management expects that this trend toward consolidation will continue for the
short to medium-term.
The nature of the Company's worldwide operations necessitates the
Company dealing with a multitude of currencies other than the U.S. dollar.
This results in the Company being exposed to the inherent risks of the
international currency markets and governmental interference. Many of the
countries where the Company maintains offices and/or agency relationships
have strict currency control regulations which influence the Company's
ability to hedge foreign currency exposure. The Company tries to compensate
for these exposures by accelerating international currency settlements among
these offices or agents. Foreign currency gains and losses recognized during
the second quarter and for the first six months of 1998 and 1997 were
immaterial.
The Company has traditionally generated revenues from airfreight, ocean
freight and customs brokerage and import services. In light of the
customer-driven trend to provide customer rates on a door-to-door basis,
management foresees the potential, in the medium to long-term, for fees
normally associated with customs house brokerage to be de-emphasized and
included as a component of other services offered by the Company.
Sources of Growth
Acquisitions - Historically, growth through aggressive acquisition has
proven to be a challenge for many of the Company's competitors and typically
involves the purchase of significant "goodwill", the value of which can be
realized in large measure only by retaining the customers and profit margins
of the acquired business. As a result, the Company has pursued a strategy
emphasizing organic growth supplemented by certain strategic acquisitions,
where future economic benefit significantly exceeds the "goodwill" recorded
in the transaction.
Office Openings - The Company opened 3 start-up offices during the
second quarter of 1998.
<TABLE>
<CAPTION>
North Indian
America Europe Sub-continent
- ------- ------ -------------
<S> <C> <C>
McAllen, TX Florence, Italy
Prague, Czech Republic
</TABLE>
12
<PAGE>
Internal Growth - Management believes that a comparison of "same store"
growth is critical in the evaluation of the quality and extent of the
Company's internally generated growth. This "same store" analysis isolates
the financial contributions from offices that have been included in the
Company's operating results for at least one full year. The table below
presents same store comparisons for the second quarter of 1998 (which is the
measure of any increase from the same quarter of 1997) and for the second
quarter of 1997 (which measures growth over 1996).
<TABLE>
<CAPTION>
For the three months
ended June 30,
1998 1997
---- ----
<S> <C> <C>
Net revenue 19% 29%
Operating income 30% 44%
</TABLE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from
operations. At June 30, 1998, working capital was $82 million, including cash
and short-term investments of $40 million. The Company had no long-term debt
at June 30, 1998. While the nature of its business does not require an
extensive investment in property and equipment, the Company is actively
looking for suitable facilities and/or property to acquire at or near
airports in certain cities in North America and overseas. The Company
expects to spend approximately $40 million on property and equipment in 1998,
which is expected to be financed with cash, short-term floating rate and/or
long-term fixed-rate borrowings.
The Company maintains foreign and domestic borrowings under unsecured
bank lines of credit totaling $40.1 million. At June 30, 1998, the Company
was directly liable for $.1 million drawn on these lines of credit and was
contingently liable for an additional $19 million from standby letters of
credit. In addition, the Company maintains a bank facility with its U.K.
bank for $8.4 million. Management believes that the Company's current cash
position, bank financing arrangements, and operating cash flows will be
sufficient to meet its capital and liquidity requirements for the foreseeable
future.
In some cases, the Company's ability to repatriate funds from foreign
operations may be subject to foreign exchange controls. In addition, certain
undistributed earnings of the Company's subsidiaries accumulated through
December 31, 1992 would, under most circumstances, be subject to some
additional United States income tax if distributed to the Company. The
Company has not provided for this additional tax because the Company intends
to reinvest such earnings to fund the expansion of its foreign activities, or
to distribute them in a manner in which no significant additional taxes would
be incurred.
13
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Shareholders was held on May 7, 1998.
(b) The following directors were elected to the Board of Directors to serve a
term of one year and until their successors are elected and qualified:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
P.J. Rose 21,853,650 129,750
K.M. Walsh 21,853,410 129,990
J.L.K. Wang 21,853,259 130,141
J.J. Casey 21,930,627 52,773
D.P. Kourkoumelis 21,930,389 53,011
J.W. Meisenbach 21,930,729 52,671
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule, Edgar Filing Only
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended June 30, 1998.
14
<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.
August __, 1998 /s/ PETER J. ROSE
--------------------------------------------
Peter J. Rose, Chairman
and Chief Executive Officer
(Principal Executive Officer)
August __, 1998 /s/ R. JORDAN GATES
--------------------------------------------
R. Jordan Gates, Senior Vice President-
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
June 30, 1998
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule (Filed Electronically Only)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<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 JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,651
<SECURITIES> 433
<RECEIVABLES> 202,267
<ALLOWANCES> 6,330
<INVENTORY> 0
<CURRENT-ASSETS> 250,381
<PP&E> 132,404
<DEPRECIATION> 42,532
<TOTAL-ASSETS> 357,516
<CURRENT-LIABILITIES> 169,664
<BONDS> 0
0
0
<COMMON> 246
<OTHER-SE> 187,606
<TOTAL-LIABILITY-AND-EQUITY> 357,516
<SALES> 0
<TOTAL-REVENUES> 465,319
<CGS> 0
<TOTAL-COSTS> 307,181
<OTHER-EXPENSES> 129,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,632
<INCOME-TAX> 11,518
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,114
<EPS-PRIMARY> .78
<EPS-DILUTED> .72
</TABLE>
