<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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______________
Commission File Number: 0-13468
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1069248
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1015 Third Avenue, 12th Floor, Seattle, Washington 98104
(Address of principal executive offices) (Zip Code)
(206) 674-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At November 12, 1998, the number of shares outstanding of the issuer's
Common Stock was 24,651,385.
Page 1 of 17 pages.
The Exhibit Index appears on page 17.
<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>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,937 $ 42,094
Short-term investments 450 214
Accounts receivable, less
allowance for doubtful accounts of
$6,087 at September 30, 1998 and
$6,449 at December 31, 1997 241,682 206,501
Deferred Federal and state taxes 2,224 4,296
Other current assets 10,927 6,399
-------- --------
Total current assets 301,220 259,504
Property and equipment, less
accumulated depreciation and
amortization of $45,938 at September 30,
1998 and $36,475 at December 31, 1997 99,844 66,550
Deferred Federal and state taxes 2,395 1,930
Other assets, net 16,551 16,122
-------- --------
$420,010 $344,106
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 26,365 $ 2,145
Accounts payable 153,363 143,980
Income taxes 8,706 7,181
Other current liabilities 27,763 18,946
-------- --------
Total current liabilities 216,197 172,252
Shareholders' equity:
Preferred stock, par value $.01
per share. Authorized 2,000,000
shares; none issued -- --
Common stock, par value $.01 per share.
Authorized 80,000,000 shares; issued
and outstanding 24,634,441 shares at
September 30, 1998, and 24,546,380 at
December 31, 1997 246 245
Additional paid-in capital 16,746 15,534
Retained earnings 190,834 159,225
Accumulated other comprehensive loss (4,013) (3,150)
-------- --------
Total shareholders' equity 203,813 171,854
-------- --------
$420,010 $344,106
-------- --------
-------- --------
</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 Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Airfreight $182,798 $178,158 $481,962 $ 470,060
Ocean freight 70,595 52,128 170,510 134,006
Customs brokerage and import services 36,282 32,023 102,522 79,787
---------- ---------- ---------- ----------
Total revenues 289,675 262,309 754,994 683,853
---------- ---------- ---------- ----------
Operating expenses:
Airfreight consolidation 145,379 145,357 381,454 382,107
Ocean freight consolidation 51,406 36,772 122,512 95,679
Salaries and related costs 49,958 41,733 137,516 111,002
Selling and promotion 3,762 3,506 10,742 9,614
Depreciation and amortization 3,993 2,878 10,867 7,922
Rent 4,158 2,654 11,164 7,649
Other 8,746 10,451 29,448 29,525
---------- ---------- ---------- ----------
Total operating expenses 267,402 243,351 703,703 643,498
---------- ---------- ---------- ----------
Operating income 22,273 18,958 51,291 40,355
Other income, net 311 95 1,925 1,124
---------- ---------- ---------- ----------
Earnings before income taxes 22,584 19,053 53,216 41,479
Income tax expense 8,367 7,276 19,885 15,930
---------- ---------- ---------- ----------
Net earnings $ 14,217 $ 11,777 $ 33,331 $ 25,549
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ .57 $ .48 $ 1.35 $ 1.05
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ .54 $ .44 $ 1.26 $ .97
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average basic
common shares outstanding 24,924,638 24,437,949 24,693,992 24,371,419
Weighted average diluted
common shares outstanding 26,471,432 26,555,155 26,549,196 26,243,552
</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 Nine months ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Activities:
Net earnings $ 14,217 $ 11,777 $ 33,331 $ 25,549
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Provision for losses on accounts receivable 681 325 1,170 1,291
Deferred income tax expense (benefit) 2,188 564 3,950 (98)
Depreciation and amortization 3,993 2,878 10,867 7,922
Other 183 271 (470) 649
Changes in operating assets and liabilities:
Increase in accounts receivable (44,089) (42,836) (35,151) (54,842)
(Increase) decrease in other current assets 140 (1,448) (4,503) (3,398)
Increase in accounts payable and
other current liabilities 18,719 31,388 18,076 45,946
-------- -------- -------- --------
Net cash (used) provided by operating
activities (3,968) 2,919 27,270 23,019
-------- -------- -------- --------
Investing Activities:
(Increase) decrease in short-term
investments (1) 1,985 (198) (87)
Purchase of property and equipment (13,740) (13,800) (44,673) (26,655)
Acquisitions, net of cash acquired -- -- -- (7,076)
Other (1,780) 209 (256) 501
-------- -------- -------- --------
Net cash used in investing activities (15,521) (11,606) (45,127) (33,317)
-------- -------- -------- --------
Financing Activities:
Short-term borrowings, net 25,153 13,548 24,155 24,205
Proceeds from issuance of common stock 3,868 2,653 4,475 3,536
Repurchases of common stock (3,938) (2,821) (4,464) (2,974)
Dividends paid -- -- (1,722) (1,217)
-------- -------- -------- --------
Net cash provided by financing activities 25,083 13,380 22,444 23,550
Effect of exchange rate changes on cash 692 ( 1,863) (744) ( 2,802)
-------- -------- -------- --------
Increase in cash and cash equivalents 6,286 2,830 3,843 10,450
Cash and cash equivalents at
beginning of period 39,651 44,586 42,094 36,966
Cash and cash equivalents at end of period $ 45,937 $ 47,416 $ 45,937 $ 47,416
-------- -------- -------- --------
-------- -------- -------- --------
</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. 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 Nine months ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $14,217 $11,777 $33,331 $25,549
------- ------- ------- -------
Foreign currency translation
adjustments net of tax of:
$885 and $0 for 3 months
ended September 30, 1998 and 1997,
and $509 and $164 for the
nine months ended September 30,
1998 and 1997. 1,506 (2,564) (863) (3,389)
------- ------- ------- -------
Total comprehensive income $15,723 $ 9,213 $32,468 $22,160
------- ------- ------- -------
------- ------- ------- -------
</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 nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended September 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 $14,217 24,924,638 $.57
Effect of dilutive stock options -- 1,546,794 --
------- ---------- ----
Diluted earnings per share $14,217 26,471,432 $.54
------- ---------- ----
------- ---------- ----
1997
Basic earnings per share $11,777 24,437,949 $.48
Effect of dilutive stock options -- 2,117,206 --
------- ---------- ----
Diluted earnings per share $11,777 26,555,155 $.44
------- ---------- ----
------- ---------- ----
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 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 $33,331 24,693,992 $1.35
Effect of dilutive stock options -- 1,855,204 --
------- ---------- -----
Diluted earnings per share $33,331 26,549,196 $1.26
------- ---------- -----
------- ---------- -----
1997
Basic earnings per share $25,549 24,371,419 $1.05
Effect of dilutive stock options -- 1,872,133 --
------- ---------- -----
Diluted earnings per share $25,549 26,243,552 $ .97
------- ---------- -----
------- ---------- -----
</TABLE>
The impact of excluding anti-dilutive stock options was to increase the
weighted average shares 109,350 and 36,450, respectively, for the three and
nine months ended September 30, 1998. There were no anti-dilutive stock
options in 1997.
Note 4. Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statements of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," (SOP 98-1). The Company
will be required to adopt SOP 98-1 effective January 1, 1999. SOP 98-1
provides, among other things, guidance for determining whether computer
software is for internal use and when the cost related to such software
should be expensed as incurred or capitalized and amortized. Management is
currently evaluating the provisions of SOP 98-1 but does not expect that the
adoption of this pronouncement will significantly impact the Company's future
results of operations.
6
<PAGE>
In June 1997, the FASB issued Statement No. 131 (SFAS No. 131),
"Disclosure about Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes standards for the way that public companies
report selected information about operating segments in annual financial
statements and requires that such companies report selected information about
segments in interim reports to shareholders. SFAS No. 131 is effective for
financial statements issued for periods beginning after December 15, 1997.
This statement is not required to be applied to interim financial statements
in the initial year of its application. The Company has not yet determined
the effects, if any, that SFAS No. 131 will have on the disclosures in its
consolidated financial statements.
In June 1998, the FASB issued Statement No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The
statement permits early adoption as of the beginning of any fiscal quarter
after its issuance. The Company expects to adopt the new statement
effective January 1, 2000. The statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of any derivative's change in fair
value will be immediately recognized in earnings. In certain situations, the
Company uses hedging as an intermediary currency risk management tool and
does not anticipate that the adoption of this statement will have a
significant effect on its consolidated financial statements.
7
<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 on Form 10-Q including the section entitled
"Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain
forward-looking statements which must be considered in connection with the
discussion of the important factors that could cause actual results to differ
materially from the forward-looking statements. In addition to risk factors
identified elsewhere in this report, attention should be given to the factors
identified and discussed in the Company's report on Form 10-K filed on or about
March 31, 1998.
GENERAL
Expeditors International of Washington, Inc. is engaged in the business
of global logistics management, including international freight forwarding
and consolidation, for both air and ocean freight. The Company also acts as
a customs broker in all domestic offices, and in many of its overseas
offices. The Company also provides additional services for its customers
including value added distribution, purchase order management, vendor
consolidation and other logistics solutions. The Company offers domestic
forwarding services only in conjunction with international shipments. The
Company does not compete for overnight courier or small parcel business. The
Company does not own or operate aircraft or steamships.
International trade is influenced by many factors, including economic
and political conditions in the United States and abroad, currency exchange
rates, and United States and foreign laws and policies relating to tariffs,
trade restrictions, foreign investments and taxation. Periodically,
governments consider a variety of changes to current tariffs and trade
restrictions. The Company cannot predict which, if any, of these proposals
may be adopted, nor can the Company predict the effects adoption of any such
proposal will have on the Company's business. Doing business in foreign
locations also subjects the Company to a variety of risks and considerations
not normally encountered by domestic enterprises. In addition to being
affected by governmental policies concerning international trade, the
Company's business may also be affected by political developments and changes
in government personnel or policies in the nations in which it does business.
The Company's ability to provide services to its customers is highly
dependant on good working relationships with a variety of entities including
airlines, ocean steamship lines, and governmental agencies. The Company
considers its current working relationships with these entities to be
satisfactory. However, changes in space allotments available from carriers,
governmental deregulation efforts, "modernization" of the regulations
governing customs brokerage, and/or changes in governmental quota
restrictions could affect the Company's business in unpredictable ways.
Historically, the Company's operating results have been subject to a
seasonal trend when measured on a quarterly basis. The first quarter has
traditionally been the weakest and the third quarter has traditionally been
the strongest. This pattern is the result of, or is influenced by, numerous
factors including climate, national holidays, consumer demand, economic
conditions and a myriad of other similar and subtle forces. In addition,
this historical quarterly trend has been influenced by the growth and
diversification of the Company's international network and service offerings.
The Company cannot accurately forecast many of these factors nor can the
Company estimate accurately the relative influence of any particular factor
8
<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 nine-month periods ended September 30, 1998
and 1997, expressed as percentages of net revenues. With respect to the
Company's services other than consolidation, net revenues are identical to
revenues. Management believes that net revenues are a better measure than total
revenues of the relative importance of the Company's principal services since
total revenues earned by the Company as a freight consolidator include the
carriers' charges to the Company for carrying the shipment whereas revenues
earned by the Company in its other capacities include only the commissions and
fees actually earned by the Company.
9
<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 September 30, Nine months ended September 30,
------------------------------------------ -----------------------------------------
1998 1997 1998 1997
Percent Percent Percent Percent
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
------- -------- ------- -------- -------- -------- ------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Airfreight $37,419 40% $32,801 41% $100,508 40% $87,953 42%
Ocean freight 19,189 21 15,356 19 47,998 19 38,327 19
Customs brokerage and
import services 36,282 39 32,023 40 102,522 41 79,787 39
------- --- ------- --- -------- --- ------- ---
Net revenues 92,890 100 80,180 100 251,028 100 206,067 100
------- --- ------- --- -------- --- ------- ---
Operating expenses:
Salaries and
related costs 49,958 54 41,733 52 137,516 55 111,002 54
Other 20,659 22 19,489 24 62,221 25 54,710 26
------- --- ------- --- -------- --- ------- ---
Total operating
expenses 70,617 76 61,222 76 199,737 80 165,712 80
------- --- ------- --- -------- --- ------- ---
Operating income 22,273 24 18,958 24 51,291 20 40,355 20
Other income, net 311 -- 95 -- 1,925 1 1,124 --
------- --- ------- --- -------- --- ------- ---
Earnings before
income taxes 22,584 24 19,053 24 53,216 21 41,479 20
Income tax expense 8,367 9 7,276 9 19,885 8 15,930 8
------- --- ------- --- -------- --- ------- ---
Net earnings $14,217 15% $11,777 15% $ 33,331 13% $25,549 12%
------- --- ------- --- -------- --- ------- ---
------- --- ------- --- -------- --- ------- ---
</TABLE>
Airfreight net revenues increased 14% for both the three and nine-month
periods ended September 30, 1998 as compared with the same periods for 1997.
This increase was primarily due to increased airfreight tonnage handled by
the Company's expanding global network.
Ocean freight net revenues increased 25% for both the three and
nine-month periods ended September 30, 1998 as compared with the same periods
for 1997. The Company continued to aggressively market competitive ocean
freight rates primarily on freight moving eastbound from the Far East. The
ocean forwarding business and ECMS (Expeditors Cargo Management Systems), the
Company's ocean freight consolidation management and purchase order tracking
service, were again instrumental in helping the Company to expand its market
share.
Customs brokerage and import services increased 13% and 28% for the
three and nine-month periods ended September 30, 1998 as compared with the
same periods for 1997. This increase is the result of 1) the Company's entry
into the truck and rail border brokerage business in the United States
primarily during 1997, 2) the Company's growing reputation for providing
high quality service, 3) consolidation within the customs brokerage market as
customers seek out brokers with sophisticated computerized capabilities
critical to an overall logistics management program, and 4) the growing
importance of distribution services which is included in this category.
Salaries and related costs increased during the three and nine-month
periods ended September 30, 1998 compared with the same period in 1997 as a
result of (1) the Company's increased hiring of sales, operations, and
administrative personnel in existing and new offices to accommodate increases
in business activity, and (2) increased compensation levels. Salaries and
related costs as a percentage of net
10
<PAGE>
revenues have increased 2% and 1% respectively for the three and nine-months
ended September 30, 1998 as compared with the same period of 1997.
Management believes that the relationship between salaries and net revenues
is significant in assessing the effectiveness of corporate cost containment
objectives. The increases noted in this percentage are in large measure a
reflection of management's hiring additional staff in anticipation of a peak
season of a greater magnitude than was manifest during the third quarter of
1998. Management expects that salaries, measured as a percentage of net
revenues will return to historic ranges in the near term. The relatively
consistent relationship between salaries and net revenues is the result of a
compensation philosophy that has been maintained since the inception of the
Company: offer a modest base salary and the opportunity to share in a fixed
and determinable percentage of the operating profit of the business unit
controlled by each key employee. Using this compensation model, changes in
individual compensation will occur in proportion to changes in Company
profits. Management believes that the organic growth in revenues, net revenue
and net earnings for the three and nine-month periods ended September 30,
1998 and 1997 are a direct result of the incentives inherent in the Company's
compensation program.
Other operating expenses increased for the three and nine-month periods
ended September 30, 1998 as compared with the same periods in 1997 as rent
expense, communications expense, quality and training expenses, and other
costs expanded to accommodate the Company's growing operations. Other
operating expenses as a percentage of net revenues decreased approximately 2%
and 1% for the three and nine-month periods ended September 30, 1998 as
compared with the same periods in 1997. This decrease is primarily due to
economies of scale realized as the Company's semi-variable other operating
expenses were spread over increased net revenues.
Other income, net, increased for the three-month period ended September 30,
1998, as compared with the same period in 1997 primarily due to higher interest
income recorded in 1998 on higher average cash balances. Other income, net,
increased for the nine-month period ended September 30, 1998 as compared with
the same period in 1997 primarily due to a $928,000 gain realized on the sale
of one of the Company's real estate assets during the second quarter of 1998.
The Company pays income taxes in the United States and other
jurisdictions. In addition, the Company pays various other taxes, which are
typically included in costs of operations. Effective income tax rates per
financial statements during the three and nine-month periods ended September
30, 1998 remained comparable with the same periods in 1997.
Currency and Other Risk Factors
International air/ocean freight forwarding and customs brokerage are
intensively competitive and are expected to remain so for the foreseeable
future. There are a large number of entities competing in the international
logistics industry, however, the Company's primary competition is confined to
a relatively small number of companies within this group. While there is
currently a marked trend within the industry toward consolidation into large
firms with multinational offices and agency networks, regional and local
broker/forwarders remain a competitive force.
Historically, the primary competitive factors in the international
logistics industry have been price and quality of service, including
reliability, responsiveness, expertise, convenience, and scope of operations.
The Company emphasizes quality service and believes that its prices are
competitive with those of others in the industry. Recently, customers have
exhibited a trend toward the more sophisticated and efficient procedures for
the management of the logistics supply chain by embracing strategies such as
just-in-time inventory management. Accordingly, sophisticated computerized
customer service capabilities and a stable worldwide network have become
significant factors in attracting and retaining customers.
11
<PAGE>
Developing these systems and a worldwide network has added a
considerable indirect cost to the services provided to customers. Smaller
and middle-tier competitors, in general, do not have the resources available
to develop customized systems and a worldwide network. As a result, there is
a significant amount of consolidation currently taking place in the industry.
Management expects that this trend toward consolidation will continue for the
short to medium-term.
The nature of the Company's worldwide operations necessitates the
Company dealing with a multitude of currencies other than the U.S. dollar.
This results in the Company being exposed to the inherent risks of the
international currency markets and governmental interference. Many of the
countries where the Company maintains offices and/or agency relationships
have strict currency control regulations which influence the Company's
ability to hedge foreign currency exposure. The Company tries to compensate
for these exposures by accelerating international currency settlements among
these offices or agents. Foreign currency gains and losses recognized during
the third quarter and for the first nine months of 1998 and 1997 were
immaterial.
The Company has traditionally generated revenues from airfreight, ocean
freight and customs brokerage and import services. In light of the
customer-driven trend to provide customer rates on a door-to-door basis,
management foresees the potential, in the medium to long-term, for fees
normally associated with customs house brokerage to be de-emphasized and
included as a component of other services offered by the Company.
Throughout the year, macroeconomic conditions in Brazil, Mexico and
across the Far East have impacted the global economy and, to some degree,
have also impacted the Company's business. The Company has a very strong
presence in the Far East, where it is most active in arranging exports to
North America and Europe. Because of this strong export bias, and also due
to the fact that a large volume of the Company's business is transacted in US
dollars, the devaluation of various Asian and other currencies over the past
year has not severely impacted the Company's earnings. The Company continues
to evaluate what actions may need to be taken in these markets in response to
the global economic events in order to safeguard, to the extent possible, the
ongoing profitability of the Company's operations.
On January 1, 1999, eleven of fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their
existing currencies ("legacy currencies") and one common currency - the
euro. The euro will then trade on currency exchanges and may be used in
business transactions. The conversion to the euro will eliminate currency
exchange rate risk between the member countries. Beginning in January 2002,
new euro-denominated bills and coins will be issued and legacy currencies
will be withdrawn from circulation. The Company has established plans to
address the issues raised by the euro currency conversion. These issues
include, among others, the need to adapt computer and financial systems,
business processes and equipment to accommodate euro-denominated
transactions and the impact of one common currency on pricing. Since existing
financial systems and processes currently accommodate multiple currencies,
the plans contemplate conversion by the end of 2001. The Company does not
expect the system and equipment conversion costs to be material. Due to
numerous uncertainties, the Company cannot reasonably estimate the effects
one common currency will have on pricing and the resulting impact, if any, on
the Company's consolidated financial statements.
12
<PAGE>
Year 2000
The Company's Information Services (IS) group has established teams to
identify and correct Year 2000 compliance issues. Information systems with
non-compliant code are expected to be modified or replaced with systems that
are Year 2000 compliant. The teams are also charged with investigating the Year
2000 readiness of suppliers, customers, agents and other third parties and with
developing contingency plans where necessary.
Key IS systems have been inventoried and assessed for compliance, and
detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are well underway, with
approximately 60% of the systems already compliant. The Company expects to
be fully compliant by the end of the second quarter of 1999. Inventories and
assessments of non-IS systems are in progress and are also expected to be
complete by the second quarter of 1999.
The Company has identified critical suppliers, customers and other third
parties and is in the process of surveying their Year 2000 remediation
programs. Risk assessments and contingency plans, where necessary, will be
finalized not later than the second quarter of 1999.
Because the Company's IS systems were developed in the late 1980's and
early 1990's, substantial infrastructure concerns inherent in hardware and
software systems developed and placed into service at an earlier date are not
a primary concern. As a result, management does not consider that the
incremental costs directly related to Year 2000 issues will be material.
Costs incurred prior to 1998 were also immaterial. The Company does not
expect to incur significant Year 2000 related costs on behalf of its
suppliers, customers, or other third parties.
Contingency plans for Year 2000-related interruptions are being
developed and will include the development of emergency recovery procedures,
replacing electronic applications with manual processes and identification of
alternate suppliers. All plans are expected to be completed by the end of
the first half of 1999.
The Company's most likely potential risk is a temporary inability of air
traffic control and government customs agencies around the world to track
flights or transact normal customer clearance procedures on a timely basis.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as
new information becomes available. It should be noted that uninterrupted
operations depend upon the ability of third parties, especially airlines, air
traffic control and governmental customs organizations to be Year 2000
compliant. The Company has no direct ability to influence the compliance
actions of customers, suppliers, agents and other third parties.
Accordingly, while the Company believes its actions will minimize the
inherent uncertainty, it is unable to eliminate or estimate the ultimate
effect Year 2000 risks on the Company's operating results.
Sources of Growth
Acquisitions - Historically, growth through aggressive acquisition has
proven to be a challenge for many of the Company's competitors and typically
involves the purchase of significant "goodwill", the value of which can be
realized in large measure only by retaining the customers and profit margins
of the acquired business. As a result, the Company has pursued a strategy
emphasizing organic growth
13
<PAGE>
supplemented by certain strategic acquisitions, where future economic benefit
significantly exceeds the "goodwill" recorded in the transaction.
Office Openings - The Company acquired 4 offices during the third
quarter of 1998, all as a result of transactions with existing agents. In the
case of Dubai, the Company acquired 75% with an irrevocable option to
purchase the remaining 25% interest.
<TABLE>
<CAPTION>
Far Middle
East East
- ---- ----
<S> <C>
Manila, Philippines Dubai, U.A.E.
Tokyo, Japan
Osaka, Japan
</TABLE>
Internal Growth - Management believes that a comparison of "same
store" growth is critical in the evaluation of the quality and extent of the
Company's internally generated growth. This "same store" analysis isolates the
financial contributions from offices that have been included in the Company's
operating results for at least one full year. The table below presents same
store comparisons for the third quarter of 1998 (which is the measure of any
increase from the same quarter of 1997) and for the third quarter of 1997 (which
measures growth over 1996).
<TABLE>
<CAPTION>
For the three months
ended September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net revenue 15% 30%
Operating income 18% 50%
</TABLE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from
operations. At September 30, 1998, working capital was $85 million, including
cash and short-term investments of $46 million. The Company had no long-term
debt at September 30, 1998. While the nature of its business does not require
an extensive investment in property and equipment, the Company is actively
looking for suitable facilities and/or property to acquire at or near
airports in certain cities in North America and overseas. The Company
expects to spend approximately $50 million on property and equipment in 1998,
which is expected to be financed with cash, short-term floating rate and/or
long-term fixed-rate borrowings.
The Company maintains foreign and domestic borrowings under unsecured
bank lines of credit totaling $40.2 million. At September 30, 1998, the
Company was directly liable for $.2 million drawn on these lines of credit
and was contingently liable for an additional $20.5 million from standby
letters of credit. In addition, the Company maintains a bank facility with
its U.K. bank for $8.5 million. Management believes that the Company's
current cash position, bank financing arrangements, and operating cash flows
will be sufficient to meet its capital and liquidity requirements for the
foreseeable future.
In some cases, the Company's ability to repatriate funds from foreign
operations may be subject to foreign exchange controls. In addition, certain
undistributed earnings of the Company's subsidiaries accumulated through
December 31, 1992 would, under most circumstances, be subject to some
additional United States income tax if distributed to the Company. The
Company has not provided for this additional tax because the Company intends
to reinvest such earnings to fund the expansion of its foreign activities, or
to distribute them in a manner in which no significant additional taxes would
be incurred.
14
<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.
<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 September 30,
1998.
15
<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.
November 13, 1998 /s/ PETER J. ROSE
------------------------------
Peter J. Rose, Chairman
and Chief Executive Officer
(Principal Executive Officer)
November 13, 1998 /s/ R. JORDAN GATES
-------------------------------
R. Jordan Gates, Senior Vice President-
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
September 30, 1998
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule (Filed Electronically Only)
</TABLE>
17
<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 SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,937
<SECURITIES> 450
<RECEIVABLES> 247,769
<ALLOWANCES> 6,087
<INVENTORY> 0
<CURRENT-ASSETS> 301,220
<PP&E> 145,782
<DEPRECIATION> 45,938
<TOTAL-ASSETS> 420,010
<CURRENT-LIABILITIES> 216,197
<BONDS> 0
0
0
<COMMON> 246
<OTHER-SE> 203,567
<TOTAL-LIABILITY-AND-EQUITY> 420,010
<SALES> 0
<TOTAL-REVENUES> 754,994
<CGS> 0
<TOTAL-COSTS> 503,966
<OTHER-EXPENSES> 199,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 53,216
<INCOME-TAX> 19,885
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,331
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.26
</TABLE>
