<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______________
Commission File Number: 0-13468
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1069248
(State of other jurisdiction of
incorporation or organization) (IRS Employer Identification Number)
1015 Third Avenue, 12th Floor, Seattle, Washington 98104
(Address of principal executive offices) (Zip Code)
(206) 674-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At May 5, 1999, the number of shares outstanding of the issuer's Common
Stock was 24,993,318.
Page 1 of 18 pages.
The Exhibit Index appears on page 17.
<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>
March 31, December 31,
ASSETS 1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents 67,545 49,429
Short term investments 205 394
Accounts receivable, less
allowance for doubtful accounts
of $8,773 at March 31, 1999 and
$8,198 at December 31, 1998 220,935 222,598
Deferred Federal and state income
taxes 1,277 2,427
Other current assets 13,588 9,151
-------- --------
Total current assets 303,550 283,999
Property and equipment, less
accumulated depreciation and
amortization of $53,775 at March 31,
1999 and $50,307 at December 31, 1998 103,180 103,030
Deferred Federal and state income taxes 2,651 2,183
Other assets, net 18,805 17,384
-------- --------
428,186 406,596
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings 16,259 12,245
Accounts payable 146,167 143,523
Income taxes 9,649 8,304
Other current liabilities 25,519 25,326
-------- --------
Total current liabilities 197,594 189,398
Shareholders' equity:
Preferred stock, par value $.01
per share. Authorized 2,000,000
shares; none issued -- --
Common stock, par value $.01 per share
Authorized 80,000,000 shares; issued
and outstanding 24,977,558 shares at
March 31, 1999, and 24,681,841 at
December 31, 1998 250 247
Additional paid-in capital 22,261 17,520
Retained earnings 212,570 203,050
Accumulated other comprehensive loss (4,489) (3,619)
-------- --------
Total shareholders' equity 230,592 217,198
-------- --------
428,186 406,596
-------- --------
-------- --------
</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
March 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Airfreight $ 182,117 $ 147,147
Ocean freight 65,073 45,329
Customs brokerage and import services 36,522 30,873
----------- -----------
Total revenues 283,712 223,349
----------- -----------
Operating expenses:
Airfreight consolidation 142,027 115,642
Ocean freight consolidation 47,272 31,943
Salaries and related costs 54,499 42,703
Selling and promotion 3,661 3,418
Rent 4,289 3,479
Depreciation and amortization 4,771 3,264
Other 12,474 10,201
----------- -----------
Total operating expenses 268,993 210,650
----------- -----------
Operating income 14,719 12,699
Other income, net 397 325
----------- -----------
Earnings before income taxes 15,116 13,024
Income tax expense 5,595 4,990
----------- -----------
Net earnings $ 9,521 $ 8,034
----------- -----------
----------- -----------
Basic earnings per share $ .38 $ .33
----------- -----------
----------- -----------
Diluted earnings per share $ .36 $ .30
----------- -----------
----------- -----------
Weighted average basic
common shares outstanding 24,803,196 24,561,119
----------- -----------
----------- -----------
Weighted average diluted
common shares outstanding 26,664,552 26,557,418
----------- -----------
----------- -----------
</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
March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities:
Net earnings $ 9,521 $ 8,034
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for losses on accounts receivable 971 515
Deferred income tax expense (benefit) 6,027 (70)
Depreciation and amortization 4,771 3,264
Other 107 210
Changes in operating assets and liabilities:
Decrease in accounts receivable 729 27,400
Decrease (Increase) in other current assets (4,557) 800
Increase (Decrease) in accounts payable
and other current liabilities 5,101 (10,834)
-------- --------
Net cash provided by operating activities 22,670 29,319
-------- --------
Investing Activities:
Decrease (Increase) in short-term investments 183 (88)
Purchase of property and equipment (5,366) (14,208)
Other (1,689) 192
-------- --------
Net cash used in investing activities (6,872) (14,104)
-------- --------
Financing Activities:
Short-term borrowings, net 4,088 (1,005)
Proceeds from issuance of common stock 2,282 271
Repurchases of common stock (2,305) (271)
-------- --------
Net cash provided by and used in financing activities 4,065 (1,005)
Effect of exchange rate changes on cash (1,747) (367)
-------- --------
Increase in cash and cash equivalents 18,116 13,843
Cash and cash equivalents at beginning
of period 49,429 42,094
Cash and cash equivalents at end of period $ 67,545 $ 55,937
-------- --------
-------- --------
</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 1998 amounts have been reclassified
to conform to the 1999 presentation. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 10-K as filed with the Securities and
Exchange Commission on or about March 31, 1999.
Note 2. Comprehensive Income
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For the Company, these consist of
foreign currency translation gains and losses, net of related income tax
effects.
The components of total comprehensive income for interim periods are
presented in the following table:
<TABLE>
<CAPTION>
Three months ended March 31,
(Dollars in thousands) 1999 1998
------- -------
<S> <C> <C>
Net earnings $ 9,521 $ 8,034
Foreign currency translation
adjustments net of deferred
taxes of $468 and $329 (870) (537)
------- -------
Total comprehensive income $ 8,651 $ 7,497
------- -------
------- -------
</TABLE>
Note 3. Business Segment Information
The Company is organized functionally in geographic operating segments.
Accordingly, management focuses its attention on revenues, net revenues,
operating income, identifiable assets, capital expenditures, depreciation and
amortization and equity generated by or allocated to each of these geographical
areas when evaluating effectiveness of geographic management.
5
<PAGE>
Financial information regarding the Company's operations by geographic area
for the three months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
United Far Australia/ Middle Latin Elimi- Consoli-
States East New Zealand Canada Europe East America nations dated
-------- -------- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
March 31, 1999
Revenues from
unaffiliated
customers $ 79,771 148,507 2,577 1,276 37,768 9,161 4,652 -- 283,712
Transfers between
geographic areas 3,481 760 673 70 1,581 358 545 (7,468) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 83,252 149,267 3,250 1,346 39,349 9,519 5,197 (7,468) 283,712
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 43,855 21,192 2,266 980 20,102 3,009 3,009 -- 94,413
Operating income $ 3,135 6,826 338 219 3,664 337 200 -- 14,719
Identifiable assets
at quarter end $222,367 80,067 8,284 5,227 86,019 12,711 13,511 -- 428,186
Capital expenditures $ 2,703 420 145 90 988 718 302 -- 5,366
Depreciation and
amortization $ 2,700 740 140 39 788 221 143 -- 4,771
Equity $230,592 76,427 5,256 1,636 18,543 2,473 (940) (103,395) 230,592
-------- -------- -------- -------- -------- -------- -------- -------- --------
Three months ended
March 31, 1998
Revenues from
unaffiliated
customers $ 72,161 108,764 2,315 1,143 33,376 3,552 2,038 -- 223,349
Transfers between
geographic areas 2,766 920 438 53 957 210 410 (5,754) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 74,927 109,684 2,753 1,196 34,333 3,762 2,448 (5,754) 223,349
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 36,617 17,145 1,873 709 16,678 1,053 1,689 -- 75,764
Operating income $ 4,071 5,437 245 91 2,946 117 (208) -- 12,699
Identifiable assets
at quarter end $180,287 65,727 7,559 6,421 67,367 5,779 6,904 -- 340,044
Capital expenditures $ 12,260 301 112 27 1,160 81 267 -- 14,208
Depreciation and
amortization $ 1,758 430 119 39 659 126 133 -- 3,264
Equity $179,791 61,640 4,478 1,233 11,135 1,082 (1,618) (77,950) 179,791
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
The Company charges its subsidiaries and affiliates for services rendered in the
United States on a cost recovery basis.
6
<PAGE>
Note 4. Basic and Diluted Earnings Per Share
The following table reconciles the numerator and denominator of the basic
and diluted per share computations for the first quarter of 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
(Amounts in Thousands, except Net Average Earnings
Share and Per Share Amounts) Earnings Shares Per Share
- ---------------------------- -------- ------ ---------
<S> <C> <C> <C>
1999
Basic earnings per share $9,521 24,803,196 $ .38
Effect of dilutive stock options -- 1,861,356 --
------ ---------- --------
Diluted earnings per share $9,521 26,664,552 $ .36
------ ---------- --------
------ ---------- --------
1998
Basic earnings per share $8,034 24,561,119 $ .33
Effect of dilutive stock options -- 1,996,299 --
------ ---------- --------
Diluted earnings per share $8,034 26,557,418 $ .30
------ ---------- --------
------ ---------- --------
</TABLE>
Note 5. Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting
standards for derivative and hedging transactions. The Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company follows a policy of accelerating international currency
settlements to manage its foreign exchange exposure. The Company does not use
derivative instruments and only enters into foreign currency hedging
transactions in limited locations where regulatory or commercial limitations
restrict the Company's ability to move money freely around the world. Any such
hedging activity during the first quarter of 1999 was insignificant.
Note 6. Stock Dividend
On May 6, 1999, the Board of Directors authorized a 2-for-1 stock split
in the form of a stock dividend to be issued to shareholders of record as of
May 17, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the section entitled
"Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain
forward-looking statements which must be considered in connection with the
discussion of the important factors that could cause actual results to differ
materially from the forward-looking statements. In addition to risk factors
identified elsewhere in this report, attention should be given to the factors
identified and discussed in the report on Form 10-K filed on or about March 31,
1999.
GENERAL
Expeditors International of Washington, Inc. is engaged in the business of
providing global logistics services, including international freight forwarding
and consolidation, for both air and ocean freight. The Company also acts as a
customs broker in all domestic offices, and in many of its overseas offices. The
Company also provides additional services for its customers including value
added distribution, purchase order management, vendor consolidation and other
logistics solutions. The Company offers domestic forwarding
7
<PAGE>
services only in conjunction with international shipments. The Company does not
compete for overnight courier or small parcel business. The Company does not own
or operate aircraft or steamships.
International trade is influenced by many factors, including economic and
political conditions in the United States and abroad, currency exchange rates,
and United States and foreign laws and policies relating to tariffs, trade
restrictions, foreign investments and taxation. Periodically, governments
consider a variety of changes to current tariffs and trade restrictions. The
Company cannot predict which, if any, of these proposals may be adopted, nor can
the Company predict the effects adoption of any such proposal will have on the
Company's business. Doing business in foreign locations also subjects the
Company to a variety of risks and considerations not normally encountered by
domestic enterprises. In addition to being affected by governmental policies
concerning international trade, the Company's business may also be affected by
political developments and changes in government personnel or policies in the
nations in which it does business.
The Company's ability to provide service to its customers is highly
dependent on good working relationships with a variety of entities including
airlines, steamship lines, and governmental agencies. The Company considers its
current working relationships with these entities to be good. However, changes
in space allotments available from carriers, governmental deregulation efforts,
"modernization" of the regulations governing customs clearance, and/or changes
in governmental quota restrictions could affect the Company's business in
unpredictable ways.
Historically, the Company's operating results have been subject to a
seasonal trend when measured on a quarterly basis. The first quarter has
traditionally been the weakest and the third quarter has traditionally been the
strongest. This pattern is the result of, or is influenced by, numerous factors
including climate, national holidays, consumer demand, economic conditions and a
myriad of other similar and subtle forces. In addition, this historical
quarterly trend has been influenced by the growth and diversification of the
Company's international network and service offerings. The Company cannot
accurately forecast many of these factors nor can the Company estimate
accurately the relative influence of any particular factor and, as a result,
there can be no assurance that historical patterns, if any, will continue in
future periods.
A significant portion of the Company's revenues are derived from
customers in industries whose shipping patterns are tied closely to consumer
demand, and from customers in industries whose shipping patterns are dependent
upon just-in-time production schedules. Therefore, the timing of the Company's
revenues are, to a large degree, impacted by factors out of the Company's
control, such as shifting consumer demand for retail goods and/or manufacturing
production delays. Additionally, many customers ship a significant portion of
their goods at or near the end of a quarter, and therefore, the Company may not
learn of a shortfall in revenues until late in a quarter. To the extent that a
shortfall in revenues or earnings was not expected by securities analysts, any
such shortfall from levels predicted by securities analysts could have an
immediate and adverse effect on the trading price of the Company's stock.
RESULTS OF OPERATIONS
The following table shows the consolidated net revenues (revenues
less consolidation expenses) attributable to the Company's principal services
and the Company's expenses for the three-month periods ended March 31, 1999 and
1998, expressed as percentages of net revenues. With respect to the Company's
services other than consolidation, net revenues are identical to revenues.
Management believes that net revenues are a better measure than total revenues
of the relative importance of the Company's principal services since total
revenues earned by the Company as a freight consolidator include the carriers'
charges to the Company for carrying the shipment whereas revenues earned by the
Company in its other capacities include only the commissions and fees actually
earned by the Company.
The table and the accompanying discussion and analysis should be read in
8
<PAGE>
conjunction with the condensed consolidated financial statements and related
notes thereto which appear elsewhere in this Quarterly Report.
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
---------------------------------------------------------
Percent Percent
of Net of Net
Amount Revenues Amount Revenues
------ -------- ------ --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net Revenues:
Airfreight $40,090 42% $31,505 41%
Ocean freight 17,801 19 13,386 18
Customs brokerage and
import services 36,522 39 30,873 41
------- --- ------- ---
Net revenues 94,413 100 75,764 100
------- --- ------- ---
Operating expenses:
Salaries and
related costs 54,499 57 42,703 56
Other 25,195 27 20,362 27
------- --- ------- ---
Total operating
expenses 79,694 84 63,065 83
------- --- ------- ---
Operating income 14,719 16 12,699 17
Other income, net 397 0 325 0
------- --- ------- ---
Earnings before
income taxes 15,116 16 13,024 17
Income tax expense 5,595 6 4,990 6
------- --- ------- ---
Net earnings $ 9,521 10% $ 8,034 11%
------- --- ------- ---
------- --- ------- ---
</TABLE>
Airfreight net revenues increased 27% for the three-month period ended
March 31, 1999 as compared with the same period for 1998. This increase was
primarily due to increased airfreight tonnage handled by the Company's expanding
global network. Management also believes that the Company benefited from
improving economic conditions in several Far Eastern countries.
Ocean freight net revenues increased 33% for the three-month period ended
March 31, 1999 as compared with the same period for 1998. The Company continued
to aggressively market competitive ocean freight rates primarily on freight
moving eastbound from the Far East. Management also has embarked on a strategy
to improve market share on trade lanes other than eastbound from the Far East.
The ocean forwarding business and ECMS (Expeditors Cargo Management Systems),
the Company's ocean freight consolidation management and purchase order tracking
service, continued to be instrumental in helping the Company to expand its
market share.
Customs brokerage and import services increased 18% for the three-month
period ended March 31, 1999 as compared with the same period for 1998. This
increase is the result of 1) the Company's growing reputation for providing high
quality service, 2)consolidation within the customs brokerage market as
customers seek out customs brokers with more sophisticated computerized
capabilities critical to an overall logistics management program, and 3) the
growing importance of distribution services as a separate and distinct service
offered to existing and potential customers.
9
<PAGE>
Salaries and related costs increased during the first quarter of 1999
compared to the same period in 1998 as a result of (1) the Company's increased
hiring of sales, operations, and administrative personnel in existing and new
offices to accommodate increases in business activity and (2) increased
compensation levels. Salaries and related costs increased approximately 1% as
a percentage of net revenues. This 1% increase is largely attributable to
management's decision to hire sufficient staff to address the requirements of
the projected peak season during the third and fourth quarter of 1998. As a
result of the 1998 peak season being somewhat below initial expectations, the
Company began 1999 in a slightly over-staffed situation. Management expects
this situation to be rectified over time through natural attrition and through
the increase in business. The relatively consistent relationship between
salaries and net revenues is the result of a compensation philosophy that has
been maintained since the inception of the Company: offer a modest base salary
and the opportunity to share in a fixed and determinable percentage of the
operating profit of the business unit controlled by each key employee. Using
this compensation model, changes in individual compensation will occur in
proportion to changes in Company profits. Management believes that the
Company's historical growth in revenues, net revenues and net earnings are a
result of the incentives inherent in the Company's compensation program.
Other operating expenses increased for the three-month period ended March
31, 1999 as compared with the same period in 1998 as rent expense,
communications expense, quality and training expenses, and other costs expanded
to accommodate the Company's growing operations. Other operating expenses as a
percentage of net revenues remained constant in the three-month period ended
March 31, 1999, as compared with the same period in 1998.
Other income, net, increased for the three-month period ended March 31,
1999 as compared with the same period in 1998, principally due to higher
interest income on a larger average balance of invested cash during the
period. Cash balances increased towards the end of the first quarter of 1999,
after the payment of peak season trade obligations and after the collection of
accounts receivable outstanding as of December 31, 1998.
The Company pays income taxes in the United States and other jurisdictions,
as well as other taxes which are typically included in costs of operations. The
Company's consolidated effective annual income tax rate during the three-month
period ended March 31, 1999 decreased slightly as compared with the same
period in 1998.
Currency and Other Risk Factors
International air/ocean freight forwarding and customs brokerage are
intensively competitive and are expected to remain so for the foreseeable
future. There are a large number of entities competing in the global logistics
industry, however, the Company's primary competition is confined to a relatively
small number of companies within this group.
Historically, the primary competitive factors in the global logistics
services industry have been price and quality of service, including reliability,
responsiveness, expertise, convenience, and scope of operations. The Company
emphasizes quality service and believes that its prices are competitive with the
prices of others in the industry. Recently, larger customers have exhibited a
trend toward the more sophisticated and efficient procedures for the management
of the logistics supply chain by embracing strategies such as just-in-time
inventory management. This trend has made having sophisticated computerized
customer service capabilities and a stable worldwide network significant factors
in attracting and retaining customers.
Developing these systems and a worldwide network has added a considerable
10
<PAGE>
indirect cost to the services provided to customers. Smaller and middle-tier
competitors, in general, do not have the resources available to develop
customized systems and a worldwide network. As a result, there is a significant
amount of consolidation currently taking place in the industry. Management
expects that this trend toward consolidation will continue for the short to
medium-term. However, regional and local broker/forwarders will likely remain a
competitive force.
The nature of the Company's worldwide operations necessitates the Company
dealing with a multitude of currencies other than the U.S. Dollar. This results
in the Company being exposed to the inherent risks of the international currency
markets and governmental interference. Many of the countries where the Company
maintains offices and/or agency relationships have strict currency control
regulations which influence the Company's ability to hedge foreign currency
exposure. The Company tries to compensate for these exposures by accelerating
international currency settlements among these offices or agents. Foreign
currency gains and losses recognized during the first quarter of 1999 and 1998
were insignificant.
The Company has traditionally generated revenues from airfreight, ocean
freight and customs brokerage and import services. In light of the
customer-driven trend to provide customer rates on a door-to-door basis,
management foresees the potential, in the medium to long-term, for fees normally
associated with customs house brokerage to be de-emphasized and included as a
component of other services offered by the Company.
Throughout 1998 and during the first quarter of 1999, macroeconomic
conditions in Brazil, Mexico and across the Far East impacted the global
economy and, to some degree, impacted the Company's business. The Company has
a very strong presence in the Far East, where it is most active in arranging
exports to North America and Europe. Because of this strong export bias, and
also due to the fact that a large volume of the Company's business is
transacted in U.S. Dollars, the devaluation of various Asian and other
currencies over the past year has not severely impacted the Company's
earnings. The Company continues to evaluate what actions may need to be taken
in these markets in response to the global economic events in order to
safeguard, to the extent possible, the ongoing profitability of the Company's
operations.
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and a new common currency - the Euro. The Euro trades on
currency exchanges and may be used in business transactions. The conversion to
the Euro eliminates currency exchange rate risk between the member countries.
Beginning in January 2002, new Euro-denominated bills and coins will be issued
and legacy currencies will be withdrawn from circulation. The Company has
established plans to address the issues raised by the Euro currency conversion
including the need to adapt computer systems and business processes to
accommodate Euro-denominated transactions. Since existing financial systems
currently accommodate multiple currencies, the plans contemplate full
conversion by the end of 2001. The Company does not expect the conversion
costs to be material. Due to numerous uncertainties, the Company is evaluating
the effects one common European currency will have on pricing. The Company is
unable to predict the resulting impact, if any, on the Company's consolidated
financial statements.
Year 2000
The Company has established teams to identify and correct Year 2000
compliance issues. Information systems with non-compliant code are expected to
be modified or replaced with systems that are Year 2000 compliant. The teams are
also charged with investigating the Year 2000 readiness of suppliers, customers,
agents and other third parties and with developing contingency plans where
necessary.
11
<PAGE>
Key systems have been inventoried and assessed for compliance, and
detailed plans are in place for required system modifications or replacements.
Remediation and testing activities are underway, with the majority of the
systems already compliant. The Company expects to be fully compliant by the
end of the second quarter of 1999. Because the Company's systems were
developed from the late 1980's forward, the substantial Year 2000 concerns
inherent in hardware and software systems placed into service by many
companies at earlier dates are not a primary concern. Management does not
believe that future costs directly related to Year 2000 issues will be
material. Costs incurred through the first quarter of 1999 were immaterial.
The Company has identified critical suppliers, customers and other third
parties and is in the process of surveying their Year 2000 remediation programs.
Contingency plans for Year 2000-related interruptions are being developed and
are expected to include the development of emergency recovery procedures,
replacing electronic applications with manual processes and identification of
alternate suppliers. Risk assessments and contingency plans, where necessary,
are expected to be finalized no later than the second quarter of 1999.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. It should be noted that uninterrupted
operations depend upon the ability of third parties, especially airlines, air
traffic control and governmental customs organizations to be Year 2000
compliant. The Company has no direct ability to influence the compliance
actions of customers, suppliers, agents and other third parties. Accordingly,
it is unable to eliminate or estimate the ultimate effect of third party Year
2000 risks on the Company's operating results. In management's opinion, the
Company's greatest risk is a potential temporary inability of air traffic
control and government customs agencies to track flights or transact normal
procedures on a timely basis. Should this actually happen, management
anticipates that restoring normal commerce would become a global priority.
Sources of Growth
Acquisitions - Historically, growth through aggressive acquisition has
proven to be a challenge for many of the Company's competitors and typically
involves the purchase of significant "goodwill", the value of which can be
realized in large measure only by retaining the customers and profit margins of
the acquired business. As a result, the Company has pursued a strategy
emphasizing organic growth supplemented by certain strategic acquisitions, where
future economic benefit significantly exceeds the "goodwill" recorded in the
transaction.
12
<PAGE>
Office Openings - The Company opened 7 start-up offices during the first
quarter of 1999.
<TABLE>
<CAPTION>
MIDDLE EAST EUROPE NORTH AMERICA
- ----------- ------ -------------
<S> <C> <C>
GREECE: U.K.: MEXICO:
Athens East Midlands Nogales
TURKEY:
Ankara
Istanbul
Izmir
Mersin
</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 first quarter of 1999 (which is the measure of any increase
from the same quarter of 1998) and for the first quarter of 1998 (which measures
growth over 1997).
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net revenue 21% 22%
Operating income 14% 39%
</TABLE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from
operations. At March 31, 1999, working capital was $106 million, including cash
and short-term investments of $67.8 million. The Company had no long-term debt
at March 31, 1999. While the nature of its business does not require an
extensive investment in property and equipment, the Company cannot eliminate the
possibility that it could acquire an equity interest in property in certain
geographic locations. The Company expects to spend approximately $15 million on
property and equipment in 1999, which is expected to be financed with cash,
short-term floating rate and/or long-term fixed-rate borrowings.
The Company borrows internationally and domestically under unsecured bank
lines of credit totaling $40.8 million. At March 31, 1999, the Company was
directly liable for $16.3 million drawn on these lines of credit and was
contingently liable for an additional $12.1 million from standby letters of
credit. In addition, the Company maintains a bank facility with its U.K. bank
for $8.1 million. Management believes that the Company's current cash position,
bank financing arrangements, and operating cash flows will be sufficient to meet
its capital and liquidity requirements for the foreseeable future.
13
<PAGE>
In some cases, the Company's ability to repatriate funds from foreign
operations may be subject to foreign exchange controls. In addition, certain
undistributed earnings of the Company's subsidiaries accumulated through
December 31, 1992 would, under most circumstances, be subject to some additional
United States income tax if distributed to the Company. The Company has not
provided for this additional tax because the Company intends to reinvest such
earnings to fund the expansion of its foreign activities, or to distribute them
in a manner in which no significant additional taxes would be incurred.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks in the ordinary course of its
business. These risks are primarily related to foreign exchange risk and changes
in short-term interest rates. The potential impact of the Company's exposure to
these risks is presented below:
Foreign Exchange Risk
The Company conducts business in many different countries and
currencies. The Company's business often results in revenue billings issued in a
country and currency which differs from that where the expenses related to the
service are incurred. In the ordinary course of business, the Company creates
numerous intercompany transactions. This brings a market risk to the Company's
earnings.
Foreign exchange rate sensitivity analysis can be quantified by
estimating the impact on the Company's earnings as a result of hypothetical
changes in the value of the U.S. Dollar, the Company's functional currency,
relative to the other currencies in which the Company transacts business. All
other things being equal, an average 10% weakening of the U.S. Dollar,
throughout the three months ended March 31, 1999, would have had the effect of
raising operating income approximately $1.1 million. An average 10%
strengthening of the U.S. Dollar, for the same period, would have had the effect
of reducing operating income approximately $0.9 million.
The Company has approximately $50 million of intercompany transactions
unsettled at any one point in time. The Company currently does not use
derivative financial instruments to manage foreign currency risk. The Company
instead follows a policy of accelerating international currency settlements to
manage foreign exchange risk relative to intercompany billings. The majority of
intercompany billings are resolved within 30 days and intercompany billings
arising in the normal course of business are fully settled within 90 days.
Interest Rate Risk
At March 31, 1999, the Company had cash and cash equivalents and
short-term investments of $67.8 million and short-term borrowings of $16.3
million, all subject to variable short-term interest rates. A hypothetical
change in the interest rate of 10% would have an immaterial impact on the
Company's earnings.
14
<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
------ -----------
Exhibit 27.1 Financial Data Schedule, EDGAR filing only.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended March 31, 1999.
15
<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 14, 1999 /s/ PETER J. ROSE
--------------------------------------------------
Peter J. Rose, Chairman
and Chief Executive Officer
(Principal Executive Officer)
May 14, 1999 /s/ R. JORDAN GATES
--------------------------------------------------
R. Jordan Gates, Senior Vice President-Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
March 31, 1999
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule (Filed Electronically Only).
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT 3-31-99 AND CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE 3 MONTHS ENDED 3-31-99 AND RELATED NOTES TO
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
1999 1ST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 67,545
<SECURITIES> 205
<RECEIVABLES> 229,708
<ALLOWANCES> 8,773
<INVENTORY> 0
<CURRENT-ASSETS> 303,550
<PP&E> 156,995
<DEPRECIATION> 53,775
<TOTAL-ASSETS> 428,186
<CURRENT-LIABILITIES> 197,594
<BONDS> 0
0
0
<COMMON> 250
<OTHER-SE> 230,342
<TOTAL-LIABILITY-AND-EQUITY> 428,186
<SALES> 0
<TOTAL-REVENUES> 283,712
<CGS> 0
<TOTAL-COSTS> 268,993
<OTHER-EXPENSES> 397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,116
<INCOME-TAX> 5,595
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,521
<EPS-PRIMARY> .38
<EPS-DILUTED> .36
</TABLE>
