<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, 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 August 10, 1999, the number of shares outstanding of the issuer's Common
Stock was 50,181,243.
Page 1 of 18 pages.
The Exhibit Index appears on page 18.
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 1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 66,896 $ 49,429
Short term investments 175 394
Accounts receivable, less
allowance for doubtful accounts of
$8,835 at June 30, 1999 and $8,198 at
December 31, 1998 252,601 222,598
Deferred Federal and state income taxes 2,815 2,427
Other current assets 20,475 9,151
------------- ------------
Total current assets 342,962 283,999
Property and equipment, less
accumulated depreciation and
amortization of $57,660 at June 30,
1999 and $50,307 at December 31, 1998 104,444 103,030
Deferred Federal and state income taxes 2,916 2,183
Other assets, net 20,455 17,384
------------- ------------
$ 470,777 $ 406,596
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 32,220 $ 12,245
Accounts payable 154,949 143,523
Income taxes 10,125 8,304
Other current liabilities 30,085 25,326
------------- ------------
Total current liabilities 227,379 189,398
Shareholders' equity:
Preferred stock, par value $.01
per share. Authorized 2,000,000
shares; none issued -- --
Common stock, par value $.01 per share. Authorized
160,000,000 shares; issued and outstanding 50,151,383
shares at June 30, 1999, and 49,363,682 shares at
December 31, 1998 502 493
Additional paid-in capital 24,580 17,274
Retained earnings 223,297 203,050
Cumulative other comprehensive loss (4,981) (3,619)
------------- ------------
Total shareholders' equity 243,398 217,198
------------- ------------
$ 470,777 $ 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 Six months ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Airfreight $ 207,190 $ 152,017 $ 389,306 $ 299,164
Ocean freight 84,233 54,586 149,307 99,915
Customs brokerage and import
services 40,557 35,367 77,080 66,240
-------- -------- --------- ---------
Total revenues 331,980 241,970 615,693 465,319
-------- -------- --------- ---------
Operating expenses:
Airfreight consolidation 164,407 120,433 306,434 236,075
Ocean freight consolidation 63,343 39,163 110,616 71,106
Salaries and related costs 57,508 45,339 112,006 88,043
Selling and promotion 4,184 3,562 7,845 6,980
Depreciation and
amortization 5,101 3,610 9,873 6,874
Rent 4,388 3,527 8,678 7,006
Other 12,353 10,017 24,826 20,217
-------- -------- --------- ---------
Total operating expenses 311,284 225,651 580,278 436,301
-------- -------- --------- ---------
Operating income 20,696 16,319 35,415 29,018
Other income, net 588 1,289 985 1,614
-------- -------- --------- ---------
Earnings before income taxes 21,284 17,608 36,400 30,632
Income tax expense 8,055 6,528 13,650 11,518
-------- -------- --------- ---------
Net earnings $ 13,229 $ 11,080 $ 22,750 $ 19,114
======== ======== ========= =========
Basic earnings per share $.26 $.23 $.46 $.39
======== ======== ========= =========
Diluted earnings per share $.25 $.21 $.42 $.36
======== ======== ========= =========
Weighted average basic
common shares outstanding 50,047,632 49,184,450 49,965,265 49,153,516
Weighted average diluted
common shares outstanding 53,796,404 53,237,476 53,609,273 53,176,210
</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,
----------------------------- ----------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Operating activities:
Net earnings $ 13,229 $ 11,080 $ 22,750 $ 19,114
Adjustments to reconcile net
earnings to net cash provided
(used) by operating activities:
Provision for losses on
accounts receivable 168 (26) 1,139 489
Deferred income tax expense 1,044 1,832 7,071 1,762
Depreciation and amortization 5,101 3,610 9,873 6,874
Other 288 (863) 394 (653)
Changes in operating assets and
liabilities:
Accounts receivable (30,782) (18,462) (30,053) 8,938
Other current assets (6,928) (5,443) (11,485) (4,643)
Accounts payable and other
current liabilities 12,956 10,191 18,057 (643)
-------- -------- -------- ---------
Net cash provided (used) by operating
activities (4,924) 1,919 17,746 31,238
-------- -------- -------- ---------
Investing activities:
Decrease (increase) in short-term investments 34 (109) 217 (197)
Purchase of property and equipment (7,307) (16,725) (12,673) (30,933)
Other (1,601) 1,332 (3,290) 1,524
-------- -------- -------- ---------
Net cash used in investing activities (8,874) (15,502) (15,746) (29,606)
-------- -------- -------- ---------
Financing activities:
Short-term borrowings, net 16,000 7 20,088 (998)
Proceeds from issuance of common stock 852 336 3,134 607
Repurchases of common stock (974) (255) (3,279) (526)
Dividends paid (2,503) (1,722) (2,503) (1,722)
-------- -------- -------- ---------
Net cash provided (used) by financing
activities 13,375 (1,634) 17,440 (2,639)
Effect of exchange rate changes
on cash (226) (1,069) (1,973) (1,436)
-------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents (649) (16,286) 17,467 (2,443)
Cash and cash equivalents at
beginning of period 67,545 55,937 49,429 42,094
Cash and cash equivalents at end
of period $ 66,896 $ 39,651 $ 66,896 $ 39,651
======== ======== ======== ========
Interest and taxes paid:
Interest 207 31 377 70
Income taxes 11,867 3,153 13,985 3,986
</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 Form 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 Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $ 13,229 $ 11,080 $ 22,750 $ 19,114
Foreign currency translation adjustments
net of tax of: $265 and $1,142 for 3
months ended June 30, 1999 and 1998,
and $733 and $1,427 for the 6 months
ended June 30, 1999 and 1998. (492) (1,832) (1,362) (2,369)
-------- -------- -------- --------
Total comprehensive income $ 12,737 $ 9,248 $ 21,388 $ 16,745
======== ======== ======== ========
</TABLE>
5
<PAGE>
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.
Financial information regarding the Company's operations by geographic area
for the three months ended June 30, 1999 and 1998 and six months ended June 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
OTHER AUSTRA-
UNITED NORTH LIA/NEW LATIN MIDDLE ELIMI- CONSOLI-
(dollars in thousands) STATES AMERICA FAR EAST EUROPE ZEALAND AMERICA EAST NATIONS DATED
-------- ------- -------- ------ ------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999:
Revenues from
unaffiliated
customers $ 85,602 6,015 185,075 40,271 3,131 1,247 10,639 331,980
Transfers between
geographic areas $ 4,200 206 830 1,702 783 427 321 (8,469) -
-------- ------- -------- ------ ------- ------- ------ -------- --------
Total revenues $ 89,802 6,221 185,905 41,973 3,914 1,674 10,960 (8,469) 331,980
======== ======= ======== ====== ======= ======= ====== ======== ========
Net revenues $ 49,355 4,220 22,984 20,382 2,708 1,097 3,484 104,230
Operating income $ 7,033 683 8,022 3,890 543 76 449 20,696
Identifiable assets
at quarter end $256,030 13,411 87,809 87,478 8,116 4,547 13,386 470,777
Capital expenditures $ 4,383 389 1,087 917 118 40 373 7,307
Depreciation and
amortization $ 2,811 162 843 798 159 55 273 5,101
Equity $243,398 2,021 71,138 19,049 5,864 (501) 2,190 (99,761) 243,398
-------- ------- -------- ------ ------- ------- ------ -------- --------
Three months ended
June 30, 1998:
Revenues from
unaffiliated
customers $ 74,024 3,380 121,449 35,229 2,476 705 4,707 241,970
Transfers between
geographic areas $ 2,878 154 858 909 543 315 208 (5,865) -
-------- ------- -------- ------ ------- ------- ------ -------- --------
Total revenues $ 76,902 3,534 122,307 36,138 3,019 1,020 4,915 (5,865) 241,970
======== ======= ======== ====== ======= ======= ====== ======== ========
Net revenues $ 39,008 2,580 19,283 17,344 2,066 821 1,272 82,374
Operating income $ 5,589 232 7,090 2,881 334 (39) 232 16,319
Identifiable assets
at quarter end $193,982 10,985 64,715 70,837 6,905 3,217 6,875 357,516
Capital expenditures $ 13,246 140 2,203 913 98 70 55 16,725
Depreciation and
amortization $ 1,899 126 519 751 116 63 136 3,610
Equity $187,852 890 64,978 12,680 4,397 (1,067) 1,211 (83,089) 187,852
-------- ------- -------- ------ ------- ------- ------ -------- --------
Six months ended
June 30, 1999:
Revenues from
unaffiliated
customers $164,789 10,837 333,582 78,039 5,708 2,937 19,801 615,693
Transfers between
geographic areas $ 7,681 416 1,590 3,283 1,456 833 678 (15,937) -
-------- ------- -------- ------ ------- ------- ------ -------- --------
Total revenues $172,470 11,253 335,172 81,322 7,164 3,770 20,479 (15,937) 615,693
======== ======= ======== ====== ======= ======= ====== ======== ========
Net revenues $ 92,626 7,745 44,176 40,484 4,974 2,146 6,492 198,643
Operating income $ 10,165 1,074 14,848 7,554 881 107 786 35,415
Identifiable assets
at quarter end $256,030 13,411 87,809 87,478 8,116 4,547 13,386 470,777
Capital expenditures $ 7,082 663 1,507 1,905 263 162 1,091 12,673
Depreciation and
amortization $ 5,507 288 1,582 1,586 299 116 495 9,873
Equity $243,398 2,021 71,138 19,049 5,864 (501) 2,190 (99,761) 243,398
-------- ------- -------- ------ ------- ------- ------ -------- --------
Six months ended
June 30, 1998:
Revenues from
unaffiliated
customers $145,675 6,430 230,213 68,605 4,791 1,345 8,260 465,319
Transfers between
geographic areas $ 5,646 311 1,778 1,866 981 619 418 (11,619) -
-------- ------- -------- ------ ------- ------- ------ -------- --------
Total revenues $151,321 6,741 231,991 70,471 5,772 1,964 8,678 (11,619) 465,319
======== ======= ======== ====== ======= ======= ====== ======== ========
Net revenues $ 75,116 4,781 36,428 34,022 3,939 1,526 2,326 158,138
Operating income $ 9,634 301 12,527 5,827 579 (200) 350 29,018
Identifiable assets
at quarter end $193,982 10,985 64,715 70,837 6,905 3,217 6,875 357,516
Capital expenditures $ 25,501 223 2,504 2,073 210 287 135 30,933
Depreciation and
amortization $ 3,653 249 949 1,410 235 116 262 6,874
Equity $187,852 890 64,978 12,680 4,397 (1,067) 1,211 (83,089) 187,852
-------- ------- -------- ------ ------- ------- ------ -------- --------
</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 three months and six months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
Weighted
(Amounts in thousands, except Net average Earnings
share and per share amounts) earnings shares per share
- ----------------------------- -------- ---------- ---------
1999
- ----
<S> <C> <C> <C>
Basic earnings per share $ 13,229 50,047,632 $ .26
Effect of dilutive stock options -- 3,748,772 --
-------- ---------- -----
Diluted earnings per share $ 13,229 53,796,404 $ .25
======== ========== =====
<CAPTION>
1998
- ----
<S> <C> <C> <C>
Basic earnings per share $ 11,080 49,184,450 $ .23
Effect of dilutive stock options -- 4,053,026 --
-------- ---------- -----
Diluted earnings per share $ 11,080 53,237,476 $ .21
======== ========== =====
<CAPTION>
Six months ended June 30,
-------------------------
Weighted
(Amounts in thousands, except Net average Earnings
share and per share amounts) earnings shares per share
- ----------------------------- -------- ---------- ---------
1999
- ----
<S> <C> <C> <C>
Basic earnings per share $ 22,750 49,965,265 $ .46
Effect of dilutive stock options -- 3,644,008 --
-------- ---------- -----
Diluted earnings per share $ 22,750 53,609,273 $ .42
======== ========== =====
<CAPTION>
1998
- ----
<S> <C> <C> <C>
Basic earnings per share $ 19,114 49,153,516 $ .39
Effect of dilutive stock options -- 4,022,694 --
-------- ---------- -----
Diluted earnings per share $ 19,114 53,176,210 $ .36
======== ========== =====
</TABLE>
Options to purchase 992,400 shares of common stock at $32.07 per share
were outstanding during the first half of 1999 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. The options,
which expire May 5, 2009, were still outstanding at June 30, 1999.
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, 2000.
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 each of the first two quarters of 1999 was
insignificant.
7
<PAGE>
Note 6. Stock Dividend
On May 5, 1999, the Board of Directors declared a 2-for-1 stock split,
effected in the form of a stock dividend of one share of common stock for
every share outstanding, and increased the authorized common stock to 160
million shares. The stock dividend was distributed on June 1, 1999 to
shareholders of record on May 17, 1999. All share and per share information,
except par value, has been adjusted for all periods to reflect the stock split.
Note 7. Contingent Liabilities
The Federal Maritime Commission has issued an order of investigation and
hearing concerning potential violations of the Shipping Act of 1984 including
allegations that the Company knowingly and willfully misdescribed commodities.
The Company denies any such "knowing and willful" violations of the law and
intends to vigorously contest these allegations. The Company does not expect
the outcome of this matter to have a material effect on the Company's
financial statements.
8
<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, 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 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.
9
<PAGE>
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 and six-month periods ended June 30,
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.
10
<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,
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent
of net of net of net of net
Amount revenues Amount revenues Amount revenues Amount revenues
-------- -------- -------- -------- -------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Airfreight $ 42,783 41% $ 31,584 38% $ 82,872 42% $ 63,089 40%
Ocean freight 20,890 20 15,423 19 38,691 19 28,809 18
Customs brokerage and
import services 40,557 39 35,367 43 77,080 39 66,240 42
-------- -------- -------- -------- -------- ------- -------- --------
Net revenues 104,230 100 82,374 100 198,643 100 158,138 100
-------- -------- -------- -------- -------- ------- -------- --------
Operating expenses:
Salaries and
related costs 57,508 55 45,339 55 112,006 56 88,043 56
Other 26,026 25 20,716 25 51,222 26 41,077 26
-------- -------- -------- -------- -------- ------- -------- --------
Total operating
expenses 83,534 80 66,055 80 163,228 82 129,120 82
-------- -------- -------- -------- -------- ------- -------- --------
Operating income 20,696 20 16,319 20 35,415 18 29,018 18
Other income, net 588 1 1,289 1 985 - 1,614 1
-------- -------- -------- -------- -------- ------- -------- --------
Earnings before
income taxes 21,284 21 17,608 21 36,400 18 30,632 19
Income tax expense 8,055 8 6,528 8 13,650 7 11,518 7
-------- -------- -------- -------- -------- ------- -------- --------
Net earnings $ 13,229 13% $ 11,080 13% $ 22,750 11% $ 19,114 12%
======== ======== ======== ======== ======== ======= ======== ========
</TABLE>
Airfreight net revenues increased 35% and 31% for the three and
six-month periods ended June 30, 1999 as compared with the same periods for
1998. This increase was primarily due to increased airfreight tonnage handled
by the Company's expanding global network.
Ocean freight net revenues increased 35% and 34% for the three and
six-month periods ended June 30, 1999 as compared with the same periods for
1998. 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 market
share.
Customs brokerage and import services increased 15% and 16% for the
three and six-month periods ended June 30, 1999 as compared with the same
periods for 1998. This increase is the result of 1) the Company's expansion in
the truck and rail border brokerage business on the southern border of 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, 1999 compared with the same periods 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 have, however, remained 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
11
<PAGE>
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, 1999 and
1998 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, 1999 as compared with the same periods 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 for the
three and six-month periods ended June 30, 1999 as compared with the same
periods in 1998.
Other income, net, decreased for the three and six-month periods ended
June 30, 1999 as compared with the same periods of 1998. This decrease can be
primarily attributed to a $928,000 one-time gain realized on the sale of one
of the Company's real estate assets in 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 during
the three and six-month periods ended June 30, 1999 remained virtually
constant as compared with the same periods 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 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.
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 second quarter and for the first six months of 1999 and 1998 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
12
<PAGE>
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, 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.
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 have been completed. 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 1998 and during the first six months 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, have been finalized.
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. 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.
13
<PAGE>
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 two start-up offices, all in North
America during the second quarter of 1999, as follows:
Pittsburgh, Pennsylvania, USA
Montreal, Quebec, Canada
Internal Growth - Management believes that a comparison of "same store"
growth is critical in the evaluation of the quality and extent of the
Company's internally generated growth. This "same store" analysis isolates
the financial contributions from offices that have been included in the
Company's operating results for at least one full year. The table below
presents same store comparisons for the quarter and for the six months ended
June 30, 1999 (which is the measure of any increase from the same period of
1998) and for the quarter and the six months ended June 30, 1998 (which
measures growth over 1997).
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 23% 19% 22% 20%
Operating income 24% 30% 20% 33%
</TABLE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from
operations. At June 30, 1999, working capital was $116 million, including
cash and short-term investments of $67 million. The Company had no long-term
debt at June 30, 1999. 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 $22 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 maintains foreign and domestic borrowings under unsecured
bank lines of credit totaling $40.2 million. At June 30, 1999, the Company
was directly liable for $32.2 million drawn on these lines of credit and was
contingently liable for an additional $12.5 million from standby letters of
credit. In addition, the Company maintains a bank facility with its U.K. bank
for $7.9 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.
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
14
<PAGE>
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 six months ended June 30, 1999, would have had the effect of
raising operating income approximately $2.3 million. An average 10%
strengthening of the U.S. Dollar, for the same period, would have had the
effect of reducing operating income approximately $1.9 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 June 30, 1999, the Company had cash and cash equivalents and
short-term investments of $67.1 million and short-term borrowings of $32.2
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.
15
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Federal Maritime Commission has issued an order of investigation and
hearing concerning potential violations of the Shipping Act of 1984 including
allegations that the Company knowingly and willfully misdescribed commodities.
The Company denies any such "knowing and willful" violations of the law and
intends to vigorously contest these allegations. The Company does not expect
the outcome of this matter to have a material effect on the Company's
financial statements.
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 5, 1999.
(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 21,809,705 82,940
K.M. Walsh 21,809,768 82,877
J.L.K. Wang 21,809,361 83,284
J.J. Casey 21,827,990 64,655
D.P. Kourkoumelis 21,828,590 64,055
J.W. Meisenbach 21,828,090 64,555
</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
------- -----------
<C> <S>
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, 1999.
16
<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 13, 1999 /s/ PETER J. ROSE
---------------------------------------------------
Peter J. Rose, Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
August 13, 1999 /s/ R. JORDAN GATES
---------------------------------------------------
R. Jordan Gates, Senior Vice President-
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
June 30, 1999
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
27.1 Financial Data Schedule (Filed Electronically Only)
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND THE RELATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THAT ARE
CONTAINED IN THE COMPANY'S 1999 2ND QUARTER 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 66,896
<SECURITIES> 175
<RECEIVABLES> 261,436
<ALLOWANCES> 8,835
<INVENTORY> 0
<CURRENT-ASSETS> 342,962
<PP&E> 162,104
<DEPRECIATION> 57,660
<TOTAL-ASSETS> 470,777
<CURRENT-LIABILITIES> 227,379
<BONDS> 0
0
0
<COMMON> 502
<OTHER-SE> 242,896
<TOTAL-LIABILITY-AND-EQUITY> 470,777
<SALES> 0
<TOTAL-REVENUES> 615,693
<CGS> 0
<TOTAL-COSTS> 417,050
<OTHER-EXPENSES> 163,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,400
<INCOME-TAX> 13,650
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,750
<EPS-BASIC> .46
<EPS-DILUTED> .42
</TABLE>
