<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, 2000
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 8, 2000, the number of shares outstanding of the issuer's Common
Stock was 50,885,631.
Page 1 of 16 pages.
The Exhibit Index appears on page 16.
<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,
2000 1999
--------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 114,811 $ 71,183
Short term investments 1,008 1,171
Accounts receivable, less
allowance for doubtful accounts
of $10,235 at March 31, 2000 and
$10,266 at December 31, 1999 279,364 314,789
Other current assets 16,586 15,566
--------- ---------
Total current assets 411,769 402,709
Property and equipment, less accumulated depreciation
and amortization of $72,329 at March 31, 2000
and $67,684 at December 31, 1999 104,652 105,905
Deferred Federal and state income taxes 6,411 5,584
Other assets, net 22,550 21,263
--------- ---------
$ 545,382 $ 535,461
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 1,752 19,442
Accounts payable 193,677 184,805
Federal, state and foreign income taxes 11,992 11,081
Deferred Federal and state income taxes 4,869 3,232
Other current liabilities 35,382 34,516
--------- ---------
Total current liabilities 247,672 253,076
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 50,876,731 shares at March 31, 2000, and
50,644,407 at
December 31, 1999 509 507
Additional paid-in capital 32,938 29,729
Retained earnings 270,554 257,198
Accumulated other comprehensive loss (6,291) (5,049)
--------- ---------
Total shareholders' equity 297,710 282,385
--------- ---------
$ 545,382 $ 535,461
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
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,
-------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Airfreight $ 208,181 $ 182,117
Ocean freight 94,968 65,073
Customs brokerage and import services 45,895 36,522
----------- -----------
Total revenues 349,044 283,712
----------- -----------
Operating expenses:
Airfreight consolidation 162,396 142,027
Ocean freight consolidation 71,176 47,272
Salaries and related costs 66,106 54,499
Selling and promotion 4,463 3,661
Rent 4,549 4,289
Depreciation and amortization 5,575 4,771
Other 13,869 12,474
----------- -----------
Total operating expenses 328,134 268,993
----------- -----------
Operating income 20,910 14,719
----------- -----------
Interest expense (106) (188)
Interest income 746 533
Other, net (125) 52
----------- -----------
Other income, net 515 397
----------- -----------
Earnings before income taxes 21,425 15,116
Income tax expense 8,069 5,595
----------- -----------
Net earnings $ 13,356 $ 9,521
----------- -----------
----------- -----------
Basic earnings per share $ .26 $ .19
----------- -----------
----------- -----------
Diluted earnings per share $ .25 $ .18
----------- -----------
----------- -----------
Weighted average basic shares outstanding 50,709,772 49,606,392
----------- -----------
----------- -----------
Weighted average diluted shares outstanding 54,480,938 53,329,104
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to 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,
------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net earnings $ 13,356 $ 9,521
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for losses on accounts receivable 132 971
Deferred income tax expense 4,532 6,027
Depreciation and amortization 5,575 4,771
Other 279 107
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 34,423 (17,019)
Increase in other current assets (1,132) (4,557)
Increase in accounts payable and other current liabilities 10,797 22,849
--------- ---------
Net cash provided by operating activities 67,962 22,670
--------- ---------
Investing activities:
Decrease in short-term investments 189 183
Purchase of property and equipment (4,978) (5,366)
Other (1,359) (1,689)
--------- ---------
Net cash used in investing activities (6,148) (6,872)
--------- ---------
Financing activities:
Increase (decrease) in short-term borrowings, net (17,655) 4,088
Proceeds from issuance of common stock 1,070 2,282
Repurchases of common stock (877) (2,305)
--------- ---------
Net cash provided by (used in) financing activities (17,462) 4,065
Effect of exchange rate changes on cash (724) (1,747)
--------- ---------
Increase in cash and cash equivalents 43,628 18,116
Cash and cash equivalents at beginning
of period 71,183 49,429
--------- ---------
Cash and cash equivalents at end of period $ 114,811 $ 67,545
--------- ---------
--------- ---------
Interest and taxes paid:
Interest $ 110 $ 170
Income taxes 3,001 2,118
</TABLE>
See notes to accompanying consolidated financial statements.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
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 1999 amounts have been reclassified
to conform to the 2000 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 29, 2000.
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) 2000 1999
--------- ---------
<S> <C> <C>
Net earnings $ 13,356 $ 9,521
Foreign currency translation
adjustments net of deferred
taxes of $668 and $468 (1,242) (870)
--------- ---------
Total comprehensive income $ 12,114 $ 8,651
--------- ---------
--------- ---------
</TABLE>
Note 3. Business Segment Information
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure
about Segments of an Enterprise and Related Information" establishes standards
for the way that public companies report selected information about segments in
their financial statements.
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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Other Australia/
United North New Latin Middle Elimi- Consoli-
States America Far East Europe Zealand America East nations Dated
------ ------- -------- ------ ---------- ------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
March 31, 2000
Revenues from
unaffiliated
customers $ 97,301 6,927 178,658 45,462 3,419 3,113 14,164 -- 349,044
Transfers between
geographic areas $ 4,709 259 846 2,071 750 628 752 (10,015) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues $102,010 7,186 179,504 47,533 4,169 3,741 14,916 (10,015) 349,044
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 54,217 5,252 23,810 23,315 2,744 1,680 4,454 -- 115,472
Operating income $ 5,850 451 8,144 4,696 612 267 890 -- 20,910
Identifiable assets
at quarter end $276,266 16,832 103,120 96,713 9,379 8,656 17,242 17,174 545,382
Capital expenditures $ 2,580 412 965 662 110 73 176 -- 4,978
Depreciation and
amortization $ 3,149 253 881 819 136 70 267 -- 5,575
Equity $297,710 3,061 88,879 23,409 6,479 76 3,432 (125,336) 297,710
-------- -------- -------- -------- -------- -------- -------- -------- --------
Three months ended
March 31, 1999
Revenues from
unaffiliated
customers $ 79,187 4,822 148,507 37,768 2,577 1,689 9,162 -- 283,712
Transfers between
geographic areas 3,481 210 760 1,581 673 406 357 (7,468) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 82,668 5,032 149,267 39,349 3,250 2,095 9,519 (7,468) 283,712
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net revenues $ 43,271 3,525 21,192 20,102 2,266 1,048 3,009 -- 94,413
Operating income $ 3,132 391 6,826 3,664 338 31 337 -- 14,719
Identifiable assets
at quarter end $221,772 15,043 80,067 86,019 8,284 4,290 12,711 17,748 445,934
Capital expenditures $ 2,699 274 420 988 145 123 717 -- 5,366
Depreciation and
amortization $ 2,696 126 740 788 140 60 221 -- 4,771
Equity $230,592 1,437 76,427 18,543 5,256 (555) 2,474 (103,582) 230,592
-------- -------- -------- -------- -------- -------- -------- -------- --------
</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 earnings per share in the first quarter
of 2000 and 1999:
<TABLE>
<CAPTION>
Weighted
(Amounts in thousands, except Net Average Earnings
share and per share amounts) Earnings Shares Per Share
- ----------------------------- --------- ---------- -----------
<S> <C> <C> <C>
2000
- ----
Basic earnings per share $ 13,356 50,709,772 $ .26
Effect of dilutive potential common shares -- 3,771,166 --
--------- ---------- -----------
Diluted earnings per share $ 13,356 54,480,938 $ .25
--------- ---------- -----------
--------- ---------- -----------
1999
- ----
Basic earnings per share $ 9,521 49,606,392 $ .19
Effect of dilutive potential common shares -- 3,722,712 --
--------- ---------- -----------
Diluted earnings per share $ 9,521 53,329,104 $ .18
--------- ---------- -----------
--------- ---------- -----------
</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, 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 the first quarter of 2000 was insignificant.
The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition", to be effective the second quarter of 2000.
The Company does not anticipate that compliance with SAB No. 101 will result
in any material change to the Company's revenue recognition policies.
Financial Accounting Standards Board (FAS) Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation" clarifies the
application of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" for certain issues. The Interpretation is
effective July 1, 2000. The Company does not anticipate that implementation
of FAS Interpretation No. 44 will result in a significant impact on the
Company's financial condition or results of operations.
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 sections 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 29,
2000.
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
7
<PAGE>
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 and fourth quarters have
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, 2000 and 1999,
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.
8
<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 March 31,
2000 1999
------------------------ -------------------------
Percent Percent
of net of net
Amount revenues Amount revenues
-------- -------- -------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net Revenues:
Airfreight $ 45,785 40% $ 40,090 42%
Ocean freight 23,792 20 17,801 19
Customs brokerage and
import services 45,895 40 36,522 39
-------- -------- -------- --------
Net revenues 115,472 100 94,413 100
-------- -------- -------- --------
Operating expenses:
Salaries and
related costs 66,106 57 54,499 57
Other 28,456 25 25,195 27
-------- -------- -------- --------
Total operating
expenses 94,562 82 79,694 84
-------- -------- -------- --------
Operating income 20,910 18 14,719 16
Other income, net 515 -- 397 --
-------- -------- -------- --------
Earnings before
income taxes 21,425 18 15,116 16
Income tax expense 8,069 7 5,595 6
-------- -------- -------- --------
Net earnings $ 13,356 11% $ 9,521 10%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Airfreight net revenues increased 14% for the three-month period ended
March 31, 2000 as compared with the same period for 1999. 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 34% for the three-month period ended
March 31, 2000 as compared with the same period for 1999. 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 26% for the three-month
period ended March 31, 2000 as compared with the same period for 1999. 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 sophisticated computerized capabilities
critical to an overall logistics management program, and 3) the growing
importance of distribution services, which is included in this category, as a
separate and distinct service offered to existing and potential customers.
9
<PAGE>
Salaries and related costs increased during the first quarter of 2000
compared to the same period in 1999 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 remained virtually constant as a
percentage of net revenues. 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, 2000 as compared with the same period in 1999 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 in the three-month period ended March 31,
2000, as compared with the same period in 1999, as the Company leveraged net
revenue increases over other operating expenses with a largely fixed or
fixed-variable cost component.
Other income, net, increased for the three-month period ended March 31,
2000 as compared with the same period in 1999, principally due to higher
interest income on a larger average cash balance during the period. Cash
balances increased towards the end of the first quarter of 2000, after the
payment of peak season trade obligations and after the collection of accounts
receivable outstanding as of December 31, 1999.
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 income tax rate during the three-month period
ended March 31, 2000 increased slightly, to 37.7% from 37%, in the same period
in 1999.
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
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 2000 and 1999
were insignificant.
10
<PAGE>
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.
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.
Prior to December 31, 1999, the Company incurred costs to assess any
potential Year 2000 issues. These amounts were immaterial and the Company has
experienced no significant problems related to Year 2000 in doing business in
early 2000.
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 one start-up office during the first
quarter of 2000 in Ciudad Juarez, Mexico.
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 2000 (which is the measure of any increase
from the same quarter of 1999) and for the first quarter of 1999 (which measures
growth over 1998).
<TABLE>
<CAPTION>
For the three months
ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net revenue 22% 21%
Operating income 43% 14%
</TABLE>
Liquidity and Capital Resources
The Company's principal source of liquidity is cash generated from
operating activities. Net cash provided by operating activities for the three
months ended March 31, 2000 was approximately $68 million, as compared with
$22.7 million for the same period of 1999. This $45.3 million increase is
principally due to a decrease in accounts receivable ($34.4 million) and an
increase in accounts payable ($10.8 million).
11
<PAGE>
As stated elsewhere, the Company's business is subject to seasonal
fluctuations. Cash flow fluctuates as a result of this seasonality.
Historically, the first quarter shows an excess of customer collections over
customer billings. This results in positive cash flow. The increased
activity associated with peak season (typically commencing late second or
early third quarter) causes an excess of customer billings over customer
collections. This cyclical growth in customer receivables consumes available
cash. In this situation, the Company has utilized short-term borrowings to
satisfy normal operating expenditures. These short-term borrowings have been
repaid when the trend reverses and customer collections exceed customer
billings.
As a customs broker, the Company makes significant 5-10 business day
cash advances for the payment of duties and freight. These advances are made
as an accommodation for a select group of credit-worthy customers. Cash
advances are a "pass through" and are not recorded as a component of revenue
and expense, but are accounted for as a direct increase in accounts receivable.
As a result of these "pass through" billings, the conventional Days Sales
Outstanding or DSO calculation does not directly measure collection
efficiency.
Cash used in investing activities for the three months ended March 31, 2000
was $6.1 million, as compared with $6.9 million during the same period of 1999.
The largest use of cash in investing activities is cash paid for capital
expenditures. In the first quarter of 2000, the Company made capital
expenditures of $5.0 million as compared with $5.4 million for the same period
in 1999. Capital expenditures in 2000 and in 1999 related primarily to
investments in technology and office furniture and equipment.
Cash used in financing activities during the first quarter of 2000 was
$17.5 million as compared with cash provided by financing activities of $4.1
million for same period in 1999. In 2000, the Company paid down $17.7 million on
short-term borrowings, as compared with an increase in short-term borrowings of
$4.9 million that occurred during the same period of 1999. The Company uses the
proceeds from stock option exercises to repurchase the Company's stock on the
open market. The differences shown at the end of the first quarter of 2000 and
1999 between proceeds from the issuance of common stock and the amounts paid to
repurchase common stock represent a timing difference in the receipt of proceeds
and the subsequent repurchase of outstanding shares.
At March 31, 2000, working capital was $164 million, including cash and
short-term investments of $116 million. The Company had no long-term debt at
March 31, 2000. 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 currently expects to spend approximately
$30 million on property and equipment in 2000, 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 $53.6 million. At March 31, 2000, the Company was
directly liable for $1.8 million drawn on these lines of credit and was
contingently liable for an additional $9.9 million from standby letters of
credit. In addition, the Company maintains a bank facility with its U.K. bank
for $8.0 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.
12
<PAGE>
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, 2000, would have had the effect of raising operating income
approximately $1.4 million. An average 10% strengthening of the U.S. Dollar, for
the same period, would have the effect of reducing operating income
approximately $1.2 million.
The Company has approximately $70 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, 2000, the Company had cash and cash equivalents and short-term
investments of $115,819,000 and short-term borrowings of $1,752,000, 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.
In management's opinion, there has been no material change in the Company's
market risk exposure in the first quarter of 2000.
13
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is ordinarily involved in claims and lawsuits which arise in
the normal course of business, none of which currently, in management's opinion,
will have a significant effect on the Company's financial condition.
ITEM 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, 2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
May 12, 2000 /s/ PETER J. ROSE
-------------------
Peter J. Rose, Chairman
and Chief Executive Officer
(Principal Executive Officer)
May 12, 2000 /s/ R. JORDAN GATES
-------------------
R. Jordan Gates, Executive Vice President-Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
March 31, 2000
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------- ----------- -----------
<S> <C> <C>
27.1 Financial Data Schedule (Filed Electronically Only).
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT 3-31-00 AND CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE 3 MONTHS ENDED 3-31-00 AND RELATED NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
2000 1ST QTR 10Q 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 114,811
<SECURITIES> 1,008
<RECEIVABLES> 289,599
<ALLOWANCES> 10,235
<INVENTORY> 0
<CURRENT-ASSETS> 411,769
<PP&E> 176,981
<DEPRECIATION> 72,329
<TOTAL-ASSETS> 545,382
<CURRENT-LIABILITIES> 247,672
<BONDS> 0
0
0
<COMMON> 509
<OTHER-SE> 297,201
<TOTAL-LIABILITY-AND-EQUITY> 545,382
<SALES> 0
<TOTAL-REVENUES> 349,044
<CGS> 0
<TOTAL-COSTS> 233,572
<OTHER-EXPENSES> 94,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,425
<INCOME-TAX> 8,069
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,356
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.25
</TABLE>
