UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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 or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |
1015 Third Avenue, | 98104 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code): (206) 674-3400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | EXPD | NASDAQ Global Select Market |
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||
Emerging growth company | |||||
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
At November 3, 2017,May 4, 2020, the number of shares outstanding of the issuer’s Common Stockcommon stock was 177,702,850.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Assets: |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1,111,973 |
|
| $ | 1,230,491 |
|
Accounts receivable, less allowance for credit loss of $3,578 at March 31, 2020 and $11,143 at December 31, 2019 |
|
| 1,268,798 |
|
|
| 1,315,091 |
|
Deferred contract costs |
|
| 143,986 |
|
|
| 131,783 |
|
Other |
|
| 94,060 |
|
|
| 92,558 |
|
Total current assets |
|
| 2,618,817 |
|
|
| 2,769,923 |
|
Property and equipment, less accumulated depreciation and amortization of $481,490 at March 31, 2020 and $478,906 at December 31, 2019 |
|
| 484,588 |
|
|
| 499,344 |
|
Operating lease right-of-use assets |
|
| 372,748 |
|
|
| 390,035 |
|
Goodwill |
|
| 7,927 |
|
|
| 7,927 |
|
Deferred federal and state income taxes, net |
|
| 9,680 |
|
|
| 8,034 |
|
Other assets, net |
|
| 16,207 |
|
|
| 16,621 |
|
Total assets |
| $ | 3,509,967 |
|
| $ | 3,691,884 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 700,944 |
|
| $ | 735,695 |
|
Accrued expenses, primarily salaries and related costs |
|
| 201,756 |
|
|
| 189,446 |
|
Contract liabilities |
|
| 170,866 |
|
|
| 154,183 |
|
Current portion of operating lease liabilities |
|
| 63,748 |
|
|
| 65,367 |
|
Federal, state and foreign income taxes |
|
| 21,864 |
|
|
| 23,627 |
|
Total current liabilities |
|
| 1,159,178 |
|
|
| 1,168,318 |
|
Noncurrent portion of operating lease liabilities |
|
| 313,644 |
|
|
| 326,347 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock, NaN issued |
|
| — |
|
| — |
| |
Common stock, par value $0.01 per share. Issued and outstanding: 166,193 shares at March 31, 2020 and 169,622 shares at December 31, 2019 |
|
| 1,662 |
|
|
| 1,696 |
|
Additional paid-in capital |
|
| 682 |
|
|
| 3,203 |
|
Retained earnings |
|
| 2,202,208 |
|
|
| 2,321,316 |
|
Accumulated other comprehensive loss |
|
| (169,746 | ) |
|
| (131,187 | ) |
Total shareholders’ equity |
|
| 2,034,806 |
|
|
| 2,195,028 |
|
Noncontrolling interest |
|
| 2,339 |
|
|
| 2,191 |
|
Total equity |
|
| 2,037,145 |
|
|
| 2,197,219 |
|
Total liabilities and equity |
| $ | 3,509,967 |
|
| $ | 3,691,884 |
|
September 30, 2017 | December 31, 2016 | ||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 1,033,444 | $ | 974,435 | |||
Accounts receivable, less allowance for doubtful accounts of $11,217 at September 30, 2017 and $9,247 at December 31, 2016 | 1,349,854 | 1,190,130 | |||||
Other | 135,623 | 54,014 | |||||
Total current assets | 2,518,921 | 2,218,579 | |||||
Property and equipment, less accumulated depreciation and amortization of $413,219 at September 30, 2017 and $406,652 at December 31, 2016 | 513,070 | 536,572 | |||||
Goodwill | 7,927 | 7,927 | |||||
Other assets, net | 28,963 | 27,793 | |||||
Total assets | $ | 3,068,881 | $ | 2,790,871 | |||
Current Liabilities: | |||||||
Accounts payable | $ | 836,055 | $ | 726,571 | |||
Accrued expenses, primarily salaries and related costs | 216,146 | 185,502 | |||||
Federal, state and foreign income taxes | 23,853 | 17,858 | |||||
Total current liabilities | 1,076,054 | 929,931 | |||||
Deferred Federal and state income taxes | 11,746 | 13,727 | |||||
Commitments and contingencies | |||||||
Shareholders’ Equity: | |||||||
Preferred stock, none issued | — | — | |||||
Common stock, par value $0.01 per share. Issued and outstanding 177,559 shares at September 30, 2017 and 179,857 shares at December 31, 2016 | 1,776 | 1,799 | |||||
Additional paid-in capital | 1,464 | 2,642 | |||||
Retained earnings | 2,053,723 | 1,944,789 | |||||
Accumulated other comprehensive loss | (78,960 | ) | (104,592 | ) | |||
Total shareholders’ equity | 1,978,003 | 1,844,638 | |||||
Noncontrolling interest | 3,078 | 2,575 | |||||
Total equity | 1,981,081 | 1,847,213 | |||||
Total liabilities and equity | $ | 3,068,881 | $ | 2,790,871 |
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
|
| Three months ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Revenues: |
|
|
|
|
|
|
|
|
Airfreight services |
| $ | 709,039 |
|
| $ | 714,901 |
|
Ocean freight and ocean services |
|
| 493,427 |
|
|
| 568,641 |
|
Customs brokerage and other services |
|
| 699,398 |
|
|
| 736,509 |
|
Total revenues |
|
| 1,901,864 |
|
|
| 2,020,051 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Airfreight services |
|
| 520,169 |
|
|
| 509,210 |
|
Ocean freight and ocean services |
|
| 366,483 |
|
|
| 420,331 |
|
Customs brokerage and other services |
|
| 400,076 |
|
|
| 436,396 |
|
Salaries and related |
|
| 342,040 |
|
|
| 356,910 |
|
Rent and occupancy |
|
| 42,524 |
|
|
| 41,523 |
|
Depreciation and amortization |
|
| 12,660 |
|
|
| 13,393 |
|
Selling and promotion |
|
| 8,243 |
|
|
| 11,076 |
|
Other |
|
| 50,614 |
|
|
| 43,611 |
|
Total operating expenses |
|
| 1,742,809 |
|
|
| 1,832,450 |
|
Operating income |
|
| 159,055 |
|
|
| 187,601 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
Interest income |
|
| 4,807 |
|
|
| 6,106 |
|
Other, net |
|
| 3,384 |
|
|
| 1,665 |
|
Other income, net |
|
| 8,191 |
|
|
| 7,771 |
|
Earnings before income taxes |
|
| 167,246 |
|
|
| 195,372 |
|
Income tax expense |
|
| 44,464 |
|
|
| 55,261 |
|
Net earnings |
|
| 122,782 |
|
|
| 140,111 |
|
Less net earnings attributable to the noncontrolling interest |
|
| 438 |
|
|
| 412 |
|
Net earnings attributable to shareholders |
| $ | 122,344 |
|
| $ | 139,699 |
|
Diluted earnings attributable to shareholders per share |
| $ | 0.71 |
|
| $ | 0.80 |
|
Basic earnings attributable to shareholders per share |
| $ | 0.73 |
|
| $ | 0.81 |
|
Weighted average diluted shares outstanding |
|
| 171,450 |
|
|
| 175,388 |
|
Weighted average basic shares outstanding |
|
| 168,735 |
|
|
| 171,818 |
|
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
Airfreight services | $ | 735,164 | $ | 621,566 | $ | 2,022,577 | $ | 1,764,512 | |||||||
Ocean freight and ocean services | 563,386 | 495,460 | 1,585,730 | 1,414,344 | |||||||||||
Customs brokerage and other services | 503,616 | 445,368 | 1,411,270 | 1,277,174 | |||||||||||
Total revenues | 1,802,166 | 1,562,394 | 5,019,577 | 4,456,030 | |||||||||||
Operating Expenses: | |||||||||||||||
Airfreight services | 547,595 | 444,359 | 1,490,417 | 1,236,555 | |||||||||||
Ocean freight and ocean services | 411,061 | 359,991 | 1,163,051 | 1,006,710 | |||||||||||
Customs brokerage and other services | 244,368 | 212,785 | 675,729 | 597,320 | |||||||||||
Salaries and related costs | 319,050 | 291,204 | 930,159 | 868,091 | |||||||||||
Rent and occupancy costs | 30,533 | 27,091 | 87,826 | 81,029 | |||||||||||
Depreciation and amortization | 12,272 | 11,882 | 36,241 | 34,853 | |||||||||||
Selling and promotion | 10,608 | 10,134 | 32,476 | 29,817 | |||||||||||
Other | 39,784 | 37,685 | 102,429 | 103,702 | |||||||||||
Total operating expenses | 1,615,271 | 1,395,131 | 4,518,328 | 3,958,077 | |||||||||||
Operating income | 186,895 | 167,263 | 501,249 | 497,953 | |||||||||||
Other Income (Expense): | |||||||||||||||
Interest income | 3,444 | 2,924 | 9,565 | 8,593 | |||||||||||
Other, net | 96 | 925 | 2,584 | 3,407 | |||||||||||
Other income (expense), net | 3,540 | 3,849 | 12,149 | 12,000 | |||||||||||
Earnings before income taxes | 190,435 | 171,112 | 513,398 | 509,953 | |||||||||||
Income tax expense | 69,829 | 63,163 | 190,470 | 188,518 | |||||||||||
Net earnings | 120,606 | 107,949 | 322,928 | 321,435 | |||||||||||
Less net earnings attributable to the noncontrolling interest | 343 | 368 | 550 | 1,218 | |||||||||||
Net earnings attributable to shareholders | $ | 120,263 | $ | 107,581 | $ | 322,378 | $ | 320,217 | |||||||
Diluted earnings attributable to shareholders per share | $ | 0.66 | $ | 0.59 | $ | 1.77 | $ | 1.75 | |||||||
Basic earnings attributable to shareholders per share | $ | 0.67 | $ | 0.59 | $ | 1.79 | $ | 1.76 | |||||||
Dividends declared and paid per common share | $ | — | $ | — | $ | 0.42 | $ | 0.40 | |||||||
Weighted average diluted shares outstanding | 181,788 | 182,692 | 181,951 | 182,958 | |||||||||||
Weighted average basic shares outstanding | 179,416 | 181,177 | 179,827 | 181,645 |
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
| Three months ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net earnings |
| $ | 122,782 |
|
| $ | 140,111 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax expense of $1,174 and $521 for the three months ended March 31, 2020 and 2019 |
|
| (38,849 | ) |
|
| 1,365 |
|
Other comprehensive (loss) income |
|
| (38,849 | ) |
|
| 1,365 |
|
Comprehensive income |
|
| 83,933 |
|
|
| 141,476 |
|
Less comprehensive income attributable to the noncontrolling interest |
|
| 148 |
|
|
| 282 |
|
Comprehensive income attributable to shareholders |
| $ | 83,785 |
|
| $ | 141,194 |
|
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net earnings | $ | 120,606 | $ | 107,949 | $ | 322,928 | $ | 321,435 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustments, net of tax of $4,128 and $202 for the three months ended September 30, 2017 and 2016 and $14,019 and $223 for the nine months ended September 30, 2017 and 2016 | 7,489 | 260 | 25,585 | (457 | ) | ||||||||||
Other comprehensive income (loss) | 7,489 | 260 | 25,585 | (457 | ) | ||||||||||
Comprehensive income | 128,095 | 108,209 | 348,513 | 320,978 | |||||||||||
Less comprehensive income attributable to the noncontrolling interest | 285 | 260 | 503 | 1,167 | |||||||||||
Comprehensive income attributable to shareholders | $ | 127,810 | $ | 107,949 | $ | 348,010 | $ | 319,811 |
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
| Three months ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Operating Activities: |
|
|
|
|
|
|
|
|
Net earnings |
| $ | 122,782 |
|
| $ | 140,111 |
|
Adjustments to reconcile net earnings to net cash from operating activities: |
|
|
|
|
|
|
|
|
Provisions for losses (recoveries) on accounts receivable |
|
| 1,820 |
|
|
| (1,888 | ) |
Deferred income tax (benefit) expense |
|
| (5,139 | ) |
|
| 2,108 |
|
Stock compensation expense |
|
| 11,156 |
|
|
| 13,382 |
|
Depreciation and amortization |
|
| 12,660 |
|
|
| 13,393 |
|
Other, net |
|
| 433 |
|
|
| 189 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
| 16,680 |
|
|
| 230,477 |
|
Increase (decrease) in accounts payable and accrued expenses |
|
| 917 |
|
|
| (122,283 | ) |
(Increase) decrease in deferred contract costs |
|
| (16,068 | ) |
|
| 31,259 |
|
Increase (decrease) in contract liabilities |
|
| 21,201 |
|
|
| (36,725 | ) |
Increase in income taxes payable, net |
|
| 10,488 |
|
|
| 16,993 |
|
(Increase) decrease in other, net |
|
| (11,930 | ) |
|
| 2,467 |
|
Net cash from operating activities |
|
| 165,000 |
|
|
| 289,483 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (6,127 | ) |
|
| (9,435 | ) |
Other, net |
|
| (143 | ) |
|
| 255 |
|
Net cash from investing activities |
|
| (6,270 | ) |
|
| (9,180 | ) |
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 23,399 |
|
|
| 27,190 |
|
Repurchases of common stock |
|
| (283,240 | ) |
|
| (44,334 | ) |
Payments for taxes related to net share settlement of equity awards |
|
| (1,396 | ) |
|
| — |
|
Net cash from financing activities |
|
| (261,237 | ) |
|
| (17,144 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (16,011 | ) |
|
| 2,535 |
|
Change in cash and cash equivalents |
|
| (118,518 | ) |
|
| 265,694 |
|
Cash and cash equivalents at beginning of period |
|
| 1,230,491 |
|
|
| 923,735 |
|
Cash and cash equivalents at end of period |
| $ | 1,111,973 |
|
| $ | 1,189,429 |
|
Taxes Paid: |
|
|
|
|
|
|
|
|
Income taxes |
| $ | 35,304 |
|
| $ | 37,253 |
|
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Operating Activities: | |||||||||||||||
Net earnings | $ | 120,606 | $ | 107,949 | $ | 322,928 | $ | 321,435 | |||||||
Adjustments to reconcile net earnings to net cash from operating activities: | |||||||||||||||
Provision for losses on accounts receivable | 1,741 | 1,321 | 3,187 | 2,461 | |||||||||||
Deferred income tax (benefit) expense | (28,854 | ) | (1,439 | ) | (16,000 | ) | 2,342 | ||||||||
Stock compensation expense | 11,210 | 10,476 | 39,036 | 34,264 | |||||||||||
Depreciation and amortization | 12,272 | 11,882 | 36,241 | 34,853 | |||||||||||
Other, net | 377 | 11 | (148 | ) | 41 | ||||||||||
Changes in operating assets and liabilities: | |||||||||||||||
(Increase) decrease in accounts receivable | (126,102 | ) | (58,279 | ) | (123,790 | ) | 6,087 | ||||||||
Increase in accounts payable and accrued expenses | 61,833 | 38,070 | 96,132 | 74,148 | |||||||||||
Increase (decrease) in income taxes payable, net | 38,149 | 7,197 | 10,814 | (16,612 | ) | ||||||||||
Increase in other current assets | (5,872 | ) | (1,395 | ) | (6,147 | ) | (2,089 | ) | |||||||
Net cash from operating activities | 85,360 | 115,793 | 362,253 | 456,930 | |||||||||||
Investing Activities: | |||||||||||||||
Purchase of property and equipment | (34,462 | ) | (12,659 | ) | (67,603 | ) | (39,973 | ) | |||||||
Other, net | (261 | ) | 1,617 | (892 | ) | 5,472 | |||||||||
Net cash from investing activities | (34,723 | ) | (11,042 | ) | (68,495 | ) | (34,501 | ) | |||||||
Financing Activities: | |||||||||||||||
Proceeds from issuance of common stock | 65,915 | 57,522 | 162,781 | 147,645 | |||||||||||
Repurchases of common stock | (202,776 | ) | (101,690 | ) | (340,736 | ) | (268,097 | ) | |||||||
Dividends paid | — | — | (75,726 | ) | (73,000 | ) | |||||||||
Net cash from financing activities | (136,861 | ) | (44,168 | ) | (253,681 | ) | (193,452 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 4,758 | 1,853 | 18,932 | 5,927 | |||||||||||
(Decrease) increase in cash and cash equivalents | (81,466 | ) | 62,436 | 59,009 | 234,904 | ||||||||||
Cash and cash equivalents at beginning of period | 1,114,910 | 980,264 | 974,435 | 807,796 | |||||||||||
Cash and cash equivalents at end of period | $ | 1,033,444 | $ | 1,042,700 | $ | 1,033,444 | $ | 1,042,700 | |||||||
Taxes Paid: | |||||||||||||||
Income taxes | $ | 58,257 | $ | 58,696 | $ | 190,911 | $ | 205,049 |
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(In thousands)
(Unaudited)
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the three months ended March 31, 2020 and 2019 |
| Shares |
|
| Par value |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders’ equity |
|
| Noncontrolling interest |
|
| Total equity |
| ||||||||
Balance at December 31, 2019 |
|
| 169,622 |
|
| $ | 1,696 |
|
| $ | 3,203 |
|
| $ | 2,321,316 |
|
| $ | (131,187 | ) |
| $ | 2,195,028 |
|
| $ | 2,191 |
|
| $ | 2,197,219 |
|
Cumulative effect of accounting change |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,074 |
|
|
| — |
|
|
| 6,074 |
|
|
| — |
|
|
| 6,074 |
|
Shares issued under employee stock plans |
|
| 571 |
|
|
| 6 |
|
|
| 21,997 |
|
|
| — |
|
|
| — |
|
|
| 22,003 |
|
|
| — |
|
|
| 22,003 |
|
Shares repurchased under provisions of stock repurchase plan |
|
| (4,000 | ) |
|
| (40 | ) |
|
| (35,799 | ) |
|
| (247,401 | ) |
|
| — |
|
|
| (283,240 | ) |
|
| — |
|
|
| (283,240 | ) |
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| 11,156 |
|
|
| — |
|
|
| — |
|
|
| 11,156 |
|
|
| — |
|
|
| 11,156 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 122,344 |
|
|
| — |
|
|
| 122,344 |
|
|
| 438 |
|
|
| 122,782 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (38,559 | ) |
|
| (38,559 | ) |
|
| (290 | ) |
|
| (38,849 | ) |
Dividends paid |
|
| — |
|
|
| — |
|
|
| 125 |
|
|
| (125 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at March 31, 2020 |
|
| 166,193 |
|
| $ | 1,662 |
|
| $ | 682 |
|
| $ | 2,202,208 |
|
| $ | (169,746 | ) |
| $ | 2,034,806 |
|
| $ | 2,339 |
|
| $ | 2,037,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
| 171,582 |
|
| $ | 1,716 |
|
| $ | 1,896 |
|
| $ | 2,088,707 |
|
| $ | (105,481 | ) |
| $ | 1,986,838 |
|
| $ | 882 |
|
| $ | 1,987,720 |
|
Shares issued under employee stock plans |
|
| 654 |
|
|
| 6 |
|
|
| 27,184 |
|
|
| — |
|
|
| — |
|
|
| 27,190 |
|
|
| — |
|
|
| 27,190 |
|
Shares repurchased under provisions of stock repurchase plans |
|
| (588 | ) |
|
| (6 | ) |
|
| (38,484 | ) |
|
| (5,844 | ) |
|
| — |
|
|
| (44,334 | ) |
|
| — |
|
|
| (44,334 | ) |
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| 13,382 |
|
|
| — |
|
|
| — |
|
|
| 13,382 |
|
|
| — |
|
|
| 13,382 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 139,699 |
|
|
| — |
|
|
| 139,699 |
|
|
| 412 |
|
|
| 140,111 |
|
Other comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,495 |
|
|
| 1,495 |
|
|
| (130 | ) |
|
| 1,365 |
|
Balance at March 31, 2019 |
|
| 171,648 |
|
| $ | 1,716 |
|
| $ | 3,978 |
|
| $ | 2,222,562 |
|
| $ | (103,986 | ) |
| $ | 2,124,270 |
|
| $ | 1,164 |
|
| $ | 2,125,434 |
|
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Note 1. Summary of Significant Accounting Policies
A. |
Basis of Presentation |
Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, industrial and manufacturing companies around the world.
The 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 note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) 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, consisting of normal recurring items, which are, in the opinion of management, necessary tofor a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 23, 2017.
All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified.
B. | Revenue Recognition |
The Company derives its revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by the customer. The Company's three principal services are the revenue categories presented in the condensed consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.
The Company typically satisfies its performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed over the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two month-period and contracts with customers have an original expected duration of less than one year. The Company satisfied nearly all performance obligations for the contract liabilities recorded as of December 31, 2019.
Beginning in the second quarter 2019, the Company revised its presentation for revenue transfers between its geographic operating segments and services rendered at the destination, which moved certain revenues and directly related operating expenses for air and ocean transactions to destination services within customs brokerage and other services. These changes better align revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The impact on reported consolidated and segment total revenues and expenses for these changes was immaterial and first quarter 2019 presentation has not been revised.
C. | Leases |
The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As the Company's leases generally do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on market information available at the commencement date to determine the present value. Certain prior year amounts have been reclassified to conformof our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from ROU assets and lease liabilities, to the 2017 presentation.extent not considered fixed, and instead expense variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses on the condensed consolidated statement of earnings.
D. | Accounts Receivable |
Effective January 1, 2020, the Company adopted a new accounting standard update related to the measurement of credit losses on financial instruments. The adoption had an immaterial effect on the Company’s consolidated financial statements and disclosures. Under this new standard, the valuation allowance reduces a financial asset’s balance for credit losses expected to be incurred over the assets contractual term. The Company maintainsdetermined that this new guidance is applicable to its accounts receivable, which are short term and for which the Company has not historically experienced significant credit losses. The Company adopted this standard using the modified retrospective transition method resulting in a $6 millionadjustment to the opening balance of retained earnings and an $8 million reduction to the opening balance of allowance for doubtfulcredit loss. The Company’s trade accounts whichreceivable present similar credit risk characteristics and the allowance for credit loss is reviewed at least monthly for estimated losses resulting fromon a collective basis, using a credit loss-rate method leveraging historical credit loss information and including considerations of the inability of its customers to make required payments for services and advances.current economic environment. Additional allowances may be necessary in the future if the ability of customerschanges in economic conditions are significant enough to pay deteriorates.affect expected credit losses. The Company has recorded an allowance for doubtful accountscredit loss in the amounts of $11,2173,578 as of September 30, 2017March 31, 2020 and $9,247$11,143 as of December 31, 2016. 2019. Additions and write-offs have not been significant in the periods presented.
E. | Use of Estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, and calculation of share-based compensation expense.expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. Actual results could differbe materially different from those estimates.the estimated provisions and accruals recorded.
F. | Recent Accounting Pronouncement |
In December 2019, the FASB issued an ASU, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. This standard will become effective for the Company on January 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
Note 2. Share-Based Compensation
The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. On May 2, 2017, shareholders approvedDuring the 2017 Omnibus Incentive Plan (2017 Plan), which made available 2,500 shares of the Company's common stock in aggregate to be issued under any award type allowed by the 2017 Plan. In the nine-month periodthree months ended September 30, 2017,March 31, 2020 and 2019, the Company awarded 583 restricted stock units (RSU) under the 2017 Plan to certain employees at a weighted-averagedid 0t grant date fair value of $54.04. The RSU vest annually over 3 years based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. The value of an RSU grant is based on the Company's stock price on the date of grant. Additionally, in the second quarter of 2017 and 2016, respectively, 38 and 41 fully vested shares were granted to non-employee directors.
The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year and 682 and 703year. NaN shares were issued in the nine-month periods ended September 30, 2017 and 2016, respectively. The fair value ofunder the employee stock purchase rights granted was $11.69plan in the three months ended March 31, 2020 and $10.99 per share for the quarters ended September 30, 2017 and 2016, respectively.
The Company recognizes stock compensation expense based on an estimate of the fair value of awards granted to employees and directors under the Company’s omnibus incentive, stock option director restricted stock and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related expenses. RSU awardscosts on the condensed consolidated statements of earnings. Restricted stock units and performance share units awarded to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately as there is no substantive service period associated with those awards. Approximately $4 million
Note 3. Income Taxes
During 2019, the Internal Revenue Service (IRS) and the U.S. Department of stock compensationTreasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. The Company expects that additional guidance will continue to be issued in future periods. As this guidance is issued, the Company will continue to evaluate the information to determine whether any additional adjustments to its tax provisions are required.
The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. For the three months ended March 31, 2020 and 2019, there was 0 BEAT expense and GILTI expense was recognizedinsignificant.
The Company’s consolidated effective income tax rate was 26.6% for the three months ended March 31, 2020, as compared to 28.3%for the comparable period in 2019. The effect of higher average tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).
The Company is subject to taxation in various states and many foreign jurisdictions including the People’s Republic of China, including Hong Kong, Taiwan, Vietnam, India, Mexico, Canada, Netherlands and the United Kingdom. The Company believes that its tax positions, including intercompany transfer pricing policies, are reasonable and consistently applied. The Company is under, or may be subject to, audit or examination and assessments by the relevant authorities in respect to these and any other jurisdictions primarily for years 2009 and thereafter. Sometimes audits result in proposed assessments where the ultimate resolution could result in significant additional tax, penalties and interest payments being required. The Company establishes liabilities when, despite its belief that the tax return positions are appropriate and consistent with tax law, it concludes that it may not be successful in realizing the tax position. In evaluating a tax position, the Company determines whether it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position and in consultation with qualified tax advisors.
The total amount of the Company’s tax contingencies may increase in 2020. In addition, changes in state, federal, and foreign tax laws and changes in interpretations of these laws may increase the Company’s existing tax contingencies. The timing of the resolution of income tax examinations can be highly uncertain, and the amounts ultimately paid including interest and penalties, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts recorded. It is reasonably possible that within the next twelve months the Company may undergo further audits and examinations by various tax authorities and possibly may reach resolution related to income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to the Company’s contingencies related to positions on tax filings in future years. The estimate of any ultimate tax liability contains assumptions based on experiences, judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by the taxing jurisdiction. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three months ended March 31, 2020 and 2019.
As discussed above, some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury. As a result, the amount of income tax recorded in the second quarterfuture may differ, possibly materially. For further information and discussion of the potential impact of the 2017 for RSU grants meeting retirement eligibility criteria.
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Stock compensation expense | $ | 11,210 | $ | 10,476 | $ | 39,036 | $ | 34,264 | |||||||
Recognized tax benefit | $ | 2,311 | $ | 2,149 | $ | 8,187 | $ | 5,928 |
Note 3.4. Basic and Diluted Earnings per Share
Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:
|
| Three months ended March 31, |
| |||||||||
�� |
| Net earnings attributable to shareholders |
|
| Weighted average shares |
|
| Earnings per share |
| |||
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
| $ | 122,344 |
|
|
| 168,735 |
|
| $ | 0.73 |
|
Effect of dilutive potential common shares |
|
| — |
|
|
| 2,715 |
|
|
| — |
|
Diluted earnings attributable to shareholders |
| $ | 122,344 |
|
|
| 171,450 |
|
| $ | 0.71 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
| $ | 139,699 |
|
|
| 171,818 |
|
| $ | 0.81 |
|
Effect of dilutive potential common shares |
|
| — |
|
|
| 3,570 |
|
|
| — |
|
Diluted earnings attributable to shareholders |
| $ | 139,699 |
|
|
| 175,388 |
|
| $ | 0.80 |
|
Three months ended | ||||||||||
September 30, | ||||||||||
(Amounts in thousands, except per share amounts) | Net earnings attributable to shareholders | Weighted average shares | Earnings per share | |||||||
2017 | ||||||||||
Basic earnings attributable to shareholders | $ | 120,263 | 179,416 | $ | 0.67 | |||||
Effect of dilutive potential common shares | — | 2,372 | — | |||||||
Diluted earnings attributable to shareholders | $ | 120,263 | 181,788 | $ | 0.66 | |||||
2016 | ||||||||||
Basic earnings attributable to shareholders | $ | 107,581 | 181,177 | $ | 0.59 | |||||
Effect of dilutive potential common shares | — | 1,515 | — | |||||||
Diluted earnings attributable to shareholders | $ | 107,581 | 182,692 | $ | 0.59 |
Nine months ended | ||||||||||
September 30, | ||||||||||
(Amounts in thousands, except per share amounts) | Net earnings attributable to shareholders | Weighted average shares | Earnings per share | |||||||
2017 | ||||||||||
Basic earnings attributable to shareholders | $ | 322,378 | 179,827 | $ | 1.79 | |||||
Effect of dilutive potential common shares | — | 2,124 | — | |||||||
Diluted earnings attributable to shareholders | $ | 322,378 | 181,951 | $ | 1.77 | |||||
2016 | ||||||||||
Basic earnings attributable to shareholders | $ | 320,217 | 181,645 | $ | 1.76 | |||||
Effect of dilutive potential common shares | — | 1,313 | — | |||||||
Diluted earnings attributable to shareholders | $ | 320,217 | 182,958 | $ | 1.75 |
Substantially all outstanding potential common shares have been excluded from the computationas of diluted earnings per share because the effect would have been antidilutive:
Three months ended | Nine months ended | ||||||||||
September 30, | September 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||
Shares | 1 | 8,646 | 1,233 | 9,516 |
Note 4. Components of5. Shareholders' Equity
Shareholders’ equity | Noncontrolling interest | Total equity | |||||||
Balance at December 31, 2016 | $ | 1,844,638 | 2,575 | 1,847,213 | |||||
Exercise of stock options | 134,014 | — | 134,014 | ||||||
Issuance of shares under stock purchase plan | 28,767 | — | 28,767 | ||||||
Shares repurchased under provisions of stock repurchase plans | (340,736 | ) | — | (340,736 | ) | ||||
Stock compensation expense | 39,036 | — | 39,036 | ||||||
Net earnings | 322,378 | 550 | 322,928 | ||||||
Other comprehensive income (loss) | 25,632 | (47 | ) | 25,585 | |||||
Dividends paid ($0.42 per share) | (75,726 | ) | — | (75,726 | ) | ||||
Balance at September 30, 2017 | $ | 1,978,003 | 3,078 | 1,981,081 | |||||
Balance at December 31, 2015 | $ | 1,691,993 | 2,683 | 1,694,676 | |||||
Exercise of stock options | 119,509 | — | 119,509 | ||||||
Issuance of shares under stock purchase plan | 28,136 | 28,136 | |||||||
Shares repurchased under provisions of stock repurchase plans | (268,097 | ) | — | (268,097 | ) | ||||
Stock compensation expense | 34,264 | — | 34,264 | ||||||
Tax benefits from stock plans, net | (2,533 | ) | — | (2,533 | ) | ||||
Net earnings | 320,217 | 1,218 | 321,435 | ||||||
Other comprehensive loss | (406 | ) | (51 | ) | (457 | ) | |||
Dividends paid ($0.40 per share) | (73,000 | ) | — | (73,000 | ) | ||||
Balance at September 30, 2016 | $ | 1,850,083 | 3,850 | 1,853,933 |
The Company has a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises and employee stock purchases. During the nine-month periods ended September 30, 2017 and 2016, 2,902 and 2,822 shares were repurchased at an average price of $55.58 and $49.84 per share, respectively.
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
Subsequent to the end of first quarter 2020, on May 2, 2017,5, 2020, the Board of Directors declared a semi-annual dividend of $0.42$0.52 per share payable on June 15, 20172020 to shareholders of record as of June 1, 2017. On May 3, 2016, the Board of Directors declared a semi-annual dividend of $0.40 per share payable on June 15, 2016 to shareholders of record as of June 1, 2016.
Note 6. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
Cash and cash equivalents consist of the following:
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||||||||
|
| Cost |
|
| Fair Value |
|
| Cost |
|
| Fair Value |
| ||||
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and overnight deposits |
| $ | 440,121 |
|
| $ | 440,121 |
|
| $ | 417,456 |
|
| $ | 417,456 |
|
Corporate commercial paper |
|
| 635,697 |
|
|
| 636,169 |
|
|
| 775,504 |
|
|
| 776,356 |
|
Time deposits |
|
| 36,155 |
|
|
| 36,155 |
|
|
| 37,531 |
|
|
| 37,531 |
|
Total cash and cash equivalents |
| $ | 1,111,973 |
|
| $ | 1,112,445 |
|
| $ | 1,230,491 |
|
| $ | 1,231,343 |
|
September 30, 2017 | December 31, 2016 | |||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||
Cash and Cash Equivalents: | ||||||||||||
Cash and overnight deposits | $ | 385,432 | 385,432 | 406,787 | 406,787 | |||||||
Corporate commercial paper | 613,433 | 613,825 | 507,777 | 507,889 | ||||||||
Time deposits | 34,579 | 34,579 | 59,871 | 59,871 | ||||||||
Total cash and cash equivalents | $ | 1,033,444 | 1,033,836 | 974,435 | 974,547 |
The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).
Note 7. Commitments
2017 | $ | 16,984 | |
2018 | 65,813 | ||
2019 | 53,209 | ||
2020 | 41,565 | ||
2021 | 27,696 | ||
Thereafter | 47,009 | ||
$ | 252,276 |
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of September 30, 2017,March 31, 2020, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Note 9.8. Business Segment Information
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues
Financial information regarding the Company’s operations by geographic area is as follows:
|
| UNITED STATES |
|
| OTHER NORTH AMERICA |
|
| LATIN AMERICA |
|
| NORTH ASIA |
|
| SOUTH ASIA |
|
| EUROPE |
|
| MIDDLE EAST, AFRICA AND INDIA |
|
| ELIMI- NATIONS |
|
| CONSOLI- DATED |
| |||||||||
For the three months ended March 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues1 |
| $ | 650,407 |
|
|
| 81,831 |
|
|
| 37,890 |
|
|
| 537,955 |
|
|
| 169,042 |
|
|
| 320,640 |
|
|
| 105,039 |
|
|
| (940 | ) |
|
| 1,901,864 |
|
Directly related cost of transportation and other expenses2 |
| $ | 373,961 |
|
|
| 45,890 |
|
|
| 23,765 |
|
|
| 425,301 |
|
|
| 121,282 |
|
|
| 221,998 |
|
|
| 74,976 |
|
|
| (445 | ) |
|
| 1,286,728 |
|
Salaries and other operating expenses3 |
| $ | 225,944 |
|
|
| 23,712 |
|
|
| 11,749 |
|
|
| 57,433 |
|
|
| 29,908 |
|
|
| 81,854 |
|
|
| 25,950 |
|
|
| (469 | ) |
|
| 456,081 |
|
Operating income |
| $ | 50,502 |
|
|
| 12,229 |
|
|
| 2,376 |
|
|
| 55,221 |
|
|
| 17,852 |
|
|
| 16,788 |
|
|
| 4,113 |
|
|
| (26 | ) |
|
| 159,055 |
|
Identifiable assets at period end |
| $ | 1,858,250 |
|
|
| 135,810 |
|
|
| 68,402 |
|
|
| 512,808 |
|
|
| 179,508 |
|
|
| 554,831 |
|
|
| 200,382 |
|
|
| (24 | ) |
|
| 3,509,967 |
|
Capital expenditures |
| $ | 4,497 |
|
|
| 61 |
|
|
| 102 |
|
|
| 325 |
|
|
| 188 |
|
|
| 645 |
|
|
| 309 |
|
|
| — |
|
|
| 6,127 |
|
Equity |
| $ | 1,369,580 |
|
|
| 63,378 |
|
|
| 28,020 |
|
|
| 237,255 |
|
|
| 102,001 |
|
|
| 159,222 |
|
|
| 113,349 |
|
|
| (35,660 | ) |
|
| 2,037,145 |
|
For the three months ended March 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues1 |
| $ | 659,784 |
|
|
| 91,410 |
|
|
| 34,179 |
|
|
| 632,853 |
|
|
| 177,179 |
|
|
| 312,690 |
|
|
| 112,675 |
|
|
| (719 | ) |
|
| 2,020,051 |
|
Directly related cost of transportation and other expenses2 |
| $ | 367,355 |
|
|
| 56,241 |
|
|
| 19,116 |
|
|
| 498,646 |
|
|
| 129,810 |
|
|
| 215,895 |
|
|
| 79,503 |
|
|
| (629 | ) |
|
| 1,365,937 |
|
Salaries and other operating expenses3 |
| $ | 218,416 |
|
|
| 24,209 |
|
|
| 12,427 |
|
|
| 68,427 |
|
|
| 31,462 |
|
|
| 82,843 |
|
|
| 28,811 |
|
|
| (82 | ) |
|
| 466,513 |
|
Operating income |
| $ | 74,013 |
|
|
| 10,960 |
|
|
| 2,636 |
|
|
| 65,780 |
|
|
| 15,907 |
|
|
| 13,952 |
|
|
| 4,361 |
|
|
| (8 | ) |
|
| 187,601 |
|
Identifiable assets at period end |
| $ | 1,906,278 |
|
|
| 175,034 |
|
|
| 71,168 |
|
|
| 511,589 |
|
|
| 174,512 |
|
|
| 579,924 |
|
|
| 234,195 |
|
|
| (9,788 | ) |
|
| 3,642,912 |
|
Capital expenditures |
| $ | 6,915 |
|
|
| 228 |
|
|
| 93 |
|
|
| 344 |
|
|
| 176 |
|
|
| 982 |
|
|
| 697 |
|
|
| — |
|
|
| 9,435 |
|
Equity |
| $ | 1,401,450 |
|
|
| 82,170 |
|
|
| 28,581 |
|
|
| 238,518 |
|
|
| 114,290 |
|
|
| 165,718 |
|
|
| 126,953 |
|
|
| (32,246 | ) |
|
| 2,125,434 |
|
1 | Beginning in the second quarter of 2019, the Company revised its process to record the transfer, between its geographic operating segments, of revenues and the directly related cost of transportation and other expenses for freight service transactions between Company origin and destination locations. This change better aligns revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The impact of these changes on reported segment revenues was immaterial and first quarter 2019 segment revenues have not been revised. |
2 | Directly related cost of transportation and other expenses totals operating expenses from airfreight services, ocean freight and ocean services and customs brokerage and other services as shown in the condensed consolidated statements of earnings. |
(in thousands) | UNITED STATES | OTHER NORTH AMERICA | LATIN AMERICA | NORTH ASIA | SOUTH ASIA | EUROPE | MIDDLE EAST, AFRICA AND INDIA | ELIMI- NATIONS | CONSOLI- DATED | ||||||||||||||||||
Three months ended September 30, 2017: | |||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 476,575 | 65,544 | 24,181 | 686,915 | 170,225 | 273,606 | 105,120 | — | 1,802,166 | |||||||||||||||||
Transfers between geographic areas | 26,888 | 2,782 | 3,679 | 5,253 | 5,681 | 10,302 | 5,318 | (59,903 | ) | — | |||||||||||||||||
Total revenues | $ | 503,463 | 68,326 | 27,860 | 692,168 | 175,906 | 283,908 | 110,438 | (59,903 | ) | 1,802,166 | ||||||||||||||||
Net revenues1 | $ | 257,030 | 30,664 | 14,710 | 138,667 | 41,411 | 85,390 | 29,956 | 1,314 | 599,142 | |||||||||||||||||
Operating income | $ | 74,645 | 9,215 | 2,652 | 72,070 | 11,697 | 11,124 | 5,495 | (3 | ) | 186,895 | ||||||||||||||||
Identifiable assets at period end | $ | 1,636,293 | 100,651 | 52,238 | 446,826 | 143,893 | 473,509 | 212,210 | 3,261 | 3,068,881 | |||||||||||||||||
Capital expenditures | $ | 7,398 | 263 | 2,436 | 589 | 390 | 23,138 | 248 | — | 34,462 | |||||||||||||||||
Depreciation and amortization | $ | 7,905 | 405 | 310 | 1,313 | 569 | 1,309 | 461 | — | 12,272 | |||||||||||||||||
Equity | $ | 1,345,266 | 52,212 | 25,709 | 231,831 | 102,477 | 139,688 | 119,649 | (35,751 | ) | 1,981,081 | ||||||||||||||||
Three months ended September 30, 2016: | |||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 423,362 | 56,747 | 21,592 | 590,622 | 154,156 | 228,256 | 87,659 | — | 1,562,394 | |||||||||||||||||
Transfers between geographic areas | 24,610 | 2,770 | 3,724 | 5,368 | 6,206 | 9,938 | 5,551 | (58,167 | ) | — | |||||||||||||||||
Total revenues | $ | 447,972 | 59,517 | 25,316 | 595,990 | 160,362 | 238,194 | 93,210 | (58,167 | ) | 1,562,394 | ||||||||||||||||
Net revenues1 | $ | 229,773 | 30,211 | 14,063 | 124,251 | 42,711 | 74,888 | 29,363 | (1 | ) | 545,259 | ||||||||||||||||
Operating income | $ | 69,457 | 6,200 | 3,328 | 59,682 | 14,045 | 7,018 | 7,534 | (1 | ) | 167,263 | ||||||||||||||||
Identifiable assets at period end | $ | 1,410,287 | 95,390 | 56,192 | 480,587 | 117,333 | 388,543 | 237,104 | 8,788 | 2,794,224 | |||||||||||||||||
Capital expenditures | $ | 8,319 | 720 | 139 | 739 | 319 | 2,127 | 296 | — | 12,659 | |||||||||||||||||
Depreciation and amortization | $ | 7,566 | 369 | 328 | 1,404 | 594 | 1,116 | 505 | — | 11,882 | |||||||||||||||||
Equity | $ | 1,145,293 | 41,542 | 37,765 | 293,383 | 87,926 | 129,989 | 150,395 | (32,360 | ) | 1,853,933 |
3 | Salaries and other operating expenses totals salaries and related, rent and occupancy, depreciation and amortization, selling and promotion and other as shown in the condensed consolidated statements of earnings. |
(in thousands) | UNITED STATES | OTHER NORTH AMERICA | LATIN AMERICA | NORTH ASIA | SOUTH ASIA | EUROPE | MIDDLE EAST, AFRICA AND INDIA | ELIMI- NATIONS | CONSOLI- DATED | ||||||||||||||||||
Nine months ended September 30, 2017: | |||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 1,354,811 | 187,997 | 69,747 | 1,873,393 | 475,163 | 764,596 | 293,870 | — | 5,019,577 | |||||||||||||||||
Transfers between geographic areas | 79,356 | 8,246 | 11,073 | 15,139 | 16,520 | 29,288 | 15,316 | (174,938 | ) | — | |||||||||||||||||
Total revenues | $ | 1,434,167 | 196,243 | 80,820 | 1,888,532 | 491,683 | 793,884 | 309,186 | (174,938 | ) | 5,019,577 | ||||||||||||||||
Net revenues1 | $ | 737,842 | 84,630 | 43,634 | 371,459 | 117,634 | 242,244 | 89,973 | 2,964 | 1,690,380 | |||||||||||||||||
Operating income | $ | 191,256 | 26,583 | 8,349 | 183,515 | 37,434 | 36,189 | 17,928 | (5 | ) | 501,249 | ||||||||||||||||
Identifiable assets at period end | $ | 1,636,293 | 100,651 | 52,238 | 446,826 | 143,893 | 473,509 | 212,210 | 3,261 | 3,068,881 | |||||||||||||||||
Capital expenditures | $ | 19,492 | 1,066 | 3,648 | 2,492 | 1,172 | 38,717 | 1,016 | — | 67,603 | |||||||||||||||||
Depreciation and amortization | $ | 23,389 | 1,163 | 930 | 3,995 | 1,656 | 3,707 | 1,401 | — | 36,241 | |||||||||||||||||
Equity | $ | 1,345,266 | 52,212 | 25,709 | 231,831 | 102,477 | 139,688 | 119,649 | (35,751 | ) | 1,981,081 | ||||||||||||||||
Nine months ended September 30, 2016: | |||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 1,248,923 | 165,527 | 62,825 | 1,605,343 | 442,464 | 680,035 | 250,913 | — | 4,456,030 | |||||||||||||||||
Transfers between geographic areas | 79,617 | 8,141 | 11,512 | 15,849 | 18,338 | 30,396 | 16,452 | (180,305 | ) | — | |||||||||||||||||
Total revenues | $ | 1,328,540 | 173,668 | 74,337 | 1,621,192 | 460,802 | 710,431 | 267,365 | (180,305 | ) | 4,456,030 | ||||||||||||||||
Net revenues1 | $ | 683,331 | 88,404 | 42,264 | 357,159 | 128,486 | 227,068 | 88,745 | (12 | ) | 1,615,445 | ||||||||||||||||
Operating income | $ | 184,876 | 23,091 | 11,016 | 176,621 | 48,090 | 31,109 | 23,162 | (12 | ) | 497,953 | ||||||||||||||||
Identifiable assets at period end | $ | 1,410,287 | 95,390 | 56,192 | 480,587 | 117,333 | 388,543 | 237,104 | 8,788 | 2,794,224 | |||||||||||||||||
Capital expenditures | $ | 25,234 | 1,476 | 941 | 2,502 | 1,325 | 6,386 | 2,109 | — | 39,973 | |||||||||||||||||
Depreciation and amortization | $ | 22,264 | 1,113 | 869 | 4,111 | 1,649 | 3,402 | 1,445 | — | 34,853 | |||||||||||||||||
Equity | $ | 1,145,293 | 41,542 | 37,765 | 293,383 | 87,926 | 129,989 | 150,395 | (32,360 | ) | 1,853,933 |
The Company’s consolidated financial results in the first quarter 2020 were significantly impacted by the effects of the Novel Coronavirus (COVID-19) pandemic and are a non-GAAP measure calculated as revenues less directly related operating expenses attributableexpected to be further impacted in the remainder of 2020. In the first quarter of 2020, North Asia and United States experienced the most significant declines in results due to the Company's principal services. The Company's management believes that net revenues aredisruptions of trade to and from China, which impacted overall freight movement around the globe. Factories in China experienced extended closures and many airlines cancelled flights to and from China. Additionally, ocean carriers have reduced their capacity by anchoring vessels and skipping ports due to the decline in demand. As a better measure thanresult, starting in January certain of the Company’s central China offices experienced temporary closures and limited operations and shipments were rerouted or delayed by customers and service providers taking their own precautionary measures. Also, available airfreight capacity was reduced affecting the ability to efficiently route customers’ freight. In the first quarter 2020 and 2019, the People's Republic of China, including Hong Kong, represented 23% and 27%, respectively, of the Company’s total revenues when evaluating the Company's operating segment performance since total revenues earned as a freight consolidator include the carriers' charges for carrying the shipment, whereas revenues earned in other capacities include primarily the commissions and fees earned by the Company. Net revenue is one25% and 29%, respectively, of the Company's primary operational and financial measures and demonstrates the Company's ability to concentrate and leverage purchasing power through effective consolidation of shipments from customers utilizing a variety of transportation carriers and optimal routings.
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Total revenues | $ | 1,802,166 | $ | 1,562,394 | $ | 5,019,577 | $ | 4,456,030 | |||||||
Expenses: | |||||||||||||||
Airfreight services | 547,595 | 444,359 | 1,490,417 | 1,236,555 | |||||||||||
Ocean freight and ocean services | 411,061 | 359,991 | 1,163,051 | 1,006,710 | |||||||||||
Customs brokerage and other services | 244,368 | 212,785 | 675,729 | 597,320 | |||||||||||
Net revenues | $ | 599,142 | $ | 545,259 | $ | 1,690,380 | $ | 1,615,445 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the sections entitled “Overview,”"Overview," "Novel Coronavirus (COVID-19)," "Expeditors' Culture and Strategy," "International Trade and Competition," "Seasonality," “Critical"Critical Accounting Estimates,” "Recent Accounting Pronouncements," “Results"Results of Operations,” “Currency" "Income tax expense," "Currency and Other Risk Factors”Factors" and “Liquidity"Liquidity and Capital Resources”Resources" contain forward-looking statements. Words such as "will likely result," "expects", "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, the anticipated impact and duration of COVID-19, and other characterizations of future events or circumstances are forward-looking statements. These statements 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. AttentionIn addition to risk factors identified in Part II, Item 1A, Risk Factors of this report, attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 23, 2017.
Overview
Expeditors International of Washington, Inc. (herein referred to as "Expeditors," the "Company," "we," "us," "our") isprovides a full suite of global logistics company.services. Our services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other logistics solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.
We derive our revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by our customer. Each performance obligation is comprised of one or more of the Company's services. We typically satisfy our performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. Our three principal sources:services are the revenue categories presented in our financial statements: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. These are the revenue categories presented in our financial statements.
We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and then reselling those services to our customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses. By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
In most cases, we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and import services such as arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices. We also provide other value added services at destination, such as warehousing and distribution, time-definitive transportation services and consulting.
In these transactions, we evaluate whether it is appropriate to record the gross or net amount as revenue. Generally, revenue is recorded on a gross basis when we are primarily responsible for fulfilling the primary obligor, are obligatedpromise to compensate direct carriers forprovide the services, performed regardlesswhen we assume risk of whether customers accept the service, have latitude in establishing price,loss, when we have discretion in selectingsetting the prices for the services to the customers, and we have the ability to direct carrier, have credit risk or have several but not allthe use of these indicators. Revenuethe services provided by the third party. When revenue is generally recorded on a net basis, where we are not primarily obligated and do not have latitude in establishing prices. Suchthe amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof.
We manage our company along five geographic areas of responsibility: Americas; North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each area is divided into sub-regions that are composed of operating units with individual profit and loss responsibility. Our business involves shipments between operating units and typically touches more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and
Our operating units share revenue using the same arms-length pricing methodologies that we use when our offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. Our strategy closely links compensation with operating unit profitability, which includes shared revenues and allocated costs. Therefore, individual success is closely linked to cooperation with other operating units within our network.
Novel Coronavirus (COVID-19)
The COVID-19 pandemic has significantly affected our revenue recognition policy (see Note 1. E.
• | Governments have designated our operations as essential business in all regions where we operate because of our important role in supply chains operations worldwide. As such, our districts continue to serve our customers while operating within the regulations established in those countries. |
• | We activated our business continuity plan, first regionally in China in January 2020, expanding to other regions worldwide in February and March 2020. Our business continuity plan includes measures to protect and safeguard the health of our employees and service providers, such as sanitization of our facilities, providing protective equipment to employees, restricting travel and requiring all employees to work remotely if they are able to. Our plan includes measures to minimize adverse impacts to our operations and those of our customers’ businesses. We have identified areas of the supply chain process that can be supported remotely and through automation, and those which require physical operations and handling. We continue to monitor the rapidly changing situation and may take additional actions based on recommendations from governments and local and national health authorities. |
• | Travel restrictions, government mandated lockdowns and additional precautionary measures resulted in business and supply chain disruption, and limited operations first in China, and then worldwide with a sharp decrease in international trade. We have also seen a shift in the goods we handle with increased shipments of medical equipment and supplies to combat COVID-19 and technology products to support social distancing and working remotely. In contrast, we have seen a significant decline in shipments from our customers in retail, aerospace, automotive, oil and energy sectors. Overall, this has negatively impacted our results of operations in the first quarter of 2020 as our freight volumes have decreased. |
• | These disruptions are threatening the financial stability of our service providers and our ability to efficiently route customer freight. Reduced passenger flight schedules and cancellations have significantly impacted available belly space, limiting our ability to utilize space under our existing capacity agreements with carriers and requiring us to buy space in a tight airfreight market and utilize chartered planes. Ocean carriers have continued to reduce their capacity by anchoring vessels and skipping ports due to the decline in demand. These freight market conditions create pricing volatility that further challenges Expeditors’ ability to maintain historical unitary profitability. |
• | Many of our customers are experiencing disruptions in their revenue and cash flow, prompting these customers to attempt to renegotiate contractual terms and increasing our accounts receivable collection risk. We have continued to apply our established credit control procedures and collection monitoring that have historically been effective in limiting credit losses. These conditions could result in the loss of business and additional bad debt allowances in the future if our customers’ ability to pay further deteriorates. |
These disruptive conditions continued in April 2020, and we expect them to continue through the remainder of the year. A prolonged slowdown in the global economy and trade would further negatively affect our annual report on Form 10-K filed on February 23, 2017
Expeditors' Culture and Strategy
From the inception of our company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. We believe that our greatest challenge is now and always has been perpetuating a consistent global corporate culture, thatwhich demands:
• | Total dedication to providing superior customer service; |
• | Compliance with our policies and procedures and government regulations; |
• | Aggressive marketing of all of our service offerings; |
• | A positive, safe work environment that is inclusive and free from discrimination and harassment; |
• | Ongoing development of key employees and management personnel; |
• | Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement; |
• | Individual commitment to the identification and mentoring of successors for every key position so that when change occurs, a qualified and well-trained internal candidate is ready to step forward; and |
• | Continuous identification, design and implementation of system solutions and differentiated service offerings, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and effective. |
We reinforce these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since we became a publicly traded company. There is no limit to how much a key manager can be compensated for success. We believe in a “real world” environment where the employees of our operating units are held accountable for the profit implications of their decisions. If these decisions result in operating losses, management generally must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, our policies, processes and relevant training focus on such things as cargo management, risk mitigation, service provider management, compliance, accounts receivable collection, cash flow and credit soundness in an attempt to help managers avoid the kinds of errors that might end a career.
We believe that failure to perpetuate our unique culture onis a self-sustained basis throughout our organization may pose a greater threatcritical component to our continued success than any external force, which likely would be largely beyond our control.success. We strongly believe that it is nearly impossible to predict events that, individually or in the aggregate, could have a positive or a negative impact on our future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment in whichwhere well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help us adapt and thrive as major trends emerge.
Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers that lead to drive profitable business growth. Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors.
Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of the effect of the COVID-19 pandemic, ongoing concern over terrorism, security, changes in governmental regulation and oversight of international trade. A good reputation helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international
Our business is also highly dependent on the financial stability and operational capabilities of the carriers we utilize. Many air and ocean carriersCarriers are highly leveraged with debt. Moreover, certain oceandebt and incurring operating losses. As a result, carriers are facing significant liquidity challenges.challenges exacerbated by COVID-19 pandemic and are seeking relief under various government support programs. This situationenvironment requires that we be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, spacecapacity allotments available from carriers, governmental regulations, and/or trade accords could adversely affect our business in unpredictable ways.
International Trade and Competition
We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. The global economy is experiencing a rapid slowdown as a result of the COVID-19 pandemic and related precautionary measures including lockdown government mandates worldwide, shutdown of manufacturing and operations for non-essential businesses and travel restrictions. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and 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 and accords. Currently, the United States and China have significantly increased tariffs on certain imports and are engaged in trade negotiations and changes to export regulations and tariffs for goods deemed essential to combating COVID-19. The United Kingdom and the European Union are negotiating the terms of the United Kingdom's exit from the European Union. We cannot predict which, if any,the outcome of these proposals may be adoptedor negotiations, or the effects the adoption of any such proposalthey will have on our business. As governments implement higher tariffs on imports, manufacturers may accelerate, to the extent possible, shipments to avoid higher tariffs and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and oil prices.
The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over airfreight capacity availability, volatile fuel costs,airfreight pricing, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.
There is uncertainty as to how new regulatory requirements and volatility in oil prices will continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our buy rates and sell rates, we would expect our revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that future fuel prices increase and we are unable to pass through the increases to our customers, this could adversely affect our operating income.
The global economic environment and trade growthenvironments remain uncertain.uncertain, including the impacts of COVID-19. We cannot predict whatthe impact this may haveof future changes in global trade on our operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Additionally, we cannot predict the direct or indirect impact that further changes in consumer purchasing behavior, such as online shopping, could have on our business.
Seasonality
Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance this seasonal trend will occur in the future.future or to what degree it will be impacted in 2020 by COVID-19. This pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, pandemics, governmental policies and inter-governmental disputes and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of our international network and service offerings.
A significant portion of our revenues is derived from customers in the retail and consumer technology 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 our revenues are, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, changes in trade tariffs,
product launches 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, we 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 or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments. We base our estimates on historical experience and on assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2016,2019, filed on February 23, 2017.21, 2020. There have been no material changes to the critical accounting estimates previously disclosed in that report.
Results of Operations
The following table shows the revenues, andthe directly related cost of transportation and other expenses for our principal services and total net revenues (a non-GAAP measure calculated as revenues less directly related operating expenses attributable to our principal services) and ouroverhead expenses for the three months ended March 31, 2020 and nine-month periods ended
The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto in this quarterly report.
|
| Three months ended March 31, | ||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| Percentage change | ||
Airfreight services: |
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 709,039 |
|
| $ | 714,901 |
|
| (1)% |
Expenses |
|
| 520,169 |
|
|
| 509,210 |
|
| 2 |
Ocean freight services and ocean services: |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
| 493,427 |
|
|
| 568,641 |
|
| (13) |
Expenses |
|
| 366,483 |
|
|
| 420,331 |
|
| (13) |
Customs brokerage and other services: |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
| 699,398 |
|
|
| 736,509 |
|
| (5) |
Expenses |
|
| 400,076 |
|
|
| 436,396 |
|
| (8) |
Overhead expenses: |
|
|
|
|
|
|
|
|
|
|
Salaries and related costs |
|
| 342,040 |
|
|
| 356,910 |
|
| (4) |
Other |
|
| 114,041 |
|
|
| 109,603 |
|
| 4 |
Total overhead expenses |
|
| 456,081 |
|
|
| 466,513 |
|
| (2) |
Operating income |
|
| 159,055 |
|
|
| 187,601 |
|
| (15) |
Other income, net |
|
| 8,191 |
|
|
| 7,771 |
|
| 5 |
Earnings before income taxes |
|
| 167,246 |
|
|
| 195,372 |
|
| (14) |
Income tax expense |
|
| 44,464 |
|
|
| 55,261 |
|
| (20) |
Net earnings |
|
| 122,782 |
|
|
| 140,111 |
|
| (12) |
Less net earnings attributable to the noncontrolling interest |
|
| 438 |
|
|
| 412 |
|
| 6 |
Net earnings attributable to shareholders |
| $ | 122,344 |
|
| $ | 139,699 |
|
| (12)% |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Amount | Percent of net revenues | Amount | Percent of net revenues | Amount | Percent of net revenues | Amount | Percent of net revenues | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Airfreight services: | ||||||||||||||||||||||||||||
Revenues | $ | 735,164 | $ | 621,566 | $ | 2,022,577 | $ | 1,764,512 | ||||||||||||||||||||
Expenses | 547,595 | 444,359 | 1,490,417 | 1,236,555 | ||||||||||||||||||||||||
Net revenues | 187,569 | 31 | % | 177,207 | 32 | % | 532,160 | 31 | % | 527,957 | 33 | % | ||||||||||||||||
Ocean freight services and ocean services: | ||||||||||||||||||||||||||||
Revenues | 563,386 | 495,460 | 1,585,730 | 1,414,344 | ||||||||||||||||||||||||
Expenses | 411,061 | 359,991 | 1,163,051 | 1,006,710 | ||||||||||||||||||||||||
Net revenues | 152,325 | 26 | 135,469 | 25 | 422,679 | 25 | 407,634 | 25 | ||||||||||||||||||||
Customs brokerage and other services: | ||||||||||||||||||||||||||||
Revenues | 503,616 | 445,368 | 1,411,270 | 1,277,174 | ||||||||||||||||||||||||
Expenses | 244,368 | 212,785 | 675,729 | 597,320 | ||||||||||||||||||||||||
Net revenues | 259,248 | 43 | 232,583 | 43 | 735,541 | 44 | 679,854 | 42 | ||||||||||||||||||||
Total net revenues | 599,142 | 100 | 545,259 | 100 | 1,690,380 | 100 | 1,615,445 | 100 | ||||||||||||||||||||
Overhead expenses: | ||||||||||||||||||||||||||||
Salaries and related costs | 319,050 | 53 | 291,204 | 53 | 930,159 | 55 | 868,091 | 54 | ||||||||||||||||||||
Other | 93,197 | 16 | 86,792 | 16 | 258,972 | 15 | 249,401 | 15 | ||||||||||||||||||||
Total overhead expenses | 412,247 | 69 | 377,996 | 69 | 1,189,131 | 70 | 1,117,492 | 69 | ||||||||||||||||||||
Operating income | 186,895 | 31 | 167,263 | 31 | 501,249 | 30 | 497,953 | 31 | ||||||||||||||||||||
Other income (expense), net | 3,540 | 1 | 3,849 | — | 12,149 | 1 | 12,000 | 1 | ||||||||||||||||||||
Earnings before income taxes | 190,435 | 32 | 171,112 | 31 | 513,398 | 31 | 509,953 | 32 | ||||||||||||||||||||
Income tax expense | 69,829 | 12 | 63,163 | 11 | 190,470 | 12 | 188,518 | 12 | ||||||||||||||||||||
Net earnings | 120,606 | 20 | 107,949 | 20 | 322,928 | 19 | 321,435 | 20 | ||||||||||||||||||||
Less net earnings attributable to the noncontrolling interest | 343 | — | 368 | — | 550 | — | 1,218 | — | ||||||||||||||||||||
Net earnings attributable to shareholders | $ | 120,263 | 20 | % | $ | 107,581 | 20 | % | $ | 322,378 | 19 | % | $ | 320,217 | 20 | % |
Airfreight services:
Airfreight services revenues increased 18% and 15%, respectively,
Airfreight services net revenues expenses increased 1% for2% during the nine-month periodthree months ended
North Asia, South Asia and North America had decreases in tonnage of 9%, 11% and Europe net revenues increased by 4% and 10%, respectively, whilefor the three months ended March 31, 2020. The largest declines in tonnage were exports out of North Asia. After a significant decrease in January and February 2020, tonnage increased 13% and 11%, respectively.in March 2020 in North Asia net revenues remained flat, despitewhile in other regions tonnage growth of 11%, due principally to higher average buy rates. South Asia net revenues decreased 18% despitedeclined. The decrease in airfreight tonnage growth of 10%was primarily due to the COVID-19 pandemic resulting in extended closures following Chinese New Year. As a result of COVID-19, the governments around the world have implemented travel restrictions and suspended non-essential services. Additionally, factories have experienced extended closures. This has caused supply chain disruptions to our domestic and international customers, which correspondingly decreased our airfreight volumes.
As a result of travel restrictions and lower average sell rates and higher average buy rates.
Ocean freight and ocean services:
Ocean freight consolidation, direct ocean forwarding and order management are the three basic services that constitute and are collectively referred to as ocean freight and ocean services. Ocean freight and ocean services revenues increased 14% and 12%, respectively, expenses decreased 13% for the three and nine-month periodsmonths ended September 30, 2017,March 31, 2020 as compared with the same periodsperiod in 2016, primarily due to 4% and 5% increases in container volume and higher average sell rates to customers. Ocean freight and ocean services expenses increased 14% and 16%, respectively, for the three and nine-month periods ended September 30, 2017, due to increased volumes and higher average buy rates as overall market demand increased and carriers managed available capacity.
Ocean freight consolidation net revenues increased 18% inand expenses decreased 20% and 19%, respectively, for the third quarter of
Direct ocean freight forwarding revenues decreased 2%and expenses increased 9% and 18%, respectively, for the nine-month periodthree months ended September 30, 2017,March 31, 2020 as compared with the same period in 2016. Decreases in net revenue per container in the first half of 2017 were largely offset by 5% volume growth and the increases in net revenue per container in the third quarter. Direct ocean freight forwarding net revenues decreased 3% in the third quarter of 2017,2019, primarily due to increased costs, principallyhigher volumes and changes in customer mix. This was partially offset by a decrease in volumes in North Asia. Order management revenues and expenses decreased 8% and 11%, respectively, for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to lower volumes in North Asia, as well as a decrease in sell and buy rates. This was partially offset by higher volumes in South Asia.
North America. DirectAsia ocean forwarding netfreight and ocean services revenues increased 3%and expenses decreased 31% and 32%, respectively for the nine-month periodthree months ended September 30, 2017,March 31, 2020 as compared with the same period in 2016,2019, primarily due to higher volumes. Order management net revenues increased 19%decrease in container volume and 15%, respectively, forlower sell and buy rates. The decline in containers shipped from North Asia followed decreases in trade volumes starting in 2019 and were accelerated by the three and nine-month periods ended September 30, 2017, mostly resulting from higher volumes with new and existing customers primarilyCOVID-19 pandemic. This was partially offset by an increase in North Asia.
Ocean carriers continue to higher average sell rates. Europe net revenues decreased 3% in the first nine months of 2017 as the increases in average buy rates during the nine-month period of 2017 were partially offsetreduce their capacity by the improvement in average sell rates in the third quarter. South Asia net revenues increased 12%anchoring vessels and remained flat, respectively, for the three and nine-month periods ended September 30, 2017, due primarily to higher order management volumes and higher net revenue per container during the third quarter of 2017. North Asia net revenues increased 19% and 11% in the three and nine-month periods ended September 30, 2017, respectively,skipping ports due to increasesthe decline in order management and direct ocean forwarding, resulting from higher volumes, and a third quarter increase in ocean consolidation net revenues, driven by higher volumes and net revenue per container.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 13%decreased 5% and 10%, respectively,expenses decreased 8% for the three and nine-month periodsmonths ended September 30, 2017,March 31, 2020 as compared with the same periodsperiod in 2016,2019, primarily as a result of higher volumesdue to decrease in both customs brokerage and road freight services. Customs brokerage and other services expenses increased 15% and 13%, respectively, for the three and nine-month periods ended September 30, 2017, as compared with the same periods in 2016, principally as a result of higher volumes.
North America net revenues increased 12%decreased 7% and directly related expenses decreased 10%, respectively, for the three and nine-month periodsmonths ended September 30, 2017,March 31, 2020 as compared with the same periods for 2016, 2019, primarily as a result of higherlower volumes in customs brokerage and road freight services. Europe net revenues increased 12% and 9%, respectively, in the third quarter and first nine months of 2017 primarily due to higher customs brokerage and road freight services net revenues.
Overhead expenses:
Salaries and related costs increased 10% and 7%, respectively, decreased by 4% for the three and nine-month periodsmonths ended September 30, 2017, March 31, 2020as compared with the same periodsperiod in 2016,2019, principally due principally to an increasereductions in the number of employees, primarily in North America, Europe,commissions and South Asia, higher base salariesbonuses earned from lower revenues and benefits, higher share-based compensation expense and increased bonuses from higher operating income. The number of employees increased primarily to support the volume growth in our business operations and our continuing investments in information systems.
Historically, the relatively consistent relationship between salaries and net revenuesoperating income has been the result of a compensation philosophy that has been maintained since the inception of our 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 incentive compensation occur in proportion to changes in our operating income, creating a directan alignment between branch and corporate performance and shareholder interests. Bonuses to field and executive management for the nine-month period ended September 30, 2017 were down 1% while operating income increased 1%. In 2017, we reduced senior executive management bonus pool allocations by 6% to help fund expansion of our strategic growth initiatives.
Our management compensation programs have always been incentive-based and performance driven. Salaries and related costs as a percentage of revenues was 53% for both of the three-month periods ended September 30, 2017 and 2016 and increased 1%Bonuses to 55%field management for the nine-month periodthree months ended September 30, 2017, asMarch 31, 2020 were down 10% when compared to the same period in
Because our management incentive compensation programs are also cumulative, generally no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must be offset in their entirety by operating profits before management is eligible for a bonus. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. Since the most significant portion of management compensation comes from the incentive bonus programs, we believe that this cumulative feature is a disincentive to excessive risk taking by our managers. Due to the nature of our services, it has a short operating cycle. The outcome of any higher risk transactions, such as overriding established credit limits, would be known in a relatively short time frame. Management believes that when the potential and certain impact on the bonus is fully considered in light of thisthe short operating cycle of our services, the potential for short-term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage excessive and inappropriate risk taking. Management believes that both the stability and the long-term growth in revenues, net revenuesoperating income and net earnings are a result of the incentives inherent in our compensation programs.
Other overhead expenses increased 7% and 4%, respectively,4% for the three and nine-month periodsmonths ended September 30, 2017,March 31, 2020, as compared with the same periodsperiod in 2016. We continue2019. The increase in expenses was due to investan increase in additionalbad debt expense, information technology consulting expense, claims and facilities, which resulted in higher rent and facilities expenses, technology-related fees and consulting costs. These increases werelegal expense, partially offset by lower claims, the recovery of certain legal and related costs totaling $8 million for the year-to-date period ended September 30, 2017 compared to $5 milliona decrease in the same period in 2016 and the favorable resolution of an indirect tax contingency of $6 million in the second quarter of 2017.travel expense. We will continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth. Other overhead expenses as a percentage of net revenues for the three and nine-month periods ended September 30, 2017 remained comparable with the same periods in 2016.
Income tax expense:
Our consolidated effective income tax rate was 36.7% and 37.1%, respectively,26.6% for the three and nine-month periodsmonths ended September 30, 2017, and 36.9% and 37.0%March 31, 2020, as compared to 28.3% for the same periodsperiod in 2016. Our effective2019. The effect of higher average tax rate is subjectrates of our international subsidiaries, when compared to variationU.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).
Some elements of the rate canrecorded impacts of the 2017 Tax Act could be moreimpacted by further legislative action as well as additional interpretations and guidance issued by the IRS or less volatile based onTreasury. See Note 3 to the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when pre-tax income is lower.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates dealing with a multitude of currencies other than the U.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the
threeInternational air and ocean freight forwarding and customs brokerage are intensivelyintensely competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry, including new technology-based competitors entering the industry, many of which have significantly more resources than us; however, our primary competition is confined to a relatively small number of companies within this group. Expeditors must compete against both the niche players and larger entities. The industry continues to experience consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local brokers and forwarders remain a competitive force.
The primary competitive factors in the international logistics industry continue to be price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. We emphasize quality customer service and believe that our prices are competitive with those of others in the industry. Customers regularly solicit bids from competitors in order to improve service, pricing and contractual terms such as seeking longer payment terms, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of expanded contractual terms could result in reduced revenues, reduced margins,operating income, higher operating costs, higher claims or loss of market share, any of which would damage our results of operations and financial condition.
Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. We believe that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing and maintaining 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.
Liquidity and Capital Resources
Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the
threeAs a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.
Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate 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 periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.
Cash used in investing activities for the three and nine months ended
Cash used in financing activities during the
threeWe follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.
We cannot predict what impact growing uncertainties in the global economy, political uncertainty nor the COVID-19 pandemic may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior.
We maintain international unsecured bank lines of credit. At
Payments due by period | ||||||||||||||||
In thousands | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | After 5 years | |||||||||||
Contractual Obligations: | ||||||||||||||||
Operating leases | $ | 252,276 | 77,266 | 92,184 | 49,135 | 33,691 | ||||||||||
Unconditional purchase obligations | 62,481 | 62,481 | — | — | — | |||||||||||
Construction, equipment and technology purchase obligations | 33,445 | 26,996 | 6,449 | — | — | |||||||||||
Total contractual cash obligations | $ | 348,202 | 166,743 | 98,633 | 49,135 | 33,691 |
Our foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and needsfunds necessary to finance local capital expenditures. In some cases, our ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of our exposure to these risks is presented below:
Foreign Exchange Risk
We conduct business in many different countries and currencies. Our business often results in billings issued in a country and currency that differs from that where the expenses related to the service are incurred. In the ordinary course of business, we create numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to our earnings. The principal foreign exchange risks to which Expeditors is exposed are ininclude Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.
Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on our earnings as a result of hypothetical changes in the value of the U.S. dollar, our functional currency, relative to the other currencies in which we transact business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the ninethree months ended September 30, 2017,March 31, 2020, would have had the effect of raising operating income by approximately $35 million.$12 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $29$10 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.
We currently do not use derivative financial instruments to manage foreign currency risk and only enter into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict our ability to move money freely. Any such hedging activity throughout the
threeInterest Rate Risk
At
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness.
Our management has confidence in our internal controls and procedures. Nevertheless, our management, including Expeditors’ Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all of our control issues and instances of fraud, if any, have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Expeditors is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on our operations, cash flows or financial position. As of September 30, 2017,March 31, 2020, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on February 21, 2020. There have been no material changes in Expeditors' risk factors from those disclosed under Item 1A Risk Factors in our annual report on Form 10-K filed on February 23, 2017 other than21, 2020, except for the following:
Novel Coronavirus (COVID-19) | ||
COVID-19 significantly impacted worldwide economic conditions and | ||
Service Providers | As a non-asset based provider of global Additionally, Expeditors' carriers are subject to increasingly stringent laws, which could, directly or | |
Economic Conditions | The global economy is experiencing a rapid slowdown as a result of the COVID-19 pandemic, which has affected trade and could further affect demand for our services. Continued unfavorable economic conditions will result in lower freight volumes and adversely affects Expeditors' revenues, operating results and cash flows. These conditions should they continue for extended period of time would further adversely affect our customers and service providers. Should our customers’ ability to pay deteriorate, additional bad debts may be incurred. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
| Total number of shares purchased |
|
| Average price paid per share |
|
| Total number of shares purchased as part of publicly announced plans |
|
| Maximum number of shares that may yet be purchased under the plans |
| ||||
January 1-31, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 9,748,977 |
|
February 1-29, 2020 |
|
| 2,000,000 |
|
|
| 74.09 |
|
|
| 2,000,000 |
|
|
| 8,283,602 |
|
March 1-31, 2020 |
|
| 2,000,000 |
|
|
| 67.53 |
|
|
| 2,000,000 |
|
|
| 6,192,763 |
|
Total |
|
| 4,000,000 |
|
| $ | 70.81 |
|
|
| 4,000,000 |
|
|
| 6,192,763 |
|
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | |||||||||
July 1-31, 2017 | — | $ | — | — | 14,683,556 | ||||||||
August 1-31, 2017 | 1,552,335 | 55.34 | 1,552,335 | 13,101,686 | |||||||||
September 1-30, 2017 | 2,057,379 | 56.80 | 2,057,379 | 10,982,748 | |||||||||
Total | 3,609,714 | $ | 56.18 | 3,609,714 | 10,982,748 |
In November 1993,2001, Expeditors' Board of Directors authorized a Non-DiscretionaryDiscretionary Stock Repurchase Plan for the purpose of repurchasing our common stock in the open market with the proceeds received from the exercise of stock options. On February 9, 2009, the Plan was amended to increase the authorization to repurchase up to 40 million shares of our common stock. This authorization has no expiration date. This plan was initially disclosed in our annual report on Form 10-K filed on March 31, 1995. In the
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a) | |
Not |
(b) | |
Not |
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
Exhibit Number | Description | |
31.1 | ||
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, has been formatted in Inline XBRL. |
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 7, | /s/ JEFFREY S. MUSSER | |
Jeffrey S. Musser, President, Chief Executive Officer and Director | ||
May 7, | /s/ BRADLEY S. POWELL | |
Bradley S. Powell, Senior Vice President and Chief Financial Officer |
26