UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2007

 

OR

 

o

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

(IRS Employer Identification Number)

incorporation or organization)

 

 

1015 Third Avenue, 12th Floor, Seattle, Washington

98104

(Address of principal executive offices)

(Zip Code)

 

(206) 674-3400

(Registrant’s telephone number, including area code)

 

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x        No  o

 

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one):

 

Large accelerated filer  x                           Accelerated filer  o                             Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o No  x

 

                At November 6, 2007, the number of shares outstanding of the issuer’s Common Stock was 213,109,823.

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

 

September 30,
2007

 

December 31,
2006

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

557,182

 

$

511,358

 

Short-term investments

 

441

 

578

 

Accounts receivable, less allowance for doubtful accounts of $14,338 at September 30, 2007 and $13,454 at December 31, 2006

 

984,092

 

811,486

 

Deferred Federal and state income taxes

 

7,760

 

7,490

 

Other current assets

 

21,854

 

10,925

 

 

 

 

 

 

 

Total current assets

 

1,571,329

 

1,341,837

 

 

 

 

 

 

 

Property and equipment, less accumulated depreciation and amortization of $207,100 at September 30, 2007 and $178,695 at December 31, 2006

 

497,768

 

449,247

 

Goodwill, less accumulated amortization of $765 at September 30, 2007 and December 31, 2006

 

7,927

 

7,927

 

Other intangibles, net

 

8,141

 

7,584

 

Other assets, net

 

20,044

 

15,743

 

 

 

 

 

 

 

 

 

$

2,105,209

 

$

1,822,338

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

660,460

 

544,028

 

Accrued expenses, primarily salaries and related costs

 

146,821

 

122,081

 

Federal, state and foreign income taxes

 

33,739

 

43,036

 

 

 

 

 

 

 

Total current liabilities

 

841,020

 

709,145

 

 

 

 

 

 

 

Deferred Federal and state income taxes

 

60,160

 

26,743

 

 

 

 

 

 

 

Minority interest

 

16,696

 

16,515

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share

 

 

 

 

 

Authorized 2,000,000 shares; none issued

 

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share

 

 

 

 

 

Authorized 320,000,000 shares; issued and outstanding 212,995,326 shares at September 30, 2007, and 213,080,466 shares at December 31, 2006

 

2,130

 

2,131

 

Additional paid-in capital

 

53,402

 

119,582

 

Retained earnings

 

1,103,253

 

934,058

 

Accumulated other comprehensive income

 

28,548

 

14,164

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,187,333

 

1,069,935

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

$

2,105,209

 

$

1,822,338

 

 

See accompanying notes to condensed consolidated financial statements.

 

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

 

2



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

 

Condensed Consolidated Statements of Earnings

(In thousands, except share data)

 

(Unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

Airfreight

 

$

629,071

 

$

575,285

 

$

1,710,747

 

$

1,611,556

 

Ocean freight and ocean services

 

520,312

 

433,212

 

1,345,945

 

1,158,151

 

Customs brokerage and other services

 

261,642

 

223,163

 

731,897

 

619,931

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

1,411,025

 

1,231,660

 

3,788,589

 

3,389,638

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Airfreight consolidation

 

490,880

 

453,246

 

1,317,970

 

1,263,803

 

Ocean freight consolidation

 

424,383

 

343,909

 

1,088,191

 

915,568

 

Customs brokerage and other services

 

110,952

 

93,230

 

308,908

 

255,163

 

Salaries and related costs

 

205,206

 

183,995

 

585,360

 

517,422

 

Rent and occupancy costs

 

17,751

 

15,814

 

50,162

 

46,971

 

Depreciation and amortization

 

9,690

 

9,341

 

29,540

 

26,020

 

Selling and promotion

 

8,890

 

8,484

 

27,567

 

25,398

 

Other

 

23,752

 

22,384

 

65,107

 

63,832

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

1,291,504

 

1,130,403

 

3,472,805

 

3,114,177

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

119,521

 

101,257

 

315,784

 

275,461

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(22

)

(4

)

82

 

(41

)

Interest income

 

5,586

 

4,236

 

16,336

 

12,900

 

Other, net

 

1,038

 

743

 

3,468

 

2,875

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

6,602

 

4,975

 

19,886

 

15,734

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

126,123

 

106,232

 

335,670

 

291,195

 

Income tax expense

 

51,750

 

47,133

 

136,225

 

119,688

 

 

 

 

 

 

 

 

 

 

 

Net earnings before minority interest

 

74,373

 

59,099

 

199,445

 

171,507

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

(53

)

4,704

 

(348

)

977

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

74,320

 

$

63,803

 

$

199,097

 

$

172,484

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.34

 

$

.29

 

$

.90

 

$

.78

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.35

 

$

.30

 

$

.93

 

$

.81

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

 

$

 

$

.14

 

$

.11

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

221,649,693

 

221,417,053

 

221,993,433

 

220,539,975

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

213,485,465

 

213,524,680

 

213,388,675

 

213,557,892

 

 

See accompanying notes to condensed consolidated financial statements.

 

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

 

3



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

(Unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

74,320

 

$

63,803

 

$

199,097

 

$

172,484

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Provision for losses on accounts receivable

 

701

 

259

 

346

 

752

 

Deferred income tax expense

 

13,216

 

3,378

 

25,456

 

15,967

 

Excess tax benefits from stock plans

 

(4,149

)

(1,194

)

(25,772

)

(22,202

)

Stock compensation expense

 

11,206

 

11,813

 

34,709

 

29,629

 

Depreciation and amortization

 

9,690

 

9,341

 

29,540

 

26,020

 

Gain on sale of assets

 

(802

)

 

(1,004

)

(214

)

Minority interest in earnings of consolidated entities

 

53

 

(4,704

)

348

 

(977

)

Other

 

369

 

1,640

 

1,057

 

3,500

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

(157,406

)

(66,758

)

(170,667

)

(95,757

)

Increase in other current assets

 

(1,821

)

(2,150

)

(2,325

)

(3,922

)

Increase in accounts payable and other current liabilities

 

79,108

 

44,290

 

141,553

 

113,306

 

Increase in income tax payables, net

 

12,029

 

24,960

 

7,187

 

39,803

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

36,514

 

84,678

 

239,525

 

278,389

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

(Increase) decrease in short-term investments

 

26

 

30

 

188

 

(253

)

Purchase of property and equipment

 

(39,650

)

(9,668

)

(70,833

)

(129,740

)

Proceeds from sale of property and equipment

 

131

 

52

 

414

 

317

 

Prepayment on long-term land lease

 

(40

)

 

(2,816

)

(1,761

)

Other

 

(786

)

(1,999

)

(2,386

)

(1,513

)

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(40,319

)

(11,585

)

(75,433

)

(132,950

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Repayments of short-term debt, net

 

(203

)

 

 

 

Net distributions to minority interests

 

 

(4,053

)

(316

)

(4,053

)

Proceeds from issuance of common stock

 

31,588

 

19,353

 

59,456

 

45,373

 

Repurchases of common stock

 

(57,122

)

(44,139

)

(186,117

)

(157,767

)

Excess tax benefits from stock plans

 

4,149

 

1,194

 

25,772

 

22,202

 

Dividends paid

 

 

 

(29,902

)

(23,576

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(21,588

)

(27,645

)

(131,107

)

(117,821

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

7,533

 

(613

)

12,839

 

8,017

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(17,860

)

44,835

 

45,824

 

35,635

 

Cash and cash equivalents at beginning of period

 

575,042

 

454,694

 

511,358

 

463,894

 

Cash and cash equivalents at end of period

 

$

557,182

 

$

499,529

 

$

557,182

 

$

499,529

 

 

 

 

 

 

 

 

 

 

 

Interest and taxes paid:

 

 

 

 

 

 

 

 

 

Interest

 

$

25

 

$

22

 

$

163

 

$

54

 

Income taxes

 

24,227

 

17,713

 

98,539

 

60,764

 

 

See accompanying notes to condensed consolidated financial statements.

 

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

 

4



 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

Note 1.  Summary of Significant Accounting Policies

 

                The attached condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 to a fair statement of the results for the interim periods presented.  These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on or about March 1, 2007.

 

                Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

 

Note 2.  Comprehensive Income

 

                Comprehensive income consists of net income and other gains and losses affecting shareholders’ equity that, under generally accepted accounting principles in the United States, are excluded from net income.  For the Company, these consist of foreign currency translation gains and losses and unrealized gains and losses on securities, net of related income tax effects.

 

                The components of total comprehensive income for interim periods are presented in the following table:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands)

 

2007

 

2006

 

2007

 

2006

 

Net earnings

 

$

74,320

 

$

63,803

 

$

199,097

 

$

172,484

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments net of tax of $(4,607) and $18 for the three months ended September 30, 2007 and 2006, and $(7,959) and $(3,714) for the nine months ended September 30, 2007 and 2006.

 

8,555

 

(33

)

14,781

 

6,897

 

Unrealized loss on securities net of tax of $258 and $(14) for the three months ended September 30, 2007 and 2006, and $259 and $38 for the nine months ended September 30, 2007 and 2006.

 

(396

)

20

 

(397

)

(13

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

82,479

 

$

63,790

 

$

213,481

 

$

179,368

 

 

Note 3.  Business Segment Information

 

                Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosure about Segments of an Enterprise and Related Information” establishes standards for the way that public companies report selected information about segments in their financial statements.

 

                The Company is organized functionally in geographic operating segments.  Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management.  The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis.  Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.

 

5



 

                Financial information regarding the Company’s operations by geographic area for the three and nine months ended September 30, 2007 and 2006 are as follows:

 

(in thousands)

 

UNITED STATES

 

OTHER NORTH AMERICA

 

ASIA

 

EUROPE

 

AUSTRAL
ASIA

 

LATIN AMERICA

 

MIDDLE EAST

 

ELIMINATIONS

 

CONSOLIDATED

 

Three months ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

273,476

 

36,209

 

825,183

 

174,668

 

18,049

 

20,155

 

63,285

 

 

1,411,025

 

Transfers between geographic areas

 

29,031

 

2,450

 

4,719

 

9,564

 

1,927

 

2,827

 

3,598

 

(54,116

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

302,507

 

38,659

 

829,902

 

184,232

 

19,976

 

22,982

 

66,883

 

(54,116

)

1,411,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

153,030

 

17,399

 

112,327

 

62,932

 

10,820

 

10,952

 

17,350

 

 

384,810

 

Operating income

 

$

37,465

 

3,971

 

55,772

 

12,965

 

3,236

 

2,044

 

4,068

 

 

119,521

 

Identifiable assets at quarter end

 

$

908,430

 

77,717

 

494,081

 

449,433

 

36,591

 

41,328

 

97,700

 

(71

)

2,105,209

 

Capital expenditures

 

$

4,496

 

304

 

31,058

 

2,095

 

248

 

194

 

1,255

 

 

39,650

 

Depreciation and amortization

 

$

5,385

 

334

 

1,166

 

1,773

 

242

 

384

 

406

 

 

9,690

 

Equity

 

$

1,330,031

 

36,581

 

375,287

 

150,828

 

23,384

 

21,307

 

44,117

 

(794,202

)

1,187,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

242,237

 

30,085

 

709,222

 

160,565

 

14,595

 

17,305

 

57,651

 

 

1,231,660

 

Transfers between geographic areas

 

29,516

 

2,136

 

4,266

 

8,335

 

1,573

 

2,092

 

3,082

 

(51,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

271,753

 

32,221

 

713,488

 

168,900

 

16,168

 

19,397

 

60,733

 

(51,000

)

1,231,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

138,747

 

15,251

 

101,202

 

54,412

 

8,403

 

8,388

 

14,872

 

 

341,275

 

Operating income

 

$

27,313

 

3,718

 

50,380

 

11,998

 

2,311

 

1,546

 

3,991

 

 

101,257

 

Identifiable assets at quarter end

 

$

854,409

 

67,458

 

415,273

 

349,654

 

27,506

 

33,518

 

63,802

 

44

 

1,811,664

 

Capital expenditures

 

$

6,378

 

226

 

799

 

1,430

 

29

 

269

 

537

 

 

9,668

 

Depreciation and amortization

 

$

4,976

 

318

 

1,369

 

1,738

 

197

 

406

 

337

 

 

9,341

 

Equity

 

$

1,165,850

 

27,797

 

307,047

 

102,363

 

16,065

 

13,533

 

27,779

 

(638,822

)

1,021,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

779,998

 

97,063

 

2,137,320

 

493,149

 

49,888

 

58,900

 

172,271

 

 

3,788,589

 

Transfers between geographic areas

 

77,383

 

6,414

 

13,168

 

25,495

 

5,478

 

8,414

 

10,364

 

(146,716

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

857,381

 

103,477

 

2,150,488

 

518,644

 

55,366

 

67,314

 

182,635

 

(146,716

)

3,788,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

431,702

 

47,476

 

305,960

 

177,560

 

29,559

 

31,698

 

49,565

 

 

1,073,520

 

Operating income

 

$

96,986

 

9,642

 

147,244

 

35,066

 

8,298

 

6,450

 

12,098

 

 

315,784

 

Identifiable assets at period end

 

$

908,430

 

77,717

 

494,081

 

449,433

 

36,591

 

41,328

 

97,700

 

(71

)

2,105,209

 

Capital expenditures

 

$

21,045

 

1,316

 

38,419

 

5,621

 

1,139

 

957

 

2,336

 

 

70,833

 

Depreciation and amortization

 

$

15,857

 

997

 

3,763

 

5,903

 

667

 

1,201

 

1,152

 

 

29,540

 

Equity

 

$

1,330,031

 

36,581

 

375,287

 

150,828

 

23,384

 

21,307

 

44,117

 

(794,202

)

1,187,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from unaffiliated customers

 

$

695,679

 

88,720

 

1,894,933

 

457,198

 

40,383

 

50,215

 

162,510

 

 

3,389,638

 

Transfers between geographic areas

 

82,443

 

5,828

 

12,120

 

23,560

 

4,603

 

6,096

 

8,144

 

(142,794

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

778,122

 

94,548

 

1,907,053

 

480,758

 

44,986

 

56,311

 

170,654

 

(142,794

)

3,389,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

394,669

 

45,804

 

270,896

 

156,345

 

23,827

 

23,862

 

39,701

 

 

955,104

 

Operating income

 

$

80,059

 

10,921

 

132,519

 

32,622

 

6,419

 

4,485

 

8,436

 

 

275,461

 

Identifiable assets at period end

 

$

854,409

 

67,458

 

415,273

 

349,654

 

27,506

 

33,518

 

63,802

 

44

 

1,811,664

 

Capital expenditures

 

$

115,142

 

521

 

6,259

 

5,240

 

375

 

1,060

 

1,143

 

 

129,740

 

Depreciation and amortization

 

$

13,461

 

1,014

 

3,769

 

5,003

 

584

 

1,153

 

1,036

 

 

26,020

 

Equity

 

$

1,165,850

 

27,797

 

307,047

 

102,363

 

16,065

 

13,533

 

27,779

 

(638,822

)

1,021,612

 

 

6



 

Note 4.  Basic and Diluted Earnings per Share

 

                The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings per share for the three months and nine months ended September 30, 2007 and 2006:

 

 

 

Three months ended September 30,

 

(Amounts in thousands, except share and per share amounts)

 

Net

Earnings

 

Weighted

Average

Shares

 

Earnings

Per Share

     

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

74,320

 

213,485,465

 

$

.35

 

Effect of dilutive potential common shares

 

 

8,164,228

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

74,320

 

221,649,693

 

$

.34

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

63,803

 

213,524,680

 

$

.30

 

Effect of dilutive potential common shares

 

 

7,892,373

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

63,803

 

221,417,053

 

$

.29

 

 

 

 

 

Nine months ended September 30,

 

(Amounts in thousands, except share and per share amounts)

 

Net
Earnings

 

Weighted
Average
Shares

 

Earnings
Per Share

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

199,097

 

213,388,675

 

$

.93

 

Effect of dilutive potential common shares

 

 

8,604,758

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

199,097

 

221,993,433

 

$

.90

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

172,484

 

213,557,892

 

$

.81

 

Effect of dilutive potential common shares

 

 

6,982,083

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

172,484

 

220,539,975

 

$

.78

 

 

The following shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:

                                               

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Shares

 

4,828,320

 

128,000

 

4,828,320

 

128,000

 

 

Note 5. Stock and Cash Dividends

 

On May 3, 2007, the Board of Directors declared a semi-annual cash dividend of $.14 per share payable on June 15, 2007 to shareholders of record as of June 1, 2007.  The dividend of $30 million was paid on June 15, 2007.

 

On May 3, 2006, the Board of Directors declared a semi-annual cash dividend of $.11 per share payable on June 15, 2006 to shareholders of record as of June 1, 2006.  The dividend of $24 million was paid on June 15, 2006.

 

7



 

                On May 3, 2006, the Board of Directors declared a 2-for-1 stock split, affected in the form of a stock dividend of one share of common stock for every share outstanding.  The stock dividend was distributed on June 23, 2006 to shareholders of record on June 9, 2006.  All share and per share information, except par value per share, has been adjusted for all years to reflect the stock split.

 

Note 6.  Shareholders’ Equity

 

A.  Stock Option Plans and Stock Purchase Plan

The Company provides compensation benefits by granting stock options to its employees and directors and employee stock purchase rights to its employees. In accordance with SFAS No. 123R, “Share-Based Payment” (SFAS 123R) the Company recognizes compensation expense based on the estimated fair value of options awarded under its fixed stock option and employee stock purchase rights plans.  The stock compensation expense is recognized on a straight-line basis over the period stock options become vested.  The Company’s annual grant of option awards generally takes place during the second quarter of each fiscal year. For the nine-month periods ended September 30, 2007 and 2006, 1,931,260 and 3,108,100 options were granted, respectively. The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are generally made in the third quarter of each fiscal year. For the three and nine-month periods ended September 30, 2007 and 2006, 632,548 and 730,814 shares were issued upon exercise of purchase rights, respectively.

                The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants issued during the nine months ended September 30, 2007 and 2006:

 

 

 

For the nine months ended September 30,

 

 

 

2007

 

2006

 

Dividend yield

 

.65

%

.51

%

Volatility

 

31 - 41

%

41 - 43

%

Risk-free interest rates

 

4.69 - 4.95

%

5.03 - 5.11

%

Expected life (years) — stock option plans

 

6.15 - 8.70

 

7.21 - 8.89

 

Expected life (years) — stock purchase rights plans

 

1

 

1

 

Weighted average fair value of stock options granted during the period

 

$

18.49

 

$

22.69

 

Weighted average fair value of stock purchase rights granted during the period

 

$

12.81

 

$

13.27

 

 

                Total stock compensation expense and the total related tax benefit recognized in the three and nine months ended September 30, 2007 and 2006 are as follows:

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Stock compensation expense

 

$

11,206

 

$

11,813

 

$

34,709

 

$

29,629

 

 

 

 

 

 

 

 

 

 

 

Recognized tax benefit

 

$

377

 

$

582

 

$

1,447

 

$

1,421

 

 

Shares issued as a result of stock option exercises and employee stock plan purchases are issued as new shares outstanding by the Company’s transfer agent.

 

Note 7.  Income Taxes

 

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), supplemented by FASB Financial Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” issued May 2, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). The interpretation establishes guidelines for recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The adoption of FIN 48 had no material impact on the Company’s consolidated financial condition or results of operations.

Based on management’s review of the Company’s tax positions the Company had no significant unrecognized tax benefits as of September 30, 2007 and January 1, 2007.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2004. In October 2007, the Internal Revenue Service initiated an audit of the Company’s federal income tax return for the year 2005.  With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years prior to 2000. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. Although the outcome of tax audits is always uncertain, the

 

8



 

Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that may result from these open tax years.

The Company recognizes interest expense related to unrecognized tax benefits or underpayment of income taxes in interest expense and recognizes penalties in operating expenses. The Company has not changed its policy as a result of adopting FIN 48.

Amounts accrued for the payment of interest and penalties were insignificant at the date of adoption of FIN 48.  Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three and nine months ended September 30, 2007 and 2006.

Note 8.  Recent Accounting Pronouncements

 

Effective January 1, 2007, the Company adopted Emerging Issues Task Force Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement,” (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, including but not limited to sales and value-added taxes.  In EITF 06-3 a consensus was reached that entities may adopt a policy of presenting these taxes in the income statement on either a gross or net basis. If these taxes are significant, an entity should disclose its policy of presenting taxes and the amount of taxes if reflected on a gross basis in the income statement. The Company presents revenues net of sales and value-added taxes in its condensed consolidated statements of earnings and did not change its policy as a result of the adoption of EITF 06-3. The adoption of EITF 06-3 had no impact on the Company’s condensed consolidated financial condition or results of operations.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans to adopt the provisions of SFAS 157 beginning in the first quarter of 2008.  The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  Under the provisions of SFAS 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a contract-by-contract basis.  Changes in fair value will be recognized in earnings each reporting period.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is required to and plans to adopt the provisions of SFAS 159 beginning in the first quarter of 2008. The Company does not expect the adoption of SFAS 159 to have a material impact on the Company’s consolidated financial condition or results of operations.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
                REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS

 

                Certain portions of this report on Form 10-Q including the section entitled “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements which must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements.  In addition to risk factors discussed in the Executive Summary in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on or about March 1, 2007.

 

EXECUTIVE SUMMARY

 

                Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight.  The Company acts as a customs broker in its domestic operating offices, and in many of its international offices.  The Company also provides additional services for its customers including value-added distribution, purchase order management, vendor consolidation and other logistics solutions.  The Company does not compete for overnight courier or small parcel business.  The Company does not own or operate aircraft or steamships.

 

International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation.  Periodically, governments consider a variety of changes to current tariffs and trade restrictions.  The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the effects the adoption of any such proposal will have on the Company’s business.  Doing business in foreign locations also subjects the Company to a variety of risks and considerations not

 

9



 

normally encountered by domestic enterprises.  In addition to being influenced by governmental policies concerning international trade, the Company’s business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business.

 

The Company derives its revenues from three principal sources: 1) airfreight, 2) ocean freight and 3) customs brokerage and other services and these are the revenue categories presented in the financial statements.

 

As a non-asset based carrier, the Company does not own transportation assets.  Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers.  The difference between the rate billed to customers (the sell rate), and the rate paid to the carrier (the buy rate) is termed “net revenue” or “yield.”  By consolidating shipments from multiple customers and concentrating its buying power, the Company is 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.

 

Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery.   This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.

 

The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies.  The significance of maintaining acceptable working relationships with governmental agencies and asset-based providers involved in global trade has gained increased importance as a result of ongoing concern over terrorism.  As each carrier labors to comply with governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade to some degree.  A good reputation helps to develop practical working understandings that will effectively meet security requirements while minimizing potential international trade obstacles.  The Company considers its current working relationships with these entities to be satisfactory.  However, changes in space allotments available from carriers, governmental deregulation efforts, “modernization” of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Company’s business in unpredictable ways.

 

Historically, the Company’s operating results have been subject to a seasonal trend when measured on a quarterly basis.  The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest.  This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces.  In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings.  The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.

 

A significant portion of the Company’s revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules.  Therefore, the timing of the Company’s revenues are, to a large degree, impacted by factors out of the Company’s control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays.  Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter.  To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company’s stock.

 

As further discussed under liquidity and capital resources, total capital expenditures in 2007 are expected to exceed $80 million.

 

In terms of the opportunities, challenges and risks that management is focused on in 2007, the Company operates in 61 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy.  From the inception of the 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.  The Company’s greatest challenge is now and always has been perpetuating a consistent global culture which demands:

 

         Total dedication, first and foremost, to providing superior customer service;

 

         Aggressive marketing of all of the Company’s service offerings;

 

         Ongoing development of key employees and management personnel via formal and informal means;

 

10



 

         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 inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and

 

         Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.

 

The Company has reinforced these values with a compensation system that rewards employees for profitably managing the things they can control.  There is no limit to how much a key manager can be compensated for success.   The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions.  At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.

 

Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company, provides a greater threat to the Company’s continued success than any external force, which would be largely beyond our control.  Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also building systems and taking preventative action to reduce exposure to negative events.   The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations.  As a result our focus is on building and maintaining a global culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.

 

Critical Accounting Policies and Estimates

 

Management believes that the nature of the Company’s business is such that there are few, if any, complex challenges in accounting for operations. 

 

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Company’s statement of earnings:

 

      accounts receivable valuation;

 

      the useful lives of long-term assets;

 

      the accrual of costs related to ancillary services the Company provides;

 

      establishment of adequate insurance liabilities for the portion of the freight related exposure which the Company has self-insured; and

 

      accrual of tax expense on an interim basis.

 

Management believes that the methods utilized in all of these areas are non-aggressive in approach and consistent in application.  Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions.  While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.

 

As described in Note 6 in the condensed consolidated financial statements in this quarterly report, the Company accounts for share-based compensation in accordance with SFAS 123R. This accounting standard requires the recognition of compensation expense based on an estimate of the fair value of options granted to employees and directors under the Company’s stock option and employee stock purchase plans.

 

This expense is recorded on a straight-line basis over the option vesting periods.

 

Determining the appropriate option pricing model to use to estimate stock compensation expense requires judgment. Any option pricing model requires assumptions that are subjective and these assumptions also require judgment. Examples include assumptions about long-term

 

11



 

stock price volatility, employee exercise patterns, pre-vesting option forfeitures, post-vesting option terminations, and the future interest rates and dividend yields.  The Company uses the Black-Scholes model for estimating the fair value of stock options.

 

Refer to Note 6 in the condensed consolidated financial statements for the assumptions used for grants issued during the nine months ended September 30, 2007 and 2006.  The assumptions used by the Company for estimating the fair value of options granted under SFAS 123R were developed on a basis consistent with assumptions used for valuing previous grants.

 

Management believes that these assumptions are appropriate, based upon the requirements of SFAS 123R, the guidance included in SAB 107 and the company’s historical and currently expected future experience. Looking to future events, management has been strongly influenced by historical patterns which may not be valid predictors of future developments and any future deviation may be material.

 

The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the corresponding yield curve in effect at the time of grant for U.S. Treasury bonds having the same term as the expected life of the option, i.e. a ten year bond rate is used for valuing an option with a ten year expected life. The expected dividend yield is based on the Company’s historical experience. The forfeiture rate used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns.

 

The use of different assumptions would result in different amounts of stock compensation expense. Keeping all other variables constant, the indicated change in each of the assumptions below increases or decreases the fair value of an option (and the resulting stock compensation expense), as follows:

 

Assumption

 

Change in assumption

 

Impact of fair value of options

 

Expected volatility

 

Higher

 

Higher

 

Expected life of option

 

Higher

 

Higher

 

Risk-free interest rate

 

Higher

 

Higher

 

Expected dividend yield

 

Higher

 

Lower

 

 

 

The fair value of an option is more significantly impacted by changes in the expected volatility and expected life assumptions. The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

 

Results of Operations

 

                The following table shows the consolidated net revenues (revenues less transportation expenses) attributable to the Company’s principal services and the Company’s expenses for the three and nine-month periods ended September 30, 2007 and 2006, expressed as percentages of net revenues.  Management believes that net revenues are a better measure than total revenues of the relative importance of the Company’s principal services since total revenues earned by the Company as a freight consolidator include the carriers’ charges to the Company for carrying the shipment whereas revenues earned by the Company in its other capacities include only the commissions and fees actually earned by the Company.

 

12



 

                The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto which appear elsewhere in this quarterly report.

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

Amount

 

Percent
of net
revenues

 

Amount

 

Percent
of net
revenues

 

Amount

 

Percent
of net
revenues

 


Amount

 

Percent
of net
revenues

 

 

 

(Amounts in thousands)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airfreight

 

$

138,191

 

36

%

$

122,039

 

36

%

$

392,777

 

37

%

$

347,753

 

37

%

Ocean freight and ocean services

 

95,929

 

25

 

89,303

 

26

 

257,754

 

24

 

242,583

 

25

 

Customs brokerage and other services

 

150,690

 

39

 

129,933

 

38

 

422,989

 

39

 

364,768

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

384,810

 

100

 

341,275

 

100

 

1,073,520

 

100

 

955,104

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overhead expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and related costs

 

205,206

 

53

 

183,995

 

54

 

585,360

 

55

 

517,422

 

54

 

Other

 

60,083

 

16

 

56,023

 

16

 

172,376

 

16

 

162,221

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total overhead expenses

 

265,289

 

69

 

240,018

 

70

 

757,736

 

71

 

679,643

 

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

119,521

 

31

 

101,257

 

30

 

315,784

 

29

 

275,461

 

29

 

Other income, net

 

6,602

 

2

 

4,975

 

1

 

19,886

 

2

 

15,734

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

126,123

 

32

 

106,232

 

31

 

335,670

 

31

 

291,195

 

31

 

Income tax expense

 

51,750

 

13

 

47,133

 

14

 

136,225

 

12

 

119,688

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings before minority interest

 

74,373

 

19

 

59,099

 

17

 

199,445

 

19

 

171,507

 

18

 

Minority interest

 

(53

)

 

4,704

 

1

 

(348

)

 

977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

74,320

 

19

%

$

63,803

 

18

%

$

199,097

 

19

%

$

172,484

 

18

%

 

Airfreight net revenues increased 13% for both the three and the nine-month periods ended September 30, 2007, as compared with the same periods for 2006.  The increase in airfreight net revenues for the three-month period was due to a 10% increase in airfreight tonnages handled by the Company during the third quarter of 2007 and a 76 basis point yield expansion (a 4% increase), as compared with the same period of 2006.  The increase in airfreight net revenues for the nine-month period was due to a 7% increase in airfreight tonnage and a 138 basis point yield expansion (a 6% increase), as compared with the same period of 2006.

The Company’s North American airfreight net revenues increased 2% for the three months ended September 30, 2007, as compared to the same period for 2006.  Airfreight net revenues for Asia, for Europe and for the Middle East/Indian subcontinent increased 21%, 12% and 8%, respectively, for the three month comparative periods.  The increase in Asia is primarily the result of yield increases of 130 basis points (a 10% increase) combined with tonnage increases of 13%.  The increase in Europe is primarily the result of yield increases of 140 basis points (a 5% increase) and tonnage increases of 2%. 

For the nine months ended September 30, 2007, as compared with the same period for 2006, the Company’s North American airfreight net revenues increased 6% while airfreight net revenues for Asia, for Europe and for the Middle East/Indian subcontinent increased 21%, 6% and 15%, respectively.  The increase in North America is primarily the result of tonnage increases of 7%.  The increase in Asia is primarily the result of yield increases of 180 basis points (a 13% increase) combined with tonnage increases of 9%. 

 

13



 

Ocean freight volumes, measured in terms of forty-foot container equivalent units (FEUs), increased 14% for the three-month period ended September 30, 2007, as compared with the same period for 2006 while ocean freight and ocean services net revenues increased 7% during the same period.  The difference between these two rates is a result of a year-over-year decrease in ocean freight yields which were partially offset by year-over-year increases in the Company’s fee-based order management and ocean forwarding business.  The primary reason for the decline in ocean freight yields was due to direct carrier cost increases that market conditions would not allow to be passed on in a timely manner.  For the nine-month period ended September 30, 2007, as compared with the same period for 2006, FEU count increased 16% while ocean freight and ocean services net revenues increased 6% during the same period.  The difference in these two rates is attributable to the same dynamics as described above for the three-month period.

The Company’s North American ocean freight net revenues increased approximately 9% and 4% for the three and nine-month periods ended September 30, 2007, respectively, as compared with the same periods for 2006. This was due to an increase in container traffic, primarily from Asia.  Increases in ocean freight net revenues were primarily a result of increases in the order management and ocean forwarding business, which were an outcome of continued marketing efforts and customer service initiatives.  Ocean freight net revenues for Asia and for Europe increased 3% and 10% for both the three and nine-month periods ended September 30, 2007, as compared with the same periods for 2006.  These increases were also a result of continued marketing efforts and customer service initiatives.

Customs brokerage and other services net revenues increased 16% for both the three and the nine-month periods ended September 30, 2007, respectively, as compared with the same periods for 2006 as a result of the Company’s continued emphasis on attracting customers by providing high quality service.  Consolidation within the customs brokerage market has also contributed to this increase as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program.  In addition, increased emphasis on regulatory compliance continues to benefit the Company’s customs brokerage offerings.

Salaries and related costs increased 12% and 13% during the three and nine-month periods ended September 30, 2007, as compared with the same periods in 2006 as a result of (1) the Company’s increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity, and (2) increased compensation levels.

 

The effect of including stock-based compensation expense in salaries and related costs for the three and nine months ended September 30, 2007 and 2006 are as follows:

 

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Salaries and related costs

 

$

205,206

 

$

183,995

 

$

585,360

 

$

517,422

 

 

 

 

 

 

 

 

 

 

 

As a % of net revenue

 

53.3

%

53.9

%

54.5

%

54.2

%

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

$

11,206

 

$

11,813

 

$

34,709

 

$

29,629

 

 

 

 

 

 

 

 

 

 

 

As a % of salaries and related costs

 

5.5

%

6.4

%

5.9

%

5.7

%

 

 

 

 

 

 

 

 

 

 

As a % of net revenue

 

2.9

%

3.5

%

3.2

%

3.1

%

 

Salaries and related costs as a percentage of net revenue for the three and nine-month periods ended September 30, 2007 are comparable to the same periods for 2006. One factor affecting the comparability of stock option expense between the nine months ended September 30, 2007 and the same period of 2006 relates to the treatment of stock options granted under the Directors’ Plan.  Directors’ Plan options granted in June 2005 and prior periods, vested immediately.  Accordingly, the Black-Scholes determined fair-value compensation expense for those options was expensed entirely in June 2005, with none of that expense included in 2006.  The terms of the Directors’ Plan options issued in June 2006 and subsequent periods, was amended to require vesting over a twelve-month period.  Accordingly, the nine-month period ended September 30, 2007 includes five months of compensation expense related to the 2006 grants and four months of compensation expense related to the 2007 grants, compared to only four months of stock compensation expense related to the 2006 grants included in the nine-month period ended September 30, 2006.

Historically, the relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee.  Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits.  Management believes that the growth in revenues, net revenues and net earnings for the three and nine-month periods ended September 30, 2007 are a result of the incentives inherent in the Company’s compensation program.

 

14



 

                Other overhead expenses increased 7% and 6% for the three and nine-month periods ended September 30, 2007, as compared with the same periods in 2006 as communications expense, quality and training expenses, and other costs expanded to accommodate the Company’s growing operations.  Other overhead expenses as a percentage of net revenues remained comparable for the three and nine month periods ended September 30, 2007, respectively, as compared with the same periods in 2006.  This was primarily due to the continued achievement of cost containment objectives.

 

                Other income, net, increased 33% and 26% for the three and nine month periods ended September 30, 2007, as compared with the same periods in 2006.  Due to higher interest rates on higher average cash balances and short-term investments during the three and nine months ended September 30, 2007, as compared with the same periods for 2006, interest income increased $1.4 million and $3.4 million, respectively.

 

                During the third quarter of 2006, the Company increased its ownership percentages in various joint ventures.   As a result of finalizing these additional investments, the third quarter includes a one-time credit of $5.0 million to minority interest.

 

                The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations.  The Company’s consolidated effective income tax rate during the three-month period ended September 30, 2007, was 41.0% as compared to 44.4% for the same period in 2006.  The Company’s consolidated effective income tax rate during the nine-month period ended September 30, 2007 was 40.6% as compared to 41.1% for the same period in 2006.  Income tax expense for the three and nine month periods ended September 30, 2006, includes a $2.3 million true-up of estimated foreign tax credits relating to the American Jobs Creation Act.  In refining the Company’s tax credit computation, it was determined that these tax credits were no longer available.

 

Currency and Other Risk Factors

 

                International air/ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry; however, the Company’s primary competition is confined to a relatively small number of companies within this group. While there is currently a marked trend within the industry toward consolidation into large firms with multinational offices and agency networks, regional and local broker/forwarders remain a competitive force.

 

                Historically, the primary competitive factors in the international logistics industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations.  The Company emphasizes quality service and believes that its prices are competitive with those of others in the industry.  Customers have exhibited a trend towards more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management.  The Company believes that this trend has resulted in customers using fewer service providers with great technological capacity and consistent global coverage.  Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers.

 

                Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers.  Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.  As a result, there is a significant amount of consolidation currently taking place in the industry.  Management expects that this trend toward consolidation will continue for the short- to medium-term.

 

                The nature of the Company’s worldwide operations necessitates the Company dealing with a multitude of currencies other than the U.S. dollar.  This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference.  Some of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company’s ability to hedge foreign currency exposure.  The Company tries to compensate for these exposures by accelerating international currency settlements among its offices or agents.  The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company’s ability to move money freely or the short-term financial outlook is such that hedging is the way to avoid short-term exchange losses.  Any such hedging activity during the three and nine months ended September 30, 2007 and 2006 was insignificant.  For the three and nine months ended September 30, 2007, the Company had foreign exchange loss of approximately $70 and foreign exchange gain of approximately $1,227, respectively, on a net basis.  For the same periods of 2006, respectively, the Company had foreign exchange gains of approximately $15 and $819, respectively, on a net basis.  The Company had no foreign currency derivatives outstanding at September 30, 2007 and 2006.

 

Sources of Growth

 

                During the third quarter of 2007, the Company opened 2 full-service offices () and 2 satellite offices (+), as follows:

 

Europe

 

Near/Middle East

Krakow, Poland+

 

Abu Dhabi, United Arab Emirates

Maastricht, The Netherlands+

 

Amman, Jordan

 

15



 

                Acquisitions - Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company’s competitors and typically involves the purchase of significant “goodwill”, the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired business. As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the “goodwill” recorded in the transaction.

 

                Internal Growth - Management believes that a comparison of “same store” growth is critical in the evaluation of the quality and extent of the Company’s internally generated growth. This “same store” analysis isolates the financial contributions from offices that have been included in the Company’s operating results for at least one full year.   The table below presents “same store” comparisons for the three and nine months ended September 30, 2007 (which is the measure of any increase from the same period of 2006) and for the three and nine months ended September 30, 2006 (which measures growth over 2005).

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net revenue

 

13

%

20

%

12

%

24

%

Operating income

 

18

%

30

%

15

%

47

%

 

Liquidity and Capital Resources

 

                The Company’s principal source of liquidity is cash generated from operating activities.  Net cash provided by operating activities for the three and nine months ended September 30, 2007, was $37 million and $240 million, as compared with $85 million and $278 million for the same periods of 2006.  The $48 million decrease for the three months ended September 30, 2007 is primarily due to an increase in accounts receivable.  Business volumes were more evenly distributed in the third quarter of 2006 as compared with the same period of 2007, where a significant portion of the business occurred in late August and into the month of September.  As a result of this large spike in volume in 2007, a much higher percentage of accounts receivable was not due for collection at September 30, 2007.  The $39 million decrease for the nine months ended September 30, 2007, is principally due to increased net earnings offset by an increase in accounts receivable and a decrease in income tax payables, net.

 

                The Company’s business is subject to seasonal fluctuations.  Cash flow fluctuates as a result of this seasonality.  Historically, the first quarter shows an excess of customer collections over customer billings.  This results in positive cash flow.  The increased activity associated with peak season (typically commencing late second or early third quarter) causes an excess of customer billings over customer collections.  This cyclical growth in customer receivables consumes available cash.

 

                As a customs broker, the Company makes significant 5-10 business day cash advances for its customers’ obligations such as the payment of duties to the Customs and Border Protection of the Department of Homeland Security.  These advances are made as an accommodation for a select group of credit-worthy customers.  Cash advances are a “pass through” and are not recorded as a component of revenue and expense.  The billings of such advances to customers are accounted for as a direct increase in accounts receivable to 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.

 

                Cash used in investing activities for the three and nine months ended September 30, 2007, was $40 million and $75 million, as compared with $12 million and $133 million during the same periods of 2006.  The largest use of cash in investing activities is cash paid for capital expenditures.  As a non-asset based provider of integrated logistics services, the Company does not own any physical means of transportation (i.e., airplanes, ships, trucks, etc.).  However, the Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight.  The Company routinely invests in technology, office furniture and equipment and leasehold improvements.  In the third quarter of 2007, the Company made capital expenditures of $40 million as compared with $10 million for the same period in 2006.  The Company currently expects to spend approximately $10 million for ongoing capital expenditures in the fourth quarter of 2007.  In addition to property and equipment, ongoing capital expenditures include leasehold improvements, warehouse equipment, computer hardware and furniture and fixtures.  Total capital expenditures in 2007 are estimated to be $80 million. This includes normal capital expenditures as noted above, plus additional real estate acquisitions and development.  During 2007, the Company completed the purchase of a 48,300 square foot office space in Kowloon, Hong Kong at a cost of $35 million (HKD 274 million).  The Company expects to finance capital expenditures in 2007 with cash.

 

                Cash used in financing activities during the three and nine-months ended September 30, 2007 were $22 million and $131 million as compared with $28 million and $118 million for each of the same periods in 2006.  The Company uses the proceeds from stock option exercises to repurchase the Company’s stock on the open market.  The Company follows a policy of repurchasing stock to limit growth in issued and outstanding shares as a result of stock option exercises.  The increase in cash used in financing activities during the three and nine months ended September 30, 2007 as compared with the same periods in 2006 is primarily the result of this policy.  During the nine months ended September 30, 2007 and 2006 the net use of cash in financing activities included the payment of dividends of $.14 per share and $.11 per share, respectively.

 

16



 

                At September 30, 2007, working capital was $730 million, including cash and short-term investments of $558 million.  The Company had no long-term debt at September 30, 2007.

 

                The Company maintains international and domestic unsecured bank lines of credit.  At September 30, 2007, the United States facility totaled $50 million and international bank lines of credit, excluding the U.K. bank facility, totaled $15 million.  In addition, the Company maintains a bank facility with its U.K. bank for $15 million which is available for short-term borrowings and issuances of standby letters of credit.  At September 30, 2007 the Company had no amounts outstanding on these lines of credit but was contingently liable for $70 million from standby letters of credit and guarantees related to these lines of credit and other obligations.  The guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company were to be required to perform.

 

                Management believes that the Company’s current cash position, bank financing arrangements, and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.

 

                In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At September 30, 2007, cash and cash equivalent balances of $451 million were held by the Company’s non-U.S. subsidiaries, of which $95 million was held in banks in the United States.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

                The Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of the Company’s exposure to these risks is presented below:

 

Foreign Exchange Risk

 

                The Company conducts business in many different countries and currencies. The Company’s business often results in revenue billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous inter-company transactions.  This brings a market risk to the Company’s earnings.

 

                Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company’s earnings as a result of hypothetical changes in the value of the U.S. dollar, the Company’s functional currency, relative to the other currencies in which the Company transacts business.  All other things being equal, an average 10% weakening of the U.S. dollar, throughout the nine months ended September 30, 2007, would have had the effect of raising operating income approximately $26 million.  An average 10% strengthening of the U.S. dollar, for the same period, would have had the effect of reducing operating income approximately $21 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.

 

                At September 30, 2007, the Company had approximately $8 million of net unsettled inter-company transactions.  The Company currently does not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict the Company’s ability to move money freely.  Any such hedging activity during the three and nine months ended September 30, 2007, was insignificant. The Company had no foreign currency derivatives outstanding at September 30, 2007 and 2006.  The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to inter-company billings.  The majority of inter-company billings are resolved within 30 days and inter-company billings arising in the normal course of business are fully settled within 90 days.

 

Interest Rate Risk

 

                At September 30, 2007, the Company had cash and cash equivalents and short-term investments of $558 million, the vast majority of which is subject to variable short-term interest rates.  The Company had no short-term borrowings at September 30, 2007.  A hypothetical change in the interest rate of 10% would not have a significant impact on the Company’s earnings.

 

                In management’s opinion, there has been no material change in the Company’s market risk exposure in the third quarter of 2007.

 

17



 

Item 4.  Controls and Procedures

 

Evaluation of Controls and Procedures

 

                The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “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 the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Controls

 

In July 2007, the Company began implementation of an upgrade to the processing of journal entries in the accounting system. The implementation is expected to be completed in all locations in 2008. Accordingly, management has reviewed the controls affected by the system modifications and has made the appropriate changes to the Company’s internal controls. This system enhancement was undertaken to improve the efficiency of the accounting system and not in response to any identified deficiency or weakness in internal control over financial reporting.

 

There were no other changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

 

18



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

 

PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

                The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management’s opinion, will have a significant effect on the Company’s financial position or results of operations.

 

                On October 10, 2007, the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to produce certain information and records relating to an investigation of air cargo freight forwarders.  The Company has retained the services of a noted law firm to assist in complying with the DOJ’s subpoena. They are also assisting management in conducting a very rigorous self-review. As part of this process, the Company has met with and continues to co-operate with the DOJ.

 

Item 1A. Risk Factors

 

                There have been no material changes in the Company’s risk factors from those disclosed in the report on Form 10-K filed on or about March 1, 2007.

 

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 or programs

 

Maximum number
of shares that may yet be purchased under the plans or programs

 

July 1-31, 2007

 

1,236

 

$

46.13

 

1,236

 

17,056,417

 

August 1-31, 2007

 

128,001

 

48.58

 

128,001

 

18,006,307