Document


 
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, 2016
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
incorporation or organization)
  
(IRS Employer
Identification Number)
 
 
 
1015 Third Avenue, 12th Floor, Seattle, Washington
  
98104
(Address of principal executive offices)
  
(Zip Code)
(206) 674-3400
(Registrant’s telephone number, including area code)
______________________________________________________

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
  
Accelerated filer
 o
 
 
 
 
 
 
Non-accelerated filer
 o
(Do not check if a smaller reporting company)
  
Smaller reporting company
 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o No x
At November 3, 2016, the number of shares outstanding of the issuer’s Common Stock was 180,374,649.
 




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)
 
 
September 30,
2016
 
December 31, 2015
Current Assets:
 
 
 
Cash and cash equivalents
$
1,042,700

 
$
807,796

Accounts receivable, less allowance for doubtful accounts of $10,238 at September 30, 2016 and $7,820 at December 31, 2015
1,108,516

 
1,112,260

Deferred Federal and state income taxes
19,573

 
16,861

Other
64,897

 
56,453

Total current assets
2,235,686

 
1,993,370

Property and equipment, less accumulated depreciation and amortization of $406,181 at September 30, 2016 and $385,023 at December 31, 2015
539,984

 
524,724

Goodwill
7,927

 
7,927

Other assets, net
30,200

 
56,417

Total assets
$
2,813,797

 
$
2,582,438

Current Liabilities:
 
 
 
Accounts payable
$
698,620

 
$
645,304

Accrued expenses, primarily salaries and related costs
207,547

 
186,571

Federal, state and foreign income taxes
21,437

 
29,498

Total current liabilities
927,604

 
861,373

Deferred Federal and state income taxes
32,260

 
26,389

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ Equity:
 
 
 
Preferred stock, none issued

 

Common stock, par value $0.01 per share. Issued and outstanding 180,278 shares at September 30, 2016 and 182,067 shares at December 31, 2015
1,803

 
1,821

Additional paid-in capital
475

 
31

Retained earnings
1,929,449

 
1,771,379

Accumulated other comprehensive loss
(81,644
)
 
(81,238
)
Total shareholders’ equity
1,850,083

 
1,691,993

Noncontrolling interest
3,850

 
2,683

Total equity
1,853,933

 
1,694,676

Total liabilities and equity
$
2,813,797

 
$
2,582,438

See accompanying notes to condensed consolidated financial statements.


2



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Airfreight services
$
621,566

 
$
659,607

 
$
1,764,512

 
$
2,060,863

Ocean freight and ocean services
495,460

 
559,976

 
1,414,344

 
1,702,465

Customs brokerage and other services
445,368

 
431,749

 
1,277,174

 
1,257,083

Total revenues
1,562,394

 
1,651,332

 
4,456,030

 
5,020,411

Operating Expenses:
 
 
 
 
 
 
 
Airfreight services
444,359

 
464,161

 
1,236,555

 
1,484,150

Ocean freight and ocean services
359,991

 
416,075

 
1,006,710

 
1,294,887

Customs brokerage and other services
212,785

 
201,115

 
597,320

 
589,766

Salaries and related costs
291,204

 
295,566

 
868,091

 
861,509

Rent and occupancy costs
27,091

 
25,747

 
81,029

 
76,106

Depreciation and amortization
11,882

 
11,475

 
34,853

 
34,424

Selling and promotion
10,134

 
10,370

 
29,817

 
30,146

Other
37,685

 
34,930

 
103,702

 
105,931

Total operating expenses
1,395,131

 
1,459,439

 
3,958,077

 
4,476,919

Operating income
167,263

 
191,893

 
497,953

 
543,492

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
2,924

 
2,666

 
8,593

 
8,034

Other, net
925

 
(3,085
)
 
3,407

 
753

Other income (expense), net
3,849

 
(419
)
 
12,000

 
8,787

Earnings before income taxes
171,112

 
191,474

 
509,953

 
552,279

Income tax expense
63,163

 
72,738

 
188,518

 
207,882

Net earnings
107,949

 
118,736

 
321,435

 
344,397

Less net earnings attributable to the noncontrolling interest
368

 
426

 
1,218

 
1,623

Net earnings attributable to shareholders
$
107,581

 
$
118,310

 
$
320,217

 
$
342,774

Diluted earnings attributable to shareholders per share
$
0.59

 
$
0.62

 
$
1.75

 
$
1.79

Basic earnings attributable to shareholders per share
$
0.59

 
$
0.63

 
$
1.76

 
$
1.80

Dividends declared and paid per common share
$

 
$

 
$
0.40

 
$
0.36

Weighted average diluted shares outstanding
182,692

 
189,642

 
182,958

 
191,448

Weighted average basic shares outstanding
181,177

 
188,424

 
181,645

 
190,232

See accompanying notes to condensed consolidated financial statements.



3



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
107,949

 
$
118,736

 
$
321,435

 
$
344,397

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $202 and $11,669 for the three months ended September 30, 2016 and 2015 and $223 and $19,866 for the nine months ended September 30, 2016 and 2015
260

 
(21,692
)
 
(457
)
 
(37,081
)
Other comprehensive income (loss)
260

 
(21,692
)
 
(457
)
 
(37,081
)
Comprehensive income
108,209

 
97,044

 
320,978

 
307,316

Less comprehensive income attributable to the noncontrolling interest
260

 
35

 
1,167

 
804

Comprehensive income attributable to shareholders
$
107,949

 
$
97,009

 
$
319,811

 
$
306,512

See accompanying notes to condensed consolidated financial statements.


4



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Operating Activities:
 
 
 
 
 
 
 
Net earnings
$
107,949

 
$
118,736

 
$
321,435

 
$
344,397

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
 
 
 
 
Provision for losses on accounts receivable
1,321

 
134

 
2,461

 
995

Deferred income tax (benefit) expense
(1,439
)
 
(7,611
)
 
2,342

 
13,312

Excess tax benefits from stock plans
(107
)
 

 
(239
)
 
(1,846
)
Stock compensation expense
10,476

 
10,919

 
34,264

 
32,489

Depreciation and amortization
11,882

 
11,475

 
34,853

 
34,424

Other
11

 
2

 
41

 
115

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
(Increase) decrease in accounts receivable
(58,279
)
 
2,466

 
6,087

 
18,910

Increase (decrease) in accounts payable and accrued expenses
38,070

 
(19,622
)
 
74,148

 
3,311

Increase (decrease) in income taxes payable, net
7,197

 
19,978

 
(16,612
)
 
4,110

Increase in other current assets
(1,395
)
 
(3,801
)
 
(2,089
)
 
(1,419
)
Net cash from operating activities
115,686

 
132,676

 
456,691

 
448,798

Investing Activities:
 
 
 
 
 
 
 
Purchase of short-term investments

 

 
(54
)
 
(47,008
)
Proceeds from maturities of short-term investments

 
38,788

 
17

 
79,084

Purchase of property and equipment
(12,659
)
 
(9,546
)
 
(39,973
)
 
(31,903
)
Other, net
1,617

 
(2,666
)
 
5,509

 
(2,482
)
Net cash from investing activities
(11,042
)
 
26,576

 
(34,501
)
 
(2,309
)
Financing Activities:
 
 
 
 
 
 
 
Proceeds from issuance of common stock
57,522

 
54,606

 
147,645

 
114,701

Repurchases of common stock
(101,690
)
 
(209,970
)
 
(268,097
)
 
(415,475
)
Excess tax benefits from stock plans
107

 

 
239

 
1,846

Dividends paid

 

 
(73,000
)
 
(68,781
)
Distributions to noncontrolling interest

 

 

 
(857
)
Net cash from financing activities
(44,061
)
 
(155,364
)
 
(193,213
)
 
(368,566
)
Effect of exchange rate changes on cash and cash equivalents
1,853

 
(20,932
)
 
5,927

 
(36,347
)
Increase (decrease) in cash and cash equivalents
62,436

 
(17,044
)
 
234,904

 
41,576

Cash and cash equivalents at beginning of period
980,264

 
985,727

 
807,796

 
927,107

Cash and cash equivalents at end of period
$
1,042,700

 
$
968,683

 
$
1,042,700

 
$
968,683

Taxes Paid:
 
 
 
 
 
 
 
Income taxes
$
58,696

 
$
60,374

 
$
205,049

 
$
190,024

See accompanying notes to condensed consolidated financial statements.

5



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 to 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 25, 2016.
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.
Accounts Receivable
The Company maintains an allowance for doubtful accounts, which is reviewed at least monthly for estimated losses resulting from the inability of its customers to make required payments for services and advances. Additional allowances may be necessary in the future if the ability of its customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of $10,238 as of September 30, 2016 and $7,820 as of December 31, 2015. Additions and write-offs have not been significant in the periods presented.
C.
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 disclosure 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 which the Company has self-insured, accrual of various tax liabilities, accrual of loss contingencies and calculation of share-based compensation expense. Actual results could differ from those estimates.



6



Note 2. Share-Based Compensation
The Company provides compensation benefits by granting stock options and employee stock purchase rights to its employees and restricted shares to its directors. On May 3, 2016, the shareholders approved the 2016 Stock Option Plan, which made available 3 million shares of the Company's common stock for purchase upon exercise of options granted. The Company has historically granted the majority of its options during the second quarter of each fiscal year and 2,973 and 2,956 options were granted in the nine months ended September 30, 2016 and 2015, respectively. Stock options granted under the 2016 Stock Option Plan vest over three years from the date of grant as compared to five years for options granted in prior years. 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 703 and 699 were issued in the nine-month periods ended September 30, 2016 and 2015, respectively. In the second quarter of 2016 and 2015, respectively, 41 and 34 fully vested shares were granted to non-employee directors.
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 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 stock awards' vesting periods as salaries and related costs.
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:
 
 
 
 
 
Nine months ended September 30,
 
2016
 
2015
Dividend yield
1.70
%
 
1.60
%
Volatility - stock option plans
24 - 25%

 
29 - 34%

Volatility - stock purchase rights plans
20
%
 
20
%
Risk free interest rates
0.51 - 1.42%

 
0.30 - 2.04%

Expected life (years) - stock option plans
5.50 - 6.50

 
6.41 - 7.47

Expected life (years) - stock purchase rights plans
1

 
1

Weighted average fair value of stock options granted during the period
$
9.57

 
$
13.44

Weighted average fair value of stock purchase rights granted during the period
$
10.99

 
$
10.45

Total stock compensation expense and the total related tax benefit recognized are as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Stock compensation expense
$
10,476

 
$
10,919

 
$
34,264

 
$
32,489

Recognized tax benefit
$
2,149

 
$
1,571

 
$
5,928

 
$
4,305




7



Note 3. 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 attributable to shareholders:
 
Three months ended 
 
September 30,
(Amounts in thousands, except per share amounts)
Net earnings
attributable to
shareholders
 
Weighted average
shares
 
Earnings per share
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

2015
 
 
 
 
 
Basic earnings attributable to shareholders
$
118,310

 
188,424

 
$
0.63

Effect of dilutive potential common shares

 
1,218

 

Diluted earnings attributable to shareholders
$
118,310

 
189,642

 
$
0.62

 
 
 
 
 
 
 
Nine months ended
 
September 30,
(Amounts in thousands, except per share amounts)
Net earnings
attributable to
shareholders
 
Weighted average
shares
 
Earnings per share
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

2015
 
 
 
 
 
Basic earnings attributable to shareholders
$
342,774

 
190,232

 
$
1.80

Effect of dilutive potential common shares

 
1,216

 

Diluted earnings attributable to shareholders
$
342,774

 
191,448

 
$
1.79

The following potential common shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Shares
8,646

 
8,380

 
9,516

 
9,713



8



Note 4. Components of Equity
The components of equity for the nine months ended September 30, 2016 and 2015 are as follows:
 
Shareholders’
equity
 
Noncontrolling
interest
 
Total
equity
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 deficiency 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

 
 
 
 
 
 
Balance at December 31, 2014
$
1,868,408

 
3,200

 
1,871,608

Exercise of stock options
88,851

 

 
88,851

Issuance of shares under stock purchase plan
25,850

 
 
 
25,850

Shares repurchased under provisions of stock repurchase plans
(415,475
)
 

 
(415,475
)
Stock compensation expense
32,489

 

 
32,489

Tax benefits from stock plans, net
1,191

 

 
1,191

Net earnings
342,774

 
1,623

 
344,397

Other comprehensive loss
(36,262
)
 
(819
)
 
(37,081
)
Dividends paid ($0.36 per share)
(68,781
)
 

 
(68,781
)
Distributions to noncontrolling interest

 
(857
)
 
(857
)
Balance at September 30, 2015
$
1,839,045

 
3,147

 
1,842,192

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, 2016 and 2015, 2,822 and 2,243 shares were repurchased at an average price of $49.84 and $47.93 per share, respectively.
The Company also has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding stock down to 170 million shares of common stock. During the nine-month periods ended September 30, 2016 and 2015, 2,579 and 6,396 shares were repurchased at an average price of $49.41 and $48.16 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.
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. On May 6, 2015, the Board of Directors declared a semi-annual cash dividend of $0.36 per share payable on June 15, 2015 to shareholders of record as of June 1, 2015.
Subsequent to the end of the third quarter, on November 8, 2016, the Board of Directors declared a semi-annual dividend of $0.40 per share payable on December 15, 2016 to shareholders of record as of December 1, 2016.




9



Note 5. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, short-term investments, 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. Short-term investments have a maturity of greater than three months at date of purchase. Cash, cash equivalents and short-term investments consist of the following:
 
September 30, 2016
 
December 31, 2015
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Cash and Cash Equivalents:
 
 
 
 
 
 
 
Cash and overnight deposits
$
451,234

 
451,234

 
445,582

 
445,582

Corporate commercial paper
535,393

 
535,452

 
302,433

 
302,480

Time deposits
56,073

 
56,073

 
59,781

 
59,781

Total cash and cash equivalents
1,042,700

 
1,042,759

 
807,796

 
807,843

Short-Term Investments:
 
 
 
 
 
 
 
Time deposits
48

 
48

 
40

 
40

Total
$
1,042,748

 
1,042,807

 
807,836

 
807,883

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 6. Commitments
The Company generally enters into short-term, unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. Historically, the Company has met these obligations in the normal course of business within one year. Purchase obligations outstanding as of September 30, 2016 totaled $148 million. Additionally, the Company occupies offices and warehouse facilities under terms of operating leases expiring up to 2028. At September 30, 2016, future minimum annual lease payments under all noncancelable leases are as follows:
2016
$
16,432

2017
52,357

2018
42,465

2019
31,909

2020
23,957

Thereafter
29,125

 
196,245


Note 7. Contingencies
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, 2016, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations 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.

10



Note 8. Business Segment Information
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues1, 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. 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. 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.
Financial information regarding the Company’s operations by geographic area is as follows:
(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, 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
$
1,429,860

 
95,390

 
56,192

 
480,587

 
117,333

 
388,543

 
237,104

 
8,788

 
2,813,797

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

Three months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
441,097

 
56,818

 
24,681

 
648,096

 
158,011

 
234,334

 
88,295

 

 
1,651,332

Transfers between geographic areas
29,168

 
3,492

 
4,991

 
5,206

 
6,289

 
11,125

 
5,459

 
(65,730
)
 

Total revenues
$
470,265

 
60,310

 
29,672

 
653,302

 
164,300

 
245,459

 
93,754

 
(65,730
)
 
1,651,332

Net revenues1
$
232,912

 
32,713

 
17,115

 
135,488

 
45,970

 
77,250

 
28,533

 

 
569,981

Operating income
$
65,389

 
11,905

 
5,007

 
69,690

 
18,574

 
14,188

 
7,140

 

 
191,893

Identifiable assets at period end
$
1,385,157

 
108,644

 
56,987

 
472,189

 
140,206

 
427,053

 
229,670

 
7,112

 
2,827,018

Capital expenditures
$
6,196

 
658

 
222

 
711

 
291

 
1,223

 
245

 

 
9,546

Depreciation and amortization
$
7,439

 
363

 
268

 
1,336

 
531

 
1,120

 
418

 

 
11,475

Equity
$
1,144,466

 
64,384

 
35,890

 
250,362

 
103,457

 
148,287

 
126,321

 
(30,975
)
 
1,842,192


11



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 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
$
1,429,860

 
95,390

 
56,192

 
480,587

 
117,333

 
388,543

 
237,104

 
8,788

 
2,813,797

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

Nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
1,334,900

 
170,351

 
73,076

 
1,943,441

 
524,254

 
716,373

 
258,016

 

 
5,020,411

Transfers between geographic areas
89,329

 
9,991

 
15,171

 
16,330

 
18,677

 
31,478

 
15,638

 
(196,614
)
 

Total revenues
$
1,424,229

 
180,342

 
88,247

 
1,959,771

 
542,931

 
747,851

 
273,654

 
(196,614
)
 
5,020,411

Net revenues1
$
681,868

 
93,967

 
51,159

 
377,384

 
135,114

 
229,745

 
82,371

 

 
1,651,608

Operating income
$
193,117

 
33,433

 
15,804

 
187,343

 
48,594

 
44,846

 
20,355

 

 
543,492

Identifiable assets at period end
$
1,385,157

 
108,644

 
56,987

 
472,189

 
140,206

 
427,053

 
229,670

 
7,112

 
2,827,018

Capital expenditures
$
20,232

 
2,602

 
1,408

 
1,476

 
1,599

 
3,292

 
1,294

 

 
31,903

Depreciation and amortization
$
22,171

 
965

 
784

 
4,114

 
1,609

 
3,542

 
1,239

 

 
34,424

Equity
$
1,144,466

 
64,384

 
35,890

 
250,362

 
103,457

 
148,287

 
126,321

 
(30,975
)
 
1,842,192

_______________________


1Net revenues are a non-GAAP measure calculated as revenues less directly related operations expenses attributable to the Company's principal services. The Company's management believes that net revenues are a better measure than 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 one 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.
 

12



The following table presents the calculation of consolidated net revenues:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Total revenues
$
1,562,394

 
$
1,651,332

 
$
4,456,030

 
$
5,020,411

Expenses:
 
 
 
 
 
 
 
Airfreight services
444,359

 
464,161

 
1,236,555

 
1,484,150

Ocean freight and ocean services
359,991

 
416,075

 
1,006,710

 
1,294,887

Customs brokerage and other services
212,785

 
201,115

 
597,320

 
589,766

Net revenues
$
545,259

 
$
569,981

 
$
1,615,445

 
$
1,651,608



13



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,” "Expeditors' Culture and Strategy," "International Trade and Competition," "Seasonality," “Critical Accounting Estimates,” "Recent Accounting Pronouncements," “Results of Operations,” “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements. Words such as "will likely result", "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, 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. Attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 25, 2016.
Overview
Expeditors International of Washington, Inc. is a global logistics company. The Company's services include air and ocean freight consolidation and forwarding, customs clearance, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, cargo insurance and other logistics solutions. The Company does not compete for overnight courier or small parcel business. As a non-asset based carrier, the Company does not own or operate transportation assets.
The Company derives its revenues from three principal sources: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. These are the revenue categories presented in the financial statements.
The Company generates the major portion of its air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and reselling those services to its customers on a retail basis. 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” (a non-GAAP measure), “yield” or “margin.” 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. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of the Company's three primary sources of revenue.
In most cases the Company acts as an indirect carrier. When acting as an indirect carrier, the Company will 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, the Company receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. In these transactions, the Company evaluates whether it is appropriate to record the gross or net amount as revenue. Generally, revenue is recorded on a gross basis when the Company is the primary obligor, it is obligated to compensate direct carriers for services performed regardless of whether customers accept the service, has latitude in establishing price, has discretion in selecting the direct carrier, has credit risk or has several but not all of these indicators. Revenue is generally recorded on a net basis where the Company is not primarily obligated and does not have latitude in establishing prices. Such amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof.
For revenues earned in other capacities, for instance, when the Company does not issue a HAWB, a HOBL or a House Seaway Bill or otherwise acts solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, the Company is not a principal and reports only commissions and fees earned in revenue.
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 arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.
The Company is managed 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 which are composed of operating units with individual profit and loss responsibility. The Company’s business involves shipments between operating units that typically

14



involve more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and cooperation among operating units. Because of this inter-relationship between operating units, it is very difficult to examine any one geographic area and draw meaningful conclusions as to its contribution to the Company’s overall success on a stand-alone basis.
The Company’s operating units share revenue using the same arms-length pricing methodologies the Company uses when its 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. The Company’s strategy closely links compensation with operating unit profitability. Individual success is closely linked to cooperation with other operating units within the network.
The mix of services varies by segment based primarily on the import or export orientation of local operations in each region. In accordance with the Company's revenue recognition policy (see Note 1. E. to the consolidated financial statements in the Company's annual report on Form 10-K filed on February 25, 2016), almost all freight revenues and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share revenue at destination and a corresponding commission or profit share expense as a component of origin consolidation costs.
Expeditors' Culture and Strategy
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 corporate culture which demands:
Total dedication, first and foremost, to providing superior customer service;
Compliance with Company policies and government regulations;
Aggressive marketing of all of the Company’s service offerings;
Ongoing development of key employees and management personnel via formal and informal means;
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 occurs, 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 the Company's customers while simultaneously delivering tools to make the Company's employees more efficient and more effective.
The Company reinforces 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 the Company became a publicly traded entity. There is no limit to how much a key, non-executive 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. If these decisions result in operating losses, management 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, 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.
The Company believes that any failure to perpetuate this unique culture on a self-sustained basis throughout the Company quite possibly provides a greater threat to the Company’s continued success than any external force, which would be largely beyond its control. 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, management's focus is on building and maintaining a global corporate culture and an environment where well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help the Company adapt and thrive as major trends emerge.
The Company's business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers to drive profitable business growth. The Company’s teams are aligned on the specific markets of its focused priorities; on the targeted accounts within those markets; and on ways that the Company can continue to differentiate itself from its competitors.
The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of ongoing concern over terrorism and increased governmental regulation and oversight of international trade. A good reputation

15



helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international trade obstacles, especially as governments promulgate new regulations and increase oversight and enforcement of new and existing laws. The Company considers its current working relationships with these entities to be satisfactory.
The Company's business is also dependent on the financial stability and operational capabilities of the carriers it utilizes. Over the last two years, airline profitability has improved, although many air carriers remain highly leveraged with debt. Moreover, the ocean steamship line industry has incurred substantial losses in recent years, many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges, such as those that led to the Hanjin bankruptcy filing that occurred on August 31, 2016. This situation requires that the Company be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, space allotments available from carriers, governmental regulations, and/or trade accords could adversely affect the Company’s business in unpredictable ways.
International Trade and Competition
The Company operates in over 60 countries in the competitive global logistics industry and Company activities are closely tied to global trade. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, 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. The Company cannot predict which, if any, of these proposals may be adopted or 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 normally encountered by domestic enterprises. In addition to being influenced by governmental policies concerning international trade and commerce, the Company’s business may also be affected by political developments and changes in government personnel or policies, as well as economic turbulence, political unrest and security concerns in the nations in which it does business and the future impact that these events may have on international trade and oil prices.
The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Consistent with continuing uncertainty in global economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates, the Company’s pricing and terms continue to be pressured by customers, carriers and service providers. We expect these competitive conditions to continue.
There is uncertainty as to how changes in oil prices will impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both the Company's cargo space buy rates and its sell rates to customers, the Company would expect its gross revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. The Company would not expect an adverse effect on net revenues resulting from changes in oil prices.
The global economic environment remains uncertain and trade growth continues to slow. The Company cannot predict what impact this may have on its operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Additionally, the Company cannot predict the direct or indirect impact that changes in consumer purchasing behavior, such as on-line shopping, could have on it.
Seasonality
Historically, the Company’s operating results have been subject to seasonal 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. This pattern has been the result of, or influenced by, numerous factors including weather patterns, national holidays, consumer demand, new product launches, 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.
A significant portion of the Company’s revenues are 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 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, 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, the Company may not learn of a shortfall in revenues until late in a quarter. 

16



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 the Company’s stock. The Company cannot accurately forecast many of these factors or 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 that the Company make estimates and judgments. The Company bases its estimates on historical experience and on assumptions that it believes are reasonable. The Company's critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's annual report on Form 10-K for the year ended December 31, 2015, filed on February 25, 2016. There have been no material changes to the critical accounting estimates previously disclosed in that report.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) amending revenue recognition guidance and requiring related detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for the Company beginning on January 1, 2018. The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements and related disclosures. However, at this time, based on the nature of the Company's operations, the adoption is not expected to have a material impact on the amount or timing of revenue recognized or the Company's revenue recognition policies.
In November 2015, the FASB issued an ASU simplifying the accounting for income taxes by requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. The Company expects to adopt this ASU in the fourth quarter of 2016. The Company is currently evaluating the method of adoption and expects this ASU will have an impact on its consolidated balance sheets as its current deferred tax assets were approximately $20 million and non-current deferred tax liabilities were $32 million as of September 30, 2016.

In February 2016, the FASB issued an ASU changing the accounting for leases and including a requirement to record all leases on the consolidated balance sheet as assets and liabilities. The ASU is effective for the Company beginning on January 1, 2019. Adoption of the ASU will impact the Company’s consolidated balance sheets as future minimum lease payments under noncancelable leases totaled $196 million as of September 30, 2016. The Company is currently evaluating the full impact that the adoption of this ASU will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued an ASU simplifying the accounting for stock compensation. The ASU also amends the classification of excess tax benefits both in accounting for income taxes and on the statement of cash flows. The Company expects to adopt this ASU in the first quarter of 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

Results of Operations
The following table shows revenues and directly related expenses for the Company's principal services and total net revenues (a non-GAAP measure calculated as revenues less directly related operations expenses attributable to the Company's principal services) and the Company’s expenses for the three and nine-month periods ended September 30, 2016 and 2015, expressed as percentages of net revenues. Management believes that net revenues are a better measure than total revenues when analyzing and discussing management's effectiveness in managing 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 primarily the commissions and fees actually earned by the Company. Net revenue is one of the Company's primary operational and financial measures that demonstrates the ability of the Company to manage sell rates to customers with its ability to concentrate and leverage its purchasing power through effective consolidation of shipments from multiple customers utilizing a variety of transportation carriers and optimal routings. Using net revenue also provides a commonality for comparison among various services.
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,
 
 
2016
 
2015
 
2016
 
2015
 
 
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
$
621,566

 
 
 
$
659,607

 
 
 
$
1,764,512

 
 
 
$
2,060,863

 
 
 
Expenses
444,359

 
 
 
464,161

 
 
 
1,236,555

 
 
 
1,484,150

 
 
 
Net revenues
177,207

 
32
%
 
195,446

 
34
%
 
527,957

 
33
%
 
576,713

 
35
%
 
Ocean freight services and ocean services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
495,460

 
 
 
559,976

 
 
 
1,414,344

 
 
 
1,702,465

 
 
 
Expenses
359,991

 
 
 
416,075

 
 
 
1,006,710

 
 
 
1,294,887

 
 
 
Net revenues
135,469

 
25

 
143,901

 
25

 
407,634

 
25

 
407,578

 
25

 
Customs brokerage and other services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
445,368

 
 
 
431,749

 
 
 
1,277,174

 
 
 
1,257,083

 
 
 
Expenses
212,785

 
 
 
201,115

 
 
 
597,320

 
 
 
589,766

 
 
 
Net revenues
232,583

 
43

 
230,634

 
41

 
679,854

 
42

 
667,317

 
40

 
Total net revenues
545,259

 
100

 
569,981

 
100

 
1,615,445

 
100

 
1,651,608

 
100

 
Overhead expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and related costs
291,204

 
53

 
295,566

 
52

 
868,091

 
54

 
861,509

 
52

 
Other
86,792

 
16

 
82,522

 
14

 
249,401

 
15

 
246,607

 
15

 
Total overhead expenses
377,996

 
69

 
378,088

 
66

 
1,117,492

 
69

 
1,108,116

 
67

 
Operating income
167,263

 
31

 
191,893

 
34

 
497,953

 
31

 
543,492

 
33

 
Other income (expense), net
3,849

 

 
(419
)
 

 
12,000

 
1

 
8,787

 

 
Earnings before income taxes
171,112

 
31

 
191,474

 
34

 
509,953

 
32

 
552,279

 
33

 
Income tax expense
63,163

 
11

 
72,738

 
13

 
188,518

 
12

 
207,882

 
13

 
Net earnings
107,949

 
20

 
118,736

 
21

 
321,435

 
20

 
344,397

 
20

 
Less net earnings attributable to the noncontrolling interest
368

 

 
426

 

 
1,218

 

 
1,623

 

 
Net earnings attributable to shareholders
$
107,581

 
20
%
 
$
118,310

 
21
%
 
$
320,217

 
20
%
 
$
342,774

 
20
%
 
Airfreight services:
Airfreight services revenues decreased 6% and 14%, respectively, in the three and nine-month periods ended September 30, 2016, as compared with the same periods for 2015, primarily as a result of lowering average sell rates in response to competitive market conditions. Average sell rates in the third quarter were comparable with the prior quarters of 2016. Airfreight tonnage increased 7% in the third quarter of 2016 and remained flat in the first nine months of 2016. Airfreight services expenses decreased 4% and 17%, respectively, in the three and nine-month periods of 2016, as a result of favorable buying opportunities throughout most regions due primarily to excess available carrier capacity. Average buy rates in the third quarter were comparable with the prior quarters of 2016. While not possible to quantify, sell rates and tonnage were favorably impacted in the first nine months of 2015 by customers converting a portion of their ocean freight shipments to airfreight due to port disruptions on the U.S. West Coast.
Airfreight services net revenues decreased 9% for the three-month period ended September 30, 2016, as compared with the same period for 2015. This was principally due to a 17% decrease in net revenue per kilo, partially offset by a 7% increase in tonnage. Average net revenue per kilo declined in most regions primarily due to competitive market conditions and rapid changes in carrier pricing caused by sporadic increases in demand. North America net revenues decreased by 6% while tonnage remained flat. North Asia, South Asia and Europe net revenues decreased 15%, 14% and 3%, respectively, despite tonnage increases of 7%, 15% and 10%.
Airfreight services net revenues decreased 8% for the nine-month period ended September 30, 2016, as compared with the same period for 2015. This decrease was principally due to a 10% decrease in net revenue per kilo. North America net revenues decreased by 9% due principally to a 6% decrease in tonnage. North Asia, South Asia and Europe net revenues decreased by 12%, 9% and 2%, respectively, due principally to competitive market conditions that resulted in lower average net revenue per kilo, partially offset by 2%, 2% and 1% increases in tonnage.
Aside from temporary disruptions such as those experienced with U.S. West Coast ports in 2015, the Company expects the global airfreight market to continue to be affected by carrier overcapacity and the timing of new product launches. Customers remain focused on improving supply-chain efficiency, reducing overall logistics costs by negotiating lower rates and utilizing ocean freight whenever possible. The Company expects these trends to continue in conjunction with carriers' efforts to manage available capacity. However, this could be affected by new product launches during periods that have historically experienced higher demands. Historically, the Company has experienced lower airfreight margins in the fourth quarter as seasonal volumes increase and carriers correspondingly increase buy rates. These events, should they occur, could create a higher degree of volatility in volumes and ultimately buy and sell 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 decreased 12% and 17%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods in 2015, as the Company continued to lower average sell rates to customers in response to competitive market conditions and lower available buy rates from carriers. Container volume increased 3% and remained flat, respectively, in the third quarter and first nine months of 2016. Ocean freight and ocean services expenses decreased 13% and 22%, respectively, for the three and nine-month periods ended September 30, 2016, due to lower average buy rates, resulting from carrier overcapacity.
Ocean freight and ocean services net revenues decreased 6% and remained flat, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods for 2015. The largest component of the Company's ocean freight net revenue was derived from ocean freight consolidation, which represented 48% and 50% of ocean freight net revenue for the nine-month periods ended September 30, 2016 and 2015, respectively.
Ocean freight consolidation net revenues decreased 15% in the third quarter of 2016, as compared with the same period in 2015, due primarily to an 18% decrease in net revenue per container, partially offset by a 3% increase in volume. During the latter part of the third quarter of 2016, the Company experienced a spike in average buy rates that began with the Hanjin bankruptcy on August 31, 2016. Ocean freight consolidation net revenues decreased 3% for the nine-month period ended September 30, 2016, as compared with the same period in 2015. This decrease was due primarily to a 3% decrease in net revenue per container, while volume remained constant. Direct ocean freight forwarding net revenues decreased 4% and 3%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods in 2015, due to lower volumes principally in North America. Order management net revenues increased 11% and 10%, respectively, for the three and nine-month periods ended September 30, 2016, mostly resulting from higher volumes with new and existing customers, primarily in North Asia and South Asia.
North America ocean freight and ocean services net revenues decreased 9% in the third quarter of 2016 due to lower margins in ocean freight consolidation. In the first nine months of 2016, ocean freight and ocean services net revenues in North America decreased 2%, primarily due to lower direct ocean forwarding volumes. North Asia net revenues decreased 3% and 1%, respectively, for the three and nine-month periods of 2016. Lower margins in the third quarter more than offset the 2% growth in volume in the three months ended September 30, 2016. Europe net revenues decreased 11% and 2%, respectively, for the three and nine-month periods of 2016 as lower direct ocean forwarding volumes more than offset growth from order management in the third quarter and ocean freight consolidation in the nine-month period.
The Company expects pricing volatility to continue as customers increasingly solicit bids and carriers react to current market conditions, including carrier liquidity challenges, such as the Hanjin bankruptcy filing and realignment of carrier alliances. These conditions could result in lower revenues and yields.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 3% and 2%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods in 2015, as a result of increased volumes from existing and new road freight customers. Customs brokerage and other services expenses increased 6% and 1%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods for 2015, principally as a result of an increase in road freight volumes.
Customs brokerage and other services net revenues increased 1% and 2%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods in 2015, primarily as a result of an increase in road freight volumes. North America net revenues increased 2% and 4%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods for 2015, primarily as a result of volumes from existing and new customers in road freight and lower import service costs. Europe net revenues increased 1% in the third quarter due to higher road freight services and remained flat for the nine-month period. North Asia net revenues increased 3% and 8% in the three and nine-month periods, respectively, due to growth in import and warehouse and distribution services.
Overhead expenses:
Salaries and related costs decreased 1% for the three months ended September 30, 2016, as compared with the same period in 2015, primarily due to reduced bonuses from lower operating income, partially offset by an increase in workforce. Salaries and related costs increased 1% for the nine-month period ended September 30, 2016, as compared with the same period in 2015, principally as a result of an increase in the number of employees, primarily in North America and Europe, partially offset by reduced bonuses from lower operating income.
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 incentive compensation will occur in proportion to changes in Company operating income, creating a direct alignment between corporate performance and shareholder interests. Bonuses to field and executive management for the nine-month period ended September 30, 2016 were down 9% as compared with the same period for 2015, primarily as a result of an 8% decrease in operating income. The Company’s management incentive compensation programs have always been incentive-based and performance driven and there is no built-in bias that favors or enriches management in a manner inconsistent with overall corporate performance. Salaries and related costs as a percentage of net revenues increased 1% and 2%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods for 2015.
Because the Company’s management incentive compensation programs are also cumulative, no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must have been 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, the Company believes that this cumulative feature is a disincentive to excessive risk taking by its managers. Due to the nature of the Company’s services, it has a short operating cycle. The outcome of most 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 this short operating cycle, 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 revenues and net earnings are a result of the incentives inherent in the Company’s compensation program.
Other overhead expenses increased 5% and 1%, respectively, for the three and nine-month periods ended September 30, 2016, as compared with the same periods in 2015. The increase in expenses was primarily due to higher rent and maintenance costs, bad debt and technology fees in both the three and nine-month periods. Lower business taxes in the third quarter and recovery of legal and related costs in the first half of 2016 partially offset these increases. Other overhead expenses increased 2% and remained constant, respectively, as a percentage of net revenues for the three and nine-month periods ended September 30, 2016, when compared with the same periods in 2015.
Income tax expense:
The Company pays income taxes in the United States and other jurisdictions. The Company’s consolidated effective income tax rate was 36.9% and 37.0%, respectively, for the three and nine-month periods ended September 30, 2016, and 38.0% and 37.6% for the same periods in 2015. The Company's effective tax rate is subject to variation and the rate can be more or less volatile based on 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.


17



Currency and Other Risk Factors
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 volatile 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 may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on the Company's 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 three and nine months ended September 30, 2016 and 2015 was insignificant. The Company had no foreign currency derivatives outstanding at September 30, 2016 and December 31, 2015. During the third quarter of 2016 total net foreign currency gains, including amounts recorded in revenues, operating expenses and other income, net, were less than $1 million. For the nine months ended September 30, 2016, total net foreign currency losses were approximately $1 million. During the three and nine months ended September 30, 2015, total net foreign currency gains were $4 million and $7 million, respectively.
International air and 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, many of which have significantly more resources than the Company; however, the Company’s primary competition is confined to a relatively small number of companies within this group. 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. The Company emphasizes quality customer service and believes that its 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 and fixed price arrangements, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of less favorable contractual terms could result in reduced revenues, reduced margins, higher operating costs or lower volumes, any of which would damage the Company's 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. The Company believes that this trend has resulted in customers using fewer service providers with greater technological capability 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
The Company’s principal source of liquidity is cash and cash equivalents, short-term investments and cash generated from operating activities. Net cash provided by operating activities for the three and nine months ended September 30, 2016 was $116 million and $457 million, respectively, as compared with $133 million and $449 million for the same periods in 2015. The decrease of $17 million in the third quarter of 2016 is primarily due to lower earnings and changes in working capital accounts. The increase of $8 million for the nine-month period ended September 30, 2016 is primarily due to changes in working capital accounts, partially offset by lower earnings. At September 30, 2016, working capital was $1,308 million, including cash and cash equivalents of $1,043 million. The Company had no long-term debt at September 30, 2016. Management believes that the Company’s current cash position and operating cash flows will be sufficient to meet its capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.
As a customs broker, the Company makes significant cash advances for a select group of its credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs and tax authorities in various countries throughout the world. 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 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, the Company has agreed to extend payment terms beyond its customary terms. Management believes that the Company has effective credit control procedures, and historically has experienced relatively insignificant collection problems.
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 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 September 30, 2016 was $11 million and $35 million, respectively, compared to cash provided of $27 million and cash used of $2 million in the same periods of 2015. The Company made minor net investments in short-term investments for both the three and nine months ended September 30, 2016 compared to net proceeds from short-term investments of $39 million and $32 million for the same periods in 2015. The Company had capital expenditures of $13 million and $40 million, respectively, for the three and nine-month periods ended September 30, 2016, as compared with capital expenditures of $10 million and $32 million for the same periods in 2015. Capital expenditures in the three and nine months ended September 30, 2016 related primarily to investments in technology, office and warehouse furniture and equipment and building and leasehold improvements. The Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight. Total capital expenditures in 2016 are currently estimated to be $60 million. This includes routine capital expenditures plus additional real estate development.
Cash used in financing activities during the three and nine months ended September 30, 2016 was $44 million and $193 million, respectively, as compared with $155 million and $369 million for the same periods in 2015. The Company uses the proceeds from stock option exercises, employee stock purchases and available cash to repurchase the Company’s common stock on the open market to reduce outstanding shares. During the three and nine months ended September 30, 2016, the Company used cash to repurchase 2.0 million and 5.4 million shares, respectively, to reduce the number of total outstanding shares, compared to 4.3 million and 8.6 million shares in the same periods in 2015.
The Company follows established guidelines relating to credit quality, diversification and maturities of its investments to preserve principal and maintain liquidity. The Company’s investment portfolio has not been adversely impacted by the disruption in the credit markets. However, there can be no assurance that the Company’s investment portfolio will not be adversely affected in the future.
The Company maintains international unsecured bank lines of credit. At September 30, 2016, the Company was contingently liable for $72 million from standby letters of credit and guarantees. The standby letters of credit and 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 is required to perform.
At September 30, 2016, the Company’s contractual obligations are as follows:
 
 
 
 
Payments due by period
In thousands
 
Total

 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
After 
5 years 
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
Operating leases
 
$
196,245

 
57,763

 
79,029

 
40,470

 
18,983

Unconditional purchase obligations
 
148,374

 
146,760

 
1,614

 

 

Construction, equipment and technology purchase obligations
 
33,104

 
23,358

 
9,322

 
377

 
47

Total contractual cash obligations
 
$
377,723

 
227,881

 
89,965

 
40,847

 
19,030

The Company generally enters into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. The Company only enters into agreements that management believes the Company can fulfill. Also, in October 2016 the Company entered into a $51 million (€45 million) contractual agreement to construct a building in Europe.
The Company's foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and needs to finance local capital expenditures. In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At September 30, 2016, cash and cash equivalent balances of $546 million were held by the Company’s non-United States subsidiaries, of which $66 million was held in banks in the United States. Earnings of the Company's foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States and, accordingly, a deferred tax liability has been accrued for all undistributed earnings, net of foreign related tax credits that are available to be repatriated.
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 billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to the Company’s earnings. The principal foreign exchange risks to which the Company is exposed are in Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.
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, 2016, would have had the effect of raising operating income approximately $35 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income approximately $29 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.
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, 2016 and 2015 was insignificant. During the third quarter of 2016 total net foreign currency gains, including amounts recorded in revenues, operating expenses and other income, net, were less than $1 million. For the nine months ended September 30, 2016, total net foreign currency losses were approximately $1 million. During the three and nine months ended September 30, 2015, total net foreign currency gains were $4 million and $7 million, respectively. The Company had no foreign currency derivatives outstanding at September 30, 2016 and December 31, 2015. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of September 30, 2016, the Company had approximately $13 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At September 30, 2016, the Company had cash and cash equivalents and short term investments of $1,043 million, of which $592 million was invested at various short-term market interest rates. The Company had no long-term debt at September 30, 2016. A hypothetical change in the interest rate of 10 basis points at September 30, 2016 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 interest rate risk exposure in the third quarter of 2016.
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 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 as of the end of the period covered by this report at the reasonable assurance level.

18



Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is developing a new accounting system which it is implementing 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 is affecting the processes that constitute the Company's internal control over financial reporting. Prior to implementing new functionalities, applicable controls are tested for operating effectiveness.
The Company's management has confidence in the Company’s internal controls and procedures. Nevertheless, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s 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 the Company’s control issues and instances of fraud, if any, have been detected.


19



PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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, 2016, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations 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.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company's annual report on Form 10-K filed on February 25, 2016.

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, 2016
 

 
$

 

 
19,163,266

August 1-31, 2016
 
621,952

 
50.99

 
621,952

 
19,408,450

September 1-30, 2016
 
1,365,663

 
51.24

 
1,365,663

 
17,224,741

Total
 
1,987,615

 
$
51.16

 
1,987,615

 
17,224,741

In November 1993, the Company’s Board of Directors authorized a Non-Discretionary Stock Repurchase Plan for the purpose of repurchasing the Company’s 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 the Company’s common stock. This authorization has no expiration date. This plan was disclosed in the Company’s annual report on Form 10-K filed on March 31, 1995. In the third quarter of 2016, 1,167,891 shares of common stock were repurchased under the Non-Discretionary Stock Repurchase Plan.
In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of the Company's common stock in the open market to reduce the issued and outstanding stock down to 200 million shares. In February 2014, the Board of Directors authorized repurchases down to 190 million shares of common stock. In February and August 2015 and May 2016, the Board of Directors further authorized repurchases down to 188 million, 180 million and 170 million, respectively. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date. In the third quarter of 2016, 819,724 shares of common stock were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases included 319,724 shares that were made to limit the growth in the number of issued and outstanding shares resulting from stock option exercises and exercise of employee stock purchase rights and 500,000 shares to reduce the number of total shares outstanding.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a)
Not applicable
(b)
Not applicable

20



Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
Exhibit Number
  
Description
3.2
 
The Company's Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Form 8-K filed on or about August 5, 2016.)
 
 
 
31.1
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32
  
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
  
XBRL Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

21



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.
 
 
 
November 8, 2016
 
/s/ JEFFREY S. MUSSER
 
 
Jeffrey S. Musser, President, Chief Executive Officer and Director
 
 
 
November 8, 2016
 
/s/ BRADLEY S. POWELL
 
 
Bradley S. Powell, Senior Vice President and Chief Financial Officer

22



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
September 30, 2016
 
Exhibit Number
  
Description
31.1