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EXPEDITORS INTERNATIONAL OF WASHINGTON INC - Quarter Report: 2010 September (Form 10-Q)

Form 10-Q

 

 

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, 2010

OR

 

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

For the transition period from              to             

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

 

Washington   91-1069248
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification Number)

 

1015 Third Avenue, 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  ¨

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  ¨

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  ¨  

Non-accelerated filer  ¨

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

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

At November 1, 2010, the number of shares outstanding of the issuer’s Common Stock was 212,356,370.

 

 

 


 

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,
2010
     December 31,
2009
 

Current Assets:

     

Cash and cash equivalents

   $ 1,057,226       $ 925,929   

Short-term investments

     601         655   

Accounts receivable, less allowance for doubtful accounts of $15,379 at September 30, 2010 and $14,235 at December 31, 2009

     1,082,733         810,369   

Deferred Federal and state income taxes

     8,325         8,338   

Other

     34,760         42,539   
                 

Total current assets

     2,183,645         1,787,830   

Property and equipment, less accumulated depreciation and amortization, of $275,384 at September 30, 2010 and $264,372 at December 31, 2009

     493,046         495,701   

Goodwill, net

     7,927         7,927   

Other intangibles, net

     3,965         4,938   

Other assets, net

     27,600         27,326   
                 

Total assets

   $ 2,716,183       $ 2,323,722   
                 

Current Liabilities:

     

Accounts payable

     700,585         546,675   

Accrued expenses, primarily salaries and related costs

     188,919         145,545   

Federal, state and foreign income taxes

     31,761         16,166   
                 

Total current liabilities

     921,265         708,386   

Deferred Federal and state income taxes

     58,800         53,989   

Commitments and contingencies

     

Shareholders’ Equity:

     

Preferred stock, none issued

     0         0   

Common stock, par value $.01 per share

     

Issued and outstanding 212,090,154 shares at September 30, 2010, and 212,025,494 shares at December 31, 2009

     2,121         2,120   

Additional paid-in capital

     5,823         18,265   

Retained earnings

     1,715,876         1,532,018   

Accumulated other comprehensive income

     4,802         604   
                 

Total shareholders’ equity

     1,728,622         1,553,007   

Noncontrolling interest

     7,496         8,340   
                 

Total equity

     1,736,118         1,561,347   
                 

Total liabilities and equity

   $ 2,716,183       $ 2,323,722   
                 

See accompanying notes to condensed consolidated financial statements.

 

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,
 
     2010     2009     2010     2009  

Revenues:

        

Airfreight services

   $ 751,555      $ 457,405      $ 2,043,819      $ 1,203,220   

Ocean freight and ocean services

     599,280        331,454        1,474,137        949,380   

Customs brokerage and other services

     316,724        248,468        867,482        692,772   
                                

Total revenues

     1,667,559        1,037,327        4,385,438        2,845,372   
                                

Operating Expenses:

        

Airfreight consolidation

     578,924        340,746        1,577,289        848,131   

Ocean freight consolidation

     488,808        247,733        1,190,627        704,850   

Customs brokerage and other services

     141,084        102,336        378,098        279,317   

Salaries and related costs

     235,357        194,743        656,310        571,517   

Rent and occupancy costs

     19,295        18,183        57,221        54,861   

Depreciation and amortization

     9,085        9,923        27,590        30,125   

Selling and promotion

     7,877        6,541        22,462        18,310   

Other

     27,508        20,876        77,183        63,614   
                                

Total operating expenses

     1,507,938        941,081        3,986,780        2,570,725   
                                

Operating income

     159,621        96,246        398,658        274,647   

Other Income (Expense):

        

Interest income

     1,679        2,214        4,938        8,253   

Interest expense

     (140     (325     (378     (404

Other, net

     (1,666     1,192        9,231        7,826   
                                

Other (expense) income, net

     (127     3,081        13,791        15,675   
                                

Earnings before income taxes

     159,494        99,327        412,449        290,322   

Income tax expense

     63,456        41,763        164,692        119,575   
                                

Net earnings

     96,038        57,564        247,757        170,747   

Less: net (losses) earnings attributable to the noncontrolling interest

     (67     (188     87        (335
                                

Net earnings attributable to shareholders

   $ 96,105      $ 57,752      $ 247,670      $ 171,082   
                                

Diluted earnings attributable to shareholders per share

   $ .44      $ .27      $ 1.14      $ .79   
                                

Basic earnings attributable to shareholders per share

   $ .45      $ .27      $ 1.17      $ .81   
                                

Dividends declared and paid per common share

   $ 0      $ 0      $ .20      $ .19   
                                

Weighted average diluted shares outstanding

     216,342,380        216,684,079        216,497,838        216,582,370   
                                

Weighted average basic shares outstanding

     212,392,286        212,241,480        212,306,521        212,153,404   
                                

See accompanying notes to condensed consolidated financial statements.

 

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,
 
     2010     2009     2010     2009  

Operating Activities:

        

Net earnings

   $ 96,038      $ 57,564      $ 247,757      $ 170,747   

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

        

Provision for losses on accounts receivable

     1,284        (778     3,109        791   

Deferred income tax (benefit) expense

     (565     (6,701     2,521        (12,945

Excess tax benefits from stock plans

     (3,470     (246     (11,589     (5,381

Stock compensation expense

     10,846        10,794        33,047        29,065   

Depreciation and amortization

     9,085        9,923        27,590        30,125   

(Gain) loss on sale of assets

     (57     8        (461     (2

Other

     387        365        1,232        1,092   

Changes in operating assets and liabilities:

        

(Increase) decrease in accounts receivable

     (34,203     (94,025     (266,770     120,318   

Increase in other current assets

     (4,095     (803     (2,959     (2,126

Increase (decrease) in accounts payable and accrued expenses

     25,330        71,711        190,440        (28,788

Increase (decrease) in income tax payables, net

     12,438        (5,350     36,770        (3,066
                                

Net cash provided by operating activities

     113,018        42,462        260,687        299,830   
                                

Investing Activities:

        

Decrease in short-term investments

     137        17        107        48   

Purchase of property and equipment

     (10,953     (9,514     (26,653     (25,336

Proceeds from sale of property and equipment

     98        48        268        125   

Prepayment on long-term land lease

     0        (1,898     0        (9,242

Other

     1,208        438        313        (1,153
                                

Net cash used in investing activities

     (9,510     (10,909     (25,965     (35,558
                                

Financing Activities:

        

Proceeds from issuance of common stock

     37,718        25,107        60,958        42,511   

Repurchases of common stock

     (67,782     (34,103     (139,450     (77,075

Excess tax benefits from stock plans

     3,470        246        11,589        5,381   

Dividends paid

     0        0        (42,397     (40,276

Distributions to noncontrolling interest

     (963     (1,009     (963     (1,009

Purchase of noncontrolling interest

     0        0        0        (2,122
                                

Net cash used in financing activities

     (27,557     (9,759     (110,263     (72,590

Effect of exchange rate changes on cash and cash equivalents

     20,975        9,493        6,838        14,559   
                                

Increase in cash and cash equivalents

     96,926        31,287        131,297        206,241   

Cash and cash equivalents at beginning of period

     960,300        915,982        925,929        741,028   
                                

Cash and cash equivalents at end of period

   $ 1,057,226      $ 947,269      $ 1,057,226      $ 947,269   
                                

Interest and Taxes Paid:

        

Interest

   $ 140      $ 317      $ 379      $ 397   

Income taxes

     52,407        46,607        129,249        121,717   

See accompanying notes to condensed consolidated financial statements.

 

4


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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, international service centers and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, 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 footnote 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 26, 2010. Certain 2009 amounts have been reclassified to conform with the 2010 presentation. All dollar amounts in the notes are presented in thousands except for share data.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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 accounts receivable allowances in the amounts of $15,379 as of September 30, 2010 and $14,235 as of December 31, 2009. Additions and write-offs have not been significant in the periods presented.

C. Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. For the Company, these consist of foreign currency translation adjustments, net of related income tax effects, and comprehensive income or loss attributable to noncontrolling interests.

D. 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. Actual results could differ from those estimates.

E. Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2009–No. 13 “Multiple-Deliverable Revenue Arrangements”, which amends Accounting Standards Codification Topic 605 –“Revenue Recognition”. This update provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. ASU 2009–No. 13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is required to and plans to adopt the provisions of this update beginning in the first quarter of 2011. While the Company is still assessing the impact of the adoption of ASU 2009–No. 13, it is not expecting this update will have a material effect on the Company’s results of operations.

Note 2. Income Taxes

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 2007. 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 2001. 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, management believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that may result from these open tax years.

 

5


 

Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three and nine months ended September 30, 2010 and 2009. Based on management’s review of the Company’s tax positions, the Company had no significant unrecognized tax benefits as of September 30, 2010 and December 31, 2009.

Note 3. 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 5, 2010, the shareholders approved the Company’s 2010 Stock Option Plan (“2010 Plan”), which made available a total of 3,000,000 shares of the Company’s common stock for purchase upon exercise of options granted under the 2010 Plan. The Company’s annual grant of option awards and restricted shares generally takes place during the second quarter of each fiscal year. For the nine-month periods ended September 30, 2010 and 2009, 2,634,885 and 2,449,200 options were granted, respectively. Also, for the nine months ended September 30, 2010 and 2009, 26,735 and 29,230 shares were granted to non-employee directors under the 2008 Directors’ Restricted Stock Plan, respectively. For the three and nine-month periods ended September 30, 2010 and 2009, 694,329 and 714,799 shares were issued upon exercise of employee stock purchase rights, respectively.

The Company recognizes compensation expense based on the estimated fair value of options awarded under its stock option and employee stock purchase rights plans. The stock compensation expense, adjusted for expected forfeitures, is recognized on a straight-line basis over the vesting period. The forfeiture assumption used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns. 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,
 
     2010     2009  

Dividend yield

     1.07 - 1.08 %     1.22 - 1.25 %

Volatility — stock option plans

     38 - 40 %     38 - 39 %

Volatility — stock purchase rights plans

     29     59

Risk-free interest rates

     .29 - 2.86 %     .48 - 3.37 %

Expected life (years) — stock option plans

     5.44 - 6.90        6.09 - 7.86   

Expected life (years) — stock purchase rights plans

     1        1   

Weighted average fair value of stock options granted during the period

   $ 14.51      $ 13.84   

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

   $ 11.16      $ 12.78   

The compensation expense for restricted stock awards is based on the fair market value of the Company’s shares of common stock on the date of grant. On June 1, 2010 and 2009, restricted shares were granted with a fair value per share of $37.40 and $34.21, respectively.

Total stock compensation expense and the total related tax benefit are recognized as follows:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Stock compensation expense

   $ 10,846       $ 10,794       $ 33,047       $ 29,065   

Recognized tax benefit

   $ 39       $ 58       $ 148       $ 206   

 

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 attributable to shareholders per share:

 

     Three months ended September 30,  

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

   Net Earnings
Attributable to
Shareholders
     Weighted Average
Shares
     Earnings Per Share  

2010

        

Basic earnings attributable to shareholders

   $ 96,105         212,392,286       $ .45   

Effect of dilutive potential common shares

     —           3,950,094         —     
                          

Diluted earnings attributable to shareholders

   $ 96,105         216,342,380       $ .44   
                          

2009

        

Basic earnings attributable to shareholders

   $ 57,752         212,241,480       $ .27   

Effect of dilutive potential common shares

     —           4,442,599         —     
                          

Diluted earnings attributable to shareholders

   $ 57,752         216,684,079       $ .27   
                          

 

     Nine months ended September 30,  

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

   Net Earnings
Attributable to
Shareholders
     Weighted  Average
Shares
     Earnings Per Share  

2010

        

Basic earnings attributable to shareholders

   $ 247,670         212,306,521       $ 1.17   

Effect of dilutive potential common shares

     —           4,191,317         —     
                          

Diluted earnings attributable to shareholders

   $ 247,670         216,497,838       $ 1.14   
                          

2009

        

Basic earnings attributable to shareholders

   $ 171,082         212,153,404       $ .81   

Effect of dilutive potential common shares

     —           4,428,966         —     
                          

Diluted earnings attributable to shareholders

   $ 171,082         216,582,370       $ .79   
                          

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,
 
     2010      2009      2010      2009  

Shares

     10,975,415         8,789,330         10,975,415         8,789,830   

 

7


 

Note 5. Components of Equity and Comprehensive Income

The components of equity for the nine months ended September 30, 2010 and 2009 are as follows:

 

     Shareholders’
equity
    Noncontrolling
interest
    Total
equity
 

Balance at December 31, 2009

   $ 1,553,007        8,340        1,561,347   

Exercise of stock options

     40,408        —          40,408   

Issuance of shares under stock purchase plan

     20,550        —          20,550   

Shares repurchased under provisions of stock repurchase plans

     (139,450     —          (139,450

Stock compensation expense

     33,047        —          33,047   

Tax benefits from stock plans

     11,589        —          11,589   

Comprehensive income

      

Net earnings

     247,670        87        247,757   

Foreign currency translation adjustments, net of tax of $2,303

     4,198        32        4,230   
                        

Total comprehensive income

     251,868        119        251,987   
                        

Dividends paid ($.20 per share)

     (42,397     —          (42,397

Distributions or declaration of dividends to noncontrolling interest

     —          (963     (963
                        

Balance at September 30, 2010

   $ 1,728,622        7,496        1,736,118   
                        

 

     Shareholders’
equity
    Noncontrolling
interest
    Total
equity
 

Balance at December 31, 2008

   $ 1,366,418        17,498        1,383,916   

Exercise of stock options

     21,999        —          21,999   

Issuance of shares under stock purchase plan

     20,512        —          20,512   

Shares repurchased under provisions of stock repurchase plans

     (77,075     —          (77,075

Stock compensation expense

     29,065        —          29,065   

Tax benefits from stock plans

     5,381        —          5,381   

Purchase of noncontrolling interest

     (281     (187     (468

Comprehensive income

      

Net earnings

     171,082        (335     170,747   

Foreign currency translation adjustments, net of tax of $8,348

     15,221        —          15,221   
                        

Total comprehensive income

     186,303        (335     185,968   
                        

Dividends paid ($.19 per share)

     (40,276     —          (40,276

Distributions or declaration of dividends to noncontrolling interest(1)

     —          (9,067     (9,067
                        

Balance at September 30, 2009

   $ 1,512,046        7,909        1,519,955   
                        

 

(1) Dividends declared to the noncontrolling interest during the period and amount of earnings owed to the noncontrolling interest at the time their ownership interest was purchased. These earnings, reclassified from noncontrolling interest to accounts payable, were distributed in periods subsequent to the effective date of the purchase, including $1,655 paid during the nine months ended September 30, 2009.

The components of total comprehensive income for interim periods are as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(in thousands)

   2010      2009     2010      2009  

Net earnings

   $ 96,038       $ 57,564      $ 247,757       $ 170,747   

Foreign currency translation adjustments, net of tax of $11,984 and $3,664 for the three months ended September 30, 2010 and 2009, and $2,303 and $8,348 for the nine months ended September 30, 2010 and 2009, respectively.

     21,983         6,674        4,230         15,221   
                                  

Comprehensive income

     118,021         64,238        251,987         185,968   

Less: comprehensive income (loss) attributable to the noncontrolling interest

     71         (196     119         (335
                                  

Comprehensive income attributable to shareholders

   $ 117,950         64,434        251,868         186,303   
                                  

 

8


 

On May 5, 2010, the Board of Directors declared a semi-annual cash dividend of $.20 per share payable on June 15, 2010 to shareholders of record as of June 1, 2010.

On May 7, 2009, the Board of Directors declared a semi-annual cash dividend of $.19 per share payable on June 15, 2009 to shareholders of record as of June 1, 2009.

Subsequent to the end of the quarter, on November 1, 2010, the Board of Directors declared a semi-annual cash dividend of $.20 per share payable on December 15, 2010 to shareholders of record as of December 1, 2010.

Note 6. 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. Cash equivalents consist of highly liquid investments with a maturity of three months or less at date of purchase. 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, 2010      December 31, 2009  
     Cost      Fair Value      Cost      Fair Value  

Cash and cash equivalents:

           

Cash and overnight deposits

   $ 373,387       $ 373,387       $ 387,612       $ 387,612   

Corporate commercial paper

     636,735         636,753         489,557         489,626   

Time deposits

     47,104         47,104         48,760         48,760   
                                   

Total cash and cash equivalents

     1,057,226         1,057,244         925,929         925,998   
                                   

Short-term investments:

           

Time deposits

     601         601         655         655   
                                   

Total

   $ 1,057,827       $ 1,057,845       $ 926,584       $ 926,653   
                                   

The fair value of corporate commercial paper is based on the use of market interest rates for identical or similar assets.

Note 7. Contingencies

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 alleged anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a law firm to assist in complying with the DOJ’s subpoena. As part of this process, the Company has met with and continues to co-operate with the DOJ. The Company expects to incur additional costs during the course of this ongoing investigation, which could include fines and/or penalties if the DOJ concludes that the Company has engaged in anti-competitive behavior and such fines and/or penalties could have a material impact on the Company’s financial position, results of operations and operating cash flows.

On January 3, 2008, the Company was named as a defendant, with seven other European and North American-based global logistics providers, in a Federal antitrust class action lawsuit filed in the United States District Court of the Eastern District of New York, Precision Associates, Inc. et al v. Panalpina World Transport, No. 08-CV0042. On July 21, 2009, the plaintiffs filed an amended complaint adding a number of new third party defendants and various claims which they assert to violate the Sherman Act. The plaintiffs’ amended complaint, which purports to be brought on behalf of a class of customers (and has not yet been certified), asserts claims that the defendants engaged in price fixing regarding eight discrete surcharges in violation of the Sherman Act. The allegations concerning the Company relate to two of these surcharges. The amended complaint seeks unspecified damages and injunctive relief. The Company believes that these allegations are without merit and intends to vigorously defend itself. On August 13, 2009, the Company filed a motion to dismiss the amended complaint for failure to state a claim. Plaintiffs filed their opposition to the Company’s motion on January 30, 2010, to which the Company filed a reply, and the motion is currently pending before the Court.

On June 18, 2008, the European Commission (EC) issued a request for information to the Company’s UK subsidiary, Expeditors International (UK) Ltd., requesting certain information relating to an ongoing investigation of freight forwarders. The Company replied to the request. On February 18, 2009, the EC issued another request for information to the same subsidiary requesting certain additional information in connection with the EC’s ongoing investigation of freight forwarders. The Company replied to the request. On February 10, 2010, the Company and its Hong Kong subsidiary, Expeditors Hong Kong Limited, received a Statement of Objections (SO) from the EC. The SO initiates a proceeding against the Company alleging anti-competitive behavior contrary to European Union rules on competition. Specific to the Company, the allegations in the SO are limited to the period from August 2005 to June 2006 and only concern airfreight trade lanes between South China/Hong Kong and the European Economic Area. The Company filed a response to the allegations in the SO on April 12, 2010 and participated in an oral hearing on July 6, 2010. The Company continues to vigorously defend itself against the allegations. The Company expects to incur additional costs during the

 

9


course of this ongoing proceeding, which could include administrative fines if the EC concludes that the Company has engaged in anti-competitive behavior and such fines could have a material impact on the Company’s financial position, results of operations and operating cash flows.

On August 17, 2010, the Company and its Brazilian subsidiary, Expeditors Internacional do Brasil Ltda received an Administrative Proceeding (AP) from the Brazilian Ministry of Justice (MOJ). The AP initiates a proceeding against the Company and one of its employees, alleging possible anti-competitive behavior. The Company intends to vigorously defend itself against the allegations. The Company expects to incur additional costs during the course of this proceeding, which could include administrative fines if the MOJ concludes that the Company has engaged in anti-competitive behavior and such fines could have a material impact on the Company’s financial position, results of operations and operating cash flows.

The Company has incurred approximately $200 and $940 for the three and nine months ended September 30, 2010, respectively, in legal and associated costs on the above matters, as compared with approximately $220 and $270, respectively, for the three and nine months ended September 30, 2009. Since the beginning of these proceedings in 2007, the Company has incurred approximately $15 million in legal and associated costs on the above matters. At this time the Company is unable to estimate the range of loss or damages, if any, that might result as an outcome of any of these proceedings. These government investigations and the related litigation matters are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include substantial monetary damages and, in matters in which injunctive relief or other conduct remedies are sought, an injunction or other order relating to business conduct. Were unfavorable final outcomes to occur, the Company’s business, financial position, results of operations, operating cash flows and overall trends could be materially harmed.

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

Note 8. Business Segment Information

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated 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.

Financial information regarding the Company’s operations by geographic area is as follows:

 

(in thousands)

  UNITED
STATES
    OTHER
NORTH
AMERICA
    LATIN
AMERICA
    ASIA     EUROPE and
AFRICA
    MIDDLE
EAST and
INDIA
    AUSTRAL-
ASIA
    ELIMI-
NATIONS
    CONSOLI-
DATED
 

Three months ended

September 30, 2010:

                 

Revenues from unaffiliated customers

  $ 361,120        43,380        20,400        947,751        190,350        83,451        21,107        —          1,667,559   

Transfers between geographic areas

    28,571        3,567        4,190        6,118        11,045        4,448        2,475        (60,414     —     
                                                                       

Total revenues

  $ 389,691        46,947        24,590        953,869        201,395        87,899        23,582        (60,414     1,667,559   
                                                                       

Net revenues

  $ 179,290        20,911        13,181        140,715        68,158        23,962        12,526        —          458,743   

Operating income

  $ 61,735        6,846        3,837        60,299        17,128        6,029        3,747        —          159,621   

Identifiable assets at quarter end

  $ 1,437,318        78,347        48,887        532,736        433,020        139,478        41,328        5,069        2,716,183   

Capital expenditures

  $ 5,297        92        354        1,502        2,963        394        351        —          10,953   

Depreciation and amortization

  $ 4,882        316        223        1,708        1,184        609        163        —          9,085   

Equity

  $ 1,121,817        40,708        23,974        318,005        155,428        80,774        28,205        (32,793     1,736,118   
                                                                       

Three months ended

September 30, 2009:

                 

Revenues from unaffiliated customers

  $ 246,066        32,214        16,552        516,897        147,354        60,269        17,975        —          1,037,327   

Transfers between geographic areas

    18,293        1,716        3,461        4,227        6,487        3,738        2,595        (40,517     —     
                                                                       

Total revenues

  $ 264,359        33,930        20,013        521,124        153,841        64,007        20,570        (40,517     1,037,327   
                                                                       

Net revenues

  $ 139,232        16,667        10,960        89,490        57,857        20,771        11,535        —          346,512   

Operating income

  $ 37,502        4,090        2,611        33,303        9,650        5,424        3,666        —          96,246   

Identifiable assets at quarter end

  $ 1,135,327        73,500        37,216        435,584        376,050        121,079        35,518        2,613        2,216,887   

Capital expenditures

  $ 7,656        186        171        248        506        588        159        —          9,514   

Depreciation and amortization

  $ 5,048        358        245        1,868        1,593        646        165        —          9,923   

Equity

  $ 964,177        44,455        14,982        290,779        137,278        70,531        22,487        (24,734     1,519,955   
                                                                       

 

10


 

(in thousands)

   UNITED
STATES
     OTHER
NORTH
AMERICA
     LATIN
AMERICA
     ASIA      EUROPE and
AFRICA
     MIDDLE
EAST and
INDIA
     AUSTRAL-
ASIA
     ELIMI-
NATIONS
    CONSOLI-
DATED
 

Nine months ended

September 30, 2010:

                         

Revenues from unaffiliated customers

   $ 979,675         120,667         55,317         2,422,208         525,064         222,599         59,908         —          4,385,438   

Transfers between geographic areas

     72,743         7,722         12,082         16,468         29,407         11,918         7,393         (157,733     —     
                                                                               

Total revenues

   $ 1,052,418         128,389         67,399         2,438,676         554,471         234,517         67,301         (157,733     4,385,438   
                                                                               

Net revenues

   $ 489,231         56,757         37,428         361,512         192,135         66,195         36,166         —          1,239,424   

Operating income

   $ 152,425         16,317         11,155         148,652         43,870         15,953         10,286         —          398,658   

Identifiable assets at quarter end

   $ 1,437,318         78,347         48,887         532,736         433,020         139,478         41,328         5,069        2,716,183   

Capital expenditures

   $ 13,137         417         988         3,513         6,415         1,729         454         —          26,653   

Depreciation and amortization

   $ 14,753         1,023         639         5,112         3,721         1,828         514         —          27,590   

Equity

   $ 1,121,817         40,708         23,974         318,005         155,428         80,774         28,205         (32,793     1,736,118   
                                                                               

Nine months ended

September 30, 2009:

                         

Revenues from unaffiliated customers

   $ 704,962         91,482         47,486         1,373,093         415,479         167,848         45,022         —          2,845,372   

Transfers between geographic areas

     54,847         5,340         9,972         11,863         19,086         11,005         7,448         (119,561     —     
                                                                               

Total revenues

   $ 759,809         96,822         57,458         1,384,956         434,565         178,853         52,470         (119,561     2,845,372   
                                                                               

Net revenues

   $ 399,614         47,718         32,645         275,680         165,623         61,229         30,565         —          1,013,074   

Operating income

   $ 95,483         11,512         8,691         107,424         26,417         15,362         9,758         —          274,647   

Identifiable assets at quarter end

   $ 1,135,327         73,500         37,216         435,584         376,050         121,079         35,518         2,613        2,216,887   

Capital expenditures

   $ 19,268         477         582         1,259         1,847         1,486         417         —          25,336   

Depreciation and amortization

   $ 15,828         1,031         729         5,714         4,490         1,860         473         —          30,125   

Equity

   $ 964,177         44,455         14,982         290,779         137,278         70,531         22,487         (24,734     1,519,955   
                                                                               

 

11


 

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 “Critical Accounting Estimates,” “Results of Operations,” “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements which must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified elsewhere in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on February 26, 2010.

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 all domestic 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 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 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, as well as economic turbulence or security concerns in the nations in which it does business. The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Consistent with current economic conditions, the Company’s pricing continues to be pressured by customers and service providers.

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.

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. In the three months and nine months ended September 30, 2010, buy rates continued to be challenging as volumes increased and carriers managed overall capacity. The combination of constrained capacity and price volatility continues to challenge the Company’s ability to maintain historical unitary profitability.

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, airline and ocean steamship line industries have incurred significant losses in recent years as a result of the global economic downturn and many carriers are highly leveraged with debt. This situation has required the Company to be increasingly selective in which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, space allotments available from carriers, governmental regulation or 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.

 

12


 

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 weather patterns, 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.

Primarily as a result of the global economic downturn that started in the second half of 2008, the Company’s air and ocean volumes were at exceptionally low levels in the first nine months of 2009. In the fourth quarter of 2009, the Company’s air and ocean volumes began to improve and this trend continued through the first nine months of 2010. Due to the uncertainty in the global economy, the Company cannot predict whether this trend will continue.

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.

In terms of the opportunities, challenges and risks that management is focused on in 2010, the Company operates in 60 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;

 

   

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 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 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, these losses must be made up from future operating profits, in the aggregate, before any cash incentive compensation can be earned. 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 Estimates

Management believes that the nature of the Company’s business is such that there are few complex measurement issues or challenges in accounting for operations.

 

13


 

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;

 

   

accrual of various tax liabilities; and

 

   

calculation of share-based compensation expense.

These estimates, other than the calculation of share-based compensation expense, are not highly uncertain and have not historically been subject to significant change. 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 3 in the condensed consolidated financial statements in this quarterly report, the Company accounts for share-based compensation based on an estimate of the fair value of options granted to employees under the Company’s stock option and employee stock purchase plans. The stock compensation expense, adjusted for expected forfeitures, is recognized on a straight-line basis over the option vesting period.

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 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 3 in the condensed consolidated financial statements for the assumptions used for grants issued during the nine months ended September 30, 2010 and 2009. The assumptions used by the Company for estimating the fair value of options granted were developed on a basis consistent with assumptions used for valuing previous grants.

Management believes that the assumptions used are appropriate based upon 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.

 

14


 

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, 2010 and 2009, 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.

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,  
     2010     2009     2010     2009  
     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 services

   $ 172,631        38   $ 116,659        34   $ 466,530         38   $ 355,089        35

Ocean freight and ocean services

     110,472        24        83,721        24        283,510         23        244,530        24   

Customs brokerage and other services

     175,640        38        146,132        42        489,384         39        413,455        41   
                                                                 

Net revenues

     458,743        100        346,512        100        1,239,424         100        1,013,074        100   
                                                                 

Overhead Expenses:

                 

Salaries and related costs

     235,357        51        194,743        56        656,310         53        571,517        56   

Other

     63,765        14        55,523        16        184,456         15        166,910        17   
                                                                 

Total overhead expenses

     299,122        65        250,266        72        840,766         68        738,427        73   
                                                                 

Operating income

     159,621        35        96,246        28        398,658         32        274,647        27   

Other (expense) income, net

     (127     0        3,081        1        13,791         1        15,675        2   
                                                                 

Earnings before income taxes

     159,494        35        99,327        29        412,449         33        290,322        29   

Income tax expense

     63,456        14        41,763        12        164,692         13        119,575        12   
                                                                 

Net earnings

     96,038        21        57,564        17        247,757         20        170,747        17   

Less: net (losses) earnings attributable to noncontrolling interest

     (67     0        (188     0        87         0        (335     0   
                                                                 

Net earnings attributable to shareholders

   $ 96,105        21   $ 57,752        17   $ 247,670         20   $ 171,082        17
                                                                 

Airfreight services net revenues increased 48% for the three-month period ended September 30, 2010, as compared with the same period for 2009. North America, Asia and Europe airfreight services net revenues increased 43%, 83% and 13%, respectively, for the third quarter of 2010 as compared with the same period in 2009. This increase in global airfreight services net revenues was primarily due to a 32% increase in airfreight tonnage and a 23% increase in net revenue per kilo.

Airfreight services net revenues increased 31% for the nine-month period ended September 30, 2010, as compared with the same period for 2009. North America, Asia and Europe airfreight services net revenues increased 37%, 37% and 18%, respectively, for the nine-month period ended September 30, 2010 as compared with the same period in 2009. This increase in global airfreight

 

15


services net revenues was primarily due to a 42% increase in airfreight tonnage, which was partially offset by an overall 9% decrease in net revenue per kilo.

The increase in airfreight tonnage is primarily due to improvements in the global economy which began in the fourth quarter of 2009. During the first half of 2009, net revenue per kilo was higher than historical levels as the Company benefited from favorable buying opportunities that existed in a number of short-term spot markets. This trend reversed in the latter part of the third quarter of 2009 as carriers reduced capacity and rapidly increased pricing. Net revenue per kilo for the three months ended September 30, 2010 returned to a level more consistent with the Company’s historical experience. Net revenue per kilo for the nine months ended September 30, 2010 was lower due to favorable spot market buying opportunities in 2009 that were not available in 2010.

Ocean freight and ocean services net revenues increased 32% for the three-month period ended September 30, 2010, as compared with the same period for 2009. North America, Asia and Europe ocean freight net revenues increased approximately 32%, 38% and 22%, respectively, for the third quarter of 2010 as compared with the same period in 2009.

Ocean freight and ocean services net revenues increased 16% for the nine-month period ended September 30, 2010, as compared with the same period for 2009. North America, Asia and Europe ocean freight net revenues increased approximately 13%, 22% and 10%, respectively, for the nine-month period ended September 30, 2010, as compared with the same period in 2009.

Ocean freight net revenues are comprised of three basic services: ocean freight consolidation, direct ocean forwarding and order management. The majority of the Company’s ocean freight net revenue is derived from ocean freight consolidation which represented 50% and 53% of ocean freight net revenue for the nine-month periods ended September 30, 2010 and 2009, respectively.

Ocean freight consolidation net revenue increased 36% for the three-month period ended September 30, 2010, as compared with the same period in 2009, primarily due to a 27% increase in volume as measured in terms of forty-foot container equivalent units (FEUs), and a 7% increase in net revenue per container. Direct ocean forwarding and order management, which are primarily fee-based, increased 21% and 38%, respectively, for the three-month period ended September 30, 2010, as compared with the same period in 2009, due to an increase in volume.

Ocean freight consolidation net revenue increased 10% for the nine-month period ended September 30, 2010, as compared with the same period in 2009, primarily due to a 23% increase in volume, partially offset by a 10% decrease in net revenue per container. Direct ocean forwarding and order management increased 15% and 34%, respectively, for the nine-month period ended September 30, 2010 as compared with the same period in 2009, due to an increase in volume.

The increase in ocean volumes is primarily due to an improvement in the global economy which began in the fourth quarter of 2009. Similar to the airfreight market, in the first half of 2009, net revenue per container was higher than historical levels as the Company benefited from favorable buying opportunities that existed in a number of short-term spot markets. This trend reversed in the latter part of the third quarter of 2009 as carriers reduced capacity and increased pricing. Net revenue per container for the three months ended September 30, 2010 returned to a level more consistent with the Company’s historical experience. Net revenue per container in the nine-month period ended September 30, 2010 was lower due to favorable spot market buying opportunities in 2009 that were not available in 2010.

Customs brokerage and other services net revenues increased 20% and 18%, respectively, for the three and nine-month periods ended September 30, 2010, as compared with the same periods for 2009, primarily as a result of increases in international air and ocean and domestic time definite freight volumes. Customers continue to seek out customs brokers with sophisticated computerized capabilities critical to an overall logistics management program, including rapid responses to changes in the regulatory and security environment.

Salaries and related costs, excluding stock compensation expense, increased 22% and 15%, respectively, during the three and nine-month periods ended September 30, 2010, as compared with the same periods in 2009, primarily as a result of larger bonuses earned from achieving higher operating income before bonuses and an increase in the number of employees.

The effects of including stock-based compensation expense in salaries and related costs are as follows:

 

     For the three months
ended September 30,
    For the nine months
ended September 30,
 
     2010     2009     2010     2009  

Salaries and related costs

   $ 235,357      $ 194,743      $ 656,310      $ 571,517   

As a % of net revenue

     51.3     56.2     53.0     56.4

Stock compensation expense

   $ 10,846      $ 10,794      $ 33,047      $ 29,065   

As a % of salaries and related costs

     4.6     5.5     5.0     5.1

As a % of net revenue

     2.4     3.1     2.7     2.9

Excluding stock compensation expense, salaries and related costs as a percentage of net revenue decreased 415 and 326 basis points, respectively, for the three and nine-month periods ended September 30, 2010, as compared with the same periods for 2009. Stock compensation expense remained constant for the three-month period ended September 30, 2010, as compared with the same

 

16


period for 2009. Stock compensation expense increased for the nine-month period ended September 30, 2010, as compared with the same period for 2009, primarily a result of a $4 million “true up” credit recognized in the first quarter of 2009 for the difference between the higher actual pre-vesting forfeiture experience and the pre-vesting forfeiture assumptions used to calculate stock option expense. The net impact on salaries and related costs was $3 million after consideration of the effect on bonuses.

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 profits, creating a direct alignment between corporate performance and shareholder interests. 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.

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. 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 any higher risk transactions, such as overriding established credit limits, would be known in a relatively short time frame. Management believes that when the potential and certain impact on the bonus is fully considered in light of 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 15% and 11%, respectively, for the three and nine-month periods ended September 30, 2010, as compared with the same periods in 2009, primarily as a result of higher business taxes, travel and other expenses related to increased activity. Other overhead expenses as a percentage of net revenues decreased for the three and nine-month periods ended September 30, 2010, as compared with the same periods in 2009. Legal and related expenses increased slightly in the third quarter of 2010 and increased approximately $1 million in the nine-month period ended September 30, 2010, as compared to the same periods in 2009. These increases are primarily attributable to preparing the Company’s responses to a Statement of Objections issued by the European Commission as described further in Part II—Item 1 on this report on Form 10-Q entitled “Legal Proceedings.” The Company will continue to incur legal costs, which could be substantial and include judgments, fines and/or penalties, until these proceedings are concluded. Further, the Company periodically conducts reviews of the operations and procedures of its offices worldwide relating to compliance with applicable laws and regulations. If the governmental regulatory agencies conclude that the Company has engaged in anti-competitive behavior or in the event of an adverse judgment in the class action lawsuit, such judgments, fines and/or penalties could have a material impact on the Company’s financial condition, results of operations and operating cash flows.

Other income, net, decreased $3 million and $2 million for the three and nine-month periods ended September 30, 2010, as compared to the same periods in 2009, primarily due to net foreign exchange losses of $3 million in the three months ended September 30, 2010 versus less than $1 million net gains for the same period in 2009. For the nine months ended September 30, 2010 compared to the same period in 2009, net foreign exchange gains decreased by less than $1 million. These net foreign exchange variances in 2010 resulted primarily from holding U.S. dollars in Euro-based subsidiaries as the Euro strengthened against the dollar during the third quarter of 2010.

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, 2010, was 39.8% as compared to 42.1% for the same period in 2009. The Company’s consolidated effective income tax rate for the nine-month period ended September 30, 2010 and 2009 was 39.9% and 41.2%, respectively. Although a tax benefit related to stock-based compensation expense is recorded for non-qualified stock options at the time the related compensation expense is recognized, the tax benefit received for disqualifying dispositions of incentive stock options cannot be anticipated. The lower consolidated effective income tax rate during the three and nine-month periods ended September 30, 2010, as compared to the same periods in 2009, is primarily the result of a higher tax benefit received for disqualifying dispositions of incentive stock options occurring during the three and nine months ended September 30, 2010, as compared to the same periods in 2009.

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. Historically, the industry has experienced consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local broker/forwarders remain a competitive force.

 

17


 

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. Large customers utilize 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 greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers.

Developing 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.

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 around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to avoid short-term exchange losses. Any such hedging activity during the three and nine months ended September 30, 2010 and 2009 was insignificant. During the three and nine months ended September 30, 2010, the Company incurred net foreign exchange losses of approximately $2,878 and net foreign exchange gains of $1,071, respectively. For the same periods of 2009, the Company incurred net foreign exchange gains of approximately $281 and $1,628, respectively. The Company had no foreign currency derivatives outstanding at September 30, 2010 and December 31, 2009.

Geographic Coverage

During the third quarter of 2010, the Company did not open nor close any offices.

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 is expected to significantly exceed the “goodwill” recorded in the transaction.

Internal Growth - Management believes that a comparison of “same store” results is critical in the evaluation of the quality and extent of the Company’s internally generated growth. The “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. There were no significant differences between the “same store” analysis and the Company’s results for the three and nine months ended September 30, 2010 and 2009.

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, 2010, was $113 million and $261 million, respectively, as compared with $42 million and $300 million for the same periods of 2009. The $71 million increase for the three months ended September 30, 2010 is primarily due to higher earnings and to changes in working capital accounts. The decrease of $39 million for the nine months ended September 30, 2010, is primarily due to changes in working capital accounts partially offset by an increase in net earnings. At September 30, 2010, working capital was $1,262 million, including cash, cash equivalents and short-term investments of $1,058 million. The Company had no long-term debt at September 30, 2010.

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 in the United States to the Customs and Border Protection Division 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 from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency.

 

18


 

Cash used in investing activities for the three and nine months ended September 30, 2010, was $10 million and $26 million, respectively, as compared with $11 million and $36 million during the same periods of 2009. The largest use of cash in investing activities is cash paid for capital expenditures. 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. The Company made capital expenditures of $11 million during both the three month periods ended September 30, 2010 and 2009, including prepayments on a long term land lease. Capital expenditures in the third quarter of 2010 and 2009 related primarily to investments in real estate, building and leasehold improvements, technology, and office furniture and equipment. Total capital expenditures in 2010 are estimated to be approximately $60 million. This includes normal capital expenditures as noted above plus additional real estate development. In the second quarter of 2010, the Company entered into a $27 million contractual obligation for the development of office/warehouse facilities in London, United Kingdom. The Company expects to finance this capital expenditure with cash in 2010 and 2011.

Cash used in financing activities during the three and nine-months ended September 30, 2010 was $28 million and $110 million, respectively, as compared with $10 million and $73 million for each of the same periods in 2009. The Company uses the proceeds from stock option exercises to repurchase the Company’s common 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 both the three and nine months ended September 30, 2010, as compared with the same periods in 2009, is primarily the result of this policy. During the nine months ended September 30, 2010 and 2009, the net use of cash in financing activities included the payment of dividends of $.20 per share and $.19 per share, respectively.

On November 1, 2010, the Board of Directors declared a semi-annual cash dividend of $.20 per share payable on December 15, 2010 to shareholders of record as of December 1, 2010.

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 disruptions 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 cannot forecast the impact that ongoing uncertainties in the global economy will have on its operating results. Management believes that the Company has effective credit control procedures, and historically has experienced relatively insignificant collection problems. The Company cannot predict what fallout any of these economic uncertainties may have on freight volumes, changes in consumer demand, supplier stability and capacity or on customers’ abilities to pay.

The Company maintains international unsecured bank lines of credit. At September 30, 2010, the international bank lines of credit totaled $19 million. In addition, the Company maintains a bank facility with its U.K. bank for $11 million which is available for issuances of standby letters of credit. At September 30, 2010, the Company had no amounts outstanding on these lines of credit but was contingently liable for $88 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.

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, 2010, cash and cash equivalent balances of $496 million were held by the Company’s non-U.S. subsidiaries, of which $74 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 intercompany transactions and may hold currencies that are not the local functional currency. This brings foreign exchange risk to the Company’s earnings.

 

19


 

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, 2010, would have had the effect of raising operating income approximately $28 million. An average 10% strengthening of the U.S. dollar, for the same period, would have had the effect of reducing operating income approximately $23 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.

As of September 30, 2010, the Company had approximately $5 million of net unsettled intercompany 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, 2010, was insignificant. For the three and nine months ended September 30, 2010, the Company incurred net foreign exchange losses of approximately $2,878 and net foreign exchange gains of $1,071, respectively. For the same periods of 2009, the Company incurred net foreign exchange gains of approximately $281 and $1,628, respectively. The Company had no foreign currency derivatives outstanding at September 30, 2010 and December 31, 2009. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. The majority of intercompany billings are resolved within 30 days and intercompany billings arising in the normal course of business are fully settled within 90 days.

Interest Rate Risk

At September 30, 2010, the Company had cash, cash equivalents and short-term investments of $1,058 million, of which $684 million was invested at various short-term market interest rates. The Company had no short-term borrowings at September 30, 2010. A hypothetical change in the interest rate of 10 basis points 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 2010.

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 at the reasonable assurance level.

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.

We have 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 procedures and controls 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 alleged anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a law firm to assist in complying with the DOJ’s subpoena. As part of this process, the Company has met with and continues to co-operate with the DOJ. The Company expects to incur additional costs during the course of this ongoing investigation, which could include fines and/or penalties if the DOJ concludes that the Company has engaged in anti-competitive behavior and such fines and/or penalties could have a material impact on the Company’s financial position, results of operations and operating cash flows.

 

20


 

On January 3, 2008, the Company was named as a defendant, with seven other European and North American-based global logistics providers, in a Federal antitrust class action lawsuit filed in the United States District Court of the Eastern District of New York, Precision Associates, Inc. et al v. Panalpina World Transport, No. 08-CV0042. On July 21, 2009, the plaintiffs filed an amended complaint adding a number of new third party defendants and various claims which they assert to violate the Sherman Act. The plaintiffs’ amended complaint, which purports to be brought on behalf of a class of customers (and has not yet been certified), asserts claims that the defendants engaged in price fixing regarding eight discrete surcharges in violation of the Sherman Act. The allegations concerning the Company relate to two of these surcharges. The amended complaint seeks unspecified damages and injunctive relief. The Company believes that these allegations are without merit and intends to vigorously defend itself. On August 13, 2009, the Company filed a motion to dismiss the amended complaint for failure to state a claim. Plaintiffs filed their opposition to the Company’s motion on January 30, 2010, to which the Company filed a reply, and the motion is currently pending before the Court.

On June 18, 2008, the European Commission (EC) issued a request for information to the Company’s UK subsidiary, Expeditors International (UK) Ltd., requesting certain information relating to an ongoing investigation of freight forwarders. The Company replied to the request. On February 18, 2009, the EC issued another request for information to the same subsidiary requesting certain additional information in connection with the EC’s ongoing investigation of freight forwarders. The Company replied to the request. On February 10, 2010, the Company and its Hong Kong subsidiary, Expeditors Hong Kong Limited, received a Statement of Objections (SO) from the EC. The SO initiates a proceeding against the Company alleging anti-competitive behavior contrary to European Union rules on competition. Specific to the Company, the allegations in the SO are limited to the period from August 2005 to June 2006 and only concern airfreight trade lanes between South China/Hong Kong and the European Economic Area. The Company filed a response to the allegations in the SO on April 12, 2010 and participated in an oral hearing on July 6, 2010. The Company continues to vigorously defend itself against the allegations. The Company expects to incur additional costs during the course of this ongoing proceeding, which could include administrative fines if the EC concludes that the Company has engaged in anti-competitive behavior and such fines could have a material impact on the Company’s financial position, results of operations and operating cash flows.

On August 17, 2010, the Company and its Brazilian subsidiary, Expeditors Internacional do Brasil Ltda received an Administrative Proceeding (AP) from the Brazilian Ministry of Justice (MOJ). The AP initiates a proceeding against the Company and one of its employees, alleging possible anti-competitive behavior. The Company intends to vigorously defend itself against the allegations. The Company expects to incur additional costs during the course of this proceeding, which could include administrative fines if the MOJ concludes that the Company has engaged in anti-competitive behavior and such fines could have a material impact on the Company’s financial position, results of operations and operating cash flows.

The Company has incurred approximately $200 and $940 for the three and nine months ended September 30, 2010, respectively, in legal and associated costs on the above matters, as compared with approximately $220 and $270, respectively, for the three and nine months ended September 30, 2009. Since the beginning of these proceedings in 2007, the Company has incurred approximately $15 million in legal and associated costs on the above matters. At this time the Company is unable to estimate the range of loss or damages, if any, that might result as an outcome of any of these proceedings. These government investigations and the related litigation matters are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include substantial monetary damages and, in matters in which injunctive relief or other conduct remedies are sought, an injunction or other order relating to business conduct. Were unfavorable final outcomes to occur, the Company’s business, financial position, results of operations, operating cash flows and overall trends could be materially harmed.

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

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 February 26, 2010.

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, 2010

     2,684       $ 41.84         2,684         31,906,142   

August 1-31, 2010

     808,852         41.31         808,852         32,070,794   

September 1-30, 2010

     798,482         42.90         798,482         30,975,838   
                                   

Total

     1,610,018       $ 42.10         1,610,018         30,975,838   
                                   

 

21


 

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. This plan was amended in February 2001 to increase the authorization to repurchase up to 20 million shares of the Company’s common stock. On February 9, 2009, the plan was further amended to increase the authorization to repurchase up to 40 million shares. This authorization has no expiration date. This plan was disclosed in the Company’s report on Form 10-K filed March 31, 1995. In the third quarter of 2010, 851,622 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 such shares as may be necessary to reduce the issued and outstanding stock to 200 million shares of common stock. 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. This plan was announced on November 13, 2001. In the third quarter of 2010, 758,396 shares of common stock were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases were made to limit the growth in number of issued and outstanding shares resulting from stock option exercises and the exercise of employee stock purchase rights.

Item 5. Other Information

 

(a) Not applicable.

 

(b) Not applicable.

 

22


 

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K.

 

Exhibit Number

  

Description

31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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

 

23


 

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, 2010

 

  /s/ PETER J. ROSE

    Peter J. Rose, Chairman and Chief Executive Officer

November 8, 2010

 

  /s/ BRADLEY S. POWELL

    Bradley S. Powell, Chief Financial Officer

 

24


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Form 10-Q Index and Exhibits

September 30, 2010

 

Exhibit Number

  

Description

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

 

25