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EXPEDITORS INTERNATIONAL OF WASHINGTON INC - Quarter Report: 2016 March (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 March 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 0-13468
___________________________________________
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its charter)
___________________________________________
Washington
  
91-1069248
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification Number)
 
 
 
1015 Third Avenue, 12th Floor, Seattle, Washington
  
98104
(Address of principal executive offices)
  
(Zip Code)
(206) 674-3400
(Registrant’s telephone number, including area code)
______________________________________________________

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
  
Accelerated filer
 o
 
 
 
 
 
 
Non-accelerated filer
 o
(Do not check if a smaller reporting company)
  
Smaller reporting company
 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o No x
At May 2, 2016, the number of shares outstanding of the issuer’s Common Stock was 182,059,031.
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
 
March 31,
2016
 
December 31, 2015
Current Assets:
 
 
 
Cash and cash equivalents
$
1,013,917

 
$
807,796

Accounts receivable, less allowance for doubtful accounts of $8,919 at March 31, 2016 and $7,820 at December 31, 2015
1,010,667

 
1,112,260

Deferred Federal and state income taxes
18,203

 
16,861

Other
44,693

 
56,453

Total current assets
2,087,480

 
1,993,370

Property and equipment, less accumulated depreciation and amortization of $396,497 at March 31, 2016 and $385,023 at December 31, 2015
526,941

 
524,724

Goodwill
7,927

 
7,927

Other assets, net
57,395

 
56,417

Total assets
$
2,679,743

 
$
2,582,438

Current Liabilities:
 
 
 
Accounts payable
623,699

 
645,304

Accrued expenses, primarily salaries and related costs
202,284

 
186,571

Federal, state and foreign income taxes
28,432

 
29,498

Total current liabilities
854,415

 
861,373

Deferred Federal and state income taxes
42,817

 
26,389

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ Equity:
 
 
 
Preferred stock, none issued

 

Common stock, par value $0.01 per share. Issued and outstanding 181,562 shares at March 31, 2016 and 182,067 shares at December 31, 2015
1,816

 
1,821

Additional paid-in capital
3,851

 
31

Retained earnings
1,845,356

 
1,771,379

Accumulated other comprehensive loss
(71,772
)
 
(81,238
)
Total shareholders’ equity
1,779,251

 
1,691,993

Noncontrolling interest
3,260

 
2,683

Total equity
1,782,511

 
1,694,676

Total liabilities and equity
$
2,679,743

 
$
2,582,438

See accompanying notes to condensed consolidated financial statements.


2



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
 
 
Three months ended
 
March 31,
 
2016
 
2015
Revenues:
 
 
 
Airfreight services
$
560,853

 
$
707,444

Ocean freight and ocean services
454,192

 
565,717

Customs brokerage and other services
403,427

 
404,365

Total revenues
1,418,472

 
1,677,526

Operating Expenses:
 
 
 
Airfreight services
388,777

 
513,001

Ocean freight and ocean services
323,020

 
445,456

Customs brokerage and other services
189,606

 
189,583

Salaries and related costs
283,355

 
278,878

Rent and occupancy costs
26,859

 
25,388

Depreciation and amortization
11,329

 
11,529

Selling and promotion
9,432

 
9,247

Other
34,268

 
35,561

Total operating expenses
1,266,646

 
1,508,643

Operating income
151,826

 
168,883

Other Income (Expense):
 
 
 
Interest income
2,779

 
2,732

Other, net
879

 
34

Other income, net
3,658

 
2,766

Earnings before income taxes
155,484

 
171,649

Income tax expense
58,437

 
64,317

Net earnings
97,047

 
107,332

Less net earnings attributable to the noncontrolling interest
463

 
628

Net earnings attributable to shareholders
$
96,584

 
$
106,704

Diluted earnings attributable to shareholders per share
$
0.53

 
$
0.55

Basic earnings attributable to shareholders per share
$
0.53

 
$
0.56

Weighted average diluted shares outstanding
183,018

 
192,707

Weighted average basic shares outstanding
182,010

 
191,628

See accompanying notes to condensed consolidated financial statements.



3



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

 
Three months ended
 
March 31,
 
2016
 
2015
Net earnings
$
97,047

 
$
107,332

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments, net of tax of $5,187 and $10,560 for the three months ended March 31, 2016 and 2015
9,580

 
(19,605
)
Other comprehensive income (loss)
9,580

 
(19,605
)
Comprehensive income
106,627

 
87,727

Less comprehensive income attributable to the noncontrolling interest
577

 
297

Comprehensive income attributable to shareholders
$
106,050

 
$
87,430

See accompanying notes to condensed consolidated financial statements.


4



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three months ended
 
March 31,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
97,047

 
$
107,332

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Provision for losses on accounts receivable
578

 
277

Deferred income tax expense
9,896

 
11,937

Excess tax benefits from stock plans

 
(1,480
)
Stock compensation expense
10,831

 
9,907

Depreciation and amortization
11,329

 
11,529

Other
36

 
86

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
112,710

 
(46,790
)
(Decrease) increase in accounts payable and accrued expenses
(15,344
)
 
14,895

Increase in income taxes payable, net
10,925

 
23,132

(Increase) decrease in other current assets
(2,055
)
 
3,569

Net cash from operating activities
235,953

 
134,394

Investing Activities:
 
 
 
Purchase of short-term investments
(52
)
 
(22
)
Proceeds from maturities of short-term investments
17

 
40,296

Purchase of property and equipment
(14,035
)
 
(9,445
)
Other, net
(524
)
 
198

Net cash from investing activities
(14,594
)
 
31,027

Financing Activities:
 
 
 
Proceeds from issuance of common stock
41,635

 
35,048

Repurchases of common stock
(70,292
)
 
(77,368
)
Excess tax benefits from stock plans

 
1,480

Distributions to noncontrolling interest

 
(857
)
Net cash from financing activities
(28,657
)
 
(41,697
)
Effect of exchange rate changes on cash and cash equivalents
13,419

 
(17,687
)
Increase in cash and cash equivalents
206,121

 
106,037

Cash and cash equivalents at beginning of period
807,796

 
927,107

Cash and cash equivalents at end of period
$
1,013,917

 
$
1,033,144

Taxes Paid:
 
 
 
Income taxes
$
37,984

 
$
28,261

See accompanying notes to condensed consolidated financial statements.

5



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)

Note 1.
Summary of Significant Accounting Policies
A.
Basis of Presentation
Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, industrial and manufacturing companies around the world.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 25, 2016.
All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified.
B.
Accounts Receivable
The Company maintains an allowance for doubtful accounts, which is reviewed at least monthly for estimated losses resulting from the inability of its customers to make required payments for services and advances. Additional allowances may be necessary in the future if the ability of its customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of $8,919 as of March 31, 2016 and $7,820 as of December 31, 2015. Additions and write-offs have not been significant in the periods presented.
C.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure which the Company has self-insured, accrual of various tax liabilities, accrual of loss contingencies and calculation of share-based compensation expense. Actual results could differ from those estimates.



6



Note 2. Share-Based Compensation
The Company provides compensation benefits by granting stock options and employee stock purchase rights to its employees and restricted shares to its directors. The Company has historically granted the majority of its options during the second quarter of each fiscal year and no options were granted in the quarter ended March 31, 2016 and 2015. The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year and none were issued in the three-month periods ended March 31, 2016 and 2015.
The Company recognizes stock compensation expense based on an estimate of the fair value of awards granted to employees and directors under the Company’s stock option, director restricted stock and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the stock awards' vesting periods as salaries and related costs.
 
 
 
 
Total stock compensation expense and the total related tax benefit recognized are as follows:
 
Three months ended
 
March 31,
 
2016
 
2015
Stock compensation expense
$
10,831

 
$
9,907

Recognized tax benefit
$
1,730

 
$
1,243



Note 3. Basic and Diluted Earnings per Share
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:
 
Three months ended 
 
March 31,
(Amounts in thousands, except share and per share amounts)
Net earnings
attributable to
shareholders
 
Weighted average
shares
 
Earnings per share
2016
 
 
 
 
 
Basic earnings attributable to shareholders
$
96,584

 
182,010

 
$
0.53

Effect of dilutive potential common shares

 
1,008

 

Diluted earnings attributable to shareholders
$
96,584

 
183,018

 
$
0.53

2015
 
 
 
 
 
Basic earnings attributable to shareholders
$
106,704

 
191,628

 
$
0.56

Effect of dilutive potential common shares

 
1,079

 

Diluted earnings attributable to shareholders
$
106,704

 
192,707

 
$
0.55

 
 
 
 
 
 
The following potential common shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
 
Three months ended
 
March 31,
 
2016
 
2015
Shares
9,414

 
7,776



7



Note 4. Components of Equity
The components of equity for the three months ended March 31, 2016 and 2015 are as follows:
 
Shareholders’
equity
 
Noncontrolling
interest
 
Total
equity
Balance at December 31, 2015
$
1,691,993

 
2,683

 
1,694,676

Exercise of stock options
41,635

 

 
41,635

Shares repurchased under provisions of stock repurchase plans
(70,292
)
 

 
(70,292
)
Stock compensation expense
10,831

 

 
10,831

Tax benefits from stock plans, net
(966
)
 

 
(966
)
Net earnings
96,584

 
463

 
97,047

Other comprehensive income
9,466

 
114

 
9,580

Balance at March 31, 2016
$
1,779,251

 
3,260

 
1,782,511

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

 
3,200

 
1,871,608

Exercise of stock options
35,048

 

 
35,048

Shares repurchased under provisions of stock repurchase plans
(77,368
)
 

 
(77,368
)
Stock compensation expense
9,907

 

 
9,907

Tax benefits from stock plans, net
1,466

 

 
1,466

Net earnings
106,704

 
628

 
107,332

Other comprehensive loss
(19,274
)
 
(331
)
 
(19,605
)
Distributions to noncontrolling interest

 
(857
)
 
(857
)
Balance at March 31, 2015
$
1,924,891

 
2,640

 
1,927,531

The Company has a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises and employee stock purchases. During the three month periods ended March 31, 2016 and 2015, 423 and 459 shares were repurchased at an average price of $47.60 and $47.84 per share, respectively. The Company also has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding stock to 180 million shares of common stock. On May 3, 2016, the Board of Directors amended the plan to further authorize repurchases down to 170 million shares of common stock. During the three-month periods ended March 31, 2016 and 2015, 1,048 and 1,158 shares were repurchased at an average price of $47.87 and $47.87 per share, respectively.
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
Subsequent to the end of the first quarter, on May 3, 2016, the Board of Directors declared a semi-annual dividend of $0.40 per share payable on June 15, 2016 to shareholders of record as of June 1, 2016.



8



Note 5. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents. Short-term investments have a maturity of greater than three months at date of purchase. Cash, cash equivalents and short-term investments consist of the following:
 
March 31, 2016
 
December 31, 2015
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Cash and Cash Equivalents:
 
 
 
 
 
 
 
Cash and overnight deposits
$
509,685

 
509,685

 
445,582

 
445,582

Corporate commercial paper
438,536

 
438,613

 
302,433

 
302,480

Time deposits
65,696

 
65,696

 
59,781

 
59,781

Total cash and cash equivalents
1,013,917

 
1,013,994

 
807,796

 
807,843

Short-Term Investments:
 
 
 
 
 
 
 
Time deposits
71

 
71

 
40

 
40

Total
$
1,013,988

 
1,014,065

 
807,836

 
807,883

The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).
Note 6. Contingencies
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of March 31, 2016, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

9



Note 7. Business Segment Information
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues1, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin.
Financial information regarding the Company’s operations by geographic area is as follows:
(in thousands)
UNITED
STATES
 
OTHER
NORTH
AMERICA
 
LATIN
AMERICA
 
NORTH ASIA
 
SOUTH ASIA
 
EUROPE
 
MIDDLE EAST, AFRICA AND INDIA
 
ELIMI-
NATIONS
 
CONSOLI-
DATED
Three months ended March 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
407,826

 
52,106

 
20,064

 
497,232

 
136,418

 
221,897

 
82,929

 

 
1,418,472

Transfers between geographic areas
26,034

 
2,700

 
3,601

 
5,096

 
5,806

 
10,361

 
5,394

 
(58,992
)
 

Total revenues
$
433,860

 
54,806

 
23,665

 
502,328

 
142,224

 
232,258

 
88,323

 
(58,992
)
 
1,418,472

Net revenues1
$
220,698

 
27,378

 
13,733

 
110,791

 
39,518

 
74,541

 
30,407

 
3

 
517,069

Operating income
$
48,205

 
7,291

 
3,852

 
55,218

 
15,691

 
12,253

 
9,313

 
3

 
151,826

Identifiable assets at period end
$
1,255,099

 
119,258

 
56,334

 
455,973

 
133,940

 
438,711

 
216,576

 
3,852

 
2,679,743

Capital expenditures
$
8,137

 
311

 
485

 
1,085

 
655

 
2,119

 
1,243

 

 
14,035

Depreciation and amortization
$
7,332

 
364

 
253

 
1,319

 
512

 
1,098

 
451

 

 
11,329

Equity
$
978,426

 
79,312

 
37,325

 
300,188

 
115,606

 
167,726

 
137,112

 
(33,184
)
 
1,782,511

Three months ended March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
444,181

 
54,794

 
24,081

 
645,444

 
181,381

 
242,086

 
85,559

 

 
1,677,526

Transfers between geographic areas
27,675

 
2,814

 
4,777

 
5,697

 
5,915

 
9,637

 
5,067

 
(61,582
)
 

Total revenues
$
471,856

 
57,608

 
28,858

 
651,141

 
187,296

 
251,723

 
90,626

 
(61,582
)
 
1,677,526

Net revenues1
$
219,603

 
30,678

 
16,559

 
117,405

 
42,200

 
75,888

 
27,153

 

 
529,486

Operating income
$
59,181

 
11,091

 
5,356

 
57,056

 
13,880

 
15,071

 
7,248

 

 
168,883

Identifiable assets at period end
$
1,451,103

 
109,180

 
57,232

 
541,983

 
143,910

 
430,338

 
198,954

 
11,078

 
2,943,778

Capital expenditures
$
6,325

 
288

 
617

 
290

 
319

 
1,148

 
458

 

 
9,445

Depreciation and amortization
$
7,393

 
292

 
268

 
1,399

 
530

 
1,246

 
401

 

 
11,529

Equity
$
1,182,808

 
58,998

 
34,604

 
306,775

 
106,139

 
154,343

 
120,086

 
(36,222
)
 
1,927,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_______________________



10



1Net revenues are a non-GAAP measure calculated as revenues less directly related operations expenses attributable to the Company's principal services. The Company's management believes that net revenues are a better measure than total revenues when evaluating the Company's operating segment performance since total revenues earned as a freight consolidator include the carriers' charges for carrying the shipment, whereas revenues earned in other capacities include primarily the commissions and fees earned by the Company. Net revenue is one of the Company's primary operational and financial measures and demonstrates the Company's ability to concentrate and leverage purchasing power through effective consolidation of shipments from customers utilizing a variety of transportation carriers and optimal routings.
 
The following table presents the calculation of consolidated net revenues:
 
Three months ended
 
March 31,
 
2016
 
2015
Total revenues
$
1,418,472

 
$
1,677,526

Expenses:
 
 
 
Airfreight services
388,777

 
513,001

Ocean freight and ocean services
323,020

 
445,456

Customs brokerage and other services
189,606

 
189,583

Net revenues
$
517,069

 
$
529,486



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 “Overview,” "Strategy and Expeditors' Culture," "International Trade and Competition," "Seasonality," “Critical Accounting Estimates,” “Results of Operations,” “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements. Words such as "will likely result", "are expected to", "would expect", "would not expect", "will continue", "is anticipated", "estimate", "project", "plan", "believe", "probable", "reasonably possible", "may", "could", "should", "intends", "foreseeable future" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, and other characterizations of future events or circumstances are forward-looking statements. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. Attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 25, 2016.
Overview
Expeditors International of Washington, Inc. is a global logistics company. The Company's services include air and ocean freight consolidation and forwarding, customs clearance, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, cargo insurance and other logistics solutions. The Company does not compete for overnight courier or small parcel business. As a non-asset based carrier, the Company does not own or operate transportation assets.
The Company derives its revenues from three principal sources: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. These are the revenue categories presented in the financial statements.
The Company generates the major portion of its air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and reselling those services to its customers on a retail basis. The difference between the rate billed to customers (the sell rate) and the rate paid to the carrier (the buy rate) is termed “net revenue” (a non-GAAP measure), “yield” or “margin.” By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of the Company's three primary sources of revenue.
In most cases the Company acts as an indirect carrier. When acting as an indirect carrier, the Company will issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, the Company receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. In these transactions, the Company evaluates whether it is appropriate to record the gross or net amount as revenue. Generally, when the Company is the primary obligor, it is obligated to compensate direct carriers for services performed regardless of whether customers accept the service, has latitude in establishing price, has discretion in selecting the direct carrier, has credit risk or has several but not all of these indicators, revenue is recorded on a gross basis. Revenue is generally recorded on a net basis where the Company is not primarily obligated and does not have latitude in establishing prices. Such amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof.
For revenues earned in other capacities, for instance, when the Company does not issue a HAWB, a HOBL or a House Seaway Bill or otherwise acts solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, the Company is not a principal and reports only commissions and fees earned in revenue.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.
The Company is managed along five geographic areas of responsibility: Americas; North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each area is divided into sub-regions which are composed of operating units with individual profit and loss responsibility. The Company’s business involves shipments between operating units that typically

12



involve more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and cooperation among operating units. Because of this inter-relationship between operating units, it is very difficult to examine any one geographic area and draw meaningful conclusions as to its contribution to the Company’s overall success on a stand-alone basis.
The Company’s operating units share revenue using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. The Company’s strategy closely links compensation with operating unit profitability. Individual success is closely linked to cooperation with other operating units within the network.
The mix of services varies by segment based primarily on the import or export orientation of local operations in each region. In accordance with the Company's revenue recognition policy (see Note 1. E. to the consolidated financial statements in the Company's annual report on Form 10-K filed on February 25, 2016), almost all freight revenues and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share revenue at destination and a corresponding commission or profit share expense as a component of origin consolidation costs.
Strategy and Expeditors' Culture
From the inception of the Company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. The Company’s greatest challenge is now and always has been perpetuating a consistent global corporate culture which demands:
Total dedication, first and foremost, to providing superior customer service;
Compliance with Company policies and government regulations;
Aggressive marketing of all of the Company’s service offerings;
Ongoing development of key employees and management personnel via formal and informal means;
Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;
Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change occurs, a qualified and well-trained internal candidate is ready to step forward; and
Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of the Company's customers while simultaneously delivering tools to make the Company's employees more efficient and more effective.
The Company reinforces these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since the Company became a publicly traded entity. There is no limit to how much a key, non-executive manager can be compensated for success. The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions. If these decisions result in operating losses, management must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.
The Company believes that any failure to perpetuate this unique culture on a self-sustained basis throughout the Company quite possibly provides a greater threat to the Company’s continued success than any external force, which would be largely beyond its control. The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment where well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help the Company adapt and thrive as major trends emerge.
The Company's business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers to drive profitable business growth. The Company’s teams are aligned on the specific markets of its focused priorities; on the targeted accounts within those markets; and on ways that the Company can continue to differentiate itself from its competitors.
The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of ongoing concern over terrorism and increased governmental regulation and oversight of international trade. A good reputation

13



helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international trade obstacles, especially as governments promulgate new regulations and increase oversight and enforcement of new and existing laws. The Company considers its current working relationships with these entities to be satisfactory.
The Company's business is also dependent on the financial stability and operational capabilities of the carriers it utilizes. Over the last two years, airline profitability has improved, although many air carriers remain highly leveraged with debt. Moreover, the ocean steamship line industry has incurred substantial losses in recent years, many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges. This situation has required the Company to be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, space allotments available from carriers, governmental regulations, and/or trade accords could adversely affect the Company’s business in unpredictable ways.
International Trade and Competition
The Company operates in 63 countries in the competitive global logistics industry and Company activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions and accords. The Company cannot predict which, if any, of these proposals may be adopted or the effects the adoption of any such proposal will have on the Company’s business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies concerning international trade and commerce, the Company’s business may also be affected by political developments and changes in government personnel or policies, as well as economic turbulence, political unrest and security concerns in the nations in which it does business and the future impact that these events may have on international trade and oil prices.
The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Consistent with continuing uncertainty in global economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates, the Company’s pricing and terms continue to be pressured by customers, carriers and service providers. We expect these competitive conditions to continue.
Currently, there is uncertainty as to how changes in oil prices will impact future buy rates due to a number of factors, including that some carriers have hedged fuel costs. Because fuel is an integral part of carriers' costs and impacts both the Company's cargo space buy rates and its sell rates to customers, the Company would expect its gross revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. The Company would not expect an adverse effect on net revenues resulting from changes in oil prices.
The Company cannot predict what impact ongoing uncertainties in the global economy may have on its operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior.
Seasonality
Historically, the Company’s operating results have been subject to seasonal trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance this seasonal trend will occur in the future. This pattern has been the result of, or influenced by, numerous factors including weather patterns, national holidays, consumer demand, new product launches, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings.
A significant portion of the Company’s revenues are derived from customers in 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, product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, the Company may not learn of a shortfall in revenues until late in a quarter. 
To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of the Company’s stock. The Company cannot accurately forecast many of these factors or estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.

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Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires that the Company make estimates and judgments. The Company bases its estimates on historical experience and on assumptions that it believes are reasonable. The Company's critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's annual report on Form 10-K for the year ended December 31, 2015, filed on February 25, 2016. There have been no material changes to the critical accounting estimates previously disclosed in that report.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) amending revenue recognition guidance and requiring related detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements and related disclosures. However, at this time, based on the nature of the Company's operations, the adoption is not expected to have a material impact on the amount or timing of revenue recognized or the Company's revenue recognition policies.
In November 2015, the FASB issued an ASU simplifying the accounting for income taxes by requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. The Company is currently evaluating the method of adoption and expects this ASU will have an impact on its consolidated balance sheets as its current deferred tax assets were $18 million and non-current deferred tax liabilities were $43 million as of March 31, 2016.

In February 2016, the FASB issued an ASU changing the accounting for leases and including a requirement to record all leases on the consolidated balance sheet as assets and liabilities. The ASU is effective for the Company beginning on January 1, 2019. Adoption of the ASU will impact the Company’s consolidated balance sheets as future minimum lease payments under noncancelable leases totaled $131 million as of December 31, 2015. The Company is currently evaluating the full impact that the adoption of this ASU will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued an ASU simplifying the accounting for stock compensation. The ASU also amends the classification of excess tax benefits both in accounting for income taxes and on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2016, but may be adopted early for any interim or annual period. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

Results of Operations
The following table shows the total net revenues (a non-GAAP measure calculated as revenues less directly related operations expenses attributable to the Company's principal services) and the Company’s expenses for the three-month periods ended March 31, 2016 and 2015, expressed as percentages of net revenues. Management believes that net revenues are a better measure than total revenues when analyzing and discussing management's effectiveness in managing the Company's principal services since total revenues earned by the Company as a freight consolidator include the carriers’ charges to the Company for carrying the shipment, whereas revenues earned by the Company in its other capacities include primarily the commissions and fees actually earned by the Company. Net revenue is one of the Company's primary operational and financial measures that demonstrates the ability of the Company to manage sell rates to customers with its ability to concentrate and leverage its purchasing power through effective consolidation of shipments from multiple customers utilizing a variety of transportation carriers and optimal routings. Using net revenue also provides a commonality for comparison among various services.
The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto which appear elsewhere in this quarterly report.
 
Three months ended March 31,
 
 
2016
 
2015
 
 
Amount
 
Percent
of net
revenues
 
Amount
 
Percent
of net
revenues
 
(in thousands)
 
 
Airfreight services:
 
 
 
 
 
 
 
 
Revenues
$
560,853

 
 
 
$
707,444

 
 
 
Expenses
388,777

 
 
 
513,001

 
 
 
Net revenues
172,076

 
33
%
 
194,443

 
37
%
 
Ocean freight services and ocean services:
 
 
 
 
 
 
 
 
Revenues
454,192

 
 
 
565,717

 
 
 
Expenses
323,020

 
 
 
445,456

 
 
 
Net revenues
131,172

 
25

 
120,261

 
23

 
Customs brokerage and other services:
 
 
 
 
 
 
 
 
Revenues
403,427

 
 
 
404,365

 
 
 
Expenses
189,606

 
 
 
189,583

 
 
 
Net revenues
213,821

 
42

 
214,782

 
40

 
Total net revenues
517,069

 
100

 
529,486

 
100

 
Overhead expenses:
 
 
 
 
 
 
 
 
Salaries and related costs
283,355

 
55

 
278,878

 
53

 
Other
81,888

 
16

 
81,725

 
15

 
Total overhead expenses
365,243

 
71

 
360,603

 
68

 
Operating income
151,826

 
29

 
168,883

 
32

 
Other income, net
3,658

 
1

 
2,766

 
1

 
Earnings before income taxes
155,484

 
30

 
171,649

 
33

 
Income tax expense
58,437

 
11

 
64,317

 
12

 
Net earnings
97,047

 
19

 
107,332

 
21

 
Less net earnings attributable to the noncontrolling interest
463

 

 
628

 

 
Net earnings attributable to shareholders
$
96,584

 
19
%
 
$
106,704

 
21
%
 
Airfreight services:
Airfreight services revenues decreased 21% in the first quarter of 2016, as compared with the same period for 2015, due to lower average sell rates in response to competitive market conditions across all regions and a 9% decrease in tonnage. Airfreight services expenses decreased 24% in the first quarter of 2016 as a result of favorable buying opportunities throughout all regions, due primarily to additional available carrier capacity, and a decline in tonnage. While not possible to quantify, tonnage was favorably impacted in the first quarter of 2015 by customers converting a portion of their ocean freight shipments to airfreight due to port disruptions on the U.S. West Coast. The 2015 tonnage increases were on exports out of North America, Europe, North Asia and South Asia.
Airfreight services net revenues decreased 12% for the three-month period ended March 31, 2016, as compared with the same period for 2015. This decrease was due to a 9% decline in airfreight tonnage and a 4% decrease in net revenue per kilo. North America net revenues decreased by 10% due to a 15% decrease in tonnage, partially offset by lower average buy rates from favorable market opportunities during the quarter. North Asia net revenues decreased 16% primarily due to competitive market conditions that resulted in lower net revenue per kilo and a 6% decrease in tonnage. South Asia net revenues decreased 7%, mostly due to a 14% decrease in tonnage. Europe net revenues remained constant as a 7% decline in tonnage was offset by higher net revenue per kilo.
Aside from temporary disruptions such as those experienced with U.S. West Coast ports in 2015, the Company expects the global airfreight market to continue to be affected by carrier overcapacity and the timing of new product launches. Customers remain focused on improving supply-chain efficiency, reducing overall logistics costs by negotiating lower rates and utilizing ocean freight whenever possible. The Company expects these trends to continue in conjunction with carriers' efforts to manage available capacity. However, this could be affected by new product launches during periods that have historically experienced higher demands. These events, should they occur, could create a higher degree of volatility in volumes and ultimately buy and sell rates.
Ocean freight and ocean services:
Ocean freight consolidation, direct ocean forwarding and order management are the three basic services that constitute and are collectively referred to as ocean freight and ocean services. Ocean freight and ocean services revenues decreased 20% for the three-month period ended March 31, 2016, as compared with the same period in 2015, as the Company lowered average sell rates to customers in response to competitive market conditions and lower available buy rates. The Company experienced a 3% decrease in container volume. Ocean freight and ocean services expenses decreased 27% in the first quarter of 2016 due to lower average buy rates, resulting from carrier overcapacity, and a decline in volume.
Ocean freight and ocean services net revenues increased 9% for the three-month period ended March 31, 2016, as compared with the same period for 2015. The largest component of the Company's ocean freight net revenue was derived from ocean freight consolidation, which represented 50% and 49% of ocean freight net revenue for the three-month period ended March 31, 2016 and 2015, respectively.
Ocean freight consolidation net revenues increased 12% in the first quarter of 2016 as compared with the same period in 2015. This increase was due primarily to a 15% increase in net revenue per container while volume decreased 3%. Direct ocean freight forwarding net revenues increased 4% for the three-month period ended March 31, 2016, as compared with the same periods in 2015, due to higher volumes principally in North Asia. Order management net revenues increased 10% in the first quarter of 2016 mostly resulting from higher volumes with new and existing customers, primarily in North Asia.
North America ocean freight and ocean services net revenues increased 7% for the three-month period ended March 31, 2016, primarily due to improved margins. North Asia increased 7% due principally to growth in direct ocean forwarding and order management. Europe increased 12% primarily as a result of growth in volume and higher margins.
The Company expects pricing volatility to continue as customers and carriers react to current market conditions, including carrier liquidity challenges. Additionally, customers continue to solicit bids from competitors. These conditions could result in lower revenues and yields.
Customs brokerage and other services:
Customs brokerage and other services revenues and expenses both remained flat for the three-month period ended March 31, 2016, as compared with the same period for 2015, as a result of increased road freight volumes in North America, which were offset by lower import services volumes, primarily in Europe.
Customs brokerage and other services net revenues remained flat for the three-month period ended March 31, 2016, as compared with the same period in 2015, as the increase in road freight volumes in North America was fully offset by lower import services volumes in Europe.
North America net revenues increased 4% in the first quarter of 2016, as compared with the same period for 2015, primarily as a result of volumes from existing and new customers in both customs brokerage and road freight. Europe net revenues decreased 8% as compared with the same period due to general market conditions.
Overhead expenses:
Salaries and related costs increased 2% for the three-month period ended March 31, 2016, as compared with the same period in 2015, principally as a result of an increase in the number of employees, primarily in North America and Europe, partially offset by reduced bonuses from lower operating income.
Historically, the relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation will occur in proportion to changes in Company operating income, creating a direct alignment between corporate performance and shareholder interests. Bonuses to field and executive management for the three-month period ended March 31, 2016 were down 4% as compared with the same period for 2015, primarily as a result of a 10% decrease in operating income and reduced executive bonuses in 2015 to recoup the retirement bonus to the Company's former chief executive officer. The Company’s management incentive compensation programs have always been incentive-based and performance driven and there is no built-in bias that favors or enriches management in a manner inconsistent with overall corporate performance. Salaries and related costs as a percentage of net revenues increased 2% for the three-month period ended March 31, 2016 as compared with the same period for 2015.
Because the Company’s management incentive compensation programs are also cumulative, no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must have been offset in their entirety by operating profits before management is eligible for a bonus. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. Since the most significant portion of management compensation comes from the incentive bonus programs, the Company believes that this cumulative feature is a disincentive to excessive risk taking by its managers. Due to the nature of the Company’s services, it has a short operating cycle. The outcome of most higher risk transactions, such as overriding established credit limits, would be known in a relatively short time frame. Management believes that when the potential and certain impact on the bonus is fully considered in light of this short operating cycle, the potential for short term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage excessive and inappropriate risk taking. Management believes that both the stability and the long term growth in revenues, net revenues and net earnings are a result of the incentives inherent in the Company’s compensation program.
Other overhead expenses remained flat for the three-month period ended March 31, 2016, as compared with the same period in 2015. Higher rent and maintenance costs were offset by lower claims, consulting fees and business taxes. Other overhead expenses as a percentage of net revenues increased 1% for the three-month period ended March 31, 2016, as compared with the same period in 2015.
Income tax expense:
The Company pays income taxes in the United States and other jurisdictions. The Company’s consolidated effective income tax rate was 37.6% and 37.5%, respectively, for the three-month periods ended March 31, 2016 and 2015. The Company's effective tax rate is subject to variation and the rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when pre-tax income is lower.

Currency and Other Risk Factors
The nature of the Company's worldwide operations necessitates the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among its offices or agents. The Company may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on the Company's ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three months ended March 31, 2016 and 2015 was insignificant. The Company had no foreign currency derivatives outstanding at March 31, 2016 and December 31, 2015. During the three months ended March 31, 2016, total net foreign currency losses, including amounts recorded in revenues, operating expenses and other income, net, were approximately $4 million. During the three months ended March 31, 2015, total net foreign currency gains were approximately $3 million.
International air and ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry, many of which have significantly more resources than the Company; however, the Company’s primary competition is confined to a relatively small number of companies within this group. The industry continues to experience consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local brokers and forwarders remain a competitive force.
The primary competitive factors in the international logistics industry continue to be price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality customer service and believes that its prices are competitive with those of others in the industry. Customers regularly solicit bids from competitors in order to improve service, pricing and contractual terms such as seeking longer payment terms, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of less favorable contractual terms could result in reduced revenues, reduced margins, higher operating costs or lower volumes, any of which would damage the Company's results of operations and financial condition.
Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. The Company believes that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly,

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sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing and maintaining these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.
Liquidity and Capital Resources
The Company’s principal source of liquidity is cash and cash equivalents, short-term investments and cash generated from operating activities. Net cash provided by operating activities for the three months ended March 31, 2016 was $236 million, as compared with $134 million for the same period in 2015. The increase of $102 million for the three-month period ended March 31, 2016 is primarily due to changes in working capital accounts. At March 31, 2016, working capital was $1,233 million, including cash and cash equivalents and short-term investments of $1,014 million. The Company had no long-term debt at March 31, 2016. Management believes that the Company’s current cash position and operating cash flows will be sufficient to meet its capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.
As a customs broker, the Company makes significant cash advances for a select group of its credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs and tax authorities in various countries throughout the world. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, the Company has agreed to extend payment terms beyond its customary terms. Management believes that the Company has effective credit control procedures, and historically has experienced relatively insignificant collection problems.
The Company’s business is subject to seasonal fluctuations. Cash flow fluctuates as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with peak season (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.
Cash used in investing activities for the three months ended March 31, 2016 was $15 million compared to cash provided by investing activities of $31 million in the same period of 2015. The Company made minor net investments in short-term investments for the quarter ended March 31, 2016 compared to receiving net proceeds of $40 million for the same period in 2015. The Company had capital expenditures of $14 million and $9 million, respectively, for the three-month periods ended March 31, 2016 and 2015. Capital expenditures in the three months ended March 31, 2016 related primarily to investments in technology, office furniture and equipment and building and leasehold improvements. The Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight. Total capital expenditures in 2016 are currently estimated to be $100 million. This includes routine capital expenditures plus additional real estate development.
Cash used in financing activities during the three months ended March 31, 2016 was $29 million as compared with $42 million for the same period in 2015. The Company uses the proceeds from stock option exercises, employee stock purchases and available cash to repurchase the Company’s common stock on the open market to reduce outstanding shares. During the three months ended March 31, 2016, the Company used cash to repurchase 1.5 million shares to reduce the number of total outstanding shares, compared to 1.6 million shares in the same period in 2015.
The Company follows established guidelines relating to credit quality, diversification and maturities of its investments to preserve principal and maintain liquidity. The Company’s investment portfolio has not been adversely impacted by the disruption in the credit markets. However, there can be no assurance that the Company’s investment portfolio will not be adversely affected in the future.
The Company maintains international unsecured bank lines of credit. At March 31, 2016, the Company was contingently liable for $77 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.
The Company's foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and needs to finance local capital expenditures. In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At March 31, 2016, cash and cash equivalent balances of $606 million were held by the Company’s non-United States subsidiaries, of which $57 million was held in banks in the United States. Earnings of the Company's foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States and, accordingly, a deferred tax liability has been accrued for all undistributed earnings, net of foreign related tax credits that are available to be repatriated.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of the Company’s exposure to these risks is presented below:
Foreign Exchange Risk
The Company conducts business in many different countries and currencies. The Company’s business often results in billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to the Company’s earnings. The principal foreign exchange risks to which the Company is exposed are in Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.
Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company’s earnings as a result of hypothetical changes in the value of the U.S. dollar, the Company’s functional currency, relative to the other currencies in which the Company transacts business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the three months ended March 31, 2016, would have had the effect of raising operating income approximately $11 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income approximately $9 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.
The Company currently does not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict the Company’s ability to move money freely. Any such hedging activity during the three months ended March 31, 2016 and 2015 was insignificant. During the three months ended March 31, 2016 total net foreign currency losses, including amounts recorded in revenues, operating expenses and other income, net, were approximately $4 million. During the three months ended March 31, 2015, total net foreign currency gains were approximately $3 million. The Company had no foreign currency derivatives outstanding at March 31, 2016 and December 31, 2015. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of March 31, 2016, the Company had approximately $12 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At March 31, 2016, the Company had cash and cash equivalents and short term investments of $1,014 million, of which $504 million was invested at various short-term market interest rates. The Company had no long-term debt at March 31, 2016. A hypothetical change in the interest rate of 10 basis points at March 31, 2016 would not have a significant impact on the Company’s earnings. In management’s opinion, there has been no material change in the Company’s interest rate risk exposure in the first quarter of 2016.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.
Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is developing a new accounting system which it is implementing on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting.

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This transition is affecting the processes that constitute the Company's internal control over financial reporting. Prior to implementing new functionalities, applicable controls are tested for operating effectiveness.
The Company's management has confidence in the Company’s internal controls and procedures. Nevertheless, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all the Company’s control issues and instances of fraud, if any, have been detected.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations or financial position. As of March 31, 2016, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company's annual report on Form 10-K filed on February 25, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
Total number of
shares purchased
 
Average price
paid per share
 
Total number of shares
purchased as part of
publicly announced
plans or programs
 
Maximum number
of shares that may yet be
purchased under the
plans or programs
January 1-31, 2016
 

 
$

 

 
11,851,035

February 1-29, 2016
 

 

 

 
11,975,394

March 1-31, 2016
 
1,470,732

 
47.79

 
1,470,732

 
10,908,871

Total
 
1,470,732

 
$
47.79

 
1,470,732

 
10,908,871

In November 1993, the Company’s Board of Directors authorized a Non-Discretionary Stock Repurchase Plan for the purpose of repurchasing the Company’s common stock in the open market with the proceeds received from the exercise of stock options. On February 9, 2009, the Plan was amended to increase the authorization to repurchase up to 40 million shares of the Company’s common stock. This authorization has no expiration date. This plan was disclosed in the Company’s annual report on Form 10-K filed on March 31, 1995. In the first quarter of 2016, 422,548 shares of common stock were repurchased under the Non-Discretionary Stock Repurchase Plan.
In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of the Company's common stock in the open market to reduce the issued and outstanding stock down to 200 million shares. In February 2014, the Board of Directors authorized repurchases down to 190 million shares of common stock. In February and August 2015 and May 2016, the Board of Directors further authorized repurchases down to 188 million, 180 million and 170 million, respectively. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date. In the first quarter of 2016, 1,048,184 shares of common stock were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases included 48,184 shares that were made to limit the growth in the number of issued and outstanding shares resulting from stock option exercises and 1,000,000 shares to reduce the number of total shares outstanding.

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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a)
Not applicable
(b)
Not applicable.


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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

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
 
 
 
May 4, 2016
 
/s/ JEFFREY S. MUSSER
 
 
Jeffrey S. Musser, President, Chief Executive Officer and Director
 
 
 
May 4, 2016
 
/s/ BRADLEY S. POWELL
 
 
Bradley S. Powell, Senior Vice President and Chief Financial Officer

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EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
March 31, 2016
 
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

22