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EXPEDITORS INTERNATIONAL OF WASHINGTON INC - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended September 30, 2019

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, Seattle, Washington

 

98104

(Address of principal executive offices)

 

(Zip Code)

 

(Registrant’s telephone number, including area code): (206) 674-3400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

EXPD

 

NASDAQ Global Select Market

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

At November 4, 2019, the number of shares outstanding of the issuer’s common stock was 170,301,245.

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Assets:

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,215,970

 

 

$

923,735

 

Accounts receivable, less allowance for doubtful accounts of

   $11,853 at September 30, 2019 and $15,345 at December 31, 2018

 

 

1,319,032

 

 

 

1,581,530

 

Deferred contract costs

 

 

130,690

 

 

 

159,510

 

Other

 

 

103,521

 

 

 

70,041

 

Total current assets

 

 

2,769,213

 

 

 

2,734,816

 

Property and equipment, less accumulated depreciation and

   amortization of $468,059 at September 30, 2019 and $446,977 at

   December 31, 2018

 

 

494,153

 

 

 

504,105

 

Operating lease right-of-use assets

 

 

374,231

 

 

 

 

Goodwill

 

 

7,927

 

 

 

7,927

 

Deferred federal and state income taxes, net

 

 

44,351

 

 

 

40,465

 

Other assets, net

 

 

16,578

 

 

 

27,246

 

Total assets

 

$

3,706,453

 

 

$

3,314,559

 

Liabilities:

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

744,002

 

 

$

902,259

 

Accrued expenses, primarily salaries and related costs

 

 

207,752

 

 

 

215,813

 

Contract liabilities

 

 

152,717

 

 

 

190,343

 

Current portion of operating lease liabilities

 

 

61,842

 

 

 

 

Federal, state and foreign income taxes

 

 

17,273

 

 

 

18,424

 

Total current liabilities

 

 

1,183,586

 

 

 

1,326,839

 

Noncurrent portion of operating lease liabilities

 

 

313,580

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, none issued

 

 

 

 

 

 

Common stock, par value $0.01 per share. Issued and

   outstanding: 170,243 shares at September 30, 2019 and 171,582

   shares at December 31, 2018

 

 

1,702

 

 

 

1,716

 

Additional paid-in capital

 

 

23,301

 

 

 

1,896

 

Retained earnings

 

 

2,301,156

 

 

 

2,088,707

 

Accumulated other comprehensive loss

 

 

(118,774

)

 

 

(105,481

)

Total shareholders’ equity

 

 

2,207,385

 

 

 

1,986,838

 

Noncontrolling interest

 

 

1,902

 

 

 

882

 

Total equity

 

 

2,209,287

 

 

 

1,987,720

 

Total liabilities and equity

 

$

3,706,453

 

 

$

3,314,559

 

 

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 September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airfreight services

 

$

715,450

 

 

$

833,338

 

 

$

2,171,928

 

 

$

2,366,326

 

Ocean freight and ocean services

 

 

585,374

 

 

 

585,810

 

 

 

1,697,824

 

 

 

1,636,701

 

Customs brokerage and other services

 

 

774,031

 

 

 

671,799

 

 

 

2,260,733

 

 

 

1,899,741

 

Total revenues

 

 

2,074,855

 

 

 

2,090,947

 

 

 

6,130,485

 

 

 

5,902,768

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airfreight services

 

 

522,868

 

 

 

620,554

 

 

 

1,574,717

 

 

 

1,727,383

 

Ocean freight and ocean services

 

 

424,215

 

 

 

435,313

 

 

 

1,234,845

 

 

 

1,199,887

 

Customs brokerage and other services

 

 

453,416

 

 

 

373,766

 

 

 

1,330,758

 

 

 

1,035,800

 

Salaries and related

 

 

356,331

 

 

 

351,577

 

 

 

1,069,592

 

 

 

1,042,420

 

Rent and occupancy

 

 

41,987

 

 

 

38,202

 

 

 

124,407

 

 

 

113,186

 

Depreciation and amortization

 

 

12,386

 

 

 

13,335

 

 

 

38,456

 

 

 

40,833

 

Selling and promotion

 

 

10,133

 

 

 

10,632

 

 

 

32,852

 

 

 

32,385

 

Other

 

 

46,969

 

 

 

44,414

 

 

 

138,506

 

 

 

131,318

 

Total operating expenses

 

 

1,868,305

 

 

 

1,887,793

 

 

 

5,544,133

 

 

 

5,323,212

 

Operating income

 

 

206,550

 

 

 

203,154

 

 

 

586,352

 

 

 

579,556

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

5,501

 

 

 

4,704

 

 

 

18,123

 

 

 

14,171

 

Other, net

 

 

1,895

 

 

 

566

 

 

 

5,822

 

 

 

2,357

 

Other income (expense), net

 

 

7,396

 

 

 

5,270

 

 

 

23,945

 

 

 

16,528

 

Earnings before income taxes

 

 

213,946

 

 

 

208,424

 

 

 

610,297

 

 

 

596,084

 

Income tax expense

 

 

53,319

 

 

 

45,357

 

 

 

156,029

 

 

 

155,871

 

Net earnings

 

 

160,627

 

 

 

163,067

 

 

 

454,268

 

 

 

440,213

 

Less net earnings attributable to the noncontrolling

   interest

 

 

406

 

 

 

375

 

 

 

1,199

 

 

 

1,224

 

Net earnings attributable to shareholders

 

$

160,221

 

 

$

162,692

 

 

$

453,069

 

 

$

438,989

 

Diluted earnings attributable to shareholders per share

 

$

0.92

 

 

$

0.92

 

 

$

2.60

 

 

$

2.46

 

Basic earnings attributable to shareholders per share

 

$

0.94

 

 

$

0.94

 

 

$

2.65

 

 

$

2.51

 

Weighted average diluted shares outstanding

 

 

173,483

 

 

 

177,173

 

 

 

174,463

 

 

 

178,447

 

Weighted average basic shares outstanding

 

 

170,415

 

 

 

173,394

 

 

 

171,084

 

 

 

174,675

 

 

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 September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net earnings

 

$

160,627

 

 

$

163,067

 

 

$

454,268

 

 

$

440,213

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of

   $5,803 and $2,904 for the three months ended

   September 30, 2019 and 2018 and $5,364 and $12,563

   for the nine months ended September 30, 2019 and

   2018

 

 

(14,603

)

 

 

(10,929

)

 

 

(14,007

)

 

 

(28,129

)

Reclassification adjustments for foreign currency realized

   losses, net of tax of $145 for the nine months ended

   September 30, 2019

 

 

 

 

 

 

 

 

535

 

 

 

 

Other comprehensive loss

 

 

(14,603

)

 

 

(10,929

)

 

 

(13,472

)

 

 

(28,129

)

Comprehensive income

 

 

146,024

 

 

 

152,138

 

 

 

440,796

 

 

 

412,084

 

Less comprehensive income (loss) attributable to the

   noncontrolling interest

 

 

481

 

 

 

(167

)

 

 

1,020

 

 

 

230

 

Comprehensive income attributable to shareholders

 

$

145,543

 

 

$

152,305

 

 

$

439,776

 

 

$

411,854

 

 

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 September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

160,627

 

 

$

163,067

 

 

$

454,268

 

 

$

440,213

 

Adjustments to reconcile net earnings to net cash from

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions for losses on accounts receivable

 

 

757

 

 

 

1,969

 

 

 

453

 

 

 

2,232

 

Deferred income tax benefit

 

 

(5,822

)

 

 

(23,610

)

 

 

(17

)

 

 

(17,522

)

Stock compensation expense

 

 

12,155

 

 

 

13,902

 

 

 

49,361

 

 

 

43,171

 

Depreciation and amortization

 

 

12,386

 

 

 

13,335

 

 

 

38,456

 

 

 

40,833

 

Other, net

 

 

652

 

 

 

666

 

 

 

812

 

 

 

770

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

43,885

 

 

 

(210,092

)

 

 

246,175

 

 

 

(156,321

)

(Decrease) increase in accounts payable and accrued

   expenses

 

 

(58,816

)

 

 

115,629

 

 

 

(141,199

)

 

 

127,860

 

Decrease (increase) in deferred contract costs

 

 

10,301

 

 

 

(34,623

)

 

 

28,550

 

 

 

(51,235

)

(Decrease) increase in contract liabilities

 

 

(13,211

)

 

 

36,256

 

 

 

(36,933

)

 

 

49,149

 

(Decrease) increase in income taxes payable, net

 

 

(671

)

 

 

9,292

 

 

 

(33,284

)

 

 

(9,258

)

(Decrease) increase in other, net

 

 

(744

)

 

 

930

 

 

 

47

 

 

 

862

 

Net cash from operating activities

 

 

161,499

 

 

 

86,721

 

 

 

606,689

 

 

 

470,754

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(15,521

)

 

 

(11,733

)

 

 

(37,943

)

 

 

(37,642

)

Other, net

 

 

232

 

 

 

1,109

 

 

 

1,525

 

 

 

(886

)

Net cash from investing activities

 

 

(15,289

)

 

 

(10,624

)

 

 

(36,418

)

 

 

(38,528

)

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

60,713

 

 

 

47,806

 

 

 

120,190

 

 

 

169,566

 

Repurchases of common stock

 

 

(61,999

)

 

 

(147,828

)

 

 

(296,922

)

 

 

(555,760

)

Dividends Paid

 

 

 

 

 

 

 

 

(85,184

)

 

 

(79,180

)

Payments for taxes related to net share settlement of equity

   awards

 

 

 

 

 

 

 

 

(6,674

)

 

 

(3,215

)

Distributions to noncontrolling interest

 

 

 

 

 

(633

)

 

 

 

 

 

(633

)

Purchase of noncontrolling interest

 

 

 

 

 

(613

)

 

 

 

 

 

(613

)

Net cash from financing activities

 

 

(1,286

)

 

 

(101,268

)

 

 

(268,590

)

 

 

(469,835

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(11,604

)

 

 

(5,071

)

 

 

(9,446

)

 

 

(22,878

)

Change in cash and cash equivalents

 

 

133,320

 

 

 

(30,242

)

 

 

292,235

 

 

 

(60,487

)

Cash and cash equivalents at beginning of period

 

 

1,082,650

 

 

 

1,020,854

 

 

 

923,735

 

 

 

1,051,099

 

Cash and cash equivalents at end of period

 

$

1,215,970

 

 

$

990,612

 

 

$

1,215,970

 

 

$

990,612

 

Taxes Paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

61,201

 

 

$

59,313

 

 

$

196,169

 

 

$

183,444

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2019

   and 2018

 

Shares

 

 

Par

value

 

 

Additional

paid-in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders’

equity

 

 

Noncontrolling

interest

 

 

Total

equity

 

Balance at June 30, 2019

 

 

170,040

 

 

$

1,701

 

 

$

12,433

 

 

$

2,140,935

 

 

$

(104,096

)

 

$

2,050,973

 

 

$

1,421

 

 

$

2,052,394

 

Exercise of stock options and release of

   restricted shares

 

 

510

 

 

 

5

 

 

 

22,833

 

 

 

 

 

 

 

 

 

22,838

 

 

 

 

 

 

22,838

 

Issuance of shares under stock

   purchase plan

 

 

585

 

 

 

6

 

 

 

37,869

 

 

 

 

 

 

 

 

 

37,875

 

 

 

 

 

 

37,875

 

Shares repurchased under provisions of

   stock repurchase plan

 

 

(892

)

 

 

(10

)

 

 

(61,989

)

 

 

 

 

 

 

 

 

(61,999

)

 

 

 

 

 

(61,999

)

Stock compensation expense

 

 

 

 

 

 

 

 

12,155

 

 

 

 

 

 

 

 

 

12,155

 

 

 

 

 

 

12,155

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

160,221

 

 

 

 

 

 

160,221

 

 

 

406

 

 

 

160,627

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,678

)

 

 

(14,678

)

 

 

75

 

 

 

(14,603

)

Balance at September 30, 2019

 

 

170,243

 

 

$

1,702

 

 

$

23,301

 

 

$

2,301,156

 

 

$

(118,774

)

 

$

2,207,385

 

 

$

1,902

 

 

$

2,209,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

173,577

 

 

$

1,736

 

 

$

1,607

 

 

$

1,977,121

 

 

$

(90,712

)

 

$

1,889,752

 

 

$

2,807

 

 

$

1,892,559

 

Exercise of stock options and release of

   restricted shares

 

 

332

 

 

 

3

 

 

 

14,512

 

 

 

 

 

 

 

 

 

14,515

 

 

 

 

 

 

14,515

 

Issuance of shares under stock

   purchase plan

 

 

666

 

 

 

7

 

 

 

33,285

 

 

 

 

 

 

 

 

 

33,292

 

 

 

 

 

 

33,292

 

Shares repurchased under provisions of

   stock repurchase plans

 

 

(2,011

)

 

 

(20

)

 

 

(61,384

)

 

 

(86,424

)

 

 

 

 

 

(147,828

)

 

 

 

 

 

(147,828

)

Stock compensation expense

 

 

 

 

 

 

 

 

13,902

 

 

 

 

 

 

 

 

 

13,902

 

 

 

 

 

 

13,902

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

162,692

 

 

 

 

 

 

162,692

 

 

 

375

 

 

 

163,067

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,386

)

 

 

(10,386

)

 

 

(543

)

 

 

(10,929

)

Purchase of noncontrolling interest

 

 

 

 

 

 

 

 

(90

)

 

 

 

 

 

 

 

 

(90

)

 

 

(523

)

 

 

(613

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(633

)

 

 

(633

)

Balance at September 30, 2018

 

 

172,564

 

 

$

1,726

 

 

$

1,832

 

 

$

2,053,389

 

 

$

(101,098

)

 

$

1,955,849

 

 

$

1,483

 

 

$

1,957,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2019

   and 2018

 

Shares

 

 

Par

value

 

 

Additional

paid-in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders’

equity

 

 

Noncontrolling

interest

 

 

Total

equity

 

Balance at December 31, 2018

 

 

171,582

 

 

$

1,716

 

 

$

1,896

 

 

$

2,088,707

 

 

$

(105,481

)

 

$

1,986,838

 

 

$

882

 

 

$

1,987,720

 

Exercise of stock options and release of

   restricted shares

 

 

2,166

 

 

 

22

 

 

 

75,619

 

 

 

 

 

 

 

 

 

75,641

 

 

 

 

 

 

75,641

 

Issuance of shares under stock

   purchase plan

 

 

585

 

 

 

6

 

 

 

37,869

 

 

 

 

 

 

 

 

 

37,875

 

 

 

 

 

 

37,875

 

Shares repurchased under provisions

   of stock repurchase plans

 

 

(4,090

)

 

 

(42

)

 

 

(141,847

)

 

 

(155,033

)

 

 

 

 

 

(296,922

)

 

 

 

 

 

(296,922

)

Stock compensation expense

 

 

 

 

 

 

 

 

49,361

 

 

 

 

 

 

 

 

 

49,361

 

 

 

 

 

 

49,361

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

453,069

 

 

 

 

 

 

453,069

 

 

 

1,199

 

 

 

454,268

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,293

)

 

 

(13,293

)

 

 

(179

)

 

 

(13,472

)

Dividends paid ($0.50)

 

 

 

 

 

 

 

 

403

 

 

 

(85,587

)

 

 

 

 

 

(85,184

)

 

 

 

 

 

(85,184

)

Balance at September 30, 2019

 

 

170,243

 

 

$

1,702

 

 

$

23,301

 

 

$

2,301,156

 

 

$

(118,774

)

 

$

2,207,385

 

 

$

1,902

 

 

$

2,209,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

176,374

 

 

$

1,764

 

 

$

546

 

 

$

2,063,512

 

 

$

(73,964

)

 

$

1,991,858

 

 

$

2,515

 

 

$

1,994,373

 

Cumulative effect of accounting

   change

 

 

 

 

 

 

 

 

 

 

 

(22,357

)

 

 

 

 

 

(22,357

)

 

 

(105

)

 

 

(22,462

)

Exercise of stock options and release of

   restricted shares

 

 

3,288

 

 

 

33

 

 

 

133,027

 

 

 

 

 

 

 

 

 

133,060

 

 

 

 

 

 

133,060

 

Issuance of shares under stock

   purchase plan

 

 

666

 

 

 

7

 

 

 

33,285

 

 

 

 

 

 

 

 

 

33,292

 

 

 

 

 

 

33,292

 

Shares repurchased under provisions

   of stock repurchase plans

 

 

(7,764

)

 

 

(78

)

 

 

(208,266

)

 

 

(347,416

)

 

 

 

 

 

(555,760

)

 

 

 

 

 

(555,760

)

Stock compensation expense

 

 

 

 

 

 

 

 

43,171

 

 

 

 

 

 

 

 

 

43,171

 

 

 

 

 

 

43,171

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

438,989

 

 

 

 

 

 

438,989

 

 

 

1,224

 

 

 

440,213

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,134

)

 

 

(27,134

)

 

 

(995

)

 

 

(28,129

)

Dividends paid ($0.45)

 

 

 

 

 

 

 

 

159

 

 

 

(79,339

)

 

 

 

 

 

(79,180

)

 

 

 

 

 

(79,180

)

Purchase of noncontrolling interest

 

 

 

 

 

 

 

 

(90

)

 

 

 

 

 

 

 

 

(90

)

 

 

(523

)

 

 

(613

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(633

)

 

 

(633

)

Balance at September 30, 2018

 

 

172,564

 

 

$

1,726

 

 

$

1,832

 

 

$

2,053,389

 

 

$

(101,098

)

 

$

1,955,849

 

 

$

1,483

 

 

$

1,957,332

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

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 for 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 22, 2019.

All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified.

 

B.

Revenue Recognition

The Company derives its revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by the customer. The Company's three principal services are the revenue categories presented in the consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.

The Company typically satisfies its performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed over the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two month-period and contracts with customers have an original expected duration of less than one year. The Company satisfied nearly all performance obligations for the contract liabilities recorded as of June 30, 2019.

In 2019, the Company revised its presentation for revenue transfers between its geographic operating segments and services rendered at the destination, which moved certain revenues and directly related operating expenses for air and ocean transactions to destination services within customs brokerage and other services. These changes better align revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The 2019 results also include the effect of changing the presentation of certain import services from a net to a gross basis, which increased revenues and directly related operating expenses in customs brokerage and other services but did not change operating income. The impact on reported consolidated and segment total revenues and expenses for these changes was immaterial and the prior year presentation has not been revised.

 

C.

Leases

Effective January 1, 2019, the Company adopted new lease accounting guidance using a modified retrospective approach and recognizing a right-of-use (ROU) asset and lease liability on the balance sheet. On January 1, 2019, ROU assets and lease liabilities were recorded for all existing leases exceeding one-year terms and were measured at the present value of lease payments over the remaining lease term. The adoption of this accounting standard resulted in recording ROU assets and lease liabilities for operating leases of $343 million and $340 million, respectively, as of January 1, 2019. The adoption of this standard had no impact on retained earnings on the condensed consolidated balance sheet.

7


 

In recording the ROU asset and lease liability, the Company elected to apply the following practical expedients:

 

Package of practical expedients not to reassess:

 

Whether a contract is or contains a lease,

 

Historical lease classification, and

 

Initial direct costs.

 

Use of hindsight when determining the lease term.

Additionally, the Company has elected to apply the short-term lease exemption for leases with a non-cancelable period of twelve months or less and has chosen not to separate nonlease components from lease components and instead to account for each as a single lease component.

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As the Company's leases generally do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on market information available at the commencement date to determine the present value. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from lease ROU assets and lease liabilities, to the extent not considered fixed, and instead expense variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses on the condensed consolidated statement of earnings.

 

D.

Accounts Receivable

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 customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of $11,853 as of September 30, 2019 and $15,345 as of December 31, 2018. Additions and write-offs have not been significant in the periods presented.

 

E.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. Actual results could be materially different from the estimated provisions and accruals recorded.

 

F.

Recent Accounting Pronouncement

In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), which amends existing guidance for the accounting of credit losses on financial instruments. Under the ASU, the Company will record a valuation allowance for credit losses that are expected to be incurred over the financial asset’s contractual term. This standard will be effective for the Company on January 1, 2020 and is not expected to have a material effect on the consolidated financial statements as the new credit loss model will primarily apply to the Company's accounts receivable, which are of short duration and for which the Company has not historically experienced significant credit losses. However, the Company is still evaluating the impact of the new prescribed model compared to its current methodology.

8


 

Note 2. Leases

The Company enters into lease agreements primarily for office and warehouse space in all districts where it conducts business. As of September 30, 2019, all of the Company's leases are operating leases.

Lease cost for the three and nine months ended September 30, 2019 are all recorded under rent and occupancy expenses on the condensed consolidated statement of earnings and are comprised of the following:

 

 

 

Three months ended

September 30, 2019

 

 

Nine months ended

September 30, 2019

 

Operating lease cost

 

$

20,784

 

 

$

60,832

 

Variable lease cost

 

 

6,990

 

 

 

19,867

 

Total lease cost

 

$

27,774

 

 

$

80,699

 

 

Variable lease cost includes short-term lease expenses, which are insignificant.

Maturities of lease liabilities as of September 30, 2019 are as follows:

 

2019

 

$

19,112

 

2020

 

 

77,416

 

2021

 

 

67,505

 

2022

 

 

61,044

 

2023

 

 

52,427

 

Thereafter

 

 

174,492

 

Total minimum lease payments

 

 

451,996

 

Less imputed interest

 

 

76,574

 

Lease liability

 

$

375,422

 

 

At December 31, 2018, the last balance sheet presented before the adoption of the new accounting standard Topic 842 Leases, future minimum annual lease payments under all noncancelable leases were as follows:

 

2019

 

$

75,227

 

2020

 

 

62,974

 

2021

 

 

47,552

 

2022

 

 

38,352

 

2023

 

 

26,580

 

Thereafter

 

 

67,140

 

 

 

$

317,825

 

 

The weighted-average remaining lease term and weighted-average discount rate as of September 30, 2019 are as follows:

 

Weighted-average remaining lease term (in years)

 

 

7.47

 

Weighted-average discount rate

 

 

4.94

%

 

Other information related to the Company's operating leases are as follows:

 

 

 

Three months ended

September 30, 2019

 

 

Nine months ended

September 30, 2019

 

Right-of-use assets obtained in exchange for

   new operating lease liabilities

 

$

14,630

 

 

$

76,664

 

Cash paid for amounts included in the

   measurement of lease liabilities

 

$

19,642

 

 

$

58,934

 

 

 

Note 3.

Share-Based Compensation

The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. During the nine months ended September 30, 2019 and 2018, the Company awarded 462 and 461 restricted stock units (RSUs), respectively, under the Omnibus Incentive Plan (2017 Plan), which was approved by shareholders in 2017. The RSUs were granted at a weighted-average fair value of $75.73 in 2019 and $69.58 in 2018. The RSUs vest annually over 3 years based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. The value of an RSU award is based on the Company's stock price on the date of grant. Additionally, in the nine months ended September 30, 2019 and 2018, 24 and 25 fully vested shares were granted to non-employee directors, respectfully.

9


 

The Company also awarded 96 and 18 performance stock units (PSUs) in 2019 and 2018, respectively, under the 2017 Plan. Outstanding PSUs include performance conditions to be finally measured at December 31, 2019, 2020 and 2021, respectively. The final number of PSUs will be determined using an adjustment factor of up to 2 times or down to 0.5 of the targeted PSU grant. If the minimum performance thresholds are not achieved, no shares will be issued. Each PSU will convert to one share of the Company's common stock upon vesting.

RSUs and PSUs granted under the 2017 Plan have dividend equivalent rights, which entitle holders of the awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs and are accumulated and paid in shares when the underlying awards vest.

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 585 and 666 shares were issued in the three and nine months ended September 30, 2019 and 2018, respectively. The fair value of the employee stock purchase rights granted was $17.03 and $17.49 per share in 2019 and 2018, respectively.

The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s omnibus incentive, stock option, director restricted stock and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the condensed consolidated statements of earnings. RSUs and PSUs awarded to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately as there is no substantive service period associated with those awards. For RSU awards meeting retirement eligibility criteria, approximately $5,000 of stock compensation expense was recognized during the nine months ended September 30, 2019, and approximately $4,000 of stock compensation expense was recognized during 2018. For PSU awards meeting retirement eligibility criteria, approximately $5,000 of stock compensation expense was recognized during the nine months ended September 30, 2019. There were no PSU awards granted meeting retirement eligibility criteria during 2018.

Note 4.

Income Taxes

In December 2017, the 2017 Tax Act was enacted in the United States. Beginning January 1, 2018, foreign earnings of the Company's international subsidiaries are generally exempt from U.S. Federal income tax upon repatriation. Notwithstanding these changes, certain withholding taxes and foreign exchange gains and losses will continue to be applicable upon the repatriation of foreign earnings.

During 2018 and 2019, the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. The Company expects that additional guidance will continue to be issued in future periods. As this guidance is issued, the Company will continue to evaluate the information to determine whether any additional adjustments to its tax provisions are required.

The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. Income tax expense for the three and nine months ended September 30, 2019 and 2018 had no significant tax expense related BEAT or GILTI.

In February 2018, the FASB issued amended guidance for reporting comprehensive income to reflect changes resulting from the 2017 Tax Act. The amendment, which had an effective date of January 1, 2019, provided the option to reclassify stranded tax effects resulting from the 2017 Tax Act within accumulated other comprehensive income (AOCI) to retained earnings. The Company elected to not reclassify stranded income tax effects from AOCI to retained earnings, including those related to implementation of the 2017 Tax Act.

 

Our consolidated effective income tax rate was 24.9% and 25.6% for the three and nine months ended September 30, 2019, respectively, as compared to 21.8% and 26.1% for the comparable periods in 2018. The effect of higher average tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).  In addition, the three month period ended 2018 benefited from required discrete adjustments as a result of interpretations issued related to the 2017 Tax Act for foreign tax credits earned as a result of withholding taxes paid on repatriated foreign earnings totaling $7 million and a state income tax refund totaling $4 million that settled during the quarter in 2018.

10


 

As discussed above, some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury. As a result, the amount of income tax recorded in the future may differ, possibly materially. For further information and discussion of the potential impact of the 2017 Tax Act, refer to Note 5 to the consolidated financial statements in the Company's 2018 Annual Report on Form 10-K.

Note 5. Basic and Diluted Earnings per Share

Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:

 

 

 

Three months ended September 30,

 

 

 

Net earnings

attributable to

shareholders

 

 

Weighted

average

shares

 

 

Earnings per

share

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

160,221

 

 

 

170,415

 

 

$

0.94

 

Effect of dilutive potential common shares

 

 

 

 

 

3,068

 

 

 

 

Diluted earnings attributable to shareholders

 

$

160,221

 

 

 

173,483

 

 

$

0.92

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

162,692

 

 

 

173,394

 

 

$

0.94

 

Effect of dilutive potential common shares

 

 

 

 

 

3,779

 

 

 

 

Diluted earnings attributable to shareholders

 

$

162,692

 

 

 

177,173

 

 

$

0.92

 

 

 

 

Nine months ended September 30,

 

 

 

Net earnings

attributable to

shareholders

 

 

Weighted

average

shares

 

 

Earnings per

share

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

453,069

 

 

 

171,084

 

 

$

2.65

 

Effect of dilutive potential common shares

 

 

 

 

 

3,379

 

 

 

 

Diluted earnings attributable to shareholders

 

$

453,069

 

 

 

174,463

 

 

$

2.60

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

438,989

 

 

 

174,675

 

 

$

2.51

 

Effect of dilutive potential common shares

 

 

 

 

 

3,772

 

 

 

 

Diluted earnings attributable to shareholders

 

$

438,989

 

 

 

178,447

 

 

$

2.46

 

 

Note 6. Shareholders' Equity

The Company has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding common stock down to 160,000 shares. During the nine months ended September 30, 2019, 4,002 shares were repurchased at an average price of $72.57 per share, compared to 5,378 shares at an average price of $71.07 per share during the same period in 2018.

The Company also had a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises and employee stock purchases. As of March 31, 2019, all shares authorized under this plan have been repurchased. During the nine months ended September 30, 2019, 88 shares were repurchased at an average price of $74.03, compared to 2,386 at an average price of $72.72 per share during the same period in 2018.

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.

11


 

On May 7, 2019, the Board of Directors declared a semi-annual dividend of $0.50 per share payable on June 17, 2019 to shareholders of record as of June 3, 2019. On May 8, 2018, the Board of Directors declared a semi-annual dividend of $0.45 per share paid on June 15, 2018 to shareholders of record as of June 1, 2018.

Subsequent to the end of third quarter 2019, on November 4, 2019, the Board of Directors declared a semi-annual dividend of $0.50 per share payable on December 16, 2019 to shareholders of record as of December 2, 2019.

Note 7. Fair Value of Financial Instruments

The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.

Cash and cash equivalents consist of the following:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and overnight deposits

 

$

398,235

 

 

$

398,235

 

 

$

427,307

 

 

$

427,307

 

Corporate commercial paper

 

 

788,060

 

 

 

788,708

 

 

 

467,300

 

 

 

467,760

 

Time deposits

 

 

29,675

 

 

 

29,675

 

 

 

29,128

 

 

 

29,128

 

Total cash and cash equivalents

 

$

1,215,970

 

 

$

1,216,618

 

 

$

923,735

 

 

$

924,195

 

 

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 8. Contingencies

The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of September 30, 2019, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

Note 9. Business Segment Information

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, directly related cost of transportation and other expenses for each of the Company’s three primary sources of revenue, salaries and other operating expenses, operating income, identifiable assets, capital expenditures 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.

12


 

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

 

 

 

UNITED

STATES

 

 

OTHER

NORTH

AMERICA

 

 

LATIN

AMERICA

 

 

NORTH

ASIA

 

 

SOUTH

ASIA

 

 

EUROPE

 

 

MIDDLE

EAST,

AFRICA

AND

INDIA

 

 

ELIMI-

NATIONS

 

 

CONSOLI-

DATED

 

For the three months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

692,229

 

 

 

88,088

 

 

 

38,341

 

 

 

624,351

 

 

 

196,569

 

 

 

320,769

 

 

 

115,397

 

 

 

(889

)

 

 

2,074,855

 

Directly related cost of transportation and

   other expenses2

 

$

389,254

 

 

 

51,420

 

 

 

22,990

 

 

 

489,195

 

 

 

145,345

 

 

 

221,149

 

 

 

81,592

 

 

 

(446

)

 

 

1,400,499

 

Salaries and other operating expenses3

 

$

210,767

 

 

 

25,731

 

 

 

14,547

 

 

 

70,410

 

 

 

32,482

 

 

 

86,156

 

 

 

28,151

 

 

 

(438

)

 

 

467,806

 

Operating income

 

$

92,208

 

 

 

10,937

 

 

 

804

 

 

 

64,746

 

 

 

18,742

 

 

 

13,464

 

 

 

5,654

 

 

 

(5

)

 

 

206,550

 

Identifiable assets at period end

 

$

2,059,345

 

 

 

128,336

 

 

 

72,029

 

 

 

489,322

 

 

 

164,976

 

 

 

563,289

 

 

 

226,657

 

 

 

2,499

 

 

 

3,706,453

 

Capital expenditures

 

$

7,644

 

 

 

513

 

 

 

833

 

 

 

523

 

 

 

631

 

 

 

5,119

 

 

 

258

 

 

 

 

 

 

15,521

 

Equity

 

$

1,578,682

 

 

 

60,526

 

 

 

27,217

 

 

 

216,061

 

 

 

77,733

 

 

 

169,450

 

 

 

111,355

 

 

 

(31,737

)

 

 

2,209,287

 

For the three months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

629,043

 

 

 

92,875

 

 

 

43,443

 

 

 

748,589

 

 

 

205,392

 

 

 

327,212

 

 

 

118,047

 

 

 

(73,654

)

 

 

2,090,947

 

Directly related cost of transportation and

   other expenses2

 

$

345,236

 

 

 

58,464

 

 

 

27,635

 

 

 

601,699

 

 

 

158,226

 

 

 

227,418

 

 

 

83,992

 

 

 

(73,037

)

 

 

1,429,633

 

Salaries and other operating expenses3

 

$

204,240

 

 

 

23,935

 

 

 

13,399

 

 

 

74,067

 

 

 

31,623

 

 

 

84,136

 

 

 

27,384

 

 

 

(624

)

 

 

458,160

 

Operating income

 

$

79,567

 

 

 

10,476

 

 

 

2,409

 

 

 

72,823

 

 

 

15,543

 

 

 

15,658

 

 

 

6,671

 

 

 

7

 

 

 

203,154

 

Identifiable assets at period end

 

$

1,694,556

 

 

 

174,402

 

 

 

53,322

 

 

 

540,465

 

 

 

156,887

 

 

 

508,855

 

 

 

212,817

 

 

 

(6,504

)

 

 

3,334,800

 

Capital expenditures

 

$

6,889

 

 

 

301

 

 

 

227

 

 

 

1,280

 

 

 

910

 

 

 

751

 

 

 

1,375

 

 

 

 

 

 

11,733

 

Equity

 

$

1,334,952

 

 

 

66,399

 

 

 

25,663

 

 

 

197,939

 

 

 

86,048

 

 

 

157,973

 

 

 

119,718

 

 

 

(31,360

)

 

 

1,957,332

 

 

 

 

UNITED

STATES

 

 

OTHER

NORTH

AMERICA

 

 

LATIN

AMERICA

 

 

NORTH

ASIA

 

 

SOUTH

ASIA

 

 

EUROPE

 

 

MIDDLE

EAST,

AFRICA

AND

INDIA

 

 

ELIMI-

NATIONS

 

 

CONSOLI-

DATED

 

For the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

2,033,088

 

 

 

265,035

 

 

 

111,277

 

 

 

1,879,155

 

 

 

555,128

 

 

 

952,790

 

 

 

336,383

 

 

 

(2,371

)

 

 

6,130,485

 

Directly related cost of transportation and

   other expenses2

 

$

1,142,701

 

 

 

157,997

 

 

 

64,149

 

 

 

1,475,395

 

 

 

407,642

 

 

 

657,720

 

 

 

236,184

 

 

 

(1,468

)

 

 

4,140,320

 

Salaries and other operating expenses3

 

$

636,243

 

 

 

76,283

 

 

 

41,342

 

 

 

208,781

 

 

 

97,324

 

 

 

258,339

 

 

 

86,385

 

 

 

(884

)

 

 

1,403,813

 

Operating income

 

$

254,144

 

 

 

30,755

 

 

 

5,786

 

 

 

194,979

 

 

 

50,162

 

 

 

36,731

 

 

 

13,814

 

 

 

(19

)

 

 

586,352

 

Identifiable assets at period end

 

$

2,059,345

 

 

 

128,336

 

 

 

72,029

 

 

 

489,322

 

 

 

164,976

 

 

 

563,289

 

 

 

226,657

 

 

 

2,499

 

 

 

3,706,453

 

Capital expenditures

 

$

23,544

 

 

 

1,509

 

 

 

1,071

 

 

 

1,167

 

 

 

1,235

 

 

 

8,015

 

 

 

1,402

 

 

 

 

 

 

37,943

 

Equity

 

$

1,578,682

 

 

 

60,526

 

 

 

27,217

 

 

 

216,061

 

 

 

77,733

 

 

 

169,450

 

 

 

111,355

 

 

 

(31,737

)

 

 

2,209,287

 

For the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

1,790,869

 

 

 

257,206

 

 

 

122,170

 

 

 

2,065,405

 

 

 

560,070

 

 

 

977,967

 

 

 

342,589

 

 

 

(213,508

)

 

 

5,902,768

 

Directly related cost of transportation and

   other expenses2

 

$

957,997

 

 

 

157,599

 

 

 

75,694

 

 

 

1,640,724

 

 

 

423,612

 

 

 

677,167

 

 

 

242,208

 

 

 

(211,931

)

 

 

3,963,070

 

Salaries and other operating expenses3

 

$

620,029

 

 

 

70,036

 

 

 

38,996

 

 

 

211,576

 

 

 

92,409

 

 

 

248,906

 

 

 

79,782

 

 

 

(1,592

)

 

 

1,360,142

 

Operating income

 

$

212,843

 

 

 

29,571

 

 

 

7,480

 

 

 

213,105

 

 

 

44,049

 

 

 

51,894

 

 

 

20,599

 

 

 

15

 

 

 

579,556

 

Identifiable assets at period end

 

$

1,694,556

 

 

 

174,402

 

 

 

53,322

 

 

 

540,465

 

 

 

156,887

 

 

 

508,855

 

 

 

212,817

 

 

 

(6,504

)

 

 

3,334,800

 

Capital expenditures

 

$

16,092

 

 

 

4,020

 

 

 

899

 

 

 

2,623

 

 

 

1,934

 

 

 

9,167

 

 

 

2,907

 

 

 

 

 

 

37,642

 

Equity

 

$

1,334,952

 

 

 

66,399

 

 

 

25,663

 

 

 

197,939

 

 

 

86,048

 

 

 

157,973

 

 

 

119,718

 

 

 

(31,360

)

 

 

1,957,332

 

 

1

In 2019, the Company revised its process to record the transfer, between its geographic operating segments, of revenues and the directly related cost of transportation and other expenses for freight service transactions between Company origin and destination locations. This change better aligns revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The 2019 results also include the effect of changing the presentation of certain import services from a net to a gross basis, which increased segment revenues and directly related operating expenses but did not change operating income. The impact of these changes on reported segment revenues was immaterial and prior year segment revenues have not been revised.

2

Directly related cost of transportation and other expenses totals operating expenses from airfreight services, ocean freight and ocean services and customs brokerage and other services as shown in the condensed consolidated statements of earnings.

3

Salaries and other operating expenses totals salaries and related, rent and occupancy, depreciation and amortization, selling and promotion and other as shown in the condensed consolidated statements of earnings.

13


 

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

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

Certain portions of this report on Form 10-Q including the sections entitled "Overview," "Expeditors' Culture and Strategy," "International Trade and Competition," "Seasonality," "Critical Accounting Estimates," "Results of Operations," "Income tax expense," "Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain forward-looking statements. Words such as "will likely result," "expects", "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, 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 22, 2019.

Overview

Expeditors International of Washington, Inc. (herein referred to as "Expeditors," the "Company," "we," "us," "our") provides a full suite of global logistics services. Our services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other logistics solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.

We derive our revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by our customer. Each performance obligation is comprised of one or more of the Company's services. We typically satisfy our performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. Our three principal services are the revenue categories presented in our financial statements: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. 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 our three primary sources of revenue.

We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and then reselling those services to our customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses. By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

In most cases, we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments.

Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties  and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and import services such as arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices. We also provide other value added services at destination, such as warehousing and distribution, time-definitive transportation services and consulting.

14


 

In these transactions, we evaluate whether it is appropriate to record the gross or net amount as revenue. Generally, revenue is recorded on a gross basis when we are primarily responsible for fulfilling the promise to provide the services, when we assume risk of loss, when we have discretion in setting the prices for the services to the customers, and we have the ability to direct the use of the services provided by the third party. When revenue is recorded on a net basis, the 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 we do not issue a HAWB, a HOBL or a House Seaway Bill or otherwise act solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, we are not a principal and report only commissions and fees earned in revenue.

We manage our company along five geographic areas of responsibility: Americas; North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each area is divided into sub-regions that are composed of operating units with individual profit and loss responsibility. Our business involves shipments between operating units and typically touches more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and 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 our overall success on a stand-alone basis.

Our operating units share revenue using the same arms-length pricing methodologies that we use when our offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. Our strategy closely links compensation with operating unit profitability, which includes shared revenues and allocated costs. Therefore, individual success is closely linked to cooperation with other operating units within our network. The mix of services varies by segment based primarily on the import or export orientation of local operations in each of our regions.

Expeditors' Culture and Strategy

From the inception of our company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. We believe that our greatest challenge is now and always has been perpetuating a consistent global corporate culture, which demands:

 

Total dedication to providing superior customer service;

 

Compliance with our policies and procedures and government regulations;

 

Aggressive marketing of all of our service offerings;

 

A positive, safe work environment that is inclusive and free from discrimination and harassment;

 

Ongoing development of key employees and management personnel;

 

Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;

 

Individual commitment to the identification and mentoring of successors for every key position so that when change occurs, a qualified and well-trained internal candidate is ready to step forward; and

 

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

We reinforce these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since we became a publicly traded company. There is no limit to how much a key manager can be compensated for success. We believe in a “real world” environment where the employees of our operating units are held accountable for the profit implications of their decisions. If these decisions result in operating losses, management generally must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, our policies, processes and relevant training focus on such things as cargo management, risk mitigation, compliance, accounts receivable collection, cash flow and credit soundness in an attempt to help managers avoid the kinds of errors that might end a career.

15


 

We believe that our unique culture is a critical component to our continued success. We strongly believe that it is nearly impossible to predict all events that, individually or in the aggregate, could have a positive or a negative impact on our future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment where well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help us adapt and thrive as major trends emerge.

Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers that lead to profitable business growth. Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors.

Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of ongoing concern over terrorism, security, changes in governmental regulation and oversight of international trade. A good reputation helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international trade obstacles, especially as governments promulgate new regulations and increase oversight and enforcement of new and existing laws. We consider our current working relationships with these entities to be satisfactory.

Our business is also highly dependent on the financial stability and operational capabilities of the carriers we utilize. Although airline profitability has improved, many carriers remain highly leveraged with debt. Moreover, the ocean carrier industry has incurred substantial losses in recent years. Many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges. This environment requires that we be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulations, and/or trade accords could adversely affect our business in unpredictable ways.

International Trade and Competition

We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. 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 tariffs and trade restrictions and accords. Currently, the United States and China have significantly increased tariffs on certain imports and are engaged in trade negotiations. The United Kingdom and the European Union are negotiating the terms of the United Kingdom's exit from the European Union. We cannot predict the outcome of these proposals or negotiations, or the effects they will have on our business. As governments implement higher tariffs on imports, manufacturers may accelerate, to the extent possible, shipments to avoid higher tariffs and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs.

The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue. Ocean carriers have incurred substantial operating losses in recent years, and many are highly leveraged with debt. These financial challenges have resulted in multiple carrier acquisitions and carrier alliance formations. Additionally, carriers continue to take delivery of new and larger ships, which may increase capacity. Carriers also face new regulatory requirements that become effective in 2020 requiring reductions in the sulfur in marine fuel, which are increasing their operating and capital costs. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.

16


 

There is uncertainty as to how new regulatory requirements and changes in oil prices will continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our buy rates and sell rates, we would expect our revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that we are unable to pass through any increases to our customers, this could adversely affect our operating income.

The global economic and trade environments remain uncertain. We cannot predict the impact of future changes in global trade on our operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Additionally, we cannot predict the direct or indirect impact that further changes in consumer purchasing behavior, such as online shopping, could have on our business. In response to governments implementing higher tariffs on imports, some customers have begun shifting manufacturing to other countries which could negatively impact us.

Seasonality

Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance this seasonal trend will occur in the future. This pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, governmental policies and inter-governmental disputes and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of our international network and service offerings.

A significant portion of our revenues is derived from customers in the retail and technology industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of our revenues are, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, changes in trade tariffs, product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter.

To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.

Critical Accounting Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments. We base our estimates on historical experience and on assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2018, filed on February 22, 2019. There have been no material changes to the critical accounting estimates previously disclosed in that report.

Results of Operations

The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for the three and nine months ended September 30, 2019 and 2018, including the respective percentage changes comparing 2019 and 2018.

17


 

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

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

(in thousands)

 

2019

 

 

2018

 

 

Percentage

change

 

2019

 

 

2018

 

 

Percentage

change

Airfreight services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

715,450

 

 

$

833,338

 

 

(14)%

 

$

2,171,928

 

 

$

2,366,326

 

 

(8)%

Expenses

 

 

522,868

 

 

 

620,554

 

 

(16)

 

 

1,574,717

 

 

 

1,727,383

 

 

(9)

Ocean freight services and ocean

   services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

585,374

 

 

 

585,810

 

 

 

 

1,697,824

 

 

 

1,636,701

 

 

4

Expenses

 

 

424,215

 

 

 

435,313

 

 

(3)

 

 

1,234,845

 

 

 

1,199,887

 

 

3

Customs brokerage and other

   services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

774,031

 

 

 

671,799

 

 

15

 

 

2,260,733

 

 

 

1,899,741

 

 

19

Expenses

 

 

453,416

 

 

 

373,766

 

 

21

 

 

1,330,758

 

 

 

1,035,800

 

 

28

Overhead expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and related costs

 

 

356,331

 

 

 

351,577

 

 

1

 

 

1,069,592

 

 

 

1,042,420

 

 

3

Other

 

 

111,475

 

 

 

106,583

 

 

5

 

 

334,221

 

 

 

317,722

 

 

5

Total overhead expenses

 

 

467,806

 

 

 

458,160

 

 

2

 

 

1,403,813

 

 

 

1,360,142

 

 

3

Operating income

 

 

206,550

 

 

 

203,154

 

 

2

 

 

586,352

 

 

 

579,556

 

 

1

Other income (expense), net

 

 

7,396

 

 

 

5,270

 

 

40

 

 

23,945

 

 

 

16,528

 

 

45

Earnings before income taxes

 

 

213,946

 

 

 

208,424

 

 

3

 

 

610,297

 

 

 

596,084

 

 

2

Income tax expense

 

 

53,319

 

 

 

45,357

 

 

18

 

 

156,029

 

 

 

155,871

 

 

Net earnings

 

 

160,627

 

 

 

163,067

 

 

(1)

 

 

454,268

 

 

 

440,213

 

 

3

Less net earnings attributable to

   the noncontrolling interest

 

 

406

 

 

 

375

 

 

8

 

 

1,199

 

 

 

1,224

 

 

(2)

Net earnings attributable to

   shareholders

 

$

160,221

 

 

$

162,692

 

 

(2)%

 

$

453,069

 

 

$

438,989

 

 

3%

 

Airfreight services:

Airfreight services revenues decreased 14% and 8% during the three and nine months ended September 30, 2019, respectively, as compared with the same periods for 2018, primarily due to 7% and 5% declines in tonnage and lower average sell rates from the softening of market demand due to slowing of the global economy and continuing inter-governmental trade disputes. North Asia and North America revenues decreased 22% and 17%, respectively, for the three months ended September 30, 2019 and 13% each for the nine months ended September 30, 2019.

Airfreight services expenses decreased 16% and 9% during the three and nine months ended September 30, 2019, respectively, as compared with the same periods for 2018 principally as a result of 7% and 5% declines in tonnage and lower average buy rates due to available carrier capacity relative to market demand. North Asia and North America directly related expenses decreased 24% and 21%, respectively, for the three months ended September 30, 2019 and 14% and 16%, respectively, for the nine months ended September 30, 2019.

Most regions experienced decreases in tonnage. North Asia and North America had decreases in tonnage at 11% and 7%, respectively, for the three months ended September 30, 2019 and 9% and 5%, respectively, for the nine months ended September 30, 2019. The largest declines in tonnage were exports out of North Asia to Europe and the United States as well as exports from the United States to North Asia.

The global airfreight market has been experiencing imbalances between carrier capacity and demand in certain lanes, which is resulting in lower buy and sell rates. These conditions are exacerbated by on-going inter-governmental trade disputes and uncertainties. Customers remain focused on improving supply-chain efficiency, reducing overall logistics costs by negotiating lower rates and utilizing ocean freight whenever possible. At the same time, customers are increasingly utilizing airfreight to improve speed to market. We expect these trends to continue in conjunction with carriers' efforts to manage available capacity and the evolution of consumer purchasing behavior, such as online shopping. These conditions could be affected by new product launches and customer responses to governmental trade policies during periods that have historically experienced higher demand. These conditions, should they continue to occur, could create a higher degree of volatility in volumes and, ultimately, buy and sell rates.

18


 

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 remained flat while expenses decreased 3% for the three months ended September 30, 2019 as compared with the same period in 2018. Ocean freight and ocean services revenues and expenses increased 4% and 3%, respectively, for the nine months ended September 30, 2019. The largest component of our ocean freight revenue was derived from ocean freight consolidation, which represented 65% and 67% of the ocean freight revenues for the nine months ended September 30, 2019 and 2018, respectively.

 

Ocean freight consolidation revenues and expenses decreased 4% and 6%, respectively, for the three months ended September 30, 2019 as compared with the same period in 2018, primarily due to a 2% decline in containers shipped, which was partially offset by increase in sell and buy rates, respectively. Ocean freight consolidation revenues and expenses both increased 1% for the nine months ended September 30, 2019, primarily due to a 1% increase in containers shipped and higher average sell and buy rates, respectively. The changes in freight consolidation revenues and directly related expenses include the revised presentation of destination services in 2019, which decreased revenues and directly related operating expenses in ocean freight consolidation but did not change consolidated operating income.

 

Direct ocean freight forwarding revenues increased 9% and 8%, respectively, while expenses increased 10% for both the three and nine months ended September 30, 2019 primarily due to higher volumes in North America and Europe. Order management revenues increased 7% and 8%, respectively, expenses increased 8% and 10%, respectively, for the three and nine months ended September 30, 2019 primarily due to higher volumes in South Asia.  

 

North Asia ocean freight and ocean services revenues decreased 13% and 5%, respectively, and directly related expenses decreased 16% and 7%, respectively, for the three and nine months ended September 30, 2019  primarily due to decrease in container volume. This was partially offset by an increase in South Asia ocean freight and ocean services revenues, up 20% and 19%, respectively, and directly related expenses up 16% for both the three and nine months ended September 30, 2019 primarily due to an increase in container volume and higher sell and buy rates. 

 

We expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, and carriers adapt to changes in capacity and market demand, merge or create alliances with other carriers. Carriers also face new regulatory requirements that become effective in 2020 to reduce the use of sulfur in marine fuel, which are increasing their operating and capital costs, which could result in higher costs for us. These conditions could result in lower operating income.

Customs brokerage and other services:

Customs brokerage and other services revenues increased 15% and 19% and expenses increased 21% and 28%, for the three and nine months ended September 30, 2019, respectively, as compared with the same periods in 2018, primarily due to increased demand for brokerage services and time-definite value added road freight services. Customers are seeking knowledgeable customs brokers with sophisticated computerized capabilities critical to an overall logistics management program, necessary to rapidly respond to changes in the regulatory and security environment. The 2019 results include the effect of changing our presentation of certain import services from a net to a gross basis and our revised presentation of destination services, which increased revenues and directly related operating expenses in customs brokerage and other services but did not change operating income.

North America revenues increased 23% and 30% and directly related expenses increased 31% and 45%, for the three and nine months ended September 30, 2019, respectively, as compared with the same periods for 2018, primarily as a result of higher volumes in customs brokerage and road freight and the effect of the change in presentation of certain import services.

Overhead expenses:

Salaries and related costs increased 1% and 3% for the three and nine months ended September 30, 2019, respectively, as compared with the same periods in 2018, principally due to an increase in the number of employees, primarily in North America and Europe, and higher base salaries and sales commissions. The number of employees increased primarily to support increased activity in our business operations.

19


 

Historically, the relatively consistent relationship between salaries and revenue has been the result of a compensation philosophy that has been maintained since the inception of our company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation occur in proportion to changes in our operating income, creating an alignment between branch and corporate performance and shareholder interests.

Our management compensation programs have always been incentive-based and performance driven. Bonuses to field management for the nine months ended September 30, 2019 were up 2% when compared to the same period in 2018. Bonuses under the executive incentive compensation plan were down 7%, primarily due to a 3% reduction made to senior executive management bonus allocations, as well as unused bonus allocations available for future investments in the development of key personnel.

Because our management incentive compensation programs are also cumulative, generally no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must be offset in their entirety by operating profits before management is eligible for a bonus. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. Since the most significant portion of management compensation comes from the incentive bonus programs, we believe that this cumulative feature is a disincentive to excessive risk taking by our managers. 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 the short operating cycle of our services, the potential for short-term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage excessive and inappropriate risk taking. Management believes that both the stability and the long-term growth in revenues, operating income and net earnings are a result of the incentives inherent in our compensation programs.

Other overhead expenses increased 5% for the three and nine months ended September 30, 2019, as compared with the same periods in 2018. The increase in expenses was due to renting additional space, occupancy costs, technology-related fees, claims expense and consulting expenses, partially offset by lower depreciation and amortization expense. We will continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.

 

Income tax expense:

 

Our consolidated effective income tax rate was 24.9% and 25.6% for the three and nine months ended September 30, 2019, respectively, as compared to 21.8% and 26.1% for the comparable periods in 2018. The effect of higher average tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).  In addition, the three months ended September 30, 2018 benefited from required discrete adjustments as a result of interpretations issued related to the 2017 Tax Act for foreign tax credits earned as a result of withholding taxes paid on repatriated foreign earnings totaling $7 million and a state income tax refund totaling $4 million that settled during the same quarter in 2018.

Some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury. See Note 4 to the consolidated financial statements for additional information.

Currency and Other Risk Factors

The nature of our worldwide operations necessitates dealing with a multitude of currencies other than the U.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and nine months ended September 30, 2019 and 2018 was insignificant. We had no foreign currency derivatives outstanding at September 30, 2019 and December 31, 2018. During the three and nine months ended September 30, 2019, net foreign currency losses were approximately $1 million and $5 million, respectively. During the three and nine months ended September 30, 2018, net foreign currency losses were approximately $3 million and $1 million, respectively.

20


 

International air and ocean freight forwarding and customs brokerage are intensely competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry, including new technology-based competitors entering the industry, many of which have significantly more resources than us; however, our primary competition is confined to a relatively small number of companies within this group. Expeditors must compete against both the niche players and larger entities. The industry continues to experience consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local brokers and forwarders remain a competitive force.

The primary competitive factors in the international logistics industry continue to be price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. We emphasize quality customer service and believe that our prices are competitive with those of others in the industry. Customers regularly solicit bids from competitors in order to improve service, pricing and contractual terms such as seeking longer payment terms, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of expanded contractual terms could result in reduced revenues, reduced operating income, higher operating costs, higher claims or loss of market share, any of which would damage our results of operations and financial condition.

Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. We believe that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing and maintaining these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.

Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and nine months ended September 30, 2019 was $161 million and $607 million, respectively, as compared with $87 million and $471 million for the same periods in 2018. The increases of $74 million and $136 million in the three and nine months ended September 30, 2019, respectively, were primarily due to changes in working capital. At September 30, 2019, working capital was $1,586 million, including cash and cash equivalents of $1,216 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at September 30, 2019. Management believes that our current cash position and operating cash flows will be sufficient to meet our 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, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.

Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.

Cash used in investing activities for the three and nine months ended September 30, 2019 was $15 million and $36 million, respectively, as compared with $11 million and $39 million in the same periods of 2018, primarily for capital expenditures. Capital expenditures in the three and nine months ended September 30, 2019 were related primarily to continuing investments in technology and building and leasehold improvements. Occasionally, we elect to purchase buildings to house staff and to facilitate the staging of customers’ freight. Total anticipated capital expenditures in 2019 are currently estimated to be $50 million. This includes routine capital expenditures and investments in technology.

21


 

Cash used in financing activities during the three and nine months ended September 30, 2019 was $1 million and $269 million, respectively, as compared with $101 million and $470 million for the same periods in 2018. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to limit the growth in issued and outstanding shares. During the three and nine months ended September 30, 2019, we used cash to repurchase 0.9 million and 4.1 million shares, respectively, to reduce the number of total outstanding shares, compared to 2.0 million and 7.8 million shares in the same periods in 2018.

We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.

We cannot predict what impact ongoing uncertainties in the global economy and political uncertainty may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior.

We maintain international unsecured bank lines of credit. At September 30, 2019, we were contingently liable for $69 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of our 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 accounting records 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.

As of September 30, 2019, our contractual obligations are as follows:

 

 

 

 

 

 

 

Payments due by period

 

In thousands

 

Total

 

 

Less than

1 year

 

 

1 - 3

years

 

 

3 - 5

years

 

 

After

5 years

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases, including imputed interest

 

$

451,996

 

 

 

79,216

 

 

 

132,699

 

 

 

98,798

 

 

 

141,283

 

Unconditional purchase obligations

 

 

91,729

 

 

 

91,729

 

 

 

 

 

 

 

 

 

 

Construction, equipment and technology purchase

   obligations

 

 

51,264

 

 

 

25,612

 

 

 

23,213

 

 

 

2,207

 

 

 

232

 

Total contractual cash obligations

 

$

594,989

 

 

 

196,557

 

 

 

155,912

 

 

 

101,005

 

 

 

141,515

 

 

We typically enter into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill.

Our foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and funds necessary to finance local capital expenditures. In some cases, our ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At September 30, 2019, cash and cash equivalent balances of $419 million were held by our non-United States subsidiaries, of which $13 million was held in banks in the United States. Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Exchange Risk

We conduct business in many different countries and currencies. Our business often results in billings issued in a country and currency that differs from that where the expenses related to the service are incurred. In the ordinary course of business, we create numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to our earnings. The principal foreign exchange risks to which Expeditors is exposed include Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.

22


 

Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on our earnings as a result of hypothetical changes in the value of the U.S. dollar, our functional currency, relative to the other currencies in which we transact business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the nine months ended September 30, 2019, would have had the effect of raising operating income by approximately $38 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $31 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.

We currently do not use derivative financial instruments to manage foreign currency risk and only enter into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict our ability to move money freely. Any such hedging activity throughout the three and nine months ended September 30, 2019 and 2018 was insignificant. During the three and nine months ended September 30, 2019, foreign currency losses were approximately $1 million and $5 million, respectively. During the three and nine months ended September 30, 2018, foreign currency losses were approximately $3 million and $1 million, respectively. We had no foreign currency derivatives outstanding at September 30, 2019 and December 31, 2018. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of September 30, 2019, we had approximately $35 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.

Interest Rate Risk

At September 30, 2019, we had cash and cash equivalents of $1,216 million, of which $818 million was invested at various short-term market interest rates. Other than our recorded lease liabilities, we had no long-term obligations or debt at September 30, 2019. A hypothetical change in the interest rate of 10 basis points at September 30, 2019 would not have a significant impact on our earnings. In management’s opinion, there has been no material change in our interest rate risk exposure in the third quarter of 2019.

Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness.

In 2018, we adopted new accounting standard Topic 606 Revenue from Contracts with Customers. The adoption of this standard resulted in changes to existing processes and systems. In particular, to capture information to measure the progress of completion of performance obligations under contracts with customers on an on-going basis and these changes are continuing in 2019 as further enhancements to our accounting information systems are introduced. In 2019, we adopted the new accounting standard Topic 842 Leases. The adoption of this accounting standard resulted in continued changes to existing processes and systems, including the implementation of a new leasing tracking and accounting system, processes and procedures associated with properly identifying and classifying leases, and the calculation and recording of leasehold right-of-use assets and lease liabilities.

Our management has confidence in our internal controls and procedures. Nevertheless, our management, including Expeditors’ Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all of our control issues and instances of fraud, if any, have been detected.

23


 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Expeditors is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on our operations, cash flows or financial position. As of September 30, 2019, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

Item 1A. Risk Factors

In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on February 22, 2019. There have been no material changes in Expeditors' risk factors from those disclosed under Item 1A Risk Factors in our annual report on Form 10-K filed on February 22, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total number

of shares

purchased

 

 

Average price

paid per share

 

 

Total number of

shares purchased

as part of publicly announced plans

 

 

Maximum number

of shares that

may yet be

purchased

under the plans

 

July 1-31, 2019

 

 

 

 

$

 

 

 

 

 

 

11,025,843

 

August 1-31, 2019

 

 

881,474

 

 

 

69.50

 

 

 

881,474

 

 

 

9,949,780

 

September 1-30, 2019

 

 

10,454

 

 

 

70.02

 

 

 

10,454

 

 

 

10,243,147

 

Total

 

 

891,928

 

 

$

69.51

 

 

 

891,928

 

 

 

10,243,147

 

 

In November 2001, Expeditors' Board of Directors authorized a Discretionary Stock Repurchase Plan for the purpose of repurchasing our 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, May 2016 and November 2018, the Board of Directors further authorized repurchases down to 188 million, 180 million, 170 million and 160 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.

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.

24


 

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

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, has been formatted in Inline XBRL.

 

25


 

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 6, 2019

 

/s/ JEFFREY S. MUSSER

 

 

Jeffrey S. Musser, President, Chief Executive Officer and Director

 

 

 

November 6, 2019

 

/s/ BRADLEY S. POWELL

 

 

Bradley S. Powell, Senior Vice President and Chief Financial Officer

 

26