UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q/A
(Mark One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the
quarterly period ended June 30, 2008
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the
transition period from to
Commission
File Number: 0-13468
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
(Exact name of
registrant as specified in its charter)
Washington
|
|
91-1069248
|
(State or other
jurisdiction of
|
|
(IRS Employer
Identification Number)
|
incorporation or
organization)
|
|
|
1015
Third Avenue, 12
th
Floor, Seattle, Washington
|
|
98104
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
(206)
674-3400
(Registrants
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
|
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
At August 4, 2008,
the number of shares outstanding of the issuers Common Stock was 213,054,998.
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
EXPLANATORY NOTE: This Amendment to the Form 10-Q is being
filed solely to correct the date on the cover of the Form 10-Q from June 30,
2007 to June 30, 2008. No other changes
have been made to the quarterly report.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
703,488
|
|
$
|
574,599
|
|
Short-term
investments
|
|
410
|
|
674
|
|
Accounts
receivable, less allowance for doubtful accounts of $13,822 at June 30,
2008 and $14,830 at December 31, 2007
|
|
982,725
|
|
933,519
|
|
Deferred
Federal and state income taxes
|
|
7,885
|
|
8,278
|
|
Other
|
|
53,456
|
|
17,627
|
|
Total
current assets
|
|
1,747,964
|
|
1,534,697
|
|
|
|
|
|
|
|
Property
and equipment, less accumulated depreciation and amortization of $231,503 at June 30,
2008 and $214,223 at December 31, 2007
|
|
505,263
|
|
497,892
|
|
Goodwill, net
|
|
7,927
|
|
7,927
|
|
Other
intangibles, net
|
|
7,216
|
|
7,832
|
|
Other
assets, net
|
|
21,334
|
|
20,717
|
|
|
|
|
|
|
|
|
|
$
|
2,289,704
|
|
$
|
2,069,065
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
682,409
|
|
613,108
|
|
Accrued
expenses, primarily salaries and related costs
|
|
158,427
|
|
129,669
|
|
Federal,
state and foreign income taxes
|
|
31,343
|
|
26,976
|
|
Total
current liabilities
|
|
872,179
|
|
769,753
|
|
|
|
|
|
|
|
Deferred
Federal and state income taxes
|
|
76,923
|
|
55,533
|
|
|
|
|
|
|
|
Minority
interest
|
|
18,050
|
|
17,208
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred
stock, par value $.01 per share
|
|
|
|
|
|
Authorized
2,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share
|
|
|
|
|
|
Authorized
320,000,000 shares; issued and outstanding 212,995,326 shares at June 30,
2008, and 212,996,776 shares at December 31, 2007
|
|
2,130
|
|
2,130
|
|
Additional
paid-in capital
|
|
32,567
|
|
50,006
|
|
Retained
earnings
|
|
1,247,023
|
|
1,143,464
|
|
Accumulated
other comprehensive income
|
|
40,832
|
|
30,971
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
1,322,552
|
|
1,226,571
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,289,704
|
|
$
|
2,069,065
|
|
See accompanying
notes to condensed consolidated financial statements.
1
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Airfreight
|
|
$
|
658,882
|
|
$
|
564,471
|
|
$
|
1,258,645
|
|
$
|
1,081,676
|
|
Ocean
freight and ocean services
|
|
516,473
|
|
450,431
|
|
963,265
|
|
825,633
|
|
Customs
brokerage and other services
|
|
278,900
|
|
243,716
|
|
539,666
|
|
470,255
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
1,454,255
|
|
1,258,618
|
|
2,761,576
|
|
2,377,564
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Airfreight
consolidation
|
|
517,683
|
|
437,446
|
|
978,782
|
|
827,090
|
|
Ocean
freight consolidation
|
|
419,767
|
|
364,917
|
|
780,207
|
|
663,808
|
|
Customs
brokerage and other services
|
|
119,480
|
|
101,681
|
|
230,934
|
|
197,956
|
|
Salaries
and related costs
|
|
215,535
|
|
197,393
|
|
421,350
|
|
380,154
|
|
Rent
and occupancy costs
|
|
19,374
|
|
15,744
|
|
38,809
|
|
32,411
|
|
Depreciation
and amortization
|
|
10,056
|
|
10,275
|
|
19,828
|
|
19,850
|
|
Selling
and promotion
|
|
9,744
|
|
9,581
|
|
19,248
|
|
18,677
|
|
Other
|
|
29,645
|
|
19,843
|
|
53,883
|
|
41,355
|
|
Total
operating expenses
|
|
1,341,284
|
|
1,156,880
|
|
2,543,041
|
|
2,181,301
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
112,971
|
|
101,738
|
|
218,535
|
|
196,263
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(75
|
)
|
118
|
|
(146
|
)
|
104
|
|
Interest
income
|
|
4,915
|
|
5,531
|
|
9,879
|
|
10,750
|
|
Other,
net
|
|
(162
|
)
|
1,675
|
|
1,112
|
|
2,430
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
4,678
|
|
7,324
|
|
10,845
|
|
13,284
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and minority interest
|
|
117,649
|
|
109,062
|
|
229,380
|
|
209,547
|
|
Income
tax expense
|
|
46,043
|
|
43,315
|
|
91,253
|
|
84,475
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
before minority interest
|
|
71,606
|
|
65,747
|
|
138,127
|
|
125,072
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
(357
|
)
|
(258
|
)
|
(406
|
)
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,249
|
|
$
|
65,489
|
|
$
|
137,721
|
|
$
|
124,777
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
.32
|
|
$
|
.30
|
|
$
|
.62
|
|
$
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.33
|
|
$
|
.31
|
|
$
|
.65
|
|
$
|
.58
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared and paid per common share
|
|
$
|
.16
|
|
$
|
.14
|
|
$
|
.16
|
|
$
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
220,515,987
|
|
221,716,414
|
|
220,490,452
|
|
222,283,372
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
213,275,229
|
|
213,251,710
|
|
213,168,730
|
|
213,339,478
|
|
See accompanying
notes to condensed consolidated financial statements.
2
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
71,249
|
|
$
|
65,489
|
|
$
|
137,721
|
|
$
|
124,777
|
|
Adjustments
to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Provision
for losses on accounts receivable
|
|
(396
|
)
|
(869
|
)
|
(573
|
)
|
(355
|
)
|
Deferred
income tax expense
|
|
7,647
|
|
6,772
|
|
16,473
|
|
12,240
|
|
Excess
tax benefits from stock plans
|
|
(7,889
|
)
|
(5,291
|
)
|
(9,395
|
)
|
(21,623
|
)
|
Stock
compensation expense
|
|
11,323
|
|
12,043
|
|
22,603
|
|
23,503
|
|
Depreciation
and amortization
|
|
10,056
|
|
10,275
|
|
19,828
|
|
19,850
|
|
Gain
on sale of property and equipment
|
|
(30
|
)
|
(79
|
)
|
(605
|
)
|
(202
|
)
|
Minority
interest in earnings of consolidated entities
|
|
357
|
|
258
|
|
406
|
|
295
|
|
Other
|
|
515
|
|
354
|
|
932
|
|
688
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
(91,778
|
)
|
(70,962
|
)
|
(32,024
|
)
|
(13,261
|
)
|
Decrease
(increase) in other current assets
|
|
622
|
|
173
|
|
677
|
|
(504
|
)
|
Increase
in accounts payable and other current liabilities
|
|
67,024
|
|
76,080
|
|
82,102
|
|
62,445
|
|
Decrease
in income taxes payable, net
|
|
(32,697
|
)
|
(7,311
|
)
|
(23,437
|
)
|
(4,842
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
36,003
|
|
86,932
|
|
214,708
|
|
203,011
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Decrease
in short-term investments
|
|
169
|
|
76
|
|
216
|
|
162
|
|
Purchase
of property and equipment
|
|
(14,316
|
)
|
(12,904
|
)
|
(24,526
|
)
|
(26,342
|
)
|
Proceeds from sale of
property and equipment
|
|
139
|
|
119
|
|
181
|
|
498
|
|
Prepayment
on long-term land lease
|
|
|
|
(2,848
|
)
|
|
|
(2,848
|
)
|
Deposit
on building purchase
|
|
|
|
(5,056
|
)
|
|
|
(5,056
|
)
|
Other
|
|
(308
|
)
|
(1,188
|
)
|
55
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(14,316
|
)
|
(21,801
|
)
|
(24,074
|
)
|
(35,114
|
)
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Net
distributions to minority interests
|
|
|
|
(316
|
)
|
(107
|
)
|
(316
|
)
|
(Repayments)
borrowings of short-term debt, net
|
|
(810
|
)
|
(17
|
)
|
|
|
203
|
|
Proceeds
from issuance of common stock
|
|
15,537
|
|
12,602
|
|
20,151
|
|
27,868
|
|
Repurchases
of common stock
|
|
(50,970
|
)
|
(56,597
|
)
|
(69,588
|
)
|
(128,995
|
)
|
Excess
tax benefits from stock plans
|
|
7,889
|
|
5,291
|
|
9,395
|
|
21,623
|
|
Dividends
paid
|
|
(34,163
|
)
|
(29,902
|
)
|
(34,163
|
)
|
(29,902
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(62,517
|
)
|
(68,939
|
)
|
(74,312
|
)
|
(109,519
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
3,352
|
|
2,034
|
|
12,567
|
|
5,306
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
(37,478
|
)
|
(1,774
|
)
|
128,889
|
|
63,684
|
|
Cash
and cash equivalents at beginning of period
|
|
740,966
|
|
576,816
|
|
574,599
|
|
511,358
|
|
Cash
and cash equivalents at end of period
|
|
$
|
703,488
|
|
$
|
575,042
|
|
$
|
703,488
|
|
$
|
575,042
|
|
|
|
|
|
|
|
|
|
|
|
Interest and taxes paid:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
75
|
|
$
|
127
|
|
$
|
146
|
|
$
|
138
|
|
Income
taxes
|
|
67,613
|
|
41,279
|
|
91,885
|
|
74,312
|
|
See accompanying
notes to condensed consolidated financial statements.
3
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
Note
1. Summary of Significant Accounting
Policies
The attached condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. As a result, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted.
The Company believes that the disclosures made are adequate to make the
information presented not misleading.
The condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring items, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and related notes included in the Companys Form 10-K as filed
with the Securities and Exchange Commission on or about February 29, 2008.
Note 2. Comprehensive Income
Comprehensive income
consists of net income and other gains and losses affecting shareholders
equity that, under generally accepted accounting principles in the United
States, are excluded from net income.
For the Company, these consist of foreign currency translation gains and
losses and unrealized gains and losses on securities, net of related income tax
effects.
The components of total
comprehensive income for interim periods are presented in the following table:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,249
|
|
$
|
65,489
|
|
$
|
137,721
|
|
$
|
124,777
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments net of tax of $(1,010) and $(2,425) for the 3 months
ended June 30, 2008 and 2007, and $(5,310) and $(3,315) for the 6 months
ended June 30, 2008 and 2007.
|
|
1,875
|
|
4,504
|
|
9,861
|
|
6,156
|
|
Unrealized gain
(loss) on securities net of tax of $0 and $(12) for the 3 months ended
June 30, 2008 and 2007, and $0 and $1 for the 6 months ended
June 30, 2008 and 2007.
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
73,124
|
|
$
|
70,011
|
|
$
|
147,582
|
|
$
|
130,932
|
|
Note 3. Business
Segment Information
The Company is organized
functionally in geographic operating segments.
Accordingly, management focuses its attention on revenues, net revenues,
operating income, identifiable assets, capital expenditures, depreciation and
amortization and equity generated in each of these geographical areas when
evaluating the effectiveness of geographic management. The Company charges its subsidiaries and
affiliates for services rendered in the United States on a cost recovery
basis. Transactions among the Companys
various offices are conducted using the same arms-length pricing methodologies
the Company uses when its offices transact business with independent agents.
4
Financial information
regarding the Companys operations by geographic area for the three and
six-months ended June 30, 2008 and 2007 are as follows:
(in thousands)
|
|
UNITED
STATES
|
|
OTHER
NORTH
AMERICA
|
|
ASIA
|
|
EUROPE
|
|
AUSTRAL-
ASIA
|
|
LATIN
AMERICA
|
|
MIDDLE
EAST
|
|
ELIMI-
NATIONS
|
|
CONSOLI-
DATED
|
|
Three
months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
320,278
|
|
41,397
|
|
768,086
|
|
209,297
|
|
23,407
|
|
24,626
|
|
67,164
|
|
|
|
1,454,255
|
|
Transfers
between geographic areas
|
|
26,842
|
|
2,623
|
|
5,629
|
|
11,257
|
|
2,158
|
|
3,649
|
|
4,539
|
|
(56,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
347,120
|
|
44,020
|
|
773,715
|
|
220,554
|
|
25,565
|
|
28,275
|
|
71,703
|
|
(56,697
|
)
|
1,454,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
153,846
|
|
18,009
|
|
104,688
|
|
72,286
|
|
13,125
|
|
14,159
|
|
21,212
|
|
|
|
397,325
|
|
Operating income
|
|
$
|
33,469
|
|
3,272
|
|
47,543
|
|
15,779
|
|
4,117
|
|
3,553
|
|
5,238
|
|
|
|
112,971
|
|
Identifiable
assets at quarter end
|
|
$
|
1,004,374
|
|
75,321
|
|
501,944
|
|
485,926
|
|
41,521
|
|
60,909
|
|
111,532
|
|
8,177
|
|
2,289,704
|
|
Capital
expenditures
|
|
$
|
7,159
|
|
855
|
|
3,207
|
|
1,684
|
|
159
|
|
505
|
|
747
|
|
|
|
14,316
|
|
Depreciation and
amortization
|
|
$
|
5,424
|
|
328
|
|
1,499
|
|
1,681
|
|
247
|
|
322
|
|
555
|
|
|
|
10,056
|
|
Equity
|
|
$
|
1,462,274
|
|
37,101
|
|
399,486
|
|
185,411
|
|
26,884
|
|
30,550
|
|
56,451
|
|
(875,605
|
)
|
1,322,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
260,796
|
|
32,765
|
|
710,104
|
|
162,100
|
|
17,057
|
|
19,377
|
|
56,419
|
|
|
|
1,258,618
|
|
Transfers
between geographic areas
|
|
25,856
|
|
1,989
|
|
4,470
|
|
8,172
|
|
1,853
|
|
3,078
|
|
3,340
|
|
(48,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
286,652
|
|
34,754
|
|
714,574
|
|
170,272
|
|
18,910
|
|
22,455
|
|
59,759
|
|
(48,758
|
)
|
1,258,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
143,206
|
|
15,377
|
|
100,479
|
|
58,600
|
|
9,812
|
|
10,950
|
|
16,150
|
|
|
|
354,574
|
|
Operating income
|
|
$
|
31,459
|
|
2,941
|
|
46,587
|
|
11,951
|
|
2,658
|
|
2,354
|
|
3,788
|
|
|
|
101,738
|
|
Identifiable
assets at quarter end
|
|
$
|
893,335
|
|
69,599
|
|
431,106
|
|
395,022
|
|
30,617
|
|
37,310
|
|
82,642
|
|
(2,370
|
)
|
1,937,261
|
|
Capital
expenditures
|
|
$
|
7,843
|
|
688
|
|
1,188
|
|
2,141
|
|
198
|
|
267
|
|
579
|
|
|
|
12,904
|
|
Depreciation and
amortization
|
|
$
|
5,304
|
|
331
|
|
1,222
|
|
2,393
|
|
225
|
|
417
|
|
383
|
|
|
|
10,275
|
|
Equity
|
|
$
|
1,256,503
|
|
32,692
|
|
326,036
|
|
134,925
|
|
20,114
|
|
19,571
|
|
39,555
|
|
(714,363
|
)
|
1,115,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
618,224
|
|
76,466
|
|
1,447,936
|
|
394,861
|
|
43,246
|
|
46,486
|
|
134,357
|
|
|
|
2,761,576
|
|
Transfers
between geographic areas
|
|
50,923
|
|
4,696
|
|
10,740
|
|
21,759
|
|
4,292
|
|
6,956
|
|
8,536
|
|
(107,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
669,147
|
|
81,162
|
|
1,458,676
|
|
416,620
|
|
47,538
|
|
53,442
|
|
142,893
|
|
(107,902
|
)
|
2,761,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
302,901
|
|
34,683
|
|
203,429
|
|
138,059
|
|
24,824
|
|
26,804
|
|
40,953
|
|
|
|
771,653
|
|
Operating income
|
|
$
|
66,013
|
|
6,399
|
|
93,573
|
|
28,220
|
|
7,589
|
|
6,819
|
|
9,922
|
|
|
|
218,535
|
|
Identifiable
assets at quarter end
|
|
$
|
1,004,374
|
|
75,321
|
|
501,944
|
|
485,926
|
|
41,521
|
|
60,909
|
|
111,532
|
|
8,177
|
|
2,289,704
|
|
Capital
expenditures
|
|
$
|
10,795
|
|
1,191
|
|
6,510
|
|
3,294
|
|
353
|
|
776
|
|
1,607
|
|
|
|
24,526
|
|
Depreciation and
amortization
|
|
$
|
10,770
|
|
640
|
|
2,753
|
|
3,449
|
|
496
|
|
637
|
|
1,083
|
|
|
|
19,828
|
|
Equity
|
|
$
|
1,462,274
|
|
37,101
|
|
399,486
|
|
185,411
|
|
26,884
|
|
30,550
|
|
56,451
|
|
(875,605
|
)
|
1,322,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
506,521
|
|
60,851
|
|
1,312,135
|
|
318,479
|
|
31,840
|
|
38,748
|
|
108,990
|
|
|
|
2,377,564
|
|
Transfers
between geographic areas
|
|
48,354
|
|
3,967
|
|
8,450
|
|
15,933
|
|
3,550
|
|
5,584
|
|
6,763
|
|
(92,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
554,875
|
|
64,818
|
|
1,320,585
|
|
334,412
|
|
35,390
|
|
44,332
|
|
115,753
|
|
(92,601
|
)
|
2,377,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
278,673
|
|
30,077
|
|
193,632
|
|
114,627
|
|
18,739
|
|
20,745
|
|
32,217
|
|
|
|
688,710
|
|
Operating income
|
|
$
|
59,522
|
|
5,670
|
|
91,471
|
|
22,102
|
|
5,062
|
|
4,406
|
|
8,030
|
|
|
|
196,263
|
|
Identifiable
assets at quarter end
|
|
$
|
893,335
|
|
69,599
|
|
431,106
|
|
395,022
|
|
30,617
|
|
37,310
|
|
82,642
|
|
(2,370
|
)
|
1,937,261
|
|
Capital
expenditures
|
|
$
|
16,548
|
|
1,012
|
|
2,521
|
|
3,526
|
|
892
|
|
762
|
|
1,081
|
|
|
|
26,342
|
|
Depreciation and
amortization
|
|
$
|
10,473
|
|
662
|
|
2,597
|
|
4,130
|
|
425
|
|
817
|
|
746
|
|
|
|
19,850
|
|
Equity
|
|
$
|
1,256,503
|
|
32,692
|
|
326,036
|
|
134,925
|
|
20,114
|
|
19,571
|
|
39,555
|
|
(714,363
|
)
|
1,115,033
|
|
5
Note 4. Basic and Diluted Earnings per Share
The following table
reconciles the numerator and the denominator of the basic and diluted per share
computations for earnings per share for the three months and six months ended June 30,
2008 and 2007:
|
|
Three
months ended June 30,
|
|
(Amounts in thousands, except
share and per share amounts)
|
|
Net
Earnings
|
|
Weighted
Average
Shares
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
71,249
|
|
213,275,229
|
|
$
|
.33
|
|
Effect
of dilutive potential common shares
|
|
|
|
7,240,758
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
71,249
|
|
220,515,987
|
|
$
|
.32
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
65,489
|
|
213,251,710
|
|
$
|
.31
|
|
Effect
of dilutive potential common shares
|
|
|
|
8,464,704
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
65,489
|
|
221,716,414
|
|
$
|
.30
|
|
|
|
Six
months ended June 30,
|
|
(Amounts in thousands, except
share and per share amounts)
|
|
Net
Earnings
|
|
Weighted
Average
Shares
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
137,721
|
|
213,168,730
|
|
$
|
.65
|
|
Effect
of dilutive potential common shares
|
|
|
|
7,321,722
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
137,721
|
|
220,490,452
|
|
$
|
.62
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
124,777
|
|
213,339,478
|
|
$
|
.58
|
|
Effect
of dilutive potential common shares
|
|
|
|
8,943,894
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
124,777
|
|
222,283,372
|
|
$
|
.56
|
|
6
The following shares have
been excluded from the computation of diluted earnings per share because the
effect would have been antidilutive:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
6,730,280
|
|
4,852,570
|
|
6,730,280
|
|
3,035,010
|
|
Note
5. Stock and Cash Dividends
On May 8, 2008, the
Board of Directors declared a semi-annual cash dividend of $.16 per share
payable on June 16, 2008 to shareholders of record as of June 2, 2008. The dividend of $34 million was paid on June 16,
2008.
On May 3, 2007, the
Board of Directors declared a semi-annual cash dividend of $.14 per share
payable on June 15, 2007 to shareholders of record as of June 1, 2007. The dividend of $30 million was paid on June 15,
2007.
Note
6. Shareholders Equity
A. Share-Based Compensation Plans
The
Company provides compensation benefits by granting stock options and employee
stock purchase rights to its employees and restricted stock to its directors.
In
May 2008, the shareholders approved the Companys 2008 Plan, which made
available a total of 3,000,000 shares of the Companys common stock for
purchase upon exercise of options granted under the 2008 Plan. The Companys annual grant of option awards
generally takes place during the second quarter of each fiscal year. For the
six-month periods ended June 30, 2008 and 2007, 2,080,315 and 1,930,510
options were granted, respectively. The grant of employee stock purchase rights
and the issuance of shares under the employee stock purchase plan are generally
made in the third quarter of each fiscal year and none were issued in the three
and six-month periods ended June 30, 2008 and 2007.
In
May 2008, the shareholders approved the Companys 2008 Directors restricted
stock plan (the 2008 Directors Plan), which provides for annual awards of
restricted stock to non-employee directors and is intended to replace the 1993
Directors Non-qualified Stock Option Plan. The shareholder approval made
available for grant 200,000 shares of the Companys common stock. The plan
provides for an annual grant of restricted stock awards with a fair market
value equal to $200,000 to each participant. Each restricted stock award under
the 2008 Directors Plan vests in equal amounts monthly over one year.
Restricted shares entitle the grantees to all shareholder rights once vested,
except for cash dividends and transfer rights which are forfeited until the
final vesting date of the award. If a participants service as director is terminated,
any unvested portion of an award will be forfeited unless the Compensation
Committee of the Board of Directors determines otherwise.
B.
Share-Based Compensation Expense
The
Company recognizes stock compensation expense on a straight-line basis over the
period the stock awards become vested.
The Company recognizes
compensation expense based on the estimated fair value of options awarded under
its fixed stock option and employee stock purchase rights plans. The fair value of each option grant was estimated
on the date of grant using the Black Scholes option pricing model with the
following assumptions used for grants issued during the six months ended June 30,
2008 and 2007.
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Dividend yield
|
|
.72
|
%
|
.65
|
%
|
Volatility
|
|
34 37
|
%
|
35 41
|
%
|
Risk-free
interest rates
|
|
3.46
|
%
|
4.69 4.75
|
%
|
Expected life
(years) stock option plans
|
|
6.50 7.99
|
|
6.54 8.70
|
|
Weighted average
fair value of stock options granted during the period
|
|
$
|
17.85
|
|
$
|
18.49
|
|
|
|
|
|
|
|
|
|
The
compensation expense for restricted stock awards is based on the fair market
value of the Companys shares of common stock on the date of grant. On June 1, 2008, 25,488 restricted
shares were granted with a fair value of $47.08 per share.
7
Total stock compensation expense and the total
related tax benefit recognized in the three and six-months ended June 30,
2008 and 2007 are as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
$
|
11,323
|
|
$
|
12,043
|
|
$
|
22,603
|
|
$
|
23,503
|
|
|
|
|
|
|
|
|
|
|
|
Recognized tax
benefit
|
|
$
|
228
|
|
$
|
482
|
|
$
|
591
|
|
$
|
1,070
|
|
Note
7. Income Taxes
Based
on managements review of the Companys tax positions the Company had no
significant unrecognized tax benefits as of June 30, 2008 and December 31,
2007.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state, local and foreign jurisdictions. The Company is
no longer subject to U.S. federal income tax examinations by tax authorities
for years prior to 2004. In October 2007,
the Internal Revenue Service initiated an audit of the Companys federal income
tax return for the year 2005. With respect to state and local jurisdictions and
countries outside of the United States, with limited exceptions, the Company
and its subsidiaries are no longer subject to income tax audits for years prior
to 2000. In the normal course of business, the Company is subject to
examination by taxing authorities throughout the world. Although the outcome of
tax audits is always uncertain, the Company believes that adequate amounts of
tax, interest and penalties have been provided for any adjustments that may
result from these open tax years.
The
Company recognizes interest expense related to unrecognized tax benefits or
underpayment of income taxes in interest expense and recognizes penalties in
operating expenses. Any interest and penalties expensed in relation to the
underpayment of income taxes were insignificant for the three and six months
ended June 30, 2008 and 2007.
Note 8. Recent Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements (SFAS 157), supplemented by FASB
Financial Staff Position 157-1 and 2. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company adopted the provisions of SFAS 157 beginning in the
first quarter of 2008, except for certain nonfinancial assets and liabilities
for which it will adopt the provisions of SFAS 157 in the first quarter of
2009. The adoption of SFAS 157 had no material impact on the Companys
consolidated financial condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS 159). Under the
provisions of SFAS 159, companies may choose to account for eligible financial
instruments, warranties and insurance contracts at fair value on a
contract-by-contract basis. Changes in fair value will be recognized in
earnings each reporting period. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company adopted the
provisions of SFAS 159 beginning in the first quarter of 2008. The
adoption of SFAS 159 had no material impact on the Companys consolidated financial
condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. SFAS 160 modifies the accounting for changes in a parents
ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company is
required to and plans to adopt the provisions of SFAS 160 beginning in the
first quarter of 2009. While the Company is still assessing the impact of the
adoption of SFAS 160, it had minority interest of $18,050 as of June 30,
2008 and $17,208 as of December 31, 2007, that it expects will be
reclassified to equity under the provisions of SFAS 160.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is required to and plans to adopt the provisions of
SFAS 141R beginning in the first quarter of 2009. The
8
Company is currently
assessing the impact of the adoption of SFAS 141R. The impact will depend upon
the acquisitions, if any, the Company consummates after the effective date.
Note
9. Contingencies
On October 10, 2007, the U. S. Department of Justice (DOJ) issued a
subpoena ordering the Company to produce certain information and records
relating to an investigation of alleged anti-competitive behavior amongst air
cargo freight forwarders. The Company
has retained the services of a law firm to assist in complying with the DOJs
subpoena. They are also assisting management in conducting a very rigorous
self-review. As part of this process,
the Company has met with and continues to co-operate with the DOJ. As of June 30, 2008, the Company had
incurred approximately $11 million of
cumulative
legal and associated costs. The
Company expects to incur additional costs during the course of this ongoing
investigation, which could include fines and/or penalties if the DOJ concludes
that the Company has engaged in anti-competitive behavior and such fines and/or
penalties could have a material impact on the Companys financial condition,
results of operations and operating cash flows.
On January 3, 2008, the Company was named as a
defendant, with seven other of the largest European and North American based
global logistics providers, in a Federal antitrust class action lawsuit filed
in the United States District Court of the Eastern District of New York,
Precision Associates, Inc. et al v. Panalpina World Transport, No. 08-CV0042.
The complaint, which purports to be brought on behalf of a class of customers
(and has not yet been certified), alleges that the defendants engaged in
various forms of anticompetitive practices. The complaint seeks unspecified
damages and injunctive relief. The Company believes that these
allegations are without merit and intends to vigorously defend itself.
On May 16, 2008, a former employee filed a putative
class action lawsuit against the Company in the United States District Court
for the Northern District of California, Kingery v. Expeditors International of
Washington, Inc., No. 08-02510. The lawsuit, in which a class has not
been certified, purports to be brought on behalf of some group of current and
former salaried management and supervisory employees plaintiff alleges were
misclassified as exempt from overtime and meal/rest breaks under California and
Federal law. The complaint seeks unspecified damages and injunctive
relief.
The
Company believes that these allegations are without merit and intends to
vigorously defend itself.
On June 18, 2008, the European Commission (EC) issued a request for
information to the Companys UK subsidiary, Expeditors International (UK) Ltd.,
requesting certain information and records relating to an ongoing investigation
of freight forwarders. The Company
intends to respond and co-operate with the EC investigation.
The Company is involved in other claims
and lawsuits which arise in the ordinary course of business, none of which
currently, in managements opinion, will have a significant effect on the
Companys operations or financial position.
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT
OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q
including the section entitled Currency and Other Risk Factors and Liquidity
and Capital Resources contain forward-looking statements which must be
considered in connection with the discussion of the important factors that
could cause actual results to differ materially from the forward-looking
statements. In addition to risk factors
identified elsewhere in this report, attention should be given to the factors
identified and discussed in the report on Form 10-K filed on or about February 29,
2008.
EXECUTIVE
SUMMARY
Expeditors
International of Washington, Inc. is engaged in the business of global
logistics management, including international freight forwarding and
consolidation, for both air and ocean freight. The Company acts as a
customs broker in all domestic offices, and in many of its international offices.
The Company also provides additional services for its customers including
value-added distribution, purchase order management, vendor consolidation and
other logistics solutions. The Company does not compete for overnight
courier or small parcel business. The Company does not own or operate
aircraft or steamships.
International
trade is influenced by many factors, including economic and political
conditions in the United States and abroad, currency exchange rates, and United
States and foreign laws and policies relating to tariffs, trade restrictions,
foreign investments and taxation. Periodically, governments consider a
variety of changes to current tariffs and trade restrictions. The Company
cannot predict which, if any, of these proposals may be adopted, nor can the
Company predict the effects the adoption of any such proposal will have on the
Companys business. Doing business in foreign locations also subjects the
Company to a variety of risks and considerations not normally encountered by
domestic enterprises. In addition to being influenced by governmental
policies concerning international trade, the Companys business may also be
affected by political developments and changes in government personnel or
policies in the nations in which it does business.
The
Company derives its revenues from three principal sources: 1) airfreight, 2)
ocean freight and 3) customs brokerage and other services and these are the
revenue categories presented in the financial statements.
As
a non-asset based carrier, the Company does not own transportation
assets. Rather, the Company generates the major portion of its air and
ocean freight revenues by purchasing transportation services from direct
(asset-based) carriers and reselling those services to its customers.
The difference between the rate billed to customers (the sell rate), and the
rate paid to the carrier (the buy rate) is termed net revenue or yield.
By consolidating shipments from multiple customers and concentrating its buying
power, the Company is able to negotiate favorable buy rates from the direct
carriers, while at the same time offering lower sell rates than customers would
otherwise be able to negotiate themselves.
9
Customs
brokerage and other services involves providing services at destination, such
as helping customers clear shipments through customs by preparing required
documentation, calculating and providing for payment of duties and other taxes
on behalf of the customers as well as arranging for any required inspections by
governmental agencies, and arranging for delivery. This is a complicated
function requiring technical knowledge of customs rules and regulations in
the multitude of countries in which the Company has offices.
The
Companys ability to provide services to its customers is highly dependent on
good working relationships with a variety of entities including airlines, ocean
steamship lines, and governmental agencies. The significance of
maintaining acceptable working relationships with governmental agencies and
asset-based providers involved in global trade has gained increased importance
as a result of ongoing concern over terrorism. As each carrier labors to
comply with governmental regulations implementing security policies and
procedures, inherent conflicts emerge which can and do affect global trade to
some degree. A good reputation helps to develop practical working
understandings that will effectively meet security requirements while
minimizing potential international trade obstacles. The Company considers
its current working relationships with these entities to be
satisfactory. However, changes in the financial stability and operating
capabilities of asset-based carriers, space allotments made available to the
Company by asset-based carriers, governmental deregulation efforts, modernization
of the regulations governing customs brokerage, and/or changes in governmental
quota restrictions could affect the Companys business in unpredictable ways.
Historically,
the Companys operating results have been subject to a seasonal trend when
measured on a quarterly basis. The first quarter has traditionally been
the weakest and the third and fourth quarters have traditionally been the
strongest. This pattern is the result of, or is influenced by, numerous
factors including climate, national holidays, consumer demand, economic
conditions and a myriad of other similar and subtle forces. In addition,
this historical quarterly trend has been influenced by the growth and diversification
of the Companys international network and service offerings. The Company
cannot accurately forecast many of these factors nor can the Company estimate
accurately the relative influence of any particular factor and, as a result,
there can be no assurance that historical patterns, if any, will continue in
future periods.
A
significant portion of the Companys revenues are derived from customers in
retail industries whose shipping patterns are tied closely to consumer demand,
and from customers in industries whose shipping patterns are dependent upon
just-in-time production schedules. Therefore, the timing of the Companys
revenues are, to a large degree, impacted by factors out of the Companys
control, such as a sudden change in consumer demand for retail goods and/or
manufacturing production delays. Additionally, many customers ship a
significant portion of their goods at or near the end of a quarter, and
therefore, the Company may not learn of a shortfall in revenues until late in a
quarter. To the extent that a shortfall in revenues or earnings was not
expected by securities analysts, any such shortfall from levels predicted by
securities analysts could have an immediate and adverse effect on the trading
price of the Companys stock.
As
further discussed under liquidity and capital resources, total capital
expenditures in 2008 are expected to exceed $85 million.
In
terms of the opportunities, challenges and risks that management is focused on
in 2008, the Company operates in 61 countries throughout the world in the
competitive global logistics industry and Company activities are tied directly
to the global economy. From the inception of the Company, management has
believed that the elements required for a successful global service organization
can only be assured through recruiting, training, and ultimately retaining
superior personnel. The Companys greatest challenge is now and always has
been perpetuating a consistent global culture which demands:
·
Total
dedication, first and foremost, to providing superior customer service;
·
Aggressive
marketing of all of the Companys service offerings;
·
Ongoing
development of key employees and management personnel via formal and informal
means;
·
Creation
of unlimited advancement opportunities for employees dedicated to hard work,
personal growth and continuous improvement;
·
Individual
commitment to the identification and mentoring of successors for every key
position so that when inevitable change is required, a qualified and
well-trained internal candidate is ready to step forward; and
·
Continuous
identification, design and implementation of system solutions, both
technological and otherwise, to meet and exceed the needs of our customers
while simultaneously delivering tools to make our employees more efficient and
more effective.
The
Company has reinforced these values with a compensation system that rewards
employees for profitably managing the things they can control. There is no
limit to how much a key manager can be compensated for success. The Company
believes in a real world environment in every operating unit where
individuals are not sheltered from the profit implications of their
decisions. At the same time, the Company insists on continued focus on
such things as accounts receivable collection, cash flow management and credit
soundness in an attempt to insulate managers from the sort of catastrophic
errors that might end a career.
10
Any
failure to perpetuate this unique culture on a self-sustained basis throughout
the Company, provides a greater threat to the Companys continued success than
any external force, which would be largely beyond our
control. Consequently, management spends the majority of its time focused
on creating an environment where employees can learn and develop while also
building systems and taking preventative action to reduce exposure to negative
events. The Company strongly believes that it is nearly impossible to
predict events that, in the aggregate, could have a positive or a negative
impact on future operations. As a result our focus is on building and
maintaining a global culture of well-trained employees and managers that are
prepared to identify and react to subtle changes as they develop and thereby
help the Company adapt and thrive as major trends emerge.
Critical Accounting Estimates
Management believes that the
nature of the Companys business is such that there are few, if any, complex
challenges in accounting for operations.
While
judgments and estimates are a necessary component of any system of accounting,
the Companys use of estimates is limited primarily to the following areas that
in the aggregate are not a major component of the Companys statement of
earnings:
·
accounts
receivable valuation;
·
the
useful lives of long-term assets;
·
the
accrual of costs related to ancillary services the Company provides;
·
establishment
of adequate insurance liabilities for the portion of the freight related
exposure which the Company has self-insured;
·
accrual
of tax expense on an interim basis; and
·
calculation of share-based compensation expense
.
These
estimates, other than the calculation of share-based compensation expense, are
not highly uncertain and have not historically been subject to significant
change. Management believes that the methods utilized in all of these areas are
non-aggressive in approach and consistent in application. Management
believes that there are limited, if any, alternative accounting principles or
methods which could be applied to the Companys transactions. While the
use of estimates means that actual future results may be different from those
contemplated by the estimates, the Company believes that alternative principles
and methods used for making such estimates would not produce materially
different results than those reported.
As described in Note 6 in the condensed consolidated
financial statements in this quarterly report, the Company accounts for
share-based compensation based on an estimate of the fair value of options
granted to employees under the Companys stock option and employee stock
purchase plans. This expense is recorded
on a straight-line basis over the option vesting periods.
Determining the appropriate option pricing model to
use to estimate stock compensation expense requires judgment. Any option
pricing model requires assumptions that are subjective and these assumptions
also require judgment. Examples include assumptions about long-term stock price
volatility, employee exercise patterns, pre-vesting option forfeitures,
post-vesting option terminations, and the future interest rates and dividend
yields. The Company uses the Black-Scholes model for estimating the fair value
of stock options.
Refer to Note 6 in the condensed consolidated
financial statements for the assumptions used for grants issued during the six
months ended June 30, 2008 and 2007.
Management believes that the assumptions used are
appropriate based upon the Companys historical and currently expected future
experience. Looking to future events, management has been strongly influenced
by historical patterns which may not be valid predictors of future developments
and any future deviation may be material.
The Companys expected volatility assumptions are based
on the historical volatility of the Companys stock. The expected life
assumption is primarily based on historical employee exercise patterns and
employee post-vesting termination behavior. The risk-free interest rate for the
expected term of the option is based on the corresponding yield curve in effect
at the time of grant for U.S. Treasury bonds having the same term as the
expected life of the option, i.e. a ten year bond rate is used for valuing an
option with a ten year expected life. The expected dividend yield is based on
the Companys historical experience. The forfeiture rate used to calculate
compensation expense is primarily based on historical pre-vesting employee
forfeiture patterns.
11
The use of different assumptions would result in
different amounts of stock compensation expense. Keeping all other variables
constant, the indicated change in each of the assumptions below increases or
decreases the fair value of an option (and the resulting stock compensation
expense), as follows:
Assumption
|
|
Change in assumption
|
|
Impact of fair value of options
|
Expected volatility
|
|
Higher
|
|
Higher
|
Expected life of option
|
|
Higher
|
|
Higher
|
Risk-free interest rate
|
|
Higher
|
|
Higher
|
Expected dividend yield
|
|
Higher
|
|
Lower
|
The fair value of an option is more significantly
impacted by changes in the expected volatility and expected life assumptions.
The pre-vesting forfeitures assumption is ultimately adjusted to the actual
forfeiture rate. Therefore, changes in the forfeitures assumption would not
impact the total amount of expense ultimately recognized over the vesting
period. Different forfeitures assumptions would only impact the timing of
expense recognition over the vesting period. Estimated forfeitures will be
reassessed in subsequent periods and may change based on new facts and
circumstances.
Results of Operations
The following table shows
the consolidated net revenues (revenues less transportation expenses)
attributable to the Companys principal services and the Companys expenses for
the three and six-month periods ended June 30, 2008 and 2007, expressed as
percentages of net revenues. Management believes that net revenues are a better
measure than total revenues of the relative importance of the Companys
principal services since total revenues earned by the Company as a freight
consolidator include the carriers charges to the Company for carrying the
shipment whereas revenues earned by the Company in its other capacities include
only the commissions and fees actually earned by the Company.
The table and the
accompanying discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes thereto which
appear elsewhere in this quarterly report.
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airfreight
|
|
$
|
141,199
|
|
36
|
%
|
$
|
127,025
|
|
36
|
%
|
$
|
279,863
|
|
36
|
%
|
$
|
254,586
|
|
37
|
%
|
Ocean freight and
ocean services
|
|
96,706
|
|
24
|
|
85,514
|
|
24
|
|
183,058
|
|
24
|
|
161,825
|
|
23
|
|
Customs brokerage
and other services
|
|
159,420
|
|
40
|
|
142,035
|
|
40
|
|
308,732
|
|
40
|
|
272,299
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
397,325
|
|
100
|
|
354,574
|
|
100
|
|
771,653
|
|
100
|
|
688,710
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overhead
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related costs
|
|
215,535
|
|
54
|
|
197,393
|
|
56
|
|
421,350
|
|
55
|
|
380,154
|
|
55
|
|
Other
|
|
68,819
|
|
17
|
|
55,443
|
|
16
|
|
131,768
|
|
17
|
|
112,293
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total overhead
expenses
|
|
284,354
|
|
71
|
|
252,836
|
|
72
|
|
553,118
|
|
72
|
|
492,447
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
112,971
|
|
29
|
|
101,738
|
|
28
|
|
218,535
|
|
28
|
|
196,263
|
|
28
|
|
Other income, net
|
|
4,678
|
|
1
|
|
7,324
|
|
2
|
|
10,845
|
|
2
|
|
13,284
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes and minority interest
|
|
117,649
|
|
30
|
|
109,062
|
|
30
|
|
229,380
|
|
30
|
|
209,547
|
|
30
|
|
Income tax
expense
|
|
46,043
|
|
12
|
|
43,315
|
|
12
|
|
91,253
|
|
12
|
|
84,475
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
before minority interest
|
|
71,606
|
|
18
|
|
65,747
|
|
18
|
|
138,127
|
|
18
|
|
125,072
|
|
18
|
|
Minority interest
|
|
(357
|
)
|
|
|
(258
|
)
|
|
|
(406
|
)
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,249
|
|
18
|
%
|
$
|
65,489
|
|
18
|
%
|
$
|
137,721
|
|
18
|
%
|
$
|
124,777
|
|
18
|
%
|
12
Airfreight net revenues
increased 11% and 10% for the three and six-month periods ended June 30,
2008, respectively, as compared with the same periods for 2007. The increase in
airfreight net revenues for the three-month period was due to a 3% increase in
airfreight tonnages handled by the Company during the second quarter of 2008.
The increase in airfreight net revenues for the six-month period was due to a
6% increase in airfreight tonnage, as compared with the same period for 2007.
Airfreight net revenues
from North America and Europe increased 23% and 25%, respectively, for the
three-month period ended June 30, 2008. Airfreight net revenues from Asia
decreased 5% for the three-month period ended June 30, 2008. The increases
in North America and Europe were a result of tonnage increases of 13% and 16%,
respectively, combined with a net revenue per kilo increase of 12%. Airfreight
tonnages from Asia decreased 4%, however net revenue per kilo increased 3%,
primarily as a result of a more favorable business mix, including a reduction
in less profitable business. This trend
enhanced the Companys ability to create more efficient and cost effective
consolidations when analyzed on a unitary basis.
Airfreight net revenues
from North America and Europe increased 16% and 22%, respectively, for the
six-month period ended June 30, 2008. Airfreight net revenues from Asia
decreased 3% for the six-month period ended June 30, 2008. The increases
in North America and Europe were a result of tonnage increases of 14% and 9%,
respectively, combined with a net revenue per kilo increase of 10%. Airfreight tonnages from Asia remained
essentially flat while net revenue per kilo decreased 1%, primarily as a result
of the same changes described for the three-month period.
Ocean
freight and ocean services net revenues increased 13% for both the three and
six-month periods ended June 30, 2008, as compared with the same periods
in 2007.
Ocean freight net revenues are comprised of three
basic services: ocean freight consolidation, direct ocean forwarding and order
management. The majority of the Companys
ocean freight net revenue is derived from ocean freight consolidation which
represented 60% and 59%, respectively, of ocean freight net revenue for the
three and six month period ended June 30, 2008.
Ocean freight
consolidation net revenue grew at a rate of 10% for the three month period
ended June 30, 2008, as compared with
the same period for 2007, while the other services, ocean forwarding and
order management, which are primarily fee based, grew at rates of 16% and 19%,
respectively, for the same period. For
the six-month period ended June 30, 2008 as compared with the same period for 2007, ocean freight
consolidation net revenue grew at a rate of 11%, while ocean forwarding and order management grew at rates of 15% and
18%, respectively.
Ocean
freight consolidation volumes, measured in terms of forty-foot container
equivalent units (FEUs), increased
3% and 5% for
the three and six-month periods ended June 30, 2008, respectively, as compared with the same periods for 2007, while net
revenue per container, on an aggregate basis, increased 7% and 6%, respectively, for the same periods. The
dynamics of these increases in ocean net revenues is a combination of the
Companys response to market demand with aggressive sales efforts and pricing
strategies necessary to expand market share.
For the three-month period ended June 30,
2008
, as compared with the same period for 2007, the Companys North American
ocean freight net revenues increased
8
% while ocean freight net
revenues for Asia and Europe increased
16
% and
25
%,
respectively.
For the
six-month period ended June 30, 2008
, as compared with the same
period for 2007, North American ocean freight net revenues increased
7
%, while ocean freight
net revenues for Asia and Europe
increased
18
% and
19
%, respectively.
The increases in European ocean freight net revenue during the three and
six-month periods are primarily a result of increased imports driven by more
focused sales coordination between the Companys Asian and European
offices. These increases continued to be
influenced by the relative strength of European currencies. The increases in Asian ocean freight net
revenue are a result of increases in container counts primarily to Europe and
other Asian ports. Increases in North
American net revenues were also influenced by stronger exports than those
experienced in prior years, primarily driven by a weak U.S. dollar.
Customs brokerage and
other services net revenues increased 12%
and 13% for the three and
six-month periods ended June 30, 2008, respectively, as compared with the
same periods for 2007, as a result of the
Companys focused marketing efforts and continued emphasis on providing high
quality service. Consolidation within
the customs brokerage market has also contributed to this increase as customers
seek out customs brokers with more sophisticated computerized capabilities
critical to an overall logistics management program. In addition, increased focus on regulatory
compliance continues to provide opportunities for the Company to expand its
customs brokerage services.
Salaries and related
costs increased 9% and 11% during
the three and six-month periods ended June 30, 2008, respectively, as compared with the same
periods in 2007 as a result of (1) the Companys increased hiring of
sales, operations, and administrative personnel in existing and new offices to
accommodate increases in business activity, and (2) increased compensation
levels.
13
The effects of including stock-based compensation
expense in salaries and related costs for the three and six months ended June 30,
2008 and 2007 are as follows:
|
|
For the three months
ended June 30,
|
|
For the six months
ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related costs
|
|
$
|
215,535
|
|
$
|
197,393
|
|
$
|
421,350
|
|
$
|
380,154
|
|
|
|
|
|
|
|
|
|
|
|
As a % of net
revenue
|
|
54.2
|
%
|
55.7
|
%
|
54.6
|
%
|
55.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
$
|
11,323
|
|
$
|
12,043
|
|
$
|
22,603
|
|
$
|
23,503
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
salaries and related costs
|
|
5.3
|
%
|
6.1
|
%
|
5.4
|
%
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
As a % of net
revenue
|
|
2.8
|
%
|
3.4
|
%
|
2.9
|
%
|
3.4
|
%
|
Of the 142 and 60 basis point decrease in salaries and related costs as
a percentage of net revenue for the three and six-month periods ended June 30,
2008, respectively, as compared with the same periods for 2007, 55 and 48 basis
points, respectively, are the result of the decrease in stock compensation
expense as a percentage of net revenue.
The remaining 95 and 12
basis point decrease in salaries and related costs as a percentage of net
revenue for the three and six-month periods ended June 30, 2008,
respectively, as compared to the same period for 2007, can be attributed to
productivity increases which resulted from more efficient staffing
utilization. Historically, the
relatively consistent relationship between salaries and net revenues is the
result of a compensation philosophy that has been maintained since the
inception of the Company: offer a modest base salary and the opportunity to
share in a fixed and determinable percentage of the operating profit of the
business unit controlled by each key employee.
Using this compensation model, changes in individual compensation will
occur in proportion to changes in Company profits. Management believes that the growth in
revenues, net revenues and net earnings for the three and six-month periods
ended June 30, 2008 are a result of the incentives inherent in the Companys
compensation program.
Other overhead expenses
increased 24% and 17% for the three and six-month periods ended June 30,
2008, respectively, as compared with
the same periods in 2007 as rent expense,
communications expense, process improvement and training expenses, and other
costs expanded to accommodate the Companys growing operations. The Company incurred legal and related
expenses of $5 million and $7 million
for the three and six month periods ended June 30, 2008, respectively, primarily
attributable to the Department of Justices (DOJ) ongoing investigation of
air cargo freight forwarders and related legal proceedings as described further
in Part II Item 1 on this report on Form 10-Q entitled Legal
Proceedings. The Company will continue
to incur substantial legal costs, which could include fines and/or penalties,
until these proceedings are concluded.
If the DOJ concludes that the Company has engaged in anti-competitive
behavior, such fines and/or penalties could have a material impact on the
Companys financial condition, results of operations and operating cash
flows.
Despite these record legal and related expenditures, other overhead
expenses as a percentage of net revenues remained relatively constant for both
the three and six-month periods ended June 30, 2008, as compared with the
same periods in 2007.
Other income, net,
decreased 36% and 18% for the three and six-month periods ended June 30,
2008, respectively, as compared with
the same periods in 2007, primarily due to foreign exchange losses incurred in
2008. Due to lower interest rates during
the three and six months ended June 30, 2008, as compared with the same
periods for 2007, interest income decreased $617 and $871, respectively.
The Company pays income
taxes in the United States and other jurisdictions, as well as other taxes
which are typically included in costs of operations. The Companys consolidated effective income
tax rate during the three-month period ended June 30, 2008, was 39.1% as
compared to 39.7% for the same period in 2007.
The Companys consolidated effective income tax rate for the six-month
periods ended June 30, 2008 and 2007 was 39.8% and 40.3%,
respectively. Although a tax benefit
related to stock-based compensation expense is recorded for non-qualified stock
options at the time the related compensation expense is recognized, the tax
benefit received for disqualifying dispositions of incentive stock options
cannot be anticipated. The lower
consolidated effective income tax rate during the three and six-month periods
ended June 30, 2008, as compared to the same periods in 2007, is partially
the result of a larger tax benefit received for disqualifying dispositions of
incentive stock options occurring during the second quarter of 2008 compared to
2007.
Currency
and Other Risk Factors
International air/ocean
freight forwarding and customs brokerage are intensively competitive and are
expected to remain so for the foreseeable future. There are a large number of
entities competing in the international logistics industry; however, the
14
Companys primary
competition is confined to a relatively small number of companies within this
group. While there is currently a marked
trend within the industry toward consolidation into large firms with
multinational offices and agency networks, regional and local broker/forwarders
remain a competitive force.
Historically, the primary
competitive factors in the international logistics industry have been price and
quality of service, including reliability, responsiveness, expertise,
convenience, and scope of operations.
The Company emphasizes quality service and believes that its prices are
competitive with those of others in the industry. Customers have exhibited a trend towards more
sophisticated and efficient procedures for the management of the logistics
supply chain by embracing strategies such as just-in-time inventory
management. The Company believes that
this trend has resulted in customers using fewer service providers with greater
technological capacity and consistent global coverage. Accordingly, sophisticated computerized
customer service capabilities and a stable worldwide network have become
significant factors in attracting and retaining customers.
Developing these systems
and a worldwide network has added a considerable indirect cost to the services
provided to customers. Smaller and
middle-tier competitors, in general, do not have the resources available to
develop customized systems and a worldwide network. As a result, there is a significant amount of
consolidation currently taking place in the industry. Management expects that this trend toward
consolidation will continue for the short- to medium-term.
The nature of the Companys
worldwide operations necessitates the Company dealing with a multitude of
currencies other than the U.S. dollar.
This results in the Company being exposed to the inherent risks of the
international currency markets and governmental interference. Some of the countries where the Company
maintains offices and/or agency relationships have strict currency control
regulations which influence the Companys ability to hedge foreign currency
exposure. The Company tries to
compensate for these exposures by accelerating international currency
settlements among its offices or agents.
The Company enters into foreign currency hedging transactions only in
limited locations where there are regulatory or commercial limitations on the
Companys ability to move money freely around the world or the short-term
financial outlook in any country is such that hedging is the most
time-sensitive way to avoid short-term exchange losses. Any such hedging activity during the three
and six months ended June 30, 2008 and 2007 was insignificant. During the three and six months ended June 30,
2008, the Company had foreign exchange losses of approximately $474 and $1,018,
respectively, on a net basis. For the
same periods of 2007 the Company had foreign exchange gains of approximately
$1,407 and $1,297, respectively, on a net basis. The Company had no foreign currency
derivatives outstanding at June 30, 2008 and 2007.
Sources of Growth
During the second quarter
of 2008, the Company opened one full service office (
·
) and one satellite office (+), as
follows:
ASIA
|
|
NEAR/MIDDLE EAST
|
·
Suzhou, Peoples Republic of China
(formerly a satellite of Shanghai)
|
|
+Mundra, India
(satellite of Bombay)
|
Acquisitions -
Historically, growth through aggressive acquisition has proven to be a
challenge for many of the Companys competitors and typically involves the
purchase of significant goodwill, the value of which can be realized in large
measure only by retaining the customers and profit margins of the acquired
business. As a result, the Company has
pursued a strategy emphasizing organic growth supplemented by certain strategic
acquisitions, where future economic benefit significantly exceeds the goodwill
recorded in the transaction.
Internal Growth -
Management believes that a comparison of same store growth is critical in the
evaluation of the quality and extent of the Companys internally generated
growth. This same store analysis
isolates the financial contributions from offices that have been included in
the Companys operating results for at least one full year. The table below presents same store
comparisons for the three and six months ended June 30, 2008 (which is the
measure of any increase from the same period of 2007) and for the three and six
months ended June 30, 2007 (which measures growth over 2006).
|
|
For the three months ended June 30,
|
|
For the six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
12
|
%
|
12
|
%
|
12
|
%
|
12
|
%
|
Operating income
|
|
11
|
%
|
15
|
%
|
11
|
%
|
13
|
%
|
Liquidity and Capital Resources
The Companys principal source of liquidity is cash generated
from operating activities. Net cash
provided by operating activities for the three and six months ended June 30,
2008, was $36 million and $215 million,
respectively, as compared with $87
15
million and $203 million for the same periods of
2007. The $51 million decrease for the
three months ended June 30, 2008, is primarily due to the timing of
receipts and disbursements represented by accounts receivable and accounts
payable balances and by a $25 million decrease in income taxes payable,
net. The decrease in income taxes
payable, net is primarily due to a change in the regulations governing the
calculation of U.S. Federal estimated tax payments, resulting in a higher
payment in the second quarter of 2008, as compared with 2007. The $12 million increase for the six months
ended June 30, 2008, is principally due to increased net earnings offset
by a decrease in taxes payable, net of prepaid taxes.
The Companys business is
subject to seasonal fluctuations. Cash
flow fluctuates as a result of this seasonality. Historically, the first quarter shows an
excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with peak
season (typically commencing late second or early third quarter) causes an
excess of customer billings over customer collections. This cyclical growth in customer receivables
consumes available cash.
As a customs broker, the
Company makes significant 5-10 business day cash advances for certain of its
customers obligations such as
the
payment of duties to the Customs and Border Protection of the Department of
Homeland Security. These advances are
made as an accommodation for a select group of credit-worthy customers. Cash advances are a pass through and are
not recorded as a component of revenue or expense. The billings of such advances to customers
are accounted for as a direct increase in accounts receivable to the customer
and a corresponding increase in accounts payable to governmental customs
authorities. As a result of these pass
through billings, the conventional Days Sales Outstanding or DSO calculation
does not directly measure collection efficiency.
Cash used in investing
activities for the three and six months ended June 30, 2008, was $14
million and $24 million, respectively, as
compared with $22 million and $35 million during the same periods of 2007. The largest use of cash in investing
activities is cash paid for capital expenditures. As a non-asset based provider of integrated
logistics services, the Company does not own any physical means of
transportation (i.e., airplanes, ships, trucks, etc.). However, the Company does have need, on
occasion, to purchase buildings to house staff and to facilitate the staging of
customers freight. The Company
routinely invests in technology, office furniture and equipment and leasehold
improvements. In the second quarter of
2008, the Company made capital expenditures of $14 million as compared with $13
million for the same period in 2007. The
Company currently expects to spend approximately $71 million for normal capital
expenditures in 2008. In addition to
property and equipment,
normal
capital expenditures include
leasehold
improvements, warehouse equipment, computer hardware and furniture and
fixtures. Total capital expenditures in
2008 are estimated to be $85 million.
This includes normal capital expenditures as noted above, plus
additional real estate acquisitions and development. The Company expects to
finance capital expenditures in 2008 with cash.
Cash used in financing
activities during the three and six months ended June 30, 2008 were $63
million and $74 million, respectively,
as compared with $69 million and $110 million for each of the same periods in
2007. The Company uses the proceeds from
stock option exercises to repurchase the Companys stock on the open
market. The Company follows a policy of
repurchasing stock to limit growth in issued and outstanding shares as a result
of stock option exercises. The decrease
in cash used in financing activities during both the three and six-month
periods ended June 30, 2008, as compared with the same periods in 2007, is
primarily due to a lower aggregate cost to repurchase stock as a result of a
lower average stock price during the period.
The amounts paid for stock option repurchases during the six-month
period were also significantly lower due to fewer aggregate shares exercised,
as compared to the same period in 2007.
During the three months ended June 30, 2008 and 2007, the net use
of cash in financing activities included the payment of dividends of $.16 per
share and $.14 per share, respectively.
At June 30, 2008,
working capital was $876 million, including cash and short-term investments of
$704 million. The Company had no
long-term debt at June 30, 2008.
The Company maintains
international and domestic unsecured bank lines of credit. At June 30, 2008, the United States
facility totaled $50 million and the international bank lines of credit totaled
$22 million. In addition, the Company
maintains a bank facility with its U.K. bank for $14 million which is available
for issuances of standby letters of credit.
At June 30, 2008 the Company had no amounts outstanding on these
lines of credit but was contingently liable for $86 million from standby
letters of credit and guarantees. The standby letters of credit and guarantees
relate to obligations of the Companys foreign subsidiaries for credit extended
in the ordinary course of business by direct carriers, primarily airlines, and
for duty and tax deferrals available from governmental entities responsible for
customs and value-added-tax (VAT) taxation. The total underlying amounts due
and payable for transportation and governmental excises are properly recorded
as obligations in the books of the respective foreign subsidiaries, and there
would be no need to record additional expense in the unlikely event the parent
company were to be required to perform.
Management believes that
the Companys current cash position, bank financing arrangements, and operating
cash flows will be sufficient to meet its capital and liquidity requirements
for the foreseeable future, including meeting any contingent liabilities
related to standby letters of credit and other obligations.
In some cases, the Companys ability to repatriate funds from foreign
operations may be subject to foreign exchange controls. At June 30, 2008,
cash and cash equivalent balances of $
522
million were held by the Companys
non-United States subsidiaries, of which $
66
million was held in banks in the United
States.
16
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
The Company is exposed to
market risks in the ordinary course of its business. These risks are primarily related to foreign
exchange risk and changes in short-term interest rates. The potential impact of the Companys
exposure to these risks is presented below:
Foreign
Exchange Risk
The Company conducts business
in many different countries and currencies.
The Companys business often results in revenue billings issued in a
country and currency which differs from that where the expenses related to the
service are incurred. In the ordinary
course of business, the Company creates numerous intercompany
transactions. This brings a market risk
to the Companys earnings.
Foreign exchange rate sensitivity analysis can be quantified by
estimating the impact on the Companys earnings as a result of hypothetical
changes in the value of the U.S. dollar, the Companys functional currency,
relative to the other currencies in which the Company transacts business. All other things being equal, an average 10%
weakening of the U.S. dollar, throughout the six months ended June 30,
2008, would have had the effect of raising operating income approximately $
18
million.
An average 10% strengthening of the U.S. dollar, for the same period,
would have had the effect of reducing operating income approximately $
15
million.
This analysis does not take in to account changes in shipping patterns
based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar
would be expected to increase exports from the United States and decrease
imports into the United States over some relevant period of time, but the exact
effect of this change cannot be quantified without making speculative
assumptions.
As of June 30, 2008,
the Company had
approximately $4 million of net unsettled intercompany transactions. The Company currently does not use derivative
financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited
locations where regulatory or commercial limitations restrict the Companys
ability to move money freely. Any such
hedging activity during the three and six months ended June 30, 2008, was
insignificant. During the three
and six months ended June 30, 2008, the Company had foreign exchange
losses of approximately $474 and $1,018, respectively, on a net basis. For the same periods of 2007, respectively,
the Company had foreign exchange gains of approximately $1,407 and $1,297,
respectively, on a net basis. The Company had no foreign currency derivatives
outstanding at June 30, 2008 and 2007.
The Company instead follows a policy of accelerating
international currency settlements to manage foreign exchange risk relative to
intercompany billings. The majority of
intercompany billings are resolved within 30 days and intercompany billings
arising in the normal course of business are fully settled within 90 days.
Interest
Rate Risk
At June 30, 2008, the Company had cash and cash equivalents and
short-term investments of $
704
million, of which $
420 million was invested at
various
short-term
market interest rates. The Company had
no short-term borrowings at June 30, 2008.
A hypothetical change in the interest rate of 10% would not have a
significant impact on the Companys earnings.
In managements opinion,
there has been no material change in the Companys market risk exposure in the
second quarter of 2008.
Item 4. Controls and Procedures
Evaluation
of Controls and Procedures
The Company carried out
an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15(e))
as of the end of the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective.
Changes
in Internal Controls
There
were no changes in the Companys internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected or
are reasonably likely to materially affect the Companys internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
On October 10, 2007,
the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to
produce certain information and records relating to an investigation of alleged
anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a
law firm to assist in complying with the DOJs subpoena. They are also
assisting management in conducting a very rigorous self-review. As part of this process, the Company has met
with and continues to co-operate with the
17
DOJ. As of June 30, 2008, the Company had
incurred approximately $11 million of cumulative legal and associated
costs. The Company expects to incur
additional costs during the course of this ongoing investigation, which could
include fines and/or penalties if the DOJ concludes that the Company has
engaged in anti-competitive behavior and such fines and/or penalties could have
a material impact on the Companys financial condition, results of operations
and operating cash flows.
On January 3, 2008, the Company was named as a
defendant, with seven other of the largest European and North American based
global logistics providers, in a Federal antitrust class action lawsuit filed
in the United States District Court of the Eastern District of New York,
Precision Associates, Inc. et al v. Panalpina World Transport, No. 08-CV0042.
The complaint, which purports to be brought on behalf of a class of customers
(and has not yet been certified), alleges that the defendants engaged in
various forms of anticompetitive practices. The complaint seeks unspecified
damages and injunctive relief. The Company believes that these
allegations are without merit and intends to vigorously defend itself.
On May 16, 2008, a former employee filed a putative
class action lawsuit against the Company in the United States District Court
for the Northern District of California, Kingery v. Expeditors International of
Washington, Inc., No. 08-02510. The lawsuit, in which a class has not
been certified, purports to be brought on behalf of some group of current and
former salaried management and supervisory employees plaintiff alleges were
misclassified as exempt from overtime and meal/rest breaks under California and
Federal law. The complaint seeks unspecified damages and injunctive
relief.
The
Company believes that these allegations are without merit and intends to
vigorously defend itself.
On June 18, 2008, the European
Commission (EC) issued a request for information to the Companys UK
subsidiary, Expeditors International (UK) Ltd., requesting certain information
and records relating to an ongoing investigation of freight forwarders. The Company intends to respond and co-operate
with the EC investigation.
The Company is involved
in other claims and lawsuits which arise in the ordinary course of business,
none of which currently, in managements opinion, will have a significant
effect on the Companys operations or financial position.
Item 1A.
Risk Factors
There have been no material
changes in the Companys risk factors from those disclosed in the report on Form 10-K
filed on or about February 29, 2008, except for noting that (i) any fines
or penalties that could be levied by the DOJ in the event the DOJ concludes the
Company has engaged in anti-competitive behavior could have a material impact
on the Companys financial condition, results of operations and operating cash
flows and (ii) the Companys UK subsidiary, Expeditors International (UK) Ltd.,
received a request for information from the EC.
RISK FACTOR
|
|
DISCUSSION
AND POTENTIAL SIGNIFICANCE
|
Litigation/Investigations
|
|
As a
multinational corporation, the Company is subject to formal or informal
investigations or litigation from governmental authorities in the countries
in which it does business. The Company is currently subject to, and is
cooperating fully with, an investigation by the U.S. Department of Justice
(DOJ) of air cargo freight forwarders. This investigation may require further
management time and cause the Company to incur substantial additional legal
and related costs, which could include fines and/or penalties if the DOJ
concludes that the Company has engaged in anti-competitive behavior and such
fines and/or penalties could have a material impact on the Companys
financial condition, results of operations and operating cash flows. In
addition, the Companys UK subsidiary has received a request for information
from the European Commission relating to an ongoing investigation of freight
forwarders. The response to the request may require substantial management
time and cause the UK subsidiary to incur substantial legal and related
costs. The Company may be subject to other civil litigation arising from these
investigations, including but not limited to shareholder class action
lawsuits and derivative claims made on behalf of the Company. In addition,
the Company has been named as a defendant in a Federal anti-trust class
action lawsuit filed in New York and will incur additional costs related to
defending itself in these proceedings.
|
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period
|
|
Total number of
shares purchased
|
|
Average price
paid per share
|
|
Total number of shares
purchased as part of
publicly announced
plans or programs
|
|
Maximum number
of shares that may yet be
purchased under the
plans or programs
|
|
April 1-30, 2008
|
|
1,514
|
|
$
|
47.38
|
|
1,514
|
|
16,276,584
|
|
May 1-31, 2008
|
|
286,272
|
|
48.61
|
|
286,272
|
|
16,442,539
|
|
June 1-30, 2008
|
|
799,978
|
|
46.23
|
|
799,978
|
|
15,647,100
|
|
Total
|
|
1,087,764
|
|
$
|
46.86
|
|
1,087,764
|
|
15,647,100
|
|
In November 1993, the Companys Board of
Directors authorized a Non-Discretionary Stock Repurchase Plan. This plan was amended in February 2001
to increase the authorization to repurchase up to 20 million shares of the
Companys common stock. This
authorization has no expiration date.
This plan was disclosed in the Companys report on Form 10-K filed March 31,
1995. In the second quarter of 2008,
335,332 shares were repurchased under the Non-Discretionary Stock Repurchase
Plan.
In November 2001, under a Discretionary Stock
Repurchase Plan, the Companys Board of Directors authorized the repurchase of
such shares as may be necessary to reduce the issued and outstanding stock to
200 million shares of common stock. The
maximum number of shares available for repurchase under this plan will increase
as the total number of outstanding shares increases. This authorization has no expiration
date. This plan was announced on November 13,
2001. In the second quarter of 2008,
752,432 shares were repurchased under the Discretionary Stock Repurchase
Plan. These discretionary repurchases
were made to limit the growth in the number of issued and outstanding shares
resulting from stock option exercises.
18
Item 4. Submission of Matters to a Vote of Security
Holders
(a) The annual meeting of the
Shareholders was held on May 7, 2008.
(b) The following directors were elected
to the Board of Directors to serve a term of one year and until their
successors are elected and qualified:
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
P.J.
Rose
|
|
181,923,348
|
|
7,185,940
|
|
J.L.K.
Wang
|
|
181,545,792
|
|
7,563,496
|
|
R.J.
Gates
|
|
181,535,602
|
|
7,573,686
|
|
J.J.
Casey
|
|
165,854,669
|
|
23,254,619
|
|
D.P.
Kourkoumelis
|
|
181,999,127
|
|
7,110,161
|
|
M.J.
Malone
|
|
184,968,705
|
|
4,140,583
|
|
J.W.
Meisenbach
|
|
181,799,568
|
|
7,309,720
|
|
M.A.
Emmert
|
|
184,913,537
|
|
4,195,751
|
|
R.R.
Wright
|
|
184,940,568
|
|
4,168,720
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
Adoption of the 2008
Stock Option Plan
|
|
155,104,029
|
|
12,708,442
|
|
2,031,475
|
|
19,265,342
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
Adoption of the 2008
Directors Restricted Stock Plan
|
|
161,505,080
|
|
6,241,119
|
|
2,097,747
|
|
19,265,342
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
Adoption of the 2008
Executive Compensation Plan
|
|
180,284,870
|
|
6,601,628
|
|
2,222,790
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
|
Ratification of KPMG LLP
as the Companys Independent Auditor Selection
|
|
182,054,288
|
|
5,641,152
|
|
1,413,848
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g)
|
|
Shareholder proposal to
amend the Companys existing equal opportunity policy
|
|
84,121,207
|
|
76,616,383
|
|
9,106,356
|
|
19,265,342
|
|
Item 5. Other Information
(a) Not applicable.
(b) Not applicable.
19
Item 6. Exhibits
Exhibits required by Item
601 of Regulation S-K.
Exhibit Number
|
|
Description
|
|
|
|
Exhibit 31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Exhibit 31.2
|
|
Certification pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
Exhibit 32
|
|
Certification pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
20
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.
|
|
|
|
August 14,
2008
|
|
/s/ PETER J. ROSE
|
|
|
Peter J. Rose, Chairman and Chief Executive
Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
August 14,
2008
|
|
/s/ R. JORDAN GATES
|
|
|
R. Jordan Gates, President and Chief
Operating Officer
|
|
|
(Principal Financial and Accounting
Officer)
|
21
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q
Index and Exhibits
June 30, 2008
Exhibit Number
|
|
Description
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 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.
|
22
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