Expeditors International Of Washington Inc 10-Q for FY2021 Q1
Expeditors International Of Washington Inc (EXPD)
About this 10-Q
Expeditors International Of Washington Inc filed this 10-Q on May 6, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.36B
- up 76.5% from $1.9B a year earlier
- Net income
- $287.22M
- up 134.8% from net income of $122.34M a year earlier
- Diluted EPS
- $1.67
- up 135.2% from $0.71 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification Number) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code): (
Securities registered pursuant to Section 12(b) of the Act:
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Trading Symbol(s) |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
At May 3, 2021, the number of shares outstanding of the issuer’s common stock was
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)
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March 31, 2021 |
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December 31, 2020 |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for credit loss of $ |
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Deferred contract costs |
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Other |
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Total current assets |
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Property and equipment, less accumulated depreciation and amortization of $ December 31, 2020 |
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Operating lease right-of-use assets |
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Goodwill |
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Other assets, net |
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Total assets |
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$ |
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$ |
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Liabilities: |
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Current Liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses, primarily salaries and related costs |
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Contract liabilities |
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Current portion of operating lease liabilities |
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Federal, state and foreign income taxes |
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Total current liabilities |
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Noncurrent portion of operating lease liabilities |
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Deferred federal and state income taxes, net |
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Commitments and contingencies |
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Shareholders’ Equity: |
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Preferred stock, |
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Common stock, par value $ outstanding: shares at December 31, 2020 |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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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)
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Three months ended March 31, |
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2021 |
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2020 |
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Revenues: |
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Airfreight services |
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$ |
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$ |
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Ocean freight and ocean services |
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Customs brokerage and other services |
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Total revenues |
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Operating Expenses: |
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Airfreight services |
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Ocean freight and ocean services |
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Customs brokerage and other services |
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Salaries and related |
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Rent and occupancy |
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Depreciation and amortization |
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Selling and promotion |
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Other |
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Total operating expenses |
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Operating income |
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Other Income (Expense): |
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Interest income |
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Other, net |
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Other income, net |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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Less net earnings attributable to the noncontrolling interest |
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Net earnings attributable to shareholders |
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$ |
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$ |
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Diluted earnings attributable to shareholders per share |
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$ |
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$ |
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Basic earnings attributable to shareholders per share |
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$ |
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$ |
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Weighted average diluted shares outstanding |
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Weighted average basic shares outstanding |
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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)
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Three months ended March 31, |
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2021 |
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2020 |
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Net earnings |
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$ |
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$ |
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Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments, net of tax (benefit) expense of $( March 31, 2021 and 2020 |
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Other comprehensive loss |
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Comprehensive income |
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Less comprehensive income attributable to the noncontrolling interest |
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Comprehensive income attributable to shareholders |
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$ |
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$ |
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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)
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Three months ended March 31, |
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2021 |
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2020 |
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Operating Activities: |
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Net earnings |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash from operating activities: |
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Provisions for losses on accounts receivable |
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Deferred income tax expense (benefit) |
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Stock compensation expense |
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Depreciation and amortization |
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Other, net |
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Changes in operating assets and liabilities: |
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(Increase) decrease in accounts receivable |
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Increase in accounts payable and accrued expenses |
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Increase in deferred contract costs |
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Increase in contract liabilities |
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Increase in income taxes payable, net |
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Increase in other, net |
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Net cash from operating activities |
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Investing Activities: |
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Purchase of property and equipment |
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Other, net |
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Net cash from investing activities |
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Financing Activities: |
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Proceeds from issuance of common stock |
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Repurchases of common stock |
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Payments for taxes related to net share settlement of equity awards |
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Net cash from financing activities |
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Effect of exchange rate changes on cash and cash equivalents |
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Change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Taxes Paid: |
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Income taxes |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
5
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(In thousands)
(Unaudited)
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Common Stock |
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For the three months ended March 31, 2021 and 2020 |
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Shares |
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Par value |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Shares issued under employee stock plans |
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— |
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— |
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— |
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Shares repurchased under provisions of stock repurchase plan |
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( |
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— |
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— |
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( |
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— |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Net earnings |
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— |
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— |
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— |
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— |
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Other comprehensive income loss |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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( |
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Dividends paid |
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— |
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— |
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( |
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— |
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— |
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— |
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— |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Cumulative effect of accounting change |
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— |
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— |
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— |
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— |
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— |
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Shares issued under employee stock plans |
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— |
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— |
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— |
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Shares repurchased under provisions of stock repurchase plan |
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( |
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( |
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( |
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( |
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— |
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( |
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— |
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( |
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Stock compensation expense |
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— |
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— |
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— |
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— |
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— |
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Net earnings |
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— |
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— |
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— |
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— |
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Other comprehensive income loss |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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( |
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Dividends paid |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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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
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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, technology, 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 19, 2021.
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.
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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 condensed 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 December 31, 2020.
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C. |
Leases |
The Company determines if an arrangement is a lease at inception. Right-of-use (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 ROU assets and lease liabilities, to the extent not considered fixed, and instead expenses 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 in the condensed consolidated statement of earnings.
7
|
|
D. |
Accounts Receivable |
The Company’s trade accounts receivable present similar credit risk characteristics and the allowance for credit loss is estimated on a collective basis, using a credit loss-rate method leveraging historical credit loss information and including considerations of the current economic environment. Additional allowances may be necessary in the future if changes in economic conditions are significant enough to affect expected credit losses. The Company has recorded an allowance for credit loss in the amounts of $
|
|
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, self-insured liabilities, 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.
Note 2. 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 three months ended March 31, 2021 and 2020, the Company did
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.
The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s Amended 2017 Plan and employee stock purchase rights plans. This expense, adjusted for expected performance and 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. Restricted stock units (RSUs) and performance share units (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.
Note 3. Income Taxes
During 2020 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. It is possible that additional guidance could be issued in future periods. As this guidance is issued, the Company will 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. For the three months ended March 31, 2021 and 2020, there was
The Company’s consolidated effective income tax rate was
The Company is subject to taxation in various states and many foreign tax jurisdictions including the People’s Republic of China, Hong Kong, Taiwan, Vietnam, India, Mexico, Canada, Netherlands and the United Kingdom. The Company believes that its tax positions, including intercompany transfer pricing policies, are reasonable and consistently applied. The Company is under, or may be subject to, audit or examination and assessments by the relevant authorities in respect to these and any other jurisdictions primarily for years 2009 and thereafter. Sometimes audits result in proposed assessments where the ultimate resolution could result in significant additional tax, penalties and interest payments being required. The Company establishes liabilities when, despite its belief that the tax return positions are appropriate and consistent with tax law, it concludes that it may not be successful in realizing the tax position. In evaluating a tax position, the Company determines whether it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position and in consultation with qualified tax advisors.
8
The total amount of the Company’s tax contingencies may increase in 2021. In addition, changes in state, federal, and foreign tax laws, including transfer pricing and changes in interpretations of these laws may increase the Company’s existing tax contingencies. The timing of the resolution of income tax examinations can be highly uncertain, and the amounts ultimately paid including interest and penalties, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts recorded. It is reasonably possible that within the next twelve months the Company may undergo further audits and examinations by various tax authorities and possibly may reach resolution related to income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to the Company’s contingencies related to positions on tax filings in future years. The estimate of any ultimate tax liability contains assumptions based on experiences, judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by the taxing jurisdiction. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three months ended March 31, 2021 and 2020.
Note 4. 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:
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Three months ended March 31, |
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Net earnings attributable to shareholders |
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Weighted average shares |
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Earnings per share |
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2021 |
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Basic earnings attributable to shareholders |
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$ |
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|
|
|
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|
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$ |
|
|
|
Effect of dilutive potential common shares |
|
|
— |
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|
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|
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— |
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Diluted earnings attributable to shareholders |
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$ |
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$ |
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2020 |
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|
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Basic earnings attributable to shareholders |
|
$ |
|
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|
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$ |
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|
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Substantially all outstanding potential common shares as of March 31, 2021 and 2020 were dilutive.
Note 5. 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
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
Subsequent to the end of the first quarter of 2021, on
Note 6. 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.
9
Cash and cash equivalents consist of the following:
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March 31, 2021 |
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December 31, 2020 |
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Cost |
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Fair Value |
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Cost |
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Fair Value |
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||||
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Cash and Cash Equivalents: |
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Cash and overnight deposits |
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$ |
|
|
|
$ |
|
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$ |
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|
$ |
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|
Corporate commercial paper |
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Time deposits |
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Total cash and cash equivalents |
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$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 7. Contingencies
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of March 31, 2021, 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 8. Business Segment Information
Financial information regarding the Company’s operations by geographic area is as follows:
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UNITED STATES |
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OTHER NORTH AMERICA |
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LATIN AMERICA |
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NORTH ASIA |
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SOUTH ASIA |
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EUROPE |
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MIDDLE EAST, AFRICA AND INDIA |
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ELIMI- NATIONS |
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CONSOLI- DATED |
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|||||||||
|
For the three months ended March 31, 2021: |
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Revenues |
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$ |
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|
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|
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( |
) |
|
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|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
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|
|
|
|
|
|
|
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|
|
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|
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|
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|
|
|
|
|
|
|
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( |
) |
|
|
|
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Salaries and other operating expenses2 |
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$ |
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|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
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( |
) |
|
|
|
|
|
Operating income |
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$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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( |
) |
|
|
|
|
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Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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( |
) |
|
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Capital expenditures |
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$ |
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|
|
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|
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|
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|
|
|
|
|
|
|
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— |
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Equity |
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$ |
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( |
) |
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|
For the three months ended March 31, 2020: |
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|
|
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Revenues |
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$ |
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|
|
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|
|
|
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( |
) |
|
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|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
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|
|
|
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|
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( |
) |
|
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Salaries and other operating expenses2 |
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$ |
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( |
) |
|
|
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Operating income |
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$ |
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( |
) |
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Identifiable assets at period end |
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$ |
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|
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( |
) |
|
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Capital expenditures |
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$ |
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— |
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Equity |
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$ |
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( |
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1 |
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2 |
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10
The Company’s consolidated financial results in the three months ended March 31, 2021 and 2020 were each significantly impacted by the effects of the global pandemic in divergent ways. In the first quarter of 2021, the Company experienced strong volumes and high sell and buy rates as a result of imbalances between demand and carrier capacity and continuing effects of disruptions in supply chains originating in measures to combat the pandemic in 2020. This is in contrast with slower activity in North Asia in the first quarter of 2020 as the pandemic resulted in temporary closures and limited operations in the Company’s China offices. Shipments were also rerouted or delayed by customers and service providers as they were taking their own precautionary measures. These impacts are affecting all of the Company’s geographical segments and most notably the year-over-year comparability of the North Asia segment. In the first quarter of 2021, the People's Republic of China, including Hong Kong, represented
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the sections entitled "Overview," "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, the anticipated impact and duration of Novel Coronavirus (COVID-19) pandemic, and other characterizations of future events or circumstances are forward-looking statements. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. 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 risk factors identified and discussed in Part I, Item 1A in the Company's annual report on Form 10-K filed on February 19, 2021. Management believes that these forward-looking statements are reasonable as of this filing date and we do not assume any obligations to update these statements except as required by law.
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 supply chain 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 revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both 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.
12
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. In accordance with our revenue recognition policy (see Note 1.B to the condensed consolidated financial statements in this report) freight revenue and related expenses are recorded by the office that performs the transportation service. Shipment profits are split between origin and destination offices by recording a commission fee or profit share of revenue at the destination.
The disruptions on supply chains and transportation caused by the ongoing COVID-19 pandemic have significantly affected our business operations and operating results for the three months ended March 31, 2021. Continued imbalance between demand and available capacity for all transportation modes have resulted in historically high average buy and sell rates and creates challenging conditions for our districts to meet our customers’ needs. We expect that these disruptive conditions may continue through the remainder of the year. We are unable to predict how these uncertainties will affect our future operations or financial results. In an effort to protect the health and safety of our employees, we continue to operate under our global business continuity plan that we implemented in the first quarter of 2020. See Part I, Item 1A: “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 for additional details.
Expeditors' Culture and Strategy
We believe that our unique culture, at the center of which are our employees, is a critical component to our continued success. We strongly believe that it is nearly impossible to predict 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. Global consistency and compliance is fundamental to preserving our culture and network of people, processes, technology and locations.
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 through the aggressive marketing of our service offerings. Innovative solutions, integrated platforms and data quality are vital to achieving a competitive advantage. 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.
13
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 supply-chain disruptions, 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 in reaction to the pandemic 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. Carriers are highly leveraged with debt and many are incurring, or have recently incurred, operating losses. 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.
As a knowledge-based global provider of logistics services, we have often concluded over the course of our history that it is better to grow organically rather than by acquisition. However, when we have made acquisitions, it has generally been to obtain technology, geographic coverage or specialized industry expertise that could be leveraged to benefit our entire network.
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. The global economy entered into a recession as a result of the pandemic and ongoing related precautionary measures including government mandated lockdowns, shutdown of manufacturing and operations for non-essential businesses and travel restrictions. 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 and changes to export regulations and tariffs. We cannot predict the outcome of changes in tariffs, or interpretations, and trade restrictions and accords and 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. The pandemic’s significant impact on supply chains along with other geo-political considerations may also drive manufacturers to relocate their operations or make changes to how they manage their supply chains and inventories in order to reduce their exposure to such disruptions in the future. 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.
In 2020, the United Kingdom and the European Union negotiated the terms of the United Kingdom's exit from the European Union (Brexit), which were effective on January 1, 2021. The full long-term impact of the United Kingdom’s departure, and impact to international trade, is still uncertain.
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 availability of airfreight, ocean freight and trucking capacity, volatile carrier pricing, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.
Air carriers are experiencing significant cash flow challenges as a result of travel restrictions resulting in cancellation of flights and have incurred record operating losses in 2020 and 2021. Uncertainty over recovery of demand for passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers’ operations and financial stability long term. Prior to 2020, many ocean carriers incurred substantial operating losses, and are highly leveraged with debt. 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.
14
There is uncertainty as to how new regulatory requirements and volatility 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 future fuel prices increases and we are unable to pass through the increases to our customers, this could adversely affect our operating income.
The global economic and trade environments remain uncertain, including the ongoing impacts of the pandemic. 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 as well as responses to the pandemic’s disruptions, 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 that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2021 by the pandemic. This historical pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, pandemics, 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, disruptions in supply-chains 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, 2020, filed on February 19, 2021. 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 months ended March 31, 2021 and 2020, including the respective percentage changes comparing 2021 and 2020.
15
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 March 31, |
||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
Percentage change |
||
|
Airfreight services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,476,961 |
|
|
$ |
709,039 |
|
|
108% |
|
Expenses |
|
|
1,105,590 |
|
|
|
520,169 |
|
|
113 |
|
Ocean freight services and ocean services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
958,178 |
|
|
|
493,427 |
|
|
94 |
|
Expenses |
|
|
746,701 |
|
|
|
366,483 |
|
|
104 |
|
Customs brokerage and other services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
922,401 |
|
|
|
699,398 |
|
|
32 |
|
Expenses |
|
|
553,713 |
|
|
|
400,076 |
|
|
38 |
|
Overhead expenses: |
|
|
|
|
|
|
|
|
|
|
|
Salaries and related costs |
|
|
452,105 |
|
|
|
342,040 |
|
|
32 |
|
Other |
|
|
113,916 |
|
|
|
114,041 |
|
|
— |
|
Total overhead expenses |
|
|
566,021 |
|
|
|
456,081 |
|
|
24 |
|
Operating income |
|
|
385,515 |
|
|
|
159,055 |
|
|
142 |
|
Other income, net |
|
|
4,946 |
|
|
|
8,191 |
|
|
(40) |
|
Earnings before income taxes |
|
|
390,461 |
|
|
|
167,246 |
|
|
133 |
|
Income tax expense |
|
|
102,511 |
|
|
|
44,464 |
|
|
131 |
|
Net earnings |
|
|
287,950 |
|
|
|
122,782 |
|
|
135 |
|
Less net earnings attributable to the noncontrolling interest |
|
|
730 |
|
|
|
438 |
|
|
67 |
|
Net earnings attributable to shareholders |
|
$ |
287,220 |
|
|
$ |
122,344 |
|
|
135% |
Airfreight services:
In 2020 and continuing in the first quarter of 2021, airfreight services experienced unprecedented events in response to the global pandemic. As a result of travel restrictions and lower passenger demand, airlines significantly reduced flight schedules which limited available belly space for cargo at a time where global demand remained high. Demand grew in the fourth quarter of 2020 and continued to remain high in the first quarter of 2021, amplified by customers converting to air shipments due to disruptions in ocean transportation, placing further constraints on available capacity. These conditions have caused extreme imbalances between carrier capacity and demand, principally on exports out of North Asia. In order to execute and meet the transportation needs of our customers we heavily utilized charter flights and purchased capacity in advance and on the spot market, which resulted in sustained high average buy and sell rates.
Airfreight services revenues and expenses increased 108% and 113%, respectively, during the three months ended March 31, 2021, as compared with the same period in 2020, due to a 29% increase in tonnage and a 70% increase in both average sell and buy rates, respectively. Sell and buy rates increased in all regions with the largest impacts in North Asia, South Asia and Europe. Tonnage increased in all regions with the largest increase coming from exports out of North Asia compared to low levels of activity in the first quarter of 2020 due to pandemic related closures in China. North Asia airfreight services revenue represented 21% and 14% of total Company consolidated revenues for the three months ended March 31, 2021 and 2020, respectively.
These conditions create a high degree of volatility in volumes, buy rates and sell rates and are expected to continue for the remainder of the year as international passenger flights are not expected to return to pre-pandemic levels and additional capacity from freighters is limited. The historically high buy and sell rates have significantly contributed to the growth in our expenses and revenues and financial results in the first quarter of 2021. These unprecedented operating conditions are not expected to be sustained long-term. We are unable to predict how these uncertainties and any future disruptions will affect our future operations or financial results.
16
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 and expenses increased 94% and 104%, respectively, for the three months ended March 31, 2021 as compared to the same period in 2020. The largest component of our ocean freight and ocean services revenue was derived from ocean freight consolidation, which represented 77% and 63% of ocean freight and ocean services revenue for the three months ended March 31, 2021 and 2020, respectively.
Ocean freight consolidation revenues and expenses both increased 135% for the three months ended March 31, 2021 as compared with the same period in 2020, primarily due to an 84% and 82% increase in average sell and buy rates, respectively, and a 29% increase in containers shipped. Demand started increasing in the second half of 2020 and continued to increase through the first quarter of 2021 due to backlogs in supply chains and low customer inventory levels, creating a severe imbalance between demand and capacity in particular on exports from North Asia and South Asia. The deficiency in available capacity continues to be affected by congestion at ports due to labor and equipment shortages, which disrupted sailing schedules, and resulted in record high average buy rates. Average sell rates and volumes increased in first quarter of 2021, compared to low levels of activity in the first quarter of 2020 due to pandemic closures in China. We were able to timely adjust to market conditions and leverage our capacity agreements with ocean carriers as global demand increased.
Containers shipped were up in all regions except for North America where they declined 11%. North Asia ocean freight and ocean services revenues and directly related expenses increased 152% and 168%, respectively, for the three months ended March 31, 2021, primarily due to higher sell rates and buy rates and a 51% increase in containers shipped.
Direct ocean freight forwarding revenues and expenses increased 18% and 22%, respectively, for the three months ended March 31, 2021, principally due to higher volumes and increased ancillary services provided primarily in North Asia and Europe. Order management revenues and expenses increased 32% and 33%, respectively, for the three months ended March 31, 2021, due to higher volumes particularly from the retail industry.
Most ocean carriers experienced significant increase in market demand starting in the second half of 2020 and we expect this demand to continue throughout 2021. Until port congestion and equipment shortages subside, we believe there will be continued pressure on buy rates, which includes the recent disruption in transit that occurred through the Suez Canal. We also expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, and adjust to the continued disruptions of the global economy from the pandemic, and carriers continue to adapt to changes in capacity and market demand. These conditions could result in lower operating income. The historically high buy and sell rates have significantly contributed to the growth in our expenses and revenues in the first quarter of 2021. These unprecedented operating conditions are not expected to be sustained long-term.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 32% and expenses increased 38% for the three months ended March 31, 2021, respectively, as compared with the same period in 2020, primarily due to an increase in shipments from existing and new customers, an increase in demand for brokerage services, in part due to Brexit and higher charges on import services due to ports’ congestion. Road freight and distribution services also grew as a result of higher volumes. Slowdowns due to the pandemic related closures affected volumes, particularly in aerospace, automotive, oil and energy and certain portions of the retail sectors in 2020 creating a backlog in supply chains that resulted in higher demand for services in the first quarter of 2021. Customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process. Customers seek knowledgeable customs brokers with sophisticated computerized capabilities critical to an overall logistics management program that are necessary to rapidly respond to changes in the regulatory and security environment.
North America and Europe revenues increased 32% and 38%, respectively, and directly related expenses increased 44% and 31%, respectively, for the three months ended March 31, 2021, as compared with the same period for 2020, primarily as a result of higher volumes in customs brokerage and higher charges on import services due to port congestion.
17
Overhead expenses:
Salaries and related costs increased by 32% for the three months ended March 31, 2021, as compared with the same period in 2020, principally due to increases in commissions and bonuses earned from higher revenues and operating income.
Historically, the relatively consistent relationship between salaries and operating income 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 and executive management for the three months ended March 31, 2021 were up 112% when compared to the same period in 2020, primarily due to a 142% increase in operating income offset by a 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 remained constant for the three months ended March 31, 2021, as compared with the same period in 2020. There was a significant decrease in travel and entertainment expenses due to travel restrictions offset by an increase in expense for renting additional space, higher local tax expenses and technology related costs. 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 26.3% for the three months ended March 31, 2021, as compared to 26.6% for the same period in 2020. The effect of higher average tax rates related to 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). 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 3 to the condensed 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 months ended March 31, 2021 and 2020 was insignificant. We had no foreign currency derivatives outstanding at March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021 and 2020 net foreign currency gains were approximately $3 million and $4 million, respectively.
18
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 months ended March 31, 2021 was $356 million as compared with $165 million for the same period in 2020. The $191 million increase for the three months ended March 31, 2021 was primarily due to higher airfreight and ocean revenues and changes in working capital. At March 31, 2021, working capital was $2,299 million, including cash and cash equivalents of $1,793 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at March 31, 2021. 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.
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. However, there is no assurance that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2021 by the pandemic.
19
Cash used in investing activities for the three months ended March 31, 2021 was $8 million as compared with $6 million in the same period of 2020, primarily for capital expenditures. Capital expenditures in the three months ended March 31, 2021 was primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. Total anticipated capital expenditures in 2021 are currently estimated to be $45 million. This includes routine capital expenditures and investments in technology.
Cash from financing activities during the three months ended March 31, 2021 was $68 million as compared with cash used in financing activities of $261 million in the same period in 2020. 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 outstanding shares. During the three months ended March 31, 2021 and 2020, we used cash to repurchase 0.9 million and 4.0 million shares of common stock, respectively.
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 further impact growing uncertainties in the global economy, political uncertainty nor the COVID-19 pandemic 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 March 31, 2021, we were contingently liable for $71 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.
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 March 31, 2021, cash and cash equivalent balances of $745 million were held by our non-United States subsidiaries, of which $28 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.
20
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 three months ended March 31, 2021, would have had the effect of raising operating income by approximately $28 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $23 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.
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 months ended March 31, 2021 and 2020 was insignificant. During the three months ended March 31, 2021 and 2020 net foreign currency gains were approximately $3 million and $4 million, respectively. We had no foreign currency derivatives outstanding at March 31, 2021 and December 31, 2020. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of March 31, 2021, we had approximately $150 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At March 31, 2021, we had cash and cash equivalents of $1,793 million of which $1,000 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 March 31, 2021. A hypothetical change in the interest rate of 10 basis points at March 31, 2021 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 first quarter of 2021.
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. As a result of the pandemic, many of our employees are working remotely and are able to do so within our established internal controls 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.
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.
21
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 March 31, 2021, 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
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 19, 2021.
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 |
|
||||
|
January 1-31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
9,343,149 |
|
|
February 1-28, 2021 |
|
|
924,913 |
|
|
|
92.98 |
|
|
|
924,913 |
|
|
|
8,774,212 |
|
|
March 1-31, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,807,642 |
|
|
Total |
|
|
924,913 |
|
|
$ |
92.98 |
|
|
|
924,913 |
|
|
|
8,807,642 |
|
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. Subsequently, the Board of Directors has from time to time increased the amount of our common stock that may be repurchased. The Board of Directors last authorized repurchases down to 160 million shares of common stock in November 2018. 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. |
22
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
|
Exhibit Number |
|
Description |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32 |
|
|
|
|
|
|
|
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 March 31, 2021, has been formatted in Inline XBRL. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. |
|
|
|
|
|
May 6, 2021 |
|
/s/ JEFFREY S. MUSSER |
|
|
|
Jeffrey S. Musser, President, Chief Executive Officer and Director |
|
|
|
|
|
May 6, 2021 |
|
/s/ BRADLEY S. POWELL |
|
|
|
Bradley S. Powell, Senior Vice President and Chief Financial Officer |
24