Expeditors International Of Washington Inc 10-Q for FY2023 Q1
Expeditors International Of Washington Inc (EXPD)
About this 10-Q
Expeditors International Of Washington Inc filed this 10-Q on May 4, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.59B
- down 44.4% from $4.66B a year earlier
- Net income
- $226.01M
- down 34.7% from net income of $346.11M a year earlier
- Diluted EPS
- $1.45
- down 29.3% from $2.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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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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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 |
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 April 28, 2023, 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, |
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December 31, |
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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 |
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Operating lease right-of-use assets |
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Goodwill |
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Deferred federal and state income taxes, net |
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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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Accrued liabilities, 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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Shareholders’ Equity: |
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Preferred stock, |
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Common stock, 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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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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2023 |
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2022 |
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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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Interest expense |
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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 (losses) 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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2023 |
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2022 |
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Net earnings |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments, net of income tax benefits of $ |
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Other comprehensive income (loss) |
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Comprehensive income |
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Less comprehensive (loss) income attributable to the |
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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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2023 |
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2022 |
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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 |
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Provisions for losses (recoveries) 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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Decrease (increase) in accounts receivable |
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(Decrease) increase in accounts payable and accrued liabilities |
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Decrease in deferred contract costs |
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Decrease in contract liabilities |
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Increase in income taxes payable, net |
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(Increase) decrease 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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Payments on borrowings on lines of credit |
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Proceeds from borrowings on lines of credit |
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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 |
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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, 2023 |
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Shares |
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Par |
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Additional |
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Retained |
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Accumulated |
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Total |
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Noncontrolling |
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Total |
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Balance at December 31, 2022 |
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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, net |
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Shares repurchased under provisions of |
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Stock compensation expense |
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Net earnings |
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Other comprehensive income (loss) |
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Dividends and dividend equivalents paid |
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Balance at March 31, 2023 |
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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, 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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Shares issued under employee stock plans, net |
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Shares repurchased under provisions of |
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Stock compensation expense |
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Net earnings |
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Other comprehensive loss |
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Dividends and dividend equivalents paid |
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Balance at March 31, 2022 |
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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
Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, high 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 March 1, 2023.
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. Certain prior year amounts have been reclassified to conform to the current year presentation, including revisions to the condensed consolidated statement of earnings and condensed consolidated statements of cash flows.
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. Each performance obligation is comprised of one or more of the Company’s services. 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, 2022.
The Company evaluates whether amounts billed to customers should be reported as revenues on a gross or net basis. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it assumes the risk of loss, when it has discretion in setting the prices for the services to the customers, and when the Company has 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 the Company does not issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (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, the Company is not a principal and reports only the commissions and fees earned in revenues.
7
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.
Additionally, the Company elected to apply the short-term lease exemption for leases with a non-cancelable period of twelve months or less and has chosen not to separate non-lease components from lease components and instead to account for each as a single lease component.
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 that uses historical credit loss information and considers 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 $
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 performs, typically at the destination location, self-insured liabilities, accrual of various tax liabilities, accrual of loss contingencies, including estimates for ongoing and potential claims as a result of the downtime caused by the cyber-attack in 2022, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. See Note 8 for further information on estimates related to the cyber-attack. Actual results could be materially different from the estimated provisions and accruals recorded.
Note 2. Income Taxes
U.S. corporate income tax laws and regulations include a territorial tax framework and 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, Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies as well as U.S. income tax deductions for Foreign-derived intangible income (FDII). The Company treats BEAT and GILTI as discrete adjustments as components of current income tax expense. Earnings of the Company's foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States.
The Company is subject to taxation in various states and many foreign jurisdictions including the People’s Republic of China, including 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 consistent with established transfer pricing methodologies and norms. 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 legal and tax advisors.
8
The total amount of the Company’s tax contingencies may increase in 2023. In addition, changes in state, federal, and foreign tax laws and changes, 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. The Company cannot currently provide an estimate of the range of possible outcomes.
The Company recognizes interest expense related to unrecognized tax benefits or underpayment of income taxes in interest expense and recognizes penalties in operating expenses.
The Company’s consolidated effective income tax rate was
Note 3. Basic and Diluted Earnings per Share
Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:
|
|
Three months ended March 31, |
|
|||||||||
|
|
Net earnings |
|
|
Weighted |
|
|
Earnings per |
|
|||
2023 |
|
|
|
|
|
|
|
|
|
|||
Basic earnings attributable to shareholders |
|
$ |
|
|
|
|
|
$ |
|
|||
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
$ |
|
|||
2022 |
|
|
|
|
|
|
|
|
|
|||
Basic earnings attributable to shareholders |
|
$ |
|
|
|
|
|
$ |
|
|||
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
$ |
|
|||
Substantially all outstanding potential common shares as of March 31, 2023 and 2022 were dilutive.
Note 4. 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. The Board of Directors last amended the plan on February 20, 2023 to authorize repurchases down from
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
9
Subsequent to the end of the first quarter of 2023, on
Note 5. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
Cash and cash equivalents consist of the following:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Cost |
|
|
Fair Value |
|
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Cost |
|
|
Fair Value |
|
||||
Cash and Cash Equivalents: |
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|
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|
|
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|
||||
Cash and overnight deposits |
|
$ |
|
|
$ |
|
|
$ |
|
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$ |
|
||||
Corporate commercial paper |
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|
||||
Time deposits and money market funds |
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|
||||
Total cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).
Note 6. Contingencies
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal and tax advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. The changes in the amounts recorded for 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 7. Business Segment Information
10
Financial information regarding the Company’s operations by geographic area is as follows:
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UNITED |
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OTHER |
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LATIN |
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NORTH |
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SOUTH |
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EUROPE |
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MIDDLE |
|
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ELIMI- |
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CONSOLI- |
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For the three months ended March 31, 2023: |
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Revenues |
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$ |
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( |
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Directly related cost of transportation |
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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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Identifiable assets at period end |
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$ |
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( |
) |
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Capital expenditures |
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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, 2022: |
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Revenues |
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$ |
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( |
) |
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Directly related cost of transportation |
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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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Capital expenditures |
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$ |
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Equity |
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$ |
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( |
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1
2
Note 8. Cyber-Attack
In the first quarter of 2022, the Company was the subject of a targeted cyber-attack, which resulted in having to shut down most the Company's connectivity, operating and accounting systems globally for a period of approximately three weeks to manage the safety of its overall global systems environment.
In the first quarter of 2022, the Company incurred, as a result of its inability to timely process and move shipments through ports during the downtime, approximately $
In the first quarter of 2023, incremental charges recorded related to the cyber-attack were insignificant. Since the cyber-attack, the company incurred cumulative additional expenses of $
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," "Highlights from First Quarter 2023," "Industry Trends, Trade Conditions 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," "would," "intends," "foreseeable future" or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, signs of a slowing economy and drop in demand, future supply chain and transportation disruptions and other characterizations of disruptive 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 March 1, 2023 and in Part II, Item 1A in this report. 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 gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of our three primary sources of revenue.
We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a volume basis from direct (asset-based) carriers and then reselling that space to our customers. 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 local pick up, storage and delivery at destination. 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
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).
Highlights from First Quarter 2023
The significant impacts are discussed within “Results of Operations” and the financial highlights below.
Industry Trends, Trade Conditions and Competition
We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investment and taxation. Periodically, governments consider a variety of changes to tariffs and impose trade restrictions and accords. Currently, the United States and China have increased concerns affecting certain imports and exports and have implemented additional 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 restrictions on imports and exports, manufacturers may change sourcing patterns, to the extent possible, and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs. We do not have employees, assets, or operations in Russia or Ukraine. While very limited, any shipment activity is conducted with independent agents in those countries in compliance with all applicable trade sanctions, laws and regulations.
13
Our ability to provide services to our customers is highly dependent on good working relationships with a variety of entities, including airlines, ocean carrier lines and ground transportation providers, as well as governmental agencies. We select and engage with best-in-class, compliance-focused, efficiently run, growth-oriented partners, based upon defined value elements and are intentional in our relationship and performance management activity, reinforcing success by awarding service providers who consistently achieve at the highest levels with additional business. We consider our current working relationships with these entities to be satisfactory. However, changes in the financial stability and operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulation or deregulation efforts, modernization of the regulations governing customs brokerage, and/or changes in governmental restrictions, quota restrictions or trade accords could affect our business in unpredictable ways. Many air carriers are recovering from significant cash flow challenges and incurred operating losses in 2020 and 2021 as a result of travel restrictions resulting from the cancellation of flights. Uncertainty over recovery of demand for trans-pacific passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers’ operations and financial stability long term. 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.
The global economic and trade environments remain uncertain, including the potential future impacts of a pandemic, higher inflation and oil prices, rising interest rates and the conflict in Ukraine. Starting in the second quarter of 2022 and continuing through the first quarter of 2023, we saw a slowdown in the global economy and a softening of customer demand resulting in declines in average buy and sell rates. As demand softened and pandemic restrictions subsided, port congestions cleared, shortages of labor and equipment eased resulting in excess carrier capacity over demand. These conditions could result in further declines in average sell and buy rates in 2023. We also expect that pricing volatility will continue as carriers adapt to lower demand, changing fuel prices and react to governmental trade policies and other regulations. Additionally, we cannot predict the direct or indirect impact that further changes in and 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 be impacted by a slowing economy. This historical pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, just-in-time inventory models, 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 is, 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.
14
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, 2022, filed on March 1, 2023 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, 2023 and 2022, including the respective percentage changes comparing 2023 and 2022.
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) |
|
2023 |
|
|
2022 |
|
|
Percentage |
||
Airfreight services: |
|
|
|
|
|
|
|
|
||
Revenues |
|
$ |
904,903 |
|
|
$ |
1,598,555 |
|
|
(43)% |
Expenses |
|
|
666,022 |
|
|
|
1,142,546 |
|
|
(42) |
Ocean freight services and ocean services: |
|
|
|
|
|
|
|
|
||
Revenues |
|
|
697,307 |
|
|
|
1,976,246 |
|
|
(65) |
Expenses |
|
|
483,682 |
|
|
|
1,600,243 |
|
|
(70) |
Customs brokerage and other services: |
|
|
|
|
|
|
|
|
||
Revenues |
|
|
990,379 |
|
|
|
1,089,497 |
|
|
(9) |
Expenses |
|
|
569,398 |
|
|
|
773,322 |
|
|
(26) |
Overhead expenses: |
|
|
|
|
|
|
|
|
||
Salaries and related costs |
|
|
449,848 |
|
|
|
538,940 |
|
|
(17) |
Other |
|
|
147,670 |
|
|
|
147,487 |
|
|
— |
Total overhead expenses |
|
|
597,518 |
|
|
|
686,427 |
|
|
(13) |
Operating income |
|
|
275,969 |
|
|
|
461,760 |
|
|
(40) |
Other income, net |
|
|
24,609 |
|
|
|
9,419 |
|
|
161 |
Earnings before income taxes |
|
|
300,578 |
|
|
|
471,179 |
|
|
(36) |
Income tax expense |
|
|
74,580 |
|
|
|
121,699 |
|
|
(39) |
Net earnings |
|
|
225,998 |
|
|
|
349,480 |
|
|
(35) |
Less net (losses) earnings attributable to |
|
|
(13 |
) |
|
|
3,371 |
|
|
(100) |
Net earnings attributable to shareholders |
|
$ |
226,011 |
|
|
$ |
346,109 |
|
|
(35)% |
Airfreight services:
Airfreight services revenues and expenses decreased 43% and 42%, respectively, during the three months ended March 31, 2023, as compared with the same period in 2022, due to 44% and 41% decreases in average sell and buy rates, respectively, and a 6% decrease in tonnage. Average sell rates decreased as a result of lower buy rates driven by declining market rates. Buy rates declined as supply chain congestion cleared, additional belly space capacity became available while demand continued to soften. Volumes were lower in 2023 as a result of softening demand and compared to strong volumes in the same period in 2022, in spite of being negatively affected by the downtime caused by the cyber-attack in 2022, from customers converting to air shipments due to ocean port congestion. Average sell and buy rates decreased in all regions with most significant decreases on exports out of North Asia and South Asia due to excess available capacity over demand. Compared to the fourth quarter 2022, airfreight services revenues and expenses declined 25% and 26%, respectively, due to lower average rates and volumes. As air carriers bring back additional flights, in some cases ahead of passenger demand, supply and demand imbalances may occur, resulting in pressure on rates.
15
The historically high average buy and sell rates caused by the pandemic and unprecedented supply chain disruptions which contributed to the growth in our revenues, expenses and operating income in 2021 and 2022 have largely dissipated as supply chains operations normalized. Buy rates and sell rates have been declining since the second quarter of 2022 and are expected to further decline in 2023, which could result in further decrease in our revenues, expenses and operating income. We are unable to predict how these uncertainties and any future disruptions will affect our future operations or financial results.
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 decreased 65% and 70%, respectively for the three months ended March 31, 2023 as compared with the same period in 2022. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 71% and 88% of ocean freight and ocean services revenue for the three months ended March 31, 2023 and 2022, respectively.
Ocean freight consolidation revenues and expenses decreased 72% and 75%, respectively for the three months ended March 31, 2023, as compared with the same period in 2022, primarily due to 62% and 66% decreases in average sell and buy rates, respectively, and a 26% decrease in containers shipped. Rising fuel prices, congestion at ports due to labor, truck and equipment shortages and disrupted sailing schedules resulted in continued high average buy rates in 2022. As demand softened, port congestion cleared and shortages of labor and equipment at ports eased, resulting in available capacity from carriers that exceeded demand in the first quarter of 2023. This resulted in a sharp decline in average buy rates starting in the fourth quarter of 2022 which continued in the first quarter of 2023. Compared to the fourth quarter 2022, ocean freight consolidation revenues and expenses declined 46% and 49%, respectively, due to lower average rates and volumes. Average sell rates declined to adjust to market conditions. Containers decreased as demand softened, inventories levels remained high and there are uncertainties in the global economy. We also experienced exceptionally high volumes in 2022 from customers transferring from direct carrier shipping due to lack of available capacity, in spite of being negatively affected by the downtime caused by cyber-attack in the first quarter of 2022.
North Asia ocean freight and ocean services revenues and expenses decreased 77% and 81%, respectively for the three months ended March 31, 2023, primarily due to 72% and 75% decreases in average sell and buy rates, respectively, and a 34% decrease in containers shipped. South Asia ocean freight and ocean services revenues and expenses decreased 77% and 81%, respectively for the three months ended March 31, 2023, primarily due to 74% and 77% decreases in average sell and buy rates, respectively, and a 27% decrease in containers shipped.
Direct ocean freight forwarding revenues increased 3%, while expenses decreased 6%, for the three months ended March 31, 2023, principally due to higher ancillary services revenues. As congestion at ports cleared, costs declined. Order management revenues and expenses decreased 41% and 50%, respectively for the three months ended March 31, 2023, due to decreases in volumes from customers as demand softened, retail inventories levels remained high and also due to lost customers caused by the cyber-attack. Our ability to provide order management services in the first quarter 2022 was significantly affected by limited system connectivity during the downtime caused by the cyber-attack.
The historically high average buy and sell rates caused by the pandemic and unprecedented supply chain disruptions which contributed to the growth in our revenues, expenses and operating income in 2021 and 2022 have significantly declined as supply chains operations normalized. Buy rates and sell rates started declining in the second half of 2022, decreased sharply beginning in the fourth quarter of 2022 and through the first quarter of 2023. As global economic conditions slow, we expect available capacity to exceed demand and continue downward pressure on sell and buy rates in 2023. While supply-chain congestion has cleared, uncertainty remains around labor at ocean ports and rail yards which could result in volatility in average buy and sell rates. We also expect that pricing volatility will continue as carriers adapt to volatility in fuel prices and customers react to governmental trade policies and other regulations, which could result in further decrease in our revenues, expenses and operating income.
Customs brokerage and other services:
Customs brokerage and other services revenues decreased 9% and expenses decreased 26% for the three months ended March 31, 2023, respectively, as compared with the same period in 2022, primarily due to declining shipments from a slowdown in the economy and the impact of the cyber-attack which resulted in lower revenues and additional expenses in the first quarter of 2022. Compared to the fourth quarter of 2022, customs brokerage and other services revenues and expenses declined 11% and 17%, respectively, primarily due to lower volumes.
16
In the first quarter of 2022, as a result of our inability to timely process and move shipments though ports during the downtime caused by the cyber-attack, we directly incurred approximately $42 million in incremental demurrage charges that were not recoverable from the customers. Additionally, import services including charges at ports such as detention, drayage, terminal charges and delivery decreased significantly as congestion at ports cleared compared to high levels in the first quarter of 2022. We expect import services revenues and expenses will decline further in the remainder of 2023.
Road freight, warehousing and distribution services declined also due to lower volumes and decreased trucking, storage and labor costs. While customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process, some customers opt to using multiple customs brokerage service providers to reduce their risk. Customers continue to 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. Additionally, as international trade slows, volumes shipped and pricing could further negatively impact our revenues and expenses.
North America revenues decreased 14% and directly related expenses decreased 34% for the three months ended March 31, 2023, respectively, as compared with the same period in 2022, primarily as a result of declining shipments and significant decrease in detention, drayage, terminal charges and delivery charges including $35 million in incremental demurrage charges related to the downtime caused by the cyber-attack incurred in the first quarter 2022.
Overhead expenses:
Salaries and related costs decreased 17% for the three months ended March 31, 2023 as compared with the same period in 2022, principally due to decreases in commissions and bonuses earned from lower 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. Total bonuses to field and executive management for the three months ended March 31, 2023, decreased 45% when compared to the same period in 2022, due to the decrease in operating income.
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 flat for the three months ended March 31, 2023, as compared with the same period in 2022 as higher expenses were offset by decreases from costs incurred in 2022 as a result of the cyber-attack. During the three months-ended March 31, 2022 we incurred $20 million of incremental costs in relation with the cyber-attack. This decrease was offset by increases in certain operational expenses from renting additional space, traveling costs, bad debt, increases from investment in technology related costs to support our operations. So long as the economic environment remains uncertain and the congestion in the supply chain experienced in the last two years clears, we will be focused on aligning headcount and our overhead expenses commensurate with our transactional volumes. We expect to continue to enhance the effectiveness and security of our systems and deploy additional protection technologies and processes which will result in increased expenses in the future. We will also 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.
17
Income tax expense:
The Company’s consolidated effective income tax rate was 24.8% for the three months ended March 31, 2023, as compared to 25.8% to the comparable period in 2022. For the three month periods ended March 31, 2023 and 2022 there was no BEAT expense and GILTI expense was insignificant. Both periods benefited from U.S. income tax deductions for FDII. For the quarter ended March 31, 2023, the Company benefited from higher U.S. Federal tax credits, principally because of withholding taxes related to the Company’s foreign operations compared to the same period in 2022. The impact of the 15% corporate alternative minimum tax based on financial statement income (BMT), which became effective in 2023 in the U.S., under the Inflation Reduction Act for the quarter ended March 31, 2023, was insignificant.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates transacting in a multitude of currencies other than the U.S. dollar. That exposes us to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or have agency relationships maintain strict currency control regulations that 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, 2023 and 2022 was insignificant. We had no foreign currency derivatives outstanding at March 31, 2023 and December 31, 2022. For the three months ended March 31, 2023, net foreign currency losses were approximately $3 million compared to $2 million net gains in the same period in 2022.
Historically, our business has not been adversely affected by inflation. However, starting in 2021 and continuing in 2022 and 2023, many countries including the United States experienced higher inflation than in recent years. In 2022, our business experienced rising labor costs, significant service provider rate increases, higher rent and occupancy and other expenses. While in the second half of 2022 buy rates for freight transportation capacity started declining, purchase prices for other services and labor costs have continued to increase through the first quarter 2023. Due to the high degree of competition in the marketplace we may not be able to increase our prices to our customers to offset this inflationary pressure, which could lead to an erosion in our margins and operating income in the future. Conversely, raising our prices to keep pace with inflationary pressure may result in a decrease in customer demand. As we are not required to purchase or maintain extensive property and equipment and have not otherwise incurred substantial interest rate-sensitive indebtedness, we currently have limited direct exposure to increased costs resulting from increases in interest rates.
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 increase and we are unable to pass through the increase to our customers, fuel price increases could adversely affect our operating income.
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, 2023 was $546 million as compared with $414 million for the same period in 2022. The increase of $132 million for the three months ended March 31, 2023, was primarily due to the collection of accounts receivable. At March 31, 2023, working capital was $2,497 million, including cash and cash equivalents of $2,351 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at March 31, 2023. Management believes that our current cash position and operating cash flows will be sufficient to meet our capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.
As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.
18
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 2023 by the softening of the global economy.
Cash used in investing activities for the three months ended March 31, 2023 was $10 million as compared with $14 million for the same period in 2022, primarily for capital expenditures. Capital expenditures in the three months ended March 31, 2023 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. Total anticipated capital expenditures in 2023 are currently estimated to be $100 million. This includes routine capital expenditures, leasehold and building improvements and investments in technology.
Cash used in financing activities during the three months ended March 31, 2023 was $227 million as compared with cash provided by financing activities of $18 million for the same period in 2022. We use the proceeds from stock option exercises and available cash to repurchase our common stock on the open market to reduce, or limit the growth of outstanding shares. During the three months ended March 31, 2023, we used cash to repurchase 2.0 million shares of common stock compared to none during the same period in 2022.
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 ongoing uncertainties in the global economy, inflation, rising interest rates, and political uncertainty, may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or changes in competitors' behavior.
We maintain international unsecured bank lines of credit for short-term working capital purposes. A few of these credit lines are supported by standby letters of credit issued by a United States bank or guarantees issued by the Company to the foreign banks issuing the credit line. At March 31, 2023, borrowings under these credit lines were $44 million and we were contingently liable for $67 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, 2023, cash and cash equivalent balances of $795 million were held by our non-United States subsidiaries, of which $8 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.
19
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, 2023, would have had the effect of raising operating income by approximately $16 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $13 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, 2023 and 2022 was insignificant. For the three months ended March 31, 2023, net foreign currency losses were approximately $3 million compared to $2 million in net gains during the same period in 2022. We had no foreign currency derivatives outstanding at March 31, 2023 and December 31, 2022. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of March 31, 2023, we had approximately $41 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At March 31, 2023, we had cash and cash equivalents of $2,351 million of which $1,082 million was invested at various short-term market interest rates. We had no long-term debt at March 31, 2023. A hypothetical change in the interest rate of 10 basis points at March 31, 2023 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 2023.
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 not effective as of the end of the period covered by this report due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022, we began implementing certain enhancements designed to strengthen IT program change management processes and we continue to conduct supplemental lookback review procedures of direct database changes until improvements are fully in place. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2023.
Changes in Internal Controls
Except for remediation related to the material weakness identified in the quarter ended December 31, 2022, there were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness.
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.
20
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 and tax advisors, none of these matters are expected to have a significant effect on our operations, cash flows or financial position. As of March 31, 2023, the amounts recorded for claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on March 1, 2023. 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 March 1, 2023, except for the following:
Global economic uncertainty impacted trade and could affect demand for our services or the financial stability of our service providers, customers and financial institutions.
Unfavorable economic conditions, rising interest rates and high inflation could result in lower freight volumes, reduced sell rates, higher operating expenses and may adversely affect Expeditors' revenues, operating results and cash flows. These conditions, should they occur for an extended period of time, could adversely affect our customers, service providers and the stability of financial institutions. Should our customers’ ability to pay deteriorate, additional credit losses may be incurred.
21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
|
Total number |
|
|
Average price |
|
|
Total number |
|
|
Maximum |
|
||||
Jan 1-31, 2023 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,335 |
|
February 1-28, 2023 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,403 |
|
March 1-31, 2023 |
|
|
1,959 |
|
|
$ |
108.98 |
|
|
|
1,959 |
|
|
|
12,712 |
|
Total |
|
|
1,959 |
|
|
$ |
108.98 |
|
|
|
1,959 |
|
|
|
12,712 |
|
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. On February 20, 2023, the Board of Directors last authorized repurchases from 150 million shares of common stock down to 140 million shares of common stock. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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, 2023, 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 4, 2023 |
|
/s/ JEFFREY S. MUSSER |
|
|
Jeffrey S. Musser, President, Chief Executive Officer and Director |
|
|
|
May 4, 2023 |
|
/s/ BRADLEY S. POWELL |
|
|
Bradley S. Powell, Senior Vice President and Chief Financial Officer |
24
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jeffrey S. Musser, certify that:
Date: May 4, 2023
/S/ JEFFREY S. MUSSER |
Jeffrey S. Musser President, Chief Executive Officer and Director |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Bradley S. Powell, certify that:
Date: May 4, 2023
/S/ BRADLEY S. POWELL |
Bradley S. Powell Senior Vice President and Chief Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Expeditors International of Washington, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jeffrey S. Musser, President, Chief Executive Officer and Director, and Bradley S. Powell, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
May 4, 2023 |
/S/ JEFFREY S. MUSSER |
Jeffrey S. Musser President, Chief Executive Officer and Director |
|
|
|
May 4, 2023 |
/S/ BRADLEY S. POWELL |
Bradley S. Powell Senior Vice President and Chief Financial Officer |