Expeditors International Of Washington Inc 10-Q for FY2020 Q1
Expeditors International Of Washington Inc (EXPD)
About this 10-Q
Expeditors International Of Washington Inc filed this 10-Q on May 7, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.9B
- down 5.9% from $2.02B a year earlier
- Net income
- $122.34M
- down 12.4% from net income of $139.7M a year earlier
- Diluted EPS
- $0.71
- down 11.3% from $0.80 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
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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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Title of each class |
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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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Large accelerated filer |
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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 4, 2020, 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, 2020 |
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December 31, 2019 |
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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, 2019 |
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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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$ |
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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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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, 2019 |
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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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2020 |
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2019 |
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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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2020 |
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2019 |
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Net earnings |
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$ |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Foreign currency translation adjustments, net of tax expense of $ March 31, 2020 and 2019 |
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Other comprehensive (loss) income |
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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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2020 |
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2019 |
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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 (recoveries) on accounts receivable |
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Deferred income tax (benefit) expense |
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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 in accounts receivable |
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Increase (decrease) in accounts payable and accrued expenses |
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(Increase) decrease in deferred contract costs |
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Increase (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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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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— |
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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, 2020 and 2019 |
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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, 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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Balance at December 31, 2018 |
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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 plans |
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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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Balance at March 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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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, electronics, industrial and manufacturing companies around the world.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 21, 2020.
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, 2019.
Beginning in the second quarter 2019, the Company revised its presentation for revenue transfers between its geographic operating segments and services rendered at the destination, which moved certain revenues and directly related operating expenses for air and ocean transactions to destination services within customs brokerage and other services. These changes better align revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The impact on reported consolidated and segment total revenues and expenses for these changes was immaterial and first quarter 2019 presentation has not been revised.
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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 expense variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses on the condensed consolidated statement of earnings.
7
|
|
D. |
Accounts Receivable |
Effective January 1, 2020, the Company adopted a new accounting standard update related to the measurement of credit losses on financial instruments. The adoption had an immaterial effect on the Company’s consolidated financial statements and disclosures. Under this new standard, the valuation allowance reduces a financial asset’s balance for credit losses expected to be incurred over the assets contractual term. The Company determined that this new guidance is applicable to its accounts receivable, which are short term and for which the Company has not historically experienced significant credit losses. The Company adopted this standard using the modified retrospective transition method resulting in a $
|
|
E. |
Use of Estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. Actual results could be materially different from the estimated provisions and accruals recorded.
|
|
F. |
Recent Accounting Pronouncement |
In December 2019, the FASB issued an ASU, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. This standard will become effective for the Company on January 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
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, 2020 and 2019, 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 omnibus incentive, stock option and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the condensed consolidated statements of earnings. Restricted stock units and performance share units 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.
8
Note 3. Income Taxes
During 2019, the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. The Company expects that additional guidance will continue to be issued in future periods. As this guidance is issued, the Company will continue to evaluate the information to determine whether any additional adjustments to its tax provisions are required.
The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. For the three months ended March 31, 2020 and 2019, there was
The Company’s consolidated effective income tax rate was
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 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.
The total amount of the Company’s tax contingencies may increase in 2020. In addition, changes in state, federal, and foreign tax laws 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, 2020 and 2019.
As discussed above, some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury. As a result, the amount of income tax recorded in the future may differ, possibly materially. For further information and discussion of the potential impact of the 2017 Tax Act, refer to Note 7 to the consolidated financial statements in the Company's 2019 Annual Report on Form 10-K.
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.
9
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 attributable to shareholders |
|
|
Weighted average shares |
|
|
Earnings per share |
|
|||
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020 and 2019 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 first quarter 2020, 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.
Cash and cash equivalents consist of the following:
|
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
||||
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and overnight deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Corporate commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
10
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, 2020, 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
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, directly related cost of transportation and other expenses for each of the Company’s three primary sources of revenue, salaries and other operating expenses, operating income, identifiable assets, capital expenditures and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin.
Financial information regarding the Company’s operations by geographic area is as follows:
|
|
|
UNITED STATES |
|
|
OTHER NORTH AMERICA |
|
|
LATIN AMERICA |
|
|
NORTH ASIA |
|
|
SOUTH ASIA |
|
|
EUROPE |
|
|
MIDDLE EAST, AFRICA AND INDIA |
|
|
ELIMI- NATIONS |
|
|
CONSOLI- DATED |
|
|||||||||
|
For the three months ended March 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses3 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
For the three months ended March 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses3 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
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|
|
|
|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
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( |
) |
|
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|
|
|
1 |
|
|
2 |
|
|
3 |
|
11
The Company’s consolidated financial results in the first quarter 2020 were significantly impacted by the effects of the Novel Coronavirus (COVID-19) pandemic and are expected to be further impacted in the remainder of 2020. In the first quarter of 2020, North Asia and United States experienced the most significant declines in results due to the disruptions of trade to and from China, which impacted overall freight movement around the globe. Factories in China experienced extended closures and many airlines cancelled flights to and from China. Additionally, ocean carriers have reduced their capacity by anchoring vessels and skipping ports due to the decline in demand. As a result, starting in January certain of the Company’s central China offices experienced temporary closures and limited operations and shipments were rerouted or delayed by customers and service providers taking their own precautionary measures. Also, available airfreight capacity was reduced affecting the ability to efficiently route customers’ freight. In the first quarter 2020 and 2019, the People's Republic of China, including Hong Kong, represented
12
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," "Novel Coronavirus (COVID-19)," "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 COVID-19, and other characterizations of future events or circumstances are forward-looking statements. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified in Part II, Item 1A, Risk Factors of this report, attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 21, 2020.
Overview
Expeditors International of Washington, Inc. (herein referred to as "Expeditors," the "Company," "we," "us," "our") provides a full suite of global logistics services. Our services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other logistics solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.
We derive our revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by our customer. Each performance obligation is comprised of one or more of the Company's services. We typically satisfy our performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. Our three principal services are the revenue categories presented in our financial statements: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of our three primary sources of revenue.
We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and then reselling those services to our customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses. By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
In most cases, we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and import services such as arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices. We also provide other value added services at destination, such as warehousing and distribution, time-definitive transportation services and consulting.
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.
13
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.
Novel Coronavirus (COVID-19)
The COVID-19 pandemic has significantly affected our business operations in the first quarter of 2020, and we expect these disruptive conditions to continue through the remainder of the year. At this time, the main elements of its impact on our business are summarized below:
|
|
• |
Governments have designated our operations as essential business in all regions where we operate because of our important role in supply chains operations worldwide. As such, our districts continue to serve our customers while operating within the regulations established in those countries. |
|
|
• |
We activated our business continuity plan, first regionally in China in January 2020, expanding to other regions worldwide in February and March 2020. Our business continuity plan includes measures to protect and safeguard the health of our employees and service providers, such as sanitization of our facilities, providing protective equipment to employees, restricting travel and requiring all employees to work remotely if they are able to. Our plan includes measures to minimize adverse impacts to our operations and those of our customers’ businesses. We have identified areas of the supply chain process that can be supported remotely and through automation, and those which require physical operations and handling. We continue to monitor the rapidly changing situation and may take additional actions based on recommendations from governments and local and national health authorities. |
|
|
• |
Travel restrictions, government mandated lockdowns and additional precautionary measures resulted in business and supply chain disruption, and limited operations first in China, and then worldwide with a sharp decrease in international trade. We have also seen a shift in the goods we handle with increased shipments of medical equipment and supplies to combat COVID-19 and technology products to support social distancing and working remotely. In contrast, we have seen a significant decline in shipments from our customers in retail, aerospace, automotive, oil and energy sectors. Overall, this has negatively impacted our results of operations in the first quarter of 2020 as our freight volumes have decreased. |
|
|
• |
These disruptions are threatening the financial stability of our service providers and our ability to efficiently route customer freight. Reduced passenger flight schedules and cancellations have significantly impacted available belly space, limiting our ability to utilize space under our existing capacity agreements with carriers and requiring us to buy space in a tight airfreight market and utilize chartered planes. Ocean carriers have continued to reduce their capacity by anchoring vessels and skipping ports due to the decline in demand. These freight market conditions create pricing volatility that further challenges Expeditors’ ability to maintain historical unitary profitability. |
|
|
• |
Many of our customers are experiencing disruptions in their revenue and cash flow, prompting these customers to attempt to renegotiate contractual terms and increasing our accounts receivable collection risk. We have continued to apply our established credit control procedures and collection monitoring that have historically been effective in limiting credit losses. These conditions could result in the loss of business and additional bad debt allowances in the future if our customers’ ability to pay further deteriorates. |
These disruptive conditions continued in April 2020, and we expect them to continue through the remainder of the year. A prolonged slowdown in the global economy and trade would further negatively affect our operations in the future.
14
Expeditors' Culture and Strategy
From the inception of our company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. We believe that our greatest challenge is now and always has been perpetuating a consistent global corporate culture, which demands:
|
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• |
Total dedication to providing superior customer service; |
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|
• |
Compliance with our policies and procedures and government regulations; |
|
|
• |
Aggressive marketing of all of our service offerings; |
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|
• |
A positive, safe work environment that is inclusive and free from discrimination and harassment; |
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|
• |
Ongoing development of key employees and management personnel; |
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|
• |
Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement; |
|
|
• |
Individual commitment to the identification and mentoring of successors for every key position so that when change occurs, a qualified and well-trained internal candidate is ready to step forward; and |
|
|
• |
Continuous identification, design and implementation of system solutions and differentiated service offerings, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and effective. |
We reinforce these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since we became a publicly traded company. There is no limit to how much a key manager can be compensated for success. We believe in a “real world” environment where the employees of our operating units are held accountable for the profit implications of their decisions. If these decisions result in operating losses, management generally must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, our policies, processes and relevant training focus on such things as cargo management, risk mitigation, compliance, accounts receivable collection, cash flow and credit soundness in an attempt to help managers avoid the kinds of errors that might end a career.
We believe that our unique culture 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.
Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers that lead to profitable business growth. Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors.
Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of the effect of the COVID-19 pandemic, ongoing concern over terrorism, security, changes in governmental regulation and oversight of international trade. A good reputation helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international trade obstacles, especially as governments rapidly promulgate new regulations in reaction to the COVID-19 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 incurring operating losses. As a result, carriers are facing liquidity challenges exacerbated by COVID-19 pandemic and are seeking relief under various government support programs. 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.
15
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 is experiencing a rapid slowdown as a result of the COVID-19 pandemic and related precautionary measures including lockdown government mandates worldwide, 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 for goods deemed essential to combating COVID-19. The United Kingdom and the European Union are negotiating the terms of the United Kingdom's exit from the European Union. We cannot predict the outcome of these proposals or negotiations, or the effects they will have on our business. As governments implement higher tariffs on imports, manufacturers may accelerate, to the extent possible, shipments to avoid higher tariffs and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs.
The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over airfreight capacity availability, volatile airfreight 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. Ocean carriers have incurred substantial operating losses in recent years, and many are highly leveraged with debt. These financial challenges have resulted in multiple carrier acquisitions and carrier alliance formations. Additionally, carriers continue to take delivery of new and larger ships, which may increase capacity. Carriers also face new regulatory requirements that became effective in 2020 requiring reductions in the sulfur in marine fuel, which are increasing their operating and capital costs. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.
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 increases to our customers, this could adversely affect our operating income.
The global economic and trade environments remain uncertain, including the impacts of COVID-19. 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 COVID-19 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 this seasonal trend will occur in the future or to what degree it will be impacted in 2020 by COVID-19. This 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,
16
product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter.
To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments. We base our estimates on historical experience and on assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2019, filed on February 21, 2020. 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, 2020 and 2019, including the respective percentage changes comparing 2020 and 2019.
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) |
|
2020 |
|
|
2019 |
|
|
Percentage change |
||
|
Airfreight services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
709,039 |
|
|
$ |
714,901 |
|
|
(1)% |
|
Expenses |
|
|
520,169 |
|
|
|
509,210 |
|
|
2 |
|
Ocean freight services and ocean services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
493,427 |
|
|
|
568,641 |
|
|
(13) |
|
Expenses |
|
|
366,483 |
|
|
|
420,331 |
|
|
(13) |
|
Customs brokerage and other services: |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
699,398 |
|
|
|
736,509 |
|
|
(5) |
|
Expenses |
|
|
400,076 |
|
|
|
436,396 |
|
|
(8) |
|
Overhead expenses: |
|
|
|
|
|
|
|
|
|
|
|
Salaries and related costs |
|
|
342,040 |
|
|
|
356,910 |
|
|
(4) |
|
Other |
|
|
114,041 |
|
|
|
109,603 |
|
|
4 |
|
Total overhead expenses |
|
|
456,081 |
|
|
|
466,513 |
|
|
(2) |
|
Operating income |
|
|
159,055 |
|
|
|
187,601 |
|
|
(15) |
|
Other income, net |
|
|
8,191 |
|
|
|
7,771 |
|
|
5 |
|
Earnings before income taxes |
|
|
167,246 |
|
|
|
195,372 |
|
|
(14) |
|
Income tax expense |
|
|
44,464 |
|
|
|
55,261 |
|
|
(20) |
|
Net earnings |
|
|
122,782 |
|
|
|
140,111 |
|
|
(12) |
|
Less net earnings attributable to the noncontrolling interest |
|
|
438 |
|
|
|
412 |
|
|
6 |
|
Net earnings attributable to shareholders |
|
$ |
122,344 |
|
|
$ |
139,699 |
|
|
(12)% |
17
Airfreight services:
Airfreight services revenues decreased 1% during the three months ended March 31, 2020 as compared with the same period for 2019, primarily due to a 7% decline in tonnage offset by 6% increase in average sell rates. Tonnage decreases in all regions were mostly offset by on average higher sell rates achieved.
Airfreight services expenses increased 2% during the three months ended March 31, 2020 as compared with the same period for 2019, principally as a result of an 8% increase in average recorded buy rates, offset by a 7% decline in tonnage.
North Asia, South Asia and North America had decreases in tonnage of 9%, 11% and 4%, respectively, for the three months ended March 31, 2020. The largest declines in tonnage were exports out of North Asia. After a significant decrease in January and February 2020, tonnage increased in March 2020 in North Asia while in other regions tonnage declined. The decrease in airfreight tonnage was primarily due to the COVID-19 pandemic resulting in extended closures following Chinese New Year. As a result of COVID-19, the governments around the world have implemented travel restrictions and suspended non-essential services. Additionally, factories have experienced extended closures. This has caused supply chain disruptions to our domestic and international customers, which correspondingly decreased our airfreight volumes.
As a result of travel restrictions and lower passenger demand, airlines cancelled flights reducing available belly space for cargo at a time where demand for time-sensitive delivery of essential supplies was high, resulting in imbalances between carrier capacity and demand in certain lanes. In order to accommodate the transportation of our customers’ shipments we increased our use of charter flights and purchases of capacity on the spot market, which resulted in significantly higher buy and sell rates. These conditions created a high degree of volatility in volumes, buy and sell rates and are expected to continue in the second quarter of 2020 and the remainder of the year.
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 13% for the three months ended March 31, 2020 as compared with the same period in 2019. The largest component of our ocean freight and ocean services revenue was derived from ocean freight consolidation, which represented 63% and 68% of ocean freight and ocean services revenue for the three months ended March 31, 2020 and 2019, respectively.
Ocean freight consolidation revenues and expenses decreased 20% and 19%, respectively, for the three months ended March 31, 2020 as compared with the same period in 2019, due to a 10% decline in containers shipped, primarily in North Asia, as well as a decrease in sell and buy rates. The changes in freight consolidation revenues and directly related expenses include a revised presentation of destination services that started in the second quarter of 2019, which decreased revenues and directly related operating expenses in ocean freight consolidation but did not change consolidated operating income.
Direct ocean freight forwarding revenues and expenses increased 9% and 18%, respectively, for the three months ended March 31, 2020 as compared with the same period in 2019, primarily due to higher volumes and changes in customer mix. This was partially offset by a decrease in volumes in North Asia. Order management revenues and expenses decreased 8% and 11%, respectively, for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to lower volumes in North Asia, as well as a decrease in sell and buy rates. This was partially offset by higher volumes in South Asia.
North Asia ocean freight and ocean services revenues and expenses decreased 31% and 32%, respectively for the three months ended March 31, 2020 as compared with the same period in 2019, primarily due to decrease in container volume and lower sell and buy rates. The decline in containers shipped from North Asia followed decreases in trade volumes starting in 2019 and were accelerated by the COVID-19 pandemic. This was partially offset by an increase in South Asia ocean freight and ocean services revenues and expenses of 9% for the three months ended March 31, 2020 as compared with the same period in 2019, primarily due to an increase in container volume.
Ocean carriers continue to reduce their capacity by anchoring vessels and skipping ports due to the decline in demand. We expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, adjust to the slowdown of the global economy from the COVID-19 pandemic and carriers continue to adapt to changes in capacity, market demand and merge or create alliances with other carriers. Carriers also face new regulatory requirements that became effective in 2020 to reduce the use of sulfur in marine fuel, which are increasing their operating and capital costs, which could result in higher costs for us. These conditions could result in continued lower operating income.
18
Customs brokerage and other services:
Customs brokerage and other services revenues decreased 5% and expenses decreased 8% for the three months ended March 31, 2020 as compared with the same period in 2019, primarily due to decrease in shipments from existing customers. Slowdowns due to COVID-19 related closures affected volumes, particularly in the retail, aerospace, automotive, oil and energy sectors. 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 revenues decreased 7% and directly related expenses decreased 10% for the three months ended March 31, 2020 as compared with the same periods for 2019, primarily as a result of lower volumes in customs brokerage and road freight.
Overhead expenses:
Salaries and related costs decreased by 4% for the three months ended March 31, 2020 as compared with the same period in 2019, principally due to reductions 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. Bonuses to field management for the three months ended March 31, 2020 were down 10% when compared to the same period in 2019. Bonuses under the executive incentive compensation plan were down 22%, primarily due a decrease in operating income and 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 increased 4% for the three months ended March 31, 2020, as compared with the same period in 2019. The increase in expenses was due to an increase in bad debt expense, information technology consulting expense, claims and legal expense, partially offset by a decrease in travel expense. We will continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.
Income tax expense:
Our consolidated effective income tax rate was 26.6% for the three months ended March 31, 2020, as compared to 28.3% for the same period in 2019. The effect of higher average tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).
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.
19
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, 2020 and 2019 was insignificant. We had no foreign currency derivatives outstanding at March 31, 2020 and December 31, 2019. During the three months ended March 31, 2020, net foreign currency gains were approximately $4 million. During the three months ended March 31, 2019, net foreign currency losses were approximately $3 million.
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, 2020 was $165 million as compared with $289 million for the same period in 2019. The decrease of $124 million in the three months ended March 31, 2020 was primarily due to changes in working capital, principally as a result of reduced customer collections when compared to the same period in 2019 due to lower revenues in the fourth quarter 2019 and the first quarter 2020. At March 31, 2020, working capital was $1,460 million, including cash and cash equivalents of $1,112 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at March 31, 2020. 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.
20
Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.
Cash used in investing activities for the three months ended March 31, 2020 was $6 million as compared with $9 million in the same period of 2019, primarily for capital expenditures. Capital expenditures in the three months ended March 31, 2020 were related primarily to continuing investments in building and leasehold improvements and technology and facilities equipment. Occasionally, we elect to purchase buildings to house staff and to facilitate the staging of customers’ freight. Total anticipated capital expenditures in 2020 are currently estimated to be $50 million. This includes routine capital expenditures and investments in technology.
Cash used in financing activities during the three months ended March 31, 2020 was $261 million as compared with $17 million for the same period in 2019. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to limit the growth in issued and outstanding shares. During the three months ended March 31, 2020, we used cash to repurchase 4.0 million shares of common stock to reduce the number of total outstanding shares, compared to 0.6 million in the same period in 2019.
We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.
We cannot predict what impact 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, 2020, we were contingently liable for $68 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, 2020, cash and cash equivalent balances of $419 million were held by our non-United States subsidiaries, of which $6 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.
21
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, 2020, would have had the effect of raising operating income by approximately $12 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $10 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, 2020 and 2019 was insignificant. During the three months ended March 31, 2020, foreign currency gains were approximately $4 million. During the three months ended March 31, 2019, foreign currency losses were approximately $3 million. We had no foreign currency derivatives outstanding at March 31, 2020 and December 31, 2019. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of March 31, 2020, we had approximately $74 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At March 31, 2020, we had cash and cash equivalents of $1,112 million, of which $672 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, 2020. A hypothetical change in the interest rate of 10 basis points at March 31, 2020 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 2020.
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 COVID-19, 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.
22
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, 2020, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on February 21, 2020. 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 21, 2020, except for the following:
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Novel Coronavirus (COVID-19)
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COVID-19 significantly impacted worldwide economic conditions and global trade and may continue to have an adverse effect on our operations, and the operations of our service providers and our customers, which may further impact our business. COVID-19 was declared as a global health emergency and later declared as a global pandemic by the World Health Organization. As a result, governments have implemented travel restrictions, mandated lockdowns and other precautionary measures that resulted in significant business and supply chain disruptions and a slowdown in international trade. This crisis has, and is expecting to continue affecting our business in many aspects. Governments have designated our operations as essential business and we activated our business continuity plan to be able to conduct operations. Our facilities and employees are operating under the constraints of special protective measures and many are working remotely. These disruptions are also threatening the financial stability of our service providers and the ability to efficiently and profitably route our customers’ freight. Reduced flight schedules and cancellations have significantly reduced available space for airfreight, while ocean carriers have continued to reduce their operating capacity. These freight market conditions create pricing volatility that challenges Expeditors’ ability to maintain historical unitary profitability. Many of our customers are experiencing disruptions in their revenue and cash flow, prompting these customers to renegotiate contractual terms and increasing our accounts receivable collection risks. Such conditions could result in the loss of business and additional bad debt allowances in the future if our customers’ ability to pay deteriorates. Although we are monitoring the situation, we cannot predict for how long, or the ultimate extent to which the pandemic and related precautionary measures may disrupt our operations. Any significant disruption resulting from this on a large scale or over an extended period of time would negatively affect our business and our financial results. |
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Service Providers |
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As a non-asset based provider of global logistics services, Expeditors depends on a variety of asset-based service providers, including air, ocean and ground freight carriers. The quality and profitability of our services depend upon effective selection, management and discipline of service providers. COVID-19 is expected to place significant stress on our air, ocean and freight ground carriers, which may result in reduced carrier capacity or availability, pricing volatility or more limited carrier transportation schedules which could adversely impact our operations and financial results. During the COVID-19 pandemic, air carriers have been particularly affected having to cancel flights due to travel restrictions resulting in dramatic drops in revenues, historical losses and liquidity challenges. Ocean carriers have incurred significant operating losses in recent years, further exacerbated by trade reductions from COVID-19 measures, and are highly leveraged with debt. Additionally, several ocean carriers have consolidated, with the potential for more to occur in the future. Changes in the financial stability, operating capabilities and capacity of asset-based carriers and capacity allotment made available to Expeditors by asset-based carriers affects us in unpredictable ways. Any combination of reduced carrier capacity or availability, pricing volatility or more limited carrier transportation schedules, such as those caused by COVID-19, could further negatively affect our ability to execute services and maintain profitability. Expeditors cannot predict if relief measures extended by certain governments will be effective in supporting the financial viability of carriers nor can we predict the long-term effects of this crisis on carriers’ financial stability and ability to provide services. Additionally, Expeditors' carriers are subject to increasingly stringent laws, which could, directly or indirectly, have a material adverse effect on our business. Future regulatory developments in the U.S. and abroad could adversely affect operations and increase operating costs in the transportation industry, which in turn could increase our purchased transportation costs. If we are unable to pass such costs on to our customers, our business and results of operations could be materially adversely affected. |
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23
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Economic Conditions |
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The global economy is experiencing a rapid slowdown as a result of the COVID-19 pandemic, which has affected trade and could further affect demand for our services. Continued unfavorable economic conditions will result in lower freight volumes and adversely affects Expeditors' revenues, operating results and cash flows. These conditions should they continue for extended period of time would further adversely affect our customers and service providers. Should our customers’ ability to pay deteriorate, additional bad debts may be incurred. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
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Period |
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Total number of shares purchased |
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Average price paid per share |
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Total number of shares purchased as part of publicly announced plans |
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Maximum number of shares that may yet be purchased under the plans |
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||||
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January 1-31, 2020 |
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— |
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|
$ |
— |
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|
|
— |
|
|
|
9,748,977 |
|
|
February 1-29, 2020 |
|
|
2,000,000 |
|
|
|
74.09 |
|
|
|
2,000,000 |
|
|
|
8,283,602 |
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March 1-31, 2020 |
|
|
2,000,000 |
|
|
|
67.53 |
|
|
|
2,000,000 |
|
|
|
6,192,763 |
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Total |
|
|
4,000,000 |
|
|
$ |
70.81 |
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|
|
4,000,000 |
|
|
|
6,192,763 |
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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. |
24
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
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Exhibit Number |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 |
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101.INS |
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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. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
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|
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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, 2020, has been formatted in Inline XBRL. |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. |
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May 7, 2020 |
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/s/ JEFFREY S. MUSSER |
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Jeffrey S. Musser, President, Chief Executive Officer and Director |
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May 7, 2020 |
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/s/ BRADLEY S. POWELL |
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|
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Bradley S. Powell, Senior Vice President and Chief Financial Officer |
26