UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the fiscal year ended December 31,
2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from to
Commission File Number: 0-13468
EXPEDITORS INTERNATIONAL
OF WASHINGTON, INC.
(Exact name of registrant as specified in its
charter)
Washington
|
|
91-1069248
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification Number)
|
|
|
|
1015 Third Avenue, 12
th
Floor,
Seattle, Washington
|
|
98104
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
|
|
(206) 674-3400
|
(Registrants telephone number, including
area code)
|
|
Securities registered pursuant to
Section 12(b) of the Act:
|
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
Common Stock, par value $.01 per share
|
|
NASDAQ Global Select Market
|
|
|
|
Securities registered pursuant to
Section 12(g) of the Act: None
|
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
x
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o
No
x
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
o
No
x
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
x
|
|
Accelerated filer
o
|
|
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes
o
No
x
At June 30, 2007, the aggregate market value of the registrants
Common Stock held by non-affiliates of the registrant was approximately
$8,664,390,065.
At February 26, 2008 the number of shares outstanding of
registrants Common Stock was 213,147,126.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrants 2008
Annual Meeting of Shareholders to be held on May 7, 2008 are incorporated
by reference into Part III of this Form 10-K.
Forward-Looking Statements
In accordance with the
provisions of the Litigation Reform Act, the Company is making readers aware
that forward-looking statements, because they relate to future events, are by
their very nature subject to many important risk factors which could cause
actual results to differ materially from those contained in the forward-looking
statements. For additional information
about forward-looking statements and for an identification of risk factors and
their potential significance, see Safe Harbor for Forward-Looking Statements
Under Securities Litigation Reform Act of 1995; Certain Cautionary Statements
immediately preceding Part II, Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations in this report.
PART I
ITEM 1BUSINESS
Expeditors International of Washington, Inc. is engaged in the
business of providing global logistics services. The Company offers its customers a seamless
international network supporting the movement and strategic positioning of
goods. The Companys services include
the consolidation or forwarding of air and ocean freight. In each United States office, and in many
overseas offices, the Company acts as a customs broker. The Company also provides additional services
including distribution management, vendor consolidation, cargo insurance,
purchase order management and customized logistics information. The Company does not compete for domestic
freight, overnight courier or small parcel business and does not own aircraft
or steamships.
The Company, including its majority-owned subsidiaries, operates full
service offices (
·
) in the cities identified below. Full service offices have also been
established in locations where the Company maintains unilateral control over assets
and operations and where the existence of the parent-subsidiary relationship is
maintained by means other than record ownership of voting stock (#). In other cities, the Company contracts with
independent agents to provide required services and has established
approximately 51 such relationships world-wide.
Locations where Company employees perform sales and customer service
functions are identified below as international service centers (*). Wholly-owned locations operating under the
supervision and control of another full service office are identified as
satellite offices (+). In each case, the
opening date for the full service office, international service center or
satellite office is set forth in parenthesis.
NORTH AMERICA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
|
|
+ Detroit-Ambassador
Bridge (12/96)
|
|
MEXICO
|
|
COSTA RICA
|
·
Seattle (5/79)
|
|
+ Lewiston-Queenston
(12/96)
|
|
·
Mexico City (6/95)
|
|
·
San Jose (10/03)
|
·
Chicago (7/81)
|
|
·
Buffalo-Peace Bridge (1/97)
|
|
·
Nuevo Laredo (4/97)
|
|
|
·
San Francisco (7/81)
|
|
·
El Paso (1/97)
|
|
·
Guadalajara (9/97)
|
|
GUATEMALA
|
·
New York (11/81)
|
|
·
Laredo (2/97)
|
|
·
Nogales (1/99)
|
|
·
Guatemala City (1/07)
|
·
Los Angeles (5/82)
|
|
·
Nogales (2/97)
|
|
·
Ciudad Juarez (5/00)
|
|
|
·
Atlanta (8/83)
|
|
·
San Diego (7/97)
|
|
·
Monterrey (1/05)
|
|
PERU
|
·
Boston (11/85)
|
|
+ Rochester (10/97)
|
|
·
Reynosa (6/06)
|
|
·
Lima (12/05)
|
·
Miami (3/86)
|
|
·
McAllen (4/98)
|
|
+ Querétaro (9/06)
|
|
|
·
Minneapolis (7/86)
|
|
·
Pittsburgh (6/99)
|
|
|
|
VENEZUELA
|
·
Denver (2/88)
|
|
·
Savannah (3/00)
|
|
SOUTH AND CENTRAL
|
|
·
Caracas (1/01)
|
|
|
|
|
AMERICA
|
|
+ Maiquetía (1/01)
|
·
Detroit (7/88)
|
|
+ Milwaukee (7/00)
|
|
|
|
|
·
Portland (7/88)
|
|
·
Kansas City (8/00)
|
|
ARGENTINA
|
|
ASIA
|
·
Cincinnati (8/89)
|
|
·
Washington, D.C. (9/00)
|
|
·
Buenos Aires (1/98)
|
|
|
·
Cleveland (7/90)
|
|
·
Nashville (10/01)
|
|
|
|
BANGLADESH
|
·
Phoenix (7/91)
|
|
+ Huntsville (12/02)
|
|
BRAZIL
|
|
·
Dhaka (6/89)
|
·
Louisville (10/91)
|
|
·
Austin (2/03)
|
|
·
Sao Paulo (9/95)
|
|
+ Chittagong (8/93)
|
·
St. Louis (4/92)
|
|
·
Orlando (8/03)
|
|
·
Rio de Janeiro (9/95)
|
|
|
·
Houston (4/92)
|
|
·
Tampa (9/03)
|
|
·
Campinas (9/95)
|
|
CAMBODIA
|
·
Baltimore (4/92)
|
|
+ New Orleans (9/04)
|
|
+ Santos (10/97)
|
|
·
Phnom Penh (4/00)
|
·
Dallas (5/92)
|
|
+ Omaha (7/06)
|
|
·
Manaus (7/00)
|
|
|
·
Columbus (6/92)
|
|
+ Calexico (6/06)
|
|
·
Porto Alegre (1/05)
|
|
PEOPLES REPUBLIC OF
|
|
|
|
|
|
|
CHINA
|
·
Charlotte (7/92)
|
|
|
|
|
|
·
Guangzhou (4/94)
|
·
Newark (9/94)
|
|
PUERTO RICO
|
|
CHILE
|
|
·
Beijing (7/94)
|
·
Philadelphia (3/95)
|
|
·
San Juan (5/95)
|
|
·
Santiago (2/95)
|
|
·
Dalian (7/94)
|
·
Charleston (6/95)
|
|
|
|
|
|
·
Shanghai (7/94)
|
·
Memphis (8/95)
|
|
CANADA
|
|
COLOMBIA
|
|
·
Shenzhen (7/94)
|
·
Salt Lake City (11/95)
|
|
·
Toronto (5/84)
|
|
·
Bogota (12/98)
|
|
·
Qingdao (7/94)
|
+ Syracuse (4/96)
|
|
·
Vancouver (9/95)
|
|
+ Cali (12/98)
|
|
·
Tianjin (7/94)
|
·
Norfolk (9/96)
|
|
+ Windsor (6/98)
|
|
+ Medellin (7/00)
|
|
·
Xian (7/94)
|
·
Indianapolis (11/96)
|
|
·
Montreal (4/99)
|
|
|
|
·
Xiamen (7/94)
|
+ Port Huron-Blue Water
Bridge (12/96)
|
|
·
Calgary (9/04)
|
|
|
|
+ Chengdu (9/00)
|
2
·
Ningbo (7/01)
|
|
VIETNAM
|
|
·
Alicante (4/96)
|
|
JORDAN
|
+ Suzhou (9/01)
|
|
·
Ho Chi Minh City (5/00)
|
|
|
|
·
Amman (9/07)
|
+ Zhongshan (9/01)
|
|
·
Hanoi (3/04)
|
|
SWEDEN
|
|
|
·
Hangzhou (10/01)
|
|
+ Da Nang (9/05)
|
|
·
Stockholm (1/94)
|
|
KUWAIT
|
+ Kunshan (12/01)
|
|
|
|
·
Goteborg (1/94)
|
|
# Kuwait City (7/97)
|
+ Fuzhou (6/02)
|
|
EUROPE
|
|
+ Malmoe (3/05)
|
|
|
·
Yantai (11/02)
|
|
|
|
|
|
LEBANON
|
+ Shenyang (12/02)
|
|
AUSTRIA
|
|
SWITZERLAND
|
|
·
Beirut (8/99)
|
+ Wuhan (1/03)
|
|
·
Vienna (11/95)
|
|
·
Chiasso (2/01)
|
|
|
+ Huizhou (12/03)
|
|
+ Graz (3/06)
|
|
·
Zurich (10/05)
|
|
PAKISTAN
|
+ Zhuhai (12/03)
|
|
|
|
|
|
·
Karachi (9/96)
|
+ Foshan (1/04)
|
|
BELGIUM
|
|
UNITED KINGDOM
|
|
·
Lahore (9/96)
|
·
Chongqing (7/04)
|
|
·
Brussels (7/90)
|
|
·
London (4/86)
|
|
+ Sialkot (6/03)
|
·
Dongguan (2/05)
|
|
+Antwerp (4/91)
|
|
·
Manchester (11/88)
|
|
+ Faisalabad (5/06)
|
·
Nanjing (3/05)
|
|
|
|
·
Birmingham (3/90)
|
|
+ Islamabad (10/06)
|
·
Macau (5/05)
|
|
THE CZECH REPUBLIC
|
|
·
Glasgow (4/92)
|
|
|
+ Shantou (12/06)
|
|
·
Prague (6/98)
|
|
·
Bristol (3/97)
|
|
QATAR
|
|
|
|
|
·
East Midlands (1/99)
|
|
·
Doha (1/07)
|
HONG KONG
|
|
FINLAND
|
|
+ Hull (1/00)
|
|
|
·
Kowloon (9/81)
|
|
·
Helsinki (4/94)
|
|
·
Belfast (9/01)
|
|
SAUDI ARABIA
|
|
|
|
|
·
Aberdeen (9/05)
|
|
# Riyadh (7/92)
|
INDONESIA
|
|
FRANCE
|
|
|
|
# Jeddah (7/92)
|
·
Jakarta (12/90)
|
|
·
Paris (1/97)
|
|
AUSTRALASIA
|
|
# Damman (6/05)
|
·
Surabaya (2/92)
|
|
·
Mulhouse (1/97)
|
|
|
|
|
+ Batam (3/07)
|
|
·
Lyon (1/97)
|
|
AUSTRALIA
|
|
SRI LANKA
|
|
|
·
Lille (3/97)
|
|
·
Sydney (8/88)
|
|
·
Colombo (3/95)
|
JAPAN
|
|
·
Bordeaux (7/00)
|
|
·
Melbourne (8/88)
|
|
|
·
Tokyo (1/01)
|
|
|
|
·
Brisbane (10/93)
|
|
TURKEY
|
·
Osaka (1/01)
|
|
GERMANY
|
|
·
Perth (12/94)
|
|
·
Ankara (1/99)
|
+ Nagoya (8/03)
|
|
·
Frankfurt (4/92)
|
|
·
Adelaide (10/97)
|
|
·
Istanbul (1/99)
|
|
|
·
Munich (4/92)
|
|
|
|
·
Izmir (1/99)
|
KOREA
|
|
·
Dusseldorf (4/92)
|
|
FIJI
|
|
·
Mersin (1/99)
|
+ Pusan (10/94)
|
|
·
Stuttgart (4/92)
|
|
* Nadi (7/96)
|
|
+ Adana (1/99)
|
·
Seoul (10/94)
|
|
·
Hamburg (1/93)
|
|
* Suva (5/97)
|
|
|
+ Bupyung (6/96)
|
|
·
Nuremberg (1/01)
|
|
|
|
U.A.E.
|
+ Chonan (6/96)
|
|
+ Hannover (1/05)
|
|
NEW ZEALAND
|
|
·
Abu Dhabi (1/94)
|
+ Kwangju (6/96)
|
|
|
|
·
Auckland (8/88)
|
|
·
Dubai (10/98)
|
+ Masan (6/96)
|
|
HUNGARY
|
|
+ Christchurch (10/07)
|
|
|
+ Taegu (6/96)
|
|
·
Budapest (4/00)
|
|
|
|
|
|
|
|
|
NEAR/MIDDLE EAST
|
|
CYPRUS
|
MALAYSIA
|
|
IRELAND
|
|
|
|
* Nicosia (6/96)
|
·
Penang (11/87)
|
|
·
Dublin (3/97)
|
|
BAHRAIN
|
|
* Larnaca (1/98)
|
·
Kuala Lumpur (6/90)
|
|
·
Cork (3/97)
|
|
·
Manama (1/08)
|
|
|
·
Johor Bahru (11/94)
|
|
·
Shannon (3/97)
|
|
|
|
AFRICA
|
|
|
|
|
EGYPT
|
|
|
MARIANA ISLANDS
|
|
ITALY
|
|
·
Cairo (2/95)
|
|
SOUTH AFRICA
|
·
Saipan (7/00)
|
|
·
Milan (4/93)
|
|
+ Alexandria (2/95)
|
|
·
Johannesburg (3/94)
|
|
|
·
Verona (4/93)
|
|
|
|
·
Durban (3/94)
|
PHILIPPINES
|
|
·
Florence (3/98)
|
|
GREECE
|
|
·
Capetown (1/97)
|
·
Manila (8/98)
|
|
+ Turin (4/05)
|
|
·
Athens (2/99)
|
|
+ Port Elizabeth (7/03)
|
+ Olongapo City (8/98)
|
|
|
|
+ Thessaloniki (2/99)
|
|
* Larnaca (1/98)
|
+ Cebu City (9/99)
|
|
THE NETHERLANDS
|
|
|
|
|
|
|
·
Amsterdam (6/94)
|
|
INDIA
|
|
MADAGASCAR
|
SINGAPORE
|
|
·
Rotterdam (3/95)
|
|
·
New Delhi (7/96)
|
|
·
Antananarivo (11/01)
|
·
Singapore (9/81)
|
|
+ Maastricht (9/07)
|
|
·
Mumbai (Bombay) (1/97)
|
|
|
|
|
|
|
·
Bangalore (6/97)
|
|
MAURITIUS
|
TAIWAN
|
|
POLAND
|
|
·
Chennai (Madras) (6/97)
|
|
·
Port Louis (7/99)
|
·
Taipei (9/81)
|
|
·
Warsaw (2/05)
|
|
+ Jaipur (6/99)
|
|
|
+ Kaohsiung (9/81)
|
|
+ Krakow (8/07)
|
|
+ Cochin (4/01)
|
|
|
+ Taichung (9/81)
|
|
|
|
+ Hyderabad (9/01)
|
|
|
+ Hsin-Chu (9/89)
|
|
PORTUGAL
|
|
+ Tuticorin (11/03)
|
|
|
|
|
·
Lisbon (10/91)
|
|
+ Ahmedabad (1/05)
|
|
|
THAILAND
|
|
·
Oporto (10/91)
|
|
+ Tiruppur (3/05)
|
|
|
·
Bangkok (9/94)
|
|
|
|
+ Ludhiana (6/05)
|
|
|
+ Laem Chabang (8/05)
|
|
SPAIN
|
|
+ Pune (10/06)
|
|
|
|
|
·
Barcelona (1/94)
|
|
+ Kolkata (1/08)
|
|
|
|
|
·
Madrid (1/94)
|
|
+ Coimbatore (1/08)
|
|
|
3
The Company was
incorporated in the State of Washington in May 1979. Its executive offices are located at 1015
Third Avenue, 12
th
Floor, Seattle, Washington, and its telephone
number is (206) 674-3400.
The Companys internet
address is http://www.expeditors.com.
The Company makes available free of charge through its internet website
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to
the Securities and Exchange Commission (SEC).
For information
concerning the amount of revenues, net revenues, operating income, identifiable
assets, capital expenditures and depreciation and amortization attributable to
the geographic areas in which the Company conducts its business, see Note 8 to
the consolidated financial statements.
Beginning in 1981, the
Companys primary business focus was on airfreight shipments from Asia to the
United States and related customs brokerage and other services. In the
mid-1980s, the Company began to expand its service capabilities in export
airfreight, ocean freight and distribution services. Today the Company
offers a complete range of global logistics services to a diversified group of
customers, both in terms of industry specialization and geographic
location. As opportunities for profitable growth arise, the Company plans
to create new offices. While the Company has historically expanded
through organic growth, the Company has also been open to growth through
acquisition of, or establishing joint ventures with, existing agents or others
within the industry.
Airfreight
Services
Airfreight services
accounted for approximately 36, 36, and 37 percent of the Companys 2007, 2006,
and 2005 consolidated revenues net of freight consolidation expenses (net
revenues), respectively. When performing airfreight services, the
Company typically acts either as a freight consolidator or as an agent for the
airline which carries the shipment. When acting as a freight
consolidator, the Company purchases cargo space from airlines on a volume basis
and resells that space to its customers at lower rates than the customers could
obtain directly from airlines. When moving shipments between points where
the volume of business does not facilitate consolidation, the Company receives
and forwards individual shipments as the agent of the airline which carries the
shipment. Whether acting as an agent or consolidator, the Company offers its
customers knowledge of optimum routing, familiarity with local business
practices, knowledge of export and import documentation and procedures, the
ability to arrange for ancillary services, and assistance with space
availability in periods of peak demand.
In its airfreight
forwarding operations, the Company procures shipments from its customers,
determines the routing, consolidates shipments bound for a particular airport
distribution point, and selects the airline for transportation to the distribution
point. At the distribution point, the Company or its agent arranges for
the consolidated lot to be broken down into its component shipments and for the
transportation of the individual shipments to their final destinations.
The Company estimates its
average airfreight consolidation weighs approximately 3,500 pounds and a
typical consolidation includes merchandise from several shippers. Because
shipment by air is relatively expensive compared with ocean transportation, air
shipments are generally characterized by a high value-to-weight ratio, the need
for rapid delivery, or both.
The Company typically
delivers shipments from a Company warehouse at the origin to the airline after
consolidating the freight into containers or onto pallets. Shipments normally
arrive at the destination distribution point within forty-eight hours after
such delivery. During peak shipment periods, cargo space available from
the scheduled air carriers can be limited and backlogs of freight shipments may
occur. When these conditions exist, the Company may charter aircraft to
meet customer demand.
The Company consolidates
individual shipments based on weight and volume characteristics in
cost-effective combinations. Typically, as the weight or volume of a shipment
increases, the cost per pound/kilo or cubic inch/centimeter charged by the
Company decreases. The rates charged by airlines to forwarders and others
also generally decrease as the weight or volume of the shipment
increases. As a result, by aggregating shipments and
presenting them to an airline as a single shipment, the Company is able to
obtain a lower rate per pound/kilo or cubic inch/centimeter than that which it
charges to its customers for the individual shipment, while generally offering
the customer a lower rate than could be obtained from the airline for an
unconsolidated shipment.
The Companys net
airfreight forwarding revenues from a consolidated shipment include the
differential between the rate charged to the Company by an airline and the rate
which the Company charges to its customers, commissions paid to the Company by
the airline carrying the freight and fees for ancillary services. Such
ancillary services provided by the Company include preparation of shipping and
customs documentation, packing, crating and insurance services, negotiation of
letters of credit, and preparation of documentation to comply with local export
laws. When the Company acts as an agent for an airline handling an
unconsolidated
shipment,
its net revenues are primarily derived from commissions paid by the airline and
fees for ancillary services paid by the customer.
4
The Company does not own
aircraft and does not plan to do so. Management believes that the
ownership of aircraft would subject the Company to undue business risks,
including large capital outlays, increased fixed operating expenses, problems
of fully utilizing aircraft and competition with airlines. Because the
Company relies on commercial airlines to transport its shipments, changes in
carrier policies and practices such as pricing, payment terms, scheduling, and
frequency of service may affect its business.
The Company also performs
breakbulk services which involve receiving and breaking down consolidated airfreight
lots and arranging for distribution of the individual shipments.
Breakbulk service revenues also include commissions from agents for airfreight
shipments.
Ocean Freight and
Ocean Services
Ocean freight services
accounted for approximately 24, 25, and 25 percent of the Companys 2007, 2006,
and 2005 consolidated net revenues, respectively. The Companys revenues
as an ocean freight forwarder are derived from commissions paid by the carrier
and revenues from fees charged to customers for ancillary services which the
Company may provide, such as preparing documentation, procuring insurance,
arranging for packing and crating services, and providing consultation.
The Company operates Expeditors International Ocean (EIO) an Ocean
Transportation Intermediary, sometimes referred to as, a Non-Vessel Operating
Common Carrier (NVOCC) specializing in ocean freight consolidation from Asia
to the United States. EIO also provides
service, on a smaller scale, to and from any location where the Company has an
office or agent. As an NVOCC, EIO contracts with ocean shipping lines to
obtain transportation for a fixed number of containers between various points
during a specified time period at an agreed rate. EIO solicits Less-than
Container Load (LCL) freight to fill the containers and charges lower rates
than those available directly from shipping lines. EIO also handles full
container loads for customers that do not have annual shipping volumes
sufficient to negotiate comparable contracts directly with the ocean
carriers. The Company does not own vessels and generally does not
physically handle the cargo.
Order Management (
previously referred to
as ECMS or Expeditors Cargo Management System) provides origin consolidation,
vendor management, container management, document management, destination
management and PO/SKU visibility through a web based and server based
application.
Customers have the ability to monitor and report against
real time status of purchase orders from the date of creation through final
delivery.
Item quantities,
required ship dates, commodity descriptions, estimated vs. actual ex factory
dates, container utilization, vendor performance and document visibility are
many of the managed fun
ctions that
are visible and reportable via the web. Order
Management is available for various modes of transportation including ocean,
air, truck and rail. Order Management revenues
are derived from services provided to the shipper as well as management fees
associated with managing purchase order execution against customer specific
rules. One basic function of Order
Management involves the taking of cargo from many vendors in a particular
origin and consolidating these shipments into the fewest possible number of
containers to maximize space and minimize cost.
Through origin consolidation customers can reduce the number of
containers shipped by putting more product in larger and fewer containers. Data integrity is an increasingly critical
function of Order Management. Efficient data
management is a by-product of our operational process.
Customs Brokerage
and Other Services
Customs brokerage and
other services accounted for approximately 40, 39 and 38 percent of the
Companys 2007, 2006, and 2005 consolidated net revenues, respectively.
As a customs broker, the Company assists importers to clear shipments through
customs by preparing required documentation, calculating and providing for
payment of duties on behalf of the importer, arranging for any required
inspections by governmental agencies, and arranging for delivery. The
Company also provides other value added services at destination such as
warehousing and product distribution, time definite transportation and
inventory management. None of these other services are currently
individually significant to the Companys net revenues.
The Company provides customs clearance services in connection with many
of the shipments it handles as a freight forwarder. However, substantial
customs brokerage revenues are derived from customers that elect to use a
competing forwarder. Conversely,
shipments handled by the Company as a forwarder may be processed by another
customs broker selected by the customer.
The Company also provides
custom clearances for goods moving by rail and truck between the United States,
Canada and/or Mexico. The commodities being cleared and the time
sensitive nature of the border brokerage business require the Company to
continue to make enhancements to its systems in order to provide competitive
service.
The Companys wholly-owned
subsidiary, Expeditors Tradewin, L.L.C., responds to customer driven requests
for high-end customs consulting services. Fees for these
non-transactional services are based upon hourly billing rates and bids for
mutually agreed projects.
5
Marketing and
Customers
The Company provides
flexible service and seeks to understand the needs of the customers from points
of origin to ultimate destinations. Although the domestic importer
usually designates the logistics company and the services that will be
required, the foreign shipper may also participate in this selection
process. Therefore, the Company coordinates its marketing program to
reach both domestic importers and their overseas suppliers.
The Companys marketing
efforts are focused primarily on the traffic, shipping and purchasing
departments of existing and potential customers. The district manager of
each office is responsible for marketing, sales coordination, and
implementation in the area in which he or she is located. All employees
are responsible for customer service and relations.
The Company staffs its
offices largely with managers and other key personnel who are citizens of the
nations in which they operate and who have extensive experience in global
logistics. Marketing and customer service staffs are responsible for
marketing the Companys services directly to local shippers and traffic
managers who may select or influence the selection of the logistics vendor and
for ensuring that customers receive timely and efficient service. The
Company believes that its expertise in supplying solutions customized to the
needs of its customers, its emphasis on coordinating its origin and destination
customer service and marketing activities, and the incentives it gives to its
managers have been important elements of its success.
The goods handled by the
Company are generally a function of the products which dominate international
trade between any particular origin and destination. Shipments of computer
components, other electronic equipment, housewares, sporting goods, machine
parts, and toys, comprise a significant percentage of the Companys
business. Typical import customers include computer retailers and
distributors of consumer electronics, department store chains, clothing and
shoe wholesalers, manufacturers and catalogue stores. Historically, no
single customer has accounted for five percent or more of the Companys net
revenues.
Competition
The global logistics
services industry is intensely competitive and is expected to remain so for the
foreseeable future. There are a large number of companies competing in
one or more segments of the industry, but the number of firms with a global
network that offer a full complement of logistics services is more
limited. Depending on the location of the shipper and the importer, the
Company must compete against both the niche players and larger entities.
While there is currently a marked trend within the industry toward
consolidation into larger firms striving for immediate multinational and
multi-service networks, the regional and local competitors maintain a strong
market presence.
Historically, the primary
competitive factors in the global logistics services industry have been price
and quality of service, including reliability, responsiveness, expertise,
convenience, and scope of operations. The Company emphasizes quality
service and believes that its prices are competitive with the prices of others
in the industry. 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. Accordingly,
computerized customer service capabilities are a significant factor in attracting
and retaining customers. These computerized customer service capabilities
include customized Electronic Data Interchange, (EDI), and on-line freight
tracing and
tracking
applications. The customized EDI applications allow the transfer of key
information between the customers systems and the Companys systems.
Freight tracing and tracking applications provide customers with real time
visibility to the location, transit time and estimated delivery time of
inventory in transit.
Management believes that
the ability to develop and deliver innovative solutions to meet customers
increasingly sophisticated information requirements is a critical factor in the
ongoing success of the Company. The Company devotes a significant amount
of resources towards the maintenance and enhancement of systems that will meet
these customer demands. Management believes that the
Companys
existing systems are competitive with the systems currently in use by other
logistics services companies with which it competes.
Unlike many of its
competitors, who have tended to grow by merger and acquisition, the Company
operates the same accounting and transportation computer software, running on a
common hardware platform, in all of its full-service locations. Small and
middle-tier competitors, in general, do not have the resources available to
develop these customized systems. As a result, there is a significant
amount of consolidation currently taking place in the industry.
Management expects that this trend toward consolidation will continue for the
short- to medium-term. Historically, growth through aggressive
acquisition has proven to be a challenge for many of the Companys competitors
and typically involves the purchase of significant goodwill. As a
result, the Company has pursued a strategy
emphasizing organic growth supplemented by certain
strategic acquisitions.
The Companys ability to
attract, retain, and motivate highly qualified personnel with experience in
global logistics services is an essential, if not the most important, element
of its ability to compete in the industry. To this end, the Company has
adopted incentive compensation programs which make percentages of branch
revenues or profits available to managers for distribution among key personnel.
The Company believes that these incentive compensation programs, combined with
its experienced personnel and its ability to coordinate global marketing
efforts, provide it with a distinct competitive advantage and account for
historical growth that competitors have generally matched only through
acquisition.
6
Currency and Other
Risk Factors
The nature of the
Companys worldwide operations necessitate the Company dealing with a multitude
of currencies other than the U.S. dollar. This results in the Company
being exposed to the inherent risks of the international currency markets and
governmental interference. Many of the countries where the Company
maintains offices and/or agency relationships have strict currency control
regulations which influence the Companys ability to hedge foreign currency
exposure. The Company tries to compensate for these exposures by
accelerating international currency settlements among these offices or agents.
In addition, the
Companys ability to provide service to its customers is highly dependent on
good working relationships with a variety of entities including airlines,
steamship lines and governmental agencies. The Company considers its
current working relationships with these entities to be good. However,
changes in space allotments available from carriers, governmental deregulation
efforts, modernization of the regulations governing customs clearance, and/or
changes in governmental quota restrictions could affect the Companys business
in unpredictable ways.
Seasonality
Historically, the
Companys operating results have been subject to seasonal trends when measured
on a quarterly basis. The first quarter has traditionally been the
weakest and the third and fourth quarters have traditionally been the
strongest. This pattern has been the result of, or influenced by,
numerous factors including climate, national holidays, consumer demand,
economic conditions and a myriad of other similar and subtle forces. In
addition, this historical quarterly trend has been influenced by the growth and
diversification of the Companys international network and service
offerings. The Company cannot accurately forecast many of these factors,
nor can the Company estimate accurately the relative influence of any
particular factor and, as a result, there can be no assurance that historical
patterns will continue in future periods.
A significant portion of
the Companys revenues are derived from customers in industries whose shipping
patterns are tied closely to consumer demand and from customers in industries
whose shipping patterns are dependent upon just-in-time production schedules.
Therefore, the timing of the Companys revenues are, to a large degree,
impacted by factors out of the Companys control, such as shifting consumer
demand for retail goods and manufacturing production delays.
Additionally, many customers ship a significant portion of their goods at or
near the end of a quarter, and therefore, the Company may not learn of a shortfall
in revenues until late in a quarter. To the extent that a shortfall in
revenues or earnings was not expected by securities analysts, any such
shortfall from levels predicted by securities analysts could have an immediate
and adverse effect on the trading price of the Companys stock.
Environmental
In the United States, the
Company is subject to Federal, state and local provisions regulating the
discharge of materials into the environment or otherwise for the protection of
the environment. Similar laws apply in many other jurisdictions in which
the Company operates. Although current operations have not been
significantly affected by compliance with these environmental laws, governments
are becoming increasingly sensitive to environmental issues, and the Company
cannot predict what impact future environmental regulations may have on its
business. The Company does not anticipate making any material capital
expenditures for environmental control purposes during the remainder of the
current or succeeding fiscal years.
Employees
At January 31, 2008,
the Company employed approximately 12,310 people, 4,460 in the United States
and 760 in the balance of North America, 630 in South America, 1,640 in Europe,
3,580 in Asia & Australasia, 950 in the Near/Middle East and 290 in
Africa. Approximately 1,720 of the Companys employees are engaged
principally in sales and marketing and customer service, 7,420 in operations
and 3,170 in finance and administration. The Company is not a party to
any collective bargaining agreement and considers its relations with its
employees to be satisfactory.
In order to retain the
services of highly qualified, experienced, and motivated employees, the Company
places considerable emphasis on its non-equity incentive compensation programs
and stock option plans.
7
Executive Officers of the
Registrant
The following table sets
forth the names, ages, and positions of current executive officers of the
Company.
Name
|
|
Age
|
|
Position
|
Peter J. Rose
|
|
64
|
|
Chairman and Chief Executive Officer and director
|
James L.K. Wang
|
|
60
|
|
President-Asia and director
|
R. Jordan Gates
|
|
52
|
|
President and Chief Operating Officer, Acting Chief
Financial Officer and director
|
Rommel C. Saber
|
|
50
|
|
President-Europe, Africa, Near/Middle East and
Indian Subcontinent
|
Robert L. Villanueva
|
|
55
|
|
President-The Americas
|
Sandy K.Y. Liu
|
|
60
|
|
Chief Operating Officer-Asia
|
Timothy C. Barber
|
|
48
|
|
President-Global Sales and Marketing
|
Rosanne Esposito
|
|
56
|
|
Executive Vice President-Global Customs
|
Eugene K. Alger
|
|
47
|
|
Senior Vice President-North America
|
Jean Claude Carcaillet
|
|
62
|
|
Senior Vice President-Australasia
|
Philip M. Coughlin
|
|
47
|
|
Senior Vice President-North America
|
Roger A. Idiart
|
|
54
|
|
Senior Vice President-Air Cargo
|
Charles J. Lynch
|
|
47
|
|
Senior Vice President-Corporate Controller
|
Jeffrey S. Musser
|
|
42
|
|
Senior Vice President and Chief Information Officer
|
Daniel R. Wall
|
|
39
|
|
Senior Vice President-Ocean Services
|
Amy J. Tangeman
|
|
39
|
|
Vice President-General Counsel and Secretary
|
Peter J. Rose has served
as a director and Vice President of the Company since July 1981.
Mr. Rose was elected a Senior Vice President of the Company in
May 1986, Executive Vice President in May 1987, President and Chief
Executive Officer in October 1988, and Chairman and Chief Executive Officer
in May 1991.
James L.K. Wang has
served as a director and the Managing Director of Expeditors International
Taiwan Ltd., the Companys former exclusive Taiwan agent, since
September 1981. In 1991, Mr. Wangs employment agreement was
assigned to E.I. Freight (Taiwan), Ltd., the Company's exclusive Taiwan agent
through 2004. Mr. Wang's contract is now assigned to ECI Taiwan Co. Ltd.,
a wholly-owned subsidiary of the Company. In October 1988,
Mr. Wang became a director of the Company and its Director-Far East, and
Executive Vice President in January 1996. In May 2000,
Mr. Wang was elected President-Asia.
R. Jordan Gates joined
the Company as its Controller-Europe in February 1991.
Mr. Gates was elected Chief Financial Officer and Treasurer of the Company
in August 1994 and Senior Vice President-Chief Financial Officer and
Treasurer in January 1998. In May 2000, Mr. Gates was
elected Executive Vice President-Chief Financial Officer and Treasurer.
Mr. Gates was also elected as a director in May 2000. Effective January 1, 2008, Mr. Gates assumed
the role of President and Chief Operating Officer. He will remain as acting Chief Financial
Officer until a replacement is announced.
Rommel C. Saber joined
the Company as Director-Near/Middle East in February 1990 and was elected
Senior Vice President-Sales and Marketing in January 1993.
Mr. Saber was elected Senior Vice President-Air Export in
September 1993. In July 1997, Mr. Saber was elected Senior Vice
President Near/Middle East and Indian Subcontinent and Executive Vice
President-Europe, Africa and Near/Middle East in August 2000. In
February 2006, Mr. Saber was elected President-Europe, Africa,
Near/Middle East and Indian Subcontinent.
Robert L. Villanueva
joined the Company as Regional Vice President Northwest U.S. Region in April 1994.
In September 1999, he was elected Executive Vice President-The Americas
and President-The Americas in May 2004.
Sandy K.Y. Liu became
Chief Operating Officer-Asia of the Company in January 2001. From
1969 through 2000, Mr. Liu was employed in various positions by China
Airlines. In November 1998, Mr. Liu was appointed President of
China Airlines.
Timothy C. Barber joined
the Company in May 1986. Mr. Barber was promoted to District
Manager of the Seattle office in January 1987 and Regional Vice President
in January 1993. Mr. Barber was elected Vice President-Sales
and Marketing in September 1993 and Senior Vice President-Sales and
Marketing in January 1998. In September 1999, Mr. Barber
was elected Executive Vice President-Global Sales. Effective January 1, 2008, Mr. Barber assumed
the role of President-Global Sales and Marketing.
Rosanne Esposito joined
the Company as its Director-U.S. Import Services in January 1996.
Ms. Esposito was promoted to Vice President in May 1997 and Senior
Vice President-Global Customs in May 2001. In May 2004,
Ms. Esposito was promoted to Executive Vice President-Global Customs.
8
Eugene K. Alger joined the Company in
October 1982. Mr. Alger was promoted to District Manager and
Regional Vice President of the Los Angeles office in May 1983. He
was elected Regional Vice President-Southwestern U.S. and Mexico Region in
January 1992, and Senior Vice President of North America in
September 1999.
Jean Claude Carcaillet
joined the Company as Managing Director-Australasia in August 1988.
Mr. Carcaillet was elected Senior Vice President-Australasia in
September 1997.
Philip M. Coughlin joined
the Company in October 1985. In August 1986, Mr. Coughlin was
promoted to District Manager.
Mr. Coughlin was elected Regional Manager for New England and Canada in
January 1991, Regional Vice President-Northeastern U.S. and Northern
Border in January 1992, and Senior Vice President of North America in
September 1999.
Roger A. Idiart joined
the Company as its Manager of Gateway Operations in December 1995.
Mr. Idiart was elected Vice President-Global Air Cargo in
January 1998, and Senior Vice President-Air Cargo in May 2001.
Charles J. Lynch joined
the Company in September 1984. Mr. Lynch was promoted to
Assistant Controller in July 1985 and Controller-Domestic Operations in
January 1989. Mr. Lynch was elected Corporate Controller in
January 1991 and Vice President-Corporate Controller in
January 1998. In May 2002, Mr. Lynch was elected Senior
Vice President-Corporate Controller.
Jeffrey S. Musser joined
the Company in February 1983. Mr. Musser was promoted to
District Manager in October 1989 and Regional Vice President in September
1999. Mr. Musser was elected Senior Vice President-Chief Information
Officer in January 2005.
Daniel R. Wall joined the
Company in March 1987. Mr. Wall was promoted to District
Manager in May 1992 and Global Director-Account Management in
March 2002. Mr. Wall was elected Vice President-ECMS in
January 2004 and Senior Vice President-Ocean Services in
September 2004.
Amy J. Tangeman joined
the Company in January 1997. Ms.
Tangeman was promoted to Assistant General Counsel in November 2001. In October 2006, Ms. Tangeman was elected
Vice-President-General Counsel and Secretary.
Regulation and
Security
With respect to the
Companys activities in the air transportation industry in the United States,
it is subject to regulation by the Transportation Security Administration of
the Department of Homeland Security as an indirect air carrier. The
Companys overseas offices and agents are licensed as airfreight forwarders in
their respective countries of operation. The Company is licensed in each
of its offices, or in the case of its newer offices, has made application for a
license as an airfreight forwarder by the International Air Transport
Association (IATA). IATA is a
voluntary association of airlines and air transport related entities which
prescribes certain operating procedures for airfreight forwarders acting as
agents for its members. The majority of the Companys airfreight
forwarding business is conducted with airlines which are IATA members.
The Company is licensed as a customs broker by Customs
and Border Protection (CBP) of the Department of Homeland Security in each
U.S. customs district in which it does business. All United States
customs brokers are required to maintain prescribed records and are subject to
periodic audits by CBP. In other jurisdictions in which the Company
performs clearance services, the Company is licensed by the appropriate
governmental authority. The Company
participates in various governmental supply chain security programs, such as
the Customs-Trade Partnership Against Terrorism (C-TPAT) in the United States
and additional security initiatives as they continue to be enacted by different
governments. In other jurisdictions in
which the Company performs clearance services, the Company is licensed by the
appropriate governmental authority.
The Company is
registered as an Ocean Transportation Intermediary
(OTI)
(sometimes
referred to as NVOCC-
N
on-
V
essel
O
wned
C
ommon
C
arrier)
by the Federal Maritime Commission (FMC). The FMC has
established certain qualifications for shipping agents, including certain
surety bonding requirements. The FMC is also responsible for the economic
regulation of OTI/NVOCC activity originating or terminating in the United
States. To comply with these economic regulations, vessel operators and
NVOCCs, such as EIO, are required to file tariffs electronically which
establish the rates to be charged for the movement of specified commodities
into and out of the United States. The FMC has the power to enforce these
regulations by assessing penalties.
The Company does not
believe that current United States and foreign governmental regulations impose
significant economic restraint upon its business operations. In general,
the Company conducts its business activities in each country through a
majority-owned subsidiary corporation that is organized and existing under the
laws of that country. However, the regulations of foreign governments can
impose barriers to the Companys ability to provide the full range of its
business activities in a wholly or majority United States-owned subsidiary.
For example, foreign ownership of a customs brokerage business is prohibited in
some jurisdictions
and less frequently the ownership of
the licenses required for freight forwarding and/or freight consolidation is
restricted to local entities. When the Company encounters this sort of
governmental restriction, it works to establish a legal structure that meets
the
9
requirements of the local regulations while also
giving the Company the substantive operating and economic advantages that would
be available in the absence of such regulation. This can be accomplished by
creating a joint venture or exclusive agency relationship with a qualified
local entity that holds the required license. In cases where the Company
has unilateral control over the assets and operations of the local entity,
notwithstanding the lack of technical majority ownership of common stock, the
Company consolidates the accounts of the local entity. In such cases,
consolidation is necessary to fairly present the financial position and results
of operations of the Company because of the existence of the parent-subsidiary
relationship by means other than record ownership of voting common stock.
The war on terror and
governments overriding concern for the safety of passengers and citizens who
import and/or export goods into and out of their respective countries has
resulted in a proliferation of cargo security regulations over the past several
years. While these cargo regulations have
already created a marked difference in the security arrangements required to
move shipments around the globe, regulations are expected to become more
stringent in the future. As governments
look for ways to minimize the exposure of their citizens to potential terror
related incidents, the Company and its competitors in the transportation
business may be required to incorporate security procedures within their scope
of services to a far greater degree than has been required in the past. The Company feels that increased security
requirements may involve further investments in technology and more
sophisticated screening procedures being applied to potential customers,
vendors and employees. While many of
these regulations have not been finalized at this time, it is the Companys
position that much of the increased costs of compliance with security
regulations will need to be passed through to those who are beneficiaries of
the Companys services.
Cargo Liability
When acting as an
airfreight consolidator, the Company assumes a carriers liability for lost or
damaged shipments. This legal liability is typically limited by contract to the
lower of the transaction value or the released value (17
S
pecial
D
rawing
R
ights per kilo unless the customer declares a higher value and pays a
surcharge), except if the loss or damage is caused by willful misconduct or in
the absence of an appropriate airway bill. The airline which the Company
utilizes to make the actual shipment is generally liable to the Company in the same
manner and to the same extent. When acting solely as the agent of the
airline or shipper, the Company does not assume any contractual liability for
loss or damage to shipments tendered to the airline.
When acting as an ocean
freight consolidator, the Company assumes a carriers liability for lost or
damaged shipments. This liability is typically limited by contract to the
lower of the transaction value or the released value ($500 per package or
customary freight unit unless the customer declares a higher value and pays a
surcharge). The steamship line which the Company utilizes to make the
actual shipment is generally liable to the Company in the same manner and to
the same extent. In its ocean freight forwarding and customs clearance operations,
the Company does not assume cargo liability.
When providing warehouse
and distribution services, the Company limits its legal liability by contract
and tariff to an amount generally equal to the lower of fair value or $0.50 per
pound with a maximum of $50 per lot which is defined as the smallest unit
that the warehouse is required to track. Upon payment of a surcharge for
warehouse and distribution services, the Company will assume additional
liability.
The Company maintains marine cargo insurance covering
claims for losses attributable to missing or damaged shipments for which it is
legally liable. The Company also maintains insurance coverage for the
property of others which is stored in Company warehouse facilities. This
insurance coverage is provided by a Vermont based insurance entity wholly owned
by the Company. The coverage is fronted and reinsured by a global
insurance company. The total risk retained by the Company in 2007 was
approximately $4 million, although actual and estimated losses are expected to
be less. In addition, the Company is
licensed as an insurance broker through its subsidiary, Expeditors Cargo
Insurance Brokers, Inc. and places stand alone insurance coverage for
other customers.
10
ITEM 1A RISK FACTORS
RISK
FACTORS
|
|
DISCUSSION
AND POTENTIAL SIGNIFICANCE
|
International Trade
|
|
The Company primarily
provides services to customers engaged in international commerce. Everything
that affects international trade has the potential to expand or contract the
Companys primary market. For example, international trade is influenced by:
|
|
|
·
|
currency exchange rate
and interest rate fluctuations;
|
|
|
·
|
changes in governmental
policies;
|
|
|
·
|
changes in and
application of international and domestic customs, trade and security
regulations;
|
|
|
·
|
wars, acts of
terrorism, and other conflicts;
|
|
|
·
|
natural disasters;
|
|
|
·
|
changes in consumer
attitudes regarding goods made in countries other than their own;
|
|
|
·
|
changes in the price
and readily available quantities of oil and other petroleum-related products;
and
|
|
|
·
|
increased global
concerns regarding environmental sustainability.
|
|
|
|
|
Third Party Vendors
|
|
The Company is a
non-asset based supplier of global logistics services. As a result, the
Company depends on a variety of asset-based third party vendors. The quality
and profitability of the Companys services depend upon effective selection,
management and discipline of third party vendors.
|
|
|
|
|
|
Predictability of
Results
|
|
The Company is not
aware of any accurate means of forecasting short-term customer requirements.
However, long-term customer satisfaction depends upon the Companys ability
to meet these unpredictable short-term customer requirements. Personnel
costs, the Companys single largest variable expense, are always less
flexible in the very near term as the Company must staff to meet uncertain
demand. As a result, short-term operating results could be disproportionately
affected.
|
|
|
|
|
|
Foreign Operations
|
|
The majority of the
Companys revenues and operating income come from operations conducted
outside the United States. To maintain a global service network, the Company
may be required to operate in hostile locations and in dangerous situations.
|
|
|
|
|
|
Key Personnel
|
|
The Company is a
service business. The quality of this service is directly related to the
quality of the Companys employees. Identifying, training and retaining key
employees is essential to continued growth and future profitability.
Continued loyalty to the Company will not be assured by contract.
|
|
|
|
|
|
Technology
|
|
Increasingly, the
Company must compete based upon the flexibility and sophistication of the
technologies utilized in performing its core businesses. Future results
depend upon the Companys success in the cost effective development and
integration of communication and information systems technologies.
|
|
|
|
|
|
Growth
|
|
To date, the Company
has relied primarily upon organic growth and has tended to avoid growth
through acquisition. Future results will depend upon the Companys ability to
continue to grow internally or to demonstrate the ability to successfully
identify and integrate non-dilutive acquisitions.
|
|
|
|
|
|
Regulatory Environment
|
|
As a publicly traded
corporation, the Company is affected by regulations from a number of sources.
The current business environment tends to stress the avoidance of risk
through regulation and oversight, the effect of which is likely to be
unforeseen costs and potentially unforeseen consequences.
In reaction to the
global war on terror, governments around the world are continuously enacting
or updating security regulations. The implementation of these regulations,
including deadlines and substantive requirements, is driven by political
urgencies rather than the industries realistic ability to comply. Failure to
timely comply may result in increased operating costs, restrictions on
operations and/or fines and penalties.
|
|
|
|
Litigation/Investigations
|
|
As a multinational
corporation, the Company is subject to formal or informal investigations or
litigation from governmental authorities in the countries in which it does
business. The Company is currently subject to, and is cooperating fully with,
an investigation by the U.S. Department of Justice (DOJ) of air cargo freight
forwarders. This investigation may require further management time and cause
the Company to incur substantial additional legal and related costs, which
could include fines and/or penalties if the DOJ concludes that the Company
has engaged in anti-competitive behavior. The Company may be subject to other
civil litigation arising from this investigation, including but not limited
to shareholder class action lawsuits and derivative claims made on behalf of
us. In addition, the Company has been named as a defendant in a Federal class
action lawsuit filed in New York and will incur additional costs related to
defending itself in these proceedings.
|
|
|
|
|
|
|
11
ITEM 1B UNRESOLVED
STAFF COMMENTS
Not applicable.
ITEM 2 PROPERTIES
The Company owns the
following properties:
Location
|
|
Nature of Property
|
|
|
|
United
States:
|
|
|
Seattle, Washington
|
|
Office buildings
|
Near Seattle-Tacoma
International Airport (in Washington)
|
|
Office building
|
Houston, Texas
|
|
Office and warehouse
|
Nassau County, New York
|
|
Office and warehouse
|
Middlesex County, New
Jersey
|
|
Office and warehouse
|
Near San Francisco
International Airport (in California)
|
|
Office and warehouse
|
Near Los Angeles
International Airport (in California)
|
|
Office and warehouse
|
Near OHare
International Airport (in Illinois)
|
|
Office and warehouse
|
Miami, Florida
|
|
Office, warehouse and
free trade zone*
|
|
|
|
Asia:
|
|
|
Kowloon, Hong Kong
|
|
Offices
|
Taipei, Taiwan
|
|
Office
|
Seoul, Korea
|
|
Office
|
Shanghai, China
|
|
Office building and
acreage
|
Near Beijing Airport
(in Beijing)
|
|
Acreage
|
|
|
|
Europe:
|
|
|
Brussels, Belgium
|
|
Office and warehouse
|
Dublin, Ireland
|
|
Office and warehouse
|
Cork, Ireland
|
|
Office and warehouse
|
Near Heathrow Airport
(in London, England)
|
|
Acreage
|
|
|
|
Latin
America:
|
|
|
Alajuela, Costa Rica
|
|
Office building
|
|
|
|
Middle
East:
|
|
|
Cairo, Egypt
|
|
Office and warehouse
|
*Company directly owns
50% with Cargo Ventures, LLC, a private, non-affiliated real estate development
company.
The
Company leases and maintains 69 additional offices and satellite locations in
the United States and 361 leased locations throughout the world, each located
close to an airport, ocean port, or on an important border crossing. The
majority of these facilities contain warehouse facilities. Lease terms
are either on a month-to-month basis or terminate at various times through
2019. See Note 6 to the Companys consolidated financial statements for
lease commitments. As an office matures, the Company will investigate the
possibility of building or buying suitable facilities. The Company believes that current leases can
be extended and that suitable alternative facilities are available in the
vicinity of each present facility should extensions be unavailable at the conclusion
of current leases.
ITEM 3 LEGAL
PROCEEDINGS
On October 10, 2007,
the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to
produce certain information and records relating to an investigation of alleged
anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a
law firm to assist in complying with the DOJs subpoena. They are also
assisting management in conducting a very rigorous self-review. As part of this process, the Company has met
with and continues to co-operate with the DOJ.
As of December 31, 2007, the Company had incurred approximately
$3.7 million of legal and associated costs.
The Company expects to incur additional costs during the course of this
ongoing investigation, which could include fines and/or penalties if the DOJ
concludes that the Company has engaged in anti-competitive behavior.
12
On
January 3, 2008, the Company was named as a defendant, with seven other of
the largest European and North American-based global logistics providers, in a Federal
antitrust class action lawsuit filed in New York. The complaint, which purports to be brought
on behalf of a class of customers (and has not yet been certified), alleges
that the defendants engaged in various forms of anti-competitive
practices. The Company believes that
these allegations are without merit and intends to vigorously defend itself.
The Company is involved
in other claims and lawsuits which arise in the ordinary course of business,
none of which currently, in managements opinion, will have a significant
effect on the Companys operations or financial position.
ITEM 4 SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART II
ITEM 5 MARKET FOR THE
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The
following table sets forth the high and low sale prices in the over-the-counter
market for the Companys Common Stock as reported by The NASDAQ Global Select
Market under the symbol EXPD.
|
|
Common Stock
|
|
|
|
Common Stock
|
|
Quarter
|
|
High
|
|
Low
|
|
Quarter
|
|
High
|
|
Low
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
First
|
|
$
|
48.050
|
|
$
|
38.310
|
|
First
|
|
$
|
43.640
|
|
$
|
32.825
|
|
Second
|
|
$
|
48.700
|
|
$
|
40.510
|
|
Second
|
|
$
|
56.810
|
|
$
|
42.310
|
|
Third
|
|
$
|
54.460
|
|
$
|
41.080
|
|
Third
|
|
$
|
58.320
|
|
$
|
37.360
|
|
Fourth
|
|
$
|
53.480
|
|
$
|
42.440
|
|
Fourth
|
|
$
|
48.990
|
|
$
|
39.790
|
|
There were 6,731 shareholders of record
as of February 7, 2008. Management estimates that there were
approximately 133,635 beneficial shareholders at that date.
The Board of Directors
declared semi-annual dividends during the two most recent fiscal years as
follows:
June 15, 2007
|
|
$.14
|
December 17, 2007
|
|
$.14
|
|
|
|
June 15, 2006
|
|
$.11
|
December 15, 2006
|
|
$.11
|
ISSUER PURCHASES OF EQUITY
SECURITIES
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased as
Part of a Publicly
Announced Plans or
Programs
|
|
Maximum
Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
October 1-31, 2007
|
|
2,066
|
|
$
|
49.91
|
|
2,066
|
|
16,306,310
|
|
November 1-30, 2007
|
|
109,054
|
|
$
|
49.39
|
|
109,054
|
|
16,359,460
|
|
December 1-31, 2007
|
|
337,111
|
|
$
|
47.39
|
|
337,111
|
|
16,090,540
|
|
Total
|
|
448,231
|
|
$
|
47.89
|
|
448,231
|
|
16,090,540
|
|
In November 1993, the Companys Board of
Directors authorized a Non-Discretionary Stock Repurchase Plan. This plan
was amended in February 2001 to increase the authorization to repurchase
up to 20,000,000 shares of the Companys common stock. This authorization
has no expiration date. This plan was disclosed in the Companys report
on Form 10-K filed March 31, 1995. In the fourth quarter of
2007, 114,718 shares were repurchased under the Non-Discretionary Stock
Repurchase Plan.
13
In November 2001,
under a Discretionary Stock Repurchase Plan, the Companys Board of Directors
authorized the repurchase of such shares as may be necessary to reduce the
issued and outstanding stock to 200,000,000 shares of common stock. The
maximum number of shares available for repurchase under this plan will increase
as the total number of outstanding shares increase. This authorization
has no expiration date. This plan was announced on November 13,
2001. In the fourth quarter of 2007, 333,513 shares were repurchased
under the Discretionary Stock Repurchase Plan. These discretionary
repurchases were made to limit the growth in the number of issued and
outstanding shares as a result of stock option exercises.
14
ITEM 6 SELECTED
FINANCIAL DATA
Financial Highlights
In thousands except per
share data
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,235,171
|
|
4,633,987
|
|
3,903,794
|
|
3,317,989
|
|
2,624,941
|
|
Net earnings
|
|
269,154
|
|
235,094
|
|
190,436
|
|
129,949
|
|
98,970
|
|
Diluted earnings per share
|
|
1.21
|
|
1.06
|
|
.86
|
|
.59
|
|
.46
|
|
Basic earnings per share
|
|
1.26
|
|
1.10
|
|
.89
|
|
.61
|
|
.47
|
|
Dividends declared and paid per share
|
|
.28
|
|
.22
|
|
.15
|
|
.11
|
|
.08
|
|
Working capital
|
|
764,944
|
|
632,691
|
|
589,460
|
|
521,544
|
|
383,614
|
|
Total assets
|
|
2,069,065
|
|
1,822,338
|
|
1,566,044
|
|
1,364,053
|
|
1,044,078
|
|
Shareholders equity
|
|
1,226,571
|
|
1,070,091
|
|
926,382
|
|
821,144
|
|
662,259
|
|
Diluted weighted
average shares
outstanding
|
|
221,800
|
|
222,223
|
|
220,230
|
|
220,117
|
|
216,228
|
|
Basic weighted
average shares
outstanding
|
|
213,315
|
|
213,455
|
|
213,555
|
|
212,768
|
|
209,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All share and per share
information have been adjusted to reflect a 2-for-1 stock split effected in
June, 2006.
Certain amounts for the
years 2003 through 2005 have been restated as required by the modified retrospective
method in connection with the implementation in 2006 of Statement of Financial
Accounting Standard No. 123R (Revised 2004), Share-Based Payment (SFAS
123R).
SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS UNDER SECURITIES
LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
From
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange
Commission. The words or phrases will likely result, are expected to, will
continue, is anticipated, estimate, project or similar expressions are
intended to identify forward-looking statements within the meaning of the
Securities Litigation Reform Act. Such statements are qualified in their
entirety by reference to and are accompanied by the discussion in Item 1A of
certain important factors that could cause actual results to differ materially
from such forward-looking statements.
The
risks included in Item 1A are not exhaustive. Furthermore, reference is
also made to other sections of this report which include additional factors
which could adversely impact the Companys business and financial
performance. Moreover, the Company operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time
and it is not possible for management to predict all of such risk factors, nor
can it assess the impact of all of such risk factors on the Companys business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Accordingly, forward-looking statements cannot be relied upon
as a guarantee of actual results.
Shareholders
should be aware that while the Company does, from time to time, communicate
with securities analysts, it is against the Companys policy to disclose to
such analysts any material non-public information or other confidential
commercial information. Accordingly, shareholders should not assume that
the Company agrees with any statement or report issued by any analyst
irrespective of the content of such statement or report. Furthermore, the
Company has a policy against issuing financial forecasts or projections or
confirming the accuracy of forecasts or projections issued by others.
Accordingly, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not the responsibility
of the Company.
ITEM 7 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Expeditors International
of Washington, Inc. is engaged in the business of global logistics
management, including international freight forwarding and consolidation, for
both air and ocean freight. The Company acts as a customs broker in all
domestic offices, and in many of its international offices. The Company
also provides additional services for its customers including value-added
distribution, purchase order management, vendor consolidation and other
logistics solutions. The Company does not compete for overnight courier
or small parcel business. The Company does not own or operate aircraft or
steamships.
15
International trade is
influenced by many factors, including economic and political conditions in the
United States and abroad, currency exchange rates, and United States and
foreign laws and policies relating to tariffs, trade restrictions, foreign investments,
taxation, regional and global conflicts. Periodically, governments
consider a variety of changes to current tariffs and trade restrictions.
The Company cannot predict which, if any, of these proposals may be adopted,
nor can the Company predict the effects the adoption of any such proposal will
have on the Companys business. Doing business in foreign locations also
subjects the Company to a variety of risks and considerations not normally
encountered by domestic enterprises. In addition to being influenced by
governmental policies concerning international trade, the Companys business
may also be affected by political developments and changes in government
personnel or policies in the nations in which it does business.
The Company derives its revenues
from three principal sources: 1) airfreight, 2) ocean freight, and 3)
customs brokerage and other services. These are the revenue categories
presented in the financial statements.
The Company is managed
along four geographic areas of responsibility: The Americas; Asia;
Europe, Africa, Near/Middle East and Indian Subcontinent (EMAIR); and
Australasia. Each area is divided into sub-regions which are composed of
operating units with individual profit and loss responsibility. The Companys
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 look at one geographic area and draw meaningful
conclusions as to its contribution to the Companys overall success on a
stand-alone basis.
The Companys operating
units share revenue using the same arms-length pricing methodologies the
Company uses when its offices transact business with independent agents.
The Companys strategy closely links compensation with operating unit
profitability. Individual success likely involves cooperation with other
operating units.
As a non-asset based
carrier, the Company does not own transportation assets. Rather, the
Company generates the major portion of its air and ocean freight revenues by
purchasing transportation services from direct (asset-based) carriers and
reselling those services to its customers. The difference between
the rate billed to customers (the sell rate), and the rate paid to the carrier
(the buy rate) is termed net revenue or yield. By consolidating
shipments from multiple customers and concentrating its buying power, the
Company is able to negotiate favorable buy rates from the direct carriers,
while at the same time offering lower sell rates than customers would otherwise
be able to negotiate themselves.
Customs brokerage and other
services involves providing services at destination, such as helping customers
clear shipments through customs by preparing required documentation,
calculating and providing for payment of duties and other taxes on behalf of
the customers as well as arranging for any required inspections by governmental
agencies, and arranging for delivery. This is a complicated
function requiring technical knowledge of customs rules and regulations in
the multitude of countries in which the Company has offices.
The Companys ability to
provide services to its customers is highly dependent on good working
relationships with a variety of entities including airlines, ocean steamship
lines, and governmental agencies. The significance of maintaining
acceptable working relationships with governmental agencies and asset-based
providers involved in global trade has gained increased importance as a result
of ongoing concern over terrorism. As each carrier labors to comply with
governmental regulations implementing security policies and procedures,
inherent conflicts emerge which can and do affect global trade to some
degree. A good reputation helps to develop practical working
understandings that will effectively meet security requirements while
minimizing potential international trade obstacles. The Company considers
its current working relationships with these entities to be satisfactory.
However, changes in space allotments available from carriers, governmental
deregulation efforts, modernization of the regulations governing customs
brokerage, and/or changes in governmental quota restrictions could affect the
Companys business in unpredictable ways.
Historically, the Companys
operating results have been subject to a seasonal trend when measured on a
quarterly basis. The first quarter has traditionally been the weakest and
the third and fourth quarters have traditionally been the strongest. This
pattern is the result of, or is influenced by, numerous factors including
climate, national holidays, consumer demand, economic conditions and a myriad
of other similar and subtle forces. In addition, this historical
quarterly trend has been influenced by the growth and diversification of the
Companys international network and service offerings. The Company cannot
accurately forecast many of these
factors nor can the Company estimate accurately the
relative influence of any particular factor and, as a result, there can be no
assurance that historical patterns, if any, will continue in future periods.
A significant portion of
the Companys revenues are derived from customers in retail industries whose
shipping patterns are tied closely to consumer demand, and from customers in
industries whose shipping patterns are dependent upon just-in-time production
schedules. Therefore, the timing of the Companys revenues are, to a
large degree, impacted by factors out of the Companys control, such as a
sudden change in consumer demand for retail goods and/or manufacturing
production delays. Additionally, many customers ship a significant
portion of their goods at or near the end of a quarter, and therefore, the
Company may not learn of a shortfall in
revenues until late in a quarter. To the extent
that a shortfall in revenues or earnings was not expected by securities
analysts, any such shortfall from levels predicted by securities analysts could
have an immediate and adverse effect on the trading price of the Companys
stock.
16
As further discussed
under liquidity and capital resources, total capital expenditures in 2008 are
expected to exceed $85 million.
In terms of the
opportunities, challenges and risks that management focused on in 2007, the
Company operates in 61 countries throughout the world in the competitive global
logistics industry and Company activities are tied directly to the global
economy. From the inception of the Company, management has believed that
the elements required for a successful global service organization can only be
assured through recruiting, training, and ultimately retaining superior
personnel. The Companys greatest challenge is now and always has been
perpetuating a consistent global culture which demands:
·
Total dedication, first and foremost, to providing
superior customer service;
·
Aggressive marketing of all of the
Companys service offerings;
·
Ongoing development of key employees and
management personnel via formal and informal means;
·
Creation of unlimited advancement opportunities for
employees dedicated to hard work, personal growth and continuous improvement;
·
Individual commitment to the
identification and mentoring of successors for every key position so that when
inevitable change is required, a qualified and well-trained internal candidate
is ready to step forward; and
·
Continuous identification, design and
implementation of system solutions, both technological and otherwise, to meet
and exceed the needs of our customers while simultaneously delivering tools to
make our employees more efficient and more effective.
The Company has
reinforced these values with a compensation system that rewards employees for
profitably managing the things they can control. There is no limit to how
much a key manager can be compensated for success. The Company
believes in a real world environment in every operating unit where
individuals are not sheltered from the profit implications of their
decisions. At the same time, the Company insists on continued focus on
such things as accounts receivable collection, cash flow management and credit
soundness in an attempt to insulate managers from the sort of catastrophic
errors that might end a career.
Any failure to perpetuate
this unique culture on a self-sustained basis throughout the Company, provides
a greater threat to the Companys continued success than any external force,
which would be largely beyond our control. Consequently, management
spends the majority of its time focused on creating an environment where
employees can learn and develop while also building systems and taking preventative
action to reduce exposure to negative events. The Company strongly
believes that it is nearly impossible to predict events that, in the aggregate,
could have a positive or a negative impact on future operations. As a
result our focus is on building and maintaining a global culture of
well-trained employees and managers that are prepared to identify and react to
subtle changes as they develop and thereby help the Company adapt and thrive as
major trends emerge.
Critical Accounting Estimates
A summary of the Companys
significant accounting policies can be found in Note 1 to the consolidated
financial statements in this Annual Report.
Management believes that
the nature of the Companys business is such that there are few, if any,
complex challenges in accounting for operations.
While judgments and
estimates are a necessary component of any system of accounting, the Companys
use of estimates is limited primarily to the following areas:
·
accounts receivable valuation;
·
the useful lives of long-term assets;
·
the accrual of costs related to ancillary services the
Company provides;
·
establishment of adequate insurance liabilities for
the portion of the freight related exposure which the Company has self-insured;
·
accrual of tax expense on an interim basis; and
·
calculation of share-based
compensation expense
These estimates, other
than the calculation of share-based compensation expense, are not highly
uncertain and have not historically been subject to significant change. Management
believes that the methods utilized in all of these areas are non-aggressive in
approach and consistent in application. Management believes that there
are limited, if any, alternative accounting principles or methods which could
be applied to the Companys transactions. While the use of estimates
means that actual future results may be different from those contemplated by
the estimates, the Company believes that alternative principles and methods
used for making such estimates, other than the calculation of share-based
compensation expense, would not produce materially different results than those
reported.
17
As described in Note 1 to the consolidated financial
statements in this report, the Company accounts for share-based compensation in
accordance with SFAS 123R. This accounting standard requires the recognition of
compensation expense based on an estimate of the fair value of options granted
to employees and directors under the Companys stock option and employee stock
purchase plans. This expense is recorded
on a straight-line basis over the option vesting periods.
Determining the appropriate option pricing model to
use to estimate stock compensation expense requires judgment. Any option
pricing model requires assumptions that are subjective and these assumptions
also require judgment. Examples include assumptions about long-term stock price
volatility, employee exercise patterns, pre-vesting option forfeitures,
post-vesting option cancellations, and the future interest rates and dividend
yields.
The Company uses the Black-Scholes model for
estimating the fair value of stock options.
Refer to Note 4E in the consolidated financial statements for the
assumptions used for grants issued during the years ended December 31,
2007, 2006 and 2005. The assumptions
used by the Company for estimating the fair value of options granted under SFAS
123R were developed on a basis consistent with assumptions used for valuing
previous grants.
Management believes that these assumptions are
appropriate, based upon the requirements of SFAS 123R, the guidance included in
Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB
107) and the companys historical and currently expected future experience.
Looking to future events, management has been strongly influenced by historical
patterns which may not be valid predictors of future developments and any
future deviation may be material.
The Companys expected volatility assumptions are
based on the historical volatility of the Companys stock. The expected life
assumption is primarily based on historical employee exercise patterns and
employee post-vesting termination behavior. The risk-free interest rate for the
expected term of the option is based on the corresponding yield curve in effect
at the time of grant for U.S. Treasury bonds having the same term as the
expected life of the option, i.e. a ten year bond rate is used for valuing an
option with a ten year expected life. The expected dividend yield is based on
the Companys historical experience. The forfeiture rate used to calculate
compensation expense is primarily based on historical pre-vesting employee
forfeiture patterns.
The use of different assumptions would result in
different amounts of stock compensation expense. Keeping all other variables
constant, the indicated change in each of the assumptions below increases or
decreases the fair value of an option (and the resulting stock compensation
expense), as follows:
Assumption
|
|
Change in assumption
|
|
Impact of fair value of options
|
|
Expected volatility
|
|
Higher
|
|
Higher
|
|
Expected life of option
|
|
Higher
|
|
Higher
|
|
Risk-free interest rate
|
|
Higher
|
|
Higher
|
|
Expected dividend yield
|
|
Higher
|
|
Lower
|
The fair value of an option is more significantly
impacted by changes in the expected volatility and expected life assumptions.
The pre-vesting forfeitures assumption is ultimately adjusted to the actual
forfeiture rate. Therefore, changes in the forfeitures assumption would not
impact the total amount of expense ultimately recognized over the vesting
period. Different forfeitures assumptions would only impact the timing of
expense recognition over the vesting period. Estimated forfeitures will be
reassessed in subsequent periods and may change based on new facts and
circumstances.
Recent Accounting
Pronouncements
In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157), supplemented by FASB Financial Staff Position
157-1 and 2. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is required to
and plans to adopt the provisions of SFAS 157 beginning in the first quarter of
2008, except for certain nonfinancial assets and liabilities for which it will
adopt the provisions of SFAS 157 in the first quarter of 2009. The
Company does not expect the adoption of SFAS 157 to have a material impact on
the Companys consolidated financial condition or results of operations.
18
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). Under the provisions of SFAS 159,
companies may choose to account for eligible financial instruments, warranties
and insurance contracts at fair value on a contract-by-contract basis.
Changes in fair value will be recognized in earnings each reporting
period. SFAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company is required to and plans to adopt the
provisions of SFAS 159 beginning in the first quarter of 2008. The Company does
not expect the adoption of SFAS 159 to have a material impact on the Companys
consolidated financial condition or results of operations.
In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160
changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 modifies the accounting for changes in a parents ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company is required to and plans
to adopt the provisions of SFAS 160 beginning in the first quarter of 2009.
While the Company is still assessing the impact of the adoption of SFAS 160, it
had minority interest of $17,208 and $16,275 as of December 31, 2007 and December 31,
2006, respectively, that it expects will be reclassified to equity under the
provisions of SFAS 160.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is required to and plans to adopt the provisions of
SFAS 141R beginning in the first quarter of 2009. The Company is currently
assessing the impact of the adoption of SFAS 141R. The impact will depend upon
the acquisitions, if any, the Company consummates after the effective date.
19
Results of
Operations
The following table shows
the consolidated net revenues (revenues less transportation expenses)
attributable to the Companys principal services and the Companys expenses for
2007, 2006, and 2005, expressed as percentages of net revenues.
Management believes that net revenues are a better measure than total revenues
of the relative importance of the Companys principal services since total
revenues earned by the Company as a freight consolidator include the carriers
charges to the Company for carrying the shipment whereas revenues earned by the
Company in its other capacities include only the commissions and fees actually
earned by the Company.
|
|
2007
|
|
2006
|
|
2005
|
|
In thousands
|
|
Amount
|
|
Percent of net
revenues
|
|
Amount
|
|
Percent of net
revenues
|
|
Amount
|
|
Percent of net
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airfreight
|
|
$
|
528,148
|
|
36
|
%
|
$
|
470,638
|
|
36
|
%
|
$
|
391,773
|
|
37
|
%
|
Ocean freight and ocean services
|
|
346,616
|
|
24
|
|
322,580
|
|
25
|
|
260,261
|
|
25
|
|
Customs brokerage and other services
|
|
578,197
|
|
40
|
|
497,742
|
|
39
|
|
409,588
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
1,452,961
|
|
100
|
|
1,290,960
|
|
100
|
|
1,061,622
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overhead expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related costs
|
|
791,879
|
|
55
|
|
701,824
|
|
54
|
|
596,804
|
|
56
|
|
Other
|
|
237,682
|
|
16
|
|
214,020
|
|
17
|
|
193,765
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total overhead expenses
|
|
1,029,561
|
|
71
|
|
915,844
|
|
71
|
|
790,569
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
423,400
|
|
29
|
|
375,116
|
|
29
|
|
271,053
|
|
26
|
|
Other income, net
|
|
26,273
|
|
2
|
|
20,548
|
|
2
|
|
15,644
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes and minority interest
|
|
449,673
|
|
31
|
|
395,664
|
|
31
|
|
286,697
|
|
27
|
|
Income tax expense
|
|
179,815
|
|
12
|
|
160,661
|
|
13
|
|
89,365
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings before minority interest
|
|
269,858
|
|
19
|
|
235,003
|
|
18
|
|
197,332
|
|
19
|
|
Minority interest
|
|
(704
|
)
|
|
|
91
|
|
|
|
(6,896
|
)
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
269,154
|
|
19
|
%
|
$
|
235,094
|
|
18
|
%
|
$
|
190,436
|
|
18
|
%
|
2007 compared with 2006
Airfreight net revenues
in 2007 increased 12% compared with 2006 primarily because of an increase in
airfreight volumes. Global airfreight tonnages in 2007 increased 8%
compared with 2006. Airfreight yields expanded 83 basis points (a 4% increase)
as compared with 2006. The Companys
North American export airfreight net revenues increased 7% in 2007 compared to 2006, primarily the result of increased
market share attributable to focused sales activity. Airfreight net
revenues from Asia and from Europe increased 17% and 9%,
respectively, for 2007 compared with 2006. These changes are the result of
market pricing and tonnage increases of 9%
from Asia and 3% from Europe. Management attributes these tonnage increases
to effective sales efforts.
Ocean freight
volumes, measured in terms of forty-foot container equivalent units (FEUs),
increased 15% over 2006 while ocean freight and ocean services net revenues
increased 7% during the same
period. The difference between these two
rates is a result of a year-over-year decrease in ocean freight yields of 173
basis points (an 8% decrease) which were partially offset by year-over-year
increases in the Companys fee-based order management and ocean forwarding
business. The primary reason for the decline in ocean freight yields was
due to direct carrier cost increases that market conditions would not allow to
be passed on in a timely manner.
The Companys
North American ocean freight net revenues increased approximately 5% in 2007 compared to 2006. This was due to an increase in container
traffic, primarily from Asia. Increases in ocean freight net revenues
were primarily a result of increases in the order management and ocean
forwarding business, which were an outcome of continued marketing efforts and
customer service initiatives. Ocean freight net revenues for Asia and
Europe increased 6% and 10%, respectively, in 2007 as compared to 2006.
These increases were also a result of continued marketing efforts and customer
service initiatives.
20
Customs brokerage and
other services net revenues increased 16% in 2007 as compared with 2006.
Consolidation within the customs brokerage market has also contributed to this
increase as customers seek out customs brokers with more sophisticated
computerized capabilities critical to an overall logistics management program. In addition, increased emphasis on regulatory
compliance continues to benefit the Companys customs brokerage offerings.
Salaries and related
costs increased 13% in 2007 compared to 2006 as a result of (1) the
Companys increased hiring of sales, operations, and administrative personnel
in existing and new offices to accommodate increases in business activity and (2) increased
compensation levels.
The effect of including
stock-based compensation expense in salaries and related costs for 2007 and
2006 are as follows:
|
|
Years ended December 31,
|
|
In thousands
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Salaries and related costs
|
|
$
|
791,879
|
|
$
|
701,824
|
|
|
|
|
|
|
|
As a % of net revenue
|
|
54.5
|
%
|
54.4
|
%
|
|
|
|
|
|
|
Stock compensation expense
|
|
$
|
44,917
|
|
$
|
41,739
|
|
|
|
|
|
|
|
As a % of salaries and related costs
|
|
5.7
|
%
|
5.9
|
%
|
|
|
|
|
|
|
As a % of net revenue
|
|
3.1
|
%
|
3.2
|
%
|
Historically, the
relatively consistent relationship between salaries and net revenues is the
result of a compensation philosophy that has been maintained since the
inception of the Company: offer a modest base salary and the opportunity to
share in a fixed and determinable percentage of the operating profit of the
business unit controlled by each key employee. Using this compensation
model, changes in individual compensation will occur in proportion to changes
in Company profits. Management believes that the growth in revenues, net
revenues and net earnings for 2007 are a result of the incentives inherent in
the Companys compensation program.
Other overhead expenses
increased 11% in 2007 as compared with 2006 as rent expense, communications
expense, process improvement and training expenses, and other costs expanded to
accommodate the Companys growing operations. Other overhead expenses as
a percentage of net revenues decreased
1% in 2007 as compared with 2006.
Other income, net,
increased 28% in 2007 as compared with 2006. Due to higher interest rates on
higher average cash balances and short-term investments during 2007, interest
income increased by $4 million for the year ended December 31, 2007.
The Company pays income taxes in the United States and
other jurisdictions, as well as other taxes which are typically included in
costs of operations. The Companys consolidated effective income tax rate
in 2007 was 40.0% as compared to 40.6% for 2006.
2006 compared with 2005
Airfreight net revenues
in 2006 increased 20% compared with
2005 primarily because of an increase in airfreight volumes. Global
airfreight tonnages in 2006 increased 18%
compared with 2005. Airfreight yields remained relatively constant at 21%
for 2006 as compared to 2005. The Companys North American export
airfreight net revenues increased 19%
in 2006 compared to 2005, primarily the result of increased market share
attributable to focused sales activity. Airfreight net revenues from Asia
and from Europe increased 22% and
18%, respectively, for 2006 compared with 2005. These changes are the result of
market pricing and tonnage increases of 19% from Asia and 16% from Europe. Management attributes these tonnage increases
to effective sales efforts.
Ocean freight volumes,
measured in terms of forty-foot container equivalents (FEUs), increased 20% over 2005 while ocean freight and
ocean services net revenues increased 24%
during the same period. Ocean freight yields increased 2% and 21% in 2006
as compared to 2005.
The Company continued its
focus of offering competitive rates to customers at the retail level, while
leveraging freight volumes to obtain favorable rates from carriers at the
wholesale level. The Companys North American ocean freight net revenues
increased 28% in 2006 compared to
2005. Ocean freight net revenues from Asia increased 24% and from Europe increased 12% for 2006 compared with 2005. The
global increases in ocean freight net revenue are primarily a result of market
share expansion.
21
Customs brokerage and
other services net revenues increased 22%
in 2006 as compared with 2005. Management believes this increase is
attributable to increased market share as a result of the Companys reputation
for providing high quality service and increased opportunities within the
customs brokerage market. These opportunities arise as customers seek out
customs brokers with sophisticated computerized capabilities. In
addition, the Companys customs brokerage offerings have benefited from
increased emphasis on regulatory compliance.
Salaries and related
costs increased 18% in 2006 compared to 2005 as a result of (1) the
Companys increased hiring of sales, operations, and administrative personnel
in existing and new offices to accommodate increases in business activity and (2) increased
compensation levels. As previously noted, the Company adopted SFAS 123R
using the modified retrospective application method and has restated all
periods presented to include compensation expense for all unvested stock
options and share awards beginning with the first period restated. Accordingly, salaries and related costs for
the year ended December 31, 2005 have been increased to include
compensation expense for the fair value of unvested stock options.
The decline in salaries
and related costs as a percentage of net revenue for 2006 as compared with the
same period for 2005, can be attributed to leveraging increased business volumes
with improved productivity and increasing overall efficiency through
technological advances. The effect of
including stock-based compensation expense in salaries and related costs for
2006 and 2005 are as follows:
|
|
Years ended December 31,
|
|
In thousands
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Salaries and related costs
|
|
$
|
701,824
|
|
$
|
596,804
|
|
|
|
|
|
|
|
As a % of net revenue
|
|
54.4
|
%
|
56.2
|
%
|
|
|
|
|
|
|
Stock compensation expense
|
|
$
|
41,739
|
|
$
|
33,457
|
|
|
|
|
|
|
|
As a % of salaries and related costs
|
|
5.9
|
%
|
5.6
|
%
|
|
|
|
|
|
|
As a % of net revenue
|
|
3.2
|
%
|
3.2
|
%
|
Historically, the
relatively consistent relationship between salaries and net revenues is the
result of a compensation philosophy that has been maintained since the
inception of the Company: offer a modest base salary and the opportunity to
share in a fixed and determinable percentage of the operating profit of the
business unit controlled by each key employee.
Other overhead expenses
increased 10% in 2006 as compared
with 2005 as rent expense, communications expense, quality and training
expenses, and other costs expanded to accommodate the Companys growing
operations. Other overhead expenses as a percentage of net revenues
decreased 1% in 2006 as compared
with 2005. Management believes that this was significant as it reflects
the successful achievement of ongoing cost containment objectives at the branch
level.
Other income, net,
increased 31% in 2006 as compared
with 2005. Due to higher interest rates on higher average cash balances and
short-term investments during 2006, interest income increased by $7 million for the year ended December 31,
2006.
The Company pays income
taxes in the United States and other jurisdictions, as well as other taxes
which are typically included in costs of operations. The Companys
consolidated effective income tax rate in 2006 of 40.6% increased when compared
with the 31.2% rate in 2005. The lower tax rate in 2005 is primarily the
result of the Company adopting a plan under Internal Revenue Code (IRC) 965,
which was added by the American Jobs Creation Act. In accordance with IRC
965, the Company recorded a one-time tax benefit of $22 million in the fourth
quarter of 2005. In order to qualify for this credit, the Company adopted
a plan which required qualified capital expenditures of approximately $105
million. The Company completed the
required capital expenditures during 2006.
Additionally, income tax expense in 2005 has been restated to include
the tax benefit related to stock-based compensation expense recorded as a
result of applying the requirements of SFAS 123R under the modified
retrospective method. Although a tax
benefit related to stock-based compensation expense is recorded for
non-qualified stock options at the time the related compensation expense is
recognized, the tax benefit received for disqualifying dispositions of
incentive stock options cannot be anticipated.
The higher consolidated effective income tax rate for 2006 as compared
to 2005 is partially the result of a smaller tax benefit received for
disqualifying dispositions of incentive stock options during 2006 than was
realized 2005.
22
Currency and Other Risk
Factors
International air/ocean
freight forwarding and customs brokerage are intensively competitive and are expected
to remain so for the foreseeable future. There are a large number of
entities competing in the international logistics industry; however, the
Companys primary competition is confined to a relatively small number of
companies within this group. While there is currently a marked trend
within the industry toward consolidation into large firms with multinational
offices and agency networks, regional and local broker/forwarders remain a
competitive force.
Historically, the primary
competitive factors in the international logistics industry have been price and
quality of service, including reliability, responsiveness, expertise,
convenience, and scope of operations. The Company emphasizes quality
customer service and believes that its prices are competitive with those of
others in the industry. Customers have exhibited a trend towards more
sophisticated and efficient procedures for the management of the logistics
supply chain by embracing strategies such as just-in-time inventory management.
The Company believes that this trend has resulted in customers using fewer
service providers with greater technological capacity and consistent global
coverage. Accordingly, sophisticated computerized customer service
capabilities and a stable worldwide network have become significant factors in
attracting and retaining customers.
Developing these systems
and a worldwide network has added a considerable indirect cost to the services
provided to customers. Smaller and middle-tier competitors, in general,
do not have the resources available to develop customized systems and a
worldwide network. As a result, there is a still a trend of consolidation
currently taking place in the industry. Management expects that this
trend toward consolidation will continue for the short- to medium-term.
The nature of the Companys
worldwide operations necessitates the Company dealing with a multitude of
currencies other than the U.S. dollar. This results in the Company being
exposed to the inherent risks of the international currency markets and
governmental interference. Some of the countries where the Company
maintains offices and/or agency relationships have strict currency control
regulations which influence the Companys ability to hedge foreign currency
exposure. The Company tries to compensate for these exposures by
accelerating international currency settlements among its offices or
agents. The Company enters into foreign currency hedging transactions
only in limited locations where there are regulatory or commercial limitations
on the Companys ability to move
money freely around the world or the short-term
financial outlook in any country is such that hedging is the most
time-sensitive way to avoid short-term exchange losses. Any such hedging
activity during 2007, 2006 and 2005 was insignificant. Net foreign
currency gains realized in 2007 were $1,300. Net foreign currency losses realized in 2006
were $321.
Net foreign currency gains realized in 2005 were $862. The
Company had no foreign currency derivatives outstanding at December 31,
2007 and 2006.
Sources of Growth
During 2007, the Company
opened 7 full-service offices (
·
) and 5 satellite offices (+), as follows:
ASIA
|
|
EUROPE
|
|
LATIN
AMERICA
|
|
NORTH
AMERICA
|
|
NEAR/MIDDLE
EAST
|
|
SOUTH
PACIFIC
|
Batam, Indonesia+
|
|
Krakow, Poland+
|
|
Guatemala City,
Guatemala
·
|
|
Knoxville, Tennessee+
|
|
Abu Dhabi,
United Arab Emirates
·
|
|
Christchurch,
New Zealand+
|
Chongqing, PRC
·
|
|
Maastricht,
The Netherlands+
|
|
|
|
|
|
Amman, Jordan
·
|
|
|
Hangzhou, PRC
·
|
|
|
|
|
|
|
|
Doha, Qatar
·
|
|
|
Yantai, PRC
·
|
|
|
|
|
|
|
|
|
|
|
Chongqing, Peoples
Republic of China (PRC) and Yantai, PRC converted from satellite offices to
full-service offices during 2007.
Acquisitions -
Historically, growth through aggressive acquisition has proven to be a
challenge for many of the Companys competitors and typically involves the
purchase of significant goodwill, the value of which can be realized in large
measure only by retaining the customers and profit margins of the acquired
business. As a result, the Company has pursued a strategy emphasizing
organic growth supplemented by certain strategic acquisitions, where future
economic benefit significantly exceeds the goodwill recorded in the
transaction.
Internal Growth -
Management believes that a comparison of same store growth is critical in the
evaluation of the quality and extent of the Companys internally generated
growth. This same store analysis isolates the financial contributions
from offices that have been included in the Companys operating results for at
least one full year. The table below presents same store comparisons on
a year-over-year basis for the years ended December 31, 2007, 2006 and
2005.
Same store comparisons
for the years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Net revenues
|
|
12
|
%
|
21
|
%
|
16
|
%
|
Operating income
|
|
13
|
%
|
38
|
%
|
28
|
%
|
23
Liquidity and Capital
Resources
The Companys principal
source of liquidity is cash generated from operating activities. Net cash
provided by operating activities for the year ended December 31, 2007 was
$313 million, as compared with $333 million for 2006. This $20 million
decrease is principally due to an increase in accounts receivable which
outpaced the increase in accounts payable and increased net earnings.
Additionally, this decrease in net cash provided by operating activities was impacted
by a smaller increase in taxes payable, net of prepaid taxes.
The Companys business is
subject to seasonal fluctuations. Cash flow fluctuates as a result of
this seasonality. Historically, the first quarter shows an excess of
customer collections over customer billings. This results in positive
cash flow. The increased activity
associated with peak season (typically commencing late
second or early third quarter 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.
As a customs broker, the
Company makes significant 5-10 business day cash advances for certain of its
customers obligations such as the payment of duties to the Customs and Border
Protection of the Department of Homeland Security. These advances are
made as an accommodation for a select group of credit-worthy customers.
Cash advances are a pass through and are not recorded as a component of
revenue and expense. The billings of such advances to customers are
accounted for as a direct increase in accounts receivable to the customer and a
corresponding increase in accounts payable to governmental customs
authorities. As a result of these pass through billings, the conventional
Days Sales Outstanding or DSO calculation does not directly measure collection
efficiency.
Cash used in investing
activities for the year ended December 31, 2007 was $88 million, as
compared with $143 million during the same period of 2006. The largest
use of cash in investing activities is cash paid for capital
expenditures. As a non-asset based provider of integrated logistics
services, the Company does not own any physical means of transportation (i.e.,
airplanes, ships, trucks, etc.). However, the Company does have need, on
occasion, to purchase buildings to house staff and to facilitate the staging of
customers freight. The Company routinely invests in technology, office
furniture and equipment and leasehold improvements.
For the year ended December 31, 2007, the Company
made capital expenditures of $83 million as compared with $139 million for the
same period in 2006. Capital expenditures in 2007 included $35 million
for the purchase of 48,300 square feet of office space in Kowloon, Hong
Kong. Capital expenditures in 2006 included $67 million for the
acquisition of real estate and office/warehouse facilities in Miami, Florida
and real estate development expenditures of $22 million related to projects in
Seattle, Washington and Houston, Texas. Other capital expenditures in 2007 and 2006
related primarily to investments in technology, office furniture and equipment
and leasehold improvements. Total
capital expenditures in 2008 are currently estimated to be $85 million. This
includes normal capital expenditures as noted above, plus additional real
estate acquisitions and development, although to a lesser extent than in the
past few years. The Company expects to
finance capital expenditures in 2008 with cash.
Cash used in financing
activities for the year ended December 31, 2007 was $175 million as
compared with $160 million for the same period in 2006. The Company uses
the proceeds from stock option exercises to repurchase the Companys stock on
the open market. In 2007, the Company continued its policy of
repurchasing stock to prevent growth in issued and outstanding shares as a
result of stock option exercises. The increase in cash used in financing
activities for the year ended December 31, 2007 compared with the same
period in 2006 is primarily the result of this policy. During 2007 and
2006 the net use of cash in financing activities included the payment of
dividends of $.28 per share and $.22 per share, respectively.
At December 31,
2007, working capital was $765 million, including cash and short-term
investments of $575 million. The Company had no long-term debt at December 31,
2007.
The Company maintains
international and domestic unsecured bank lines of credit. At December 31,
2007, the United States facility totaled $50 million and the international bank
lines of credit-totaled $19 million. In addition, the Company maintains a
bank facility with its U.K. bank for $14 million which is available for
issuances of standby letters of credit. At December 31, 2007, the
Company had no amounts outstanding on these lines of credit, but was
contingently liable for $74 million from standby letters of credit and
guarantees. The standby letters of credit and guarantees relate to
obligations of the Companys foreign subsidiaries for credit extended in the
ordinary course of business by direct carriers, primarily airlines, and for
duty and tax deferrals available from governmental entities responsible for
customs and value-added-tax (VAT)
taxation. The total underlying amounts due and payable for transportation
and governmental excises are properly recorded as obligations in the books of
the respective foreign subsidiaries, and there would be no need to record
additional expense in the unlikely event the parent company were to be required
to perform.
24
At December 31,
2007, the Companys contractual obligations and other commitments are as
follows:
|
|
Payments Due by Period
|
|
In thousands
|
|
Total
|
|
Less than
1 year
|
|
1 - 3
years
|
|
3 - 5
years
|
|
After
5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
78,389
|
|
$
|
37,382
|
|
$
|
30,829
|
|
$
|
7,493
|
|
$
|
2,685
|
|
Unconditional purchase obligations
|
|
263,273
|
|
263,273
|
|
|
|
|
|
|
|
Construction
obligations
|
|
17,578
|
|
15,366
|
|
2,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
359,240
|
|
$
|
316,021
|
|
$
|
33,041
|
|
$
|
7,493
|
|
$
|
2,685
|
|
The Company enters into
short-term agreements with asset-based providers reserving space on a
guaranteed basis. The pricing of these obligations varies to some degree
with market conditions. The Company only enters into agreements that
management believes the Company can fulfill with relative ease.
Historically, the Company has not paid for guaranteed space that it has not
used. Management believes, in line with historical experience, committed
purchase obligations outstanding as of December 31, 2007, will be
fulfilled during 2008 in the Companys ordinary course of business.
|
|
|
|
Amount of Commitment Expiration
Per Period
|
|
In thousands
|
|
Total
amounts
committed
|
|
Less than
1 year
|
|
1 - 3
years
|
|
3 - 5
years
|
|
After
5 years
|
|
Other commitments:
|
|
|
|
|
|
|
|
|
|
|
|
International lines of credit
|
|
$
|
19,067
|
|
$
|
19,067
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Standby letters of credit
|
|
74,498
|
|
69,409
|
|
4,814
|
|
182
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
93,565
|
|
$
|
88,476
|
|
$
|
4,814
|
|
$
|
182
|
|
$
|
93
|
|
The Company has a
Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds
of stock option exercises. As of December 31, 2007, the Company had
repurchased and retired 16,906,236 shares of common stock at an average price
of $15.94 per share over the period from 1994 through 2007. During 2007,
1,498,763 shares were repurchased at an average price of $43.78 per share.
The Company has a
Discretionary Stock Repurchase Plan under which Management is allowed to
repurchase such shares as may be necessary to reduce the issued and outstanding
stock to 200,000,000 shares of common stock. As of December 31,
2007, the Company had repurchased and retired 12,948,579 shares of common stock
at an average price of $30.87 per share over the period from 2001 through
2007. During 2007, 3,196,383 shares were repurchased at an average price
of $44.42. These discretionary repurchases were made to limit the growth
in the number of issued and outstanding shares as a result of stock option
exercises.
Management believes that
the Companys current cash position, bank financing arrangements, and operating
cash flows will be sufficient to meet its capital and liquidity requirements
for the foreseeable future, including meeting any contingent liabilities
related to standby letters of credit and other obligations.
In some cases, the Companys ability to repatriate
funds from foreign operations may be subject to foreign exchange
controls. At December 31, 2007, cash and cash equivalent balances of
$395 million were held by the Companys non-United States subsidiaries, of
which $50 million was held in banks in the United States.
Impact of Inflation
To date, the Companys
business has not been adversely affected by inflation. Direct carrier
rate increases could occur over the short- to medium-term period. Due to
the high degree of competition in the market place, these rate increases can
lead to an erosion in the Companys margins. As the Company is not
required to purchase or maintain extensive property and equipment and has not
otherwise incurred substantial interest rate-sensitive indebtedness, the
Company currently has limited direct exposure to increased costs resulting from
increases in interest rates.
Off-Balance Sheet Arrangements
As of December 31,
2007, the Company did not have any material off-balance-sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
25
ITEM 7A QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to
market risks in the ordinary course of its business. These risks are
primarily related to foreign exchange risk and changes in short-term interest
rates. The potential impact of the Companys exposure to these
risks is presented below:
Foreign Exchange Risk
The Company conducts
business in many different countries and currencies. The Companys
business often results in revenue billings issued in a country and currency
which differs from that where the expenses related to the service are
incurred. In the ordinary course of business, the Company creates
numerous intercompany transactions. This brings a market risk to the
Companys earnings.
Foreign exchange rate
sensitivity analysis can be quantified by estimating the impact on the Companys
earnings as a result of hypothetical changes in the value of the U.S. dollar,
the Companys reporting currency, relative to the other currencies in which the
Company transacts business. All other things being equal, an average 10%
weakening of the U.S. dollar, throughout the year ended December 31, 2007,
would have had the effect of raising operating income approximately $36
million. An average 10% strengthening of the U.S. dollar, for the same
period, would have the effect of reducing operating income approximately $29
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 depress imports into the United States over some relevant
period of time, but the exact effect of this change cannot be quantified
without making speculative assumptions.
As of December 31,
2007, the Company had approximately $6 million of net unsettled intercompany
transactions. The Company currently does not use derivative financial
instruments to manage foreign currency risk and only enters into foreign
currency hedging transactions in limited locations where regulatory or
commercial limitations restrict the Companys ability to move money
freely. Any such hedging activity throughout the year ended December 31,
2007, was insignificant. Net foreign currency gains realized in 2007 were
$1,300. Net foreign currency losses realized in 2006 were $321. Net
foreign currency gains realized in 2005 were $862. The Company had no foreign currency
derivatives outstanding at December 31, 2007 and 2006. The Company
instead follows a policy of accelerating international currency settlements to
manage foreign exchange risk relative to intercompany billings. The
majority of intercompany billings are resolved within 30 days and intercompany
billings arising in the normal course of business are fully settled within 90
days.
Interest Rate Risk
At December 31,
2007, the Company had cash and cash equivalents and short-term investments of
$575 million, of which $1 million was invested at various short-term market
interest rates. There were no short-term borrowings at December 31,
2007. A hypothetical change in the interest rate of 10% would not have a
significant impact on the Companys earnings.
In managements opinion,
there has been no material change in the Companys market risk exposure between
2006 and 2007.
26
ITEM 8 FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The following documents
are filed on the pages listed below, as part of Part II, Item 8 of
this report.
ITEM 9 CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A CONTROLS AND
PROCEDURES
Evaluation of Controls
and Procedures
The Company carried out
an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15(e))
as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective.
Changes in Internal
Controls
There were no changes in
the Companys internal control over financial reporting that occurred during
the most recent fiscal quarter that have materially affected or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
Management Report on
Internal Control Over Financial Reporting
The management of
Expeditors International of Washington, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting
as required by the Sarbanes-Oxley Act of 2002 and as defined in Exchange Act Rule 13a-15(f).
The Companys system of internal control over financial reporting is designed
to provide reasonable assurance to the Companys management and Board of
Directors regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors
of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect on the financial
statements.
A system of internal
control can provide only reasonable, not absolute assurance, that the
objectives of the control system are met. Our management, including our
Chief Executive Officer and Chief Financial Officer, conducted an assessment of
the design and operating effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Based on this assessment,
our management has concluded that, as of December 31, 2007, our internal
control over financial reporting was effective.
KPMG LLP, an independent
registered public accounting firm, has issued an attestation report on the
Companys internal control over financial reporting as of December 31,
2007, which is included herein at F-2.
ITEM 9B OTHER
INFORMATION
Not applicable.
27
PART III
ITEM 10 DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required
by this item is incorporated by reference to information under the caption Proposal
1 - Election of Directors and to the information under the caption Section 16(a) Beneficial
Ownership Reporting Compliance in the Companys definitive Proxy Statement for
its annual meeting of shareholders to be held on May 7, 2008. See
also Part I - Item 1 - Executive Officers of the Registrant.
Audit Committee and Audit
Committee Financial Expert
Our Board has a
separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of
the Exchange Act. The members of the Audit Committee are James J. Casey,
Dan P. Kourkoumelis, Michael J. Malone, and John W. Meisenbach. Our Board
has determined that James J. Casey, Chairman of the Audit Committee, is an
audit committee financial expert as defined by Item 401(h) of Regulation
S-K of the Exchange Act and that each member of the Audit Committee is
independent within the meaning of Rule 4200(a)(15) of the National
Association of Securities Dealers listing standards.
Code of Ethics and
Governance Guidelines
We have adopted a
Code of Business Conduct
that applies to
all Company employees including, of course, our principal executive officer,
principal financial officer and principal accounting officer. The
Code of Business Conduct
is posted on our
website at
http://www.investor.expeditors.com
.
We will post any amendments to the
Code of
Business Conduct
at that location. No amendments were made in
2007. In the unlikely event that the Board of Directors approves any sort
of waiver to the
Code of Business Conduct
for our executive officers or directors, information concerning such waiver
will also be posted at that location. No waivers were granted in
2007. In addition to posting information regarding amendments and waivers
on our website, the same information will be included in a Current Report on Form 8-K
within four business days following the date of the amendment or waiver, unless
website posting of such amendments or waivers is permitted by the rules of
The Nasdaq Stock Market, LLC.
ITEM 11 EXECUTIVE
COMPENSATION
The information required
by this item is incorporated by reference to information under the captions Proposal
1 Election of Directors and Executive Compensation in the Companys
definitive Proxy Statement for its annual meeting of shareholders to be held on
May 7, 2008.
ITEM 12 SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required
by this item is incorporated by reference to information under the captions Principal
Holders of Voting Securities and Proposal 1 - Election of Directors in the
Companys definitive Proxy Statement for its annual meeting of shareholders to
be held on May 7, 2008.
28
Securities Authorized for
Issuance under Equity Compensation Plans
The following table
provides information as of December 31, 2007, regarding compensation plans
under which equity securities of the Company are authorized for issuance.
Equity Compensation Plan
Information
as of December 31,
2007
|
|
|
|
|
|
Number of Securities Available
|
|
|
|
Number of Securities to be
|
|
|
|
for Future Issuance, Other Than
|
|
|
|
Issued Upon Exercise of
|
|
Weighted-Average Exercise
|
|
Securities to be Issued Upon
|
|
|
|
Outstanding Options,
|
|
Price of Outstanding Options,
|
|
Exercise of All Outstanding Options,
|
|
Plan Category
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Approved by Security
Holders
|
|
19,274,808
|
|
$
|
23.03
|
|
1,203,652
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Not Approved by Security
Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
19,274,808
|
|
$
|
23.03
|
|
1,203,652
|
|
ITEM 13 CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required
by this item is incorporated by reference to information under the captions Proposal
1 Election of Directors, Executive Compensation and Certain Transactions
in the Companys definitive Proxy Statement for its annual meeting of
shareholders to be held on May 7, 2008.
ITEM 14 PRINCIPAL
ACCOUNTING FEES AND SERVICES
The information required
by this item is incorporated by reference to information under the caption Relationship
with Independent Public Accountants in the Companys definitive Proxy
Statement for its annual meeting of shareholders to be held on May 7,
2008.
29
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Schedules
are omitted because of the absence of conditions under which they are required
or because the required information is given in the consolidated financial
statements or notes thereto.
30
3.
EXECUTIVE COMPENSATION PLANS AND
ARRANGEMENTS
The
following list is a subset of the list of exhibits described below and contains
all compensatory plans, contracts or arrangements in which any director or
executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1)
|
|
Form of Employment
Agreement executed by the Companys Chairman and Chief Executive Officer. See
Exhibit 10.23.
|
|
|
|
(2)
|
|
Form of Employment
Agreement executed by the Companys President and Chief Operating Officer and
certain of the Companys executive officers. See Exhibit 10.24.
|
|
|
|
(3)
|
|
The Companys Amended
1985 Stock Option Plan. See Exhibit 10.4.
|
|
|
|
(4)
|
|
Form of Stock
Option Agreement used in connection with options granted under the Companys
Amended 1985 Stock Option Plan. See Exhibit 10.5.
|
|
|
|
(5)
|
|
The Companys Amended
1993 Directors Non-Qualified Stock Option Plan. See Exhibit 10.39.
|
|
|
|
(6)
|
|
Form of Stock
Option Agreement used in connection with options granted under the Companys
1993 Directors Non-Qualified Stock Option Plan. See Exhibit 10.9.
|
|
|
|
(7)
|
|
The Companys Amended
1997 Non-Qualified and Incentive Stock Option Plan. See Exhibit 10.40.
|
|
|
|
(8)
|
|
Form of Stock
Option Agreement used in connection with Non-Qualified options granted under
the Companys 1997 Non-Qualified and Incentive Stock Option Plan. See
Exhibit 10.30.
|
|
|
|
(9)
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 1997 Non-Qualified and Incentive Stock Option Plan. See
Exhibit 10.31.
|
|
|
|
(10)
|
|
The Companys 1997
Executive Incentive Compensation Plan. See Exhibit 10.32.
|
|
|
|
(11)
|
|
Form of Executive
Incentive Compensation Plan Award Certification used in connection with the
awards granted under the Companys 1997 Executive Incentive Compensation
Plan. See Exhibit 10.33.
|
|
|
|
(12)
|
|
Form of Executive
Incentive Compensation Plan Award Agreement used in connection with
establishing the terms and conditions of an award under the Companys 1997
Executive Incentive Compensation Plan. See Exhibit 10.34.
|
|
|
|
(13)
|
|
The Companys 2002
Employee Stock Purchase Plan. See Exhibit 10.42.
|
|
|
|
(14)
|
|
The Companys 2005
Stock Option Plan. See Exhibit 10.45.
|
|
|
|
(15)
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2005 Incentive Stock Option Plan. See Exhibit 10.46.
|
|
|
|
(16)
|
|
The Companys 2006
Stock Option Plan. See Exhibit 10.47.
|
|
|
|
(17)
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2006 Incentive Stock Option Plan. See Exhibit 10.48.
|
|
|
|
(18)
|
|
The Companys 2007
Stock Option Plan. See Exhibit 10.49.
|
|
|
|
(19)
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2007 Incentive Stock Option Plan. See Exhibit 10.50.
|
31
(b) EXHIBITS
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
|
3.1
|
|
The Companys Restated
Articles of Incorporation and the Articles of Amendment thereto dated
December 9, 1993. (Incorporated by reference to Exhibit 3.1 to
Form 10-K, filed on or about March 31, 1995.)
|
|
|
|
3.1.1
|
|
Articles of Amendment
to the Restated Articles of Incorporation dated November 12, 1996.
(Incorporated by reference to Exhibit 3.1.1 to Form 10-K, filed on
or about March 31, 1997.)
|
|
|
|
3.1.2
|
|
Articles of Amendment
to the Restated Articles of Incorporation dated May 20, 1999.
(Incorporated by reference to Exhibit 3.1.2 to Form 10-K, filed on
or about March 28, 2003.)
|
|
|
|
3.1.3
|
|
Articles of Amendment
to the Restated Articles of Incorporation dated June 12, 2002.
(Incorporated by reference to Exhibit 3.1.3 to Form 10-K, filed on
or about March 28, 2003.)
|
|
|
|
3.2
|
|
The Companys Amended
and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to
Form 10-Q, filed on or about August 9, 2007.)
|
|
|
|
10.4
|
|
The Companys Amended
1985 Stock Option Plan. (Incorporated by reference to Exhibit 10.14 to
Form 10-K, filed on or about March 28, 1991.)
|
|
|
|
10.5
|
|
Form of Stock
Option Agreement used in connection with options granted under the Companys
Amended 1985 Stock Option Plan. (Incorporated by reference to
Exhibit 10.15 to Form 10-K, filed on or about March 28, 1991.)
|
|
|
|
10.9
|
|
Form of Stock
Option Agreement used in connection with options granted under the Companys
1993 Directors Non-Qualified Stock Option Plan. (Incorporated by reference
to Exhibit 10.9 to Form 10-K, filed on or about March 28,
1994.)
|
|
|
|
10.18
|
|
Plan and Agreement of
Reorganization, dated as of January 1, 1984, between the Company and the
individual shareholders of Fons Pte. Ltd. (Incorporated by reference to
Exhibit 2.5 to Registration Statement No. 2-91224, filed on
May 21, 1984.)
|
|
|
|
10.19
|
|
Plan and Agreement of
Reorganization, dated as of January 1, 1984, among the Company, EIO
Investment Ltd., Wong Hoy Leung, Chiu Chi Shing, and James Li Kou Wang.
(Incorporated by reference to Exhibit 2.6 to Registration Statement
No. 2-91224, filed on May 21, 1984.)
|
|
|
|
10.23
|
|
Form of Employment
Agreement executed by the Companys Chairman and Chief Executive Officer
dated November 2, 1994. (Incorporated by reference to Exhibit 10.23
to Form 10-K, filed on or about March 31, 1995.)
|
|
|
|
10.24
|
|
Form of Employment
Agreement executed by the Companys President and Chief Operating Officer and
certain of the Companys executive officers dated November 2, 1994.
(Incorporated by reference to Exhibit 10.24 to Form 10-K, filed on
or about March 31, 1995.)
|
|
|
|
10.30
|
|
Form of Stock
Option Agreement used in connection with Non-Qualified options granted under
the Companys 1997 Non-Qualified and Incentive Stock Option Plan.
(Incorporated by reference to Exhibit 10.30 to Form 10-K, filed on
or about March 31, 1998.)
|
|
|
|
10.31
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 1997 Non Qualified and Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10.31 to Form 10-K, filed on or about
March 31, 1998.)
|
|
|
|
10.32
|
|
The Companys 1997
Executive Incentive Compensation Plan. (Incorporated by reference to Appendix
B of the Companys Notice of Annual Meeting of Shareholders and Proxy
Statement pursuant to Regulation 14A filed on or about March 24, 1997.)
|
32
10.33
|
|
Form of Executive
Incentive Compensation Plan Award Certification used in connection with the
awards granted under the Companys 1997 Executive Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.33 to Form 10-K,
filed on or about March 31, 1998.)
|
|
|
|
10.34
|
|
Form of Executive
Incentive Compensation Plan Award Agreement used in connection with
establishing the terms and conditions of an award under the Companys 1997
Executive Incentive Compensation Plan. (Incorporated by reference to
Exhibit 10.34 to Form 10-K, filed on or about March 31, 1998.)
|
|
|
|
10.39
|
|
The Companys Amended
1993 Directors Non-Qualified Stock Option Plan. (Incorporated by reference
to Appendix B of the Companys Notice of Annual Meeting of Shareholders and
Proxy Statement pursuant to Regulation 14A filed on or about March 28, 2001.)
|
|
|
|
10.39.1
|
|
Amendment to Amended
1993 Directors Non-Qualified Stock Option Plan (Incorporated by reference to
Exhibit 10.39.1 to Form 10-Q filed on or about August 9,
2007.)
|
|
|
|
10.40
|
|
The Companys Amended
1997 Non-Qualified and Incentive Stock Option Plan. (Incorporated by
reference to Appendix C of the Companys Notice of Annual Meeting of
Shareholders and Proxy Statement pursuant to Regulation 14A filed on or about
March 28, 2001.)
|
|
|
|
10.42
|
|
The Companys 2002
Employee Stock Purchase Plan. (Incorporated by reference to Appendix B of the
Companys Notice of Annual Meeting of Shareholders and Proxy Statement
pursuant to Regulation 14A filed on or about March 30, 2007.)
|
|
|
|
10.45
|
|
The Companys 2005
Stock Option Plan. (Incorporated by reference to Appendix A of the Companys
Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A filed on or about March 31, 2005.)
|
|
|
|
10.46
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2005 Incentive Stock Option Plan. (Incorporated by reference to
Exhibit 10.46 to Form 10-K filed on or about March 1, 2007.)
|
|
|
|
10.47
|
|
The Companys 2006
Stock Option Plan. (Incorporated by reference to Appendix A of the Companys
Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A filed on or about March 31, 2006.)
|
|
|
|
10.48
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2006 Incentive Stock Option Plan. (Incorporated by reference to
Exhibit 10.46 to Form 10-K filed on or about March 1, 2007.)
|
|
|
|
10.49
|
|
The Companys 2007
Stock Option Plan. (Incorporated by reference to Appendix A of the Companys
Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A filed on or about March 30, 2007.)
|
|
|
|
10.50
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2007 Incentive Stock Option Plan.
|
|
|
|
21.1
|
|
Subsidiaries of the
Registrant.
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32
|
|
Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe
Sarbanes-Oxley Act of 2002.
|
33
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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.
Date: February 29,
2008
|
|
|
|
|
|
|
EXPEDITORS
INTERNATIONAL OF
|
|
WASHINGTON,
INC.
|
|
|
|
|
By:
|
/s/ R. JORDAN GATES
|
|
|
R. Jordan Gates
|
|
|
President and Chief
Operating Officer
(Principal Financial
and Accounting Officer)
|
34
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on February 29, 2008.
Signature
|
|
Title
|
|
|
|
/s/ Peter J. Rose
|
|
Chairman of the Board
and Chief Executive Officer
|
(Peter J. Rose)
|
|
(Principal Executive
Officer) and Director
|
|
|
|
/s/ R. Jordan Gates
|
|
President and Chief
Operating Officer
|
(R. Jordan Gates)
|
|
(Principal Financial
and Accounting Officer) and Director
|
|
|
|
/s/ James Li Kou Wang
|
|
President-Asia and
Director
|
(James Li Kou Wang)
|
|
|
|
|
|
/s/ James J. Casey
|
|
Director
|
(James J. Casey)
|
|
|
|
|
|
/s/ Dan P. Kourkoumelis
|
|
Director
|
(Dan P. Kourkoumelis)
|
|
|
|
|
|
/s/ John W. Meisenbach
|
|
Director
|
(John W. Meisenbach)
|
|
|
|
|
|
/s/ Michael J. Malone
|
|
Director
|
(Michael J. Malone)
|
|
|
35
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
COMPRISING ITEM 8
ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
Report of Independent Registered Public Accounting
Firm
The Board of Directors
and Shareholders
Expeditors International
of Washington, Inc.:
We have audited the
accompanying consolidated balance sheets of Expeditors International of
Washington, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of earnings, shareholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007.
These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Expeditors International of
Washington, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Expeditors International of Washington, Inc.s
internal control over financial reporting as of December 31, 2007, based
on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 29,
2008 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
|
|
|
Seattle,
Washington
|
February 29,
2008
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
and Shareholders
Expeditors International
of Washington, Inc.:
We have audited
Expeditors International of Washington, Inc.s internal control over
financial reporting as of December 31, 2007, based on criteria established
in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Expeditors International of
Washington, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying
Management Report on Internal Control Over Financial Reporting under Item
9A. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our
audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion,
Expeditors International of Washington, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Expeditors International of
Washington, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of earnings, shareholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007 and our report dated February 29, 2008
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
|
|
|
Seattle,
Washington
|
February 29,
2008
|
F-2
Consolidated
Balance Sheets
In thousands except share
data
December 31,
|
|
2007
|
|
2006
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
574,599
|
|
511,358
|
|
Short-term investments
|
|
674
|
|
578
|
|
Accounts receivable, less allowance for doubtful
accounts of $14,830 in 2007 and $13,454 in 2006
|
|
933,519
|
|
811,486
|
|
Deferred Federal and state income taxes
|
|
8,278
|
|
7,490
|
|
Other
|
|
17,627
|
|
10,925
|
|
Total current
assets
|
|
1,534,697
|
|
1,341,837
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
Land
|
|
178,834
|
|
176,690
|
|
Buildings and leasehold improvements
|
|
337,095
|
|
283,846
|
|
Furniture, fixtures, equipment and purchased
software
|
|
180,661
|
|
158,673
|
|
Construction in progress
|
|
11,072
|
|
5,054
|
|
Vehicles
|
|
4,453
|
|
3,679
|
|
|
|
712,115
|
|
627,942
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
214,223
|
|
178,695
|
|
Property and equipment, net
|
|
497,892
|
|
449,247
|
|
Goodwill, net
|
|
7,927
|
|
7,927
|
|
Other intangibles, net
|
|
7,832
|
|
7,584
|
|
Other assets, net
|
|
20,717
|
|
15,743
|
|
|
|
$
|
2,069,065
|
|
1,822,338
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
613,108
|
|
544,028
|
|
Accrued expenses, primarily salaries and related
costs
|
|
129,669
|
|
122,081
|
|
Federal, state, and foreign income taxes
|
|
26,976
|
|
43,036
|
|
Total current
liabilities
|
|
769,753
|
|
709,145
|
|
|
|
|
|
|
|
Deferred Federal and state income taxes
|
|
55,533
|
|
26,827
|
|
|
|
|
|
|
|
Minority interest
|
|
17,208
|
|
16,275
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
Preferred stock,
|
|
|
|
|
|
par value $.01
per share
|
|
|
|
|
|
Authorized
2,000,000 shares; none issued
|
|
|
|
|
|
Common stock,
|
|
|
|
|
|
par value $.01
per share
|
|
|
|
|
|
Authorized
320,000,000 shares;
issued and
outstanding 212,996,776 shares at December 31, 2007 and
213,080,466
shares at December 31, 2006
|
|
2,130
|
|
2,131
|
|
Additional paid-in capital
|
|
50,006
|
|
119,582
|
|
Retained earnings
|
|
1,143,464
|
|
934,058
|
|
Accumulated other comprehensive income
|
|
30,971
|
|
14,320
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
1,226,571
|
|
1,070,091
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
$
|
2,069,065
|
|
1,822,338
|
|
See accompanying notes to consolidated financial statements.
Certain 2006 amounts have been reclassified to conform to the 2007
presentation.
F-3
Consolidated
Statements of Earnings
In thousands except share
data
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
Airfreight
|
|
$
|
2,407,582
|
|
2,229,545
|
|
1,827,009
|
|
Ocean freight and ocean
services
|
|
1,820,558
|
|
1,553,048
|
|
1,374,197
|
|
Customs brokerage and other services
|
|
1,007,031
|
|
851,394
|
|
702,588
|
|
Total revenues
|
|
5,235,171
|
|
4,633,987
|
|
3,903,794
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
Airfreight consolidation
|
|
1,879,434
|
|
1,758,907
|
|
1,435,236
|
|
Ocean freight consolidation
|
|
1,473,942
|
|
1,230,468
|
|
1,113,936
|
|
Customs brokerage and other services
|
|
428,834
|
|
353,652
|
|
293,000
|
|
Salaries and related costs
|
|
791,879
|
|
701,824
|
|
596,804
|
|
Rent and occupancy costs
|
|
67,676
|
|
61,627
|
|
56,438
|
|
Depreciation and amortization
|
|
39,303
|
|
35,448
|
|
30,888
|
|
Selling and promotion
|
|
38,735
|
|
35,050
|
|
29,892
|
|
Other
|
|
91,968
|
|
81,895
|
|
76,547
|
|
Total operating
expenses
|
|
4,811,771
|
|
4,258,871
|
|
3,632,741
|
|
Operating income
|
|
423,400
|
|
375,116
|
|
271,053
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
Interest income
|
|
22,341
|
|
18,020
|
|
11,415
|
|
Interest expense
|
|
45
|
|
(198
|
)
|
(313
|
)
|
Other, net
|
|
3,887
|
|
2,726
|
|
4,542
|
|
Other income,
net
|
|
26,273
|
|
20,548
|
|
15,644
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
449,673
|
|
395,664
|
|
286,697
|
|
Income tax expense
|
|
179,815
|
|
160,661
|
|
89,365
|
|
Net earnings
before minority interest
|
|
269,858
|
|
235,003
|
|
197,332
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
(704
|
)
|
91
|
|
(6,896
|
)
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
269,154
|
|
235,094
|
|
190,436
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.21
|
|
1.06
|
|
.86
|
|
Basic earnings per share
|
|
$
|
1.26
|
|
1.10
|
|
.89
|
|
Dividends declared and paid per common share
|
|
$
|
0.28
|
|
|
0.22
|
|
|
0.15
|
|
Weighted average diluted shares outstanding
|
|
221,799,868
|
|
222,223,312
|
|
220,230,176
|
|
Weighted average basic shares outstanding
|
|
213,314,761
|
|
213,454,579
|
|
213,555,102
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
Certain 2006 and
2005 amounts have been reclassified to conform to the 2007 presentation.
F-4
Consolidated
Statements of Shareholders Equity
and
Comprehensive Income
In
thousands except share data
Years ended December 31, 2007, 2006
and 2005
|
|
|
|
Additional
paid-in
capital
|
|
Retained earnings
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Total
|
|
|
Common stock
|
Shares
|
|
Par value
|
Balance at December 31, 2004
|
|
213,287,906
|
|
$
|
2,133
|
|
178,734
|
|
628,591
|
|
11,686
|
|
821,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
3,612,592
|
|
36
|
|
27,118
|
|
|
|
|
|
27,154
|
|
Issuance of shares under stock purchase plan
|
|
699,968
|
|
7
|
|
14,049
|
|
|
|
|
|
14,056
|
|
Shares repurchased
under provisions of stock
repurchase plans
|
|
(4,373,424
|
)
|
(44
|
)
|
(85,820
|
)
|
(40,988
|
)
|
|
|
(126,852
|
)
|
Stock compensation expense
|
|
|
|
|
|
33,457
|
|
|
|
|
|
33,457
|
|
Tax benefits from stock plans
|
|
|
|
|
|
13,367
|
|
|
|
|
|
13,367
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
190,436
|
|
|
|
190,436
|
|
Unrealized losses
on securities, net of tax of
$117
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
(117
|
)
|
Foreign currency
translation adjustments, net
of tax of $7,650
|
|
|
|
|
|
|
|
|
|
(14,208
|
)
|
(14,208
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
176,111
|
|
Dividends paid ($.15 per share)
|
|
|
|
|
|
|
|
(32,055
|
)
|
|
|
(32,055
|
)
|
Balance at December 31, 2005
|
|
213,227,042
|
|
$
|
2,132
|
|
180,905
|
|
745,984
|
|
(2,639
|
)
|
926,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
3,053,425
|
|
31
|
|
32,268
|
|
|
|
|
|
32,299
|
|
Issuance of shares under stock purchase plan
|
|
730,814
|
|
7
|
|
17,008
|
|
|
|
|
|
17,015
|
|
Shares repurchased
under provisions of stock
repurchase plans
|
|
(3,930,815
|
)
|
(39
|
)
|
(175,744
|
)
|
|
|
|
|
(175,783
|
)
|
Stock compensation expense
|
|
|
|
|
|
41,739
|
|
|
|
|
|
41,739
|
|
Tax benefits from stock plans
|
|
|
|
|
|
23,406
|
|
|
|
|
|
23,406
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
235,094
|
|
|
|
235,094
|
|
Unrealized gains
on securities, net of tax of $0
|
|
|
|
|
|
|
|
|
|
61
|
|
61
|
|
Foreign currency
translation adjustments, net
of tax of $9,015
|
|
|
|
|
|
|
|
|
|
16,898
|
|
16,898
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
252,053
|
|
Dividends paid ($.22 per share)
|
|
|
|
|
|
|
|
(47,020
|
)
|
|
|
(47,020
|
)
|
Balance at December 31, 2006
|
|
213,080,466
|
|
$
|
2,131
|
|
119,582
|
|
934,058
|
|
14,320
|
|
1,070,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
3,978,908
|
|
40
|
|
43,138
|
|
|
|
|
|
43,178
|
|
Issuance of shares under stock purchase plan
|
|
632,548
|
|
6
|
|
21,801
|
|
|
|
|
|
21,807
|
|
Shares repurchased
under provisions of stock
repurchase plans
|
|
(4,695,146
|
)
|
(47
|
)
|
(207,537
|
)
|
|
|
|
|
(207,584
|
)
|
Stock compensation expense
|
|
|
|
|
|
44,917
|
|
|
|
|
|
44,917
|
|
Tax benefits from stock plans
|
|
|
|
|
|
28,105
|
|
|
|
|
|
28,105
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
269,154
|
|
|
|
269,154
|
|
Unrealized gains
on securities, net of tax of
$28
|
|
|
|
|
|
|
|
|
|
44
|
|
44
|
|
Reclassification
adjustment for realized gain, net of tax $286
|
|
|
|
|
|
|
|
|
|
(443
|
)
|
(443
|
)
|
Foreign currency
translation adjustments, net
of tax of $9,264
|
|
|
|
|
|
|
|
|
|
17,050
|
|
17,050
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
285,805
|
|
Dividends paid ($.28 per share)
|
|
|
|
|
|
|
|
(59,748
|
)
|
|
|
(59,748
|
)
|
Balance at December 31, 2007
|
|
212,996,776
|
|
$
|
2,130
|
|
50,006
|
|
1,143,464
|
|
30,971
|
|
1,226,571
|
|
See accompanying notes to consolidated financial statements.
All share and per share amounts have been adjusted for the 2-for-1 stock
split effective June 2006.
Certain 2006 amounts have been reclassified to conform to the 2007
presentation.
F-5
Consolidated
Statements of Cash Flows
In thousands
Years
ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Operating Activities:
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
269,154
|
|
235,094
|
|
190,436
|
|
Adjustments to
reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Provision for
losses on accounts receivable
|
|
940
|
|
1,197
|
|
1,313
|
|
Deferred income
tax expense (benefit)
|
|
18,991
|
|
4,172
|
|
(3,700
|
)
|
Excess tax
benefits from stock plans
|
|
(28,105
|
)
|
(23,406
|
)
|
(13,367
|
)
|
Stock
compensation expense
|
|
44,917
|
|
41,739
|
|
33,457
|
|
Depreciation and
amortization
|
|
39,303
|
|
35,448
|
|
30,888
|
|
Gain on sale of
assets
|
|
(1,053
|
)
|
(182
|
)
|
(897
|
)
|
Amortization of
other intangible assets
|
|
1,483
|
|
1,369
|
|
1,422
|
|
Minority
interest in earnings of consolidated entities
|
|
704
|
|
(91
|
)
|
6,896
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase in
accounts receivable
|
|
(84,950
|
)
|
(96,414
|
)
|
(95,015
|
)
|
Increase in
accounts payable and accrued expenses
|
|
46,881
|
|
85,012
|
|
94,826
|
|
Increase in
income taxes payable, net
|
|
4,673
|
|
48,392
|
|
20,580
|
|
Other
|
|
(353
|
)
|
957
|
|
237
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
312,585
|
|
333,287
|
|
267,076
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
Increase in short-term investments
|
|
(10
|
)
|
(419
|
)
|
(12
|
)
|
Purchase of property and equipment
|
|
(82,786
|
)
|
(139,464
|
)
|
(90,781
|
)
|
Proceeds from sale of property and equipment
|
|
504
|
|
397
|
|
1,428
|
|
Prepayment on long-term land lease
|
|
(2,820
|
)
|
(1,761
|
)
|
|
|
Other
|
|
(2,859
|
)
|
(1,260
|
)
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(87,971
|
)
|
(142,507
|
)
|
(90,767
|
)
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
Repayments of short-term debt, net
|
|
|
|
|
|
(2,057
|
)
|
Net distributions to minority interests
|
|
(316
|
)
|
(10,024
|
)
|
(436
|
)
|
Proceeds from issuance of common stock
|
|
64,985
|
|
49,314
|
|
41,210
|
|
Repurchases of common stock
|
|
(207,584
|
)
|
(175,783
|
)
|
(126,852
|
)
|
Excess tax benefits from stock plans
|
|
28,105
|
|
23,406
|
|
13,367
|
|
Dividends paid
|
|
(59,748
|
)
|
(47,020
|
)
|
(32,055
|
)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(174,558
|
)
|
(160,107
|
)
|
(106,823
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
13,185
|
|
16,791
|
|
(14,575
|
)
|
Increase in cash and cash equivalents
|
|
63,241
|
|
47,464
|
|
54,911
|
|
Cash and cash equivalents at beginning of year
|
|
511,358
|
|
463,894
|
|
408,983
|
|
Cash and cash equivalents at end of year
|
|
$
|
574,599
|
|
511,358
|
|
463,894
|
|
|
|
|
|
|
|
|
|
Interest and Taxes Paid:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
83
|
|
194
|
|
253
|
|
Income taxes
|
|
146,353
|
|
103,715
|
|
62,176
|
|
See
accompanying notes to consolidated financial statements.
Certain 2006 and 2005 amounts have been reclassified to conform to the
2007 presentation.
F-6
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of Presentation
Expeditors International
of Washington, Inc. (the Company) is a global logistics company
operating through a worldwide network of offices, international service centers
and exclusive or non-exclusive agents. The Companys customers include
retailing and wholesaling, electronics, and manufacturing companies around the
world. The Company grants credit upon approval to customers.
International trade is
influenced by many factors, including economic and political conditions in the
United States and abroad, currency exchange rates, and United States and
foreign laws and policies relating to tariffs, trade restrictions, foreign
investments and taxation. Periodically, governments consider a variety of
changes to current tariffs and trade restrictions. The Company cannot
predict which, if any, of these proposals may be adopted, nor can the Company
predict the effects adoption of any such proposal will have on the Companys
business. Doing business in foreign locations also subjects the Company
to a variety of risks and considerations not normally encountered by domestic
enterprises. In addition to being affected by governmental policies concerning
international trade, the Companys business may also be affected by political
developments and changes in government personnel or policies in the nations in
which it does business.
The consolidated
financial statements include the accounts of the Company and its subsidiaries
stated in U.S. dollars, the Companys reporting currency. In addition,
the consolidated financial statements also include the accounts of operating
entities where the Company maintains a parent-subsidiary relationship through
unilateral control over assets and operations together with responsibility for
payment of all liabilities, notwithstanding a lack of technical majority
ownership of the subsidiary common stock.
All significant
intercompany accounts and transactions have been eliminated in consolidation.
All dollar amounts in the
notes are presented in thousands except for share data.
B.
Cash Equivalents
All highly liquid
investments with a maturity of three months or less at date of purchase are
considered to be cash equivalents.
C.
Short-term Investments
Short-term investments
are designated as available-for-sale and cost approximates market at December 31,
2007 and 2006.
D.
Accounts Receivable
The Company maintains an
allowance for doubtful accounts, which is reviewed at least monthly for
estimated losses resulting from the inability of its customers to make required
payments for services. Additional allowances may be necessary in the
future if the ability of its customers to pay deteriorates. The Company has recorded accounts receivable
allowances in the amounts of $14,830, $13,454 and $12,777 as of December 31,
2007, 2006 and 2005, respectively.
Additions and write-offs have not been significant in any of these
years.
E.
Long-Lived Assets, Depreciation and Amortization
Property and equipment
are recorded at cost and are depreciated or amortized on the straight-line
method over the shorter of the assets estimated useful lives or lease terms.
Useful lives for major categories of property and equipment are as follows:
Buildings
|
|
28 to 40 years
|
Furniture, fixtures, equipment and purchased
software
|
|
3 to 5 years
|
Vehicles
|
|
3 to 5 years
|
Expenditures for
maintenance, repairs, and renewals of minor items are charged to earnings as
incurred. Major renewals and improvements are capitalized. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in income for the period.
F-7
Effective January 1,
2002, the Company ceased to amortize goodwill. Goodwill is recorded net of
accumulated amortization of $765 at December 31, 2007 and 2006. For
the years ended December 31, 2007 and 2006, the Company performed the
required annual impairment test during the fourth quarter and determined that
no impairment had occurred
.
Other intangibles consist
principally of payments made to purchase customer lists of agents in countries
where the Company established its own presence by opening offices. Other
intangible assets are amortized over their estimated useful lives for periods
up to 15 years and are reviewed for impairment if an event or circumstance
indicates that an impairment loss may have been incurred.
Balances as of December 31
are as follows:
|
|
2007
|
|
2006
|
|
Other intangibles
|
|
$
|
21,585
|
|
19,689
|
|
Less accumulated amortization
|
|
(13,753
|
)
|
(12,105
|
)
|
|
|
$
|
7,832
|
|
7,584
|
|
Aggregate
amortization expense for the year ended December 31
|
|
$
|
1,483
|
|
1,369
|
|
Estimated annual
amortization expense during each of the next five years is as follows:
2008
|
|
$
|
1,553
|
|
2009
|
|
1,459
|
|
2010
|
|
1,424
|
|
2011
|
|
1,358
|
|
2012
|
|
929
|
|
F.
Revenues and Revenue Recognition
The Company derives its
revenues from three principal sources: 1) airfreight, 2) ocean freight, and 3)
customs brokerage and other services. These are the revenue categories
presented in the financial statements.
As a non-asset based
carrier, the Company does not own transportation assets. Rather, the
Company generates the major portion of its air and ocean freight revenues by
purchasing transportation services from direct (asset-based) carriers and
reselling those services to its customers. The difference between
the rate billed to customers (the sell rate), and the rate paid to the carrier
(the buy rate) is termed net revenue or yield. By consolidating
shipments from multiple customers and concentrating its buying power, the
Company is able to negotiate favorable buy rates from the direct carriers,
while at the same time offering lower sell rates than customers would otherwise
be able to negotiate themselves.
Airfreight revenues
include the charges to the Company for carrying the shipments when the Company
acts as a freight consolidator. Ocean freight revenues include the
charges to the Company for carrying the shipments when the Company acts as a
Non-Vessel Operating Common Carrier (NVOCC). In each case the Company is
acting as an indirect carrier. When acting as an indirect carrier, the
Company will issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading
(HOBL) to customers as the contract of carriage. In turn, when the
freight is physically tendered to a direct carrier, the Company receives a
contract of carriage known as a Master Airway Bill for airfreight shipments and
a Master Ocean Bill of Lading for ocean shipments. At this point, the
risk of loss passes to the carrier, however, in order to claim for any such
loss, the customer is first obligated to pay the freight charges.
Based upon the terms in
the contract of carriage, revenues related to shipments where the Company
issues an HAWB or an HOBL are recognized at the time the freight is tendered to
the direct carrier at origin. Costs related to the shipments are also
recognized at this same time.
Revenues realized in
other capacities, for instance, when the Company acts as an agent for the
shipper, and does not issue an HAWB or an HOBL, include only the commissions
and fees earned for the services performed. These revenues are recognized
upon completion of the services.
Customs brokerage and
other services involves providing services at destination, such as helping
customers clear shipments through customs by preparing required documentation,
calculating and providing for payment of duties and other taxes on behalf of
the customers as well as arranging for any required inspections by governmental
agencies, and arranging for delivery. This is a complicated
function requiring technical knowledge of customs rules and regulations in
the multitude of countries in which the Company has offices. Revenues
related to customs brokerage and other services are recognized upon completion
of the services.
F-8
Arranging international
shipments is a complex task. Each actual movement can require multiple
services. In some instances, the Company is asked to perform only one of
these services. However, in most instances, the Company may perform
multiple services. These services include destination breakbulk services
and value added
ancillary
services such as local transportation, export customs
formalities, distribution services and logistics management. Each of
these services has an associated fee which is recognized as revenue upon
completion of the service.
Typically, the fees for
each of these services are quoted as separate components, however, customers on
occasion will request an all-inclusive rate for a set of services known in the
industry as door-to-door service. This means that the customer is
billed a single rate for all services from pickup at origin to delivery at
destination. In these instances, the revenue for origin and destination services,
as well as revenue that will be characterized as freight charges, is allocated
to branches as set by preexisting Company policy perhaps
supplemented by customer specific
negotiations between the offices involved. Each of the Companys branches
are separate profit centers and the primary compensation for the branch
management group comes in the form of incentive-based compensation calculated
directly from the operating income of that branch. This compensation
structure ensures that the allocation of revenue and expense among components
of services, when provided under an all-inclusive rate, are done in an
objective manner on a fair value basis in accordance with Emerging Issues Task
Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables.
G.
Income Taxes
Income taxes are
accounted for under the asset and liability method of accounting. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, the tax effect of loss carryforwards and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
H.
Net Earnings per Common Share
Diluted earnings per
share is computed using the weighted average number of common shares and
dilutive potential common shares outstanding. Dilutive potential common
shares represent outstanding stock options and stock purchase rights.
Basic earnings per share is calculated using the weighted average number of
common shares outstanding without taking into consideration dilutive potential
common shares outstanding.
I.
Stock Option Plans
The Company accounts for
share-based compensation in accordance with Statement of Financial Accounting
Standard (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS 123R).
This accounting standard requires the recognition of compensation expense based
on an estimate of the fair value of options granted to employees and directors
under the Companys stock option and employee stock purchase rights plans. This
expense is recorded on a straight-line basis over the option vesting periods.
Effective January 1,
2006, the Company adopted SFAS 123R using the modified retrospective transition
method. Under the modified retrospective
method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented.
Upon adoption, the Company elected to restate all periods presented to
include compensation expense for all unvested stock options and share awards. Accordingly, salaries and related costs for
the year ended December 31, 2005 have been increased to include
compensation expense for the fair value of stock options and stock purchase
rights recognized on a straight line basis over the period they become vested.
J.
Foreign Currency
Foreign currency amounts
attributable to foreign operations have been translated into U.S. dollars using
year-end exchange rates for assets and liabilities, historical rates for
equity, and weighted average rates for revenues and expenses. Unrealized gains
or losses arising from fluctuations in the year-end exchange rates are
generally recorded as components of other comprehensive income as adjustments
from foreign currency translation. Currency fluctuations are a normal
operating factor in the conduct of the Companys business and exchange
transaction gains and losses are generally included in freight consolidation
expenses.
The Company follows a
policy of accelerating international currency settlements to manage its foreign
exchange exposure. Accordingly, the Company enters into foreign currency
hedging transactions only in limited locations where there are regulatory or
commercial limitations on the Companys ability to move money freely around the
world. Such hedging activity during 2007, 2006, and 2005 was
insignificant. Net foreign currency gains realized in 2007 were
$1,300. Net foreign currency losses
realized in 2006 were $321. Net foreign
currency gains realized in 2005 were $862. The Company had no foreign
currency derivatives outstanding at December 31, 2007 and 2006.
F-9
K.
Comprehensive Income
Comprehensive income
consists of net earnings and other gains and losses affecting shareholders
equity that, under generally accepted accounting principles in the United
States, are excluded from net earnings. For the Company, these consist of
foreign currency translation gains and losses and unrealized gains and losses
on available-for-sale securities, net of related income tax effects.
Accumulated other
comprehensive income consists of the following:
Years ended December 31,
|
|
2007
|
|
2006
|
|
(in thousands)
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
30,971
|
|
13,921
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
399
|
|
|
|
$
|
30,971
|
|
14,320
|
|
L.
Segment Reporting
The Company is organized
functionally in geographic operating segments. Accordingly, management
focuses its attention on revenues, net revenues, operating income, identifiable
assets, capital expenditures, depreciation and amortization and equity
generated in
each of these
geographical areas when evaluating effectiveness of geographic
management. The Company charges its subsidiaries and affiliates for
services rendered in the United States on a cost recovery basis.
Transactions among the Companys various offices are conducted using the same
arms-length pricing methodologies the Company uses when its offices transact
business with independent agents.
M.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of the assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could
differ from those estimates.
N.
Reclassifications
Certain prior year
amounts have been reclassified to conform with the 2007 presentation. A minor reclassification was recorded between Accumulated
Other Comprehensive Income and Minority Interest.
O.
Recent Accounting Pronouncements
Effective January 1,
2007, the Company adopted EITF Issue 06-3, How Sales Taxes Collected From
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement, (EITF 06-3). The scope of EITF 06-3 includes any tax
assessed by a governmental authority that is both imposed on and concurrent
with a specific revenue-producing transaction between a seller and a customer,
including but not limited to sales and value-added taxes. In EITF 06-3 a
consensus was reached that entities may adopt a policy of presenting these
taxes in the income statement on either a gross or net basis. If these taxes
are significant, an entity should disclose its policy of presenting taxes and
the amount of taxes if reflected on a gross basis in the income statement. The
Company presents revenues net of sales and value-added taxes in its
consolidated statements of earnings and did not change its policy as a result
of the adoption of EITF 06-3. The adoption of EITF 06-3 had no impact on the
Companys consolidated financial condition or results of operations.
In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157), supplemented by FASB Financial Staff Position
157-1 and 2. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is required to
and plans to adopt the provisions of SFAS 157 beginning in the first quarter of
2008, except for certain nonfinancial assets and liabilities for which it will
adopt the provisions of SFAS 157 in the first quarter of 2009. The
Company does not expect the adoption of SFAS 157 to have a material impact on
the Companys consolidated financial condition or results of operations.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). Under the provisions of SFAS 159,
companies may choose to account for eligible financial instruments, warranties
and insurance contracts at fair value on a contract-by-contract basis.
Changes in fair value will be recognized in earnings each reporting period.
SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is required to and plans to adopt the provisions of
SFAS 159 beginning in the first quarter of 2008. The Company does not expect
the adoption of SFAS 159 to have a material impact on the Companys
consolidated financial condition or results of operations.
F-10
In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160
changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 modifies the accounting for changes in a parents ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company is required to and plans
to adopt the provisions of SFAS 160 beginning in the first quarter of 2009.
While the Company is still assessing the impact of the adoption of SFAS 160, it
had minority interest of $17,208 and $16,275 as of December 31, 2007 and December 31,
2006, respectively, that it expects will be reclassified to equity under the
provisions of SFAS 160.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is required to and plans to adopt the provisions of
SFAS 141R beginning in the first quarter of 2009. The Company is currently
assessing the impact of the adoption of SFAS 141R. The impact will depend upon
the acquisitions, if any, the Company consummates after the effective date.
NOTE 2.
|
|
CREDIT ARRANGEMENTS
|
The Company has a $50,000
United States bank line of credit extending through July 1, 2008.
Borrowings under the line bear interest at LIBOR + .75% (5.35% at December 31,
2007) and are unsecured. As of December 31, 2007, the entire $50,000
was available and the Company had no borrowings under this line.
The majority of the
Companys foreign subsidiaries maintain bank lines of credit for short-term
working capital purposes. These credit lines are supported by standby
letters of credit issued by a United States bank, or guarantees issued by the
Company to the foreign banks issuing the credit line. Lines of credit
totaling $19,067 and $19,516 at December 31, 2007 and 2006, respectively,
bear interest at rates up to 4% over the foreign banks equivalent prime
rates. At December 31, 2007, the Company had no amounts outstanding
under these lines and was contingently liable for approximately $74,498 under
outstanding standby letters of credit and guarantees.
The standby letters of
credit and guarantees relate to obligations of the Companys foreign
subsidiaries for credit extended in the ordinary course of business by direct
carriers, primarily airlines, and for duty and tax deferrals available from
governmental entities responsible for customs and value-added-tax (VAT)
taxation. The total underlying amounts due and payable for transportation
and governmental excises are properly recorded as obligations in the books of
the respective foreign subsidiaries, and there would be no need to record
additional expense in the unlikely event the parent company were to be required
to perform.
At December 31,
2007, the Company was in compliance with all restrictive covenants of these
credit lines and the associated credit facilities, including maintenance of
certain minimum asset, working capital and equity balances and ratios.
F-11
Income tax expense
(benefit) for 2007, 2006, and 2005 includes the following components:
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
2007
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
65,799
|
|
9,825
|
|
85,200
|
|
160,824
|
|
Deferred
|
|
18,274
|
|
717
|
|
|
|
18,991
|
|
|
|
$
|
84,073
|
|
10,542
|
|
85,200
|
|
179,815
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
68,176
|
|
9,760
|
|
78,553
|
|
156,489
|
|
Deferred
|
|
2,096
|
|
2,076
|
|
|
|
4,172
|
|
|
|
$
|
70,272
|
|
11,836
|
|
78,553
|
|
160,661
|
|
2005
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
25,776
|
|
6,851
|
|
60,438
|
|
93,065
|
|
Deferred
|
|
(2,830
|
)
|
(870
|
)
|
|
|
(3,700
|
)
|
|
|
$
|
22,946
|
|
5,981
|
|
60,438
|
|
89,365
|
|
Income tax expense
differs from amounts computed by applying the United States Federal income tax
rate of 35% to earnings before income taxes and minority interest as a result
of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
Computed expected tax
expense
|
|
$
|
157,386
|
|
138,482
|
|
100,344
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
State income
taxes, net of Federal income tax benefit
|
|
6,852
|
|
7,694
|
|
3,888
|
|
Nondeductible stock compensation expense, net
|
|
11,856
|
|
10,426
|
|
7,346
|
|
IRC 965 tax
benefit for repatriated foreign earnings
|
|
|
|
2,328
|
|
(21,680
|
)
|
Other, net
|
|
3,721
|
|
1,731
|
|
(533
|
)
|
|
|
$
|
179,815
|
|
160,661
|
|
89,365
|
|
In accordance with IRC
965, the Company recorded a one-time tax benefit of $22 million in the fourth quarter
of 2005. In order to qualify for this credit, the Company adopted a plan
which required qualified capital expenditures of approximately $105
million. The Company completed the
required capital expenditures during 2006.
The components of
earnings before income taxes and minority interest are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
United States
|
|
$
|
117,447
|
|
117,725
|
|
72,339
|
|
Foreign
|
|
332,226
|
|
277,939
|
|
214,358
|
|
|
|
$
|
449,673
|
|
395,664
|
|
286,697
|
|
|
|
|
|
|
|
|
|
|
|
F-12
The tax effects of
temporary differences, tax credits and operating loss carryforwards that give
rise to significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2007 and 2006 are as follows:
Years ended December 31,
|
|
2007
|
|
2006
|
|
Deferred Tax Assets:
|
|
|
|
|
|
Accrued third
party charges, deductible for taxes upon economic performance
(i.e. actual payment)
|
|
$
|
4,567
|
|
3,661
|
|
Provision for doubtful accounts receivable
|
|
2,313
|
|
2,348
|
|
Excess of financial statement over tax depreciation
|
|
5,900
|
|
4,474
|
|
Retained liability for cargo claims
|
|
783
|
|
806
|
|
Capital loss
|
|
844
|
|
1,140
|
|
Deductible stock compensation expense, net
|
|
11,639
|
|
12,720
|
|
Total gross deferred tax assets
|
|
26,046
|
|
25,149
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
Unremitted foreign earnings, net of related foreign
tax credits
|
|
(56,167
|
)
|
(36,322
|
)
|
Foreign currency translation adjustment
|
|
(16,677
|
)
|
(7,497
|
)
|
Other
|
|
(457
|
)
|
(667
|
)
|
Total gross deferred tax liabilities
|
|
$
|
(73,301
|
)
|
(44,486
|
)
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(47,255
|
)
|
(19,337
|
)
|
Current deferred tax assets
|
|
$
|
(8,278
|
)
|
(7,490
|
)
|
Noncurrent deferred tax liabilities
|
|
$
|
(55,533
|
)
|
(26,827
|
)
|
On January 1, 2007,
the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), supplemented by FASB Financial Staff
Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48,
issued May 2, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the Companys financial statements in accordance
with SFAS No. 109, Accounting for Income Taxes (SFAS 109). The
interpretation establishes guidelines for recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The adoption of FIN 48 had no material impact on
the Companys consolidated financial condition or results of operations.
Based on managements
review of the Companys tax positions the Company had no significant
unrecognized tax benefits as of December 31, 2007 and January 1,
2007.
The Company or one of its
subsidiaries files income tax returns in the U.S. federal jurisdiction and
various state, local and foreign jurisdictions. The Company is no longer
subject to U.S. federal income tax examinations by tax authorities for years
prior to 2004. In October 2007, the Internal Revenue Service initiated an
audit of the Companys federal income tax return for the year 2005. With
respect to state and local jurisdictions and countries outside of the United
States, with limited exceptions, the Company and its subsidiaries are no longer
subject to income tax audits for years prior to 2000. In the normal course of
business, the Company is subject to examination by taxing authorities
throughout the world. Although the outcome of tax audits is always uncertain,
the Company believes that adequate amounts of tax, interest and penalties have
been provided for any adjustments that may result from these open tax years.
The Company recognizes
interest expense related to unrecognized tax benefits or underpayment of income
taxes in interest expense and recognizes penalties in operating expenses. The
Company has not changed its policy as a result of adopting FIN 48.
Amounts accrued for the
payment of interest and penalties were insignificant at the date of adoption of
FIN 48. Any interest and penalties expensed in relation to the underpayment of
income taxes were insignificant for the years ended December 31, 2007 and
2006.
NOTE 4.
|
|
SHAREHOLDERS
EQUITY
|
A.
|
Stock Repurchase Plans
|
The Company has a
Non-Discretionary Stock Repurchase Plan under which management is authorized to
repurchase up to 20,000,000 shares of the Companys common stock in the open
market with the proceeds received from the exercise of Employee and Director
Stock Options. As of December 31,
2007, the Company had repurchased and retired 16,906,236 shares of common stock
at an average price of $15.94 per share over the period from 1994 through 2007.
F-13
In November 2001, the Board of Directors
expanded the Companys Discretionary Stock Repurchase Plan to allow for the
repurchase of such shares as may be necessary to reduce the issued and
outstanding stock to 200,000,000 shares of common stock. As of December 31, 2007, the Company had
repurchased and retired
12,948,579 shares of common
stock at an average price of $30.87 per share over the period from 2001 through
2007.
At December 31,
2007, the Company has two stock option plans (the 1985 Plan and the 2007
Plan) for employees under which the Board of Directors may grant officers and
key employees options to purchase common stock at prices equal to or greater
than market value on the date of grant.
On May 2, 2007, the shareholders approved the Companys 2007 Plan,
which made available a total of 3,000,000 shares of the Companys common stock
for purchase upon exercise of options granted under the 2007 Plan. The 1985 Plan provides for non-qualified
grants. The 2007 Plan provides for
qualified and non-qualified grants. Grants under the 2007 Plan are limited to
not more than 100,000 shares per person.
No additional shares can be granted under the 2007 Plan after April 30,
2008. Under the 1985, 1997, 2005, 2006
and 2007 Plans, outstanding options generally vest and become exercisable over
periods up to five years from the date of grant and expire no more than 10
years from the date of grant.
The Company also has a
stock option plan (Directors Plan) under which non-employee directors
elected at each annual meeting are granted non-qualified options to purchase
32,000 shares of common stock at prices equal to the market value on the date
of grant on the first business day of the month following the meeting. On May 3, 2006, the Directors Plan was
amended by shareholder vote to require a one year vesting period. Previously, options granted under the
Directors Plan vested immediately.
Upon the exercise
of non-qualified stock options and disqualifying dispositions of incentive
stock options, the Company derives a tax deduction measured by the excess of
the market value over the option price at the date of disqualifying
disposition. The portion of the benefit
from the deduction which equals the estimated fair value of the options
(previously recognized as compensation expense) is recorded as a credit to the
deferred tax asset for non-qualified stock options and is recorded as a credit
to current tax expense for any disqualified dispositions of incentive stock
options. All of the tax benefit received
upon option exercise for the tax deduction in excess of the estimated fair
value of the options is credited to additional paid-in capital.
Details regarding
the plans are as follows:
|
|
Unoptioned shares
|
|
|
|
1985 Plan
|
|
1997 Plan
|
|
2005 Plan
|
|
2006 Plan
|
|
2007 Plan
|
|
Directors
Plan
|
|
Balance at December 31, 2004
|
|
6,912
|
|
952,300
|
|
|
|
|
|
|
|
384,000
|
|
Options authorized
|
|
|
|
|
|
1,809,100
|
|
|
|
|
|
|
|
Options transferred
|
|
|
|
(1,190,900
|
)
|
1,190,900
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
(2,903,250
|
)
|
|
|
|
|
(128,000
|
)
|
Options forfeited
|
|
|
|
234,800
|
|
53,500
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
3,800
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
6,912
|
|
|
|
150,250
|
|
|
|
|
|
256,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
(2,984,610
|
)
|
|
|
(128,000
|
)
|
Options forfeited
|
|
|
|
|
|
|
|
64,300
|
|
|
|
|
|
Options not granted
|
|
|
|
|
|
(150,250
|
)
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
6,912
|
|
|
|
|
|
79,690
|
|
|
|
128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
(1,803,260
|
)
|
(128,000
|
)
|
Options forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options not granted
|
|
|
|
|
|
|
|
(79,690
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
6,912
|
|
|
|
|
|
|
|
1,196,740
|
|
|
|
In May 2002, the
shareholders approved the Companys 2002 Employee Stock Purchase Plan (2002
Plan), which became effective August 1, 2002 upon the expiration of the
1988 Employee Stock Purchase Plan (1988 Plan) on July 31, 2002. In May 2007, the shareholders approved
an amendment to the 2002 Plan to increase by 5,000,000 the number of shares of
the Companys common stock available for purchase under the 2002 Plan. The Companys amended 2002 Plan provides for
9,305,452 shares of the Companys
F-14
common stock, including
305,452 remaining shares transferred from the 1988 Plan, to be reserved for
issuance upon exercise of purchase rights granted to employees who elect to
participate through regular payroll deductions beginning August 1 of each
year. The purchase rights are
exercisable on July 31 of the following year at a price equal to the
lesser of (1) 85% of the fair market value of the Companys stock on July 31
or (2) 85% of the fair market value of the Companys stock on the
preceding August 1. At December 31,
2007, an aggregate of 3,760,126 shares had been issued under the 2002 Plan and
$12,292 had been withheld in connection with the plan year ending July 31,
2008.
The following
tables summarize information about fixed-price stock options for the year ended
December 31, 2007:
|
|
Number of
shares
|
|
Weighted
average
exercise price
per share
|
|
Weighted
average
remaining
contractual life
|
|
Aggregate
intrinsic value
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
21,896,181
|
|
$
|
19.23
|
|
|
|
|
|
Options granted
|
|
1,931,260
|
|
43.02
|
|
|
|
|
|
Options exercised
|
|
(3,978,908
|
)
|
10.85
|
|
|
|
|
|
Options forfeited
|
|
(559,350
|
)
|
30.13
|
|
|
|
|
|
Options cancelled
|
|
(14,375
|
)
|
16.86
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
19,274,808
|
|
$
|
23.03
|
|
5.65 years
|
|
$
|
418,179
|
|
Exercisable at December 31, 2007
|
|
10,500,357
|
|
$
|
14.29
|
|
3.85 years
|
|
$
|
320,014
|
|
|
|
Unvested Options
|
|
|
|
Number of shares
|
|
Weighted average fair
value per share
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
10,307,991
|
|
$
|
13.98
|
|
Options granted
|
|
1,931,260
|
|
18.49
|
|
Options vested
|
|
(2,905,450
|
)
|
9.48
|
|
Options forfeited
|
|
(559,350
|
)
|
14.93
|
|
Balance at December 31, 2007
|
|
8,774,451
|
|
$
|
16.40
|
|
E.
|
Share-Based
Compensation Expense
|
As described in
Note 1, effective January 1, 2006, the Company adopted SFAS 123R,
requiring the recording of compensation expense based on an estimate of the
fair value of options awarded under its fixed stock option or employee stock
purchase rights plans. The Company
elected to utilize the modified retrospective method of transitioning to SFAS
123R and at the date of adoption the Company restated all prior periods to
recognize the required stock compensation expense.
The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants issued
during the years ended December 31, 2007, 2006 and 2005:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend yield
|
|
.65
|
%
|
.51
|
%
|
.56
|
%
|
Volatility
|
|
31 41
|
%
|
40 43
|
%
|
44 49
|
%
|
Risk-free interest rates
|
|
4.69 4.96
|
%
|
4.69 5.11
|
%
|
3.64 4.14
|
%
|
Expected life (years) stock option plans
|
|
6.15 8.70
|
|
7.14 8.89
|
|
6.67 9.36
|
|
Expected life (years) stock purchase rights plans
|
|
1
|
|
1
|
|
1
|
|
Weighted average
fair value of stock options granted
during the period
|
|
$
|
18.49
|
|
$
|
22.69
|
|
$
|
12.69
|
|
Weighted average
fair value of stock purchase rights
granted during the period
|
|
$
|
12.81
|
|
$
|
13.27
|
|
$
|
7.17
|
|
The Companys expected volatility assumptions are
based on the historical volatility of the Companys stock. The expected life
assumption is primarily based on historical employee exercise patterns and
employee post-vesting termination behavior. The risk-free interest rate for the
expected term of the option is based on the corresponding yield curve in effect
at the time of grant for U.S. Treasury bonds having the same term as the
expected life of the option, i.e. a ten year bond rate is used for valuing an
option with a ten year expected life. The expected dividend yield is based on
the Companys historical experience. The forfeiture rate used to calculate
compensation expense is primarily based on historical pre-vesting employee
forfeiture patterns.
F-15
The total
intrinsic value of options exercised during the years ended December 31,
2007, 2006 and 2005 was approximately $138 million, $111 million and $76
million, respectively. The estimated
fair value of shares vested during the years ended December 31, 2007, 2006
and 2005 was approximately $28 million, $29 million and $28 million,
respectively.
As of December 31,
2007, the total unrecognized compensation cost related to unvested stock
options and stock purchase rights is $96 million and the weighted average
period over which that cost is expected to be recognized is 1.76 years.
Total stock compensation expense
and the total related tax benefit recognized for the years ended December 31,
2007, 2006 and 2005 are as follows:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Stock compensation expense
|
|
$
|
44,917
|
|
$
|
41,739
|
|
$
|
33,457
|
|
|
|
|
|
|
|
|
|
Recognized tax benefit
|
|
$
|
1,714
|
|
$
|
1,982
|
|
$
|
3,792
|
|
Shares issued as a result of stock option exercises
and employee stock plan purchases are issued as new shares outstanding by the
Companys transfer agent.
F. Basic and Diluted Earnings Per
Share
The following table
reconciles the numerator and the denominator of the basic and diluted per share
computations for earnings per share in 2007, 2006 and 2005.
|
|
Net
earnings
|
|
Weighted
average
shares
|
|
Earnings
per share
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
269,154
|
|
213,314,761
|
|
$
|
1.26
|
|
Effect of dilutive potential common shares
|
|
|
|
8,485,107
|
|
|
|
Diluted earnings per share
|
|
$
|
269,154
|
|
221,799,868
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
235,094
|
|
213,454,579
|
|
$
|
1.10
|
|
Effect of dilutive potential common shares
|
|
|
|
8,768,733
|
|
|
|
Diluted earnings per share
|
|
$
|
235,094
|
|
222,223,312
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
190,436
|
|
213,555,102
|
|
$
|
.89
|
|
Effect of dilutive potential common shares
|
|
|
|
6,675,074
|
|
|
|
Diluted earnings per share
|
|
$
|
190,436
|
|
220,230,176
|
|
$
|
.86
|
|
The following shares have
been excluded from the computation of diluted earnings per share because the
effect would have been antidilutive:
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Shares
|
|
4,760,520
|
|
132,510
|
|
500
|
|
NOTE
5. FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Companys financial
instruments, other than cash, consist primarily of cash equivalents, short-term
investments, accounts receivable, short-term debt, accounts payable and accrued
expenses. The fair values of these
financial instruments approximate their carrying amounts based upon market
interest rates or their short-term nature.
F-16
NOTE
6. COMMITMENTS
A. Leases
The Company occupies
office and warehouse facilities under terms of operating leases expiring up to
2019. Total rent expense for 2007, 2006
and 2005 was $48,200, $44,496 and $39,378, respectively. At December 31, 2007, future minimum
annual lease payments under all leases are as follows:
2008
|
|
$
|
37,382
|
|
2009
|
|
20,002
|
|
2010
|
|
10,827
|
|
2011
|
|
4,885
|
|
2012
|
|
2,608
|
|
Thereafter
|
|
2,685
|
|
|
|
$
|
78,389
|
|
B. Unconditional
Purchase Obligations
The Company enters into short-term agreements with
asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to
some degree with market conditions. The
Company only enters into agreements that management believes the Company can
fulfill with relative ease.
Historically, the Company has not paid for guaranteed space that it has
not used. Management believes, in line with historical experience, committed
purchase obligations outstanding as of December 31, 2007 of $263,273, will
be fulfilled during 2008 in the Companys ordinary course of business.
C.
Employee
Benefits
The Company has employee
savings plans under which the Company provides a discretionary matching contribution. In 2007, 2006, and 2005, the Companys
contributions under the plans were $6,790, $5,814, and $5,183, respectively.
NOTE 7.
CONTINGENCIES
On October 10, 2007,
the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to
produce certain information and records relating to an investigation of alleged
anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a
law firm to assist in complying with the DOJs subpoena. They are also assisting
management in conducting a very rigorous self-review. As part of this process, the Company has met
with and continues to co-operate with the DOJ.
As of December 31, 2007, the Company had incurred approximately
$3.7 million of legal and associated costs.
The Company expects to incur additional costs during the course of this
ongoing investigation, which could include fines and/or penalties if the DOJ
concludes that the Company has engaged in anti-competitive behavior.
On
January 3, 2008, the Company was named as a defendant, with seven other of
the largest European and North American-based global logistics providers, in a Federal
antitrust class action lawsuit filed in New York. The complaint, which purports to be brought
on behalf of a class of customers (and has not yet been certified), alleges
that the defendants engaged in various forms of anti-competitive
practices. The Company believes that
these allegations are without merit and intends to vigorously defend itself.
The Company is involved
in other claims and lawsuits which arise in the ordinary course of business,
none of which currently, in managements opinion, will have a significant
effect on the Companys operations or financial position.
F-17
NOTE
8. BUSINESS SEGMENT INFORMATION
Financial information
regarding the Companys 2007, 2006, and 2005 operations by geographic area are
as follows:
|
|
United States
|
|
Other North America
|
|
Asia
|
|
Europe
|
|
Australasia
|
|
Latin America
|
|
Middle East
|
|
Elimi-nations
|
|
Consoli- dated
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated
customers
|
|
$
|
1,069,734
|
|
134,436
|
|
2,959,873
|
|
684,661
|
|
71,091
|
|
79,314
|
|
236,062
|
|
|
|
5,235,171
|
|
|
Transfers
between geographic areas
|
|
105,263
|
|
9,030
|
|
18,234
|
|
36,563
|
|
7,854
|
|
11,640
|
|
13,883
|
|
(202,467
|
)
|
|
|
Total revenues
|
|
$
|
1,174,997
|
|
143,466
|
|
2,978,107
|
|
721,224
|
|
78,945
|
|
90,954
|
|
249,945
|
|
(202,467
|
)
|
5,235,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
586,938
|
|
65,534
|
|
402,613
|
|
245,761
|
|
42,044
|
|
42,920
|
|
67,151
|
|
|
|
1,452,961
|
|
Operating income
|
|
$
|
120,311
|
|
15,893
|
|
197,017
|
|
50,762
|
|
11,913
|
|
9,958
|
|
17,546
|
|
|
|
423,400
|
|
Identifiable
assets at year end
|
|
$
|
939,203
|
|
72,150
|
|
422,038
|
|
443,758
|
|
34,174
|
|
46,492
|
|
100,934
|
|
10,316
|
|
2,069,065
|
|
Capital expenditures
|
|
$
|
25,437
|
|
1,899
|
|
41,773
|
|
7,879
|
|
1,420
|
|
1,259
|
|
3,119
|
|
|
|
82,786
|
|
Depreciation and
amortization
|
|
$
|
21,204
|
|
1,321
|
|
4,917
|
|
7,759
|
|
922
|
|
1,523
|
|
1,657
|
|
|
|
39,303
|
|
Equity
|
|
$
|
1,371,296
|
|
32,309
|
|
306,115
|
|
156,349
|
|
19,410
|
|
25,341
|
|
48,477
|
|
(732,726
|
)
|
1,226,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated
customers
|
|
$
|
940,186
|
|
120,381
|
|
2,616,098
|
|
618,999
|
|
54,948
|
|
67,463
|
|
215,912
|
|
|
|
4,633,987
|
|
|
Transfers
between geographic areas
|
|
109,552
|
|
7,956
|
|
16,228
|
|
32,595
|
|
6,383
|
|
8,368
|
|
11,293
|
|
(192,375
|
)
|
|
|
Total revenues
|
|
$
|
1,049,738
|
|
128,337
|
|
2,632,326
|
|
651,594
|
|
61,331
|
|
75,831
|
|
227,205
|
|
(192,375
|
)
|
4,633,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
533,060
|
|
61,531
|
|
359,613
|
|
216,110
|
|
32,894
|
|
32,931
|
|
54,821
|
|
|
|
1,290,960
|
|
Operating income
|
|
$
|
102,041
|
|
15,433
|
|
178,265
|
|
48,366
|
|
8,887
|
|
7,519
|
|
14,605
|
|
|
|
375,116
|
|
Identifiable
assets at year end
|
|
$
|
906,256
|
|
62,584
|
|
360,904
|
|
363,332
|
|
26,055
|
|
33,273
|
|
67,794
|
|
2,140
|
|
1,822,338
|
|
Capital expenditures
|
|
$
|
121,005
|
|
820
|
|
8,269
|
|
6,086
|
|
446
|
|
1,205
|
|
1,633
|
|
|
|
139,464
|
|
Depreciation and
amortization
|
|
$
|
18,533
|
|
1,339
|
|
5,108
|
|
6,739
|
|
785
|
|
1,548
|
|
1,396
|
|
|
|
35,448
|
|
Equity
|
|
$
|
1,215,454
|
|
26,160
|
|
249,017
|
|
117,738
|
|
14,844
|
|
16,133
|
|
31,570
|
|
(600,825
|
)
|
1,070,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated
customers
|
|
$
|
764,848
|
|
98,369
|
|
2,224,313
|
|
534,897
|
|
48,234
|
|
58,976
|
|
174,157
|
|
|
|
3,903,794
|
|
|
Transfers
between geographic areas
|
|
87,778
|
|
5,588
|
|
13,280
|
|
24,923
|
|
5,920
|
|
7,416
|
|
8,406
|
|
(153,311
|
)
|
|
|
Total revenues
|
|
$
|
852,626
|
|
103,957
|
|
2,237,593
|
|
559,820
|
|
54,154
|
|
66,392
|
|
182,563
|
|
(153,311
|
)
|
3,903,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
434,543
|
|
50,823
|
|
296,925
|
|
179,238
|
|
30,135
|
|
26,772
|
|
43,186
|
|
|
|
1,061,622
|
|
Operating income
|
|
$
|
61,245
|
|
11,273
|
|
147,130
|
|
30,179
|
|
7,956
|
|
5,698
|
|
7,572
|
|
|
|
271,053
|
|
Identifiable
assets at year end
|
|
$
|
805,273
|
|
51,312
|
|
322,391
|
|
294,555
|
|
21,681
|
|
26,639
|
|
47,009
|
|
(2,816
|
)
|
1,566,044
|
|
Capital expenditures
|
|
$
|
78,668
|
|
882
|
|
3,374
|
|
4,534
|
|
1,084
|
|
1,290
|
|
949
|
|
|
|
90,781
|
|
Depreciation and
amortization
|
|
$
|
15,077
|
|
1,484
|
|
4,759
|
|
6,107
|
|
830
|
|
1,198
|
|
1,433
|
|
|
|
30,888
|
|
Equity
|
|
$
|
1,021,761
|
|
17,329
|
|
205,027
|
|
75,146
|
|
11,108
|
|
10,679
|
|
22,030
|
|
(436,698
|
)
|
926,382
|
|
F-18
The Company charges its
subsidiaries and affiliates for services rendered in the United States on a
cost recovery basis.
No single country outside
the United States represented more than 10% of the Companys total revenue, net
revenue or total identifiable assets in any period presented except as noted in
the table below.
|
|
2007
|
|
2006
|
|
2005
|
|
Total revenues:
|
|
|
|
|
|
|
|
Hong Kong
|
|
14
|
%
|
15
|
%
|
15
|
%
|
Peoples Republic of China
|
|
24
|
%
|
21
|
%
|
21
|
%
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
Hong Kong
|
|
|
*
|
|
*
|
|
*
|
Peoples
Republic of China
|
|
|
*
|
|
*
|
12
|
%
|
*Represents less than 10%
in the period presented.
NOTE
9. QUARTERLY RESULTS (UNAUDITED)
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,118,946
|
|
1,258,618
|
|
1,411,025
|
|
1,446,582
|
|
Net revenues
|
|
334,136
|
|
354,574
|
|
384,810
|
|
379,441
|
|
Net earnings
|
|
59,288
|
|
65,489
|
|
74,320
|
|
70,057
|
|
Diluted earnings per share
|
|
.27
|
|
.30
|
|
.34
|
|
.32
|
|
Basic earnings per share
|
|
.28
|
|
.31
|
|
.35
|
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,026,537
|
|
1,131,441
|
|
1,231,660
|
|
1,244,348
|
|
Net revenues
|
|
298,142
|
|
315,687
|
|
341,275
|
|
335,855
|
|
Net earnings
|
|
52,352
|
|
56,329
|
|
63,803
|
|
62,610
|
|
Diluted earnings per share
|
|
.24
|
|
.25
|
|
.29
|
|
.28
|
|
Basic earnings per share
|
|
.25
|
|
.26
|
|
.30
|
|
.29
|
|
Net revenues are determined by deducting freight consolidation costs
from total revenues. The sum of
quarterly per share data may not equal the per share total reported for the
year.
All share and per share
information have been adjusted to reflect a 2-for-1 stock split effected in June 2006.
F-19
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
ANNUAL REPORT
ON
FORM 10-K
FOR FISCAL YEAR
ENDED
DECEMBER 31, 2007
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number
|
|
Description
|
|
|
|
10.50
|
|
Form of Stock
Option Agreement used in connection with Incentive options granted under the
Companys 2007 Incentive Stock Option Plan.
|
|
|
|
21.1
|
|
Subsidiaries of the
Registrant.
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32
|
|
Certification Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
Expeditors International... (NASDAQ:EXPD)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Expeditors International... (NASDAQ:EXPD)
Historical Stock Chart
Von Jul 2023 bis Jul 2024