UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
x
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended March 31, 2008
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|
OR
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|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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|
91-1069248
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(State or other
jurisdiction of
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(IRS Employer
Identification Number)
|
incorporation or
organization)
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1015
Third Avenue, 12
th
Floor, Seattle, Washington
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98104
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(Address of
principal executive offices)
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(Zip Code)
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(206)
674-3400
(Registrants
telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
o
No
x
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a
smaller reporting company)
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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 May 7, 2008, the number of shares
outstanding of the issuers Common Stock was 213,294,318.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
|
|
March 31,
2008
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December 31,
2007
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Assets
|
|
|
|
|
|
|
|
|
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Current
assets:
|
|
|
|
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Cash and cash
equivalents
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|
$
|
740,966
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|
$
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574,599
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Short-term
investments
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606
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674
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Accounts
receivable, less allowance for doubtful accounts of $14,465 at March 31,
2008 and $14,830 at December 31, 2007
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878,191
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933,519
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|
Deferred Federal
and state income taxes
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|
7,185
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|
8,278
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Other
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19,117
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17,627
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Total current
assets
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1,646,065
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|
1,534,697
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|
|
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|
Property and
equipment, less accumulated depreciation and amortization of $224,696 at
March 31, 2008 and $214,223 at December 31, 2007
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|
500,845
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|
497,892
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|
Goodwill, net
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7,927
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|
7,927
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Other
intangibles, net
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7,710
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7,832
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Other assets,
net
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21,156
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20,717
|
|
|
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$
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2,183,703
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$
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2,069,065
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Liabilities
and Shareholders Equity
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Current
liabilities:
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Short-term debt
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748
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Accounts payable
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615,800
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613,108
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Accrued
expenses, primarily salaries and related costs
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145,598
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129,669
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Federal, state
and foreign income taxes
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36,812
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26,976
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Total current
liabilities
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798,958
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769,753
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Deferred Federal
and state income taxes
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67,566
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|
55,533
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|
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Minority
interest
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17,367
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17,208
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Shareholders
equity:
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Preferred stock,
par value $.01 per share.
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Authorized
2,000,000 shares; none issued
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Common stock,
par value $.01 per share.
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Authorized
320,000,000 shares; issued and outstanding 212,995,326 shares at
March 31, 2008, and 212,996,776 shares at December 31, 2007
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2,130
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2,130
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Additional
paid-in capital
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48,788
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50,006
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Retained
earnings
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1,209,937
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1,143,464
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Accumulated
other comprehensive income
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38,957
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30,971
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Total
shareholders equity
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1,299,812
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1,226,571
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Commitments and
contingencies
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$
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2,183,703
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$
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2,069,065
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|
See accompanying notes to condensed consolidated financial statements.
2
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
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Three months ended
March 31,
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2008
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2007
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Revenues:
|
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Airfreight
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$
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599,763
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$
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517,205
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Ocean freight
and ocean services
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446,792
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375,202
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Customs
brokerage and other services
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260,766
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226,539
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Total revenues
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1,307,321
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1,118,946
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Operating
expenses:
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Airfreight
consolidation
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461,099
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389,644
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Ocean freight
consolidation
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360,440
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298,891
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Customs
brokerage and other services
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111,454
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96,275
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Salaries and
related costs
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205,815
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182,761
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Rent and
occupancy costs
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19,435
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16,667
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Depreciation and
amortization
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9,772
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9,575
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Selling and
promotion
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9,504
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9,096
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Other
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24,238
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21,512
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Total operating
expenses
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1,201,757
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1,024,421
|
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Operating income
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105,564
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94,525
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Interest expense
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(71
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)
|
(14
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)
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Interest income
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4,964
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|
5,219
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Other, net
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1,274
|
|
755
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Other income,
net
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6,167
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5,960
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Earnings before
income taxes and minority interest
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111,731
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100,485
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Income tax
expense
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45,210
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41,160
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Net earnings
before minority interest
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66,521
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59,325
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Minority
interest
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(49
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)
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(37
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)
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Net earnings
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$
|
66,472
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$
|
59,288
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|
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|
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Diluted earnings
per share
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|
$
|
.30
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$
|
.27
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Basic earnings
per share
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$
|
.31
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$
|
.28
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Weighted average
diluted shares outstanding
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220,437,979
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222,842,546
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Weighted average
basic shares outstanding
|
|
213,062,231
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213,428,221
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|
See accompanying notes to
condensed consolidated financial statements.
3
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
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Three months ended
March 31,
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2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
Net earnings
|
|
$
|
66,472
|
|
$
|
59,288
|
|
Adjustments to
reconcile net earnings to net cash provided by operating activities:
|
|
|
|
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Provision for
losses on accounts receivable
|
|
(177
|
)
|
514
|
|
Deferred income
tax expense
|
|
8,826
|
|
5,468
|
|
Excess tax
benefits from stock plans
|
|
(1,506
|
)
|
(16,332
|
)
|
Stock
compensation expense
|
|
11,280
|
|
11,460
|
|
Depreciation and
amortization
|
|
9,772
|
|
9,575
|
|
Gain on sale of
property and equipment
|
|
(575
|
)
|
(123
|
)
|
Minority
interest in earnings of consolidated entities
|
|
49
|
|
37
|
|
Other
|
|
417
|
|
334
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Decrease in
accounts receivable
|
|
59,754
|
|
57,701
|
|
Decrease
(increase) in other current assets
|
|
55
|
|
(677
|
)
|
Increase
(decrease) in accounts payable and other current liabilities
|
|
15,078
|
|
(13,635
|
)
|
Increase in
income taxes payable, net
|
|
9,260
|
|
2,469
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
178,705
|
|
116,079
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
Decrease in
short-term investments
|
|
47
|
|
86
|
|
Purchase of
property and equipment
|
|
(10,210
|
)
|
(13,438
|
)
|
Proceeds from
sale of property and equipment
|
|
42
|
|
379
|
|
Other
|
|
363
|
|
(340
|
)
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
(9,758
|
)
|
(13,313
|
)
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
Net
distributions to minority interests
|
|
(107
|
)
|
|
|
Borrowings of
short-term debt, net
|
|
810
|
|
220
|
|
Proceeds from
issuance of common stock
|
|
4,614
|
|
15,266
|
|
Repurchases of
common stock
|
|
(18,618
|
)
|
(72,398
|
)
|
Excess tax benefits
from stock plans
|
|
1,506
|
|
16,332
|
|
|
|
|
|
|
|
Net cash used in
financing activities
|
|
(11,795
|
)
|
(40,580
|
)
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash
|
|
9,215
|
|
3,272
|
|
|
|
|
|
|
|
Increase in cash
and cash equivalents
|
|
166,367
|
|
65,458
|
|
Cash and cash
equivalents at beginning of period
|
|
574,599
|
|
511,358
|
|
Cash and cash
equivalents at end of period
|
|
$
|
740,966
|
|
$
|
576,816
|
|
|
|
|
|
|
|
Interest
and taxes paid:
|
|
|
|
|
|
Interest
|
|
$
|
71
|
|
$
|
11
|
|
Income taxes
|
|
24,272
|
|
33,033
|
|
See accompanying
notes to condensed consolidated financial statements.
4
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(in thousands,
except share data)
(Unaudited)
Note
1. Summary of Significant Accounting
Policies
The attached condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. As a result, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. The Company believes that the disclosures made are
adequate to make the information presented not misleading. The condensed consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and related notes included in the Companys Form 10-K as filed
with the Securities and Exchange Commission on or about February 29, 2008.
Note 2. Comprehensive Income
Comprehensive income
consists of net income and other gains and losses affecting shareholders equity
that, under generally accepted accounting principles in the United States, are
excluded from net income. For the
Company, these consist of foreign currency translation gains and losses and
unrealized gains and losses on securities, net of related income tax effects.
The components of total
comprehensive income for interim periods are presented in the following table:
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
66,472
|
|
$
|
59,288
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments net of tax of $(4,300) and $(890)
|
|
7,986
|
|
1,652
|
|
Unrealized loss
on securities net of tax of $0 and $12
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
74,458
|
|
$
|
60,921
|
|
5
Note 3. Business Segment Information
The Company is organized
functionally in geographic operating segments.
Accordingly, management focuses its attention on revenues, net revenues,
operating income, identifiable assets, capital expenditures, depreciation and
amortization and equity generated in each of these geographical areas when
evaluating the effectiveness of geographic management. The Company charges its subsidiaries and
affiliates for services rendered in the United States on a cost recovery
basis. Transactions among the Companys
various offices are conducted using the same arms-length pricing methodologies
the Company uses when its offices transact business with independent agents.
Financial information
regarding the Companys operations by geographic area for the three months
ended March 31, 2008 and 2007 are as follows:
(in thousands)
|
|
UNITED
STATES
|
|
OTHER
NORTH
AMERICA
|
|
ASIA
|
|
EUROPE
|
|
AUSTRALASIA
|
|
LATIN
AMERICA
|
|
MIDDLE
EAST
|
|
ELIMI-
NATIONS
|
|
CONSOLI-
DATED
|
|
Three
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
297,946
|
|
35,069
|
|
679,850
|
|
185,564
|
|
19,839
|
|
21,860
|
|
67,193
|
|
|
|
1,307,321
|
|
Transfers between
geographic areas
|
|
24,081
|
|
2,073
|
|
5,111
|
|
10,502
|
|
2,134
|
|
3,307
|
|
3,997
|
|
(51,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
322,027
|
|
37,142
|
|
684,961
|
|
196,066
|
|
21,973
|
|
25,167
|
|
71,190
|
|
(51,205
|
)
|
1,307,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
149,055
|
|
16,674
|
|
98,741
|
|
65,773
|
|
11,699
|
|
12,645
|
|
19,741
|
|
|
|
374,328
|
|
Operating income
|
|
$
|
32,539
|
|
3,131
|
|
46,021
|
|
12,437
|
|
3,472
|
|
3,263
|
|
4,701
|
|
|
|
105,564
|
|
Identifiable
assets at quarter end
|
|
$
|
999,281
|
|
70,349
|
|
465,935
|
|
444,133
|
|
36,072
|
|
52,824
|
|
109,713
|
|
5,396
|
|
2,183,703
|
|
Capital
expenditures
|
|
$
|
3,636
|
|
336
|
|
3,303
|
|
1,610
|
|
194
|
|
271
|
|
860
|
|
|
|
10,210
|
|
Depreciation and
amortization
|
|
$
|
5,346
|
|
312
|
|
1,254
|
|
1,768
|
|
249
|
|
315
|
|
528
|
|
|
|
9,772
|
|
Equity
|
|
$
|
1,437,355
|
|
34,711
|
|
355,801
|
|
171,294
|
|
23,068
|
|
27,142
|
|
52,381
|
|
(801,940
|
)
|
1,299,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
unaffiliated customers
|
|
$
|
245,725
|
|
28,086
|
|
602,031
|
|
156,379
|
|
14,783
|
|
19,371
|
|
52,571
|
|
|
|
1,118,946
|
|
Transfers between
geographic areas
|
|
22,498
|
|
1,978
|
|
3,980
|
|
7,761
|
|
1,697
|
|
2,506
|
|
3,423
|
|
(43,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
268,223
|
|
30,064
|
|
606,011
|
|
164,140
|
|
16,480
|
|
21,877
|
|
55,994
|
|
(43,843
|
)
|
1,118,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
135,467
|
|
14,700
|
|
93,153
|
|
56,027
|
|
8,927
|
|
9,795
|
|
16,067
|
|
|
|
334,136
|
|
Operating income
|
|
$
|
28,063
|
|
2,729
|
|
44,884
|
|
10,151
|
|
2,404
|
|
2,052
|
|
4,242
|
|
|
|
94,525
|
|
Identifiable
assets at quarter end
|
|
$
|
878,559
|
|
62,270
|
|
395,634
|
|
361,557
|
|
27,678
|
|
38,209
|
|
75,262
|
|
(2,370
|
)
|
1,836,799
|
|
Capital
expenditures
|
|
$
|
8,705
|
|
324
|
|
1,333
|
|
1,385
|
|
694
|
|
495
|
|
502
|
|
|
|
13,438
|
|
Depreciation and
amortization
|
|
$
|
5,169
|
|
331
|
|
1,375
|
|
1,737
|
|
200
|
|
400
|
|
363
|
|
|
|
9,575
|
|
Equity
|
|
$
|
1,239,866
|
|
29,120
|
|
285,593
|
|
126,658
|
|
17,169
|
|
17,481
|
|
36,299
|
|
(650,659
|
)
|
1,101,527
|
|
6
Note 4. Basic and Diluted Earnings per Share
The following table
reconciles the numerator and the denominator of the basic and diluted per share
computations for earnings per share for the three months ended March 31,
2008 and 2007:
|
|
Three months ended March 31,
|
|
(Amounts in thousands, except share and per share amounts)
|
|
Net Earnings
|
|
Weighted Average
Shares
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$
|
66,472
|
|
213,062,231
|
|
$
|
.31
|
|
Effect of
dilutive potential common shares
|
|
|
|
7,375,748
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
earnings per share
|
|
$
|
66,472
|
|
220,437,979
|
|
$
|
.30
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$
|
59,288
|
|
213,428,221
|
|
$
|
.28
|
|
Effect of
dilutive potential common shares
|
|
|
|
9,414,325
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
earnings per share
|
|
$
|
59,288
|
|
222,842,546
|
|
$
|
.27
|
|
The following shares have
been excluded from the computation of diluted earnings per share because the
effect would have been antidilutive:
|
|
For the three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Shares
|
|
4,708,895
|
|
3,011,960
|
|
Note 5. Shareholders
Equity
Stock Option Plans and
Stock Purchase Plan
The Company provides
compensation benefits by granting stock options to its employees and directors
and employee stock purchase rights to its employees. The Company recognizes
compensation expense based on the estimated fair value of options awarded under
its fixed stock option and employee stock purchase rights plans. The stock compensation expense is recognized
on a straight-line basis over the period stock options become vested. The Companys annual grant of option awards
generally takes place during the second quarter of each fiscal year and no
grants were made in the quarters ended March 31, 2008 and 2007. The grant
of employee stock purchase rights and the issuance of shares under the employee
stock purchase plan are generally made in the third quarter of each fiscal year
and none were issued in the quarters ended March 31, 2008 and 2007.
Total stock
compensation expense and the total related tax benefit recognized in the three
months ended March 31, 2008 and 2007 are as follows:
|
|
For the three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
$
|
11,280
|
|
11,460
|
|
|
|
|
|
|
|
Recognized tax
benefit
|
|
363
|
|
588
|
|
|
|
|
|
|
|
|
Note
6. Income Taxes
7
Based on managements review of the Companys
tax positions the Company had no significant unrecognized tax benefits as of March
31, 2008 and December 31, 2007.
The Company or one of its subsidiaries files
income tax returns in the U.S. federal jurisdiction and various state, local
and foreign jurisdictions. The Company is no longer subject to U.S. federal
income tax examinations by tax authorities for years prior to 2004. In October 2007,
the Internal Revenue Service initiated an audit of the Companys federal income
tax return for the year 2005. With respect to state and local
jurisdictions and countries outside of the United States, with limited
exceptions, the Company and its subsidiaries are no longer subject to income tax
audits for years prior to 2000. In the normal course of business, the Company
is subject to examination by taxing authorities throughout the world. Although
the outcome of tax audits is always uncertain, the Company believes that
adequate amounts of tax, interest and penalties have been provided for any
adjustments that may result from these open tax years.
The Company recognizes interest expense related
to unrecognized tax benefits or underpayment of income taxes in interest
expense and recognizes penalties in operating expenses. Any interest and
penalties expensed in relation to the underpayment of income taxes were
insignificant for the three months ended March 31, 2008 and 2007.
Note
7. Recent Accounting Pronouncements
In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements (SFAS 157), supplemented by FASB Financial Staff Position 157-1
and 2. SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require
any new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company adopted the provisions of SFAS 157
beginning in the first quarter of 2008, except for certain nonfinancial assets
and liabilities for which it will adopt the provisions of SFAS 157 in the first
quarter of 2009. The adoption of SFAS 157 had no material impact on the
Companys consolidated financial condition or results of operations.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). Under the provisions of SFAS 159, companies may
choose to account for eligible financial instruments, warranties and insurance
contracts at fair value on a contract-by-contract basis. Changes in fair
value will be recognized in earnings each reporting period. SFAS 159 is
effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company adopted
the provisions of SFAS 159 beginning in the first quarter of 2008. The adoption
of SFAS 159 had no material impact on the Companys consolidated financial
condition or results of operations.
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 changes the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. SFAS 160
modifies the accounting for changes in a parents ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company is required to and plans to adopt the
provisions of SFAS 160 beginning in the first quarter of 2009. While the
Company is still assessing the impact of the adoption of SFAS 160, it had
minority interest of $17,367 as of March 31, 2008 and $17,208 as of December 31,
2007, that it expects will be reclassified to equity under the provisions of
SFAS 160.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company is required to and plans to adopt the provisions of
SFAS 141R beginning in the first quarter of 2009. The 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 8.
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 March 31, 2008, the Company had incurred approximately $6.6
million of legal and associated costs.
The Company expects to incur additional costs during the course of this
on-going investigation, which could include fines and/or penalties if the DOJ
concludes that the Company has engaged in anti-competitive behavior and such
fines and/or penalties could have a material impact on the Companys financial
condition, results of operations and operating cash flows.
On January 3, 2008, the Company was named as
a defendant, with seven other of the largest European and North American-based
global logistics providers, in a Federal antitrust class action lawsuit filed
in 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.
8
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this
report on Form 10-Q including the section entitled Currency and Other
Risk Factors and Liquidity and Capital Resources contain forward-looking
statements, which must be considered in connection with the discussion of the
important factors that could cause actual results to differ materially from the
forward-looking statements. In addition
to risk factors identified elsewhere in this report, attention should be given
to the factors identified and discussed in the report on Form 10-K filed
on or about February 29, 2008.
EXECUTIVE SUMMARY
Expeditors International of Washington, Inc.
is engaged in the business of global logistics management, including
international freight forwarding and consolidation, for both air and ocean
freight. The Company acts as a customs
broker in all domestic offices, and in many of its international offices. The Company also provides additional services
for its customers including value-added distribution, purchase order management,
vendor consolidation and other logistics solutions. The Company does not
compete for overnight courier or small parcel business. The Company does not own or operate aircraft
or steamships.
International trade is influenced by many
factors, including economic and political conditions in the United States and
abroad, currency exchange rates, and United States and foreign laws and
policies relating to tariffs, trade restrictions, foreign investments and
taxation. Periodically, governments consider a variety of changes to
current tariffs and trade restrictions. The Company cannot predict which,
if any, of these proposals may be adopted, nor can the Company predict the
effects the adoption of any such proposal will have on the Companys
business. Doing business in foreign locations also subjects the Company
to a variety of risks and considerations not normally encountered by domestic
enterprises. In addition to being influenced by governmental policies
concerning international trade, the Companys business may also be affected by
political developments and changes in government personnel or policies in the
nations in which it does business.
The Company derives its revenues from
three principal sources: 1) airfreight, 2) ocean freight and 3) customs brokerage
and other services and these are the revenue categories presented in the
financial statements.
As a non-asset based carrier, the Company
does not own transportation assets. Rather, the Company generates the
major portion of its air and ocean freight revenues by purchasing
transportation services from direct (asset-based) carriers and reselling those
services to its customers. The
difference between the rate billed to customers (the sell rate), and the rate paid
to the carrier (the buy rate) is termed net revenue or yield. By consolidating shipments from multiple
customers and concentrating its buying power, the Company is able to negotiate
favorable buy rates from the direct carriers, while at the same time offering
lower sell rates than customers would otherwise be able to negotiate
themselves.
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
9
revenues until late in a quarter. To the
extent that a shortfall in revenues or earnings was not expected by securities
analysts, any such shortfall from levels predicted by securities analysts could
have an immediate and adverse effect on the trading price of the Companys
stock.
As further discussed
under liquidity and capital resources, total capital expenditures in 2008 are
expected to exceed $85 million.
In terms of the opportunities, challenges
and risks that management is focused on in 2008, the Company operates in 61
countries throughout the world in the competitive global logistics industry and
Company activities are tied directly to the global economy. From the
inception of the Company, management has believed that the elements required
for a successful global service organization can only be assured through
recruiting, training, and ultimately retaining superior personnel. The
Companys greatest challenge is now and always has been perpetuating a
consistent global culture which demands:
·
Total
dedication, first and foremost, to providing superior customer service;
·
Aggressive
marketing of all of the Companys service offerings;
·
Ongoing
development of key employees and management personnel via formal and informal
means;
·
Creation
of unlimited advancement opportunities for employees dedicated to hard work,
personal growth and continuous improvement;
·
Individual
commitment to the identification and mentoring of successors for every key
position so that when inevitable change is required, a qualified and
well-trained internal candidate is ready to step forward; and
·
Continuous
identification, design and implementation of system solutions, both
technological and otherwise, to meet and exceed the needs of our customers
while simultaneously delivering tools to make our employees more efficient and
more effective.
The Company has reinforced these values
with a compensation system that rewards employees for profitably managing the
things they can control. There is no limit to how much a key manager can
be compensated for success. The Company
believes in a real world environment in every operating unit where
individuals are not sheltered from the profit implications of their
decisions. At the same time, the Company insists on continued focus on
such things as accounts receivable collection, cash flow management and credit
soundness in an attempt to insulate managers from the sort of catastrophic
errors that might end a career.
Any failure to perpetuate this unique
culture on a self-sustained basis throughout the Company, provides a greater
threat to the Companys continued success than any external force, which would
be largely beyond our control. Consequently, management spends the
majority of its time focused on creating an environment where employees can
learn and develop while also building systems and taking preventative action to
reduce exposure to negative events. The
Company strongly believes that it is nearly impossible to predict events that,
in the aggregate, could have a positive or a negative impact on future
operations. As a result our focus is on building and maintaining a global
culture of well-trained employees and managers that are prepared to identify
and react to subtle changes as they develop and thereby help the Company adapt
and thrive as major trends emerge.
Critical
Accounting Estimates
Management believes that the nature of the
Companys business is such that there are few, if any, complex measurement
issues or challenges in accounting for operations.
While judgments and estimates are a necessary
component of any system of accounting, the Companys use of estimates is
limited primarily to the following areas that in the aggregate are not a major
component of the Companys statement of earnings:
·
accounts
receivable valuation;
·
the
useful lives of long-term assets;
·
the
accrual of costs related to ancillary services the Company provides;
·
establishment
of adequate insurance liabilities for the portion of the freight related
exposure which the Company has self-insured;
·
accrual
of tax expense on an interim basis; and
·
calculation of share-based compensation expense
.
These estimates, other than the calculation of
share-based compensation expense, are not highly uncertain and have not
historically been subject to significant change.
Management
believes that the methods utilized in all of these areas are non-aggressive in
approach and consistent in application. Management believes that there
are limited, if any, alternative accounting principles or methods which could
be applied to the Companys transactions. While the use of estimates
means that actual future results may be different from those contemplated by
the estimates, the Company believes that alternative principles and methods
used for making such estimates would not produce materially different results
than those reported.
As described in Note 5 in the condensed consolidated
financial statements in this quarterly report, the Company accounts for
share-based compensation based on an
10
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 terminations, and the future interest rates and dividend
yields. The Company uses the
Black-Scholes model for estimating the fair value of stock options.
For the three month periods ended March 31, 2008
and 2007, no options were granted by the Company.
Management believes that the assumptions used are
appropriate based upon the Companys historical and currently expected future
experience. Looking to future events,
management has been strongly influenced by historical patterns which may not be
valid predictors of future developments and any future deviation may be
material.
The Companys expected volatility assumptions are
based on the historical volatility of the Companys stock. The expected life assumption is primarily
based on historical employee exercise patterns and employee post-vesting
termination behavior. The risk-free
interest rate for the expected term of the option is based on the corresponding
yield curve in effect at the time of grant for U.S. Treasury bonds having the
same term as the expected life of the option, i.e. a ten year bond rate is used
for valuing an option with a ten year expected life. The expected dividend yield is based on the
Companys historical experience. The
forfeiture rate used to calculate compensation expense is primarily based on
historical pre-vesting employee forfeiture patterns.
The use of different assumptions would result in
different amounts of stock compensation expense. Keeping all other variables constant, the
indicated change in each of the assumptions below increases or decreases the
fair value of an option (and the resulting stock compensation expense), as
follows:
Assumption
|
|
Change in assumption
|
|
Impact of fair value of options
|
Expected volatility
|
|
Higher
|
|
Higher
|
Expected life of option
|
|
Higher
|
|
Higher
|
Risk-free interest rate
|
|
Higher
|
|
Higher
|
Expected dividend yield
|
|
Higher
|
|
Lower
|
The fair value of an option is more significantly
impacted by changes in the expected volatility and expected life
assumptions. The pre-vesting forfeitures
assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures
assumption would not impact the total amount of expense ultimately recognized
over the vesting period. Different
forfeitures assumptions would only impact the timing of expense recognition
over the vesting period. Estimated
forfeitures will be reassessed in subsequent periods and may change based on
new facts and circumstances.
Results of Operations
The following table shows
the consolidated net revenues (revenues less transportation expenses)
attributable to the Companys principal services and the Companys expenses for
the three-month periods ended March 31, 2008 and 2007, expressed as
percentages of net revenues. Management
believes that net revenues are a better measure than total revenues of the
relative importance of the Companys principal services since total revenues
earned by the Company as a freight consolidator include the carriers charges
to the Company for carrying the shipment whereas revenues earned by the Company
in its other capacities include only the commissions and fees actually earned
by the Company.
The table and the
accompanying discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes thereto which
appear elsewhere in this quarterly report.
11
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Amount
|
|
Percent of net
revenues
|
|
Amount
|
|
Percent of net
revenues
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
Airfreight
|
|
$
|
138,664
|
|
37
|
%
|
$
|
127,561
|
|
38
|
%
|
Ocean freight
and ocean services
|
|
86,352
|
|
23
|
|
76,311
|
|
23
|
|
Customs
brokerage and other services
|
|
149,312
|
|
40
|
|
130,264
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
374,328
|
|
100
|
|
334,136
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
Overhead
expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and
related costs
|
|
205,815
|
|
55
|
|
182,761
|
|
55
|
|
Other
|
|
62,949
|
|
17
|
|
56,850
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Total overhead
expenses
|
|
268,764
|
|
72
|
|
239,611
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
105,564
|
|
28
|
|
94,525
|
|
28
|
|
Other income,
net
|
|
6,167
|
|
2
|
|
5,960
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes and minority interest
|
|
111,731
|
|
30
|
|
100,485
|
|
30
|
|
Income tax
expense
|
|
45,210
|
|
12
|
|
41,160
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
before minority interest
|
|
66,521
|
|
18
|
|
59,325
|
|
18
|
|
Minority
interest
|
|
(49
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
66,472
|
|
18
|
%
|
$
|
59,288
|
|
18
|
%
|
Airfreight net revenues
increased 9% for the three month period ended March 31, 2008, as compared
with the same period for 2007. The
increase in airfreight net revenues was primarily due to an 8% increase in
airfreight tonnages handled by the Company during the first quarter of 2008, as
compared with the same period of 2007.
The Companys North American export airfreight net revenues increased
10% in the first quarter of 2008, as compared to the same period for 2007,
primarily the result of increased market share attributable to focused sales
activity. Airfreight net revenues from
Europe increased 18% while airfreight net revenues from Asia remained essentially
flat, for the three month period ended March 31, 2008. The increase in Europe is a result of tonnage
increases of 4% combined with a net revenue per kilo increase of 9%. Airfreight tonnages from Asia increased 5%
while net revenue per kilo decreased 5%.
Ocean
freight and ocean services net revenues increased 13% during the first quarter
of 2008, as compared with the same period in 2007.
Ocean freight net revenues are
comprised of three basic services: ocean freight consolidation, direct ocean
forwarding and order management. The
majority of the Companys ocean freight net revenue is derived from ocean
freight consolidation which represented 58% of ocean freight net revenue for
the three months ended March 31, 2008 and 59% for the same period in
2007. Ocean freight consolidation net
revenue grew at a rate of 11% during the first quarter of 2008, as compared to
the same period for 2007, while the other services, ocean forwarding and order
management, which are primarily fee based, grew at rates of 14% and 18%,
respectively, for the same period. Ocean freight consolidation volumes, measured in
terms of forty-foot container equivalent units (FEUs), increased 8% in the
first quarter 2008, as compared with the same period for 2007 while net revenue
per container, on an aggregate basis, increased 5% for the same period. The
dynamics of these increases in ocean net revenues is a combination of the
Companys response to market demand with aggressive sales efforts and pricing
strategies necessary to expand market share.
The
Companys North American ocean freight net revenues increased 7% in the first
quarter of 2008, as compared with the same period for 2007. Ocean freight net revenues for Asia increased
20% while ocean freight net revenues for Europe increased 14% for the three
months ended March 31, 2008, as compared to the same period for 2007. The increase in European ocean freight net
revenue during the quarter is primarily a result of increased imports driven by
more focused sales coordination between the Companys Asian and European
offices. This increase continued to be
influenced by the relative strength of European currencies. The increase in Asian ocean freight net
revenue is a result of increases in container counts to North America and
Europe.
Customs brokerage and
other services net revenues increased 15% for the three month period ended March 31,
2008, as compared with the same period for 2007, as a result of the Companys focused marketing efforts and continued emphasis
on providing high quality service.
Consolidation within the customs brokerage market has also contributed
to this increase as customers seek out
12
customs
brokers with more sophisticated computerized capabilities critical to an
overall logistics management program. In
addition, increased focus on regulatory compliance continues to provide
opportunities for the Company to expand its customs brokerage services.
Salaries and related costs increased 13%
during the three month period ended March 31, 2008, as compared with the
same period in 2007, as a result of (1) the Companys increased hiring of
sales, operations, and administrative personnel in existing and new offices to
accommodate increases in business activity, and (2) increased compensation
levels.
The effects of including stock-based
compensation expense in salaries and related costs for the three-months ended March 31,
2008 and 2007 are as follows:
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Salaries and
related costs
|
|
$
|
205,815
|
|
$
|
182,761
|
|
|
|
|
|
|
|
As a % of net
revenue
|
|
55.0
|
%
|
54.7
|
%
|
|
|
|
|
|
|
Stock
compensation expense
|
|
$
|
11,280
|
|
$
|
11,460
|
|
|
|
|
|
|
|
As a % of
salaries and related costs
|
|
5.5
|
%
|
6.3
|
%
|
|
|
|
|
|
|
As a % of net
revenue
|
|
3.0
|
%
|
3.4
|
%
|
Historically, the relatively consistent
relationship between salaries and net revenues is the result of a compensation
philosophy that has been maintained since the inception of the Company: offer a
modest base salary and the opportunity to share in a fixed and determinable
percentage of the operating profit of the business unit controlled by each key
employee. Using this compensation model,
changes in individual compensation will occur in proportion to changes in
Company profits. Management believes
that the growth in revenues, net revenues and net earnings, for the three month
period ended March 31, 2008, are a result of the incentives inherent in
the Companys compensation program.
Other overhead expenses
increased 11% for the three month period ended March 31, 2008, as compared
with the same period in 2007, as rent
expense, communications expense, process improvement and training expenses, and
other costs expanded to accommodate the Companys growing operations. Also, legal and related expenses during this
same period increased approximately $2 million, primarily as a result of the
Department of Justices (DOJ) ongoing investigation of air cargo freight
forwarders as described further in Part II Item 1 of this report on Form 10-Q
entitled Legal Proceedings. The
Company will continue to incur substantial legal costs, which could include
fines and/or penalties, until this investigation is concluded. If the DOJ concludes that the Company has
engaged in anti-competitive behavior, such fines and/or penalties could have a
material impact on the Companys financial condition, results of
operations and operating cash flows. Other overhead expenses remained constant as
a percentage of net revenues for the three-month period ended March 31,
2008, as compared with the same period in 2007.
Other income, net,
increased 3% and remained constant as a percentage of net revenues for the
three-month period ended March 31, 2008, as compared with the same period
in 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 for the three months ended March 31, 2008 of 40.46% decreased
slightly when compared with the 40.96% rate for the same period in 2007. The lower consolidated effective income tax
rate for 2008 as compared to 2007 is partially the result of a higher net tax
benefit received for stock options during the first quarter of 2008 than was
realized during the first quarter of 2007.
Currency and
Other Risk Factors
International air/ocean
freight forwarding and customs brokerage are intensively competitive and are
expected to remain so for the foreseeable future. There are a large number of
entities competing in the international logistics industry; however, the
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
13
technological capacity
and consistent global coverage.
Accordingly, sophisticated computerized customer service capabilities
and a stable worldwide network have become significant factors in attracting
and retaining customers.
Developing these systems
and a worldwide network has added a considerable indirect cost to the services
provided to customers. Smaller and
middle-tier competitors, in general, do not have the resources available to
develop customized systems and a worldwide network. As a result, there is a significant amount of
consolidation currently taking place in the industry. Management expects that this trend toward
consolidation will continue for the short- to medium-term.
The nature of the Companys worldwide
operations necessitates the Company dealing with a multitude of currencies
other than the U.S. dollar. This results
in the Company being exposed to the inherent risks of the international
currency markets and governmental interference.
Some of the countries where the Company maintains offices and/or agency
relationships have strict currency control regulations which influence the
Companys ability to hedge foreign currency exposure. The Company tries to compensate for these
exposures by accelerating international currency settlements among its offices
or agents. The Company enters into
foreign currency hedging transactions only in limited locations where there are
regulatory or commercial limitations on the Companys ability to move money
freely around the world or the short-term financial outlook in any country is
such that hedging is the most time-sensitive way to avoid short-term exchange
losses. Any such hedging activity during
the three months ended March 31, 2008 and 2007 was insignificant. During the three months ended March 31,
2008 and 2007, the Company realized net foreign exchange losses of
approximately $544 and $110, respectively.
The Company had no foreign currency derivatives outstanding at March 31,
2008 and 2007.
Sources
of Growth
During the first quarter
of 2008, the Company opened four full-service offices (
) and two
satellite offices (+), as follows:
Asia
|
|
Middle East
|
|
North America
|
Fuzhou, Peoples
Republic of China
|
|
Damman, Kingdom of
Saudi Arabia
|
|
Raleigh, North Carolina
|
|
|
Coimbatore, India+
|
|
|
|
|
Kolkata, India +
|
|
|
|
|
Manama, Kingdom of
Bahrain
|
|
|
(1) Damman, Saudi
Arabia converted from a satellite to a full-service office.
(2) Coimbatore,
India is a satellite office of Chennai.
(3) Kolkata, India
is a satellite office of Delhi.
Acquisitions -
Historically, growth through aggressive acquisition has proven to be a
challenge for many of the Companys competitors and typically involves the
purchase of significant goodwill, the value of which can be realized in large
measure only by retaining the customers and profit margins of the acquired
business. As a result, the Company has
pursued a strategy emphasizing organic growth supplemented by certain strategic
acquisitions, where future economic benefit significantly exceeds the goodwill
recorded in the transaction.
Internal Growth -
Management believes that a comparison of same store growth is critical in the
evaluation of the quality and extent of the Companys internally generated
growth. This same store analysis isolates the financial contributions from
offices that have been included in the Companys operating results for at least
one full year. The table below presents same
store comparisons for the first quarter of 2008 (which is the measure of any
increase from the same period of 2007) and for the first quarter of 2007 (which
measures growth over 2006).
|
|
For the three months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net revenue
|
|
12
|
%
|
12
|
%
|
Operating income
|
|
12
|
%
|
11
|
%
|
Liquidity and Capital Resources
The
Companys principal source of liquidity is cash generated from operating
activities. Net cash provided by
operating activities for the three months ended March 31, 2008, was
approximately $179 million, as compared with $116 million for the same period
of 2007. This $63 million increase is
principally due to
an increase in accounts payable and other current
liabilities as a result of the timing of disbursements.
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
14
activity associated with
peak season (typically commencing late second or early third quarter) causes an
excess of customer billings over customer collections. This cyclical growth in customer receivables
consumes available cash.
As a customs broker, the
Company makes significant 5-10 business day cash advances for certain of its
customers obligations such as
the
payment of duties to the Customs and Border Protection of the Department of
Homeland Security. These advances are
made as an accommodation for a select group of credit-worthy customers. Cash advances are a pass through and are
not recorded as a component of revenue or expense. The billings of such advances to customers
are accounted for as a direct increase in accounts receivable to the customer
and a corresponding increase in accounts payable to governmental customs
authorities. As a result of these pass
through billings, the conventional Days Sales Outstanding or DSO calculation
does not directly measure collection efficiency.
Cash used in investing
activities for the three months ended March 31, 2008, was $10 million, as
compared with $13 million during the same period of 2007. The largest use of cash in investing
activities is cash paid for capital expenditures. As a
non-asset based provider of integrated logistics services, the Company does not
own any physical means of transportation (i.e., airplanes, ships, trucks,
etc.). However, the Company does have
need, on occasion, to purchase buildings to house staff and to facilitate the
staging of customers freight. The Company
routinely invests in technology, office furniture and equipment and leasehold
improvements. In the first
quarter of 2008, the Company made capital expenditures of $10 million, as
compared with $13 million for the same period in 2007. Capital expenditures in the first quarter of
2008 and 2007 related primarily to investments in technology, office furniture
and equipment building improvements and leasehold improvements. The Company currently expects to spend approximately
$71 million for normal capital expenditures in 2008. In addition to property
and equipment,
normal capital
expenditures include
leasehold
improvements, warehouse equipment, computer hardware and furniture and
fixtures. Total capital expenditures in
2008 are currently estimated to be $85 million.
This includes normal capital expenditures as noted above, plus
additional real estate acquisitions and development.
Cash used in financing
activities during the first quarter of 2008 was $12 million as compared with
$41 million during the first quarter of 2007.
The Company uses the proceeds from stock option exercises to repurchase
the Companys stock on the open market.
The Company follows a policy of repurchasing stock to limit growth in
issued and outstanding shares as a result of stock option exercises. The decrease in cash used in financing
activities during the first quarter of 2008 compared with the same period in
2007 is primarily the result of this policy and of fewer stock option exercises
in the first quarter of 2008 when compared to the same period in 2007.
At March 31, 2008, working capital was
$847 million, including cash and short-term investments of $742 million. The Company had no long-term debt at March 31,
2008.
The Company maintains
international and domestic unsecured bank lines of credit. At March 31, 2008, the United States
facility totaled $50 million and international bank lines of credit, excluding
the U.K. bank facility, totaled $18 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 March 31, 2008, the
Company had $748 outstanding on these lines of credit and was contingently
liable for $81 million from standby letters of credit and guarantees related to
these lines of credit and other obligations.
The standby letters of credit and
guarantees relate to obligations of the Companys foreign subsidiaries for
credit extended in the ordinary course of business by direct carriers,
primarily airlines, and for duty and tax deferrals available from governmental
entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable
for transportation and governmental excises are properly recorded as
obligations in the books of the respective foreign subsidiaries, and there
would be no need to record additional expense in the unlikely event the parent
company were to be required to perform.
Management believes that
the Companys current cash position, bank financing arrangements, and operating
cash flows will be sufficient to meet its capital and liquidity requirements
for the foreseeable future, including meeting any contingent liabilities
related to standby letters of credit and other obligations.
In some cases, the Companys ability to
repatriate funds from foreign operations may be subject to foreign exchange
controls. At March 31, 2008, cash and cash equivalent balances of $464
million were held by the Companys non-United States subsidiaries, of which $56
million was held in banks in the United States.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
The
Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign
exchange risk and changes in short-term interest rates. The potential impact of the Companys
exposure to these risks is presented below:
Foreign
Exchange Risk
The Company conducts
business in many different countries and currencies. The Companys business often results in
revenue billings issued in a country and currency which differs from that where
the expenses related to the service are incurred. In the ordinary course of
business, the Company creates numerous intercompany transactions. This brings a market risk to the Companys
earnings.
15
Foreign exchange rate sensitivity analysis
can be quantified by estimating the impact on the Companys earnings as a
result of hypothetical changes in the value of the U.S. dollar, the Companys
functional currency, relative to the other currencies in which the Company
transacts business. All other things
being equal, an average 10% weakening of the U.S. dollar, throughout the three
months ended March 31, 2008, would have had the effect of raising
operating income approximately $8 million.
An average 10% strengthening of the U.S. dollar, for the same period,
would have the effect of reducing operating income approximately $7 million. This analysis does not take in to account
changes in shipping patterns based upon this hypothetical currency
fluctuation. For example, a weakening in
the U.S. dollar would be expected to increase exports from the United States
and decrease imports into the United States over some relevant period of time,
but the exact effect of this change cannot be quantified without making
speculative assumptions.
As of March 31,
2008, the Company had approximately $3 million of net unsettled intercompany
transactions. The Company currently does
not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging
transactions in limited locations where regulatory or commercial limitations
restrict the Companys ability to move money freely. Any such hedging activity during the three
months ended March 31, 2008, was insignificant. During the three months ended March 31,
2008 and 2007, the Company realized net foreign exchange losses of $544 and
$110, respectively. The Company had no
foreign currency derivatives outstanding at March 31, 2008 and 2007. The Company instead follows a policy
of accelerating international currency settlements to manage foreign exchange
risk relative to intercompany billings.
The majority of intercompany billings are resolved within 30 days and
intercompany billings arising in the normal course of business are fully
settled within 90 days.
Interest
Rate Risk
At March 31, 2008, the Company had cash
and cash equivalents and short-term investments of $742 million, of which $529
million was invested at various short-term market interest rates. The Company had short-term borrowings of $748
at March 31, 2008. A hypothetical
change in the interest rate of 10% would not have a significant impact on the
Companys earnings.
In managements opinion,
there has been no material change in the Companys market risk exposure in the
first quarter of 2008.
Item 4. Controls and Procedures
Evaluation
of Controls and Procedures
The Company carried out
an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15(e))
as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective.
Changes
in Internal Controls
There
were no changes in the Companys internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected or
are reasonably likely to materially affect, the Companys internal control over
financial reporting.
16
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
On October 10, 2007, the U. S. Department of
Justice (DOJ) issued a subpoena ordering the Company to produce certain
information and records relating to an investigation of alleged
anti-competitive behavior amongst air cargo freight forwarders. The Company has retained the services of a
law firm to assist in complying with the DOJs subpoena. They are also
assisting management in conducting a very rigorous self-review. As part of this process, the Company has met
with and continues to co-operate with the DOJ.
As of March 31, 2008, the Company had incurred approximately $6.6 million
of legal and associated costs. The
Company expects to incur additional costs during the course of this on-going
investigation, which could include fines and/or penalties if the DOJ concludes
that the Company has engaged in anti-competitive behavior and such fines and/or
penalties could have a material impact on the Companys financial condition,
results of operations and operating cash flows.
On January 3, 2008, the Company was named as a
defendant, with seven other of the largest European and North American-based global
logistics providers, in a Federal antitrust class action lawsuit filed in 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 1A.
Risk Factors
There have been no
material changes in the Companys risk factors from those disclosed in the
report on Form 10-K filed on or about February 29, 2008, except for
noting that any fines or penalties that could be levied by the DOJ in the event
the DOJ concludes the Company has engaged in anti-competitive behavior could
have a material impact on the Companys financial condition, results of
operations and operating cash flows.
RISK FACTOR
|
|
DISCUSSION AND POTENTIAL SIGNIFICANCE
|
Litigation/Investigations
|
|
As a
multinational corporation, the Company is subject to formal or informal
investigations or litigation from governmental authorities in the countries
in which it does business. The Company is currently subject to, and is
cooperating fully with, an investigation by the U.S. Department of Justice
(DOJ) of air cargo freight forwarders. This investigation may require further
management time and cause the Company to incur substantial additional legal
and related costs, which could include fines and/or penalties if the DOJ
concludes that the Company has engaged in anti-competitive behavior and such
fines and/or penalties could have a material impact on the Companys
financial condition, results of operations and operating cash flows. 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 the Company. In addition, the Company
has been named as a defendant in a Federal anti-trust class action lawsuit
filed in New York and will incur additional costs related to defending itself
in these proceedings.
|
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY
SECURITIES
Period
|
|
Total number of
shares purchased
|
|
Average price
paid per share
|
|
Total number of shares
purchased as part of
publicly announced
plans or programs
|
|
Maximum number
of shares that may yet be
purchased under the
plans or programs
|
|
January 1-31,
2008
|
|
241
|
|
$
|
45.62
|
|
241
|
|
16,158,766
|
|
February 1-29,
2008
|
|
222,921
|
|
41.93
|
|
222,921
|
|
16,187,861
|
|
March 1-31,
2008
|
|
204,285
|
|
45.32
|
|
204,285
|
|
15,982,432
|
|
Total
|
|
427,447
|
|
$
|
43.56
|
|
427,447
|
|
15,982,432
|
|
In November 1993, the Companys Board of Directors
authorized a Non-Discretionary Stock Repurchase Plan. This plan was amended in February 2001
to increase the authorization to repurchase up to 20 million shares of the
Companys common stock.
17
This
authorization has no expiration date.
This plan was disclosed in the Companys report on Form 10-K filed March 31,
1995. In the first quarter of 2008,
106,658 shares were repurchased under the Non-Discretionary Stock Repurchase
Plan.
In November 2001, under a Discretionary Stock
Repurchase Plan, the Companys Board of Directors authorized the repurchase of
such shares as may be necessary to reduce the issued and outstanding stock to
200 million shares of common stock. The
maximum number of shares available for repurchase under this plan will increase
as the total number of outstanding shares increases. This authorization has no expiration date. This plan was announced on November 13,
2001. In the first quarter of 2008,
320,789 shares were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases were made to
limit the growth in the number of issued and outstanding shares resulting from
stock option exercises.
Item
5. Other Information
(a)
Not applicable.
(b) Not applicable.
Item 6. Exhibits
Exhibits required by Item
601 of Regulation S-K.
Exhibit Number
|
|
Description
|
|
|
|
Exhibit 31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Exhibit 31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Exhibit 32
|
|
Certification pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
18
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
|
|
|
|
May 9, 2008
|
|
/s/ PETER J.
ROSE
|
|
|
Peter J. Rose, Chairman
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
May 9, 2008
|
|
/s/ R. JORDAN
GATES
|
|
|
R. Jordan Gates,
President and Chief Operating Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
19
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index
and Exhibits
March 31,
2008
Exhibit Number
|
|
Description
|
|
|
|
Exhibit 31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Exhibit 31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Exhibit 32
|
|
Certification pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
20
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