Item 1. Financial Statements
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,033,444
|
|
|
$
|
974,435
|
|
Accounts receivable, less allowance for doubtful accounts of $11,217 at September 30, 2017 and $9,247 at December 31, 2016
|
1,349,854
|
|
|
1,190,130
|
|
Other
|
135,623
|
|
|
54,014
|
|
Total current assets
|
2,518,921
|
|
|
2,218,579
|
|
Property and equipment, less accumulated depreciation and amortization of $413,219 at September 30, 2017 and $406,652 at December 31, 2016
|
513,070
|
|
|
536,572
|
|
Goodwill
|
7,927
|
|
|
7,927
|
|
Other assets, net
|
28,963
|
|
|
27,793
|
|
Total assets
|
$
|
3,068,881
|
|
|
$
|
2,790,871
|
|
Current Liabilities:
|
|
|
|
Accounts payable
|
$
|
836,055
|
|
|
$
|
726,571
|
|
Accrued expenses, primarily salaries and related costs
|
216,146
|
|
|
185,502
|
|
Federal, state and foreign income taxes
|
23,853
|
|
|
17,858
|
|
Total current liabilities
|
1,076,054
|
|
|
929,931
|
|
Deferred Federal and state income taxes
|
11,746
|
|
|
13,727
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
Preferred stock, none issued
|
—
|
|
|
—
|
|
Common stock, par value $0.01 per share. Issued and outstanding 177,559 shares at September 30, 2017 and 179,857 shares at December 31, 2016
|
1,776
|
|
|
1,799
|
|
Additional paid-in capital
|
1,464
|
|
|
2,642
|
|
Retained earnings
|
2,053,723
|
|
|
1,944,789
|
|
Accumulated other comprehensive loss
|
(78,960
|
)
|
|
(104,592
|
)
|
Total shareholders’ equity
|
1,978,003
|
|
|
1,844,638
|
|
Noncontrolling interest
|
3,078
|
|
|
2,575
|
|
Total equity
|
1,981,081
|
|
|
1,847,213
|
|
Total liabilities and equity
|
$
|
3,068,881
|
|
|
$
|
2,790,871
|
|
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Airfreight services
|
$
|
735,164
|
|
|
$
|
621,566
|
|
|
$
|
2,022,577
|
|
|
$
|
1,764,512
|
|
Ocean freight and ocean services
|
563,386
|
|
|
495,460
|
|
|
1,585,730
|
|
|
1,414,344
|
|
Customs brokerage and other services
|
503,616
|
|
|
445,368
|
|
|
1,411,270
|
|
|
1,277,174
|
|
Total revenues
|
1,802,166
|
|
|
1,562,394
|
|
|
5,019,577
|
|
|
4,456,030
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
Airfreight services
|
547,595
|
|
|
444,359
|
|
|
1,490,417
|
|
|
1,236,555
|
|
Ocean freight and ocean services
|
411,061
|
|
|
359,991
|
|
|
1,163,051
|
|
|
1,006,710
|
|
Customs brokerage and other services
|
244,368
|
|
|
212,785
|
|
|
675,729
|
|
|
597,320
|
|
Salaries and related costs
|
319,050
|
|
|
291,204
|
|
|
930,159
|
|
|
868,091
|
|
Rent and occupancy costs
|
30,533
|
|
|
27,091
|
|
|
87,826
|
|
|
81,029
|
|
Depreciation and amortization
|
12,272
|
|
|
11,882
|
|
|
36,241
|
|
|
34,853
|
|
Selling and promotion
|
10,608
|
|
|
10,134
|
|
|
32,476
|
|
|
29,817
|
|
Other
|
39,784
|
|
|
37,685
|
|
|
102,429
|
|
|
103,702
|
|
Total operating expenses
|
1,615,271
|
|
|
1,395,131
|
|
|
4,518,328
|
|
|
3,958,077
|
|
Operating income
|
186,895
|
|
|
167,263
|
|
|
501,249
|
|
|
497,953
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
Interest income
|
3,444
|
|
|
2,924
|
|
|
9,565
|
|
|
8,593
|
|
Other, net
|
96
|
|
|
925
|
|
|
2,584
|
|
|
3,407
|
|
Other income (expense), net
|
3,540
|
|
|
3,849
|
|
|
12,149
|
|
|
12,000
|
|
Earnings before income taxes
|
190,435
|
|
|
171,112
|
|
|
513,398
|
|
|
509,953
|
|
Income tax expense
|
69,829
|
|
|
63,163
|
|
|
190,470
|
|
|
188,518
|
|
Net earnings
|
120,606
|
|
|
107,949
|
|
|
322,928
|
|
|
321,435
|
|
Less net earnings attributable to the noncontrolling interest
|
343
|
|
|
368
|
|
|
550
|
|
|
1,218
|
|
Net earnings attributable to shareholders
|
$
|
120,263
|
|
|
$
|
107,581
|
|
|
$
|
322,378
|
|
|
$
|
320,217
|
|
Diluted earnings attributable to shareholders per share
|
$
|
0.66
|
|
|
$
|
0.59
|
|
|
$
|
1.77
|
|
|
$
|
1.75
|
|
Basic earnings attributable to shareholders per share
|
$
|
0.67
|
|
|
$
|
0.59
|
|
|
$
|
1.79
|
|
|
$
|
1.76
|
|
Dividends declared and paid per common share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
Weighted average diluted shares outstanding
|
181,788
|
|
|
182,692
|
|
|
181,951
|
|
|
182,958
|
|
Weighted average basic shares outstanding
|
179,416
|
|
|
181,177
|
|
|
179,827
|
|
|
181,645
|
|
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net earnings
|
$
|
120,606
|
|
|
$
|
107,949
|
|
|
$
|
322,928
|
|
|
$
|
321,435
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax of $4,128 and $202 for the three months ended September 30, 2017 and 2016 and $14,019 and $223 for the nine months ended September 30, 2017 and 2016
|
7,489
|
|
|
260
|
|
|
25,585
|
|
|
(457
|
)
|
Other comprehensive income (loss)
|
7,489
|
|
|
260
|
|
|
25,585
|
|
|
(457
|
)
|
Comprehensive income
|
128,095
|
|
|
108,209
|
|
|
348,513
|
|
|
320,978
|
|
Less comprehensive income attributable to the noncontrolling interest
|
285
|
|
|
260
|
|
|
503
|
|
|
1,167
|
|
Comprehensive income attributable to shareholders
|
$
|
127,810
|
|
|
$
|
107,949
|
|
|
$
|
348,010
|
|
|
$
|
319,811
|
|
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating Activities:
|
|
|
|
|
|
|
|
Net earnings
|
$
|
120,606
|
|
|
$
|
107,949
|
|
|
$
|
322,928
|
|
|
$
|
321,435
|
|
Adjustments to reconcile net earnings to net cash from operating activities:
|
|
|
|
|
|
|
|
Provision for losses on accounts receivable
|
1,741
|
|
|
1,321
|
|
|
3,187
|
|
|
2,461
|
|
Deferred income tax (benefit) expense
|
(28,854
|
)
|
|
(1,439
|
)
|
|
(16,000
|
)
|
|
2,342
|
|
Stock compensation expense
|
11,210
|
|
|
10,476
|
|
|
39,036
|
|
|
34,264
|
|
Depreciation and amortization
|
12,272
|
|
|
11,882
|
|
|
36,241
|
|
|
34,853
|
|
Other, net
|
377
|
|
|
11
|
|
|
(148
|
)
|
|
41
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
(126,102
|
)
|
|
(58,279
|
)
|
|
(123,790
|
)
|
|
6,087
|
|
Increase in accounts payable and accrued expenses
|
61,833
|
|
|
38,070
|
|
|
96,132
|
|
|
74,148
|
|
Increase (decrease) in income taxes payable, net
|
38,149
|
|
|
7,197
|
|
|
10,814
|
|
|
(16,612
|
)
|
Increase in other current assets
|
(5,872
|
)
|
|
(1,395
|
)
|
|
(6,147
|
)
|
|
(2,089
|
)
|
Net cash from operating activities
|
85,360
|
|
|
115,793
|
|
|
362,253
|
|
|
456,930
|
|
Investing Activities:
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
(34,462
|
)
|
|
(12,659
|
)
|
|
(67,603
|
)
|
|
(39,973
|
)
|
Other, net
|
(261
|
)
|
|
1,617
|
|
|
(892
|
)
|
|
5,472
|
|
Net cash from investing activities
|
(34,723
|
)
|
|
(11,042
|
)
|
|
(68,495
|
)
|
|
(34,501
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
65,915
|
|
|
57,522
|
|
|
162,781
|
|
|
147,645
|
|
Repurchases of common stock
|
(202,776
|
)
|
|
(101,690
|
)
|
|
(340,736
|
)
|
|
(268,097
|
)
|
Dividends paid
|
—
|
|
|
—
|
|
|
(75,726
|
)
|
|
(73,000
|
)
|
Net cash from financing activities
|
(136,861
|
)
|
|
(44,168
|
)
|
|
(253,681
|
)
|
|
(193,452
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
4,758
|
|
|
1,853
|
|
|
18,932
|
|
|
5,927
|
|
(Decrease) increase in cash and cash equivalents
|
(81,466
|
)
|
|
62,436
|
|
|
59,009
|
|
|
234,904
|
|
Cash and cash equivalents at beginning of period
|
1,114,910
|
|
|
980,264
|
|
|
974,435
|
|
|
807,796
|
|
Cash and cash equivalents at end of period
|
$
|
1,033,444
|
|
|
$
|
1,042,700
|
|
|
$
|
1,033,444
|
|
|
$
|
1,042,700
|
|
Taxes Paid:
|
|
|
|
|
|
|
|
Income taxes
|
$
|
58,257
|
|
|
$
|
58,696
|
|
|
$
|
190,911
|
|
|
$
|
205,049
|
|
See accompanying notes to condensed consolidated financial statements.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
|
|
Note 1.
|
Summary of Significant Accounting Policies
|
Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, industrial and manufacturing companies around the world.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 23, 2017.
All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified. Certain prior year amounts have been reclassified to conform to the 2017 presentation.
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 and advances. Additional allowances may be necessary in the future if the ability of customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of
$11,217
as of
September 30, 2017
and
$9,247
as of
December 31, 2016
. Additions and write-offs have not been significant in the periods presented.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities, accrual of loss contingencies and calculation of share-based compensation expense. Actual results could differ from those estimates.
Note 2. Share-Based Compensation
The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. On
May 2, 2017
, shareholders approved the 2017 Omnibus Incentive Plan (2017 Plan), which made available
2,500
shares of the Company's common stock in aggregate to be issued under any award type allowed by the 2017 Plan. In the nine-month period ended
September 30, 2017
, the Company awarded
583
restricted stock units (RSU) under the 2017 Plan to certain employees at a weighted-average grant date fair value of
$54.04
. The RSU vest annually over
3 years
based on continued employment and are settled upon vesting in shares of the Company's common stock on a
one
-for-one basis. The value of an RSU grant is based on the Company's stock price on the date of grant. Additionally, in the second quarter of
2017
and
2016
, respectively,
38
and
41
fully vested shares were granted to non-employee directors.
The Company also awarded
23
performance stock units (PSU) under the 2017 Plan. The PSU include performance conditions and a time-based vesting component. The final number of PSU will be determined using an adjustment factor of up to
two times
each PSU granted, depending on the degree of achievement of the designated performance targets. If the minimum performance thresholds are not achieved,
no
shares will be issued. Each PSU will convert to
one
share of the Company's common stock upon vesting.
RSU and PSU granted under the 2017 Plan have dividend equivalent rights, which entitle holders of RSU and PSU to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSU and PSU and are accumulated and paid in shares when the underlying awards vest.
Under the 2016 Stock Option Plan,
2,973
options were granted in the nine months ended
September 30, 2016
, vesting over
3 years
from the date of grant. The Company does not plan to grant stock options in 2017.
The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year and
682
and
703
were issued in the
nine-month
periods ended
September 30, 2017
and
2016
, respectively. The fair value of the employee stock purchase rights granted was
$11.69
and
$10.99
per share for the quarters ended
September 30, 2017
and
2016
, respectively.
The Company recognizes stock compensation expense based on an estimate of the fair value of awards granted to employees and directors under the Company’s omnibus incentive, stock option, director restricted stock and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related expenses. RSU awards to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately, as there is no substantive service period associated with those awards. Approximately
$4 million
of stock compensation expense was recognized in the second quarter of
2017
for RSU grants meeting retirement eligibility criteria.
Beginning on January 1, 2017, the Company adopted accounting guidance requiring that, prospectively, excess tax benefits and deficiencies be recorded in income tax expense for vesting of RSU, stock option exercises, cancellations and disqualifying dispositions of employee stock purchase plan shares. Also, the Company has elected to continue to estimate forfeitures expected to occur in determining compensation cost to be recognized in each period.
Total stock compensation expense and the total related tax benefit recognized are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock compensation expense
|
$
|
11,210
|
|
|
$
|
10,476
|
|
|
$
|
39,036
|
|
|
$
|
34,264
|
|
Recognized tax benefit
|
$
|
2,311
|
|
|
$
|
2,149
|
|
|
$
|
8,187
|
|
|
$
|
5,928
|
|
Note 3. Basic and Diluted Earnings per Share
Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
September 30,
|
(Amounts in thousands, except per share amounts)
|
Net earnings
attributable to
shareholders
|
|
Weighted average
shares
|
|
Earnings per share
|
2017
|
|
|
|
|
|
Basic earnings attributable to shareholders
|
$
|
120,263
|
|
|
179,416
|
|
|
$
|
0.67
|
|
Effect of dilutive potential common shares
|
—
|
|
|
2,372
|
|
|
—
|
|
Diluted earnings attributable to shareholders
|
$
|
120,263
|
|
|
181,788
|
|
|
$
|
0.66
|
|
2016
|
|
|
|
|
|
Basic earnings attributable to shareholders
|
$
|
107,581
|
|
|
181,177
|
|
|
$
|
0.59
|
|
Effect of dilutive potential common shares
|
—
|
|
|
1,515
|
|
|
—
|
|
Diluted earnings attributable to shareholders
|
$
|
107,581
|
|
|
182,692
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
September 30,
|
(Amounts in thousands, except per share amounts)
|
Net earnings
attributable to
shareholders
|
|
Weighted average
shares
|
|
Earnings per share
|
2017
|
|
|
|
|
|
Basic earnings attributable to shareholders
|
$
|
322,378
|
|
|
179,827
|
|
|
$
|
1.79
|
|
Effect of dilutive potential common shares
|
—
|
|
|
2,124
|
|
|
—
|
|
Diluted earnings attributable to shareholders
|
$
|
322,378
|
|
|
181,951
|
|
|
$
|
1.77
|
|
2016
|
|
|
|
|
|
Basic earnings attributable to shareholders
|
$
|
320,217
|
|
|
181,645
|
|
|
$
|
1.76
|
|
Effect of dilutive potential common shares
|
—
|
|
|
1,313
|
|
|
—
|
|
Diluted earnings attributable to shareholders
|
$
|
320,217
|
|
|
182,958
|
|
|
$
|
1.75
|
|
The following potential common shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares
|
1
|
|
|
8,646
|
|
|
1,233
|
|
|
9,516
|
|
Note 4. Components of Equity
The components of equity for the
nine
months ended
September 30,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
Noncontrolling
interest
|
|
Total
equity
|
Balance at December 31, 2016
|
$
|
1,844,638
|
|
|
2,575
|
|
|
1,847,213
|
|
Exercise of stock options
|
134,014
|
|
|
—
|
|
|
134,014
|
|
Issuance of shares under stock purchase plan
|
28,767
|
|
|
—
|
|
|
28,767
|
|
Shares repurchased under provisions of stock repurchase plans
|
(340,736
|
)
|
|
—
|
|
|
(340,736
|
)
|
Stock compensation expense
|
39,036
|
|
|
—
|
|
|
39,036
|
|
Net earnings
|
322,378
|
|
|
550
|
|
|
322,928
|
|
Other comprehensive income (loss)
|
25,632
|
|
|
(47
|
)
|
|
25,585
|
|
Dividends paid ($0.42 per share)
|
(75,726
|
)
|
|
—
|
|
|
(75,726
|
)
|
Balance at September 30, 2017
|
$
|
1,978,003
|
|
|
3,078
|
|
|
1,981,081
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
1,691,993
|
|
|
2,683
|
|
|
1,694,676
|
|
Exercise of stock options
|
119,509
|
|
|
—
|
|
|
119,509
|
|
Issuance of shares under stock purchase plan
|
28,136
|
|
|
|
|
28,136
|
|
Shares repurchased under provisions of stock repurchase plans
|
(268,097
|
)
|
|
—
|
|
|
(268,097
|
)
|
Stock compensation expense
|
34,264
|
|
|
—
|
|
|
34,264
|
|
Tax benefits from stock plans, net
|
(2,533
|
)
|
|
—
|
|
|
(2,533
|
)
|
Net earnings
|
320,217
|
|
|
1,218
|
|
|
321,435
|
|
Other comprehensive loss
|
(406
|
)
|
|
(51
|
)
|
|
(457
|
)
|
Dividends paid ($0.40 per share)
|
(73,000
|
)
|
|
—
|
|
|
(73,000
|
)
|
Balance at September 30, 2016
|
$
|
1,850,083
|
|
|
3,850
|
|
|
1,853,933
|
|
The Company has a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises and employee stock purchases. During the
nine-month
periods ended
September 30, 2017
and
2016
,
2,902
and
2,822
shares were repurchased at an average price of
$55.58
and
$49.84
per share, respectively.
The Company also has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding stock down to
170 million
shares of common stock. During the
nine
-month periods ended
September 30, 2017
and
2016
,
3,189
and
2,579
shares were repurchased at an average price of
$56.26
and
$49.41
per share, respectively.
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
On
May 2, 2017
, the Board of Directors declared a semi-annual dividend of
$0.42
per share payable on
June 15, 2017
to shareholders of record as of
June 1, 2017
. On
May 3, 2016
, the Board of Directors declared a semi-annual dividend of
$0.40
per share payable on
June 15, 2016
to shareholders of record as of
June 1, 2016
.
Subsequent to the end of the third quarter, on
November 7, 2017
, the Board of Directors declared a semi-annual dividend of
$0.42
per share payable on
December 15, 2017
to shareholders of record as of
December 1, 2017
.
Note 5. Assets Held for Sale
In January 2017, the Company formally approved a plan to sell land and buildings located in Miami, Florida. The decision to sell these assets was largely based upon changes in local operational requirements and the Company's intended use of the property. The net book value of the property assets is
$80 million
, and is reported within the United States segment. The Company continues to market the land and buildings at a selling price which, after selling costs, is expected to exceed the net book value. As of
September 30, 2017
, these assets are being reported as held for sale and are classified in other current assets.
Note 6. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
Cash and overnight deposits
|
$
|
385,432
|
|
|
385,432
|
|
|
406,787
|
|
|
406,787
|
|
Corporate commercial paper
|
613,433
|
|
|
613,825
|
|
|
507,777
|
|
|
507,889
|
|
Time deposits
|
34,579
|
|
|
34,579
|
|
|
59,871
|
|
|
59,871
|
|
Total cash and cash equivalents
|
$
|
1,033,444
|
|
|
1,033,836
|
|
|
974,435
|
|
|
974,547
|
|
The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).
Note 7. Commitments
The Company generally enters into short-term, unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. Historically, the Company has met these obligations in the normal course of business within one year. Purchase obligations outstanding as of September 30, 2017 totaled
$62 million
.
Additionally, the Company occupies offices and warehouse facilities under terms of operating leases expiring up to
2028
. At September 30, 2017, future minimum annual lease payments under all noncancelable leases are as follows:
|
|
|
|
|
2017
|
$
|
16,984
|
|
2018
|
65,813
|
|
2019
|
53,209
|
|
2020
|
41,565
|
|
2021
|
27,696
|
|
Thereafter
|
47,009
|
|
|
$
|
252,276
|
|
Note 8. Contingencies
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of
September 30, 2017
, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Note 9. Business Segment Information
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues
1
, 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. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin.
Financial information regarding the Company’s operations by geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
UNITED
STATES
|
|
OTHER
NORTH
AMERICA
|
|
LATIN
AMERICA
|
|
NORTH ASIA
|
|
SOUTH ASIA
|
|
EUROPE
|
|
MIDDLE EAST, AFRICA AND INDIA
|
|
ELIMI-
NATIONS
|
|
CONSOLI-
DATED
|
Three months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
$
|
476,575
|
|
|
65,544
|
|
|
24,181
|
|
|
686,915
|
|
|
170,225
|
|
|
273,606
|
|
|
105,120
|
|
|
—
|
|
|
1,802,166
|
|
Transfers between geographic areas
|
26,888
|
|
|
2,782
|
|
|
3,679
|
|
|
5,253
|
|
|
5,681
|
|
|
10,302
|
|
|
5,318
|
|
|
(59,903
|
)
|
|
—
|
|
Total revenues
|
$
|
503,463
|
|
|
68,326
|
|
|
27,860
|
|
|
692,168
|
|
|
175,906
|
|
|
283,908
|
|
|
110,438
|
|
|
(59,903
|
)
|
|
1,802,166
|
|
Net revenues
1
|
$
|
257,030
|
|
|
30,664
|
|
|
14,710
|
|
|
138,667
|
|
|
41,411
|
|
|
85,390
|
|
|
29,956
|
|
|
1,314
|
|
|
599,142
|
|
Operating income
|
$
|
74,645
|
|
|
9,215
|
|
|
2,652
|
|
|
72,070
|
|
|
11,697
|
|
|
11,124
|
|
|
5,495
|
|
|
(3
|
)
|
|
186,895
|
|
Identifiable assets at period end
|
$
|
1,636,293
|
|
|
100,651
|
|
|
52,238
|
|
|
446,826
|
|
|
143,893
|
|
|
473,509
|
|
|
212,210
|
|
|
3,261
|
|
|
3,068,881
|
|
Capital expenditures
|
$
|
7,398
|
|
|
263
|
|
|
2,436
|
|
|
589
|
|
|
390
|
|
|
23,138
|
|
|
248
|
|
|
—
|
|
|
34,462
|
|
Depreciation and amortization
|
$
|
7,905
|
|
|
405
|
|
|
310
|
|
|
1,313
|
|
|
569
|
|
|
1,309
|
|
|
461
|
|
|
—
|
|
|
12,272
|
|
Equity
|
$
|
1,345,266
|
|
|
52,212
|
|
|
25,709
|
|
|
231,831
|
|
|
102,477
|
|
|
139,688
|
|
|
119,649
|
|
|
(35,751
|
)
|
|
1,981,081
|
|
Three months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
$
|
423,362
|
|
|
56,747
|
|
|
21,592
|
|
|
590,622
|
|
|
154,156
|
|
|
228,256
|
|
|
87,659
|
|
|
—
|
|
|
1,562,394
|
|
Transfers between geographic areas
|
24,610
|
|
|
2,770
|
|
|
3,724
|
|
|
5,368
|
|
|
6,206
|
|
|
9,938
|
|
|
5,551
|
|
|
(58,167
|
)
|
|
—
|
|
Total revenues
|
$
|
447,972
|
|
|
59,517
|
|
|
25,316
|
|
|
595,990
|
|
|
160,362
|
|
|
238,194
|
|
|
93,210
|
|
|
(58,167
|
)
|
|
1,562,394
|
|
Net revenues
1
|
$
|
229,773
|
|
|
30,211
|
|
|
14,063
|
|
|
124,251
|
|
|
42,711
|
|
|
74,888
|
|
|
29,363
|
|
|
(1
|
)
|
|
545,259
|
|
Operating income
|
$
|
69,457
|
|
|
6,200
|
|
|
3,328
|
|
|
59,682
|
|
|
14,045
|
|
|
7,018
|
|
|
7,534
|
|
|
(1
|
)
|
|
167,263
|
|
Identifiable assets at period end
|
$
|
1,410,287
|
|
|
95,390
|
|
|
56,192
|
|
|
480,587
|
|
|
117,333
|
|
|
388,543
|
|
|
237,104
|
|
|
8,788
|
|
|
2,794,224
|
|
Capital expenditures
|
$
|
8,319
|
|
|
720
|
|
|
139
|
|
|
739
|
|
|
319
|
|
|
2,127
|
|
|
296
|
|
|
—
|
|
|
12,659
|
|
Depreciation and amortization
|
$
|
7,566
|
|
|
369
|
|
|
328
|
|
|
1,404
|
|
|
594
|
|
|
1,116
|
|
|
505
|
|
|
—
|
|
|
11,882
|
|
Equity
|
$
|
1,145,293
|
|
|
41,542
|
|
|
37,765
|
|
|
293,383
|
|
|
87,926
|
|
|
129,989
|
|
|
150,395
|
|
|
(32,360
|
)
|
|
1,853,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
UNITED
STATES
|
|
OTHER
NORTH
AMERICA
|
|
LATIN
AMERICA
|
|
NORTH ASIA
|
|
SOUTH ASIA
|
|
EUROPE
|
|
MIDDLE EAST, AFRICA AND INDIA
|
|
ELIMI-
NATIONS
|
|
CONSOLI-
DATED
|
Nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
$
|
1,354,811
|
|
|
187,997
|
|
|
69,747
|
|
|
1,873,393
|
|
|
475,163
|
|
|
764,596
|
|
|
293,870
|
|
|
—
|
|
|
5,019,577
|
|
Transfers between geographic areas
|
79,356
|
|
|
8,246
|
|
|
11,073
|
|
|
15,139
|
|
|
16,520
|
|
|
29,288
|
|
|
15,316
|
|
|
(174,938
|
)
|
|
—
|
|
Total revenues
|
$
|
1,434,167
|
|
|
196,243
|
|
|
80,820
|
|
|
1,888,532
|
|
|
491,683
|
|
|
793,884
|
|
|
309,186
|
|
|
(174,938
|
)
|
|
5,019,577
|
|
Net revenues
1
|
$
|
737,842
|
|
|
84,630
|
|
|
43,634
|
|
|
371,459
|
|
|
117,634
|
|
|
242,244
|
|
|
89,973
|
|
|
2,964
|
|
|
1,690,380
|
|
Operating income
|
$
|
191,256
|
|
|
26,583
|
|
|
8,349
|
|
|
183,515
|
|
|
37,434
|
|
|
36,189
|
|
|
17,928
|
|
|
(5
|
)
|
|
501,249
|
|
Identifiable assets at period end
|
$
|
1,636,293
|
|
|
100,651
|
|
|
52,238
|
|
|
446,826
|
|
|
143,893
|
|
|
473,509
|
|
|
212,210
|
|
|
3,261
|
|
|
3,068,881
|
|
Capital expenditures
|
$
|
19,492
|
|
|
1,066
|
|
|
3,648
|
|
|
2,492
|
|
|
1,172
|
|
|
38,717
|
|
|
1,016
|
|
|
—
|
|
|
67,603
|
|
Depreciation and amortization
|
$
|
23,389
|
|
|
1,163
|
|
|
930
|
|
|
3,995
|
|
|
1,656
|
|
|
3,707
|
|
|
1,401
|
|
|
—
|
|
|
36,241
|
|
Equity
|
$
|
1,345,266
|
|
|
52,212
|
|
|
25,709
|
|
|
231,831
|
|
|
102,477
|
|
|
139,688
|
|
|
119,649
|
|
|
(35,751
|
)
|
|
1,981,081
|
|
Nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
$
|
1,248,923
|
|
|
165,527
|
|
|
62,825
|
|
|
1,605,343
|
|
|
442,464
|
|
|
680,035
|
|
|
250,913
|
|
|
—
|
|
|
4,456,030
|
|
Transfers between geographic areas
|
79,617
|
|
|
8,141
|
|
|
11,512
|
|
|
15,849
|
|
|
18,338
|
|
|
30,396
|
|
|
16,452
|
|
|
(180,305
|
)
|
|
—
|
|
Total revenues
|
$
|
1,328,540
|
|
|
173,668
|
|
|
74,337
|
|
|
1,621,192
|
|
|
460,802
|
|
|
710,431
|
|
|
267,365
|
|
|
(180,305
|
)
|
|
4,456,030
|
|
Net revenues
1
|
$
|
683,331
|
|
|
88,404
|
|
|
42,264
|
|
|
357,159
|
|
|
128,486
|
|
|
227,068
|
|
|
88,745
|
|
|
(12
|
)
|
|
1,615,445
|
|
Operating income
|
$
|
184,876
|
|
|
23,091
|
|
|
11,016
|
|
|
176,621
|
|
|
48,090
|
|
|
31,109
|
|
|
23,162
|
|
|
(12
|
)
|
|
497,953
|
|
Identifiable assets at period end
|
$
|
1,410,287
|
|
|
95,390
|
|
|
56,192
|
|
|
480,587
|
|
|
117,333
|
|
|
388,543
|
|
|
237,104
|
|
|
8,788
|
|
|
2,794,224
|
|
Capital expenditures
|
$
|
25,234
|
|
|
1,476
|
|
|
941
|
|
|
2,502
|
|
|
1,325
|
|
|
6,386
|
|
|
2,109
|
|
|
—
|
|
|
39,973
|
|
Depreciation and amortization
|
$
|
22,264
|
|
|
1,113
|
|
|
869
|
|
|
4,111
|
|
|
1,649
|
|
|
3,402
|
|
|
1,445
|
|
|
—
|
|
|
34,853
|
|
Equity
|
$
|
1,145,293
|
|
|
41,542
|
|
|
37,765
|
|
|
293,383
|
|
|
87,926
|
|
|
129,989
|
|
|
150,395
|
|
|
(32,360
|
)
|
|
1,853,933
|
|
_______________________
1
Net revenues are a non-GAAP measure calculated as revenues less directly related operating expenses attributable to the Company's principal services. The Company's management believes that net revenues are a better measure than total revenues when evaluating the Company's operating segment performance since total revenues earned as a freight consolidator include the carriers' charges for carrying the shipment, whereas revenues earned in other capacities include primarily the commissions and fees earned by the Company. Net revenue is one of the Company's primary operational and financial measures and demonstrates the Company's ability to concentrate and leverage purchasing power through effective consolidation of shipments from customers utilizing a variety of transportation carriers and optimal routings.
The following table presents the calculation of consolidated net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total revenues
|
$
|
1,802,166
|
|
|
$
|
1,562,394
|
|
|
$
|
5,019,577
|
|
|
$
|
4,456,030
|
|
Expenses:
|
|
|
|
|
|
|
|
Airfreight services
|
547,595
|
|
|
444,359
|
|
|
1,490,417
|
|
|
1,236,555
|
|
Ocean freight and ocean services
|
411,061
|
|
|
359,991
|
|
|
1,163,051
|
|
|
1,006,710
|
|
Customs brokerage and other services
|
244,368
|
|
|
212,785
|
|
|
675,729
|
|
|
597,320
|
|
Net revenues
|
$
|
599,142
|
|
|
$
|
545,259
|
|
|
$
|
1,690,380
|
|
|
$
|
1,615,445
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the sections entitled “Overview,” "Expeditors' Culture and Strategy," "International Trade and Competition," "Seasonality," “Critical Accounting Estimates,” "Recent Accounting Pronouncements," “Results of Operations,” “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements. Words such as "will likely result," "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, and other characterizations of future events or circumstances are forward-looking statements. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. Attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 23, 2017.
Overview
Expeditors International of Washington, Inc. (herein referred to as "Expeditors," the "Company," "we," "us," "our") is a global logistics company. Our services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, cargo insurance and other logistics solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.
We derive our revenues from three principal sources: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. These are the revenue categories presented in our financial statements.
We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and reselling those services to our customers on a retail basis. The difference between the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue” (a non-GAAP measure), “yield” or “margin.” By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of our three primary sources of revenue.
In most cases, we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. In these transactions, we evaluate whether it is appropriate to record the gross or net amount as revenue. Generally, revenue is recorded on a gross basis when we are the primary obligor, are obligated to compensate direct carriers for services performed regardless of whether customers accept the service, have latitude in establishing price, have discretion in selecting the direct carrier, have credit risk or have several but not all of these indicators. Revenue is generally recorded on a net basis where we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof.
For revenues earned in other capacities, for instance, when we do not issue a HAWB, a HOBL or a House Seaway Bill or otherwise act solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, we are not a principal and report only commissions and fees earned in revenue.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices.
We manage our company along five geographic areas of responsibility: Americas; North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each area is divided into sub-regions that are composed of operating units with individual profit and loss responsibility. Our business involves shipments between operating units and typically touches more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and
cooperation among operating units. Because of this inter-relationship between operating units, it is very difficult to examine any one geographic area and draw meaningful conclusions as to its contribution to our overall success on a stand-alone basis.
Our operating units share revenue using the same arms-length pricing methodologies that we use when our offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. Our strategy closely links compensation with operating unit profitability which includes shared revenues and allocated costs. Therefore, individual success is closely linked to cooperation with other operating units within our network.
The mix of services varies by segment based primarily on the import or export orientation of local operations in each of our regions. In accordance with our revenue recognition policy (see Note 1. E.
to the consolidated financial statements in our annual report on Form 10-K filed on February 23, 2017
), almost all freight revenues and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share revenue at destination and a corresponding commission or profit share expense as a component of origin consolidation costs.
Expeditors' Culture and Strategy
From the inception of our company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. We believe that our greatest challenge is now and always has been perpetuating a consistent global corporate culture that demands:
|
|
•
|
Total dedication, first and foremost, to providing superior customer service;
|
|
|
•
|
Compliance with our policies and procedures and government regulations;
|
|
|
•
|
Aggressive marketing of all of our service offerings;
|
|
|
•
|
A positive, safe work environment that is inclusive and free from discrimination and harassment;
|
|
|
•
|
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 occurs, a qualified and well-trained internal candidate is ready to step forward; and
|
|
|
•
|
Continuous identification, design and implementation of system solutions and differentiated service offerings, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.
|
We reinforce these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since we became a publicly traded company. There is no limit to how much a key manager can be compensated for success. We believe in a “real world” environment where the employees of our operating units are held accountable for the profit implications of their decisions. If these decisions result in operating losses, management generally must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, our policies, processes and relevant training focus on such things as cargo management, risk mitigation, service provider management, compliance, accounts receivable collection, cash flow and credit soundness in an attempt to help managers avoid the kinds of errors that might end a career.
We believe that failure to perpetuate our unique culture on a self-sustained basis throughout our organization may pose a greater threat to our continued success than any external force, which likely would be largely beyond our control. We believe that it is nearly impossible to predict events that, individually or in the aggregate, could have a positive or a negative impact on our future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment in which well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help us adapt and thrive as major trends emerge.
Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers to drive profitable business growth. Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors.
Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of ongoing concern over terrorism, security, changes in governmental regulation and oversight of international trade. A good reputation helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international
trade obstacles, especially as governments promulgate new regulations and increase oversight and enforcement of new and existing laws. We consider our current working relationships with these entities to be satisfactory.
Our business is also highly dependent on the financial stability and operational capabilities of the carriers we utilize. Many air and ocean carriers are highly leveraged with debt. Moreover, certain ocean carriers are facing significant liquidity challenges. This situation requires that we be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, space allotments available from carriers, governmental regulations, and/or trade accords could adversely affect our business in unpredictable ways.
International Trade and Competition
We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and 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 and accords. We cannot predict which, if any, of these proposals may be adopted or the effects the adoption of any such proposal will have on our business. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations in which we conduct business and the future impact that these events may have on international trade and oil prices.
The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.
Ocean carriers have incurred substantial operating losses in recent years, and many are highly leveraged with debt. These financial challenges resulted in the 2016 bankruptcy of a major carrier, as well as multiple carrier acquisitions and carrier alliance formations. Carriers continue to pursue scale and market share in an effort to reduce operating costs and improve their financial results. Additionally, while overall global demand has recently increased, carriers continue to take delivery of new and larger ships, which creates additional capacity. When the market experiences seasonal peaks or any sort of disruption, the carriers react by increasing their pricing as quickly as possible. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.
The global economic environment and trade growth remain uncertain. We cannot predict what impact this may have on our operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Additionally, we cannot predict the direct or indirect impact that changes in consumer purchasing behavior, such as online shopping, could have on our business.
Seasonality
Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance this seasonal trend will occur in the future. This pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, 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 our international network and service offerings.
A significant portion of our revenues is derived from customers in the retail and consumer technology industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of our revenues are, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter.
To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments. We base our estimates on historical experience and on assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended
December 31, 2016
, filed on February 23, 2017. There have been no material changes to the critical accounting estimates previously disclosed in that report.
Recent Accounting Pronouncements
Revenue recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update amending existing revenue recognition guidance and requiring related detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of our revenues and cash flows arising from contracts with customers. The standard is effective for us beginning on January 1, 2018. We formed a cross-functional project team that is in the process of evaluating the adoption impacts for each of our products and services.
Under the current standard, our transportation revenue is recognized at the point in time freight is tendered to the direct carrier at origin. Under the new standard, our transportation and related services revenue will be recognized over time as control is transferred to the customer. We expect to defer more revenues under the new standard. We are also evaluating whether we act as principal or an agent with regards to our promise to transfer services to the customer and we expect the presentation to change for certain of our services from net to gross revenue amounts.
We are developing and implementing systems solutions and process changes to facilitate revenue recognition under the new standard. We are also identifying and designing changes to our internal controls to support the adoption. We will adopt this standard using the modified retrospective transition method applied to those contracts that are not completed as of January 1, 2018. Upon adoption, we will recognize the cumulative effect of adopting as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted.
At this time, based on the nature of our operations and the short transit time of most of our transportation services, we do not believe that the adoption of the standard will have a material impact on our results of operations, financial position and cash flows once implemented. As we work towards completing our assessment, we continue to design and implement necessary process and system changes around gathering the data required to quantify the impact of the adoption and to comply with the new standard. We expect to complete our assessment of the impact towards the end of 2017.
Leases
In February 2016, the FASB issued an Accounting Standard Update changing the accounting for leases and includes a requirement to record all leases exceeding one year on the consolidated balance sheet as assets and liabilities. The new lease standard will be effective for us beginning on January 1, 2019 and will be adopted using a modified retrospective transition. Adoption will impact our consolidated balance sheets as future minimum lease payments under noncancelable leases totaled approximately
$252 million
as of
September 30, 2017
. We are currently evaluating our existing lease portfolios, including accumulating all of the necessary information required to properly evaluate and account for the leases under this new standard. Additionally, we are beginning the implementation of an enterprise-wide lease management system that, along with accompanying process changes, will assist us in the accounting and internal control changes necessary to meet the reporting and disclosure requirements of the new standard when it becomes effective.
Results of Operations
The following table shows the revenues and directly related expenses for our principal services and total net revenues (a non-GAAP measure calculated as revenues less directly related operating expenses attributable to our principal services) and our expenses for the three and
nine-month
periods ended
September 30, 2017
and
2016
, expressed as percentages of net revenues. Management believes that net revenues are a better measure than total revenues when analyzing and discussing management's effectiveness in managing our principal services since total revenues earned by Expeditors as a freight consolidator include the carriers’ charges to us for carrying the shipment, whereas revenues earned by Expeditors in our other capacities include primarily the commissions and fees actually earned by us. Net revenue is one of our primary operational and financial measures and demonstrates our ability to manage sell rates to customers with our ability to concentrate and leverage our purchasing power through effective consolidation of shipments from multiple customers utilizing a variety of transportation carriers and optimal routings. Using net revenue also provides a commonality for comparison among various services.
The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto in this quarterly report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
Amount
|
|
Percent
of net
revenues
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Airfreight services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
735,164
|
|
|
|
|
$
|
621,566
|
|
|
|
|
$
|
2,022,577
|
|
|
|
|
$
|
1,764,512
|
|
|
|
|
Expenses
|
547,595
|
|
|
|
|
444,359
|
|
|
|
|
1,490,417
|
|
|
|
|
1,236,555
|
|
|
|
|
Net revenues
|
187,569
|
|
|
31
|
%
|
|
177,207
|
|
|
32
|
%
|
|
532,160
|
|
|
31
|
%
|
|
527,957
|
|
|
33
|
%
|
|
Ocean freight services and ocean services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
563,386
|
|
|
|
|
495,460
|
|
|
|
|
1,585,730
|
|
|
|
|
1,414,344
|
|
|
|
|
Expenses
|
411,061
|
|
|
|
|
359,991
|
|
|
|
|
1,163,051
|
|
|
|
|
1,006,710
|
|
|
|
|
Net revenues
|
152,325
|
|
|
26
|
|
|
135,469
|
|
|
25
|
|
|
422,679
|
|
|
25
|
|
|
407,634
|
|
|
25
|
|
|
Customs brokerage and other services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
503,616
|
|
|
|
|
445,368
|
|
|
|
|
1,411,270
|
|
|
|
|
1,277,174
|
|
|
|
|
Expenses
|
244,368
|
|
|
|
|
212,785
|
|
|
|
|
675,729
|
|
|
|
|
597,320
|
|
|
|
|
Net revenues
|
259,248
|
|
|
43
|
|
|
232,583
|
|
|
43
|
|
|
735,541
|
|
|
44
|
|
|
679,854
|
|
|
42
|
|
|
Total net revenues
|
599,142
|
|
|
100
|
|
|
545,259
|
|
|
100
|
|
|
1,690,380
|
|
|
100
|
|
|
1,615,445
|
|
|
100
|
|
|
Overhead expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related costs
|
319,050
|
|
|
53
|
|
|
291,204
|
|
|
53
|
|
|
930,159
|
|
|
55
|
|
|
868,091
|
|
|
54
|
|
|
Other
|
93,197
|
|
|
16
|
|
|
86,792
|
|
|
16
|
|
|
258,972
|
|
|
15
|
|
|
249,401
|
|
|
15
|
|
|
Total overhead expenses
|
412,247
|
|
|
69
|
|
|
377,996
|
|
|
69
|
|
|
1,189,131
|
|
|
70
|
|
|
1,117,492
|
|
|
69
|
|
|
Operating income
|
186,895
|
|
|
31
|
|
|
167,263
|
|
|
31
|
|
|
501,249
|
|
|
30
|
|
|
497,953
|
|
|
31
|
|
|
Other income (expense), net
|
3,540
|
|
|
1
|
|
|
3,849
|
|
|
—
|
|
|
12,149
|
|
|
1
|
|
|
12,000
|
|
|
1
|
|
|
Earnings before income taxes
|
190,435
|
|
|
32
|
|
|
171,112
|
|
|
31
|
|
|
513,398
|
|
|
31
|
|
|
509,953
|
|
|
32
|
|
|
Income tax expense
|
69,829
|
|
|
12
|
|
|
63,163
|
|
|
11
|
|
|
190,470
|
|
|
12
|
|
|
188,518
|
|
|
12
|
|
|
Net earnings
|
120,606
|
|
|
20
|
|
|
107,949
|
|
|
20
|
|
|
322,928
|
|
|
19
|
|
|
321,435
|
|
|
20
|
|
|
Less net earnings attributable to the noncontrolling interest
|
343
|
|
|
—
|
|
|
368
|
|
|
—
|
|
|
550
|
|
|
—
|
|
|
1,218
|
|
|
—
|
|
|
Net earnings attributable to shareholders
|
$
|
120,263
|
|
|
20
|
%
|
|
$
|
107,581
|
|
|
20
|
%
|
|
$
|
322,378
|
|
|
19
|
%
|
|
$
|
320,217
|
|
|
20
|
%
|
|
Airfreight services:
Airfreight services revenues increased 18% and 15%, respectively,
in the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods for
2016
, primarily due to a 12% growth in tonnage in both periods and higher sell rates in response to increased buy rates resulting from higher overall market demand. Airfreight services expenses increased 23% and 21%, respectively, in the three and
nine-month
periods ended
September 30, 2017
, principally as a result of the increase in tonnage and higher buy rates due to tighter carrier capacity.
Airfreight services net revenues increased 6% for the three-month period ended
September 30, 2017
, as compared with the same period for
2016
. This was principally due to 12% tonnage growth, partially offset by a 5% decrease in net revenue per kilo. Europe, North America, and North Asia net revenues increased by 20%, 8%, and 7%, respectively, while tonnage increased 13%, 19%, and 6%. Europe's average net revenue per kilo improved primarily due to the increases in average sell rates. Average net revenue per kilo declined in North America primarily due to competitive market conditions, which resulted in lower average sell rates. South Asia net revenues decreased 19% despite tonnage growth of 6%, primarily due to higher average buy rates. Carriers in South Asia increased pricing significantly as a result of higher demand relative to available capacity.
Airfreight services net revenues increased 1% for the nine-month period ended
September 30, 2017
, as compared with the same period for
2016
. This was principally due to a 12% increase in tonnage, mostly offset by a 13% decrease in net revenue per kilo. Average net revenue per kilo declined in most regions primarily due to competitive market conditions and tight carrier capacity. Carriers in North Asia and South Asia increased pricing significantly as a result of higher demand relative to available capacity. North America and Europe net revenues increased by 4% and 10%, respectively, while tonnage increased 13% and 11%, respectively. North Asia net revenues remained flat, despite tonnage growth of 11%, due principally to higher average buy rates. South Asia net revenues decreased 18% despite tonnage growth of 10% primarily due to lower average sell rates and higher average buy rates.
The global airfreight market is experiencing imbalances between carrier capacity and demand in certain lanes, which is resulting in higher average buy rates. Customers remain focused on improving supply-chain efficiency, reducing overall logistics costs by negotiating lower rates and utilizing ocean freight whenever possible. We expect these trends to continue in conjunction with carriers' efforts to manage available capacity. These conditions could be affected by new product launches during periods that have historically experienced higher demand. Historically, we have experienced lower airfreight margins in the fourth quarter as seasonal volumes increase and carriers correspondingly increase buy rates. These conditions, should they continue to occur, could create a higher degree of volatility in volumes and, ultimately, buy and sell rates.
Ocean freight and ocean services:
Ocean freight consolidation, direct ocean forwarding and order management are the three basic services that constitute and are collectively referred to as ocean freight and ocean services. Ocean freight and ocean services revenues increased 14% and 12%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
, primarily due to 4% and 5% increases in container volume and higher average sell rates to customers. Ocean freight and ocean services expenses increased 14% and 16%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, due to increased volumes and higher average buy rates as overall market demand increased and carriers managed available capacity.
Ocean freight and ocean services net revenues increased 12% and 4%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
. The largest component of our ocean freight net revenue was derived from ocean freight consolidation, which represented 46% and 48% of ocean freight net revenue for the
nine-month
periods ended
September 30, 2017
and
2016
, respectively.
Ocean freight consolidation net revenues increased 18% in the third quarter of
2017
, as compared with the same period in
2016
, due primarily to a 15% increase in net revenue per container and a 4% increase in volume. In the third quarter of 2016, net revenue per container was negatively affected by the bankruptcy of a large ocean carrier, which resulted in a spike in buy rates. Ocean freight consolidation net revenues decreased 2% for the
nine-month
period ended
September 30, 2017
, as compared with the same period in
2016
. Decreases in net revenue per container in the first half of 2017 were largely offset by 5% volume growth and the increases in net revenue per container in the third quarter. Direct ocean freight forwarding net revenues decreased 3% in the third quarter of 2017, primarily due to increased costs, principally in North Asia and North America. Direct ocean forwarding net revenues increased 3% for the
nine-month
period ended
September 30, 2017
, as compared with the same period in
2016
, due to higher volumes. Order management net revenues increased 19% and 15%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, mostly resulting from higher volumes with new and existing customers primarily in North Asia.
North America ocean freight and ocean services net revenues increased 9% and remained flat, respectively, for the three and
nine-month
periods ended
September 30, 2017
, primarily due to an improvement in import margins during the third quarter that offset margin declines during the first half of 2017. Europe net revenues increased 8% in the third quarter due principally to higher average sell rates. Europe net revenues decreased 3% in the first nine months of 2017 as the increases in average buy rates during the nine-month period of 2017 were partially offset by the improvement in average sell rates in the third quarter. South Asia net revenues increased 12% and remained flat, respectively, for the three and nine-month periods ended September 30, 2017, due primarily to higher order management volumes and higher net revenue per container during the third quarter of 2017. North Asia net revenues increased 19% and 11% in the three and nine-month periods ended September 30, 2017, respectively, due to increases in order management and direct ocean forwarding, resulting from higher volumes, and a third quarter increase in ocean consolidation net revenues, driven by higher volumes and net revenue per container.
We expect that pricing volatility will continue as customers solicit bids and carriers adapt to changing market conditions, new alliances and liquidity challenges. These conditions could result in lower margins.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 13% and 10%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
, primarily as a result of higher volumes in both customs brokerage and road freight services. Customs brokerage and other services expenses increased 15% and 13%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
, principally as a result of higher volumes.
Customs brokerage and other services net revenues increased 11% and 8%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
, primarily as a result of an increase in customs brokerage and road freight volumes, particularly in North America. Customers continue to seek out customs brokers, such as Expeditors, with sophisticated computerized capabilities critical to an overall logistics management program, including rapid responses to changes in the regulatory and security environment.
North America net revenues increased 12% and 10%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods for
2016
, primarily as a result of higher volumes in customs brokerage and road freight services. Europe net revenues increased 12% and 9%, respectively, in the third quarter and first nine months of 2017 primarily due to higher customs brokerage and road freight services net revenues.
Overhead expenses:
Salaries and related costs increased 10% and 7%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
, due principally to an increase in the number of employees, primarily in North America, Europe, and South Asia, higher base salaries and benefits, higher share-based compensation expense and increased bonuses from higher operating income. The number of employees increased primarily to support the volume growth in our business operations and our continuing investments in information systems.
Historically, the relatively consistent relationship between salaries and net revenues has been the result of a compensation philosophy that has been maintained since the inception of our company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation occur in proportion to changes in our operating income, creating a direct alignment between corporate performance and shareholder interests. Bonuses to field and executive management for the
nine-month
period ended
September 30, 2017
were down 1% while operating income increased 1%. In 2017, we reduced senior executive management bonus pool allocations by 6% to help fund expansion of our strategic growth initiatives. Our management compensation programs have always been incentive-based and performance driven. Salaries and related costs as a percentage of revenues was 53% for both of the three-month periods ended September 30, 2017 and 2016 and increased 1% to 55% for the nine-month period ended
September 30, 2017
, as compared to the same period in
2016
.
Because our management incentive compensation programs are also cumulative, generally no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must be offset in their entirety by operating profits before management is eligible for a bonus. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. Since the most significant portion of management compensation comes from the incentive bonus programs, we believe that this cumulative feature is a disincentive to excessive risk taking by our managers. Due to the nature of our services, it has a short operating cycle. The outcome of any higher risk transactions, such as overriding established credit limits, would be known in a relatively short time frame. Management believes that when the potential and certain impact on the bonus is fully considered in light of this short operating cycle, the potential for short-term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage excessive and inappropriate risk taking. Management believes that both the stability and the long-term growth in revenues, net revenues and net earnings are a result of the incentives inherent in our compensation programs.
Other overhead expenses increased 7% and 4%, respectively, for the three and
nine-month
periods ended
September 30, 2017
, as compared with the same periods in
2016
. We continue to invest in additional technology and facilities, which resulted in higher rent and facilities expenses, technology-related fees and consulting costs. These increases were offset by lower claims, the recovery of certain legal and related costs totaling $8 million for the year-to-date period ended
September 30, 2017
compared to $5 million in the same period in
2016
and the favorable resolution of an indirect tax contingency of $6 million in the second quarter of 2017. We will continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth. Other overhead expenses as a percentage of net revenues for the three and
nine-month
periods ended
September 30, 2017
remained comparable with the same periods in
2016
.
Income tax expense:
We pay income taxes in the United States and other jurisdictions. Our consolidated effective income tax rate was
36.7%
and
37.1%
, respectively, for the three and
nine-month
periods ended
September 30, 2017
, and
36.9%
and
37.0%
for the same periods in
2016
. Our effective tax rate is subject to variation and the rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when pre-tax income is lower.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates dealing with a multitude of currencies other than the U.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the
three and nine
months ended
September 30, 2017
and
2016
was insignificant. We had no foreign currency derivatives outstanding at
September 30, 2017
and
December 31, 2016
. During the three and
nine-month
periods ended
September 30, 2017
, total net foreign currency losses were approximately
$3 million
and
$12 million
, respectively. During the three and
nine-month
periods ended
September 30, 2016
, net foreign currency gains were less than $1 million and net foreign currency losses were
$1 million
, respectively.
International air and 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, including new technology-based competitors entering the industry, many of which have significantly more resources than us; however, our primary competition is confined to a relatively small number of companies within this group. Expeditors must compete against both the niche players and larger entities. The industry continues to experience consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local brokers and forwarders remain a competitive force.
The primary competitive factors in the international logistics industry continue to be price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. We emphasize quality customer service and believe that our prices are competitive with those of others in the industry. Customers regularly solicit bids from competitors in order to improve service, pricing and contractual terms such as seeking longer payment terms, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of expanded contractual terms could result in reduced revenues, reduced margins, higher operating costs or loss of market share, any of which would damage our results of operations and financial condition.
Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. We believe that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing and maintaining these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.
Liquidity and Capital Resources
Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the
three and nine
months ended
September 30, 2017
was
$85 million
and
$362 million
, respectively, as compared with
$116 million
and
$457 million
for the same periods in
2016
. The decreases of
$31 million
and
$95 million
in the third quarter and first nine months of
2017
, respectively, are primarily due to increases in accounts receivable from higher revenues, partially offset by growth in accounts payable and accrued expenses and higher earnings. At
September 30, 2017
, working capital was
$1,443 million
, including cash and cash equivalents of
$1,033 million
. We had no long-term debt at
September 30, 2017
. Management believes that our current cash position and operating cash flows will be sufficient to meet our capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.
As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.
Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.
Cash used in investing activities for the
three and nine
months ended
September 30, 2017
was
$35 million
and
$68 million
, respectively, as compared with
$11 million
and
$35 million
in the same periods of
2016
. We had capital expenditures of
$34 million
and
$68 million
for the
three and nine
-month periods ended
September 30, 2017
, as compared with
$13 million
and
$40 million
for the same periods in
2016
, respectively. Capital expenditures in the
three and nine
months ended
September 30, 2017
related primarily to building construction and continuing investments in technology, office and warehouse furniture and equipment and building and leasehold improvements. Occasionally, we elect to purchase buildings to house staff and to facilitate the staging of customers’ freight. In 2016, we completed a land acquisition in Europe. Additional expenditures are expected to be made in
2017
and 2018 in connection with the construction of a building on this land. Total anticipated capital expenditures in 2017 are currently estimated to be $100 million. This includes routine capital expenditures, including the construction of the building in Europe, plus additional real estate development.
Cash used in financing activities during the
three and nine
months ended
September 30, 2017
was
$137 million
and
$254 million
, respectively, as compared with
$44 million
and
$193 million
for the same periods in
2016
. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to limit the growth in issued and outstanding shares. During the
three and nine
months ended
September 30, 2017
, we used cash to repurchase
3.6 million
and
6.1 million
shares, respectively, to reduce the number of total outstanding shares, compared to
2.0 million
and
5.4 million
shares in the same periods in
2016
.
We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.
We maintain international unsecured bank lines of credit. At
September 30, 2017
, we were contingently liable for $71 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of our foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company is required to perform.
At September 30, 2017, our contractual obligations 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
|
|
$
|
252,276
|
|
|
77,266
|
|
|
92,184
|
|
|
49,135
|
|
|
33,691
|
|
Unconditional purchase obligations
|
|
62,481
|
|
|
62,481
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction, equipment and technology purchase obligations
|
|
33,445
|
|
|
26,996
|
|
|
6,449
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
348,202
|
|
|
166,743
|
|
|
98,633
|
|
|
49,135
|
|
|
33,691
|
|
We typically enter into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill.
Our foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and needs to finance local capital expenditures. In some cases, our ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At
September 30, 2017
, cash and cash equivalent balances of
$436 million
were held by our non-United States subsidiaries, of which
$50 million
was held in banks in the United States. Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States and, accordingly, a deferred tax liability has been accrued for all undistributed earnings, net of foreign related tax credits that are available to be repatriated.