ITEM 1 - -BUSINESS
Expeditors International of Washington, Inc. (the "Company") is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The Company's services include the consolidation or forwarding of air and ocean freight. In each U.S. office, and in many overseas offices, the Company acts as a customs broker. The Company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information. The Company does not compete for domestic freight, overnight courier or small parcel business and does not own aircraft or steamships.
The Company, including its majority owned subsidiaries, operates full service offices (-) in the major cities identified below. Full service offices have also been established in locations where the Company maintains unilateral control over assets and operations and where the existence of the parent subsidiary relationship is maintained by means other than record ownership of voting stock (#). In other cities, the Company contracts with independent agents to provide required services and has established over 120 such relationships world-wide. Locations where Company employees perform sales and customer service functions are identified below as international service centers (*). In each case, the opening date for the full service office or international service center is set forth in parenthesis.
The Company was incorporated in the State of Washington in May 1979. Its executive offices are located at 999 Third Avenue, Suite 2500, Seattle, Washington, and its telephone number is (206) 674-3400.
For information concerning the amount of revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization attributable to the geographic areas in which the Company conducts its business, see Note 7 to the Consolidated Financial Statements.
Beginning in 1981, the Company's primary business focus was on airfreight shipments from the Far East to the United States and related customs brokerage and import services. In the mid-1980's, the Company began to expand its service capabilities in export airfreight, ocean freight and distribution services. Today the Company offers a complete range of global logistics services to a diversified group of customers, both in terms of industry specialization and geographic location. As opportunities for profitable growth arise, the Company plans to create new offices. While the Company has historically expanded through organic growth, the Company has also been open to growth through acquisition of, or establishing joint ventures with, existing agents or others within the industry.
AIRFREIGHT SERVICES
Airfreight services accounted for approximately 47, 47 and 48 percent of the Company's 1996, 1995, and 1994 consolidated revenues net of freight consolidation expenses ("net revenues"), respectively. When performing airfreight services, the Company typically acts either as a freight consolidator or as an agent for the airline which carries the shipment. When acting as a freight consolidator, the Company purchases cargo space from airlines on a volume basis and resells that space to its customers at lower rates than the customers could obtain directly from airlines. When moving shipments between points where the volume of business does not facilitate consolidation, the Company receives and forwards individual shipments as the agent of the airline which carries the shipment. Whether acting as an agent or consolidator, the Company offers its customers knowledge of optimum routing, familiarity with local business practices, knowledge of export and import documentation and procedures, the ability to arrange for ancillary services, and assistance with space availability in periods of peak demand.
In its airfreight forwarding operations, the Company procures shipments from its customers, determines the routing, consolidates shipments bound for a particular airport distribution point, and selects the airline for transportation to the distribution point. At the distribution point, the Company or its agent arranges for the consolidated lot to be broken down into its component shipments and for the transportation of the individual shipments to their final destinations.
The Company estimates its average airfreight consolidation weighs approximately 3,500 to 4,500 pounds and includes merchandise from several shippers. Because shipment by air is relatively expensive compared with ocean transportation, air shipments are generally characterized by a high value-to-weight ratio, the need for rapid delivery, or both.
The Company typically delivers shipments from a Company warehouse at the origin to the airline after consolidating the freight into containers or onto pallets. Shipments normally arrive at the destination distribution point within forty-eight hours after such delivery. During peak shipment periods, cargo space available from the scheduled air carriers can be limited and backlogs of freight shipments may occur. When these conditions exist, the Company may charter aircraft to meet customer demand.
The Company consolidates individual shipments based on weight and volume characteristics in cost-effective combinations. Typically, as the weight or volume of a shipment increases, the cost per pound/kilo or cubic inch/centimeter charged by the Company decreases. The rates charged by airlines to forwarders and others also generally decrease as the weight or volume of the shipment increases. As a result, by aggregating shipments and presenting them to an airline as a single shipment, the Company is able to obtain a lower rate per pound/kilo or cubic inch/centimeter than that which it charges to its customers for the individual shipment, while generally offering the customer a lower rate than could be obtained from the airline for an unconsolidated shipment.
The Company's net airfreight forwarding revenues from a consolidated shipment includes the differential between the rate charged to the Company by an airline and the rate which the Company charges to its customers, commissions paid to the Company by the airline carrying the freight and fees for ancillary services. Such ancillary services provided by the Company include preparation of shipping and customs documentation, packing, crating and insurance services, negotiation of letters of credit, and preparation of documentation to comply with local export laws. When the Company
acts as an agent for an airline handling an unconsolidated shipment, its net revenues are primarily derived from commissions paid by the airline and fees for ancillary services paid by the customer.
The Company does not own aircraft and does not plan to do so. Management believes that the ownership of aircraft would subject the Company to undue business risks, including large capital outlays, increased fixed operating expenses, problems of fully utilizing aircraft and competition with airlines. Because the Company relies on commercial airlines to transport its shipments, changes in carrier policies and practices such as pricing, payment terms, scheduling, and frequency of service may affect its business.
The Company also performs breakbulk services which involve receiving and breaking down consolidated airfreight lots and arranging for distribution of the individual shipments. Breakbulk service revenues also include commissions from non-exclusive agents for airfreight shipments.
CUSTOMS BROKERAGE AND IMPORT SERVICES
Customs brokerage and import services accounted for approximately 34, 35, and 37 percent of the Company's 1996, 1995, and 1994 consolidated net revenues, respectively. As a customs broker, the Company assists importers to clear shipments through customs by preparing required documentation, calculating and providing for payment of duties on behalf of the importer, arranging for any required inspections by governmental agencies, and arranging for delivery. The Company also provides other services at destination including temporary warehousing, inland transportation, inventory manipulation and management, cargo insurance and product distribution.
The Company provides customs clearance services in connection with many of the shipments it handles as a freight forwarder. However, substantial customs brokerage revenues are derived from customers that elect to use a competing forwarder. Conversely, shipments handled by the Company as a forwarder may be processed by another customs broker selected by the customer.
The Company also provides custom clearances for goods moving by rail and truck between the United States, Canada and/or Mexico. The commodities being cleared and the time sensitive nature of the border brokerage business required the Company to make significant modifications to its systems and traditional office structure in order to provide competitive service. Management believes that success in the border brokerage business will be an important addition to the Company's global logistics strategy.
During 1996 the Company established a subsidiary, Expeditors Consulting Services, L.L.C., to respond to customer driven requests for high-end customs consulting services. The demand for these services was stimulated by the changes made by US Customs Service in response to the 1993 Customs Modernization Act. Fees for these non-transactional services are based upon hourly billing rates and bids for mutually agreed procedures.
There is currently a noticeable trend, prompted by customer demand, to quote rates on a door-to-door basis. Management foresees the potential, in the medium to long-term, for fees normally associated with customs clearance to be de-emphasized and included as a component of other services offered by the Company.
OCEAN FREIGHT SERVICES
Ocean freight services accounted for approximately 19, 18 and 15 percent of the Company's 1996, 1995, and 1994 consolidated net revenues, respectively. The Company's revenues as an ocean freight forwarder are derived from commissions paid by the carrier and revenues from fees charged to customers for ancillary services which the Company may provide, such as preparing documentation, procuring insurance, arranging for packing and crating services, and providing consultation. The Company operates Expeditors International Ocean ("EIO"), a Non-Vessel Operating Common Carrier ("NVOCC") specializing in ocean freight consolidation from the Far East to the United States. EIO also provides service, on a smaller scale, to and from any location where the Company has an office or agent. As an NVOCC, EIO contracts with ocean shipping lines to obtain transportation for a fixed number of containers between various points during a specified time period at an agreed rate. EIO solicits less than container load ("LCL") freight to fill the containers and charges lower rates than those available directly from shipping lines. EIO also handles full container loads for customers that do not have annual shipping volumes sufficient to negotiate comparable contracts directly with the ocean carriers. The Company does not own vessels and generally does not physically handle the cargo.
Expeditors Cargo Management Systems ("ECMS") supplies a sophisticated ocean consolidation service. The Company owns and maintains software that allows it to sell ECMS to large volume customers that have signed their own service contracts with the ocean carriers. As an ocean consolidator, ECMS may obtain LCL freight from several vendors and consolidate this cargo into full containers. The Company's revenues as an ocean consolidator are derived from handling LCL cargo at origin and from the fees paid by customers for access to data captured during the consolidation process.
MARKETING AND CUSTOMERS
The Company provides flexible service and seeks to understand the needs of the customers from point of origin to ultimate destinations. Although the domestic importer usually designates the logistics company and the services that will be required, the foreign shipper may also participate in this selection process. Therefore, the Company coordinates its marketing program to reach both domestic importers and their overseas suppliers.
The Company's marketing efforts are focused primarily on the traffic, shipping and purchasing departments of existing and potential customers. The district manager of each office is responsible for marketing, sales coordination, and implementation in the area in which he or she is located. All employees are responsible for customer service and relations.
The Company staffs its offices largely with managers and other key personnel who are citizens of the nations in which they operate and who have extensive experience in global logistics. Marketing and customer service staffs are responsible for marketing the Company's services directly to local shippers and traffic managers who may select or influence the selection of the logistics vendor and for ensuring that customers receive timely and efficient service. The Company believes that its expertise in supplying solutions customized to the needs of its customers, its emphasis on coordinating its origin and destination customer service and marketing activities, and the incentives it gives to its managers have been important elements of its success.
The goods handled by the Company are generally a function of the products which dominate international trade between any particular origin and destination. Shipments of computer components, other electronic equipment, housewares, sporting goods, machine parts, and toys comprise a significant percentage of the Company's business. Typical import customers include computer retailers and distributors of consumer electronics, department store chains, clothing and shoe wholesalers, manufacturers and catalogue stores. Historically, no single customer has accounted for five percent or more of the Company's revenues.
COMPETITION
The global logistics services industry is intensively competitive and is expected to remain so for the foreseeable future. There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited. Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities. While there is currently a marked trend within the industry toward consolidation of the niche players into the larger firms striving for immediate multinational and multi-service networks, the regional and local competitors maintain a strong market presence. The U.S. publicly traded entities most similar to the Company are Air Express International Corporation, The Harper Group, Inc. and Fritz Companies, Inc.
Historically, the primary competitive factors in the global logistics services industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with the prices of others in the industry. Recently, larger customers have exhibited a trend toward more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. This trend has made computerized customer service capabilities a significant factor in attracting and retaining customers. These computerized customer service capabilities include customized Electronic Data Interchange, or EDI, and on-line freight tracing and tracking applications. The customized EDI applications allow the transfer of key information between the customers' systems and the Company's systems. Freight tracing and tracking applications allows customers to know the location, transit time and estimated delivery time of inventory in transit.
Management believes that the ability to develop and deliver innovative solutions to meet customers' increasingly sophisticated information requirements is a critical factor in the ongoing success of the Company. Accordingly, the Company has devoted a significant amount of resources towards the maintenance and enhancement of systems that will meet these customer demands. Management believes that the Company's existing systems are competitive with the systems currently in use by other logistics services companies with whom it competes.
Developing these systems has added a considerable indirect cost to the services provided to customers. Small and middle-tier competitors, in general, do not have the resources available to develop these customized systems. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short to medium term. Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company's competitors and typically involves the purchase of significant "goodwill." As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions.
The Company's ability to attract, retain, and motivate highly qualified personnel with experience in global logistics services is an essential, if not the most important, element of its ability to compete in the industry. To this end, the Company has adopted incentive compensation programs which make percentages of branch revenues or profits available to managers for distribution among key personnel. The Company believes that these incentive compensation programs, combined with its experienced personnel and its ability to coordinate global marketing efforts, provide it with a distinct competitive advantage and accounts for historical growth that competitors have matched only through acquisition.
CURRENCY AND OTHER RISK FACTORS
The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents.
In addition, the Company's ability to provide service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines and governmental agencies. The Company considers its current working relationships with these entities to be good. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways.
SEASONALITY
Historically, the Company's operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third quarter has 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 Company's 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 Company's revenues are derived from customers in industries whose shipping patterns are tied closely to consumer demand and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company's revenues are, to a large degree, impacted by factors out of the Company's control, such as shifting consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock.
ENVIRONMENTAL
In the United States, the Company is subject to Federal, state and local provisions regulating the discharge of materials into the environment or otherwise for the protection of the environment. Similar laws apply in many foreign
jurisdictions in which the Company operates. Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its business. The Company does not anticipate making any material capital expenditures for environmental control purposes during the remainder of the current or succeeding fiscal years.
EMPLOYEES
At February 28,1997, the Company employed approximately 3,250 people, 1,550 in the United States and 40 in the balance of North America, 30 in South America, 360 in Europe, 1,100 in the Far East & Australasia, 110 in the Near/Middle East and 60 in Africa. Approximately 330 of the Company's employees are engaged principally in sales and marketing and customer service, 2,150 in operations and 770 in finance and administration. The Company is not a party to any collective bargaining agreement and considers its relations with its employees to be satisfactory.
In order to retain the services of highly qualified, experienced, and motivated employees, the Company places considerable emphasis on its incentive compensation programs and stock option plans.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, and positions of current executive officers of the Company.
Peter J. Rose has served as a director and Vice President of the Company since July 1981. Mr. Rose was elected a Senior Vice President of the Company in May 1986, Executive Vice President in May 1987, President and Chief Executive Officer in October 1988, and Chairman and Chief Executive Officer in May 1991.
Kevin M. Walsh has served as a director and Vice President of the Company since July 1981. Mr. Walsh was elected a Senior Vice President of the Company in May 1986, Executive Vice President in December 1989, and President and Chief Operating Officer in May 1991.
James L.K. Wang has served as a director and the Managing Director of Expeditors International Taiwan Ltd., the Company's former exclusive Taiwan agent, since September 1981. Mr. Wang's employment agreement with the Company has been assigned to the Company's current exclusive Taiwan agent, E.I. Freight (Taiwan), Ltd. In October 1988, Mr. Wang became a director of the Company and its Director-Far East. In January 1996, Mr. Wang was elected to the office of Executive Vice President.
Glenn M. Alger joined the Company in July 1981 as a Regional Manager. Mr. Alger was elected Vice President in October 1988, Senior Vice President and Regional Manager in January 1992, and Senior Vice President in January 1993. In March 1997, Mr. Alger was elected Executive Vice President and Director-North America.
William J. Coogan was employed as New York Ocean Manager of EIO when it was acquired by the Company in May 1985. Mr. Coogan was promoted to East Coast Regional Sales Manager of the Company in June 1986, District Manager of the Company's New York office in July 1988, and Senior Vice President of EIO in April 1989. Mr. Coogan was elected Senior Vice President--Ocean in February 1993 and Senior Vice President-Ocean Cargo in May 1996.
Rommel C. Saber joined the Company as Director-Middle/Near East in February 1990 and was elected Senior Vice President-Sales and Marketing in January 1993. In September 1993, Mr. Saber was elected Senior Vice President-Air Export. Mr. Saber was elected Senior Vice President-Air Cargo and Director-Middle East in May 1996.
Michael R. Claydon joined the Company as Director-Europe in October 1987.
Timothy C. Barber joined the Company in May 1986 as Import Manager in the Seattle office. Mr. Barber was promoted to District Manager in January 1987 and Regional Vice President in January 1993. Mr. Barber was elected Vice President-Sales and Marketing in September 1993.
R. Jordan Gates joined the Company as its Controller-Europe in February 1991. Mr. Gates was elected Chief Financial Officer and Treasurer of the Company in August 1994.
Jeffrey J. King joined the Company in October 1990 as Director-Taxation and Legal Services and was elected Vice President-General Counsel in May 1992. In August 1994, Mr. King was elected Vice President-General Counsel and Secretary.
David M. Lincoln joined the Company as its Controller-U.S. Operations in March 1984. Mr. Lincoln served as Corporate Controller of the Company from May 1986 to January 1991, and was elected Vice President-Systems Management in December 1989. Mr. Lincoln was elected Vice President-Information Systems in May 1996.
Charles J. Lynch joined the Company as its Senior Accountant in September 1984. Mr. Lynch was promoted to Assistant Controller in July 1985 and Controller-Domestic Operations in January 1989. Mr. Lynch was elected Corporate Controller in January 1991.
REGULATION
With respect to Company's activities in the air transportation industry in the United States, it is subject to regulation by the Department of Transportation ("DOT") as an indirect air carrier. The Company's overseas offices and agents are licensed as airfreight forwarders in their respective countries of operation. The Company is licensed in each of its offices or in the case of its newer offices, has made application for a license, as an airfreight forwarder by the International Air Transport Association ("IATA"). IATA is a voluntary association of airlines which prescribes certain operating procedures for airfreight forwarders acting as agents for its members. The majority of the Company's airfreight forwarding business is conducted with airlines which are IATA members.
The Company is licensed as a customs broker by the Customs Service of the Department of the Treasury in each U.S. customs district in which it does business. All U.S. customs brokers are required to maintain prescribed records and are subject to periodic audits by the Customs Service. In other jurisdictions in which the Company performs clearance services, the Company is licensed by the appropriate governmental authority.
The Company is licensed as an ocean freight forwarder by the Federal Maritime Commission ("FMC"). The FMC has established certain qualifications for shipping agents, including certain surety bonding requirements. The FMC also is responsible for the economic regulation of NVOCC activity originating or terminating in the United States. To comply with these economic regulations, vessel operators and NVOCCs, such as EIO, are required to file tariffs electronically which establish the rates to be charged for the movement of specified commodities into and out of the U.S. The FMC has the power to enforce these regulations by assessing penalties.
The Company does not believe that current U.S. and foreign governmental regulation impose significant economic restraint upon its business operations. In general, the Company conducts its business activities in each country through a majority owned subsidiary corporation that is organized and existing under the laws of that country. However, the regulations of foreign governments can impose barriers to the Company's ability to provide the full range of its business activities in a wholly or majority U.S. owned subsidiary. For example, foreign ownership of a customs brokerage business is prohibited in some jurisdictions and less frequently the ownership of the licenses required for freight forwarding and/or freight consolidation is restricted to local entities. When the Company encounters this sort of governmental restriction, it works to establish a legal structure that meets the requirements of the local regulations while also giving the Company the substantive operating and economic advantages that would be available in the absence of such regulation. This can be accomplished by creating a joint venture or exclusive agency relationship with a qualified local entity that holds the required license. In cases where the Company has unilateral control over the assets and operations of the local entity, notwithstanding the lack of technical majority ownership of common stock, the Company consolidates the accounts of the local entity. In such cases, consolidation is necessary to fairly present the financial position and results of operations of the Company because of the existence of the parent-subsidiary relationship by means other than record ownership of voting common stock.
CARGO LIABILITY
When acting as an airfreight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This legal liability is typically limited by contract to the lower of the transaction value or the released value ($9.07 per pound unless the customer declares a higher value and pays a surcharge), except if the loss or damage is caused by willful misconduct or in the absence of an appropriate air waybill. The airline which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. When acting solely as the agent of the airline or shipper, the Company does not assume any contractual liability for loss or damage to shipments tendered to the airline.
When acting as an ocean freight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This liability is typically limited by contract to the lower of the transaction value or the released value ($500 per package or customary freight unit unless the customer declares a higher value and pays a surcharge). The steamship line which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. In its ocean freight forwarding and customs clearance operations, the Company does not assume cargo liability.
When providing warehouse and distribution services, the Company limits its legal liability by contract and tariff to an amount generally equal to the lower of fair value or fifty cents per pound with a maximum of fifty dollars per "lot"--which is defined as the smallest unit that the warehouse is required to track. Upon payment of a surcharge for warehouse and distribution services, the Company will assume additional liability.
The Company maintains marine cargo insurance covering claims for losses attributable to missing or damaged shipments for which it is legally liable. The Company also maintains insurance coverage for the property of others which is stored in Company warehouse facilities.
ITEM 2
ITEM 2 - -PROPERTIES
The Company owns a 27,200 square foot office facility near Seattle-Tacoma International Airport, an 80,000 square foot office and warehouse facility on a ten-acre parcel near O'Hare International Airport in Chicago, a 5,500 square foot office facility in the Tsim Sha Tsui East district of Kowloon, Hong Kong, and a 10,900 square foot office facility in Taipei, Taiwan. The Company also owns a 23,400 square foot office and warehouse facility on a long-term renewable land lease at the Brussels Cargo facility in Brussels, Belgium. During 1996, the Company purchased a 150,000 square foot warehouse with the underlying land in Nassau County, New York. The Company also purchased a 130,000 square foot office building in downtown Seattle, Washington. The Company intends to renovate and expand the building and will initially occupy approximately 60,000 square feet as a new corporate office. The remaining square footage will be leased to tenants.
The Company leases and maintains 32 additional offices and satellite locations in the United States and 78 offices throughout the world, each located close to an airport, ocean port, or on an important border crossing. The majority of these facilities contain warehouse facilities. Lease terms are either on a month-to-month basis or terminate at various times through 2007. As an office matures, the Company will investigate the possibility of building or buying suitable facilities. Lease payments currently aggregate approximately $665,000 per month. See Note 5 to the Company's Consolidated Financial Statements. The Company believes that current leases can be extended and that suitable alternative facilities are available in the vicinity of each present facility should extensions be unavailable at the conclusion of current leases.
ITEM 3
ITEM 3 - -LEGAL PROCEEDINGS
The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition.
ITEM 4
ITEM 4 - -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5
ITEM 5 - -MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sale prices in the over-the-counter market for the Company's Common Stock as reported by The NASDAQ National Market System under the symbol EXPD.
There were 609 shareholders of record as of December 31, 1996. Management estimates that there were approximately 4,500 beneficial shareholders at that date.
In 1995 and 1996, the Board of Directors declared a semi-annual dividend of $.03 per share and $.04 per share, respectively, which was paid as follows:
1995 15 June 15 December 1996 17 June 16 December
ITEM 6
ITEM 6 - -SELECTED FINANCIAL DATA
Financial Highlights In thousands except per share data
All share and per share information has been adjusted to reflect two 2-for-1 stock splits effected in November, 1993 and November, 1996.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The words or phrases "will likely result", "are expected to",'will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to maximize to the fullest extent possible the protections of the safe harbor established in the Reform Act. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.
The risks included here are not exhaustive. Furthermore, reference is also made to other sections of this report which include additional factors which could adversely impact the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all of such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a guarantee of actual results.
Shareholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to such analysts any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of such statement or report. Furthermore, the Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. Accordingly, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
International Trade The Company primarily provides services to customers engaged in international commerce. Everything that effects international trade has the potential to expand or contact the Company's primary market.
Third Party Vendors The Company is a non-asset based supplier of global logistics services. As a result the Company depends on a variety of asset based third party vendors. The quality and profitability of the Company's services depend upon effective selection, management and discipline of third party vendors.
Predictability of Results The Company is not aware of any accurate means of forecasting short term customer requirements. However, long term customer satisfaction depends upon the Company's ability to meet these unpredictable short term customer requirements. Personnel costs, the Company's single largest variable expense, are always less flexible in the very near term as the Company must staff to meet uncertain demand. As a result, short term operating results could be disproportionately effected.
Foreign Operations The majority of the Company's revenues and operating income come from operations conducted outside the United States. To maintain a global service network, the Company may be required to operate in hostile locations.
Key Personnel The Company is a service business. The quality of this service is directly related to the quality of the Company's employees. Identifying, training and retaining key employees is essential to continued growth and future profitability. Continued loyalty to the Company will not be assured by contract.
Technology Increasingly, the Company must compete based upon the flexibility and sophistication of the technologies utilized in preforming its core businesses. Future results depend upon the Company's success in the cost effective development and integration of communication and information systems technologies.
Growth To date the Company has relied primarily upon organic growth and has tended to avoid growth through acquisition. Future results will depend upon the Company's ability to continue to grow internally or to demonstrate the ability to successfully identify and integrate non-dilutive acquisitions.
ITEM 7
ITEM 7 - -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto contained elsewhere within this document.
GENERAL
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 overseas 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 offers domestic forwarding services only in conjunction with international shipments. 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 adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's 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's 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 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 Company's business in unpredictable ways.
Historically, the Company's 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 quarter has 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 Company's 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 Company's 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 Company's revenues are, to a large degree, impacted by factors out of the Company's control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock.
RESULTS OF OPERATIONS
The following table shows the consolidated net revenues (revenues less consolidation expenses) attributable to the Company's principal services and the Company's expenses for 1996, 1995 and 1994, expressed as percentages of net revenues. With respect to the Company's services other than consolidation, net revenues are identical to revenues. Management believes that net revenues are a better measure than total revenues of the relative importance of the
Company's 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.
1996 compared with 1995
Airfreight net revenues in 1996 increased 33% compared with 1995 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe, and from North America to Australia and the Middle East. The Company's North American export airfreight net revenues increased 32% in 1996 compared to 1995. Airfreight net revenues from the Far East and from Europe increased 46% and 6%, respectively, for 1996 compared with 1995.
Ocean freight net revenues increased 38% in 1996 compared to 1995. During the first three quarters of 1996, the ocean freight market to North America from the Far East was severely impacted by extreme overcapacity on the part of direct ocean carriers. This overcapacity situation was largely the result of new vessels being placed into service. As a result, ocean freight rates during this period dropped precipitously. However, due to aggressive marketing and its relations with direct ocean carriers, management was able to expand market share, increase ocean tonnage, expand margins and increase net ocean freight revenues while still being able to offer competitive market rates to its customers. In addition to increases in the traditional NVOCC (Non-Vessel Operating Common Carrier) and ocean forwarding business, E.C.M.S. (Expeditors Cargo Management Systems), a PC-based ocean freight consolidation management and purchase order tracking service, continues to be instrumental in providing new business. The Company's North American export ocean freight net revenues increased 31% in 1996 compared to 1995. This increase was a result of the Company handling more ocean shipments moving from North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 54% and 10%, respectively, for 1996 compared with 1995.
Customs brokerage and import services revenue increased 26% in 1996 as compared with 1995 as a result of (1) the Company's growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers-- distribution services accounted for nearly 12% of the increase in customs brokerage and import services revenues for 1996 compared with 1995.
Salaries and related costs increased annually as a result of (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs decreased approximately 1% as a percentage of net revenues. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel cost. The 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 1996, (and 1995 and 1994) are directly impacted by the incentives inherent in the Company's compensation program.
Other operating expenses increased in 1996 as compared with 1995 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues decreased 1% in 1996 as compared with 1995 due to increased revenues in both new and existing offices and the realization of certain economies of scale.
Other income, net, increased in 1996 as compared to 1995 primarily due to higher interest income earned, as a result of higher positive cash flow during 1996 and resulting in higher interest income on the Company's invested cash balances. In addition, due to the change in the Company's tax policy effected January 1, 1993, line of credit borrowings in the United States were kept at a minimum level by repatriating cash from overseas subsidiaries. This is very significant to the Company's U.S. operations where the Company is most active in its role as a customs broker and regularly advances duties on behalf of customers.
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 Company's consolidated effective income tax rate remained constant at 38.7% for both 1996 and 1995.
1995 compared with 1994
Airfreight net revenues in 1995 increased 25% compared with 1994 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe, and from North America to Australia and the Middle East. The Company's North American export airfreight net revenues increased 24% in 1995 compared to 1994. Airfreight net revenues from the Far East and from Europe increased 14% and 46%, respectively, for 1995 compared with 1994.
Ocean freight net revenues increased 59% in 1995 compared to 1994 a result of the Company being able to aggressively market extremely competitive ocean freight rates to its customers, primarily on freight from the Far East to North America. The ability to offer these competitive rates was due to favorable contracts with certain key ocean carriers from whom the Company contracts space on a wholesale basis to be offered to its customers on a retail basis.
The Company was able to expand market share while at the same time increase its ocean freight margins. In addition to increases in the traditional NVOCC and ocean forwarding business, E.C.M.S., was instrumental in providing new business. The Company's North American export ocean freight net revenues increased 52% in 1995 compared to 1994. This increase was a result of the Company handling more ocean shipments moving from North America to Europe, and, from North America to the Far East. Ocean freight net revenues from the Far East and from Europe increased 71% and 71%, respectively, for 1995 compared with 1994.
Customs brokerage and import services revenue increased 23% in 1995 as compared with 1994 as a result of (1) the Company's growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities, critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers-distribution services accounted for nearly 15% of the increase in Customs brokerage and import services revenues for 1995 compared with 1994.
Salaries and related costs increased annually as a result of, (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs increased approximately 1% as a percentage of net revenues. This small
1% increase is largely attributable to increased staffing related to the opening of new offices, principally in Latin America and Europe, in the last six months of 1995.
Other operating expenses increased in 1995 as compared with 1994 as rent expense, communications expense, quality and training expenses, and other costs to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues remained constant in 1995 as compared with 1994.
Other income, net, increased in 1995 as compared to 1994 primarily due to higher interest income earned, as a result of higher positive cash flow during 1995 and resulting in higher interest income on the Company's invested cash balances.
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 Company's consolidated effective income tax rate decreased in 1995 to 38.7% compared with 41% in 1994. This decrease is a result of lower state taxes in the state of California allowed because of changes in that state's unitary tax regulations and also as a result of the reversal of certain valuation allowances established in 1994 and earlier. These valuation allowances related to net operating loss carryforwards generated at the time the actual losses were incurred in foreign countries, but were not recognized as a reduction in income tax expense until actually utilized to offset subsequent taxable income.
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 global logistics industry, however, the Company's 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 office 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 service and believes that its prices are competitive with those of others in the industry. Recently 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. This trend has made having sophisticated computerized customer service capabilities and a stable worldwide network 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. Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company's 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.
The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents. Foreign currency gains and losses recognized during 1996, 1995 and 1994 were immaterial.
The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and import services. In light of the customer-driven trend to provide customer rates on a door-to-door basis, management foresees the potential, in the medium- to long-term, for fees normally associated with customs house brokerage to be de-emphasized and included as a component of other services offered by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash generated from operations. At December 31, 1996, working capital was $83 million, including cash and short-term investments of $37 million. The Company had no long-term debt at December 31, 1996. The Company purchased land and a 150,000 square foot office and warehouse facility in Inwood, New York and a new corporate office building located in Seattle, Washington. While the nature of its business does not require an extensive investment in property and equipment, the Company cannot eliminate the possibility that it could acquire an equity interest in facilities and/or property at or near airports. The Company currently expects to spend approximately $30 million on property and equipment in 1997, which is expected to be financed with cash, short-term floating rate, and/or long-term fixed-rate borrowings.
The Company borrows internationally and domestically under unsecured bank lines of credit totaling $31.7 million. At December 31, 1996, the Company was directly liable for $3.5 million drawn on these lines of credit and was contingently liable for an additional $14.9 million of standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.05 million. The Company was contingently liable at December 31, 1996 for the entire $8.05 million.
Management believes that the Company's current cash position, bank financing arrangements, and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future.
In some cases, the Company's ability to repatriate funds from foreign operations is subject to foreign exchange controls. These matters, at the current time, do not have a significant impact on the Company's operations. The repatriation of certain undistributed earnings of the Company's subsidiaries would, under most circumstances, require the Company to pay some additional Federal and state income tax. The Company has not provided for this additional tax on undistributed earnings accumulated through December 31, 1992 because the Company intends to reinvest such earnings to fund the expansion of its foreign activities, or to distribute them in a manner in which no significant additional taxes would be incurred. At December 31, 1996, the total of such pre-1993 undistributed earnings was approximately $41.9 million and the associated Federal and state tax that would be payable on any hypothetical repatriation of these earnings approximates $10.1 million.
IMPACT OF INFLATION
To date, the Company's business has not been adversely affected by inflation, nor has the Company experienced significant difficulty in passing carrier rate increases on to its customers by means of price increases. Direct carrier rate increases could occur over the short- to medium-term period. Due to the high degree of competition in the market place, these rate increases might lead to an erosion in the Company's margins. However, as the Company is not required to purchase or maintain extensive property and equipment and has not otherwise incurred substantial interest rate-sensitive indebtedness, the Company currently has no direct exposure to increased costs resulting from increases in interest rates.
ITEM 8
ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed on the pages listed below, as part of Part II, Item 8 of this report.
ITEM 9
ITEM 9 - -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10
ITEM 10 - -DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to information under the caption "Proposal 1--Election of Directors" and to the information under the caption "Section 16(a) Reporting Delinquencies" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997. See also Part I--Item 1 - -Executive Officers of the Registrant.
ITEM 11
ITEM 11 - -EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to information under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997.
ITEM 12
ITEM 12 - -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to information under the captions "Voting Securities and Principal Holders" and "Proposal 1--Election of Directors" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997.
ITEM 13
ITEM 13 - -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to information under the caption "Executive Compensation" and "Certain Transactions" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997.
PART IV
ITEM 14
ITEM 14 - -EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
(a)(3) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following list is a subset of the list of exhibits described below and contains all compensatory plans, contracts or arrangements in which any director or executive officer of the Company is a participant, unless the method of allocation of benefits thereunder is the same for management and non-management participants:
(1) Form of Employment Agreement executed by the Company's Chairman and Chief Executive Officer. See Exhibit 10.23.
(2) Form of Employment Agreement executed by the Company's President and Chief Operating Officer and certain of the Company's executive officers. See Exhibit 10.24.
(3) Form of Employment Agreement executed by certain of the Company's Principal foreign employees. See Exhibit 10.2.
(4) Form of Employment Agreement executed by the Company's Director -Europe. See Exhibit 10.3.
(5) The Company's Amended 1985 Stock Option Plan. See Exhibit 10.4.
(6) Form of Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Stock Option Plan. See Exhibit 10.5.
(7) The Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.20.
(8) Form of Stock Purchase Agreement used in connection with options granted under the Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.7.
(9) The Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.8.
(10) Form of Stock Option Agreement used in connection with options granted under the Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.9.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report on Form 10-K.
(c) EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1997.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
By: /s/ R. Jordan Gates -------------------- R. Jordan Gates Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 1997.
SIGNATURE TITLE - --------------------------- ------------------------------------------------
/s/ Peter J. Rose Chairman of the Board and Chief Executive Officer - --------------------------- (Principal Executive Officer) and Director (Peter J. Rose)
/s/ R. Jordan Gates Chief Financial Officer and Treasurer - --------------------------- (Principal Financial and Accounting Officer) (R. Jordan Gates)
/s/ Kevin M. Walsh President and Chief Operating Officer and - --------------------------- Director (Kevin M. Walsh)
/s/ James Li Kou Wang Executive Vice President and Director-Far East - --------------------------- and Director (James Li Kou Wang)
/s/ James J. Casey Director - --------------------------- (James J. Casey)
/s/ Dan P. Kourkoumelis Director - --------------------------- (Dan P. Kourkoumelis)
/s/ John W. Meisenbach Director - --------------------------- (John W. Meisenbach)
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
-----------
CONSOLIDATED FINANCIAL STATEMENTS
COMPRISING ITEM 8 AND SCHEDULE II LISTED IN THE
INDEX AT ITEM 14(a)2 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Expeditors International of Washington, Inc.:
We have audited the consolidated financial statements of Expeditors International of Washington, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Expeditors International of Washington, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK, LLP
/s/ KPMG Peat Marwick, LLP
Seattle, Washington February 14, 1997
Consolidated Balance Sheets In thousands except share data December 31,
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings In thousands except share data Years ended December 31,
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data Years ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Non-Cash Investing and Financing Activities:
During 1996 the Company purchased real estate for $5.7 million with short-term financing provided by the seller. No principal was paid in 1996. The obligation was paid in February 1997.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Expeditors International of Washington, Inc. ("the Company") is a global logistics company operating through a worldwide network of offices, international service centers and exclusive or non-exclusive agents. The Company's customers include retailing and wholesaling, electronics, and manufacturing companies around the world. The Company grants credit upon approval to customers.
The consolidated financial statements include the accounts of the Company and its subsidiaries. In addition the accounts of exclusive agents have been consolidated in those circumstances where the Company maintains unilateral control over the agents' assets and operations, notwithstanding a lack of technical majority ownership of the agents common stock.
All significant intercompany accounts and transactions have been eliminated in consolidation.
All dollar amounts in the footnotes are presented in thousands except for share data.
B. Short-term Investments
Short-term investments are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Short-term investments are designated as available-for-sale and cost approximates market at December 31, 1996 and 1995.
C. Property and Equipment, Depreciation and Amortization
Property and equipment are recorded at cost, including interest capitalized for the construction of certain facilities, and are depreciated or amortized on the straight-line method over the shorter of the assets' estimated useful lives or lease terms. Interest capitalized in 1996 amounts to $133. No interest was capitalized in 1995 or 1994.
Expenditures for maintenance, repairs, and renewals of minor items are charged to earnings as incurred. Major renewals and improvements are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income for the period.
The excess of the cost over the fair value of the net assets of acquired businesses (included in Other assets, net) is amortized on the straight-line method over periods up to 40 years.
D. Revenues and Revenue Recognition
Airfreight revenues include the charges to the Company for carrying the shipments when the Company acts as a freight consolidator. Ocean freight revenues include the charges to the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier (NVOCC). Revenues realized in other capacities include only the commissions and fees earned.
Revenues related to shipments are recognized at the time the freight is tendered to a direct carrier at origin. All other revenues, including breakbulk services, local transportation, customs formalities, distribution services and logistics management, are recognized upon performance.
E. Income Taxes
Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
F. Net Earnings per Common Share
Net earnings per common share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding. Common share equivalents represent outstanding stock options. Fully diluted earnings per share do not differ materially from primary earnings per share.
G. Foreign Currency
Foreign currency amounts attributable to foreign operations have been translated into U.S. dollars using year-end exchange rates for assets and liabilities, historical rates for equity, and average annual rates for revenues and expenses. Unrealized gains or losses arising from fluctuations in the year-end exchange rates are generally recorded as equity adjustments from foreign currency translation. Currency fluctuations are a normal operating factor in the conduct of the Company's business and exchange transaction gains and losses are included in freight consolidation expenses. Foreign currency transaction gains and losses realized by the Company's foreign operations in 1996, 1995, and 1994, were insignificant.
H. Cash Equivalents
All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
I. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted. Nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business.
J. Reclassification
Certain 1994 and 1995 amounts have been reclassified to conform with the 1996 presentation.
NOTE 2. CREDIT ARRANGEMENTS
The Company has a $30,000 bank line of credit with a United States bank extending through March 31, 1997. Borrowings under the line bear interest at the prime rate (8.01% at December 31, 1996) and are unsecured. As of December 31, 1996, the Company had $2,500 of borrowings under this line.
The majority of the Company's foreign subsidiaries maintain bank lines of credit for short-term working capital purposes. These credit lines are supported by standby letters of credit issued by a United States bank, or guarantees issued by the Company to the foreign banks issuing the credit line. Lines of credit bear interest at .5% to 1.5% over the foreign banks' equivalent prime rates. At December 31, 1996 and 1995, the Company was liable for $952 and $285, respectively, of borrowings under these lines, and at December 31, 1996 was contingently liable for approximately $14,873 under outstanding standby letters of credit and guarantees related to these lines of credit and other obligations.
In addition, at December 31, 1996 the Company had a $8,050 credit facility with a United Kingdom bank (U.K. facility), secured by a corporate guarantee. The Company was contingently liable under the U.K. facility at December 31, 1996 for $8,050 used to secure customs bonds issued by foreign governments.
At December 31, 1996, the Company was in compliance with all restrictive covenants of these credit lines and the associated credit facilities, including maintenance of certain minimum asset, working capital and equity balances and ratios.
NOTE 3. INCOME TAXES
Income tax expense for 1996, 1995 and 1994 includes the following components:
Income tax expense differs from amounts computed by applying the U.S. Federal income tax rate of 35% to earnings before income taxes as a result of the following:
The components of earnings before income taxes are as follows:
The tax effects of temporary differences, tax credits and operating loss carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
At December 31, 1996 the Company has net operating loss carryforwards for foreign income tax purposes of $1,470 which are available over an indefinite period to offset future foreign taxable income.
The Company has not provided U.S. Federal income taxes on undistributed earnings of foreign subsidiaries accumulated through December 31, 1992 since the Company intends to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. Such undistributed earnings are approximately $41,900 and the additional Federal and state taxes payable in a hypothetical distribution of such accumulated earnings would approximate $10,100. Commencing in 1993, the Company provides for Federal and state income tax expense on foreign earnings without regard to whether such earnings will be permanently reinvested outside the United States.
NOTE 4. SHAREHOLDERS' EQUITY
A. DIVIDENDS
On November 7, 1996, the Board of Directors declared a 2-for-1 stock split, effected in the form of a stock dividend of one share of common stock for every share outstanding, and increased the authorized common stock to 80,000,000 shares. The stock dividend was distributed on December 11, 1996 to shareholders of record on November 25, 1996. All share and per share information, except par value, has been adjusted for all years to reflect the stock split.
The Board of Directors declared and the Company paid dividends during 1996, 1995 and 1994 as set forth in the table below:
B. Non-Discretionary Stock Repurchase Plan
The Board of Directors has approved a Non-Discretionary Stock Repurchase Plan. Under the terms of this plan, management is authorized to repurchase up to 1,100,000 shares of the Company's common stock, in the open market, with the proceeds received from the exercise of Employee and Director Stock Options. As of December 31, 1996, the Company had repurchased and retired 585,212 shares of common stock at an average price of $12.91.
C. Stock Option Plans
The Company has a stock option plan ("1985 Plan") for employees under which the Board of Directors may grant to officers and key employees non-qualified stock options to purchase common stock at prices equal to or greater than market value on the date of grant. The Company also has a stock option plan ("Directors' Plan") under which non-employee directors elected at each annual meeting are granted non-qualified options to purchase 4,000 shares of common stock on the first business day of the next month following the meeting. Outstanding options under the 1985 Plan generally vest and become exercisable over periods up to five years from the date of grant and expire no more than ten years from the date of grant. Outstanding options under the Directors' Plan vest and are exercisable immediately and expire ten years from the date of grant. Upon the exercise of non-qualified stock options, the Company derives a tax deduction measured by the excess of the market value over the option price at the date of exercise. The related tax benefit is credited to additional paid-in capital.
Details regarding the plans are as follows:
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's three stock based compensation plans been determined consistent with FASB No. 123, the Company's net earnings and net earnings per share would have been decreased to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants:
The following table summarizes information about fixed-price stock options outstanding at December 31, 1996:
D. Stock Purchase Plan
The Company's 1988 Employee Stock Purchase Plan provides for 1,400,000 shares of the Company's common stock to be reserved for issuance upon exercise of purchase rights granted to employees who elect to participate through regular payroll deductions beginning August 1 of each year. The purchase rights are exercisable on July 31 of the following year at a price equal to the lesser of (1) 85% of the fair market value of the Company's stock on July 31 or (2) 85% of the fair market value of the Company's stock on the preceding August 1. At December 31, 1996, 1995 and 1994, an aggregate of 675,746 shares, 547,772 shares and 426,926 shares, respectively, had been issued under the plan, and at December 31, 1996, $893 had been withheld in connection with the plan year ending July 31, 1997.
NOTE 5. COMMITMENTS
A. LEASES
The Company occupies office and warehouse facilities under terms of operating leases expiring up to 2007. At December 31, 1996, future minimum annual lease payments under all leases are as follows:
B. Employee Benefits
The Company has an employee savings plan under which the Company provides a discretionary matching contribution. In 1996, 1995, and 1994, the Company's contributions under the plan were $1,044, $756 and $558, respectively.
NOTE 6. CONTINGENT LIABILITIES
The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition.
NOTE 7. BUSINESS SEGMENT INFORMATION
Financial information regarding the Company's 1996, 1995, and 1994 operations by geographic area follows:
The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis.
Note 8. Quarterly Results (Unaudited)
Net revenues are determined by deducting freight consolidation costs from total revenues. Quarterly per share data may not equal the per share total reported for the year.
SCHEDULE II
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands) Additions --------- Balance at Charged to Balance beginning costs and Deductions at end Description of year expenses Other write-offs of year - ----------- ---------- ----------- --------- -------------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
1996 $3,807 $2,120 $ -- $ 880 $5,047 ------ ------ ------- ------- ------- ------ ------ ------- ------- -------
1995 $3,310 $ 710 $ 14 $ 227 $3,807 ------ ------ ------- ------- ------- ------ ------ ------- ------- -------
1994 $2,230 $1,322 $ -- $ 242 $3,310 ------ ------ ------- ------- ------- ------ ------ ------- ------- -------
S-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. ------------------- ANNUAL REPORT
ON
FORM 10-K
FOR FISCAL YEAR ENDED
DECEMBER 31, 1996 ------------------- EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
EXHIBITS
INDEX TO EXHIBITS