Item 1 "Business" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements and other information relating to the Company are based on the beliefs of management and are necessarily the result of assumptions made using the information currently available to management. Actual results will vary, and even vary materially, from those predicted in the forward-looking statements.
In accordance with the provisions of the Litigation Reform Act the Company is making readers aware that forward-looking statements, because they relate to future events, are by their very nature subject to many important risk factors which could cause actual results to differ materially from those contained in the forward-looking statements. For additional information about forward-looking statements and for an identification of risk factors and their potential significance, see "Safe Harbor for Forward-Looking Statements Under Securities Reform Act of 1995; Certain Cautionary Statements" immediately preceding Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report.
PART I
ITEM 1 - -BUSINESS
Expeditors International of Washington, Inc. is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The 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 43, 47 and 47 percent of the Company's 1997, 1996 and 1995 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 on to 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 39, 34, and 35 percent of the Company's 1997, 1996, and 1995 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 18, 19, and 18 percent of the Company's 1997, 1996, and 1995 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 intensely competitive and is expected to remain so for the foreseeable future. There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited. Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities. While there is currently a marked trend within the industry toward consolidation 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 such 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, 1998, the Company employed approximately 4,500 people, 2,070 in the United States and 60 in the balance of North America, 110 in South America, 660 in Europe, 1,280 in the Far East & Australasia, 160 in the Near/Middle East and 160 in Africa. Approximately 505 of the Company's employees are engaged principally in sales and marketing and customer service, 2,855 in operations and 1,135 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 has worked for the Company since May 1985. Mr. Coogan was promoted 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.
Albert H. Leung joined the Company as Senior Vice President-Far East in May 1997. Prior to joining the Company, Mr. Leung was employed by Northwest Airlines for 19 years, most recently as Regional Director-Cargo, Taiwan, S.E. Asia and Indian Subcontinent.
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. Mr. Saber was elected Senior Vice President-Air Export in September 1993. Since July 1997 he has served as Senior Vice President Near/Middle East and Indian Subcontinent.
Michael R. Claydon joined the Company as Director-Europe in October 1987. He was elected Senior Vice President-Europe and Africa in September 1997.
Jean Claude Carcaillet joined the Company as Managing Director-Australasia in August 1988. He was elected Senior Vice President-Australasia in September 1997.
Timothy C. Barber joined the Company in May 1986. Mr. Barber was promoted to District Manager of the Seattle
office in January 1987 and Regional Vice President in January 1993. Mr. Barber was elected Vice President-Sales and Marketing in September 1993 and Senior Vice President-Sales and Marketing in January 1998.
R. Jordan Gates joined the Company as its Controller-Europe in February 1991. Mr. Gates was elected Chief Financial Officer and Treasurer of the Company in August 1994 and Senior Vice President-Chief Financial Officer and Treasurer in January 1998.
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 and Senior Vice President-General Counsel and Secretary in January 1998.
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 and Senior Vice President and Chief Information Officer in October 1997.
Charles J. Lynch joined the Company in September 1984. Mr. Lynch was promoted to Assistant Controller in July 1985 and Controller-Domestic Operations in January 1989. Mr. Lynch was elected Corporate Controller in January 1991 and Vice President-Corporate Controller in January 1998.
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 to approximately 200,000 square feet and will initially occupy approximately 100,000 square feet as a new corporate office. The remaining square footage will be leased to tenants.
The Company leases and maintains 40 additional offices and satellite locations in the United States and 97 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 $787,000 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 856 shareholders of record as of December 31, 1997. Management estimates that there were approximately 9,000 beneficial shareholders at that date.
The Board of Directors declared semi-annual dividends during the two most recent fiscal years as follows:
All share and per share information have been adjusted to reflect a 2-for-1 stock split effected in November, 1996.
ITEM 6
ITEM 6 - -SELECTED FINANCIAL DATA
Financial Highlights In thousands except per share data
All share and per share information have 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 Securities Litigation Reform Act. 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 cannot be relied upon as a guarantee of actual results.
Shareholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the 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.
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 report.
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 1997, 1996 and 1995, 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.
1997 COMPARED WITH 1996
Airfreight net revenues in 1997 increased 31% compared with 1996 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. The Company's North American export airfreight net revenues increased 34% in 1997 compared to 1996. Airfreight net revenues from the Far East and from Europe increased 25% and 40%, respectively, for 1997 compared with 1996.
Ocean freight net revenues increased 35% in 1997 compared to 1996. During the first two quarters of 1997, the ocean freight market to North America from the Far East continued to be impacted by overcapacity experienced by direct ocean carriers. During the last two quarters of 1997, freight volumes between North America and the Far East somewhat reduced the overcapacity situation. As a result, freight rates, which had steadily fallen over the previous two years, stabilized. Management was still able to expand market share, increase ocean tonnage, expand margins
and increase net ocean freight revenues while offering 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, continued to be instrumental in attracting new business. The Company's North American export ocean freight net revenues increased 41% in 1997 compared to 1996. 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 26% and 57%, respectively, for 1997 compared with 1996.
Customs brokerage and import services revenue increased 65% in 1997 as compared with 1996 as a result of (1) the Company's entry into the truck and rail border brokerage business in the United States, (2) the Company's growing reputation for providing high quality service, (3) 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 (4) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers. Distribution services accounted for nearly 16% of the increase in customs brokerage and import services revenues for 1997 compared with 1996.
Salaries and related costs increased in 1997 compared to 1996 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 -- a measure that management believes is significant in assessing the effectiveness of corporate cost containment objectives. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel costs. The relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits. Management believes that the growth in revenues, net revenues and net earnings for 1997, (and 1996 and 1995) are a result of the incentives inherent in the Company's compensation program.
Other operating expenses increased in 1997 as compared with 1996 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 1997 as compared with 1996 due to increased revenues in both new and existing offices and the realization of certain economies of scale.
Other income, net, increased in 1997 as compared to 1996 primarily due to foreign exchange gains. Interest income was lower in 1997 as a result of cash being used for the acquisitions of real estate and of the Company's Irish agent.
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 virtually constant at 38.6% for 1997 and 38.7% in 1996.
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. 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. E.C.M.S. was 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.
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's consolidated effective income tax rate remained constant at 38.7% for both 1996 and 1995.
CURRENCY AND OTHER RISK FACTORS
During the third and fourth quarters of 1997, the currencies in Thailand, Malaysia, Indonesia and South Korea devalued significantly. The currencies of Taiwan, Singapore and other Far East countries were also weakened by events in these other Asian countries. A large percentage of the billings from these countries are denominated in U.S. Dollars. The Company also utilizes an internal clearing house to reduce exposure from foreign exchange rate fluctuations. Net foreign currency gains realized during 1997 were approximately $1.065 million. Foreign currency gains and losses realized during 1996 and 1995 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.
Management believes that the Company has sufficiently addressed any "Year 2000" issues related to its information systems.
SOURCES OF GROWTH
Historically, growth through aggressive acquisition typically involves the purchase of significant "goodwill", the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired
business. As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the "goodwill" recorded in the transactions.
OFFICE ADDITIONS
The Company added 22 offices -- 19 start-ups and 3 acquisitions (indicated below with an asterisk) during 1997.
INTERNAL GROWTH
Management believes that a comparison of "same store" growth is critical in the evaluation of the quality and extent of the Company's internally generated growth. This "same store" analysis isolates the financial contributions from offices that have been included in the Company's operating results for at least one full year. The table below presents "same store" comparisons for the year ended December 31, 1997, relative to the same period of 1996, and for the year ended December 31, 1996, relative to the same period of 1995.
Same store comparisons for the years ended December 31,
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash generated from operations. At December 31, 1997, working capital was $87 million, including cash and short-term investments of $42 million. The Company had no long-term debt at December 31, 1997. In 1996, the Company purchased a corporate office building located in Seattle, Washington, a portion of which will house the Company's corporate offices. Total anticipated costs approximate $40 million of which $15.5 million had been incurred as of December 31, 1997. 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 $35 million on property and equipment in 1998, 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 $31.2 million. At December 31, 1997, the Company was directly liable for $1.1 million drawn on these lines of credit and was contingently liable for an additional $16.5 million of standby letters of credit. In addition, the Company maintains
a bank facility with its U.K. bank for $8.3 million. The Company was contingently liable at December 31, 1997 for the entire $8.3 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, 1997, 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.
The forward looking statements contained in this document involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from these statements include: risks associated with foreign operations, elimination of intercompany transactions, matching of expenses with the associated revenue, seasonality, shifts in consumer demand, other accounting estimates, and other risk factors disclosed from time to time in the Company's public reports.
ITEM 7A
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market capitalization as of January 28, 1997 did not exceed $2.5 billion. Therefore, in accordance with the instructions to this item, the Company is not obligated to disclose information under this item as part of this report.
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, 1998. 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, 1998.
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 "Principal Holders of Voting Securities" 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, 1998.
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, 1998.
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:
(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, 1998.
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
By: /s/ R. Jordan Gates ------------------------------- R. Jordan Gates Senior Vice President-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, 1998.
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, 1997, 1996, AND 1995
Independent Auditors' Report
The Board of Directors and Shareholders Expeditors International of Washington, Inc.:
We have audited the consolidated balance sheets 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 have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, 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 13, 1998
CONSOLIDATED BALANCE SHEETS IN THOUSANDS EXCEPT SHARE DATA DECEMBER ,
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, 1997, 1996 AND 1995
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS YEARS ENDED DECEMBER 31,
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.
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 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.
In 1997, the Company acquired its Irish agent in a purchase business combination for approximately $8,500 of cash. Goodwill from this transaction was approximately $5,500. Results of operations of this entity are not material in relation to the Company as a whole.
All significant intercompany accounts and transactions have been eliminated in consolidation.
All dollar amounts in the notes are presented in thousands except for share data.
B. SHORT-TERM INVESTMENTS
Short-term investments are designated as available-for-sale and cost approximates market at December 31, 1997 and 1996.
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. Useful lives for major categories of property and equipment are as follows:
Interest capitalized in 1997 and 1996 was $505 and $133, respectively. No interest was capitalized in 1995.
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
During 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128. Under SFAS No. 128, diluted earnings per share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding. Common share equivalents represent outstanding stock options. Basic earnings per share is calculated using the weighted average of common shares outstanding without taking into consideration dilutive common share equivalents outstanding.
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 generally included in freight consolidation expenses. Net foreign currency transaction gains realized outside of ordinary transaction settlements in 1997 were approximately $1,065. Foreign currency transaction gains and losses realized in 1996 and 1995 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.
J. RECLASSIFICATION
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997 presentation.
NOTE 2. CREDIT ARRANGEMENTS
The Company has a $30,000 United States bank line of credit extending through March 30, 1998. Borrowings under the line bear interest at the LIBOR +.75% (7.52% at December 31, 1997) and are unsecured. As of December 31, 1997, the Company had $1,000 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, 1997 and 1996, the Company was liable for $1,145 and $952, respectively, of borrowings under these lines, and at December 31, 1997 was contingently liable for approximately $16,500 under outstanding standby letters of credit and guarantees related to these lines of credit and other obligations.
In addition, at December 31, 1997 the Company had a $8,271 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, 1997 for $8,271 used to secure customs bonds issued by foreign governments.
At December 31, 1997, 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 1997, 1996 and 1995 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, 1997 and 1996 are as follows:
At December 31, 1997, the Company has net operating loss carryforwards for foreign income tax purposes of $1,228 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. Since 1993, the Company has been providing 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.
B. NON-DISCRETIONARY STOCK REPURCHASE PLAN
The Company has a Non-Discretionary Stock Repurchase Plan under which 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, 1997, the Company had repurchased and retired 641,096 shares of common stock at an average price of $16.15.
C. STOCK OPTION PLANS
The Company has two stock option plans (the "1985 Plan" and the "1997 Plan") for employees under which the Board of Directors may grant officers and key employees options to purchase common stock at prices equal to or greater than market value on the date of the grant. The 1985 Plan provides for non-qualified grants at exercise prices equal to or greater than the market value on the date of grant. Outstanding options generally vest and become exercisable over periods up to five years from the date of grant and expire no more than 10 years from the date of grant. The 1997 Plan provides for qualified and non-qualified grants of options to purchase shares, limited to not more than 50,000 per person per year. Grants less than or equal to 10,000 shares in any fiscal year, are granted at or above common stock prices on the date of the grant. Any 1997 Plan grants in excess of the initial 10,000 shares granted per person per year (Excess Grants) require an exercise price of not less than 120% of the common stock price on the date of the grant. Excess Grants expire no later than 5 years from the date of grant. Excess Grants in 1997 vest completely 3 years from the date of grant.
The Company also has a stock option plan (Directors Plan) under which non-employee directors elected at each annual meeting are granted non-qualified options to purchase 4,000 shares of common stock on the first business day of the month following the meeting.
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 and its employee stock purchase rights plans. Accordingly, no compensation cost has been recognized for its fixed stock option or employee stock purchase rights plans. Had compensation cost for the Company's three stock based compensation and employee stock purchase rights plans been determined consistent with FASB No. 123, the Company's net earnings, basic earnings per share and diluted 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, 1997:
D. BASIC AND DILUTED EARNINGS PER SHARE
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for the earnings per share in 1997, 1996 and 1995.
E. 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, 1997, 1996 and 1995, an aggregate of 846,145 shares, 675,746 shares and 547,772 shares, respectively, had been issued under the plan, and at December 31, 1997, $1,828 had been withheld in connection with the plan year ending July 31, 1998.
NOTE 5. COMMITMENTS
A. LEASES
The Company occupies office and warehouse facilities under terms of operating leases expiring up to 2007. At December 31, 1997, 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 1997, 1996, and 1995, the Company's contributions under the plan were $1,119, $1,044 and $756, 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 1997, 1996, and 1995 operations by geographic area are as 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, 1997, 1996, AND 1995 (IN THOUSANDS)
S-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
ANNUAL REPORT
ON
FORM 10-K
FOR FISCAL YEAR ENDED
DECEMBER 31, 1997
------------------------
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
EXHIBITS
INDEX TO EXHIBITS