XNAS:EXPD Expeditors International of Washington Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:EXPD Fair Value Estimate
Premium
XNAS:EXPD Consider Buying
Premium
XNAS:EXPD Consider Selling
Premium
XNAS:EXPD Fair Value Uncertainty
Premium
XNAS:EXPD Economic Moat
Premium
XNAS:EXPD Stewardship
Premium
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 0-13468
___________________________________________
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
(Exact name of registrant as specified in its charter)
___________________________________________
Washington
  
91-1069248
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification Number)
 
 
 
1015 Third Avenue, 12thFloor, Seattle, Washington
  
98104
(Address of principal executive offices)
  
(Zip Code)
(206) 674-3400
(Registrant’s telephone number, including area code)
______________________________________________________

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
  
Accelerated filer
¨
 
 
 
 
 
 
Non-accelerated filer
 o
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At August 3, 2012, the number of shares outstanding of the issuer’s Common Stock was 210,542,529.
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
 
June 30,
2012
 
December 31, 2011
Current Assets:
 
 
 
Cash and cash equivalents
$
1,364,247

 
$
1,294,356

Short-term investments
376

 
472

Accounts receivable, less allowance for doubtful accounts of $8,731 at June 30, 2012 and $10,381 at December 31, 2011
983,131

 
934,752

Deferred Federal and state income taxes
10,234

 
10,415

Other
47,409

 
46,888

Total current assets
2,405,397

 
2,286,883

Property and equipment, less accumulated depreciation and amortization of $309,467 at June 30, 2012 and $296,481 at December 31, 2011
546,754

 
538,806

Goodwill and other intangibles, net
10,003

 
10,557

Other assets, net
30,218

 
30,581

Total assets
$
2,992,372

 
$
2,866,827

Current Liabilities:
 
 
 
Accounts payable
672,836

 
606,628

Accrued expenses, primarily salaries and related costs
184,114

 
169,445

Federal, state and foreign income taxes
25,948

 
20,072

Total current liabilities
882,898

 
796,145

Deferred Federal and state income taxes
59,417

 
60,613

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ Equity:
 
 
 
Preferred stock, none issued

 

Common stock, par value $.01 per share. Issued and outstanding 210,503,675 shares at June 30, 2012 and 212,003,662 shares at December 31, 2011
2,105

 
2,120

Additional paid-in capital
1,013

 
13,260

Retained earnings
2,044,682

 
1,991,222

Accumulated other comprehensive loss
(4,345
)
 
(2,964
)
Total shareholders’ equity
2,043,455

 
2,003,638

Noncontrolling interest
6,602

 
6,431

Total equity
2,050,057

 
2,010,069

Total liabilities and equity
$
2,992,372

 
$
2,866,827

See accompanying notes to condensed consolidated financial statements.


2



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Airfreight services
$
638,541

 
$
749,861

 
$
1,277,453

 
$
1,450,784

Ocean freight and ocean services
518,998

 
486,831

 
953,334

 
926,972

Customs brokerage and other services
347,413

 
344,676

 
685,535

 
664,460

Total revenues
1,504,952

 
1,581,368

 
2,916,322

 
3,042,216

Operating Expenses:
 
 
 
 
 
 
 
Airfreight consolidation
484,311

 
576,280

 
965,354

 
1,100,916

Ocean freight consolidation
413,447

 
377,805

 
745,401

 
717,354

Customs brokerage and other services
153,543

 
154,722

 
305,345

 
297,470

Salaries and related costs
249,925

 
249,114

 
496,057

 
486,929

Rent and occupancy costs
20,853

 
21,354

 
42,029

 
42,735

Depreciation and amortization
9,670

 
9,257

 
19,215

 
18,431

Selling and promotion
8,860

 
10,022

 
17,523

 
19,185

Other
31,940

 
30,539

 
67,724

 
59,691

Total operating expenses
1,372,549

 
1,429,093

 
2,658,648

 
2,742,711

Operating income
132,403

 
152,275

 
257,674

 
299,505

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
3,050

 
2,312

 
6,410

 
4,632

Interest expense
(222
)
 
(229
)
 
(842
)
 
(443
)
Other, net
3,682

 
857

 
4,779

 
1,974

Other income, net
6,510

 
2,940

 
10,347

 
6,163

Earnings before income taxes
138,913

 
155,215

 
268,021

 
305,668

Income tax expense
54,892

 
60,195

 
107,278

 
119,441

Net earnings
84,021

 
95,020

 
160,743

 
186,227

Less net earnings (losses) attributable to the noncontrolling interest
66

 
20

 
81

 
(5
)
Net earnings attributable to shareholders
$
83,955

 
$
95,000

 
$
160,662

 
$
186,232

Diluted earnings attributable to shareholders per share
$
.39

 
$
.44

 
$
.75

 
$
.86

Basic earnings attributable to shareholders per share
$
.40

 
$
.45

 
$
.76

 
$
.88

Dividends declared and paid per common share
$
.28

 
$
.25

 
$
.28

 
$
.25

Weighted average diluted shares outstanding
213,212,912

 
215,659,043

 
213,683,587

 
215,780,230

Weighted average basic shares outstanding
211,724,082

 
212,136,164

 
211,910,872

 
212,112,643

See accompanying notes to condensed consolidated financial statements.



3



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net earnings
$
84,021

 
$
95,020

 
$
160,743

 
$
186,227

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $6,257 and $3,014 for the three months ended June 30, 2012 and 2011, and $758 and $7,855 for the six months ended June 30, 2012 and 2011
(11,453
)
 
5,372

 
(1,291
)
 
14,193

Other comprehensive income (loss)
(11,453
)
 
5,372

 
(1,291
)
 
14,193

Comprehensive income
72,568

 
100,392

 
159,452

 
200,420

Less comprehensive income (loss) attributable to the noncontrolling interest
22

 
(109
)
 
171

 
(146
)
Comprehensive income attributable to shareholders
$
72,546

 
$
100,501

 
$
159,281

 
$
200,566

See accompanying notes to condensed consolidated financial statements.


4



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Operating Activities:
 
 
 
 
 
 
 
Net earnings
$
84,021

 
$
95,020

 
$
160,743

 
$
186,227

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
 
 
 
 
Provision for losses on accounts receivable
(388
)
 
(63
)
 
(855
)
 
1,790

Deferred income tax (benefit) expense
(5,739
)
 
1,601

 
(258
)
 
(335
)
Excess tax benefits from stock plans
(806
)
 
(2,285
)
 
(4,232
)
 
(4,531
)
Stock compensation expense
10,926

 
10,236

 
21,526

 
20,708

Depreciation and amortization
9,670

 
9,257

 
19,215

 
18,431

Gain on sale of assets
(65
)
 
(21
)
 
(130
)
 
(51
)
Other
271

 
311

 
553

 
618

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Increase in accounts receivable
(63,260
)
 
(14,173
)
 
(50,292
)
 
(7,490
)
Decrease in other current assets
1,642

 
3,896

 
3,566

 
2,481

Increase in accounts payable and accrued expenses
70,674

 
7,943

 
84,233

 
38,130

(Decrease) increase in income taxes payable, net
(14,132
)
 
(33,665
)
 
6,142

 
(88
)
Net cash from operating activities
92,814

 
78,057

 
240,211

 
255,890

Investing Activities:
 
 
 
 
 
 
 
Decrease (increase) in short-term investments, net
15,878

 
(449
)
 
98

 
(538
)
Purchase of property and equipment
(9,814
)
 
(17,110
)
 
(26,902
)
 
(38,235
)
Proceeds from sale of property and equipment
141

 
42

 
253

 
85

Other
(232
)
 
(64
)
 
126

 
(1,506
)
Net cash from investing activities
5,973

 
(17,581
)
 
(26,425
)
 
(40,194
)
Financing Activities:
 
 
 
 
 
 
 
Proceeds from issuance of common stock
7,482

 
15,821

 
20,402

 
23,625

Repurchases of common stock
(84,401
)
 
(45,690
)
 
(106,266
)
 
(65,274
)
Excess tax benefits from stock plans
806

 
2,285

 
4,232

 
4,531

Dividends paid
(59,358
)
 
(53,014
)
 
(59,358
)
 
(53,014
)
Net cash from financing activities
(135,471
)
 
(80,598
)
 
(140,990
)
 
(90,132
)
Effect of exchange rate changes on cash and cash equivalents
(11,984
)
 
7,481

 
(2,905
)
 
15,801

(Decrease) increase in cash and cash equivalents
(48,668
)
 
(12,641
)
 
69,891

 
141,365

Cash and cash equivalents at beginning of period
1,412,915

 
1,238,471

 
1,294,356

 
1,084,465

Cash and cash equivalents at end of period
$
1,364,247

 
$
1,225,830

 
$
1,364,247

 
$
1,225,830

Interest and Taxes Paid:
 
 
 
 
 
 
 
Interest
$
233

 
$
13

 
$
420

 
$
17

Income taxes
77,583

 
91,035

 
104,095

 
117,311

See accompanying notes to condensed consolidated financial statements.

5



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)

Note 1.
Summary of Significant Accounting Policies
A.
Basis of Presentation
Expeditors International of Washington, Inc. (“the Company”) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, and manufacturing companies around the world.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on February 28, 2012. All dollar amounts in the notes are presented in thousands except for share data. All significant intercompany accounts and transactions have been eliminated in consolidation.
B.
Accounts Receivable
The Company maintains an allowance for doubtful accounts, which is reviewed at least monthly for estimated losses resulting from the inability of its customers to make required payments for services and advances. Additional allowances may be necessary in the future if the ability of its customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of $8,731 as of June 30, 2012 and $10,381 as of December 31, 2011. Additions and write-offs have not been significant in the periods presented.
C.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of insurance liabilities for the portion of the freight related exposure which the Company has self-insured, accrual of various tax liabilities, accrual of loss contingencies and calculation of share-based compensation expense. Actual results could differ from those estimates.
D.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-No. 05 “Presentation of Comprehensive Income”, which amends Accounting Standards Codification (ASC) Topic 220 -“Comprehensive Income”. This update is intended to increase the prominence of items reported in other comprehensive income by giving the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted the provisions of ASU 2011-No. 05, as amended by ASU 2011-No. 12, beginning in the first quarter of 2012. Accordingly, condensed consolidated statements of comprehensive income were included consecutive to the condensed consolidated statements of earnings. The adoption only had a presentation impact on the Company's consolidated financial statements.
Note 2. Share-Based Compensation
The Company provides compensation benefits by granting stock options and employee stock purchase rights to its employees and restricted shares to its directors. On May 2, 2012, the shareholders approved the 2012 Stock Option Plan ("2012 Plan"), which made available 3,000,000 shares of the Company's common stock for purchase upon exercise of options granted under the 2012 Plan. The Company's annual grant of option awards generally takes place during the second quarter of each fiscal year. For the six months ended June 30, 2012 and 2011, 2,822,990 and 2,998,390 options were granted, respectively. The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the

6



third quarter of each fiscal year and none were issued in the six-month period ended June 30, 2012 and 2011.
The Company recognizes stock compensation expense based on an estimate of the fair value of awards granted to employees and directors under the Company’s stock option, director restricted stock and employee stock purchase rights plans. The expense, adjusted for expected forfeitures, is recognized on a straight-line basis over the stock awards' vesting period. The forfeiture assumption used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns. 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:
 
 
 
 
 
Six months ended June 30,
 
2012
 
2011
Dividend yield
1.30
%
 
0.97
%
Volatility - stock option plans

38 - 39 %

 
38 - 40%

Risk free interest rates
0.89 - 1.43%

 
2.17 - 2.84%

Expected life (years) - stock option plans
5.79 - 7.26

 
5.50 - 7.11

Weighted average fair value of stock options granted during the period
$
13.53

 
$
19.35

    
Total stock compensation expense and the total related tax benefit recognized are as follows:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Stock compensation expense
$
10,926

 
$
10,236

 
$
21,526

 
$
20,708

Recognized tax benefit
$
336

 
$
39

 
$
375

 
$
77



7



Note 3. Basic and Diluted Earnings per Share
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders per share:
 
Three months ended 
 
June 30,
(Amounts in thousands, except share and per share amounts)
Net earnings
attributable to
shareholders
 
Weighted average
shares
 
Earnings per share
2012
 
 
 
 
 
Basic earnings attributable to shareholders
$
83,955

 
211,724,082

 
$
.40

Effect of dilutive potential common shares

 
1,488,830

 

Diluted earnings attributable to shareholders
$
83,955

 
213,212,912

 
$
.39

2011
 
 
 
 
 
Basic earnings attributable to shareholders
$
95,000

 
212,136,164

 
$
.45

Effect of dilutive potential common shares

 
3,522,879

 

Diluted earnings attributable to shareholders
$
95,000

 
215,659,043

 
$
.44

 
 
 
 
 
 
 
Six months ended
 
June 30,
(Amounts in thousands, except share and per share amounts)
Net earnings
attributable to
shareholders
 
Weighted average
shares
 
Earnings per share
2012
 
 
 
 
 
Basic earnings attributable to shareholders
$
160,662

 
211,910,872

 
$
.76

Effect of dilutive potential common shares

 
1,772,715

 

Diluted earnings attributable to shareholders
$
160,662

 
213,683,587

 
$
.75

2011
 
 
 
 
 
Basic earnings attributable to shareholders
$
186,232

 
212,112,643

 
$
.88

Effect of dilutive potential common shares

 
3,667,587

 

Diluted earnings attributable to shareholders
$
186,232

 
215,780,230

 
$
.86

The following shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Shares
15,444,641

 
7,413,458

 
15,427,041

 
7,415,063



8



Note 4. Components of Equity
The components of equity for the six months ended 2012 and 2011 are as follows:
 
Shareholders’
equity
 
Noncontrolling
interest
 
Total
equity
Balance at December 31, 2011
$
2,003,638

 
6,431

 
2,010,069

Exercise of stock options
20,402

 

 
20,402

Shares repurchased under provisions of stock repurchase plans
(106,266
)
 

 
(106,266
)
Stock compensation expense
21,526

 

 
21,526

Tax benefits from stock plans
4,232

 

 
4,232

Net earnings
160,662

 
81

 
160,743

Other comprehensive income (loss)
(1,381
)
 
90

 
(1,291
)
Dividends paid ($.28 per share)
(59,358
)
 

 
(59,358
)
Balance at June 30, 2012
$
2,043,455

 
6,602

 
2,050,057

 
 
 
 
 
 
Balance at December 31, 2010
$
1,740,906

 
7,248

 
1,748,154

Exercise of stock options
23,625

 

 
23,625

Shares repurchased under provisions of stock repurchase plans
(65,274
)
 

 
(65,274
)
Stock compensation expense
20,708

 

 
20,708

Tax benefits from stock plans
4,531

 

 
4,531

Net earnings
186,232

 
(5
)
 
186,227

Other comprehensive income (loss)
14,334

 
(141
)
 
14,193

Dividends paid ($.25 per share)
(53,014
)
 

 
(53,014
)
Balance at June 30, 2011
$
1,872,048

 
7,102

 
1,879,150

On May 2, 2012 , the Board of Directors declared a semi-annual cash dividend of $0.28 per share payable on June 15, 2012 to shareholders of record as of June 1, 2012. On May 4, 2011, the Board of Directors declared a semi-annual cash dividend of $0.25 per share payable on June 15, 2011 to shareholders of record as of June 1, 2011.
Note 5. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. Cash equivalents consist of highly liquid investments with a maturity of three months or less at date of purchase. Short term investments have a maturity of greater than three months at date of purchase. Cash, cash equivalents and short-term investments consist of the following:
 
June 30, 2012
 
December 31, 2011
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Cash and Cash Equivalents:
 
 
 
 
 
 
 
Cash and overnight deposits
$
498,782

 
$
498,782

 
$
445,586

 
$
445,586

Corporate commercial paper
804,782

 
805,080

 
791,729

 
791,902

Time deposits
60,683

 
60,683

 
57,041

 
57,041

Total cash and cash equivalents
1,364,247

 
1,364,545

 
1,294,356

 
1,294,529

Short-Term Investments:
 
 
 
 
 
 
 
Time deposits
376

 
376

 
472

 
472

Total
$
1,364,623

 
$
1,364,921

 
$
1,294,828

 
$
1,295,001

The fair value of corporate commercial paper is based on the use of market interest rates for identical or similar assets.

9



Note 6. Contingencies
On October 10, 2007, the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to produce certain information and records relating to an investigation of alleged anti-competitive behavior amongst air cargo freight forwarders. As part of this process, the Company has met with and continues to co-operate with the DOJ. The Company may incur additional costs during the course of this ongoing investigation, which could include fines and/or penalties if the DOJ concludes that the Company has engaged in anti-competitive behavior and such fines and/or penalties could have a material impact on the Company's results of operations and operating cash flows for any particular quarter or year.
On April 19, 2012, the Company received a federal grand jury subpoena from the DOJ requiring the production of documents related to the export or re-export by unaffiliated third-parties to end users in a US-embargoed country of products and/or services produced by a U.S. manufacturer. In a related matter, the Company is also responding to an administrative subpoena from the Commerce Department's Bureau of Industry and Security (BIS) requiring the production of documents pertaining to the export or re-export of US-origin goods to the same embargoed country. The Company is co-operating with the DOJ and BIS. If it is determined that the Company or one of its subsidiaries, directly or indirectly, facilitated the export or re-export of these specified products and/or services, the Company may incur fines and/or penalties which could have a material impact on the Company's results of operations and cash flows for any particular quarter or year.
Government investigations are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include substantial monetary damages and, in matters in which injunctive relief or other conduct remedies are sought, an injunction or other order relating to business conduct. Were unfavorable final outcomes to occur, the Company's results of operations and cash flows for the particular quarter or year could be materially harmed.
The Company is involved in other claims and lawsuits which arise in the ordinary course of business, none of which currently, in management's opinion, are expected to have a significant effect on the Company's operations or financial position. As of June 30, 2012, the amounts accrued for these claims and lawsuits, and the other legal matters described above, are not significant to the Company's operations or financial position. At this time the Company is unable to estimate any additional loss or range of reasonably possible loss, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Note 7. Business Segment Information
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.


10



Financial information regarding the Company’s operations by geographic area are as follows:
(in thousands)
UNITED
STATES
 
OTHER
NORTH
AMERICA
 
LATIN
AMERICA
 
ASIA
PACIFIC
 
EUROPE and
AFRICA
 
MIDDLE
EAST and
INDIA
 
ELIMI-
NATIONS
 
CONSOLI-
DATED
Three months ended June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
379,126

 
49,802

 
21,366

 
780,858

 
202,301

 
71,499

 

 
1,504,952

Transfers between geographic areas
22,504

 
2,466

 
4,791

 
11,038

 
9,603

 
4,670

 
(55,072
)
 

Total revenues
$
401,630

 
52,268

 
26,157

 
791,896

 
211,904

 
76,169

 
(55,072
)
 
1,504,952

Net revenues
$
182,291

 
25,115

 
14,724

 
135,908

 
71,497

 
24,116

 

 
453,651

Operating income
$
49,193

 
8,085

 
4,118

 
51,768

 
12,951

 
6,288

 

 
132,403

Identifiable assets at quarter end
$
1,597,543

 
93,374

 
52,019

 
687,586

 
412,752

 
152,754

 
(3,656
)
 
2,992,372

Capital expenditures
$
5,236

 
153

 
400

 
2,602

 
1,111

 
312

 

 
9,814

Depreciation and amortization
$
5,756

 
181

 
207

 
1,645

 
1,430

 
451

 

 
9,670

Equity
$
1,295,963

 
51,248

 
31,903

 
462,123

 
144,659

 
94,892

 
(30,731
)
 
2,050,057

Three months ended June 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
390,806

 
47,816

 
21,136

 
816,350

 
229,724

 
75,536

 

 
1,581,368

Transfers between geographic areas
25,973

 
2,783

 
5,220

 
10,170

 
11,355

 
4,500

 
(60,001
)
 

Total revenues
$
416,779

 
50,599

 
26,356

 
826,520

 
241,079

 
80,036

 
(60,001
)
 
1,581,368

Net revenues
$
181,603

 
21,581

 
15,157

 
150,616

 
78,828

 
24,776

 

 
472,561

Operating income
$
57,752

 
5,761

 
4,486

 
61,542

 
16,877

 
5,857

 

 
152,275

Identifiable assets at quarter end
$
1,411,881

 
91,678

 
58,396

 
678,668

 
479,852

 
155,503

 
2,026

 
2,878,004

Capital expenditures
$
3,350

 
448

 
144

 
4,622

 
7,881

 
665

 

 
17,110

Depreciation and amortization
$
4,926

 
277

 
264

 
1,847

 
1,416

 
527

 

 
9,257

Equity
$
1,123,482

 
52,814

 
33,784

 
420,962

 
184,252

 
94,447

 
(30,591
)
 
1,879,150

(in thousands)
UNITED
STATES
 
OTHER
NORTH
AMERICA
 
LATIN
AMERICA
 
ASIA
PACIFIC
 
EUROPE  and
AFRICA
 
MIDDLE
EAST and
INDIA
 
ELIMI-
NATIONS
 
CONSOLI-
DATED
Six months ended June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
756,428

 
99,756

 
40,635

 
1,468,928

 
408,572

 
142,003

 

 
2,916,322

Transfers between geographic areas
44,712

 
4,931

 
9,870

 
22,010

 
19,070

 
9,321

 
(109,914
)
 

Total revenues
$
801,140

 
104,687

 
50,505

 
1,490,938

 
427,642

 
151,324

 
(109,914
)
 
2,916,322

Net revenues
$
363,766

 
47,357

 
29,559

 
267,722

 
143,030

 
48,788

 

 
900,222

Operating income
$
94,718

 
14,454

 
8,880

 
99,006

 
27,198

 
13,418

 

 
257,674

Identifiable assets at quarter end
$
1,597,543

 
93,374

 
52,019

 
687,586

 
412,752

 
152,754

 
(3,656
)
 
2,992,372

Capital expenditures
$
14,995

 
329

 
655

 
7,889

 
2,053

 
981

 

 
26,902

Depreciation and amortization
$
11,378

 
368

 
424

 
3,269

 
2,834

 
942

 

 
19,215

Equity
$
1,295,963

 
51,248

 
31,903

 
462,123

 
144,659

 
94,892

 
(30,731
)
 
2,050,057

Six months ended June 30, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from unaffiliated customers
$
767,911

 
91,663

 
41,469

 
1,544,480

 
443,335

 
153,358

 

 
3,042,216

Transfers between geographic areas
49,938

 
5,465

 
10,841

 
19,353

 
22,062

 
8,709

 
(116,368
)
 

Total revenues
$
817,849

 
97,128

 
52,310

 
1,563,833

 
465,397

 
162,067

 
(116,368
)
 
3,042,216

Net revenues
$
359,537

 
42,282

 
30,260

 
292,104

 
152,753

 
49,540

 

 
926,476

Operating income
$
111,486

 
11,550

 
9,249

 
120,980

 
34,584

 
11,656

 

 
299,505

Identifiable assets at quarter end
$
1,411,881

 
91,678

 
58,396

 
678,668

 
479,852

 
155,503

 
2,026

 
2,878,004

Capital expenditures
$
7,380

 
608

 
300

 
9,334

 
19,587

 
1,026

 

 
38,235

Depreciation and amortization
$
9,911

 
580

 
533

 
3,816

 
2,526

 
1,065

 

 
18,431

Equity
$
1,123,482

 
52,814

 
33,784

 
420,962

 
184,252

 
94,447

 
(30,591
)
 
1,879,150



11



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the sections entitled “Executive Summary,” “Critical Accounting Estimates,” “Results of Operations,” “Currency and Other Risk Factors” and “Liquidity and Capital Resources” contain forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, and other characterizations of future events or circumstances are forward-looking statements. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified elsewhere in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on February 28, 2012.
EXECUTIVE SUMMARY
Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The Company acts as a customs broker in all domestic offices, and in many of its international offices. The Company also provides additional services for its customers including value-added distribution, purchase order management, vendor consolidation, domestic time definite services and other logistics solutions. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships.
International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions and accords. The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the effects the adoption of any such proposal will have on the 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 influenced by governmental policies concerning international trade, the Company’s business may also be affected by political developments and changes in government personnel or policies, as well as economic turbulence, political unrest or security concerns in the nations in which it does business and the future impact that these events may have on international trade and oil prices. The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Consistent with continuing uncertainty in global economic conditions, concerns over volatile fuel costs, rising costs in general, political unrest and fluctuating currency exchange rates, the Company’s pricing and terms continue to be pressured by customers and service providers. Absent of any meaningful improvement in economic conditions, the Company expects similar trends to continue in the near term.
The Company derives its revenues from three principal sources: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. These are the revenue categories presented in the financial statements.
As a non-asset based carrier, the Company does not own transportation assets. Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers. The difference between the rate billed to customers (the sell rate) and the rate paid to the carrier (the buy rate) is termed “net revenue” or “yield.” By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery. This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.
The 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 significance of maintaining acceptable working relationships with governmental agencies and asset-based carriers involved in global trade has gained increased importance as a result of ongoing concern over terrorism. As each carrier labors to comply with additional governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade. A good reputation helps to develop practical working understandings that will assist in meeting security

12



requirements while minimizing potential international trade obstacles. The Company considers its current working relationships with these entities to be satisfactory. However, the airline and ocean steamship line industries have incurred significant losses in recent years as a result of the global economic downturn and many carriers are highly leveraged with debt. This situation has required the Company to be increasingly selective in which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, space allotments available from carriers, governmental regulation or deregulation efforts, “modernization” of the regulations governing customs brokerage, and/or changes in governmental quota restrictions or trade accords 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 and fourth quarters have traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including weather patterns, 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.
The Company operates in 60 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy. From the inception of the Company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. The Company’s greatest challenge is now and always has been perpetuating a consistent global corporate culture which demands:
Total dedication, first and foremost, to providing superior customer service;
Aggressive marketing of all of the Company’s service offerings;
Ongoing development of key employees and management personnel via formal and informal means;
Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;
Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and
Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.
The Company reinforces these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since the Company became a publicly traded entity. There is no limit to how much a key manager can be compensated for success. The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions. If these decisions result in operating losses, these losses must be made up from future operating profits, in the aggregate, before any cash incentive compensation can be earned. At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.
Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company provides a greater threat to the Company’s continued success than any external force, which would be largely beyond our control. Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also improving systems and taking preventative action to reduce exposure to negative events and risks. The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations. As a result our focus is on building and maintaining a global corporate culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.

13



Critical Accounting Estimates
Management believes that the nature of the Company’s business is such that there are few complex challenges in accounting for operations. While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas:
accounts receivable valuation;
accrual of costs related to ancillary services the Company provides;
accrual of insurance liabilities for the portion of the freight related exposure which the Company has self-insured;
accrual of various tax liabilities;
accrual of loss contingencies; and
calculation of share-based compensation expense.
These estimates, other than the accrual of loss contingencies and calculation of share-based compensation expense, are not highly uncertain and have not historically been subject to significant change. Management believes that the methods utilized in all of these areas are non-aggressive in approach and consistent in application. Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions. While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates would not produce materially different results than those reported.
The outcomes of government investigations, legal proceedings and claims brought against the Company are subject to significant uncertainty. An estimated loss from a contingency such as a government investigation, legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is required if there is at least a reasonable possibility that a significant loss has been incurred. In determining whether a loss should be accrued, management evaluates several factors, including advice from outside legal counsel, in order to estimate the degree of probability of an unfavorable outcome and make a reasonable estimate of the amount of loss or range of reasonably possible loss. Changes in these factors could have a material impact on the Company’s results of operations and operating cash flows for any particular quarter or year.
As described in Note 2 in the condensed consolidated financial statements in this quarterly report, the Company accounts for share-based compensation based on an estimate of the fair value of options granted to employees under the Company’s stock option and stock purchase rights plans. This expense, as adjusted for expected forfeitures, is recorded on a straight-line basis over the option vesting period.
Determining the appropriate option pricing model to use to estimate stock compensation expense requires judgment. Any option pricing model requires assumptions that are subjective and these assumptions also require judgment. Examples include assumptions about long-term stock price volatility, employee exercise patterns, pre-vesting option forfeitures, post-vesting option terminations, and future interest rates and dividend yields. The Company uses the Black-Scholes model for estimating the fair value of stock options.
Management believes that the assumptions used are appropriate based upon the Company’s historical and currently expected future experience. Looking to future events, management has been strongly influenced by historical patterns which may not be valid predictors of future developments and any future deviation may be material. The fair value of an option is more significantly impacted by changes in the expected volatility and expected life assumptions. The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

14



Results of Operations
The following table shows the consolidated net revenues (revenues less transportation expenses) attributable to the Company’s principal services and the Company’s expenses for the three and six-month periods ended June 30, 2012 and 2011, expressed as percentages of net 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. The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto which appear elsewhere in this quarterly report.
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
Amount
 
Percent
of net
revenues
 
Amount
 
Percent
of net
revenues
 
Amount
 
Percent
of net
revenues
 
Amount
 
Percent
of net
revenues
 
 
(Amounts in thousands)
 
Net Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Airfreight services
$
154,230

 
34

%
$
173,581

 
37

%
$
312,099

 
35

%
$
349,868

 
38

%
Ocean freight and ocean services
105,551

 
23

 
109,026

 
23

 
207,933

 
23

 
209,618

 
23

 
Customs brokerage and other services
193,870

 
43

 
189,954

 
40

 
380,190

 
42

 
366,990

 
39

 
Net revenues
453,651

 
100

 
472,561

 
100

 
900,222

 
100

 
926,476

 
100

 
Overhead Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and related costs
249,925

 
55

 
249,114

 
53

 
496,057

 
55

 
486,929

 
53

 
Other
71,323

 
16

 
71,172

 
15

 
146,491

 
16

 
140,042

 
15

 
Total overhead expenses
321,248

 
71

 
320,286

 
68

 
642,548

 
71

 
626,971

 
68

 
Operating income
132,403

 
29

 
152,275

 
32

 
257,674

 
29

 
299,505

 
32

 
Other income, net
6,510

 
1

 
2,940

 
1

 
10,347

 
1

 
6,163

 
1

 
Earnings before income taxes
138,913

 
30

 
155,215

 
33

 
268,021

 
30

 
305,668

 
33

 
Income tax expense
54,892

 
12

 
60,195

 
13

 
107,278

 
12

 
119,441

 
13

 
Net earnings
84,021

 
18

 
95,020

 
20

 
160,743

 
18

 
186,227

 
20

 
Less net earnings (losses) attributable to noncontrolling interest
66

 

 
20

 

 
81

 

 
(5
)
 

 
Net earnings attributable to shareholders
$
83,955

 
18

%
$
95,000

 
20

%
$
160,662

 
18

%
$
186,232

 
20

%
Airfreight services net revenues decreased 11% for the three-month period ended June 30, 2012, as compared with the same period for 2011. The decrease in global airfreight services net revenues was primarily due to a 10% decrease in airfreight tonnage. North America, Asia Pacific and Europe airfreight services net revenues decreased 3%, 18% and 16%, respectively, in the second quarter of 2012 as compared with the same period in 2011, while airfreight export tonnage for North America, Asia Pacific and Europe decreased 14%, 8% and 10%, respectively.
Airfreight services net revenues decreased 11% for the six-month period ended June 30, 2012, as compared with the same period for 2011. The decrease in global airfreight services net revenues was primarily due to a 9% decrease in airfreight tonnage. North America, Asia Pacific and Europe airfreight services net revenues decreased 7%, 15% and 12%, respectively, in the six months ended June 30, 2012 as compared with the same period in 2011, while airfreight export tonnage for North America, Asia Pacific and Europe decreased 15%, 5% and 7%, respectively.
The decline in airfreight tonnage for the three and six months ended June 30, 2012 can be attributed to an overall decrease in the global airfreight market and a lower level of customer specific infrastructure and project related tonnage than experienced during the first half of 2011. Absent of any meaningful improvements in the uncertainties related to global economic conditions, the Company expects similar trends to continue in the near term.
Ocean freight and ocean services net revenues are comprised of three basic services: ocean freight consolidation, direct ocean forwarding and order management. The largest component of the Company’s ocean freight net revenue is derived from ocean freight consolidation which represented 46% and 47% of ocean freight net revenue for the three and six-month periods ended June 30, 2012, respectively, and 50% and 51% for the same periods ended June 30, 2011, respectively.
Ocean freight and ocean services net revenues decreased 3% for the three-month period ended June 30, 2012, as compared with the same period for 2011. North America ocean freight net revenues increased 1% while Asia Pacific and Europe decreased 6% and 5%, respectively, in the second quarter of 2012, as compared with the same period in 2011. Ocean freight consolidation net revenue decreased 11% for the three-month period ended June 30, 2012, as compared with the same period for 2011, due to a 12% decrease in net revenue per container offset by a 1% increase in container volume as measured in terms of forty-foot container equivalent units (FEUs).
Ocean freight and ocean services net revenues decreased 1% for the six-month period ended June 30, 2012, as compared with the same period for 2011. North America ocean freight net revenues increased 2% while Asia Pacific and Europe decreased by 4% and 2%, respectively, in the six-month period ended June 30, 2012, as compared with the same period in 2011. Ocean freight consolidation net revenue decreased 9% for the six-month period ended June 30, 2012, as compared with the same period for 2011, due to a 10% decrease in net revenue per container offset by a 1% increase in container volume as measured in terms of forty-foot container equivalent units (FEUs). The decreases in net revenue per container were primarily due to the timing of significant increases in buy rates implemented by carriers combined with a reduction in available market capacity. We expect carriers will continue to manage overall available capacity in an attempt to maintain rates and improve their operating results.
Direct ocean freight forwarding and order management, which are primarily fee-based, increased 7% and 2%, respectively, for the three-month period ended June 30, 2012, and increased 10% and 4%, respectively, for the six-month period ended June 30, 2012, as compared with the same periods in 2011, primarily due to an increase in market share and volume.
Customs brokerage and other services net revenues increased 2% and 4%, respectively, for the three and six-month periods ended June 30, 2012, as compared with the same periods for 2011, primarily as a result of an increase in market share and volume related to domestic time definite services. Customers continue to seek out customs brokers with sophisticated computerized capabilities critical to an overall logistics management program, including rapid responses to changes in the regulatory and security environment.
Salaries and related costs remained constant and increased 2%, respectively, for the three and six-month periods ended June 30, 2012, as compared with the same periods for 2011, primarily as a result of a 3% increase in the number of employees and higher payroll related taxes and medical costs, partially offset by lower bonuses. The effects of including stock-based compensation expense in salaries and related costs are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Salaries and related costs
$
249,925

 
$
249,114

 
$
496,057

 
$
486,929

As a % of net revenue
55.1
%
 
52.7
%
 
55.1
%
 
52.6
%
Stock compensation expense
$
10,926

 
$
10,236

 
$
21,526

 
$
20,708

As a % of net revenue
2.4
%
 
2.2
%
 
2.4
%
 
2.2
%
Historically, the relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation will occur in proportion to changes in Company profits, creating a direct alignment between corporate performance and shareholder interests. However, the results in the first half of 2012 were not consistent with this historical relationship primarily due to a higher number of employees and a decrease in net revenue. Bonuses to field and executive management for the first half of 2012 were down 9% and 14%, respectively, as compared with the same period for 2011, primarily as a result of a 14% decrease in operating income. The Company’s management incentive compensation programs have always been incentive-based and performance driven and there is no built-in bias that favors or enriches management in a manner inconsistent with overall corporate performance.
Because the Company’s management incentive compensation programs are also cumulative, no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must have been offset in their entirety by operating profits before management is eligible for a bonus. Since the most significant portion of management compensation comes from the incentive bonus programs, the Company believes that this cumulative feature is a disincentive to excessive risk taking by its managers. Due to the nature of the Company’s services, it has a short operating cycle. The outcome of any higher risk transactions, such as overriding established credit limits, would be known in a relatively short time frame. Management believes that when the potential and certain impact on the bonus is fully considered in light of this short operating cycle, the potential for short term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage excessive and inappropriate risk taking. Management believes that both the stability and the long term growth in revenues, net revenues and net earnings are a result of the incentives inherent in the Company’s compensation program.
Other overhead expenses remained constant and increased 5%, respectively, for the three and six-month periods ended June 30, 2012, as compared with the same periods in 2011. The increase for the first half of 2012 is primarily due to the European Commission's conclusion that the Company engaged in anti-competitive behavior which resulted in a fine of €4.14 million ($5.5 million). The Company will continue to incur legal costs related to matters described in Note 6 in the condensed consolidated financial statements in this quarterly report until these legal proceedings are concluded. The Company is subject to formal and informal investigations or litigation from governmental authorities of others, some of which are described in Note 6 in the condensed consolidated financial statements in this quarterly report. If the governmental regulatory agencies conclude that the Company violated certain laws or regulations, fines and/or penalties could have a material impact on the Company’s results of operations and operating cash flows for any particular quarter or year. Further, the Company periodically conducts reviews of the operations and procedures of its offices worldwide relating to compliance with applicable laws and regulations.
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 increased to approximately 39.5% and 40.0%, respectively, for the three and six-month periods ended June 30, 2012, as compared to 38.8% and 39.1%, respectively, for the three and six-month periods ended June 30, 2011, due to higher nondeductible expenses and stock compensation relative to lower pre-tax earnings.

Currency and Other Risk Factors
The nature of the Company's worldwide operations necessitates the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among its offices or agents. The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company's ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and six months ended June 30, 2012 and 2011 was insignificant. The Company had no foreign currency derivatives outstanding at June 30, 2012 and December 31, 2011. Net foreign currency losses were approximately $1,430 and $2,506, respectively, for the three and six months ended June 30, 2012. For the same periods of 2011, the Company's net foreign currency gains were approximately $363 and net foreign currency losses were approximately $330, respectively.
International air and ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the international logistics industry; however, the Company’s primary competition is confined to a relatively small number of companies within this group. Historically, the industry has experienced consolidations into larger firms striving for stronger and more complete multinational and multi-service networks. However, regional and local brokers and forwarders remain a competitive force.
The primary competitive factors in the international logistics industry continue to be price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with those of others in the industry. Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. The Company believes that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.
Liquidity and Capital Resources
The Company’s principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and six months ended June 30, 2012, was approximately $93 million and $240 million, respectively, as compared with $78 million and $256 million for the same periods in 2011. The increase of $15 million for the three-month period ended June 30, 2012 is primarily due to less cash used by working capital accounts, partially offset by lower earnings. The decrease of $16 million for the six-month period ended June 30, 2012 is primarily due to lower earnings, partially offset by changes in working capital accounts. At June 30, 2012, working capital was $1,522 million, including cash, cash equivalents and short-term investments of $1,365 million. The Company had no long-term debt at June 30, 2012. Management believes that the Company’s current cash position and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.
The Company’s business is subject to seasonal fluctuations. Cash flow fluctuates as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with peak season (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.
As a customs broker, the Company makes significant cash advances for a select group of its credit-worthy customers. These cash advances are for customer obligations such as the payment of duties to customs authorities in various countries throughout the world. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency.
Cash from investing activities for the three months ended June 30, 2012, was $6 million. Cash used in investing activities for the six months ended June 30, 2012, was $26 million. The largest use of cash in investing activities is cash paid for capital expenditures. The Company does have need, on occasion, to purchase or construct buildings to house staff and to facilitate the staging of customers’ freight. The Company routinely invests in technology, office furniture and equipment and leasehold improvements. In the second quarter of 2012, the Company made capital expenditures of $10 million, as compared with $17 million for the same period in 2011. Capital expenditures in the second quarter of 2012 related primarily to investments in buildings and leasehold improvements, technology, and office furniture and equipment. Total capital expenditures in 2012 are currently estimated to be $86 million. This includes normal capital expenditures as noted above plus additional real estate development.
Cash used in financing activities during the three and six months ended June 30, 2012, was $135 million and $141 million, as compared with $81 million and $90 million for each of the same periods in 2011. The Company uses the proceeds from stock option exercises and available cash to repurchase the Company’s common stock on the open market. In the second quarter of 2012, the Company continued its policy of repurchasing stock to limit growth in issued and outstanding shares as a result of stock option exercises. The increase in cash used in financing activity during the three and six months ended June 30, 2012, as compared to the same periods in 2011, is primarily the result of this policy and an additional discretionary repurchase of 1.5 million shares at an average price of $37.57. During the three months ended June 30, 2012 and 2011, the Company paid dividends of $.28 per share and $.25 per share, respectively.
The Company follows established guidelines relating to credit quality, diversification and maturities of its investments to preserve principal and maintain liquidity. In the past, the Company’s investment portfolio has not been adversely impacted by disruptions in the credit markets. However, there can be no assurance that the Company’s investment portfolio will not be adversely affected in the future.
The Company cannot forecast the impact that ongoing uncertainties in the global economy will have on its operating results. Management believes that the Company has effective credit control procedures, and historically has experienced relatively insignificant collection problems. The Company cannot predict what fallout economic uncertainties may have on freight volumes, pricing, changes in consumer demand, supplier stability and capacity or on customers’ abilities to pay.
The Company maintains international unsecured bank lines of credit. At June 30, 2012, amounts available for borrowing under international bank lines of credit totaled $14 million. At June 30, 2012, the Company was contingently liable for $100 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company is required to perform.
The Company's foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and needs to finance local capital expenditures. In some cases, the Company’s ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At June 30, 2012, cash and cash equivalent balances of $599 million were held by the Company’s non-United States subsidiaries, of which $43 million was held in banks in the United States. Earnings of the Company's foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States and, accordingly, a deferred tax liability has been accrued for all undistributed earnings, net of foreign related tax credits, that are available to be repatriated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of the Company’s exposure to these risks is presented below:
Foreign Exchange Risk
The Company conducts business in many different countries and currencies. The Company’s business often results in revenue billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to the Company’s earnings. The principal foreign exchange risks to which the Company is exposed are in Chinese yuan, Euro, Mexican peso and Canadian dollar.
Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company’s earnings as a result of hypothetical changes in the value of the U.S. dollar, the Company’s functional currency, relative to the other currencies in which the Company transacts business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the six months ended June 30, 2012, would have had the effect of raising operating income approximately $19 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income approximately $15 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.
As of June 30, 2012, the Company had approximately $3 million of net unsettled intercompany transactions. The Company currently does not use derivative financial instruments to manage foreign currency risk and only enters into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict the Company’s ability to move money freely. Any such hedging activity during the six months ended June 30, 2012 and 2011 was insignificant. During the three and six months ended June 30, 2012, net foreign currency losses were approximately $1,430 and $2,506. For the same periods of 2011, the Company's net foreign currency gains were approximately $363 and net foreign currency losses were approximately $330, respectively. The Company had no foreign currency derivatives outstanding at June 30, 2012 and December 31, 2011. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. The majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At June 30, 2012, the Company had cash, cash equivalents and short-term investments of $1,365 million of which $866 million was invested at various short-term market interest rates. The Company had no long-term debt at June 30, 2012. A hypothetical change in the interest rate of 10 basis points at June 30, 2012 would not have a significant impact on the Company’s earnings.
In management’s opinion, there has been no material change in the Company’s interest rate risk exposure in the second quarter of 2012.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.
Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over

15



financial reporting.
The Company's management has confidence in the Company’s internal controls and procedures. Nevertheless, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure procedures and controls or the Company’s internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all the Company’s control issues and instances of fraud, if any, have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 10, 2007, the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to produce certain information and records relating to an investigation of alleged anti-competitive behavior amongst air cargo freight forwarders. As part of this process, the Company has met with and continues to co-operate with the DOJ. The Company may incur additional costs during the course of this ongoing investigation, which could include fines and/or penalties if the DOJ concludes that the Company has engaged in anti-competitive behavior and such fines and/or penalties could have a material impact on the Company's results of operations and operating cash flows for any particular quarter or year.
On April 19, 2012, the Company received a federal grand jury subpoena from the DOJ requiring the production of documents related to the export or re-export by unaffiliated third-parties to end users in a US-embargoed country of products and/or services produced by a U.S. manufacturer. In a related matter, the Company is also responding to an administrative subpoena from the Commerce Department's Bureau of Industry and Security (BIS) requiring the production of documents pertaining to the export or re-export of US-origin goods to the same embargoed country. The Company is co-operating with the DOJ and BIS. If it is determined that the Company or one of its subsidiaries, directly or indirectly, facilitated the export or re-export of these specified products and/or services, the Company may incur fines and/or penalties which could have a material impact on the Company's results of operations and cash flows for any particular quarter or year.
Government investigations are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include substantial monetary damages and, in matters in which injunctive relief or other conduct remedies are sought, an injunction or other order relating to business conduct. Were unfavorable final outcomes to occur, the Company's results of operations and cash flows for the particular quarter or year could be materially harmed.
The Company is involved in other claims and lawsuits which arise in the ordinary course of business, none of which currently, in management's opinion, are expected to have a significant effect on the Company's operations or financial position. As of June 30, 2012, the amounts accrued for these claims and lawsuits, and the other legal matters described above, are not significant to the Company's operations or financial position. At this time the Company is unable to estimate any additional loss or range of reasonably possible loss, if any, beyond the amounts recorded, that might result from the resolution of these matters.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the report on Form 10-K filed on February 28, 2012, except for the following:
RISK FACTOR
 
DISCUSSION AND POTENTIAL SIGNIFICANCE
Litigation/Investigations
  
As a multinational corporation, the Company is subject to formal or informal investigations or litigation from governmental authorities or others in the countries in which it does business. Included among these investigations, the Company is currently subject to, and is cooperating fully with, investigations by the U.S. Department of Justice and the Commerce Department's Bureau of Industry and Security. These investigations and other periodic investigations will require further management time and could cause the Company to incur substantial additional legal and related costs, which may include fines and/or penalties that could have a material impact on the Company's results of operations and cash flows.
 
The Company may also become subject to other civil litigation arising from such investigations or litigations, including but not limited to shareholder class action lawsuits and derivative claims made on behalf of plaintiffs.


16



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
Total number of
shares purchased
 
Average price
paid per share
 
Total number of shares
purchased as part of
publicly announced
plans or programs
 
Maximum number
of shares that may yet be
purchased under  the
plans or programs
April 1-30, 2012
 
4,142

 
$
46.22

 
4,142

 
29,065,352

May 1-31, 2012
 
659,660

 
39.21

 
659,660

 
28,388,337

June 1-30, 2012
 
1,550,533

 
37.63

 
1,550,533

 
26,881,952

Total
 
2,214,335

 
$
38.12

 
2,214,335

 
26,881,952

In November 1993, the Company’s Board of Directors authorized a Non-Discretionary Stock Repurchase Plan for the purpose of repurchasing the Company’s common stock in the open market with the proceeds received from the exercise of stock options. On February 9, 2009, the Plan was amended to increase the authorization to repurchase up to 40 million shares of the Company’s common stock. This authorization has no expiration date. This plan was disclosed in the Company’s report on Form 10-K filed March 31, 1995. In the second quarter of 2012, 307,565 shares of common stock were repurchased under the Non-Discretionary Stock Repurchase Plan.
In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of such shares as may be necessary to reduce the issued and outstanding stock to 200 million shares of common stock. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date. This plan was announced on November 13, 2001. In the second quarter of 2012, 1,906,770 shares of common stock were repurchased under the Discretionary Stock Repurchase Plan. These discretionary repurchases included 406,770 shares that were made to limit the growth in the number of issued and outstanding shares resulting from stock option exercises and the exercise of employee stock purchase rights and 1.5 million shares to reduce the number of total shares outstanding.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a)
On August 6, 2012, the Company's Board of Directors amended Article IV(1) of the Company's Bylaws, effective immediately, in order to increase the maximum potential size of the Board of Directors from nine to ten directors. The preceding description is qualified in its entirety by reference to the complete text of the Company's Bylaws, as amended, which are attached as Exhibit 3.2 to this Form 10-Q.
(b)
Not applicable.


17



Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
Exhibit Number
  
Description
3.2
 
The Company's Bylaws, as amended on August 6, 2012.
 
 
 
10.1
 
The Company's 2012 Stock Option Plan. (Incorporated by reference to Appendix A of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to Regulation 14A filed on March 20, 2012.)
 
 
 
10.2
 
Form of Stock Option Agreement used in connection with options granted under the Company's 2012 Stock Option Plan. (Incorporated by reference to Appendix B of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to Regulation 14A filed on March 20, 2012.)
 
 
 
31.1
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32
  
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
  
Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

18



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
 
 
 
August 8, 2012
 
/s/ PETER J. ROSE
 
 
Peter J. Rose, Chairman and Chief Executive Officer
 
 
 
August 8, 2012
 
/s/ BRADLEY S. POWELL
 
 
Bradley S. Powell, Senior Vice President and Chief Financial Officer

19



EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Form 10-Q Index and Exhibits
June 30, 2012
 
Exhibit Number
  
Description
3.2
 
The Company's Bylaws, as amended on August 6, 2012.
 
 
 
31.1
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32
  
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
  
Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

20

XNAS:EXPD Expeditors International of Washington Inc Quarterly Report 10-Q Filling

Expeditors International of Washington Inc XNAS:EXPD Stock - Get Quarterly Report SEC Filing of Expeditors International of Washington Inc XNAS:EXPD stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:EXPD Expeditors International of Washington Inc Quarterly Report 10-Q Filing - 6/30/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:EXPD Expeditors International of Washington Inc Quarterly Report 10-Q Filing - 3/31/2012  |  Next: XNAS:EXPE Expedia Inc Insider Activity 3 Filing - 4/25/2012