UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification Number) |
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(Address of principal executive offices) |
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(Zip Code) |
(Registrant’s telephone number, including area code): (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At November 4, 2022, the number of shares outstanding of the issuer’s common stock was
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
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September 30, 2022 |
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December 31, 2021 |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for credit loss of $ |
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Deferred contract costs |
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Other |
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Total current assets |
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Property and equipment, less accumulated depreciation and amortization of $ December 31, 2021 |
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Operating lease right-of-use assets |
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Goodwill |
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Deferred federal and state income taxes, net |
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Other assets, net |
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Total assets |
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$ |
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$ |
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Liabilities: |
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Current Liabilities: |
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Accounts payable |
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Accrued liabilities, primarily salaries and related costs |
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Contract liabilities |
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Current portion of operating lease liabilities |
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Federal, state and foreign income taxes |
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Total current liabilities |
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Noncurrent portion of operating lease liabilities |
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Commitments and contingencies |
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Shareholders’ Equity: |
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Preferred stock, |
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Common stock, par value $ outstanding: shares at December 31, 2021 |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
2
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
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Three months ended September 30, |
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Nine months ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenues: |
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Airfreight services |
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$ |
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$ |
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$ |
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$ |
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Ocean freight and ocean services |
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Customs brokerage and other services |
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Total revenues |
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Operating Expenses: |
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Airfreight services |
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Ocean freight and ocean services |
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Customs brokerage and other services |
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Salaries and related |
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Rent and occupancy |
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Depreciation and amortization |
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Selling and promotion |
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Other |
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Total operating expenses |
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Operating income |
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Other Income (Expense): |
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Interest income |
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Other, net |
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Other income, net |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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Less net (losses) earnings attributable to the noncontrolling interest |
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Net earnings attributable to shareholders |
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$ |
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$ |
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$ |
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$ |
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Diluted earnings attributable to shareholders per share |
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$ |
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$ |
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$ |
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$ |
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Basic earnings attributable to shareholders per share |
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$ |
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$ |
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$ |
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$ |
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Weighted average diluted shares outstanding |
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Weighted average basic shares outstanding |
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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)
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Three months ended September 30, |
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Nine months ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments, net of income tax benefit of $ |
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( |
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( |
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( |
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( |
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Other comprehensive loss |
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( |
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( |
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Comprehensive income |
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Less comprehensive (loss) income attributable to the noncontrolling interest |
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Comprehensive income attributable to shareholders |
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$ |
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$ |
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$ |
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$ |
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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)
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Three months ended September 30, |
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Nine months ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Operating Activities: |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash from operating activities: |
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Provisions for losses on accounts receivable |
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Deferred income tax (benefit) expense |
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( |
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( |
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( |
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Stock compensation expense |
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Depreciation and amortization |
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Other, net |
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Changes in operating assets and liabilities: |
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Decrease (increase) in accounts receivable |
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( |
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(Decrease) increase in accounts payable and accrued expenses |
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( |
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Decrease (increase) in deferred contract costs |
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( |
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(Decrease) increase in contract liabilities |
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( |
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( |
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(Decrease) increase in income taxes payable, net |
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( |
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(Increase) decrease in other, net |
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( |
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Net cash from operating activities |
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Investing Activities: |
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Purchase of property and equipment |
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( |
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( |
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Other, net |
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( |
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( |
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( |
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( |
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Net cash from investing activities |
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Financing Activities: |
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Payments from borrowing on lines of credit |
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Proceeds from borrowing on lines of credit |
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Proceeds from issuance of common stock |
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Repurchases of common stock |
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Dividends paid |
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( |
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Payments for taxes related to net share settlement of equity awards |
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( |
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( |
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( |
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Distribution to noncontrolling interest |
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( |
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( |
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( |
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( |
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Net cash from financing activities |
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( |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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( |
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( |
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Change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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$ |
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$ |
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Taxes Paid: |
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Income taxes |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
5
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(In thousands)
(Unaudited)
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Common Stock |
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For the three months ended September 30, 2022 and 2021 |
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Shares |
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Par value |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Shares issued under employee stock plans, net of tax withholding for net settlement |
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Shares repurchased under provisions of stock repurchase plan |
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( |
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( |
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( |
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( |
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( |
) |
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( |
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Stock compensation expense |
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Net earnings |
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( |
) |
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Other comprehensive loss |
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( |
) |
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( |
) |
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( |
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( |
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Dividends and dividend equivalents paid |
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Distribution to noncontrolling interest |
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( |
) |
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( |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Shares issued under employee stock plans, net of tax withholding for net settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased under provisions of stock repurchase plan |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Dividends and dividend equivalents paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
For the nine months ended September 30, 2022 and 2021 |
|
Shares |
|
|
Par value |
|
|
Additional paid-in capital |
|
|
Retained earnings |
|
|
Accumulated other comprehensive loss |
|
|
Total shareholders’ equity |
|
|
Noncontrolling interest |
|
|
Total equity |
|
||||||||
|
Balance at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Shares issued under employee stock plans, net of tax withholding for net settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased under provisions of stock repurchase plans |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Dividends and dividend equivalents paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Distribution to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at September 30, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Shares issued under employee stock plans, net of tax withholding for net settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased under provisions of stock repurchase plans |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Dividends and dividend equivalents paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See accompanying notes to condensed consolidated financial statements.
6
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Note 1. Summary of Significant Accounting Policies
|
|
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, high technology, industrial and manufacturing companies around the world.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for 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 March 15, 2022.
All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified. Certain prior year amounts have been reclassified to conform to the current year presentation, including revisions to the condensed consolidated statements of cash flows.
|
|
B. |
Revenue Recognition |
The Company derives its revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by the customer. The Company's three principal services are the revenue categories presented in the condensed consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.
The Company typically satisfies its performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed over the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two month-period and contracts with customers have an original expected duration of less than one year. The Company satisfied nearly all performance obligations for the contract liabilities recorded as of June 30, 2022.
The Company evaluates whether amounts billed to customers should be reported as gross or net basis. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it assumes the risk of loss, when it has discretion in setting the prices for the services to the customers, and when the Company has the ability to direct the use of the services provided by the third party. When revenue is recorded on a net basis, the amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof. For revenues earned in other capacities, for instance, when we do not issue a HAWB, a HOBL or a House Seaway Bill or otherwise act solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, the Company is not a principal and report only commissions and fees earned in revenue.
|
|
C. |
Leases |
The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As the Company's leases generally do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on market information available at the commencement date to determine the present value. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from ROU assets and lease
7
liabilities to the extent not considered fixed, and instead expenses variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses in the condensed consolidated statement of earnings.
Additionally, the Company elected to apply the short-term lease exemption for leases with a non-cancelable period of twelve months or less and has chosen not to separate non-lease components from lease components and instead to account for each as a single lease component.
|
|
D. |
Accounts Receivable |
The Company’s trade accounts receivable present similar credit risk characteristics and the allowance for credit loss is estimated on a collective basis, using a credit loss-rate method that uses historical credit loss information and considers the current economic environment. Additional allowances may be necessary in the future if changes in economic conditions are significant enough to affect expected credit losses. The Company has recorded an allowance for credit loss in the amounts of $
|
|
E. |
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 performs, typically at the destination location, self-insured liabilities, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, including estimates for potential claims as a result of the downtime caused by the cyber-attack, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. In 2022, ancillary services include additional estimated costs for demurrage charges incurred as a result of downtime caused by the cyber-attack. See Note 9 for further information on estimates related to the cyber-attack. Actual results could be materially different from the estimated provisions and accruals recorded.
Note 2. Share-Based Compensation
The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year.
In the nine months ended September 30, 2022 and 2021, the Company awarded
The Company also awarded
The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year and
The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s Amended and Restated 2017 Omnibus Plan and employee stock purchase rights plan. This expense, adjusted for expected performance and forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the condensed consolidated statements of earnings. RSUs and PSUs awarded to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately as there is no substantive service period associated with those awards.
8
Note 3. Income Taxes
During 2020 and 2021, the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. It is possible that additional guidance issued by the U.S, IRS and Treasury could be issued in future periods. As this guidance is issued, or as other changes in tax regulations occur in the U.S. or other jurisdictions, the Company will evaluate the information to determine whether any additional adjustments to its tax provisions or disclosures are required.
The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. For the three and nine months ended September 30, 2022 and 2021, there was
Note 4. Basic and Diluted Earnings per Share
Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:
|
|
|
Three months ended September 30, |
|
|||||||||
|
|
|
Net earnings attributable to shareholders |
|
|
Weighted average shares |
|
|
Earnings per share |
|
|||
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Effect of dilutive potential common shares |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|||||||||
|
|
|
Net earnings attributable to shareholders |
|
|
Weighted average shares |
|
|
Earnings per share |
|
|||
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Effect of dilutive potential common shares |
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to shareholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Effect of dilutive potential common shares |
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
Diluted earnings attributable to shareholders |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
For the three and nine months ended September 30, 2022,
9
Note 5. Shareholders' Equity
The Company has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding common stock down to
On May 2, 2022, the Board of Directors amended the plan to further authorize repurchases down to from the previous number of
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.
On
Subsequent to the end of the third quarter of 2022, on
Note 6. Fair Value of Financial Instruments
The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
Cash and cash equivalents consist of the following:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
||||
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and overnight deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Corporate commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).
Note 7. Contingencies
The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of September 30, 2022, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters, including potential claims resulting from the downtime caused by the cyber-attack, see further information in Note 9.
Note 8. Business Segment Information
10
Financial information regarding the Company’s operations by geographic area is as follows:
|
|
|
UNITED STATES |
|
|
OTHER NORTH AMERICA |
|
|
LATIN AMERICA |
|
|
NORTH ASIA |
|
|
SOUTH ASIA |
|
|
EUROPE |
|
|
MIDDLE EAST, AFRICA AND INDIA |
|
|
ELIMI- NATIONS |
|
|
CONSOLI- DATED |
|
|||||||||
|
For the three months ended September 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
For the three months ended September 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES |
|
|
OTHER NORTH AMERICA |
|
|
LATIN AMERICA |
|
|
NORTH ASIA |
|
|
SOUTH ASIA |
|
|
EUROPE |
|
|
MIDDLE EAST, AFRICA AND INDIA |
|
|
ELIMI- NATIONS |
|
|
CONSOLI- DATED |
|
|||||||||
|
For the nine months ended September 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
For the nine months ended September 30, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Directly related cost of transportation and other expenses1 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Salaries and other operating expenses2 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Operating income |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Identifiable assets at period end |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Capital expenditures |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
Equity |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
( |
) |
|
|
|
|
1
2
Note 9. Cyber-Attack
On February 20, 2022, management determined that the Company was the subject of a targeted cyber-attack. Upon discovering the incident, the Company shut down most of its connectivity, operating and accounting systems globally to manage the safety of its overall global systems environment, and initiated its cybersecurity incident response plan. The Company's security teams, supplemented by commercial cybersecurity experts and in collaboration with law enforcement, worked to remediate this cyber-attack. The Company undertook extensive efforts to identify, contain, eradicate and methodically recover from this attack as rapidly as possible. The Company had limited ability to conduct operations for a period of approximately three weeks including but not limited to arranging for shipments of freight or managing customs and distribution activities for its customers’ shipments and performing accounting functions. The Company’s teams worked to maintain its business operations and minimize the impact on its employees, customers and operating partners, including regulatory agencies. The Company continues to navigate the residual effects and incorporate learnings from the cyber-attack.
11
For the nine-month period ended September 30, 2022, the Company has incurred, as a result of its inability to timely process and move shipments through ports during the downtime, approximately $
Additionally, principally in the first quarter, the Company incurred investigation, recovery, and remediation expenses, including costs to recover its operational and accounting systems and to enhance cybersecurity protections. These costs are primarily comprised of various consulting services including cybersecurity experts, outside legal advisors, and other IT professional expenses. The Company also recorded estimated liabilities for potential shipment-related claims. For the nine-month period ended September 30, 2022, the total amount recorded for these items were approximately $
The Company may incur additional expenses which could include third-party expenses, increased information services costs, or indemnities to customers. When the Company’s operating systems were down, many customers worked with other providers to meet their logistics needs, resulting in lower shipment volumes in the first quarter and to a lesser extent in the second quarter for which the financial impact on revenues and operating income cannot be quantified. Such costs and the ongoing impacts from the downtime caused by the cyber-attack are not expected to have further material adverse impact on the Company’s business. The Company is unable to estimate the ultimate direct and indirect financial impacts of this cyber-attack.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor for Forward-Looking Statements Under Private Securities Litigation Reform Act Of 1995; Certain Cautionary Statements
Certain portions of this report on Form 10-Q including the sections entitled "Overview," "Highlights from Third Quarter 2022," "Industry Trends, Trade Conditions and Competition," "Seasonality," "Critical Accounting Estimates," "Results of Operations," "Income tax expense," "Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain forward-looking statements. Words such as "will likely result," "expects", "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, signs of a slowing economy and drop in demand, the uneven lifting of the Novel Coronavirus (COVID-19) pandemic restrictions around the world, current supply chain and transportation disruptions and other characterizations of future events or circumstances are forward-looking statements. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. Attention should be given to the risk factors identified and discussed in Part I, Item 1A in the Company’s annual report on Form 10-K filed on March 15, 2022 and in Part II, Item 1A in this report. Management believes that these forward-looking statements are reasonable as of this filing date and we do not assume any obligations to update these statements except as required by law.
Overview
Expeditors International of Washington, Inc. (herein referred to as "Expeditors," the "Company," "we," "us," "our") provides a full suite of global logistics services. Our services include air and ocean freight consolidation and forwarding, customs brokerage, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other supply chain solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.
We derive our revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by our customer. Each performance obligation is comprised of one or more of the Company's services. We typically satisfy our performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. Our three principal services are the revenue categories presented in our financial statements: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. The most significant drivers of changes in revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both revenues and related transportation expenses in each of our three primary sources of revenue.
We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and then reselling those services to our customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses. By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
In most cases, we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating, and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and import services such as arranging for local pick up, storage and delivery at destination. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices. We also provide other value-added services at destination, such as warehousing and distribution, time-definitive transportation services and consulting.
13
We manage our company along five geographic areas of responsibility: Americas; North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each area is divided into sub-regions that are composed of operating units with individual profit and loss responsibility. Our business involves shipments between operating units and typically touches more than one geographic area. The nature of the international logistics business necessitates a high degree of communication and cooperation among operating units. Because of this inter-relationship between operating units, it is very difficult to examine any one geographic area and draw meaningful conclusions as to its contribution to our overall success on a stand-alone basis.
Our operating units share revenue using the same arms-length pricing methodologies that we use when our offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. Our strategy closely links compensation with operating unit profitability, which includes shared revenues and allocated costs. Therefore, individual success is closely linked to cooperation with other operating units within our network.
The mix of services varies by segment based primarily on the import or export orientation of local operations in each of our regions. In accordance with our revenue recognition policy (see Note 1. B to the condensed consolidated financial statements in this report), almost all freight revenue and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share of revenue at the destination.
Highlights from Third Quarter 2022
In the first quarter of 2022, our company was the subject of a targeted cyber-attack which resulted in having to shut down most of our connectivity, operating and accounting systems globally to manage the safety of our entire global systems environment. We had limited ability to conduct operations for a period of approximately three weeks, including but not limited to arranging for shipments of freight or managing customs and distribution activities for our customers’ shipments. While we continued to navigate residual effects and incorporate learnings from the cyber-attack, our core systems were utilized to deliver our services throughout the second and third quarter. Beyond the loss of revenue and additional expenses incurred in the first half of the year, we do not expect to have further material adverse impact on the Company’s business.
In the third quarter of 2022, the COVID-19 pandemic, including the effect of ongoing quarantine requirements in China and resulting disruptions on supply chains, continued to affect our business operations and financial results. Although we believe these disruptive conditions have diminished, we expect them to continue to some degree at least through 2022.
The significant impacts are discussed within “Results of Operations” and the financial highlights below.
|
|
• |
Volumes transacted in most services were down due to softening customer demand from a slowdown in the global economy and retail customers’ inventory build-up earlier in the year. |
|
|
• |
Average buy and sell rates, while still higher than historical levels and higher than the third quarter of 2021, have continued declining as imbalances between available capacity for transportation and demand and major port congestion have eased. |
|
|
• |
As a result of volume and rate trends above, airfreight revenues and expenses were down compared to prior year and previous quarters in 2022, while the year-over-year growth in ocean freight and customs brokerage and other services significantly slowed in the third quarter of 2022 compared to previous quarters. |
|
|
• |
Continuing shortages in equipment, labor and warehousing space at destinations and disruptions from COVID-19 precautionary measures, in addition to higher inflation and fuel prices, resulted in ongoing pressure on pricing of services at origin and destination. |
|
|
• |
Net earnings to shareholders increased 15%, operating cash flows were $670 million and we returned $469 million to shareholders in common stock repurchases. |
Industry Trends, Trade Conditions and Competition
We operate in over 60 countries in the competitive global logistics industry, and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investment, and taxation. Periodically, governments consider a variety of changes to tariffs and impose trade restrictions and accords. Currently, the United States and China have increased concerns affecting certain imports and exports and have implemented additional tariffs. We cannot predict the outcome of changes in tariffs, interpretations, trade restrictions and accords and the effects they will have on our business. As governments implement restrictions on imports and exports, manufacturers may change sourcing patterns to the extent possible and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental
14
disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs. We do not have employees, assets, or operations in Russia or Ukraine. Any shipment activity is conducted with independent agents in those countries and is inconsequential to the Company.
Our ability to provide services to our customers is highly dependent on good working relationships with a variety of entities, including airlines, ocean carrier lines and ground transportation providers, as well as governmental agencies. We select and engage with best-in-class, compliance-focused, efficiently run, growth-oriented partners, based upon defined value elements and are intentional in our relationship and performance management activity, reinforcing success by awarding service providers who consistently achieve at the highest levels with additional business. We consider our current working relationships with these entities to be satisfactory. However, changes in the financial stability and operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulation or deregulation efforts, modernization of the regulations governing customs brokerage, and/or changes in governmental restrictions, quota restrictions or trade accords could affect our business in unpredictable ways. Many air carriers are recovering from significant cash flow challenges and record operating losses incurred in 2020 and 2021 as a result of travel restrictions resulting in cancellation of flights. Uncertainty over recovery of demand for trans-pacific passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers’ operations and financial stability long term. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.
The global economic and trade environments remain uncertain, including the ongoing impacts of the pandemic, higher inflation and oil prices and the conflict in Ukraine. Starting in the second quarter and continuing in the third quarter, we saw a slowdown in the global economy and a softening of customer demand resulting in declines in average buy and sell rates compared to the previous quarter. Until supply chain congestion, labor, truck, rail and equipment shortages and COVID 19-related restrictions fully subside, we expect a continued high level of volatility in average buy and sell rates. We also expect that pricing volatility will continue as carriers adapt to lower demand, changing fuel prices and react to governmental trade policies and other regulations. Additionally, we cannot predict the direct or indirect impact that further changes in and purchasing behavior, such as online shopping, could have on our business. In response to governments implementing higher tariffs on imports, as well as responses to the pandemic’s disruptions, some customers have begun shifting manufacturing to other countries which could negatively impact us.
Seasonality
Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2022 by the downtime caused by the cyber-attack, impacts of a slowing economy and the continued effects of the pandemic. This historical pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, just-in-time inventory models, economic conditions, pandemics, governmental policies and inter-governmental disputes and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of our international network and service offerings.
A significant portion of our revenues is derived from customers in the retail and technology industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of our revenues is, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, changes in trade tariffs, product launches, disruptions in supply-chains and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter.
To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments. We base our estimates on historical experience and on
15
assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year ended December 31, 2021, filed on March 15, 2022 to the critical accounting estimates previously disclosed in that report.
Results of Operations
The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for the three and nine months ended September 30, 2022 and 2021, including the respective percentage changes comparing 2022 and 2021.
The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto in this quarterly report.
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
||||||||||||||||
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Percentage change |
|
2022 |
|
|
2021 |
|
|
Percentage change |
||||
|
Airfreight services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,480,955 |
|
|
$ |
1,628,115 |
|
|
(9)% |
|
$ |
4,682,076 |
|
|
$ |
4,477,599 |
|
|
5% |
|
Expenses |
|
|
1,104,812 |
|
|
|
1,244,381 |
|
|
(11) |
|
|
3,459,861 |
|
|
|
3,335,253 |
|
|
4 |
|
Ocean freight services and ocean services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
1,684,579 |
|
|
|
1,598,597 |
|
|
5 |
|
|
5,420,471 |
|
|
|
3,651,059 |
|
|
48 |
|
Expenses |
|
|
1,343,355 |
|
|
|
1,254,334 |
|
|
7 |
|
|
4,345,963 |
|
|
|
2,859,020 |
|
|
52 |
|
Customs brokerage and other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
1,196,612 |
|
|
|
1,092,549 |
|
|
10 |
|
|
3,527,209 |
|
|
|
2,998,516 |
|
|
18 |
|
Expenses |
|
|
746,106 |
|
|
|
686,775 |
|
|
9 |
|
|
2,345,508 |
|
|
|
1,837,134 |
|
|
28 |
|
Overhead expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related costs |
|
|
499,341 |
|
|
|
519,611 |
|
|
(4) |
|
|
1,546,503 |
|
|
|
1,452,902 |
|
|
6 |
|
Other |
|
|
141,609 |
|
|
|
124,523 |
|
|
14 |
|
|
437,256 |
|
|
|
357,068 |
|
|
22 |
|
Total overhead expenses |
|
|
640,950 |
|
|
|
644,134 |
|
|
— |
|
|
1,983,759 |
|
|
|
1,809,970 |
|
|
10 |
|
Operating income |
|
|
526,923 |
|
|
|
489,637 |
|
|
8 |
|
|
1,494,665 |
|
|
|
1,285,797 |
|
|
16 |
|
Other income, net |
|
|
7,933 |
|
|
|
3,195 |
|
|
148 |
|
|
20,178 |
|
|
|
12,978 |
|
|
55 |
|
Earnings before income taxes |
|
|
534,856 |
|
|
|
492,832 |
|
|
9 |
|
|
1,514,843 |
|
|
|
1,298,775 |
|
|
17 |
|
Income tax expense |
|
|
120,694 |
|
|
|
132,922 |
|
|
(9) |
|
|
368,975 |
|
|
|
333,941 |
|
|
10 |
|
Net earnings |
|
|
414,162 |
|
|
|
359,910 |
|
|
15 |
|
|
1,145,868 |
|
|
|
964,834 |
|
|
19 |
|
Less net (losses) earnings attributable to the noncontrolling interest |
|
|
(47 |
) |
|
|
842 |
|
|
(106) |
|
|
7,745 |
|
|
|
2,174 |
|
|
256 |
|
Net earnings attributable to shareholders |
|
$ |
414,209 |
|
|
$ |
359,068 |
|
|
15% |
|
$ |
1,138,123 |
|
|
$ |
962,660 |
|
|
18% |
Airfreight services:
In the third quarter of 2022, demand for airfreight services continued to soften but remained high relative to available capacity compared to pre-pandemic levels, which resulted in sustained high average buy and sell rates. Continued restrictions from the pandemic, such as ongoing quarantine requirements in China, have resulted in airlines not increasing passenger flight schedules to pre-pandemic levels, which limited available belly space for cargo. Additionally, capacity was further limited due to the conflict in Ukraine and the related route restrictions in Asia and Europe lanes and sanctions on Russian carriers. In order to execute and meet the transportation needs of our customers, we continued to purchase capacity in advance and on the spot market. Volumes were lower in 2022 as a result of softening demand and compared to strong volumes in the same period in 2021 from customers converting to air shipments due to ocean port congestion.
16
Airfreight services revenues and expenses decreased 9% and 11%, respectively, during the three months ended September 30, 2022, as compared with the same period in 2021, due to a 13% decrease in tonnage partially offset by 4% and 2% increases in average sell and buy rates, respectively. Tonnage decreased in almost all regions due to softening demand from slowing economies, with the largest decreases coming from exports out of North Asia. Compared to the same quarter in 2021, average sell rates increased as a result of increased buy rates due to imbalances in available capacity relative to demand and increased fuel costs.
Airfreight services revenues and expenses increased 5% and 4%, respectively, during the nine months ended September 30, 2022, as compared with the same period in 2021, due to 25% and 23% increases in average sell and buy rates, respectively, partially offset by a 16% decrease in tonnage. Average sell rates increased as a result of increased buy rates due to imbalances in available capacity relative to demand and increased fuel costs. Average sell and buy rates increased in all regions with most significant increases on exports out of North Asia and South Asia. Tonnage decreased due to COVID-19 related lockdowns in China, softening demand and downtime caused by the cyber-attack with the largest decreases coming from exports out of North Asia and South Asia. Though we continued to process air shipments on a limited basis during the downtime caused by the cyber-attack, our volumes were negatively affected. Subsequent to the downtime in March, our volumes began to recover as customers gradually returned but were negatively affected through the second quarter.
These conditions including the impact of rising jet fuel costs create a high degree of volatility in average buy rates and sell rates and are expected to continue at least through the end of 2022. Furthermore, transpacific passenger flights are not expected to return to pre-pandemic levels and further disruptions in the ocean market may continue to impact demand for airfreight. The continued high average buy and sell rates have significantly contributed to the growth in our revenues, expenses and operating income compared to 2021. These unprecedented operating conditions in 2021 and in the first half of 2022 are not expected to be sustained long-term. Buy rates and sell rates have been declining since the second quarter of 2022. Should customer demand decrease further and rates return to pre-pandemic levels, it will result in a significant decrease in our revenues, expenses and operating income. We are unable to predict how these uncertainties and any future disruptions will affect our future operations or financial results.
Ocean freight and ocean services:
Ocean freight consolidation, direct ocean forwarding, and order management are the three basic services that constitute and are collectively referred to as ocean freight and ocean services. Ocean freight and ocean services revenues increased 5% and 48%, respectively, while expenses increased 7% and 52%, respectively for the three and nine months ended September 30, 2022 as compared with the same periods in 2021. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 86% and 80% of ocean freight and ocean services revenue for the nine months ended September 30, 2022 and 2021, respectively.
Ocean freight consolidation revenues and expenses increased 8% and 9%, respectively, for the three months ended September 30, 2022, as compared with the same period in 2021, primarily due to 20% and 21% increases in average sell and buy rates, respectively, partially offset by a 10% decrease in containers shipped. Ocean freight consolidation revenues and expenses increased 60% and 61%, respectively, for the nine months ended September 30, 2022 as compared with the same period in 2021, primarily due to a 74% increase in both average sell and buy rates, partially offset by an 8% decrease in containers shipped. Rising fuel prices, congestion at ports due to labor, truck and equipment shortages and disrupted sailing schedules resulted in continued high average buy rates in 2022. While the ability to secure necessary capacity from ocean carriers and major port congestions have eased, availability of labor and equipment at ports and rail heads remains challenging in certain locations.
Containers shipped were lower in all regions, most significantly in North Asia as a result of COVID-19 related lockdowns in China. A slowdown in international trade and a buildup of retail inventories in the United States resulted in softening demand which negatively affected containers shipped compared to historically high volumes in the three and nine months ended September 30, 2021. Europe and Middle East ocean freight and ocean services revenues increased 26% and 47%, respectively, while directly related expenses increased 32% and 54%, respectively, for the three months ended September 30, 2022 primarily due to higher average sell rates and buy rates. North Asia and South Asia ocean freight and ocean services revenues increased 40% and 62%, respectively, while directly related expenses increased 42% and 66%, respectively, for the nine months ended September 30, 2022 primarily due to higher average sell rates and buy rates.
Direct ocean freight forwarding revenues increased 10% and 7%, respectively, while expenses increased 11% and 9%, respectively, for the three and nine months ended September 30, 2022 principally due to increased ancillary services provided at higher rates. Order management revenues decreased 23% and 5%, respectively, while expenses decreased 27% and 2%, respectively, for the three and nine months ended September 30, 2022, mainly due to lower volumes from retail customers, including those that advanced holiday related shipments to the first half of the year, and the impact of downtime and lost customers caused by the cyber-attack. Our ability to provide order management services in the first quarter of 2022 was significantly affected by limited system connectivity during the downtime caused by the cyber-attack.
17
Although global economic conditions are slowing and sell and buy rates have been declining since the second quarter of 2022, we expect ocean carriers to continue to manage available capacity. Until supply-chain congestion, labor, rail, truck and equipment shortages and COVID 19-related restrictions fully subside, we expect a high level of volatility in average buy and sell rates. We also expect that pricing volatility will continue as carriers adapt to increases in fuel prices and customers react to governmental trade policies and other regulations. The high average buy and sell rates have significantly contributed to the growth in our revenues and expenses in the nine months ended September 30, 2022. Should customer demand or rates further decrease from these levels, or if we are unable to secure sufficient capacity from carriers, it will result in a significant decrease in our revenues, expenses and operating income.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 10% and 18%, respectively, and expenses increased 9% and 28%, for the three and nine months ended September 30, 2022, respectively, as compared with the same periods in 2021, primarily due to higher charges on import services due to supply chain congestion and costs related to the downtime caused by the cyber-attack. Revenues and expenses for import services increased significantly due to high drayage, storage, delivery, demurrage, and detention costs incurred at destinations caused by supply chains congestion, shortages in warehousing space and delays in retrieving and delivering cargo and were partially offset by a decrease in revenue from customs clearance due to fewer shipments. Additionally, as a result of our inability to timely process and move shipments through ports during the cyber-attack downtime, we directly incurred approximately $55 million in incremental demurrage charges for the nine months ended September 30, 2022. Road freight, warehousing and distribution services also grew due to higher volumes and higher trucking, storage and labor costs. While customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process, some customers opt to using multiple customs brokerage service providers to reduce their risk. Customers continue to seek knowledgeable customs brokers with sophisticated computerized capabilities critical to an overall logistics management program that are necessary to rapidly respond to changes in the regulatory and security environment. Additionally, as supply-chains congestion subsides and international trade slows, volumes shipped and pricing could be negatively affected resulting in lower revenues and expenses.
North America revenues increased 13% and 25%, respectively, and directly related expenses increased 13% and 39% for the three and nine months ended September 30, 2022, respectively, as compared with the same periods in 2021, primarily as a result of higher charges on import services due to port congestion. Additionally, $51 million in demurrage charges related to the downtime caused by the cyber-attack also contributed to the increase in expenses for the nine months ended September 30, 2022.
Overhead expenses:
Salaries and related costs increased 6% for the nine months ended September 30, 2022 as compared with the same period in 2021, principally due to increases in commissions and bonuses earned from higher revenues and operating income and a 6% increase in headcount during the same period to support increased complexity and disruptions in global supply chains. During the three months ended September 30, 2022 salaries and related costs decreased 4% due to decreases in bonus expense offset by a 6% increase in headcount during the same period.
Historically, the relatively consistent relationship between salaries and operating income has been the result of a compensation philosophy that has been maintained since the inception of our company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation occur in proportion to changes in our operating income, creating an alignment between branch and corporate performance and shareholder interests.
Our management compensation programs have always been incentive-based and performance driven. Total bonuses to field and executive management for the nine months ended September 30, 2022 were up 4% when compared to the same period in 2021, due to an increase in operating income offset by unused bonus allocations and reductions in bonuses awarded to senior management.
Because our management incentive compensation programs are also cumulative, generally no management bonuses can be paid unless the relevant business unit is, from inception, cumulatively profitable. Any operating losses must be offset in their entirety by operating profits before management is eligible for a bonus. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. Since the most significant portion of management compensation comes from the incentive bonus programs, we believe that this cumulative feature is a disincentive to excessive risk taking by our managers. 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 the short operating cycle of our services, the potential for short-term gains that could be generated by engaging in risky business practices is sufficiently mitigated to discourage
18
excessive and inappropriate risk taking. Management believes that both the stability and the long-term growth in revenues, operating income and net earnings are a result of the incentives inherent in our compensation programs.
Other overhead expenses increased 14% and 22% for the three and nine months ended September 30, 2022, respectively, as compared with the same period in 2021. We incurred $15 million of incremental costs in relation with the cyber-attack in the nine months ended September 30, 2022. These costs comprised of various consulting services including cybersecurity experts, outside legal advisors, and other IT professional expenses; and estimated liabilities for potential shipment-related claims. The remaining increases in other overhead expenses are the result of certain operational expenses, renting additional space, bad debt, higher claims and technology and consulting related costs to support our operations. During the three months ended September 30, 2022, the Company revised earlier estimates of incremental cyber-attack costs downward by $11 million. We expect to continue to enhance the effectiveness and security of our systems and deploy additional protection technologies and processes which will result in increased expenses in the future. We will also continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.
Income tax expense:
Our consolidated effective income tax rate was 22.6% and 24.4% for the three and nine months ended September 30, 2022, as compared to 27.0% and 25.7%, respectively, for the same periods in 2021. Both periods in 2022 benefited from U.S. income tax deductions for FDII. For the three and nine months ended September 30, 2022 and 2021, there was no BEAT expense and GILTI expense was insignificant. Some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the U.S. Internal Revenue Service and Department of Treasury.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates transacting in a multitude of currencies other than the U.S. dollar. That exposes us to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or have agency relationships have strict currency control regulations that influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and nine months ended September 30, 2022 and 2021 was insignificant. We had no foreign currency derivatives outstanding at September 30, 2022 and December 31, 2021. For the three months ended September 30, 2022, net foreign currency gains were approximately $9 million compared to less than $1 million in the same period in 2021. During the nine months ended September 30, 2022, net foreign currency gains were approximately $17 million compared to net foreign currency losses of approximately $1 million in the same period in 2021.
Historically, our business has not been adversely affected by inflation. However, starting in 2021, most countries including the United States experienced higher inflation than in recent years. In 2021 and continuing into 2022, our business has experienced rising labor costs, significant service provider rate increases, higher rent and occupancy and other expenses. Due to the high degree of competition in the marketplace we may not be able to increase our prices to our customers to offset this inflationary pressure, which could lead to an erosion in our margins and operating income in the future. Conversely, raising our prices to keep pace with inflationary pressure may result in a decrease in customer demand. As we are not required to purchase or maintain extensive property and equipment and have not otherwise incurred substantial interest rate-sensitive indebtedness, we currently have limited direct exposure to increased costs resulting from increases in interest rates.
There is uncertainty as to how new regulatory requirements and increases in oil prices are expected to continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our buy rates and sell rates, we would expect our revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that future fuel prices increase and we are unable to pass through the increase to our customers, fuel price increases could adversely affect our operating income.
Liquidity and Capital Resources
Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and nine months ended September 30, 2022 was $670 million and $1,643 million, respectively, as compared with $177 million and $563 million for the same periods in 2021. The increase of $493 million for the three months ended September 30, 2022, was primarily due to collection of accounts receivable and higher net earnings. At September 30, 2022, working capital was $2,881 million, including cash and cash equivalents of $2,155 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at September 30, 2022.
19
Management believes that our current cash position and operating cash flows will be sufficient to meet our capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future meeting any contingent liabilities related to standby letters of credit and other obligations.
As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Our accounts receivable and consequently our customer credit exposure has also increased as a result of historically high freight rates. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.
Our business historically has been subject to seasonal fluctuations, and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash. However, there is no assurance that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2022 by the pandemic, the downtime caused by the cyber-attack and the impacts of the slowing down economy.
Cash used in investing activities for the three and nine months ended September 30, 2022 was $17 million and $69 million as compared with $10 million and $25 million for the same periods in 2021, respectively, primarily for capital expenditures. Capital expenditures in the three and nine months ended September 30, 2022 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. In the first quarter of 2022 we spent $3 million on capital expenditures for technology equipment and software in relation with the remediation effort for the cyber-attack. Total anticipated capital expenditures in 2022 are currently estimated to be $80 million.
Cash used in financing activities during the three and nine months ended September 30, 2022 was $429 million and $1,048 million as compared with cash used in financing activities of $14 million and $233 million for the same periods in 2021. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to reduce, or limit the growth of outstanding shares. During the three and nine months ended September 30, 2022, we used cash to repurchase 4.5 million and 9.5 million shares of common stock, respectively, compared to 0.6 million and 2.0 million, respectively, during the same periods in 2021.
We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.
We cannot predict what further impact growing uncertainties in the global economy, political uncertainty, increase in oil prices, nor the pandemic may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior.
We maintain international unsecured bank lines of credit for short-term working capital purposes. A few of 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. At September 30, 2022, borrowings under these credit lines were $31 million and we were contingently liable for $70 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of our foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the accounting records 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.
We have lease arrangements primarily for office and warehouse space in all districts where we conduct business. At of September 30 2022, we had fixed lease payment obligations of $563 million, with $107 million payable within 12 months.
We typically enter into unconditional purchase obligations with asset-based providers (generally short-term in nature) reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill. In the regular course of business, we
20
also enter into agreements with service providers to maintain or operate equipment, facilities or software that can be longer than one year. We also regularly have contractual obligations for specific projects related to improvements of our owned or leased facilities and information technology infrastructure. Purchase obligations outstanding as of September 30, 2022 totaled $336 million.
Our foreign subsidiaries regularly remit dividends to the U.S. parent company after evaluating their working capital requirements and funds necessary to finance local capital expenditures. In some cases, our ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At September 30, 2022, cash and cash equivalent balances of $904 million were held by our non-United States subsidiaries, of which $24 million was held in banks in the United States. Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of our exposure to these risks is presented below:
Foreign Exchange Risk
We conduct business in many different countries and currencies. Our business often results in billings issued in a country and currency that differs from that where the expenses related to the service are incurred. In the ordinary course of business, we create 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 our earnings. The principal foreign exchange risks to which Expeditors is exposed include Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.
Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on our earnings as a result of hypothetical changes in the value of the U.S. dollar, our functional currency, relative to the other currencies in which we transact business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the nine months ended September 30, 2022, would have had the effect of raising operating income by approximately $112 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $92 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.
We currently do not use derivative financial instruments to manage foreign currency risk and only enter into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict our ability to move money freely. Any such hedging activity throughout the three and nine months ended September 30, 2022 and 2021 was insignificant. For the three months ended September 30, 2022, net foreign currency gains were approximately $9 million compared to less than $1 million during the same period in 2021. During the nine months ended September 30, 2022, net foreign currency gains were approximately $17 million compared to foreign currency losses of approximately $1 million during the same period in 2021. We had no foreign currency derivatives outstanding at September 30, 2022 and December 31, 2021. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of September 30, 2022, we had approximately $175 million of net unsettled intercompany transactions. In the regular course of business, the majority of intercompany billings are resolved within 30 days.
Interest Rate Risk
At September 30, 2022, we had cash and cash equivalents of $2,155 million of which $985 million was invested at various short-term market interest rates. Other than our recorded lease liabilities, we had no long-term obligations or debt at September 30, 2022. A hypothetical change in the interest rate of 10 basis points at September 30, 2022 would not have a significant impact on our earnings. In management’s opinion, there has been no material change in our interest rate risk exposure in the third quarter of 2022.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our 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 our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.
21
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than related to the cyber-attack as discussed below.
With respect to the cyber-attack that is discussed in Note 9 to the condensed consolidated financial statements in this report, starting on February 20, 2022, we shut down most of our operating systems globally, including our accounting information systems, to manage the safety of our entire global systems environment. We engaged third-party cybersecurity experts to investigate and assist in the remediation. Our Board of Directors was regularly apprised of, and directors with experience in cybersecurity participated in, the critical investigation and remediation activities. Subsequently, we restored and strengthened the security of our systems and networks and enhanced the continuous monitoring of the entire information security environment. Additionally, we have continued to implement various improvements to our network and processes to mitigate the risk of recurrence and severity of such incidents in the future.
During the disruption caused by the cyber-attack, we deployed interim procedures and controls to maintain our systems of internal control over financial reporting. As a result of this cyber-attack and based on information known at this date, management determined that our disclosure controls and procedures were effective and the cyber-attack did not materially affect, nor was it reasonably likely to affect the effectiveness of the Company’s internal control over financial reporting.
We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness. As a result of the pandemic, many of our employees may work remotely on a temporary basis, as necessary due to local conditions and are able to do so within our established internal controls over financial reporting.
Our management has confidence in our internal controls and procedures. Nevertheless, our management, including Expeditors’ Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our 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 of our control issues and instances of fraud, if any, have been detected.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Expeditors is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on our operations, cash flows or financial position. As of September 30, 2022, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters including potential claims resulting from the downtime caused by the cyber-attack in February 2022, see further information in Note 9 in the condensed consolidated financial statements in this report.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on March 15, 2022. There have been no material changes in Expeditors' risk factors from those disclosed under Item 1A Risk Factors in our annual report on Form 10-K filed on March 15, 2022, except for the following:
Global economic uncertainty impacted trade and could affect demand for our services or the financial stability of our service providers and customers.
The global economy entered a recession as a result of the pandemic, which initially affected trade and negatively affected demand for our services for a period of time, before rebounding in 2021. Current and future unfavorable economic conditions, high inflation and increasing geopolitical risks, such as the conflict in Ukraine, could result in lower freight volumes and adversely affect Expeditors' revenues, operating results and cash flows. These conditions, should they occur for an extended period of time, could adversely affect our customers and service providers. Should our customers’ ability to pay deteriorate, additional credit losses may be incurred.
COVID-19 significantly impacted worldwide economic conditions and global trade and may continue to have a disruptive effect on our operations, and the operations of our service providers and our customers, which may further impact our business.
COVID-19 was declared as a global health emergency and later declared as a global pandemic by the World Health Organization. As a result, throughout 2020 and 2021 and continuing into 2022, governments have implemented travel restrictions, mandated lockdowns and other precautionary measures that resulted in significant business and supply chain disruptions and has had direct impacts on international trade. This crisis has largely abated but is expected to continue affecting our business in many aspects. Governments have designated our operations as essential business and we activated our business continuity plan to be able to conduct operations. Our facilities and employees in most parts of the world have returned to normal working conditions. Certain pandemic related constraints continue to impact operations including reduced flight schedules from pre-pandemic levels and new regulations, which limited available belly space for cargo, congestion at ports and railheads resulting from labor and equipment shortages and insufficient warehousing space at destinations. While we believe these constraints are not long-term in nature, they can temporarily impact our ability to move increased air and ocean volumes in these capacity-constrained regions. These freight market conditions have created and continue to create pricing volatility that challenges Expeditors’ ability to maintain historical unitary profitability. Many of our customers are experiencing disruptions in their revenues and cash flows and have incurred higher operating expenses as a result of supply chain cost increases and other inflationary pressures. This has caused some customers to renegotiate contractual terms, increasing our accounts receivable collection and extended liability risks. Such conditions could result in the loss of business and additional credit losses in the future if our customers’ ability to pay deteriorates. Although we are monitoring the situation, we cannot predict for how long, or the ultimate extent to which the pandemic and related precautionary measures may disrupt our operations. Any significant disruption resulting from this on a large scale or over an extended period of time would negatively affect our business and our financial results. Throughout 2021 and into 2022, transportation rates rose to historically high levels. We believe that as Covid-19 disruptions recede, and passenger air travel rebounds, supply chain congestion will continue to improve. This will result in additional transportation capacity becoming available. Rates will likely continue to decline as this occurs. On a limited basis, we have entered in to fixed-rate buy agreements to secure space in the air and ocean markets. Future declines of sell rates will negatively affect our operating income and cash flows.
23
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 |
|
|
Maximum number of shares that may yet be purchased under the plans |
|
||||
|
July 1-31, 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,595 |
|
|
August 1-31, 2022 |
|
|
2,158 |
|
|
|
105.03 |
|
|
|
2,158 |
|
|
|
11,484 |
|
|
September 1-30, 2022 |
|
|
2,371 |
|
|
|
102.23 |
|
|
|
2,371 |
|
|
|
9,128 |
|
|
Total |
|
|
4,529 |
|
|
$ |
103.56 |
|
|
|
4,529 |
|
|
|
9,128 |
|
In November 2001, Expeditors' Board of Directors authorized a Discretionary Stock Repurchase Plan for the purpose of repurchasing our common stock in the open market to reduce the issued and outstanding stock down to 200 million shares. Subsequently, the Board of Directors has from time to time increased the amount of our common stock that may be repurchased. The Board of Directors last authorized repurchases from 160 million shares of common stock down to 150 million shares of common stock on May 2, 2022. 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
|
(a) |
Not applicable. |
|
(b) |
Not applicable. |
24
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K.
|
Exhibit Number |
|
Description |
|
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 |
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, has been formatted in Inline XBRL. |
25
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. |
|
|
|
|
|
November 8, 2022 |
|
/s/ JEFFREY S. MUSSER |
|
|
|
Jeffrey S. Musser, President, Chief Executive Officer and Director |
|
|
|
|
|
November 8, 2022 |
|
/s/ BRADLEY S. POWELL |
|
|
|
Bradley S. Powell, Senior Vice President and Chief Financial Officer |
26