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EXPEDITORS INTERNATIONAL OF WASHINGTON INC filed this 10-Q on May 09, 2022

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EXPEDITORS INTERNATIONAL OF WASHINGTON INC (Form: 10-Q, Received: 05/09/2022 12:50:40)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

Washington		91-1069248
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1015 Third Avenue, Seattle, Washington		98104
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code): (206) 674-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		EXPD		NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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). Yes ☒ No ☐

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.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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 ☐ No ☒

At May 5, 2022, the number of shares outstanding of the issuer’s common stock was 167,753,884.

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)

	March 31, 2022			December 31, 2021
Assets:
Current Assets:
Cash and cash equivalents	$	2,139,626		$	1,728,692
Accounts receivable, less allowance for credit loss of $5,677 at March 31, 2022 and $6,686 at December 31, 2021		3,934,856			3,810,286
Deferred contract costs		817,435			987,266
Other		70,812			108,801
Total current assets		6,962,729			6,635,045
Property and equipment, less accumulated depreciation and amortization of $553,048 at March 31, 2022 and $541,677 at December 31, 2021		504,125			487,870
Operating lease right-of-use assets		458,637			459,158
Goodwill		7,927			7,927
Deferred federal and state income taxes, net		5,573			729
Other assets, net		17,002			19,200
Total assets	$	7,955,993		$	7,609,929
Liabilities:
Current Liabilities:
Accounts payable	$	1,980,439		$	2,012,461
Accrued liabilities, primarily salaries and related costs		607,882			403,625
Contract liabilities		952,370			1,142,026
Current portion of operating lease liabilities		85,076			82,019
Federal, state and foreign income taxes		96,205			86,166
Total current liabilities		3,721,972			3,726,297
Noncurrent portion of operating lease liabilities		384,690			385,641
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, none issued		—			—
Common stock, par value $0.01 per share. Issued and outstanding: 167,477 shares at March 31, 2022 and 167,210 shares at December 31, 2021		1,675			1,672
Additional paid-in capital		13,343			3,160
Retained earnings		3,965,803			3,620,008
Accumulated other comprehensive loss		(137,429	)		(130,414	)
Total shareholders’ equity		3,843,392			3,494,426
Noncontrolling interest		5,939			3,565
Total equity		3,849,331			3,497,991
Total liabilities and equity	$	7,955,993		$	7,609,929

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2022		2021
Revenues:
Airfreight services	$	1,598,555	$	1,325,915
Ocean freight and ocean services		1,976,246		953,912
Customs brokerage and other services		1,089,497		918,993
Total revenues		4,664,298		3,198,820
Operating Expenses:
Airfreight services		1,142,546		954,544
Ocean freight and ocean services		1,600,243		742,435
Customs brokerage and other services		773,322		550,305
Salaries and related		538,940		452,105
Rent and occupancy		50,928		45,280
Depreciation and amortization		12,975		12,987
Selling and promotion		4,048		3,070
Other		79,536		52,579
Total operating expenses		4,202,538		2,813,305
Operating income		461,760		385,515
Other Income (Expense):
Interest income		1,892		1,946
Other, net		7,527		3,000
Other income, net		9,419		4,946
Earnings before income taxes		471,179		390,461
Income tax expense		121,699		102,511
Net earnings		349,480		287,950
Less net earnings attributable to the noncontrolling interest		3,371		730
Net earnings attributable to shareholders	$	346,109	$	287,220
Diluted earnings attributable to shareholders per share	$	2.05	$	1.67
Basic earnings attributable to shareholders per share	$	2.07	$	1.70
Weighted average diluted shares outstanding		169,216		171,551
Weighted average basic shares outstanding		167,499		169,214

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three months ended March 31,
	2022			2021
Net earnings	$	349,480		$	287,950
Other comprehensive loss, net of tax:
Foreign currency translation adjustments, net of income tax benefit of $1,500 and $3,393 for the three months ended March 31, 2022 and 2021		(8,012	)		(16,197	)
Other comprehensive loss		(8,012	)		(16,197	)
Comprehensive income		341,468			271,753
Less comprehensive income attributable to the noncontrolling interest		2,374			266
Comprehensive income attributable to shareholders	$	339,094		$	271,487

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended March 31,
	2022			2021
Operating Activities:
Net earnings	$	349,480		$	287,950
Adjustments to reconcile net earnings to net cash from operating activities:
(Recoveries) provisions for losses on accounts receivable		(416	)		1,199
Deferred income tax (benefit) expense		(3,236	)		8,151
Stock compensation expense		11,603			11,185
Depreciation and amortization		12,975			12,987
Other, net		455			551
Changes in operating assets and liabilities:
Increase in accounts receivable		(132,348	)		(252,914	)
Increase in accounts payable and accrued liabilities		140,191			233,238
Decrease (increase) in deferred contract costs		173,930			(71,258	)
(Decrease) increase in contract liabilities		(193,357	)		79,590
Increase in income taxes payable, net		46,259			46,638
Decrease (increase) in other, net		8,410			(1,488	)
Net cash from operating activities		413,946			355,829
Investing Activities:
Purchase of property and equipment		(14,412	)		(8,391	)
Other, net		79			(34	)
Net cash from investing activities		(14,333	)		(8,425	)
Financing Activities:
Proceeds from borrowing on lines of credit, net		19,490			(85	)
Proceeds from issuance of common stock		5,751			19,757
Repurchases of common stock		—			(85,997	)
Payments for taxes related to net share settlement of equity awards		(7,482	)		(1,275	)
Net cash from financing activities		17,759			(67,600	)
Effect of exchange rate changes on cash and cash equivalents		(6,438	)		(14,202	)
Change in cash and cash equivalents		410,934			265,602
Cash and cash equivalents at beginning of period		1,728,692			1,527,791
Cash and cash equivalents at end of period	$	2,139,626		$	1,793,393
Taxes Paid:
Income taxes	$	77,960		$	46,607

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

	Common Stock
For the three months ended March 31, 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		167,210		$	1,672		$	3,160		$	3,620,008		$	(130,414	)	$	3,494,426		$	3,565		$	3,497,991
Shares issued under employee stock plans		267			3			(1,734	)		—			—			(1,731	)		—			(1,731	)
Stock compensation expense		—			—			11,603			—			—			11,603			—			11,603
Net earnings		—			—			—			346,109			—			346,109			3,371			349,480
Other comprehensive income loss		—			—			—			—			(7,015	)		(7,015	)		(997	)		(8,012	)
Dividends paid		—			—			314			(314	)		—			—			—			—
Balance at March 31, 2022		167,477		$	1,675		$	13,343		$	3,965,803		$	(137,429	)	$	3,843,392		$	5,939		$	3,849,331

Balance at December 31, 2020		169,294		$	1,693		$	157,496		$	2,600,201		$	(99,753	)	$	2,659,637		$	3,590		$	2,663,227
Shares issued under employee stock plans		439			4			18,478			—			—			18,482			—			18,482
Shares repurchased under provisions of stock repurchase plan		(925	)		(9	)		(85,988	)		—			—			(85,997	)		—			(85,997	)
Stock compensation expense		—			—			11,185			—			—			11,185			—			11,185
Net earnings		—			—			—			287,220			—			287,220			730			287,950
Other comprehensive income loss		—			—			—			—			(15,733	)		(15,733	)		(464	)		(16,197	)
Dividends paid		—			—			98			(98	)		—			—			—			—
Balance at March 31, 2021		168,808		$	1,688		$	101,269		$	2,887,323		$	(115,486	)	$	2,874,794		$	3,856		$	2,878,650

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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 correct for immaterial errors as previously disclosed in the Company’s second quarter results on Form 10-Q filed on August 5, 2021 and in the 2021 Form 10-K.

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 December 31, 2021.

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.

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 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.

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 leveraging historical credit loss information and including considerations of 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 $5,677 as of March 31, 2022 and $6,686 as of December 31, 2021. Additions and write-offs have not been significant in the periods presented.

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 the first quarter of 2022, ancillary services include additional estimated costs for demurrage charges incurred as a result of downtime caused by the cyber-attack. See Note 8 for further information on estimates related to the cyber-attack. Actual results could be materially different from the estimated provisions and accruals recorded.

Share-Based Compensation

The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are historically made in the third quarter of each fiscal year. 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 plans. 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. Restricted stock units (RSUs) and performance share units (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.

Note 2. 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 could be issued in future periods. As this guidance is issued, the Company will evaluate the information to determine whether any additional adjustments to its tax provisions 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 months ended March 31, 2022, and 2021, there was no BEAT expense and GILTI expense was insignificant. The Company’s consolidated effective income tax rate was 25.8%, for the three months ended March 31, 2022, as compared to 26.3% for the comparable period in 2021. Both periods benefited from U.S. income tax deductions for Foreign-derived intangible income (FDII).

Note 3. Basic and Diluted Earnings per Share

Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:

	Three months ended March 31,
	Net earnings attributable to shareholders		Weighted average shares		Earnings per share
2022
Basic earnings attributable to shareholders	$	346,109		167,499	$	2.07
Effect of dilutive potential common shares		—		1,717		—
Diluted earnings attributable to shareholders	$	346,109		169,216	$	2.05
2021
Basic earnings attributable to shareholders	$	287,220		169,214	$	1.70
Effect of dilutive potential common shares		—		2,337		—
Diluted earnings attributable to shareholders	$	287,220		171,551	$	1.67

Substantially all outstanding potential common shares as of March 31, 2022 and 2021 were dilutive.

Note 4. 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 160,000 shares. On May 2, 2022, the Board of Directors amended the plan to further authorize repurchases down to 150,000 shares. This authorization has no expiration date. During the three months ended March 31, 2022, there were no shares repurchased, compared to 925 shares at an average price of $92.98 per share during the same period in 2021.

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.

Subsequent to the end of the first quarter of 2022, on May 2, 2022, the Board of Directors declared a semi-annual dividend of $0.67 per share payable on June 15, 2022 to shareholders of record as of June 1, 2022.

Note 5. 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:

	March 31, 2022				December 31, 2021
	Cost		Fair Value		Cost		Fair Value
Cash and Cash Equivalents:
Cash and overnight deposits	$	2,080,077	$	2,080,077	$	1,241,565	$	1,241,565
Corporate commercial paper		—		—		423,261		423,279
Time deposits		59,548		59,548		63,866		63,866
Total cash and cash equivalents	$	2,139,626	$	2,139,626	$	1,728,692	$	1,728,710

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 6. 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 March 31, 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 8.

Note 7. Business Segment Information

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, directly related cost of transportation and other expenses for each of the Company’s three primary sources of revenue, salaries and other operating expenses, operating income, identifiable assets, capital expenditures and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin.

Financial information regarding the Company’s operations by geographic area is as follows:

	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 March 31, 2022:
Revenues	$	1,241,224		104,610		57,707		1,769,016		646,329		575,791		270,681		(1,060	)		4,664,298
Directly related cost of transportation and other expenses¹	$	763,423		64,232		33,857		1,480,093		538,883		417,620		218,100		(97	)		3,516,111
Salaries and other operating expenses²	$	333,649		24,869		13,101		123,113		45,329		109,269		38,042		(945	)		686,427
Operating income	$	144,152		15,509		10,749		165,810		62,117		48,902		14,539		(18	)		461,760
Identifiable assets at period end	$	4,199,798		283,674		147,391		1,329,469		591,672		1,076,451		358,722		(31,184	)		7,955,993
Capital expenditures	$	9,477		1,078		109		531		290		2,058		869		—			14,412
Equity	$	2,753,888		108,208		52,188		337,802		189,168		317,436		133,250		(42,609	)		3,849,331
For the three months ended March 31, 2021:
Revenues³	$	875,390		94,117		44,864		1,209,048		349,766		466,333		160,506		(1,204	)		3,198,820
Directly related cost of transportation and other expenses^1,3	$	502,635		53,050		26,700		967,529		269,944		306,909		121,109		(592	)		2,247,284
Salaries and other operating expenses²	$	238,698		25,737		12,377		106,920		43,165		109,455		30,275		(606	)		566,021
Operating income	$	134,057		15,330		5,787		134,599		36,657		49,969		9,122		(6	)		385,515
Identifiable assets at period end	$	2,747,984		194,050		93,072		988,954		331,271		853,944		265,495		(19,773	)		5,454,997
Capital expenditures	$	3,025		122		53		357		579		3,554		701		—			8,391
Equity	$	1,985,265		73,066		32,632		342,233		148,293		218,198		121,040		(42,077	)		2,878,650

¹Directly related cost of transportation and other expenses totals operating expenses from airfreight services, ocean freight and ocean services and customs brokerage and other services as shown in the condensed consolidated statements of earnings.