8-KOther Events

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report (Aug 12, 2002)

Filed August 12, 2002For Securities:EXPD

Summary

Expeditors International of Washington, Inc. (EXPD) filed an 8-K on August 12, 2002, addressing selected questions regarding their second quarter 2002 results. A key discussion point revolved around IATA Resolution 502, which alters the calculation of volumetric weight for air cargo. While Expeditors stated this change would be operationally manageable due to their systems, its financial impact is uncertain and could lead to higher charges for certain 'fluffy' cargo. The company also clarified accounting practices, specifically differentiating a 'reclassification' of gross revenue from a 'restatement,' emphasizing that the bottom line was unaffected. Expeditors confirmed that certain accessorial charges would now be reported on a gross basis per new accounting pronouncements (EITF D-103), a change mandated by accounting standards rather than a voluntary adoption. Investor inquiries also touched upon performance in Europe, with the company acknowledging ongoing efforts to improve profitability in the region through significant structural and cultural changes, likening the process to pruning an apple tree for long-term health. Furthermore, the report addressed yield pressures in airfreight, noting that recent rate increases from airlines were not immediately passed on to customers, impacting margins. However, tonnage increases helped offset this. Expeditors also provided updates on China and Taiwan operations, clarifying their presence and revenue contribution from these regions, and detailed employee headcounts across various geographies. The company reiterated its focus on net revenue rather than gross revenue for performance evaluation.

Key Highlights

  • 1Expeditors International of Washington, Inc. (EXPD) filed an 8-K on August 12, 2002, addressing selected questions regarding their Q2 2002 results.
  • 2The company clarified the impact of IATA Resolution 502, which changes air cargo volumetric weight calculations, stating it would be operationally manageable but with uncertain financial implications.
  • 3Expeditors explained a 'reclassification' of gross revenue, distinguishing it from a 'restatement,' and noted this change was driven by new accounting standards (EITF D-103).
  • 4Progress and ongoing strategic changes in the European operations were discussed, acknowledging the challenges posed by local employment laws and social costs.
  • 5Airfreight yields experienced pressure in Q2 2002 due to a lag in passing on airline rate increases to customers, although tonnage growth provided some offset.
  • 6The company provided details on its operations and revenue contributions from the People's Republic of China and Taiwan.
  • 7Employee headcounts by region as of June 30, 2002, were disclosed, showing a net decrease of 204 employees year-over-year.

Frequently Asked Questions

IATA Resolution 502 changes the industry standard for calculating volumetric weight in air cargo from 6000 cubic centimeters per kilogram to 5000 cubic centimeters per kilogram. Expeditors stated this change is operationally manageable as their systems can adapt to the new calculation. However, it may increase shipping costs for 'fluffy' or low-density cargo by approximately 20% and could impact profitability if similar rules are applied to Expeditors by airlines. The company expressed reservations about supporting the resolution without further clarification on key customer issues.

Expeditors clarified that they performed a 'reclassification' of gross revenue, not a 'restatement.' A restatement implies previously reported figures were erroneous and earnings were overstated. A reclassification, as in Expeditors' case, involves shifting numbers between reporting categories without altering the total net revenue or earnings. This specific reclassification was driven by new accounting guidance (EITF D-103) requiring certain accessorial charges, where Expeditors bears collection risk, to be reported on a gross basis instead of net.

Expeditors acknowledged that their European operations continued to face challenges in the second quarter of 2002, similar to the previous quarter. However, they expressed confidence in the management team and the progress being made. The company described ongoing structural and cultural changes aimed at improving profitability to 'Expeditors-like' levels, likening the process to pruning an apple tree for long-term health and integration with the global network. They noted that European employment laws and social costs make significant changes more difficult than in other regions.

Expeditors experienced unprecedented airfreight yield declines due to airlines implementing rate increases with less lead time than usual. Expeditors chose to provide customers with appropriate notice for rate increases, resulting in a margin hit for the company during the lag period. While increased tonnage helped offset this, the company's ability to pass on costs is crucial. They also noted that air chartering generally results in lower net revenue margins than standard commercial operations, but it can be a necessary service option when capacity is tight.