8-KOther Events

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report (Nov 18, 2003)

Filed November 18, 2003For Securities:EXPD

Summary

Expeditors International of Washington, Inc. (EXPD) filed an 8-K on November 17, 2003, providing responses to various investor inquiries regarding its third quarter 2003 results and business operations. The company addressed key areas including its approach to pre-committed space contracts with carriers, customer satisfaction tracking, the drivers behind an increase in "other operating expense" (notably higher royalty fees in China and increased taxes), and its capital expenditure plans which were revised downwards for 2003. Expeditors also discussed growth trends in its Customs Brokerage/Import Services and ocean freight segments, providing insights into yield performance and the impact of service mix. Significant discussion was dedicated to the evolving accounting treatment of stock options and the company's stance on expensing them when mandated, emphasizing that the economics of the business would not change and the debate was primarily about dilution. The company also reiterated its commitment to developing its European operations and outlined its dividend policy, noting a historical practice of annual increases.

Key Highlights

  • 1Expeditors' decision-making for pre-committed space with carriers is centralized with corporate product managers and senior geographic management, not at the local branch level. Rates are generally adjustable, and while contracts are enforceable, the company has historically not paid penalties for unfulfilled commitments due to mitigation efforts with carriers.
  • 2The increase in "other operating expense" in Q3 2003 was primarily driven by higher royalty fees in China due to increased profitability and increased gross receipt taxes in various regions, along with an unusual settlement payment for a bankrupt customer's claim.
  • 3Expeditors' capital expenditure forecast for 2003 was revised down to approximately $20 million, with future investments focused on computer equipment, leasehold improvements, and the San Francisco redevelopment effort. The company prefers a conservative approach to capital spending estimates.
  • 4Growth in Customs Brokerage/Import Services is attributed to an increase in the number of import clearances tied to both air and ocean shipments, as well as significant growth in "stand-alone" brokerage services, including U.S. border services and port brokerage.
  • 5Ocean freight gross revenue growth was driven by container count increases and carrier-driven rate adjustments, while net revenue growth was more significantly impacted by vendor consolidation services (ECMS) and ocean forwarding. The company prioritizes net revenue and margin improvement over gross revenue increases.
  • 6Expeditors will expense employee stock options when it becomes mandatory, likely in 2005, and does not plan to adopt early expensing. The company views the debate over stock option expensing as primarily an issue of dilution rather than fundamental business economics.
  • 7The company plans to continue developing its European operations, recognizing it as a significant growth opportunity and a key part of its overall strategy, with most of the necessary "re-tooling" now completed.
  • 8Expeditors has successfully adjusted its pricing to reflect most ocean carrier rate increases as of mid-November 2003, enabling it to pass these costs along to clients.

Frequently Asked Questions

Expeditors' policy is to never commit to more space than they expect to have freight to move. Decisions on space commitments are made at the corporate level by product managers in consultation with senior management. While rates are typically adjustable, tonnage and TEU commitments are fixed and enforceable. Historically, Expeditors has not paid penalties for unfulfilled commitments due to mitigation strategies with carriers.

The increase in "other operating expense" was mainly due to higher royalty fees paid to local partners in the People's Republic of China, resulting from increased profitability in that region. Additionally, there were increases in gross receipt taxes for China, Brazil, and some U.S. states, as well as an unusual payment to settle a "preference payment" claim related to a bankrupt customer.

The next dividend payment is scheduled for December 15, 2003, at $0.08 per share, payable to shareholders of record as of December 1, 2003.

Expeditors does not plan to voluntarily expense employee stock options prior to the mandatory requirement. They will adopt the mandated expensing when it becomes effective, likely in 2005, booking it as a non-cash expense. The company believes that while expensing will not alter the business's economics, it is primarily driven by a desire to reduce dilution rather than a fundamental change in valuation.

Expeditors expects to spend around $20 million on capital expenditures for 2003. For the next three to twelve months, the focus will be on new computer equipment, real estate-related leasehold improvements, and the commencement of the San Francisco redevelopment project. The company prioritizes conservative budgeting and does not emphasize precise forecasting for capital expenditures.