8-KRegulation FD

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report, Regulation FD Disclosure (Nov 12, 2004)

Filed November 12, 2004For Securities:EXPD

Summary

This Form 8-K filing from Expeditors International of Washington, Inc. (EXPD), dated November 12, 2004, provides responses to a series of investor and media inquiries regarding the company's third quarter 2004 results and outlook. A key theme is the impact of rising fuel costs and general capacity constraints on the freight forwarding industry, particularly as the company heads into the traditionally busy fourth quarter. Expeditors acknowledges these pressures, noting that while traffic conditions remain robust, higher energy costs and increased demand are contributing to rate increases and creating operational challenges in passing these costs through to customers. Furthermore, the filing addresses investor concerns about the company's tax structure, explaining the difference between accrued tax expense and cash taxes paid, largely due to deferred taxes on unremitted foreign earnings and stock option exercises. It also touches upon the potential impact of the end of textile quotas and the company's strategy for expanding its service offerings in supply chain management, emphasizing a focus on profitable, core competencies. Overall, the report aims to provide transparency on the operational dynamics and financial considerations facing Expeditors.

Key Highlights

  • 1Expeditors acknowledged that traffic conditions remained robust in early November 2004, despite higher energy costs, with underlying demand for goods being stronger than fuel cost increases.
  • 2The company explained that accrued tax expense differs from cash taxes paid due to GAAP accounting rules for income taxes, unremitted foreign earnings, and stock option exercises.
  • 3Expeditors noted that approximately 30% of its net revenue at the time came from textile-based retail sales, and expressed confidence in its ability to handle increased goods flow from China post-textile quotas, with minimal capital investment needs.
  • 4The company stated that the vast majority of the freight it handles does not move under contractual terms, relying on advance notice from carriers for surcharge pass-throughs to customers.
  • 5Expeditors indicated that market share gains have historically been the most significant contributor to its organic growth, driven by a commitment to superior customer service.
  • 6Regarding capacity, Expeditors noted strong year-over-year volume trends at the beginning of November 2004, with backlogs in many Asian locations.
  • 7The company confirmed that all principal end markets (retail, computers and office, electronics) were strong in the third quarter of 2004 and expected to remain so in the fourth quarter.

Frequently Asked Questions

The difference arises from GAAP accounting requirements. Accrued tax expense is calculated based on expected future tax rates, while cash taxes paid are determined by government tax codes. Key factors contributing to this difference include deferred taxes on unremitted foreign earnings (where U.S. tax is recognized for financial statements but only taxed upon repatriation) and tax deductions related to stock option exercises which reduce cash tax liabilities but are not always recognized as expenses for financial statement purposes.

Expeditors acknowledged that the fourth quarter was shaping up to be a challenge due to increased volume amplifying the effects of rapid fuel price increases. The primary tactic is to pass on fuel surcharges effectively. While the company aims for a high pass-through rate (estimated around 90% in normal environments), rapid increases can cause temporary margin pressure due to timing lags in customer communication and agreement.

Expeditors' intent is to provide services that customers need, using Expeditors as their primary service provider, with the critical caveats that these services must be profitable and not alter the company's financial, operational, or cultural foundations. They aim to avoid offering 'vapor-ware' – services they cannot execute reliably.

Expeditors, which derived about 30% of its revenue from textile-based retail sales, does not foresee the end of quotas as an end to freight movement. While manufacturing sites may shift, consumer demand for apparel is expected to remain. The company believes it has adequate capacity in places like China to handle increased flows and is not overly concerned about needing significant capital investments. Their primary focus is ensuring they have offices capable of managing this shift, rather than relying on offices tied to the current quota regime.