8-KRegulation FD

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report, Regulation FD Disclosure (Aug 25, 2011)

Filed August 25, 2011For Securities:EXPD

Summary

Expeditors International of Washington Inc. (EXPD) filed an 8-K on August 25, 2011, primarily to disclose answers to selected inquiries received through August 5, 2011. The company addressed strategic decisions, its significant cash balance and repatriation tax policies, expense management, regional revenue growth nuances, pricing trends in air and ocean freight, and industry volume comparisons. Key takeaways include the company's stance against acquisitions and layoffs during the 2008-2009 downturn, which they view as successful operational and financial decisions. Expeditors also clarified its approach to foreign earnings, stating that it has a long-standing policy of accruing for worldwide taxes as income is earned, thus mitigating concerns about repatriation taxes acting as a barrier to cash deployment. The company also provided insights into revenue recognition, expense drivers, and industry volume trends, while expressing caution about making long-term predictions in the volatile freight market.

Key Highlights

  • 1Expeditors explicitly stated that it did not make material strategic or operational mistakes in the last five years, highlighting the success of not pursuing acquisitions or layoffs during the 2008-2009 financial crisis.
  • 2The company clarified its cash repatriation policy, noting that it accrues taxes on a worldwide basis as income is earned, meaning its substantial foreign cash balance is not restricted by tax policy and is deployed based on treasury strategy.
  • 3Expeditors explained that the increase in 'Other' operating expenses in Q2 2011 was primarily due to higher revenue-based taxes in China and other jurisdictions, along with increased computer maintenance costs and lower bad debt recoveries.
  • 4The filing provided insights into regional revenue growth disparities, explaining that higher net revenue growth compared to gross revenue growth in Latin America and Asia Pacific is due to market dynamics and how profits are split between origin and destination offices.
  • 5Regarding pricing, Expeditors suggested that access to real-time freight rates has not significantly altered the dynamic for airfreight due to consolidation advantages, while ocean freight shippers, particularly larger ones, may have access to superior rates at certain times.
  • 6The company reported approximately $700 million in unrepatriated foreign earnings and reiterated that its philosophy on dividends, not tax policy, dictates the timing and amount of payouts to shareholders.
  • 7Expeditors provided specific year-over-year volume growth figures for airfreight and ocean freight for several periods in 2010 and noted that July 2011 saw a year-over-year decline of 8% in airfreight and 4% in ocean freight.

Frequently Asked Questions

Expeditors views its decision not to pursue acquisitions or implement layoffs during the 2008-2009 period as a strategically sound and operationally/financially vindicating choice. They believe these decisions, despite criticism from market pundits, were 'spot-on' and avoided potential operational and financial burdens.

Expeditors has a long-standing policy (since 1993) of repatriating all foreign earnings to the U.S. and accruing for worldwide taxes as income is earned. This means the cash is not restricted by tax policy and is deployed based on sound treasury strategy. Taxes paid overseas are taken as credits against U.S. tax obligations, preventing double taxation. The company estimates about $700 million in unrepatriated earnings, but this is managed for operational capital needs rather than being held back due to tax concerns.

The rise in 'Other' operating expenses in the second quarter of 2011 was primarily attributed to increased revenue-based taxes in China and other jurisdictions as governments sought to bolster tax revenues. Additionally, there were expected increases in computer and related maintenance costs, and a lower amount of bad debt recoveries compared to the second quarter of 2010.

The difference is explained by the region's orientation (inbound vs. export) and how profits are shared between origin and destination offices. Latin America, being more inbound-oriented, shows a higher net revenue to gross revenue ratio. Asia Pacific, being more export-oriented, has a lower ratio. This also reflects the company's revenue recognition policies and profit-sharing or commission methods used in different freight modes and regions.