8-KRegulation FD

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report, Regulation FD Disclosure (Dec 4, 2018)

Filed December 4, 2018For Securities:EXPD

Summary

Expeditors International of Washington Inc. (EXPD) filed an 8-K on December 4, 2018, to disclose responses to selected inquiries received through November 9, 2018. The report addresses key investor concerns, including the potential impact of tariff implementation on inventory pre-loading and future demand volatility, as well as the company's strategy for managing ocean carrier relationships. EXPD emphasizes its strong partnerships with carriers, viewing them as mutually beneficial and essential for a sustainable business model. The company also provides updates on its operational focus, aiming for profitable growth by being more selective in the business it handles, which has led to profit margins growing faster than volumes. The filing also touches upon the potential impact of IMO 2020 regulations, noting that associated costs are expected to be passed on to customers. Regarding working capital, the company clarifies that its balance has decreased compared to prior periods and addresses advances made for duties and taxes. EXPD also explains the divergence in Air Freight (AF) volume growth in North Asia by highlighting a strategic shift towards more profitable business, rather than solely focusing on tonnage. Furthermore, the report addresses the company's effective tax rate, explaining that the lower rate in 2018 was influenced by factors such as stock option exercises, adjustments related to the 2017 Tax Act, and a state income tax refund, and therefore, the company will not be providing specific tax rate guidance for future periods.

Key Highlights

  • 1Expeditors (EXPD) is addressing investor inquiries concerning the impact of tariffs on inventory movements and future demand, indicating that while some pre-loading occurred in Q3, the extent and future impact remain uncertain.
  • 2The company reaffirms its strong, mutually beneficial relationships with ocean carriers, referring to them as 'service providers' and emphasizing their partnership approach to foster carrier success and preferred business treatment.
  • 3EXPD's strategy involves focusing on profitable business rather than just volume growth, leading to profit margins expanding at a faster rate than volumes, particularly noted in the North Asia Air Freight segment.
  • 4Ocean freight rates have been volatile, impacting yield compression in ocean freight consolidation, but EXPD states there is no correlation between this and direct ocean freight forwarding, which is a fixed-rate service.
  • 5The company expects to pass on costs associated with IMO 2020 regulations to its customers.
  • 6Working capital intensity has decreased compared to prior periods, and the company clarifies its practice of extending payment terms for certain customers and making significant cash advances for duties and taxes.
  • 7The effective tax rate for the nine months ended September 30, 2018, was 26.1%, significantly lower than the prior year's 37.1%, driven by the 2017 Tax Act, stock option exercises, and a state tax refund. EXPD is not providing specific future tax rate guidance due to ongoing interpretations and factors.

Frequently Asked Questions

Expeditors is aware that some customers moved shipments in Q3 to avoid potential tariff increases and logically expects similar behavior before final implementation. However, they cannot quantify the amount of product moved forward or the percentage of customers participating. Due to this uncertainty and their policy of not discussing current or forward-looking quarters, they are unable to precisely assess the impact on future demand.

Expeditors considers its relationships with ocean carriers, whom they refer to as 'service providers,' to be excellent and believes they are partners. They strive to ensure timely payments, fair rates, and efficient processes, aiming to be a low-cost customer that carriers prefer to do business with. They also support carriers' efforts to manage capacity, viewing it as essential for a sustainable business model.

The company attributes the 5% reduction in North Asia AF volume growth to a deliberate strategic shift. Expeditors has become more selective in the business it handles, prioritizing profitable operations over simply increasing tonnage. This focus has resulted in profit margins growing at a faster pace than volumes, which they view as sound operational management.

The effective tax rate for the first nine months of 2018 was 26.1%, down from 37.1% in the same period of 2017. This decrease was influenced by the lower U.S. federal tax rate, significant deductions from stock option exercises, discrete adjustments from interpretations of the 2017 Tax Act, and a state income tax refund. Due to ongoing interpretations and potential changes, Expeditors is not providing specific tax rate guidance for the remainder of 2018 or for 2019.