8-KRegulation FD

EXPEDITORS INTERNATIONAL OF WASHINGTON INC 8-K Report, Regulation FD Disclosure (May 20, 2022)

Filed May 20, 2022For Securities:EXPD

Summary

This 8-K filing from Expeditors International of Washington Inc. (EXPD) provides an update on its operations, particularly in the wake of a significant cyber-attack that occurred in February 2022. The company confirms that while the majority of systems are back online and operational, residual effects and recovery efforts are ongoing. The cyber-attack had a notable impact on air freight tonnage in February and March, as the company temporarily lost the ability to generate necessary documentation and experienced customers shifting to competitors. Expeditors is actively working to re-establish connections and regain business, noting that most customers have re-engaged, though the re-engagement process varies by client. Beyond the cyber-attack, the filing addresses the company's procurement processes for air and ocean freight, emphasizing that their established methods of securing capacity have remained consistent despite market constraints. Expeditors utilizes a mix of long-term commitments with core carriers and shorter-term agreements or charters to manage volatility and secure capacity. The company also provides details on its incentive compensation programs for customer-facing employees, explaining how these programs are designed to encourage new business growth and employee retention, and affirming that high-performing employees are generally retained due to satisfaction with the incentive structure.

Key Highlights

  • 1The majority of Expeditors' core systems are back online following a February 2022 cyber-attack, allowing for the resumption of key services, though recovery efforts and system re-engagement are ongoing.
  • 2The cyber-attack caused a significant, albeit temporary, impact on air freight tonnage in late February and March, as the company faced system outages that prevented document generation and led some customers to use competitors.
  • 3Expeditors maintains its established procurement processes for air and ocean freight, relying on a blend of long-term carrier commitments and flexible, shorter-term agreements to secure capacity amidst market volatility.
  • 4The company's incentive compensation programs for sales and account management staff are designed to promote new business acquisition and retention through a 'smaller piece of a bigger pie' philosophy.
  • 5Expeditors reports no issues retaining high-performing employees, attributing this to the effectiveness of their incentive-based compensation programs and the attractiveness of their work environment in a service-oriented industry.
  • 6Personnel expenses, particularly commissions and bonuses, increased by 19% in the first quarter of 2022 compared to the prior year, driven by higher revenues, operating income, and a 10% headcount increase.
  • 7While some extraordinary bonuses were paid for contributions to cyber-attack recovery, these were managed within existing incentive compensation programs and did not cause distortions to base salaries or normal bonus accruals.

Frequently Asked Questions

The majority of Expeditors' core systems are now back online and operational, allowing the company to deliver its key services, including freight arrangement, customs, and distribution. However, the company is still navigating residual effects and incorporating learnings from the attack, with ongoing efforts to fully re-engage all systems and processes.

The cyber-attack severely impacted Expeditors' air freight product, particularly in late February and the first two weeks of March. The inability to generate necessary shipping documents and labels led customers to seek services from competitors. Expeditors assisted in this temporary transition, including releasing committed airline space to competitors, but has since re-established its allocations and is working to regain lost business.

Expeditors maintains a consistent procurement process, utilizing historical data and forecasts to secure capacity from core carriers through annual agreements. To manage market volatility, especially in air freight, they do not allocate 100% of forecasted volumes to core partners, supplementing with shorter-term commitments and charters. They also encourage customers to consider shorter pricing terms (up to 3 months) to accommodate market fluctuations.

Expeditors' philosophy is based on incentivizing employees to 'take a smaller piece of a bigger pie.' Their commission and bonus programs are tied to net revenue and account growth. They have found that high-performing employees are generally well-compensated under these programs and prefer to stay with the company rather than seek opportunities elsewhere, contributing to a strong employee tenure which they consider a key competitive advantage.