0001564590-20-022492.txt : 20200507 0001564590-20-022492.hdr.sgml : 20200507 20200507110510 ACCESSION NUMBER: 0001564590-20-022492 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 44 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200507 DATE AS OF CHANGE: 20200507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPEDITORS INTERNATIONAL OF WASHINGTON INC CENTRAL INDEX KEY: 0000746515 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 911069248 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13468 FILM NUMBER: 20855155 BUSINESS ADDRESS: STREET 1: 1015 THIRD AVENUE CITY: SEATTLE STATE: WA ZIP: 98104 BUSINESS PHONE: 2066743400 MAIL ADDRESS: STREET 1: 1015 THIRD AVENUE CITY: SEATTLE STATE: WA ZIP: 98104 10-Q 1 expd-10q_20200331.htm 10-Q expd-10q_20200331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to

Commission File Number: 0-13468

 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1069248

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

 

 

1015 Third Avenue, Seattle, Washington

 

98104

(Address of principal executive offices)

 

(Zip Code)

 

(Registrant’s telephone number, including area code): (206) 674-3400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

EXPD

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

At May 4, 2020, the number of shares outstanding of the issuer’s common stock was 166,426,186.

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets:

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,111,973

 

 

$

1,230,491

 

Accounts receivable, less allowance for credit loss of

   $3,578 at March 31, 2020 and $11,143 at December 31, 2019

 

 

1,268,798

 

 

 

1,315,091

 

Deferred contract costs

 

 

143,986

 

 

 

131,783

 

Other

 

 

94,060

 

 

 

92,558

 

Total current assets

 

 

2,618,817

 

 

 

2,769,923

 

Property and equipment, less accumulated depreciation and

   amortization of $481,490 at March 31, 2020 and $478,906 at

   December 31, 2019

 

 

484,588

 

 

 

499,344

 

Operating lease right-of-use assets

 

 

372,748

 

 

 

390,035

 

Goodwill

 

 

7,927

 

 

 

7,927

 

Deferred federal and state income taxes, net

 

 

9,680

 

 

 

8,034

 

Other assets, net

 

 

16,207

 

 

 

16,621

 

Total assets

 

$

3,509,967

 

 

$

3,691,884

 

Liabilities:

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

700,944

 

 

$

735,695

 

Accrued expenses, primarily salaries and related costs

 

 

201,756

 

 

 

189,446

 

Contract liabilities

 

 

170,866

 

 

 

154,183

 

Current portion of operating lease liabilities

 

 

63,748

 

 

 

65,367

 

Federal, state and foreign income taxes

 

 

21,864

 

 

 

23,627

 

Total current liabilities

 

 

1,159,178

 

 

 

1,168,318

 

Noncurrent portion of operating lease liabilities

 

 

313,644

 

 

 

326,347

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, none issued

 

 

 

 

 

Common stock, par value $0.01 per share. Issued and

   outstanding: 166,193 shares at March 31, 2020 and 169,622

   shares at December 31, 2019

 

 

1,662

 

 

 

1,696

 

Additional paid-in capital

 

 

682

 

 

 

3,203

 

Retained earnings

 

 

2,202,208

 

 

 

2,321,316

 

Accumulated other comprehensive loss

 

 

(169,746

)

 

 

(131,187

)

Total shareholders’ equity

 

 

2,034,806

 

 

 

2,195,028

 

Noncontrolling interest

 

 

2,339

 

 

 

2,191

 

Total equity

 

 

2,037,145

 

 

 

2,197,219

 

Total liabilities and equity

 

$

3,509,967

 

 

$

3,691,884

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Airfreight services

 

$

709,039

 

 

$

714,901

 

Ocean freight and ocean services

 

 

493,427

 

 

 

568,641

 

Customs brokerage and other services

 

 

699,398

 

 

 

736,509

 

Total revenues

 

 

1,901,864

 

 

 

2,020,051

 

Operating Expenses:

 

 

 

 

 

 

 

 

Airfreight services

 

 

520,169

 

 

 

509,210

 

Ocean freight and ocean services

 

 

366,483

 

 

 

420,331

 

Customs brokerage and other services

 

 

400,076

 

 

 

436,396

 

Salaries and related

 

 

342,040

 

 

 

356,910

 

Rent and occupancy

 

 

42,524

 

 

 

41,523

 

Depreciation and amortization

 

 

12,660

 

 

 

13,393

 

Selling and promotion

 

 

8,243

 

 

 

11,076

 

Other

 

 

50,614

 

 

 

43,611

 

Total operating expenses

 

 

1,742,809

 

 

 

1,832,450

 

Operating income

 

 

159,055

 

 

 

187,601

 

Other Income (Expense):

 

 

 

 

 

 

 

 

Interest income

 

 

4,807

 

 

 

6,106

 

Other, net

 

 

3,384

 

 

 

1,665

 

Other income, net

 

 

8,191

 

 

 

7,771

 

Earnings before income taxes

 

 

167,246

 

 

 

195,372

 

Income tax expense

 

 

44,464

 

 

 

55,261

 

Net earnings

 

 

122,782

 

 

 

140,111

 

Less net earnings attributable to the noncontrolling

   interest

 

 

438

 

 

 

412

 

Net earnings attributable to shareholders

 

$

122,344

 

 

$

139,699

 

Diluted earnings attributable to shareholders per share

 

$

0.71

 

 

$

0.80

 

Basic earnings attributable to shareholders per share

 

$

0.73

 

 

$

0.81

 

Weighted average diluted shares outstanding

 

 

171,450

 

 

 

175,388

 

Weighted average basic shares outstanding

 

 

168,735

 

 

 

171,818

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Net earnings

 

$

122,782

 

 

$

140,111

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax expense of

   $1,174 and $521 for the three months ended

   March 31, 2020 and 2019

 

 

(38,849

)

 

 

1,365

 

Other comprehensive (loss) income

 

 

(38,849

)

 

 

1,365

 

Comprehensive income

 

 

83,933

 

 

 

141,476

 

Less comprehensive income attributable to the

   noncontrolling interest

 

 

148

 

 

 

282

 

Comprehensive income attributable to shareholders

 

$

83,785

 

 

$

141,194

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

122,782

 

 

$

140,111

 

Adjustments to reconcile net earnings to net cash from

   operating activities:

 

 

 

 

 

 

 

 

Provisions for losses (recoveries) on accounts receivable

 

 

1,820

 

 

 

(1,888

)

Deferred income tax (benefit) expense

 

 

(5,139

)

 

 

2,108

 

Stock compensation expense

 

 

11,156

 

 

 

13,382

 

Depreciation and amortization

 

 

12,660

 

 

 

13,393

 

Other, net

 

 

433

 

 

 

189

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

16,680

 

 

 

230,477

 

Increase (decrease) in accounts payable and accrued

   expenses

 

 

917

 

 

 

(122,283

)

(Increase) decrease in deferred contract costs

 

 

(16,068

)

 

 

31,259

 

Increase (decrease) in contract liabilities

 

 

21,201

 

 

 

(36,725

)

Increase in income taxes payable, net

 

 

10,488

 

 

 

16,993

 

(Increase) decrease in other, net

 

 

(11,930

)

 

 

2,467

 

Net cash from operating activities

 

 

165,000

 

 

 

289,483

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(6,127

)

 

 

(9,435

)

Other, net

 

 

(143

)

 

 

255

 

Net cash from investing activities

 

 

(6,270

)

 

 

(9,180

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

23,399

 

 

 

27,190

 

Repurchases of common stock

 

 

(283,240

)

 

 

(44,334

)

Payments for taxes related to net share settlement of equity

   awards

 

 

(1,396

)

 

 

 

Net cash from financing activities

 

 

(261,237

)

 

 

(17,144

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(16,011

)

 

 

2,535

 

Change in cash and cash equivalents

 

 

(118,518

)

 

 

265,694

 

Cash and cash equivalents at beginning of period

 

 

1,230,491

 

 

 

923,735

 

Cash and cash equivalents at end of period

 

$

1,111,973

 

 

$

1,189,429

 

Taxes Paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

35,304

 

 

$

37,253

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2020

   and 2019

 

Shares

 

 

Par

value

 

 

Additional

paid-in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders’

equity

 

 

Noncontrolling

interest

 

 

Total

equity

 

Balance at December 31, 2019

 

 

169,622

 

 

$

1,696

 

 

$

3,203

 

 

$

2,321,316

 

 

$

(131,187

)

 

$

2,195,028

 

 

$

2,191

 

 

$

2,197,219

 

Cumulative effect of accounting

   change

 

 

 

 

 

 

 

 

 

 

 

6,074

 

 

 

 

 

 

6,074

 

 

 

 

 

 

6,074

 

Shares issued under employee

   stock plans

 

 

571

 

 

 

6

 

 

 

21,997

 

 

 

 

 

 

 

 

 

22,003

 

 

 

 

 

 

22,003

 

Shares repurchased under provisions of

   stock repurchase plan

 

 

(4,000

)

 

 

(40

)

 

 

(35,799

)

 

 

(247,401

)

 

 

 

 

 

(283,240

)

 

 

 

 

 

(283,240

)

Stock compensation expense

 

 

 

 

 

 

 

 

11,156

 

 

 

 

 

 

 

 

 

11,156

 

 

 

 

 

 

11,156

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

122,344

 

 

 

 

 

 

122,344

 

 

 

438

 

 

 

122,782

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,559

)

 

 

(38,559

)

 

 

(290

)

 

 

(38,849

)

Dividends paid

 

 

 

 

 

 

 

 

125

 

 

 

(125

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

166,193

 

 

$

1,662

 

 

$

682

 

 

$

2,202,208

 

 

$

(169,746

)

 

$

2,034,806

 

 

$

2,339

 

 

$

2,037,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

171,582

 

 

$

1,716

 

 

$

1,896

 

 

$

2,088,707

 

 

$

(105,481

)

 

$

1,986,838

 

 

$

882

 

 

$

1,987,720

 

Shares issued under employee

   stock plans

 

 

654

 

 

 

6

 

 

 

27,184

 

 

 

 

 

 

 

 

 

27,190

 

 

 

 

 

 

27,190

 

Shares repurchased under provisions of

   stock repurchase plans

 

 

(588

)

 

 

(6

)

 

 

(38,484

)

 

 

(5,844

)

 

 

 

 

 

(44,334

)

 

 

 

 

 

(44,334

)

Stock compensation expense

 

 

 

 

 

 

 

 

13,382

 

 

 

 

 

 

 

 

 

13,382

 

 

 

 

 

 

13,382

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

139,699

 

 

 

 

 

 

139,699

 

 

 

412

 

 

 

140,111

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,495

 

 

 

1,495

 

 

 

(130

)

 

 

1,365

 

Balance at March 31, 2019

 

 

171,648

 

 

$

1,716

 

 

$

3,978

 

 

$

2,222,562

 

 

$

(103,986

)

 

$

2,124,270

 

 

$

1,164

 

 

$

2,125,434

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1. Summary of Significant Accounting Policies

 

A.

Basis of Presentation

Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, industrial and manufacturing companies around the world.

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 21, 2020.

All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified.

 

B.

Revenue Recognition

The Company derives its revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by the customer. The Company's three principal services are the revenue categories presented in the condensed consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.

The Company typically satisfies its performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. The Company measures the performance of its obligations as services are completed over the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two month-period and contracts with customers have an original expected duration of less than one year. The Company satisfied nearly all performance obligations for the contract liabilities recorded as of December 31, 2019.

Beginning in the second quarter 2019, the Company revised its presentation for revenue transfers between its geographic operating segments and services rendered at the destination, which moved certain revenues and directly related operating expenses for air and ocean transactions to destination services within customs brokerage and other services. These changes better align revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment operating income. The impact on reported consolidated and segment total revenues and expenses for these changes was immaterial and first quarter 2019 presentation has not been revised.

 

C.

Leases

The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As the Company's leases generally do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on market information available at the commencement date to determine the present value. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from ROU assets and lease liabilities, to the extent not considered fixed, and instead expense variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses on the condensed consolidated statement of earnings.

7


 

 

D.

Accounts Receivable

Effective January 1, 2020, the Company adopted a new accounting standard update related to the measurement of credit losses on financial instruments. The adoption had an immaterial effect on the Company’s consolidated financial statements and disclosures. Under this new standard, the valuation allowance reduces a financial asset’s balance for credit losses expected to be incurred over the assets contractual term. The Company determined that this new guidance is applicable to its accounts receivable, which are short term and for which the Company has not historically experienced significant credit losses. The Company adopted this standard using the modified retrospective transition method resulting in a $6 million adjustment to the opening balance of retained earnings and an $8 million reduction to the opening balance of allowance for credit loss. The Company’s trade accounts receivable present similar credit risk characteristics and the allowance for credit loss is estimated on a collective basis, using a credit loss-rate method leveraging historical credit loss information and including considerations of the current economic environment. Additional allowances may be necessary in the future if changes in economic conditions are significant enough to affect expected credit losses. The Company has recorded an allowance for credit loss in the amounts of $3,578 as of March 31, 2020 and $11,143 as of December 31, 2019. Additions and write-offs have not been significant in the periods presented.

 

E.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. Actual results could be materially different from the estimated provisions and accruals recorded.

 

F.

Recent Accounting Pronouncement

 

In December 2019, the FASB issued an ASU, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. This standard will become effective for the Company on January 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

 

Note 2. Share-Based Compensation

The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. During the three months ended March 31, 2020 and 2019, the Company did not grant any share-based awards.

The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year. No shares were issued under the employee stock purchase plan in the three months ended March 31, 2020 and 2019.

The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s omnibus incentive, stock option and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the condensed consolidated statements of earnings. Restricted stock units and performance share units awarded to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately as there is no substantive service period associated with those awards.

8


 

Note 3. Income Taxes

During 2019, the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. The Company expects that additional guidance will continue to be issued in future periods. As this guidance is issued, the Company will continue to evaluate the information to determine whether any additional adjustments to its tax provisions are required.

The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. For the three months ended March 31, 2020 and 2019, there was no BEAT expense and GILTI expense was insignificant.

 

The Company’s consolidated effective income tax rate was 26.6% for the three months ended March 31, 2020, as compared to 28.3% for the comparable period in 2019. The effect of higher average tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were partially offset by U.S. foreign tax credits and U.S. income tax deductions for Foreign-derived intangible income (FDII).  

 

The Company is subject to taxation in various states and many foreign jurisdictions including the People’s Republic of China, including Hong Kong, Taiwan, Vietnam, India, Mexico, Canada, Netherlands and the United Kingdom. The Company believes that its tax positions, including intercompany transfer pricing policies, are reasonable and consistently applied. The Company is under, or may be subject to, audit or examination and assessments by the relevant authorities in respect to these and any other jurisdictions primarily for years 2009 and thereafter. Sometimes audits result in proposed assessments where the ultimate resolution could result in significant additional tax, penalties and interest payments being required. The Company establishes liabilities when, despite its belief that the tax return positions are appropriate and consistent with tax law, it concludes that it may not be successful in realizing the tax position. In evaluating a tax position, the Company determines whether it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position and in consultation with qualified tax advisors.

 

The total amount of the Company’s tax contingencies may increase in 2020. In addition, changes in state, federal, and foreign tax laws and changes in interpretations of these laws may increase the Company’s existing tax contingencies. The timing of the resolution of income tax examinations can be highly uncertain, and the amounts ultimately paid including interest and penalties, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts recorded. It is reasonably possible that within the next twelve months the Company may undergo further audits and examinations by various tax authorities and possibly may reach resolution related to income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to the Company’s contingencies related to positions on tax filings in future years. The estimate of any ultimate tax liability contains assumptions based on experiences, judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by the taxing jurisdiction. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three months ended March 31, 2020 and 2019.

As discussed above, some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury. As a result, the amount of income tax recorded in the future may differ, possibly materially. For further information and discussion of the potential impact of the 2017 Tax Act, refer to Note 7 to the consolidated financial statements in the Company's 2019 Annual Report on Form 10-K.

Note 4. Basic and Diluted Earnings per Share

Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.

9


 

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:

 

 

 

Three months ended March 31,

 

 

 

Net earnings

attributable to

shareholders

 

 

Weighted

average

shares

 

 

Earnings per

share

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

122,344

 

 

 

168,735

 

 

$

0.73

 

Effect of dilutive potential common shares

 

 

 

 

 

2,715

 

 

 

 

Diluted earnings attributable to shareholders

 

$

122,344

 

 

 

171,450

 

 

$

0.71

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings attributable to shareholders

 

$

139,699

 

 

 

171,818

 

 

$

0.81

 

Effect of dilutive potential common shares

 

 

 

 

 

3,570

 

 

 

 

Diluted earnings attributable to shareholders

 

$

139,699

 

 

 

175,388

 

 

$

0.80

 

 

Substantially all outstanding potential common shares as of March 31, 2020 and 2019 were dilutive.

 

Note 5. Shareholders' Equity

The Company has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding common stock down to 160,000 shares. During the three months ended March 31, 2020, 4,000 shares were repurchased at an average price of $70.81 per share, compared to 500 shares at an average price of $75.64 per share during the same period in 2019. In the first quarter of 2019, the Company also repurchased 88 shares at an average price of $74.03 under a Non-discretionary Stock Repurchase Plan that expired in 2019.

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.

Subsequent to the end of first quarter 2020, on May 5, 2020, the Board of Directors declared a semi-annual dividend of $0.52 per share payable on June 15, 2020 to shareholders of record as of June 1, 2020.

Note 6. Fair Value of Financial Instruments

The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.

Cash and cash equivalents consist of the following:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and overnight deposits

 

$

440,121

 

 

$

440,121

 

 

$

417,456

 

 

$

417,456

 

Corporate commercial paper

 

 

635,697

 

 

 

636,169

 

 

 

775,504

 

 

 

776,356

 

Time deposits

 

 

36,155

 

 

 

36,155

 

 

 

37,531

 

 

 

37,531

 

Total cash and cash equivalents

 

$

1,111,973

 

 

$

1,112,445

 

 

$

1,230,491

 

 

$

1,231,343

 

 

The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).

10


 

Note 7. Contingencies

The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of March 31, 2020, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

Note 8. Business Segment Information

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, directly related cost of transportation and other expenses for each of the Company’s three primary sources of revenue, salaries and other operating expenses, operating income, identifiable assets, capital expenditures and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin.

Financial information regarding the Company’s operations by geographic area is as follows:

 

 

 

UNITED

STATES

 

 

OTHER

NORTH

AMERICA

 

 

LATIN

AMERICA

 

 

NORTH

ASIA

 

 

SOUTH

ASIA

 

 

EUROPE

 

 

MIDDLE

EAST,

AFRICA

AND

INDIA

 

 

ELIMI-

NATIONS

 

 

CONSOLI-

DATED

 

For the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

650,407

 

 

 

81,831

 

 

 

37,890

 

 

 

537,955

 

 

 

169,042

 

 

 

320,640

 

 

 

105,039

 

 

 

(940

)

 

 

1,901,864

 

Directly related cost of transportation and

   other expenses2

 

$

373,961

 

 

 

45,890

 

 

 

23,765

 

 

 

425,301

 

 

 

121,282

 

 

 

221,998

 

 

 

74,976

 

 

 

(445

)

 

 

1,286,728

 

Salaries and other operating expenses3

 

$

225,944

 

 

 

23,712

 

 

 

11,749

 

 

 

57,433

 

 

 

29,908

 

 

 

81,854

 

 

 

25,950

 

 

 

(469

)

 

 

456,081

 

Operating income

 

$

50,502

 

 

 

12,229

 

 

 

2,376

 

 

 

55,221

 

 

 

17,852

 

 

 

16,788

 

 

 

4,113

 

 

 

(26

)

 

 

159,055

 

Identifiable assets at period end

 

$

1,858,250

 

 

 

135,810

 

 

 

68,402

 

 

 

512,808

 

 

 

179,508

 

 

 

554,831

 

 

 

200,382

 

 

 

(24

)