UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
o |
|
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 |
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(State or other jurisdiction of |
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(IRS Employer Identification Number) |
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incorporation or organization) |
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1015 Third Avenue, 12th Floor, Seattle, Washington |
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98104 |
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(Address of principal executive offices) |
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(Zip Code) |
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(206)
674-3400
(Registrants telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
At November 6, 2006, the number of shares outstanding of the issuers Common Stock was 213,170,373.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
|
|
September 30, |
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December 31, |
|
||
Assets |
|
|
|
|
|
||
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
499,529 |
|
$ |
463,894 |
|
Short-term investments |
|
386 |
|
123 |
|
||
Accounts receivable, less allowance for doubtful accounts of $13,280 at September 30, 2006 and $12,777 at December 31, 2005 |
|
812,224 |
|
709,331 |
|
||
Deferred Federal and state income taxes |
|
8,717 |
|
7,208 |
|
||
Other current assets |
|
14,161 |
|
21,405 |
|
||
|
|
|
|
|
|
||
Total current assets |
|
1,335,017 |
|
1,201,961 |
|
||
|
|
|
|
|
|
||
Property and equipment, less accumulated depreciation and amortization of $170,228 at September 30, 2006 and $152,304 at December 31, 2005 |
|
445,964 |
|
333,787 |
|
||
Goodwill, less accumulated amortization of $765 at September 30, 2006 and December 31, 2005 |
|
7,774 |
|
7,774 |
|
||
Other intangibles, net |
|
7,957 |
|
8,997 |
|
||
Other assets, net |
|
14,952 |
|
13,525 |
|
||
|
|
|
|
|
|
||
|
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$ |
1,811,664 |
|
$ |
1,566,044 |
|
|
|
|
|
|
|
||
Liabilities and Shareholders Equity |
|
|
|
|
|
||
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable |
|
562,592 |
|
479,546 |
|
||
Accrued expenses, primarily salaries and related costs |
|
135,467 |
|
103,674 |
|
||
Federal, state and foreign income taxes |
|
36,225 |
|
29,281 |
|
||
|
|
|
|
|
|
||
Total current liabilities |
|
734,284 |
|
612,501 |
|
||
|
|
|
|
|
|
||
Deferred Federal and state income taxes |
|
34,430 |
|
13,278 |
|
||
|
|
|
|
|
|
||
Minority interest |
|
21,338 |
|
13,883 |
|
||
|
|
|
|
|
|
||
Shareholders equity: |
|
|
|
|
|
||
Preferred stock, par value $.01 per share |
|
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|
|
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||
Authorized 2,000,000 shares; none issued |
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||
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|
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Common stock, par value $.01 per share |
|
|
|
|
|
||
Authorized 320,000,000 shares; issued and outstanding 213,121,366 shares at September 30, 2006, and 213,227,042 shares at December 31, 2005 |
|
2,131 |
|
2,132 |
|
||
Additional paid-in capital |
|
120,343 |
|
180,905 |
|
||
Retained earnings |
|
894,893 |
|
745,984 |
|
||
Accumulated other comprehensive income |
|
4,245 |
|
(2,639 |
) |
||
|
|
|
|
|
|
||
Total shareholders equity |
|
1,021,612 |
|
926,382 |
|
||
|
|
|
|
|
|
||
Commitments and contingencies |
|
|
|
|
|
||
|
|
$ |
1,811,664 |
|
$ |
1,566,044 |
|
See accompanying notes to condensed consolidated financial statements.
Certain 2005 amounts have been restated as required by the modified retrospective method in connection with the implementation of FAS 123R and other amounts have been reclassified to conform to the 2006 presentation.
All share and per share amounts have been adjusted for the 2-for-1 stock split effective June 2006.
2
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Earnings
(In thousands, except share data)
(Unaudited)
|
Three months ended |
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Nine months ended |
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|||||||||
|
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2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Airfreight |
|
$ |
575,285 |
|
$ |
478,294 |
|
$ |
1,611,556 |
|
$ |
1,272,392 |
|
Ocean freight and ocean services |
|
433,212 |
|
383,975 |
|
1,158,151 |
|
1,018,053 |
|
||||
Customs brokerage and other services |
|
221,226 |
|
184,173 |
|
613,932 |
|
509,160 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
1,229,723 |
|
1,046,442 |
|
3,383,639 |
|
2,799,605 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
Airfreight consolidation |
|
453,246 |
|
377,758 |
|
1,263,803 |
|
992,465 |
|
||||
Ocean freight consolidation |
|
343,909 |
|
308,385 |
|
915,568 |
|
829,614 |
|
||||
Customs brokerage and other services |
|
93,230 |
|
78,374 |
|
255,163 |
|
214,258 |
|
||||
Salaries and related costs |
|
183,995 |
|
155,450 |
|
517,422 |
|
433,965 |
|
||||
Rent and occupancy costs |
|
13,877 |
|
13,993 |
|
40,972 |
|
41,197 |
|
||||
Depreciation and amortization |
|
9,341 |
|
7,840 |
|
26,020 |
|
22,782 |
|
||||
Selling and promotion |
|
8,484 |
|
7,059 |
|
25,398 |
|
21,725 |
|
||||
Other |
|
22,384 |
|
20,147 |
|
63,832 |
|
56,985 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
1,128,466 |
|
969,006 |
|
3,108,178 |
|
2,612,991 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
101,257 |
|
77,436 |
|
275,461 |
|
186,614 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
(4 |
) |
(14 |
) |
(41 |
) |
(262 |
) |
||||
Interest income |
|
4,236 |
|
3,031 |
|
12,900 |
|
7,903 |
|
||||
Other, net |
|
743 |
|
1,355 |
|
2,875 |
|
3,425 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other income, net |
|
4,975 |
|
4,372 |
|
15,734 |
|
11,066 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Earnings before income taxes and minority interest |
|
106,232 |
|
81,808 |
|
291,195 |
|
197,680 |
|
||||
Income tax expense |
|
47,133 |
|
31,344 |
|
119,688 |
|
77,090 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings before minority interest |
|
$ |
59,099 |
|
$ |
50,464 |
|
$ |
171,507 |
|
$ |
120,590 |
|
|
|
|
|
|
|
|
|
|
|
||||
Minority interest |
|
4,704 |
|
(2,060 |
) |
977 |
|
(4,442 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
63,803 |
|
$ |
48,404 |
|
$ |
172,484 |
|
$ |
116,148 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per share |
|
$ |
.29 |
|
$ |
.22 |
|
$ |
.78 |
|
$ |
.53 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per share |
|
$ |
.30 |
|
$ |
.23 |
|
$ |
.81 |
|
$ |
.54 |
|
|
|
|
|
|
|
|
|
|
|
||||
Dividends declared per common share |
|
$ |
|
|
$ |
|
|
$ |
.11 |
|
$ |
.075 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average diluted shares outstanding |
|
221,417,053 |
|
221,334,628 |
|
220,539,975 |
|
220,901,210 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic shares outstanding |
|
213,524,680 |
|
213,737,374 |
|
213,557,892 |
|
213,583,128 |
|
See accompanying notes to condensed consolidated financial statements.
Certain 2005 amounts have been restated as required by the modified retrospective method in connection with the implementation of FAS 123R and other amounts have been reclassified to conform to the 2006 presentation.
All share and per share amounts have been adjusted for the 2-for-1 stock split effective June 2006.
3
EXPEDITORS
INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Operating activities: |
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
63,803 |
|
$ |
48,404 |
|
$ |
172,484 |
|
$ |
116,148 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
||||
Provision for losses on accounts receivable |
|
259 |
|
782 |
|
752 |
|
424 |
|
||||
Deferred income tax expense |
|
4,572 |
|
6,111 |
|
38,169 |
|
21,013 |
|
||||
Excess tax benefits from employee stock plans |
|
(1,194 |
) |
(1,919 |
) |
(22,202 |
) |
(8,241 |
) |
||||
Stock compensation expense |
|
11,813 |
|
8,364 |
|
29,629 |
|
25,048 |
|
||||
Depreciation and amortization |
|
9,341 |
|
7,840 |
|
26,020 |
|
22,782 |
|
||||
Gain on sale of property and equipment |
|
|
|
(811 |
) |
(214 |
) |
(856 |
) |
||||
Minority interest in earnings of consolidated entities |
|
(4,768 |
) |
2,087 |
|
(757 |
) |
3,890 |
|
||||
Other |
|
1,704 |
|
775 |
|
3,280 |
|
1,068 |
|
||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
||||
Increase in accounts receivable |
|
(66,758 |
) |
(97,236 |
) |
(95,757 |
) |
(98,884 |
) |
||||
Increase in other current assets |
|
14,011 |
|
9,015 |
|
7,711 |
|
7,269 |
|
||||
Increase in accounts payable and other current liabilities |
|
51,895 |
|
67,580 |
|
119,274 |
|
97,805 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
|
84,678 |
|
50,992 |
|
278,389 |
|
187,466 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Investing activities: |
|
|
|
|
|
|
|
|
|
||||
(Increase) decrease in short-term investments |
|
30 |
|
25 |
|
(253 |
) |
13 |
|
||||
Purchase of property and equipment |
|
(9,668 |
) |
(22,967 |
) |
(131,501 |
) |
(66,159 |
) |
||||
Proceeds from sale of property and equipment |
|
52 |
|
1,082 |
|
317 |
|
1,331 |
|
||||
Other |
|
(1,999 |
) |
77 |
|
(1,513 |
) |
(1,262 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash used in investing activities |
|
(11,585 |
) |
(21,783 |
) |
(132,950 |
) |
(66,077 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Financing activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds (repayments) of short-term debt, net |
|
|
|
37 |
|
|
|
(2,093 |
) |
||||
Proceeds from issuance of common stock |
|
19,353 |
|
21,153 |
|
45,373 |
|
32,228 |
|
||||
Repurchases of common stock |
|
(44,139 |
) |
(30,153 |
) |
(157,767 |
) |
(80,166 |
) |
||||
Excess tax benefits from employee stock plans |
|
1,194 |
|
1,919 |
|
22,202 |
|
8,241 |
|
||||
Net distributions to minority interests |
|
(4,053 |
) |
|
|
(4,053 |
) |
(133 |
) |
||||
Dividends paid |
|
|
|
|
|
(23,576 |
) |
(16,055 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash used in financing activities |
|
(27,645 |
) |
(7,044 |
) |
(117,821 |
) |
(57,978 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Effect of exchange rate changes on cash |
|
(613 |
) |
405 |
|
8,017 |
|
(10,951 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Increase in cash and cash equivalents |
|
44,835 |
|
22,570 |
|
35,635 |
|
52,460 |
|
||||
Cash and cash equivalents at beginning of period |
|
454,694 |
|
438,873 |
|
463,894 |
|
408,983 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
499,529 |
|
$ |
461,443 |
|
$ |
499,529 |
|
$ |
461,443 |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest and taxes paid: |
|
|
|
|
|
|
|
|
|
||||
Interest |
|
$ |
22 |
|
$ |
6 |
|
$ |
54 |
|
$ |
240 |
|
Income taxes |
|
17,713 |
|
10,297 |
|
60,764 |
|
38,857 |
|
See accompanying notes to condensed consolidated financial statements.
Certain 2005 amounts have been restated as required by the modified retrospective method in connection with the implementation of FAS 123R and other amounts have been reclassified to conform to the 2006 presentation.
4
EXPEDITORS INTERNATIONAL
OF WASHINGTON, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The attached 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 footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Companys Form 10-K as filed with the Securities and Exchange Commission on or about March 16, 2006.
Prior to January 1, 2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option and its employee stock purchase rights plans. Accordingly, no compensation cost had been recognized for its fixed stock option or employee stock purchase rights plans.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) using the modified retrospective transition method. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The Company has elected to restate all periods presented to include compensation expense for all unvested stock options and share awards. Accordingly, salaries and related costs for the three and nine-month periods ended September 30, 2005 have been increased to include compensation expense for the fair value of unvested stock options. See Note 6 for further discussion of the impact of the adoption of SFAS 123R on the consolidated balance sheet, the consolidated results of operations, earnings per share and consolidated statement of cash flows.
Certain 2005 amounts have been reclassified to conform to the 2006 presentation.
Comprehensive income consists of net income and other gains and losses affecting shareholders equity that, under generally accepted accounting principles in the United States, are excluded from net income. For the Company, these consist of foreign currency translation gains and losses and unrealized gains and losses on securities, net of related income tax effects.
The components of total comprehensive income for interim periods are presented in the following table:
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
(in thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
63,803 |
|
$ |
48,404 |
|
$ |
172,484 |
|
$ |
116,148 |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments net of tax of: $18 and $(18) for the three months ended September 30, 2006 and 2005, and $(3,714) and $6,235 for the nine months ended September 30, 2006 and 2005. |
|
(33 |
) |
32 |
|
6,897 |
|
(11,578 |
) |
||||
Unrealized loss on securities net of tax of $(14) and $4 for the three months ended September 30, 2006 and 2005, and $38 and $41 for the nine months ended September 30, 2006 and 2005. |
|
20 |
|
(6 |
) |
(13 |
) |
(57 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Total comprehensive income |
|
$ |
63,790 |
|
$ |
48,430 |
|
$ |
179,368 |
|
$ |
104,513 |
|
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information establishes standards for the way that public companies report selected information about segments in their financial statements.
The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. Transactions among the Companys various offices are conducted using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.
5
Financial information regarding the Companys operations by geographic area for the three and nine-months ended September 30, 2006 and 2005 are as follows:
(in thousands) |
|
UNITED |
|
OTHER |
|
ASIA |
|
EUROPE |
|
AUSTRALASIA |
|
LATIN |
|
MIDDLE |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|
Three months ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers |
|
$ |
240,300 |
|
30,085 |
|
709,222 |
|
160,565 |
|
14,595 |
|
17,305 |
|
57,651 |
|
|
|
1,229,723 |
|
Transfers between geographic areas |
|
29,516 |
|
2,136 |
|
4,266 |
|
8,335 |
|
1,573 |
|
2,092 |
|
3,082 |
|
(51,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
269,816 |
|
32,221 |
|
713,488 |
|
168,900 |
|
16,168 |
|
19,397 |
|
60,733 |
|
(51,000 |
) |
1,229,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
136,810 |
|
15,251 |
|
101,202 |
|
54,412 |
|
8,403 |
|
8,388 |
|
14,872 |
|
|
|
339,338 |
|
Operating income |
|
$ |
27,313 |
|
3,718 |
|
50,380 |
|
11,998 |
|
2,311 |
|
1,546 |
|
3,991 |
|
|
|
101,257 |
|
Identifiable assets at quarter end |
|
$ |
854,409 |
|
67,458 |
|
415,273 |
|
349,654 |
|
27,506 |
|
33,518 |
|
63,802 |
|
44 |
|
1,811,664 |
|
Capital expenditures |
|
$ |
6,378 |
|
226 |
|
799 |
|
1,430 |
|
29 |
|
269 |
|
537 |
|
|
|
9,668 |
|
Depreciation and amortization |
|
$ |
4,976 |
|
318 |
|
1,369 |
|
1,738 |
|
197 |
|
406 |
|
337 |
|
|
|
9,341 |
|
Equity |
|
$ |
1,165,850 |
|
27,797 |
|
307,047 |
|
102,363 |
|
16,065 |
|
13,533 |
|
27,779 |
|
(638,822 |
) |
1,021,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers |
|
$ |
199,139 |
|
25,354 |
|
616,305 |
|
133,297 |
|
12,372 |
|
14,500 |
|
45,475 |
|
|
|
1,046,442 |
|
Transfers between geographic areas |
|
25,313 |
|
1,547 |
|
3,511 |
|
6,368 |
|
1,492 |
|
1,999 |
|
2,173 |
|
(42,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
224,452 |
|
26,901 |
|
619,816 |
|
139,665 |
|
13,864 |
|
16,499 |
|
47,648 |
|
(42,403 |
) |
1,046,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
115,242 |
|
12,036 |
|
84,226 |
|
44,837 |
|
7,559 |
|
7,095 |
|
10,930 |
|
|
|
281,925 |
|
Operating income |
|
$ |
21,127 |
|
1,475 |
|
43,083 |
|
7,344 |
|
2,030 |
|
1,419 |
|
958 |
|
|
|
77,436 |
|
Identifiable assets at quarter end |
|
$ |
705,474 |
|
55,849 |
|
372,276 |
|
304,809 |
|
25,636 |
|
26,573 |
|
43,848 |
|
7,408 |
|
1,541,873 |
|
Capital expenditures |
|
$ |
20,333 |
|
204 |
|
767 |
|
913 |
|
135 |
|
330 |
|
285 |
|
|
|
22,967 |
|
Depreciation and amortization |
|
$ |
3,875 |
|
377 |
|
1,192 |
|
1,529 |
|
191 |
|
312 |
|
364 |
|
|
|
7,840 |
|
Equity |
|
$ |
950,642 |
|
21,120 |
|
279,106 |
|
89,116 |
|
16,713 |
|
9,593 |
|
20,202 |
|
(504,752 |
) |
881,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers |
|
$ |
689,680 |
|
88,720 |
|
1,894,933 |
|
457,198 |
|
40,383 |
|
50,215 |
|
162,510 |
|
|
|
3,383,639 |
|
Transfers between geographic areas |
|
82,443 |
|
5,828 |
|
12,120 |
|
23,560 |
|
4,603 |
|
6,096 |
|
8,144 |
|
(142,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
772,123 |
|
94,548 |
|
1,907,053 |
|
480,758 |
|
44,986 |
|
56,311 |
|
170,654 |
|
(142,794 |
) |
3,383,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
388,670 |
|
45,804 |
|
270,896 |
|
156,345 |
|
23,827 |
|
23,862 |
|
39,701 |
|
|
|
949,105 |
|
Operating income |
|
$ |
80,059 |
|
10,921 |
|
132,519 |
|
32,622 |
|
6,419 |
|
4,485 |
|
8,436 |
|
|
|
275,461 |
|
Identifiable assets at period end |
|
$ |
854,409 |
|
67,458 |
|
415,273 |
|
349,654 |
|
27,506 |
|
33,518 |
|
63,802 |
|
44 |
|
1,811,664 |
|
Capital expenditures |
|
$ |
115,142 |
|
521 |
|
8,020 |
|
5,240 |
|
375 |
|
1,060 |
|
1,143 |
|
|
|
131,501 |
|
Depreciation and amortization |
|
$ |
13,461 |
|
1,014 |
|
3,769 |
|
5,003 |
|
584 |
|
1,153 |
|
1,036 |
|
|
|
26,020 |
|
Equity |
|
$ |
1,165,850 |
|
27,797 |
|
307,047 |
|
102,363 |
|
16,065 |
|
13,533 |
|
27,779 |
|
(638,822 |
) |
1,021,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers |
|
$ |
549,915 |
|
68,968 |
|
1,578,092 |
|
394,040 |
|
35,857 |
|
43,165 |
|
129,568 |
|
|
|
2,799,605 |
|
Transfers between geographic areas |
|
60,939 |
|
3,894 |
|
9,359 |
|
17,366 |
|
4,139 |
|
5,437 |
|
5,956 |
|
(107,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
610,854 |
|
72,862 |
|
1,587,451 |
|
411,406 |
|
39,996 |
|
48,602 |
|
135,524 |
|
(107,090 |
) |
2,799,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
311,261 |
|
36,231 |
|
211,777 |
|
131,731 |
|
21,328 |
|
19,638 |
|
31,302 |
|
|
|
763,268 |
|
Operating income |
|
$ |
48,391 |
|
6,276 |
|
100,227 |
|
19,107 |
|
5,250 |
|
3,650 |
|
3,713 |
|
|
|
186,614 |
|
Identifiable assets at period end |
|
$ |
705,474 |
|
55,849 |
|
372,276 |
|
304,809 |
|
25,636 |
|
26,573 |
|
43,848 |
|
7,408 |
|
1,541,873 |
|
Capital expenditures |
|
$ |
56,770 |
|
716 |
|
2,917 |
|
3,432 |
|
672 |
|
882 |
|
770 |
|
|
|
66,159 |
|
Depreciation and amortization |
|
$ |
11,097 |
|
1,106 |
|
3,578 |
|
4,541 |
|
517 |
|
859 |
|
1,084 |
|
|
|
22,782 |
|
Equity |
|
$ |
950,642 |
|
21,120 |
|
279,106 |
|
89,116 |
|
16,713 |
|
9,593 |
|
20,202 |
|
(504,752 |
) |
881,740 |
|
6
Note 4. Basic and Diluted Earnings per Share
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings per share for the three months and nine-months ended September 30, 2006 and 2005:
|
|
Three months ended September 30, |
|
||||||
(Amounts in thousands, except |
|
Net |
|
Weighted |
|
Earnings |
|
||
|
|
|
|
|
|
|
|
||
2006 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
63,803 |
|
213,524,680 |
|
$ |
.30 |
|
Effect of dilutive potential common shares |
|
|
|
7,892,373 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
63,803 |
|
221,417,053 |
|
$ |
.29 |
|
|
|
|
|
|
|
|
|
||
2005 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
48,404 |
|
213,737,374 |
|
$ |
.23 |
|
Effect of dilutive potential common shares |
|
|
|
7,597,254 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
48,404 |
|
221,334,628 |
|
$ |
.22 |
|
|
|
Nine months ended September 30, |
|
||||||
(Amounts in thousands, except |
|
Net |
|
Weighted |
|
Earnings |
|
||
|
|
|
|
|
|
|
|
||
2006 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
172,484 |
|
213,557,892 |
|
$ |
.81 |
|
Effect of dilutive potential common shares |
|
|
|
6,982,083 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
172,484 |
|
220,539,975 |
|
$ |
.78 |
|
|
|
|
|
|
|
|
|
||
2005 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
116,148 |
|
213,583,128 |
|
$ |
.54 |
|
Effect of dilutive potential common shares |
|
|
|
7,318,082 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
116,148 |
|
220,901,210 |
|
$ |
.53 |
|
The following shares have been excluded from the computation of diluted earnings per share because the effect would have been antidilutive:
|
|
Three months ended |
|
Nine months ended |
|
||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
128,000 |
|
500 |
|
128,000 |
|
500 |
|
On May 3, 2006, the Board of Directors declared a 2-for-1 stock split, effected in the form of a stock dividend of one share of common stock for every share outstanding. The stock dividend was distributed on June 23, 2006 to shareholders of record on June 9, 2006. All share and per share information, except par value per share, has been adjusted for all years to reflect the stock split.
7
On May 3, 2006, the Board of Directors declared a semi-annual cash dividend of $.11 per share payable on June 15, 2006 to shareholders of record as of June 1, 2006. The dividend of $24 million was paid on June 15, 2006.
On May 9, 2005, the Board of Directors declared a semi-annual cash dividend of $.075 per share payable on June 15, 2005 to shareholders of record as of June 1, 2005. The dividend of $16 million was paid on June 15, 2005.
A. Stock Option Plans
At September 30, 2006, the Company has two stock option plans (the 1985 Plan and the 2006 Plan) for employees under which the Board of Directors may grant officers and key employees options to purchase common stock at prices equal to or greater than market value on the date of grant. On May 3, 2006, the shareholders approved the Companys 2006 Plan, which made available a total of 3,000,000 shares of the Companys common stock for purchase upon exercise of options granted under the 2006 Plan. The 1985 Plan provides for non-qualified grants. The 2006 Plan provides for qualified and non-qualified grants. Under the 1985, 2005 and 2006 Plans, outstanding options generally vest and become exercisable over periods up to five years from the date of grant and expire no more than 10 years from the date of grant. Grants under the 2006 Plan are limited to not more than 100,000 shares per person. No additional shares can be granted under the 2006 Plan after April 30, 2007. Under the terms of the 2005 and 2006 Plans, no options can be granted after April 30th of the year following shareholder approval. Accordingly, no options were granted under the 2005 Plan after April 30, 2006.
The Company also has a stock option plan (Directors Plan) under which non-employee directors elected at each annual meeting are granted non-qualified options to purchase 32,000 shares of common stock at prices equal to the market value on the date of grant on the first business day of the month following the meeting. On May 3, 2006, the Directors Plan was amended by shareholder vote to require a one year vesting period. Previously options granted under the Directors Plan vested immediately.
Upon the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options, the Company derives a tax deduction measured by the excess of the market value over the option price at the date of disqualifying disposition. The portion of the benefit from the deduction which equals the estimated fair value of the options (previously recognized as compensation expense) is recorded as a credit to the deferred tax asset for non-qualified stock options and is recorded as a credit to current tax expense for any disqualified dispositions of incentive stock options. All of the tax benefit received upon option exercise which exceeds the estimated fair value of the options is credited to additional paid-in capital.
B. Stock Purchase Plan
In May 2002, the shareholders approved the Companys 2002 Employee Stock Purchase Plan (2002 Plan), which became effective August 1, 2002 upon the expiration of the 1988 Employee Stock Purchase Plan (1988 Plan) on July 31, 2002. The Companys 2002 Plan provides for 4,305,452 shares of the Companys common stock, including 305,452 remaining shares transferred from the 1988 Plan, to be reserved for issuance upon exercise of purchase rights granted to employees who elect to participate through regular payroll deductions beginning August 1 of each year. The purchase rights are exercisable on July 31 of the following year at a price equal to the lesser of (1) 85% of the fair market value of the Companys stock on July 31 or (2) 85% of the fair market value of the Companys stock on the preceding August 1.
C. Adoption of SFAS 123R
As described in Note 1, effective January 1, 2006, the Company adopted SFAS 123R, requiring the recording of compensation expense based on an estimate of the fair value of options awarded under its fixed stock option or employee stock purchase rights plans. The Company elected to utilize the modified retrospective method of transitioning to SFAS 123R and has restated all prior periods to recognize the required stock compensation expense.
In applying the modified retrospective method, the Company has recorded compensation expense as previously stated in the Companys pro forma SFAS 123 disclosures in the footnotes to its prior period financial statements. The fair value of options used to determine this compensation expense was originally determined using the Black-Scholes model and no changes have been made to the compensation expense as originally stated in the pro forma disclosures. The original measurements and assumptions previously disclosed in the footnotes to the Companys financial statement included in its annual Form 10-K filings and, in more recent years, in its Form 10-Q filings, also have not been changed. In the process of recording the associated deferred tax assets related to this compensation expense, as required by SFAS 123R, the Company made its computations on a grant by grant basis. As a result of this exercise, the Company determined that the tax benefit amounts previously included in determining the disclosed pro forma net earnings figures, if actually recorded into the Companys financial statements, would have overstated deferred tax assets on the Companys balance sheet that would have been incorrect under the provisions of SFAS No. 109, Accounting for Income Taxes. Accordingly, in restating the results of prior years, management has elected to record adjustments to income tax expense and to properly record deferred tax assets.
8
Prior to the adoption of SFAS 123R, in the statement of cash flows, the tax benefits received by the Company from the exercise of certain employee stock options were added back to net earnings in determining net cash provided by operating activities. SFAS 123R requires a different presentation for that portion of the tax benefit received upon option exercise which exceeds the tax benefit originally recorded based on the estimated fair value of the options previously recognized as compensation expense. Accordingly, the Company has reclassified this excess tax benefit from cash provided by operating activities to cash provided by financing activities in the statement of cash flows.
The following tables summarize the adjustments to certain line items in the Companys consolidated financial statements as a result of adopting SFAS 123R for all periods presented:
Restated line items in the condensed consolidated balance sheet:
|
December 31, 2005 |
|
||||||||||
|
|
As |
|
SFAS No. |
|
Reclassifications |
|
As restated |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Deferred Federal and state income taxes |
|
$ |
25,939 |
|
$ |
(12,661 |
) |
|
|
$ |
13,278 |
|
|
|
|
|
|
|
|
|
|
|
|||
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|||
Additional paid-in capital |
|
18,663 |
|
162,242 |
|
|
|
180,905 |
|
|||
Retained earnings |
|
895,565 |
|
(149,581 |
) |
|
|
745,984 |
|
|||
Restated line items in the condensed consolidated statement of earnings:
|
Three months ended September 30, 2005 |
|
|||||||||||
|
|
As |
|
SFAS 123R |
|
Reclassifications |
|
As restated |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Salaries and related costs |
|
$ |
145,629 |
|
$ |
8,364 |
|
$ |
1,457 |
|
$ |
155,450 |
|
Other operating expenses |
|
21,604 |
|
|
|
(1,457 |
) |
20,147 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
960,642 |
|
8,364 |
|
|
|
969,006 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
85,800 |
|
(8,364 |
) |
|
|
77,436 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Earnings before income taxes and minority interest |
|
90,172 |
|
(8,364 |
) |
|
|
81,808 |
|
||||
Income tax expense |
|
32,343 |
|
(999 |
) |
|
|
31,344 |
|
||||
Net earnings before minority interest |
|
57,829 |
|
(7,365 |
) |
|
|
50,464 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
55,769 |
|
(7,365 |
) |
|
|
48,404 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per share |
|
$ |
.25 |
|
$ |
|
|
$ |
|
|
$ |
.22 |
|
Basic earnings per share |
|
$ |
.26 |
|
$ |
|
|
$ |
|
|
$ |
.23 |
|
|
Nine months ended September 30, 2005 |
|
|||||||||||
|
|
As |
|
|
|
Reclassifications |
|
As restated |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Salaries and related costs |
|
$ |
405,024 |
|
$ |
25,048 |
|
$ |
3,893 |
|
$ |
433,965 |
|
Other operating expenses |
|
60,877 |
|
|
|
(3,892 |
) |
56,985 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
2,587,943 |
|
25,048 |
|
|
|
2,612,991 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
211,662 |
|
(25,048 |
) |
|
|
186,614 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Earnings before income taxes and minority interest |
|
222,728 |
|
(25,048 |
) |
|
|
197,680 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income tax expense |
|
80,129 |
|
(3,039 |
) |
|
|
77,090 |
|
||||
Net earnings before minority interest |
|
142,599 |
|
(22,009 |
) |
|
|
120,590 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
138,157 |
|
(22,009 |
) |
|
|
116,148 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per share |
|
$ |
.62 |
|
$ |
|
|
$ |
|
|
$ |
.53 |
|
Basic earnings per share |
|
$ |
.65 |
|
$ |
|
|
$ |
|
|
$ |
.54 |
|
9
Restated line items in the condensed consolidated statement of cash flows:
|
Three months ended September 30, 2005 |
|
|||||||||||
|
|
As |
|
SFAS 123R |
|
Reclassifications |
|
As restated |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
55,769 |
|
$ |
(7,365 |
) |
|
|
$ |
48,404 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred income tax expense |
|
4,258 |
|
1,853 |
|
|
|
6,111 |
|
||||
Excess tax benefits from employee stock plans |
|
|
|
(1,919 |
) |
|
|
(1,919 |
) |
||||
Tax benefits from employee stock plans |
|
2,852 |
|
(2,852 |
) |
|
|
|
|
||||
Stock compensation expense |
|
|
|
8,364 |
|
|
|
8,364 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
|
52,911 |
|
(1,919 |
) |
|
|
50,992 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Excess tax benefits from employee stock plans |
|
|
|
1,919 |
|
|
|
1,919 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash used in financing activities |
|
$ |
(8,963 |
) |
$ |
1,919 |
|
$ |
|
|
$ |
(7,044 |
) |
|
Nine months ended September 30, 2005 |
|
||||||||||
|
|
As |
|
SFAS 123R |
|
Reclassifications |
|
As restated |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Net earnings |
|
$ |
138,157 |
|
$ |
(22,009 |
) |
|
|
$ |
116,148 |
|
|
|
|
|
|
|
|
|
|
|
|||
Deferred income tax expense |
|
12,245 |
|
8,768 |
|
|
|
21,013 |
|
|||
Excess tax benefits from employee stock plans |
|
|
|
(8,241 |
) |
|
|
(8,241 |
) |
|||
Tax benefits from employee stock plans |
|
11,807 |
|
(11,807 |
) |
|
|
|
|
|||
Stock compensation expense |
|
|
|
25,048 |
|
|
|
25,048 |
|
|||
Minority interest in earnings of consolidated entities |
|
3,757 |
|
|
|
133 |
|
3,890 |
|
|||
Net cash provided by operating activities |
|
195,574 |
|
(8,241 |
) |
133 |
|
187,466 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Excess tax benefits from employee stock plans |
|
|
|
8,241 |
|
|
|
8,241 |
|
|||
Net distributions to minority interests |
|
|
|
|
|
(133 |
) |
(133 |
) |
|||
Net cash used in financing activities |
|
$ |
(66,086 |
) |
$ |
8,241 |
|
(133 |
) |
$ |
(57,978 |
) |
The following tables summarize information about fixed-price stock options for the nine months ended September 30, 2006:
|
Number of |
|
Weighted |
|
Weighted |
|
Aggregate |
|
|||
|
|
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2005 |
|
22,266,646 |
|
$ |
14.64 |
|
|
|
|
|
|
Options granted |
|
3,108,100 |
|
44.20 |
|
|
|
|
|
||
Options exercised |
|
(2,678,533 |
) |
10.65 |
|
|
|
|
|
||
Options forfeited |
|
(275,450 |
) |
22.07 |
|
|
|
|
|
||
Options expired |
|
(15,200 |
) |
11.53 |
|
|
|
|
|
||
Outstanding at September 30, 2006 |
|
22,405,563 |
|
$ |
19.12 |
|
6.04 years |
|
$ |
571,243 |
|
Exercisable at September 30, 2006 |
|
11,897,088 |
|
$ |
11.66 |
|
4.22 years |
|
$ |
391,625 |
|
10
|
Unvested Options |
|
||||
|
|
Number of shares |
|
Weighted average fair |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
11,368,450 |
|
$ |
9.57 |
|
Options granted |
|
3,108,100 |
|
22.69 |
|
|
Options vested |
|
(3,692,625 |
) |
7.75 |
|
|
Options forfeited |
|
(275,450 |
) |
11.15 |
|
|
Balance at September 30, 2006 |
|
10,508,475 |
|
$ |
14.05 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants issued during the nine months ended September 30, 2006 and 2005:
|
For the nine months ended September 30, |
|
|||||
|
|
2006 |
|
2005 |
|
||
Dividend yield |
|
.51 |
% |
.56 |
% |
||
Volatility |
|
41 43 |
% |
44 - 49 |
% |
||
Risk-free interest rates |
|
5.03 5.11 |
% |
3.64 4.14 |
% |
||
Expected life (years) stock option plans |
|
7.21 8.89 |
|
6.67 9.36 |
|
||
Expected life (years) stock purchase rights plans |
|
1 |
|
1 |
|
||
Weighted average fair value of stock options granted during the period |
|
$ |
22.69 |
|
$ |
25.38 |
|
Weighted average fair value of stock purchase rights granted during the period |
|
$ |
12.41 |
|
$ |
14.33 |
|
The Companys expected volatility assumptions are based on the historical volatility of the Companys stock. The expected life assumption is primarily based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the corresponding yield curve in effect at the time of grant for U.S. Treasury bonds having the same term as the expected life of the option, i.e. a ten year bond rate is used for valuing an option with a ten year expected life. The expected dividend yield is based on the Companys historical experience. The forfeiture rate used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns.
The total intrinsic value of options exercised during the three months ended September 30, 2006 and 2005 was $8 million and $12 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $98 million and $46 million, respectively.
As of September 30, 2006, the total unrecognized compensation cost related to unvested stock options is $114,696 and the weighted average period over which that cost is expected to be recognized is 1.97 years.
Total stock compensation expense and the total related tax benefit recognized in the three and nine-months ended September 30, 2006 and 2005 are as follows:
|
For the three months ended |
|
For the nine months ended |
|
|||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Stock compensation expense |
|
$ |
11,813 |
|
$ |
8,364 |
|
$ |
29,629 |
|
$ |
25,048 |
|
|
|
|
|
|
|
|
|
|
|
||||
Recognized tax benefit, net |
|
$ |
710 |
|
$ |
999 |
|
$ |
2,178 |
|
$ |
3,039 |
|
Shares issued as a result of stock option exercises and employee stock plan purchases are issued as new shares outstanding by the Companys transfer agent.
Note 7. Recent Accounting Pronouncements
In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) Issue 06-3, How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement, (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, including but not limited to sales and value-added taxes. In EITF 06-3 a consensus was reached that entities may adopt a policy of presenting these taxes in the income statement on either a gross or net basis. If these taxes are significant, an entity should disclose its policy of presenting taxes and the amount of taxes if reflected on a gross basis in the income statement. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company presents revenues net of sales and value-added taxes in its consolidated statement of earnings and does not anticipate changing its policy as a result of EITF 06-3.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). The interpretation establishes guidelines for recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is required to and plans to adopt the provisions of FIN 48 beginning in the first quarter of 2007. The Company is currently assessing the impact of the adoption of FIN 48.
On September 13, 2006, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in its fiscal year ending December 31, 2006. However, early application is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, filed after the publication of this guidance. The Company is currently assessing the impact of the adoption of SAB 108.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans to adopt the provisions of SFAS 157 beginning in the first quarter of 2008. The Company is currently assessing the impact of the adoption of SFAS 157.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the section entitled Currency and Other Risk Factors and Liquidity and Capital Resources contain forward-looking statements which must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors discussed in the Executive Summary in this report, attention should be given to the factors identified and discussed in the report on Form 10-K filed on or about March 16, 2006.
Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The Company acts as a customs broker in all
11
domestic offices, and in many of its international offices. The Company also provides additional services for its customers including value-added distribution, purchase order management, vendor consolidation and other logistics solutions. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships.
International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the affects adoption of any such proposal will have on the Companys business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies concerning international trade, the Companys business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business.
The Company derives its revenues from three principal sources: 1) airfreight, 2) ocean freight and 3) customs brokerage and other services and these are the revenue categories presented in the financial statements.
As a non-asset based carrier, the Company does not own transportation assets. Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers. The difference between the rate billed to customers (the sell rate), and the rate paid to the carrier (the buy rate) is termed net revenue or yield. By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies, and arranging for delivery. This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.
The Companys ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies. The significance of maintaining acceptable working relationships with governmental agencies and asset-based providers involved in global trade has gained increased importance as a result of ongoing concern over terrorism. As each carrier labors to comply with governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade to some degree. A good reputation helps to develop practical working understandings that will effectively meet security requirements while minimizing potential international trade obstacles. The Company considers its current working relationships with these entities to be satisfactory. However, changes in space allotments available from carriers, governmental deregulation efforts, modernization of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Companys business in unpredictable ways.
Historically, the Companys operating results have been subject to a seasonal trend when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Companys international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.
A significant portion of the Companys revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Companys revenues are, to a large degree, impacted by factors out of the Companys control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Companys stock.
As further discussed under liquidity and capital resources, total capital expenditures in 2006 are expected to exceed $140 million.
In terms of the opportunities, challenges and risks that management is focused on in 2006, the Company operates in 58 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy. From the inception of the Company, management has believed that the elements required for a successful global service organization can
12
only be assured through recruiting, training, and ultimately retaining superior personnel. The Companys greatest challenge is now and always has been perpetuating a consistent global culture which demands:
Total dedication, first and foremost, to providing superior customer service;
Aggressive marketing of all of the Companys service offerings;
Ongoing development of key employees and management personnel via formal and informal means;
Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;
Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and
Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.
The Company has reinforced these values with a compensation system that rewards employees for profitably managing the things they can control. There is no limit to how much a key manager can be compensated for success. The Company believes in a real world environment in every operating unit where individuals are not sheltered from the profit implications of their decisions. At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.
Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company, provides a greater threat to the Companys continued success than any external force, which would be largely beyond our control. Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also building systems and taking preventative action to reduce exposure to negative events. The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations. As a result our focus is on building and maintaining a global culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.
While judgments and estimates are a necessary component of any system of accounting, the Companys use of estimates is limited primarily to the following areas that in the aggregate are not a major component of the Companys statement of earnings:
accounts receivable valuation;
the useful lives of long-term assets;
the accrual of costs related to ancillary services the Company provides;
establishment of adequate insurance liabilities for the portion of the freight related exposure which the Company has self-insured; and