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Quotes & Info
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| EXPD > SEC Filings for EXPD > Form 8-K on 23-Jun-2009 | All Recent SEC Filings |
23-Jun-2009
Regulation FD Disclosure
The following information is included in this document as a result of Expeditors' policy regarding public disclosure of corporate information. Answers to additional inquiries, if any, that comply with this policy are scheduled to become available on or about July 24, 2009.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this document including the answers to questions 1, 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 14, 16, 17, 19, 20, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, and 42 contain forward-looking statements which are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any forward-looking statements depending on a variety of factors including, but not limited to, changes in customer demand for Expeditors' services caused by a general economic slow-down, inventory build-up, decreased consumer confidence, volatility in equity markets, energy prices, political changes, or the unpredictable acts of competitors.
1. In the 10-K, you note that as of December 31, 2008, EXPD incurred approximately $14 million of cumulative legal and associated costs related to the DOJ investigation, of which $10 million occurred in 2008. What were your Legal costs associated with the Federal antitrust class action lawsuit and/or the European Commission's request for information beyond those related to the DOJ investigation and what were your total legal costs for all of 2008 compared to 2007? Do you anticipate any incremental legal expense associated with the European Commission's additional request for information at your U.K. subsidiary in connection with the ongoing freight forwarder investigation? What do you expect your total Legal and associated costs in 2009 to look like compared to 2008?
Legal costs for the Federal anti-trust class action lawsuit and the European Commission's Request for Information (RFI) have been a relatively small part of the $14 million of legal fees incurred related to anti-trust investigations. The lion's share of legal expenses have primarily been related to the U.S. Department of Justice's (DOJ's) anti-trust investigation. While legal expenses have abated, relative to levels being incurred a year ago, we still expect to have some ongoing legal expenses during 2009 related to each of these aforementioned proceedings. Without being trite, as we've addressed this topic before on more than one occasion, an attempt to predict the magnitude of these expenses at this juncture would be pointless as we feel the ongoing questions asking us to predict future legal spend have been. We understand everyone's interest in the topic, it is something we are keenly interested in as well. We would hope, however, that everyone understands that if we actually knew enough to be able to predict our legal expenses, that would be an associative discussion which would follow a much more serious disclosure. At that juncture, legal fees would be of lesser concern.
When you come from a frame of reference, as we do, where $0 spent on legal expense would be the most preferred alternative, having to predict anything beyond that, by its nature, would become inherently and incredibly biased towards our own wants, desires and expectations. To us, this is somewhat akin to being asked to predict how many minutes after being force fed a dead frog we would throw-up…and the operative word is "force," as we'd never elect to do either on our own. In both cases (the legal fees or swallowing the dead frog) we're certain we would eventually throw up. In neither case do we know exactly how much money or how much time would pass before we did. In both cases, however, our gut check, no pun intended, is not very much and not very long! It should go without saying that given our druthers, we'd rather not spend the legal fees or eat the dead frog in the first place. Sometimes you don't get the luxury of deciding what you have to eat. When
With respect to the European Commission (EC) investigation, like our system here in the United States, the degree to which outside counsel is involved is totally driven by the degree to which the EC sees fit to ask questions and seek clarification. Contrary to the DOJ's procedure, the EC's procedures are civil as opposed to criminal proceedings. The EC will ask questions and ask for information then, depending on the responses, they will issue a charging document that either requires you to formally respond…or they would not name you, in which case, there would be nothing to formally respond to. One involves a lot of money, the other, obviously, does not. If charges are issued, the target companies have to then formally prepare their defenses and present that to the EC, and later to a Court, if an appeal is taken. As we said, their system works very differently from ours and, at this stage, we are simply waiting to hear if they will make further requests of us, or take actions that will require us to engage in a more formal legal defense.
2. Can you provide an update on your claim as direct purchaser in Lufthansa antitrust settlement? What is the total proposed settlement amount or Expeditors' estimated share? While final court approval is still required, how would Expeditors pass its share of the settlement back to customers for service provided between 2000 and 2006? And will some of the proceeds, or the decision itself, help to mitigate future legal costs related to DOJ investigation?
This case is still unresolved. Accordingly, we need to be somewhat careful in what we say here and even more careful about how we say it. We can say what now is a matter of public record, and that is the policy that we've adopted and have also communicated to our customers. The proposed settlement amount offered by Lufthansa was €58 million. We have gone on record as saying that we do not intend to keep for ourselves any money that would be passed to us by Lufthansa, or any other carrier for that matter, who settle their related civil class action lawsuit obligations. We are, by necessity, a plaintiff in this suit because, as an indirect carrier, we were part of the relatively small group that actually paid all of these surcharges to the air carriers. Since we don't believe we made any money from surcharges, we do not intend to pocket any of the money that came back to us as a result of airlines having pled guilty and subsequently having made a payment as an offering to settle their civil obligations. To add a little further perspective, to put money where our proverbial mouth is, we intend to have distributed any money we receive to our customers in accordance with some fair methodology closely aligned with the methodologies the Court chooses to divide up these various settlements. Expeditors would absorb the costs of administration for the distribution of any settlement funds we receive and pass on. And that's all we're going to say about that today.
3. In 1993, the company net income has decreased (the only time in 20 years), could you explain what happened?
The year 1993 was very significant for Expeditors. It was the year that we began paying dividends and it was also the year that we increased our accrued income tax rate to apply the U.S. statutory tax rate to all worldwide earnings. Prior to that time, we had only provided income tax at the U.S. tax rate for that portion of earnings which were actually earned in the United States. The portion of the taxable income that was earned offshore by our overseas subsidiaries and affiliates was accrued and subsequently paid to local governments at tax rates which were applicable to those individual tax jurisdictions. In those days, a very large percentage of our profits were earned in Asia and were subject to tax rates that were substantially below the tax rates applicable in the United States. In some jurisdictions, in reviewing our financial situation at that time, we determined that it was important for our continued development to begin paying a dividend. Also, in order to make the
4. Could you explain the higher profitability of the Asian operations (27% of net revenues and 45% of operating income) compare to US and Europe? Is the competition less intense in Asia?
No, actually the competition in Asia is very keen. What is being reflected in these profitability ratios is caused by two factors: 1) the product mix differentials between Asia and Europe and the United States; and 2) the favorable labor expense differentials available in Asia. Asia is much more export oriented. Exports at the origin, in general, are more profitable than imports. This profitability is particularly enhanced when your cost of service, primarily payroll costs, is much lower in Asia as compared with service costs in the United States and Europe.
5. Can you update volumes on a year-over-year basis for the months of February and March? You've mentioned in prior 8-K's that the company tends to compare the first two months of the year to the same two months of the previous year in assessing relative volume strengths for the first quarter? Can you update those results as well place. What did March look like?
Please note the percentage changes in year-over-year (2009 versus 2008) monthly airfreight tonnages and ocean freight container counts:
Airfreight Ocean Freight
January (32 )% (18 )%
February (19 )% (27 )%
March (30 )% (18 )%
April (32 )% (25 )%
May (27 )% (23 )%
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6. I heard a rumor that you are hosting an upcoming analyst day? Is this correct? And if so what are the dates and times? Is it open to all analysts? I would like to attend if possible.
We have never hosted an "Analyst Day" and have no plans to do so. We're not sure where you may have heard this rumor, but it does remind us of a quote we once heard by baseball pitcher John Tudor (who had his leg broken by an opposing player crashing into a dugout where Tudor was sitting watching a game he wasn't even pitching in). "A rumor without a leg to stand on will find some other way to get around."
We do meet with analysts at our Corporate Office here in Seattle, and when we are traveling, if we can arrange times that do not interfere with the necessary activities of managing our business and meeting with existing and potential customers. We meet with analysts with the understanding that such discussions are limited to responses already discussed in these 8-K filings, events of previous quarters already made public, general market information published by others in the media, and that there be no discussion related to particular events that could be construed in any way to be material non-public information.
If you compare our operating income percentages with those companies whom the analysts designate as our peer group, you will note that our operating income percentages are much higher, nearly double of most of those within the market defined peer group we are thrown in with. We have also done responsible, measured things when times were good. Perhaps the most significant thing we can point to is having had the good fortune to have developed a corporate culture and a compensation system that reinforces the need for constant productivity improvement by tying people's individual compensation to direct operating profit, on a cumulative basis. As a consequence, we've always done many of the things people are just getting around to doing now in an attempt to tighten their belts. We initiated a hiring freeze last year. There are, of course, reasonable and logical exceptions that need to be made in instances, for example, where new business comes on-trying to handle new business with inadequate resources flies in the face of one of our 2009 corporate goals-"Don't do anything stupid". Our hiring freeze is also a "Don't do anything stupid" (D2AS) kind of hiring freeze. "Don't do anything stupid" also means that we don't take steps in the name of short-term profitability that will weaken our long-term capability to meet the service needs of our customers nor damage our greatest asset-our employees.
We have no corporate aircraft and, accordingly, there was nothing to downsize in this area specifically. A few of our executives have had very limited personal time share arrangements and because these were personal, they were paid for privately (i.e. with their own "after tax" compensation). We don't think how they spend their own money is any of our business. How many other corporations would sign up for this deal? Not many, that is for certain, and that is one reason we are who we are.
8. Is there a heavy lift / project forwarding spin to this?
Is it further to Chicago than by bus? We're not sure what the question is, hope the answer helps, didn't do much for us, but then again neither did the question.
9. In your ocean segment, your order management business grew in first quarter and again outpaced that rate of change of your forwarding and consolidation business. Please provide more details as to why you are having such success in this area. Is this environment more conducive to this type of sale; or does this relate to better traction of the service offering within Expeditors relative to the other two areas? What percent of ocean net revenue does order management represent?
It is probably a good idea to spend a few moments defining what order management is before we attempt to describe why we are seeing stronger growth in this sector of our ocean services than in other parts. Order management services are, at their core, a series of activities that pertain to the management and co-ordination of our customers' various and sundry vendors at origin locations. The purpose is to ensure that the goods are shipped timely and accurately. That co-ordination can extend beyond the origins to key points along the supply chain if the customer so desires (like destination brokerage and delivery for instance). The most universal part of order management services relates to origin activities of several distinct types. Typically these services do not involve the actual transportation of the goods. The historical profiles for most order management customers have tended to be large ocean shippers with their own steamship line contracts for transportation services, but who still require origin services to ensure the goods ordered from their factory suppliers get on the right ship destined to the correct destination. While that has been the historical focus of this business, as supply chain management has become more integrated with information management, it is not unusual for customers who use our own NVO services (described in more detail below) or, although much less common, even our airfreight services, to utilize our order management capabilities.
The purchase order (PO)-or some similar arrangement, which our customers have used to place their orders with the factories that will be producing the goods, provides the basis around which to organize the order management services. In many cases customers require that, as part of managing
Our involvement varies according to customer preference. At a minimum, we would be providing a real-time information window that tracks when our customers' suppliers are providing their goods to our warehouses or the steamships' container yard, again depending on customer preference. In some instances we might supervise the loading (or "stuffing" as we call it) in our designated container freight station, before moving it to the container yard, or we would co-ordinate the containers loaded by the factories ("shipper load") being tendered to the relevant steamship line's (with whom our customers have their own contract) container yard. In these instances, they don't need us to move that freight on one of our own house bills of lading as an OTI. OTI is an abbreviation for "Ocean Transportation Intermediary" obviously a word coined by a government agency to describe the ocean freight consolidation service. This particular service is still more commonly recognized and referenced by its former abbreviation, NVOCC (Non-Vessel Owning Common Carrier) or just "NVO" for short. We continue to work with the steamship lines to make sure that the containers delivered to their container yard are loaded correctly. Ultimately, these origin services result in a container or a group of containers, being tendered to a common carrier. The associated information regarding these tenderings and subsequent sailings is also captured and transmitted to our customers via our proprietary software. The benefits of an efficient order management program extend from more efficient aggregate container utilization to carbon footprint reduction by maximizing the amount of space in each loaded container to reduce the total number of containers used.
We are seeing more year-over-year growth in order management than we are seeing in general ocean volumes, either as an ocean freight consolidator (the NVO product) or when performing direct ocean forwarding services, where we prepare critical documentation on behalf of the customer, and if asked, arrange for the pickup and delivery of customers' containers to their designated steamship line. The growth in order management is related to several factors: 1) our having absorbed more business from a very large retail customer which we began transitioning last year; and 2) a renewed focus on marketing this order management business with additional features that we have added to our service offering which enhances our value added capabilities. Order management net revenue, as a percentage of total ocean net revenue, has steadily grown over the past number of years but is still less than 20% of total ocean freight net revenue.
10. To what extent is Expeditors involved in the testing of the 10+2 program? Are you doing any voluntary submission of data to test the interoperability of the program?
Probably to a greater degree than we can actually talk about. Because of the underlying security rules, our response needs to be understandably understated. From a general perspective, however, the "10+2" program, or Importer Security Filings (ISF) as it is now officially known, is a security requirement whereby certain critical manifest information related to foreign shippers and U.S. importers is submitted to a stipulated government agency for approval prior to the shipments being allowed to sail on an ocean freight vessel headed to a port in the United States. When fully implemented, no container can be loaded on a vessel bound for the United States until said agency has given approval. This is all done via electronic data interchanges, and because of that, technological capability is critical. "10 + 2" relates to the number of security elements that are transmitted.
11. Growth in your ocean net revenue per kilo in first quarter slowed relative to fourth quarter while the growth in your airfreight net revenue per ton remained as strong as fourth quarter, if not a bit stronger than first quarter. Can you compare the current dynamics of these two market places in late first quarter/early second quarter in terms of how these metrics are now trending? Do the general trends for air and ocean freight, respectively differ materially on the Asia-to-US lane versus the Asia-to-Europe lane?
Just to clarify how we monitor these statistics at its highest levels, ocean freight volume is typically measured according to container counts (equalized to Twenty (20) Foot Equivalent Units or TEU's). We do not track ocean freight "by kilo." Airfreight is typically tracked by kilo. That is the way it is sold by the common carriers and that is the way we track it. We don't know what our growth in ocean net revenue per kilo is and, while we could derive net revenue per metric ton readily enough, we're not sure either of those mathematical exercises would mean much to us. Accordingly let's answer the question we think you meant to ask as opposed to trying to address the question with some kind of meaningless freight doggerel.
We're not sure how you make your assumptions about relative growth and strength, because we don't release actual container or kilo information….We think the point of this question is a discussion about yields and yield management. Managing net revenue per kilo or net revenue per container does not utilize a fixed formula. There are vast differences on different traffic lanes depending on freight mix, carrier selection, customer service expectations and end-user markets.
Historically, on a seasonal basis, the first quarter has the highest yields and, as freight volumes start to expand throughout the annual business cycle, yields start to decline. As noted in our most recent earnings release and 10-Q filing, there was a significant spot market which developed in both the ocean and air markets. Spot markets, by their nature, are much more pronounced and much more prevalent during periods of excess capacity. These spot markets have continued into June. On a comparable basis, the yields in 2009 remain higher than the yields in 2008, however, we believe yields in both ocean and air have and will tighten from those experienced in the 2009 first quarter. Yields to North America and yields to Europe move back and forth. As of last month, yields to Europe were slightly higher, but in both markets these yields are very much a function of excess supply and inconsistent demand. That yields will moderate over time goes without saying. However, the economics of providing these services are much more important than an incessant analysis of how much mathematical yields are gyrating. That said, the one thing that does need to be carefully analyzed is the true meaning of yields in the context of falling freight rates. For example, a 12% yield with the rates at $4.00 per kilo results in a profit of $.48 per kilo net revenue before covering salaries, rent and other overheads. At a freight rate of $2.50 per kilo, you could be making $.40 per kilo net revenue, 20% less than $.48 per kilo noted above, despite having a higher yield of 16%.
31-Mar-09 31-Mar-08 Diff % Diff
North America 4,262 4,474 (212 ) -4.7 %
Asia 3,382 3,403 (21 ) -0.6 %
Europe and Africa 1,984 1,967 17 0.8 %
Middle East 1,095 1,018 77 7.6 %
South America 617 630 (13 ) -2.1 %
Australasia 225 217 8 3.5 %
Information Systems 599 547 52 9.5 %
Corporate 191 169 22 13.0 %
Total 12,355 12,425 (70 ) -0.6 %
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Like so many things in our culture, the management of head count at Expeditors takes on a very unique approach. We have not mandated lay-offs, favoring instead to have natural attrition. What hasn't been affected is our normal focus on being slow to hire…i.e. do we really need the extra person and quick to . . .
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