filings.toolsItem 16. FORM 10-K SUMMARY
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Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2023
| EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. | |||
| By: | /s/ Bradley S. Powell | ||
| Bradley S. Powell | |||
| Senior Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2023.
| Signature | Title | |
| /s/ Jeffrey S. Musser | President, Chief Executive Officer and Director | |
| (Jeffrey S. Musser) | (Principal Executive Officer) | |
| /s/ Bradley S. Powell | Senior Vice President and Chief Financial Officer | |
| (Bradley S. Powell) | (Principal Financial and Accounting Officer) | |
| /s/ Robert P. Carlile | Chairman of the Board and Director | |
| (Robert P. Carlile) | ||
| /s/ Glenn M. Alger | Director | |
| (Glenn M. Alger) | ||
| /s/ James M. DuBois | Director | |
| (James M. DuBois) | ||
| /s/ Mark A. Emmert | Director | |
| (Mark A. Emmert) | ||
| /s/ Diane H. Gulyas | Director | |
| (Diane H. Gulyas) | ||
| /s/ Brandon S. Pedersen | Director | |
| (Brandon S. Pedersen) | ||
| /s/ Liane J. Pelletier | Director | |
| (Liane J. Pelletier) | ||
| /s/ Olivia D. Polius | Director | |
| (Olivia D. Polius) |
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
COMPRISING ITEM 8
ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION FOR THE
YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Expeditors International of Washington, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Expeditors International of Washington, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2023 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of gross unrecognized tax benefits
As discussed in Note 7 to the consolidated financial statements, the Company is subject to examination by taxing authorities throughout the world in the normal course of business. The Company estimates additional tax expense, as well as interest and penalties that could arise from certain tax audits.
We identified the assessment of certain gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation of tax law and its estimate of the ultimate resolution of tax positions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s unrecognized tax benefit process. This included controls related to the interpretation of tax law and its application in the liability estimation process. Since tax law is complex and often subject to interpretations, we involved tax professionals with specialized skills and knowledge, who assisted in:
F-1
evaluating the Company’s interpretation of tax laws,
assessing transfer pricing positions for compliance with applicable laws and regulations,
inspecting settlement documents with applicable taxing authorities and appeals documents with applicable tax courts,
assessing the expiration of statutes of limitations,
comparing historical gross unrecognized tax benefits to actual results upon conclusion of tax audits or expiration of the statute of limitations, and
performing an independent assessment of the Company’s tax positions and comparing the results to the Company’s assessment.
In addition, we assessed the responses received directly from the Company’s external legal counsel regarding tax positions for which they had been engaged.
| /s/ KPMG LLP |
| We have served as the Company's auditor since 1982. |
| Seattle, Washington |
| March 1, 2023 |
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Expeditors International of Washington, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Expeditors International of Washington, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2023 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness in internal control related to certain database changes made to an information technology (IT) system that supports the Company’s financial reporting process has been identified and included in management’s assessment. A control to review and authorize direct changes to databases that support several key operational and accounting systems did not capture the complete population of database changes and, as such did not operate effectively as designed. Management concluded that unauthorized database changes could have gone undetected, could have resulted in errors in the financial statements for the year ended 2022 and could have had a direct or indirect impact on financial reporting controls, as there were no alternate ITGC controls or processes operating at a sufficient level of precision that would have timely detected improper database changes. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F-3
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ KPMG LLP |
| Seattle, Washington |
| March 1, 2023 |
F-4
Consolidated Balance Sheets
In thousands, except per share data
| December 31, | 2022 | 2021 | ||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 2,034,131 | $ | 1,728,692 | ||||
| Accounts receivable, net | 2,107,645 | 3,810,286 | ||||||
| Deferred contract costs | 257,545 | 987,266 | ||||||
| Other | 118,696 | 108,801 | ||||||
| Total current assets | 4,518,017 | 6,635,045 | ||||||
| Property and equipment, net | 501,916 | 487,870 | ||||||
| Operating lease right-of-use assets | 507,503 | 459,158 | ||||||
| Goodwill | 7,927 | 7,927 | ||||||
| Deferred federal and state income taxes, net | 37,449 | 729 | ||||||
| Other assets, net | 17,622 | 19,200 | ||||||
| Total assets | $ | 5,590,434 | $ | 7,609,929 | ||||
| Liabilities: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,108,996 | $ | 2,012,461 | ||||
| Accrued expenses, primarily salaries and related costs | 479,262 | 403,625 | ||||||
| Contract liabilities | 323,101 | 1,142,026 | ||||||
| Current portion of operating lease liabilities | 95,621 | 82,019 | ||||||
| Federal, state and foreign income taxes | 47,075 | 86,166 | ||||||
| Total current liabilities | 2,054,055 | 3,726,297 | ||||||
| Noncurrent portion of operating lease liabilities | 422,844 | 385,641 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Preferred stock, par value $0.01 per share, authorized 2,000 shares; none issued | — | — | ||||||
| Common stock, par value $0.01 per share, authorized 640,000. Issued and outstanding: 154,313 shares and 167,210 shares at December 31, 2022 and 2021, respectively | 1,543 | 1,672 | ||||||
| Additional paid-in capital | 139 | 3,160 | ||||||
| Retained earnings | 3,310,892 | 3,620,008 | ||||||
| Accumulated other comprehensive loss | (202,553 | ) | (130,414 | ) | ||||
| Total shareholders’ equity | 3,110,021 | 3,494,426 | ||||||
| Noncontrolling interest | 3,514 | 3,565 | ||||||
| Total equity | 3,113,535 | 3,497,991 | ||||||
| Total liabilities and equity | $ | 5,590,434 | $ | 7,609,929 |
See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Earnings
In thousands, except per share data
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||
| Revenues: | ||||||||||||
| Airfreight services | $ | 5,886,886 | $ | 6,771,402 | $ | 4,274,026 | ||||||
| Ocean freight and ocean services | 6,544,559 | 5,545,818 | 2,342,344 | |||||||||
| Customs brokerage and other services | 4,639,839 | 4,206,297 | 2,968,023 | |||||||||
| Total revenues | 17,071,284 | 16,523,517 | 9,584,393 | |||||||||
| Operating Expenses: | ||||||||||||
| Airfreight services | 4,359,726 | 5,067,380 | 3,168,808 | |||||||||
| Ocean freight and ocean services | 5,188,066 | 4,364,160 | 1,751,850 | |||||||||
| Customs brokerage and other services | 3,029,105 | 2,626,615 | 1,736,044 | |||||||||
| Salaries and related costs | 2,056,387 | 2,062,351 | 1,538,104 | |||||||||
| Rent and occupancy costs | 209,532 | 186,287 | 169,863 | |||||||||
| Depreciation and amortization | 57,338 | 51,312 | 56,959 | |||||||||
| Selling and promotion | 24,293 | 16,026 | 18,436 | |||||||||
| Other | 322,466 | 240,060 | 203,892 | |||||||||
| Total operating expenses | 15,246,913 | 14,614,191 | 8,643,956 | |||||||||
| Operating income | 1,824,371 | 1,909,326 | 940,437 | |||||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 25,554 | 8,807 | 10,415 | |||||||||
| Interest expense | (23,277 | ) | (411 | ) | (219 | ) | ||||||
| Other, net | 9,243 | 6,894 | 5,931 | |||||||||
| Other income, net | 11,520 | 15,290 | 16,127 | |||||||||
| Earnings before income taxes | 1,835,891 | 1,924,616 | 956,564 | |||||||||
| Income tax expense | 475,286 | 505,771 | 258,350 | |||||||||
| Net earnings | 1,360,605 | 1,418,845 | 698,214 | |||||||||
| Less net earnings attributable to the noncontrolling interest | 3,206 | 3,353 | 2,074 | |||||||||
| Net earnings attributable to shareholders | $ | 1,357,399 | $ | 1,415,492 | $ | 696,140 | ||||||
| Diluted earnings attributable to shareholders per share | $ | 8.26 | $ | 8.27 | $ | 4.07 | ||||||
| Basic earnings attributable to shareholders per share | $ | 8.33 | $ | 8.37 | $ | 4.14 | ||||||
| Weighted average diluted shares outstanding | 164,427 | 171,250 | 170,896 | |||||||||
| Weighted average basic shares outstanding | 163,010 | 169,145 | 168,333 |
See accompanying notes to consolidated financial statements.
F-6
Consolidated Statements of Comprehensive Income
In thousands
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||
| Net earnings | $ | 1,360,605 | $ | 1,418,845 | $ | 698,214 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustments, net of tax (benefit) expense of ($5,037) in 2022, ($5,275) in 2021, and $4,254 in 2020 | (73,451 | ) | (32,408 | ) | 30,759 | |||||||
| Other comprehensive (loss) income | (73,451 | ) | (32,408 | ) | 30,759 | |||||||
| Comprehensive income | 1,287,154 | 1,386,437 | 728,973 | |||||||||
| Less comprehensive income attributable to the noncontrolling interest | 1,894 | 1,606 | 1,399 | |||||||||
| Comprehensive income attributable to shareholders | $ | 1,285,260 | $ | 1,384,831 | $ | 727,574 |
See accompanying notes to consolidated financial statements.
F-7
Consolidated Statements of Equity
In thousands, except per share data
Years ended December 31, 2022, 2021 and 2020
| Common Stock | ||||||||||||||||||||||||||||||||
| 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 adjustment for adoption of new accounting pronouncement | — | — | — | 6,074 | — | 6,074 | — | 6,074 | ||||||||||||||||||||||||
| Shares issued under employee stock plans | 4,272 | 43 | 175,736 | — | — | 175,779 | — | 175,779 | ||||||||||||||||||||||||
| Shares repurchased under provisions of stock repurchase plan | (4,600 | ) | (46 | ) | (84,941 | ) | (247,400 | ) | — | (332,387 | ) | — | (332,387 | ) | ||||||||||||||||||
| Stock compensation expense | — | — | 62,498 | — | — | 62,498 | — | 62,498 | ||||||||||||||||||||||||
| Net earnings | — | — | — | 696,140 | — | 696,140 | 2,074 | 698,214 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 31,434 | 31,434 | (675 | ) | 30,759 | |||||||||||||||||||||||
| Dividends and dividend equivalents paid ($1.04) | — | — | 1,000 | (175,929 | ) | — | (174,929 | ) | — | (174,929 | ) | |||||||||||||||||||||
| Balance at December 31, 2020 | 169,294 | 1,693 | 157,496 | 2,600,201 | (99,753 | ) | 2,659,637 | 3,590 | 2,663,227 | |||||||||||||||||||||||
| Shares issued under employee stock plans | 2,294 | 23 | 90,910 | — | — | 90,933 | — | 90,933 | ||||||||||||||||||||||||
| Shares repurchased under provisions of stock repurchase plan | (4,378 | ) | (44 | ) | (315,565 | ) | (198,985 | ) | — | (514,594 | ) | — | (514,594 | ) | ||||||||||||||||||
| Stock compensation expense | — | — | 69,385 | — | — | 69,385 | — | 69,385 | ||||||||||||||||||||||||
| Net earnings | — | — | — | 1,415,492 | — | 1,415,492 | 3,353 | 1,418,845 | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (30,661 | ) | (30,661 | ) | (1,747 | ) | (32,408 | ) | ||||||||||||||||||||
| Dividends and dividend equivalents paid ($1.16) | — | — | 934 | (196,700 | ) | — | (195,766 | ) | — | (195,766 | ) | |||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | (1,631 | ) | (1,631 | ) | ||||||||||||||||||||||
| Balance at December 31, 2021 | 167,210 | 1,672 | 3,160 | 3,620,008 | (130,414 | ) | 3,494,426 | 3,565 | 3,497,991 | |||||||||||||||||||||||
| Shares issued under employee stock plans | 1,632 | 16 | 61,629 | — | — | 61,645 | — | 61,645 | ||||||||||||||||||||||||
| Shares repurchased under provisions of stock repurchase plan | (14,529 | ) | (145 | ) | (130,212 | ) | (1,451,551 | ) | — | (1,581,908 | ) | — | (1,581,908 | ) | ||||||||||||||||||
| Stock compensation expense | — | — | 64,397 | — | — | 64,397 | — | 64,397 | ||||||||||||||||||||||||
| Net earnings | — | — | — | 1,357,399 | — | 1,357,399 | 3,206 | 1,360,605 | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (72,139 | ) | (72,139 | ) | (1,312 | ) | (73,451 | ) | ||||||||||||||||||||
| Dividends and dividend equivalents paid ($1.34) | — | — | 1,165 | (214,964 | ) | — | (213,799 | ) | — | (213,799 | ) | |||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | (1,945 | ) | (1,945 | ) | ||||||||||||||||||||||
| Balance at December 31, 2022 | 154,313 | $ | 1,543 | $ | 139 | $ | 3,310,892 | $ | (202,553 | ) | $ | 3,110,021 | $ | 3,514 | $ | 3,113,535 |
See accompanying notes to consolidated financial statements.
F-8
Consolidated Statements of Cash Flows
In thousands
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||
| Operating Activities: | ||||||||||||
| Net earnings | $ | 1,360,605 | $ | 1,418,845 | $ | 698,214 | ||||||
| Adjustments to reconcile net earnings to net cash from operating activities: | ||||||||||||
| Provisions for losses on accounts receivable | 11,050 | 7,540 | 5,584 | |||||||||
| Deferred income tax (benefit) expense | (33,240 | ) | (3,690 | ) | 8,371 | |||||||
| Stock compensation expense | 64,397 | 69,385 | 62,498 | |||||||||
| Depreciation and amortization | 57,338 | 51,312 | 56,959 | |||||||||
| Other, net | 1,252 | 3,790 | 3,960 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (Increase) in accounts receivable | 1,592,341 | (1,869,827 | ) | (647,193 | ) | |||||||
| (Decrease) increase in accounts payable and accrued expenses | (798,123 | ) | 1,041,805 | 430,452 | ||||||||
| Decrease (Increase) in deferred contract costs | 714,960 | (700,273 | ) | (189,447 | ) | |||||||
| (Decrease) increase in contract liabilities | (798,356 | ) | 803,837 | 217,699 | ||||||||
| (Decrease) increase in income taxes payable, net | (55,129 | ) | 57,867 | 8,502 | ||||||||
| Decrease (increase) in other, net | 12,580 | (12,097 | ) | (630 | ) | |||||||
| Net cash from operating activities | 2,129,675 | 868,494 | 654,969 | |||||||||
| Investing Activities: | ||||||||||||
| Purchase of property and equipment | (86,824 | ) | (36,247 | ) | (47,543 | ) | ||||||
| Other, net | (890 | ) | (398 | ) | 1,516 | |||||||
| Net cash from investing activities | (87,714 | ) | (36,645 | ) | (46,027 | ) | ||||||
| Financing Activities: | ||||||||||||
| Proceeds from borrowing on lines of credit | 81,756 | 10,063 | 257 | |||||||||
| Payments from borrowing on lines of credit | (30,289 | ) | (2,551 | ) | (214 | ) | ||||||
| Proceeds from issuance of common stock | 80,980 | 106,105 | 186,345 | |||||||||
| Repurchases of common stock | (1,581,908 | ) | (514,594 | ) | (332,387 | ) | ||||||
| Dividends paid | (213,799 | ) | (195,766 | ) | (174,929 | ) | ||||||
| Payments for taxes related to net share settlement of equity awards | (19,335 | ) | (15,172 | ) | (10,566 | ) | ||||||
| Distribution to noncontrolling interest | (1,945 | ) | (1,631 | ) | — | |||||||
| Net cash from financing activities | (1,684,540 | ) | (613,546 | ) | (331,494 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (51,982 | ) | (17,402 | ) | 19,852 | |||||||
| Change in cash and cash equivalents | 305,439 | 200,901 | 297,300 | |||||||||
| Cash and cash equivalents at beginning of period | 1,728,692 | 1,527,791 | 1,230,491 | |||||||||
| Cash and cash equivalents at end of period | $ | 2,034,131 | $ | 1,728,692 | $ | 1,527,791 | ||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Cash paid for income taxes | $ | 566,533 | $ | 442,549 | $ | 239,849 |
See accompanying notes to consolidated financial statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, high technology, industrial and manufacturing companies around the world.
International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to tariffs and trade restrictions and accords. The Company cannot predict the outcome of ongoing proposals or negotiations, nor can the Company predict the effects adoption of any such proposal will have on the Company’s 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 and inter-governmental disputes concerning international trade, the Company’s business may also be affected by political developments and changes in government personnel or policies as well as economic turbulence, natural disasters and pandemics, political unrest and security concerns in the nations and on the shipping lanes in which it does business and the future impact that these events may have on international trade, oil prices and security costs.
The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The consolidated financial statements include the accounts of the Company and its subsidiaries stated in U.S. dollars, the Company’s reporting currency. In addition, the consolidated financial statements also include the accounts of operating entities where the Company maintains a parent-subsidiary relationship through unilateral control over assets and operations together with responsibility for payment of all liabilities, notwithstanding a lack of technical majority ownership of the subsidiary's common stock.
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. Certain prior year amounts on the consolidated statements of earnings and consolidated statements of cash flows have been reclassified to conform to the current year presentation.
B. | Cash Equivalents
All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.
C. | 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 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 adoption had an immaterial effect on the Company’s consolidated financial statements and disclosures. 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 valuation allowance reduces a financial asset’s balance for credit losses expected to be incurred over the assets contractual term. 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 that uses historical credit loss information and considers 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 $9,466 and $6,686 as of December 31, 2022 and 2021, respectively. Additions and write-offs have not been significant in the periods presented.
F-10
D. | Long-Lived Assets, Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated or amortized on the straight-line method over the shorter of the assets’ estimated useful lives or lease terms. Useful lives for major categories of property and equipment are as follows:
| Buildings and land improvements | 30 to 40 years | ||
| Building improvements | 3 to 10 years | ||
| Furniture, fixtures, equipment and purchased software | 3 to 10 years |
Expenditures for maintenance, repairs, and replacements of minor items are charged to earnings as incurred. Major upgrades and improvements that extend the life of the asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income for the period.
For the years ended December 31, 2022 and 2021, the Company performed the required goodwill annual impairment test during the fourth quarter and determined that no impairment had occurred.
E. | 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 expenses 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 consolidated statement of earnings.
Additionally, the Company elected to apply the short-term lease exemption for leases with a non-cancelable period of twelve months or less and has chosen not to separate non-lease components from lease components and instead to account for each as a single lease component.
F. | Revenues and Revenue Recognition
The Company provides global logistics services, including air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking and other logistics solutions. As a non-asset-based carrier, the Company does not own transportation assets.
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. Each performance obligation is comprised of one or more of the Company’s services. The Company's three principal services are the revenue categories presented in the Consolidated Statements of Earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of the Company's three primary sources of revenue.
The major portion of the Company's air and ocean freight revenues are generated by purchasing transportation services on a volume basis from direct (asset-based) carriers and then reselling that space to customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses.
F-11
Revenue is recognized upon transfer of control of promised services to customers, which occurs over time. The Company has determined that in general each shipment transaction or service order constitutes a separate contract with the customer. However, when the Company provides multiple services to a customer, different contracts may be present for different services. The Company combines the contracts, which form a single performance obligation, and accounts for the contracts as a single contract when certain criteria are met.
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.
This method of measurement of progress depicts the pattern of the Company's actual performance under the contracts with the customer. There are no significant judgments involved in measuring the progress of the performance obligations. Amounts allocated to the services for each performance obligation are typically based on standalone selling prices. The Company does not have significant variable consideration in its contracts. Taxes assessed concurrently with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenues.
Typically, the transaction price for each of the Company's services are quoted as separate components; however, customers on occasion will request an all-inclusive rate for a set of services known in the industry as “door-to-door service.” This means that the customer is billed a single rate for all services from pickup at origin to delivery at destination. In these instances, the transaction price is allocated to each service on a relative selling price basis.
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 generally has an unconditional right to consideration when the services are initiated or soon thereafter. The amount due from the customer is recorded as accounts receivable. The amounts related to services that are not yet completed at the reporting date are presented as contract liabilities, with corresponding direct costs to fulfill the performance obligation that will be satisfied in the future presented as deferred contract costs. The Company generally does not incur incremental costs to obtain the contract with the customer. The Company may incur costs to fulfill the contract with the customers, such as set-up costs. However, the amount incurred is insignificant to the Company’s consolidated financial statements.
The Company evaluates whether amounts billed to customers should be reported as revenues on a gross or net basis. Generally, revenue is recorded on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the services, when it assumes the risk of loss, when it has discretion in setting the prices for the services to the customers, and when the Company has the ability to direct the use of the services provided by the third party. In most cases the Company acts as an indirect carrier. When acting as an indirect carrier, the Company issues a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, the Company receives a contract of carriage known as a Master Airway Bill for airfreight shipments and a Master Ocean Bill of Lading for ocean shipments. When revenue is recorded on a net basis, the amounts earned are determined using a fixed fee, a per unit of activity fee or a combination thereof. For revenues earned in other capacities, for instance, when the Company does not issue a HAWB, a HOBL, or a House Seaway Bill or otherwise act solely as an agent for the shipper, only the commissions and fees earned for such services are included in revenues. In these transactions, the Company is not a principal and report only commissions and fees earned in revenues.
The Company disaggregates its revenues by its three primary service categories in the consolidated financial statements: airfreight, ocean freight and ocean services and customs brokerage and other. Revenues by geographic location are presented within business segment information in Note 10.
F-12
G. | Income Taxes
Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, the tax effect of loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
The Company uses a two-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating its tax positions and estimating our tax benefits, which may require periodic adjustments and which may not match the ultimate future outcome. The Company recognizes interest expense related to unrecognized tax benefits or underpayment of income taxes in interest expense and recognizes penalties in operating expenses.
U.S. corporate income tax laws and regulations include a territorial tax framework and 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, Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies as well as U.S. income tax deductions for Foreign-derived intangible income (FDII). The Company treats BEAT and GILTI as discrete adjustments as components of current income tax expense.
Earnings of the Company's foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States.
H | Net Earnings Attributable to Shareholders per Common 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 common shares represent outstanding stock options, stock purchase rights 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.
I. | Stock Plans
The Company maintains several equity incentive plans under which the Company has granted stock options, director restricted stock, restricted stock units (RSUs), performance stock units (PSUs) and employee stock purchase rights to employees or directors. The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s Amended and Restated 2017 Omnibus Plan and employee stock purchase rights plans. This expense, adjusted for expected performance and forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the consolidated statements of earnings. Expense for PSUs is recognized over the service period when it is probable the performance goal will be achieved and based on the most probable outcome of performance conditions at the reporting date. RSUs and PSUs 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.
F-13
J. | Foreign Currency
Foreign currency amounts attributable to foreign operations have been translated into U.S. dollars using year-end exchange rates for assets and liabilities, historical rates for equity, and weighted average rates for revenues and expenses. Currency fluctuations are a normal operating factor in the conduct of the Company’s business and foreign exchange transaction gains and losses are included in revenues and operating expenses. Also, the Company is exposed to foreign currency exchange fluctuations on monetary assets and liabilities denominated in currencies that are not the local functional currency. Foreign exchange gains and losses on such balances are recognized in net earnings within customs brokerage and other services costs. Net foreign currency losses in 2022, 2021 and 2020 were $1,616, $11,806, and $25,398, respectively.
The Company follows a policy of accelerating international currency settlements to manage its foreign exchange exposure. Accordingly, the Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company’s ability to move money freely. Such hedging activity during 2022, 2021 and 2020 was insignificant. The Company had no foreign currency derivatives outstanding at December 31, 2022 and 2021.
K. | Comprehensive Income
Comprehensive income consists of net earnings and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net earnings. For the Company, these consist of foreign currency translation gains and losses, net of related income tax effects and comprehensive income or loss attributable to the noncontrolling interests. Upon the complete or substantially complete liquidation of the Company's investment in a foreign entity, cumulative translation adjustments are recorded as reclassification adjustments in other comprehensive income and recognized in net earnings.
Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, as of December 31, 2022 and 2021.
L. | Segment Reporting
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, depreciation and amortization 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.
M. | 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 disclosure 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 performs, typically at the destination location, self-insured liabilities, accrual of various tax liabilities, accrual of loss contingencies, including estimates for ongoing and potential claims as a result of the downtime caused by the cyber-attack, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. See Note 11 for further information on estimates related to the cyber-attack. Actual results could be materially different from the estimated provisions and accruals recorded.
NOTE 2. 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.
F-14
Cash and cash equivalents consist of the following:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||
| Cost | Fair Value | Cost | Fair Value | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Cash and overnight deposits | $ | 1,038,903 | $ | 1,038,903 | $ | 1,241,565 | $ | 1,241,565 | |||||||||
| Corporate commercial paper | 977,887 | 978,325 | 423,261 | 423,279 | |||||||||||||
| Time deposits and money market funds | 17,341 | 17,341 | 63,866 | 63,866 | |||||||||||||
| Total cash and cash equivalents | $ | 2,034,131 | $ | 2,034,569 | $ | 1,728,692 | $ | 1,728,710 |
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).
NOTE 3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
| 2022 | 2021 | ||||||||
| Land | $ | 139,635 | $ | 147,310 | |||||
| Buildings and leasehold improvements | 505,525 | 494,797 | |||||||
| Furniture, fixtures, equipment and purchased software | 420,485 | 382,676 | |||||||
| Construction in progress | 4,029 | 4,764 | |||||||
| Property and equipment, at cost | 1,069,674 | 1,029,547 | |||||||
| Less accumulated depreciation and amortization | 567,758 | 541,677 | |||||||
| Property and equipment, net | $ | 501,916 | $ | 487,870 |
NOTE 4. LEASES
The Company enters into lease agreements primarily for office and warehouse space in all districts where it conducts business. As of December 31, 2022, all of the Company's leases are operating leases. Lease terms are either on a month-to-month basis or terminate at various times through 2040. The Company also has two long-term operating lease arrangements to use land, for which the usage rights were entirely prepaid. Usage rights for those arrangements are recognized in rent expense over the lease terms up to 2057.
Lease cost is recorded under rent and occupancy expenses in the consolidated statements of earnings and is comprised of the following for the year-ended December 31:
| 2022 | 2021 | 2020 | ||||||||||
| Operating lease cost | $ | 107,858 | $ | 98,219 | $ | 91,436 | ||||||
| Variable lease cost | 47,553 | 39,607 | 26,857 | |||||||||
| Total lease cost | $ | 155,411 | $ | 137,826 | $ | 118,293 |
Variable lease cost includes short-term lease expenses, which are insignificant.
Maturities of lease liabilities as of December 31, 2022 are as follows:
| 2023 | $ | 112,010 | ||
| 2024 | 97,113 | |||
| 2025 | 88,513 | |||
| 2026 | 71,776 | |||
| 2027 | 56,552 | |||
| Thereafter | 159,363 | |||
| Total minimum lease payments | 585,327 | |||
| Less imputed interest | 66,862 | |||
| Lease liability | $ | 518,465 |
F-15
As of December 31, 2022, the Company had $101 million in operating lease obligations with maturities through 2034 for several office and warehouse locations not included in the lease liabilities, as the lease had not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate are as follows:
| 2022 | 2021 | |||||||
| Weighted-average remaining lease term (in years) | 7.10 | 7.45 | ||||||
| Weighted-average discount rate | 3.63 | % | 3.71 | % |
Other information related to the Company's operating leases are as follows:
| 2022 | 2021 | 2020 | ||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 151,654 | $ | 117,409 | $ | 109,515 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 106,772 | $ | 95,804 | $ | 90,101 |
NOTE 5. SHAREHOLDERS’ EQUITY
A. | Stock Repurchase Plan
The Company has a Discretionary Stock Repurchase Plan, originally approved by the Board of Directors in November 2001 and amended from time to time, under which management as of December 31, 2022 is authorized to repurchase shares down to 150,000 shares of common stock outstanding. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. On February 20, 2023, the Board of Directors amended the plan to further authorize repurchases down to 140,000 shares. This authorization has no expiration date.
Cumulative shares of common stock repurchased since inception of the above plan and a previous now expired plan were 137,498.
B. | Omnibus Incentive Plan
On May 5, 2020, the shareholders approved the Company's Amended and Restated 2017 Omnibus Incentive Plan (Amended 2017 Plan), which made available 5,500 shares of the Company's common stock in aggregate to be issued under any award type allowed by the Amended 2017 Plan. The RSUs granted in 2022, 2021 and 2020 generally vest annually over three years based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis.
The Amended 2017 Plan also provides for annual equity awards to non-employee directors. The Amended 2017 Plan provides for an annual grant of equity awards to each participant with a fair market value that may not exceed $600, or $800 with respect to the Chairman of the Board. Restricted shares granted to non-employee directors in 2022, 2021 and 2020 vest at the time of grant and there were no unvested restricted shares as of December 31, 2022. In 2022, 16 fully vested RSUs with a weighted average grant date fair value per share of $102.65 were granted to non-employee directors.
The following table summarizes information about RSUs and restricted shares:
| Number of shares | Weighted average grant date fair value | ||||||||
| Nonvested at December 31, 2021 | 794 | $ | 89.74 | ||||||
| RSUs granted | 372 | $ | 102.65 | ||||||
| RSUs vested | (439 | ) | $ | 85.37 | |||||
| RSUs forfeited | (20 | ) | $ | 93.24 | |||||
| Nonvested at December 31, 2022 | 707 | $ | 99.09 |
F-16
In 2022, 2021 and 2020, the Company also awarded 84, 75 and 95 PSUs, respectively, under the Amended 2017 Plan. Nonvested PSUs include performance conditions to be finally measured based on financial results at December 31, 2023 and 2024. The final number of PSUs will be determined using an adjustment factor of up to 2 times or down to 0.5 of the targeted PSU grant, depending on the degree of achievement of the designated performance targets. If the minimum performance thresholds are not achieved, no shares will be issued. Each PSU will convert to one share of the Company's common stock upon vesting.
At December 31, 2022, there were 161 shares of nonvested PSUs at target levels, with a weighted-average grant date fair value of $107.58. At December 31, 2022, 197 PSUs with a grant date fair value of $72.90 became vested based on satisfaction of performance goals but had not settled.
RSUs and PSUs granted under the Amended 2017 Plan have dividend equivalent rights, which entitle holders of RSUs and PSUs to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs and are accumulated and paid in shares when the underlying awards is released.
At December 31, 2022, there are approximately 2,041 shares available for grant under the Amended 2017 Plan.
When restrictions on employee RSUs or PSUs lapse the Company derives a tax deduction in certain countries based on the fair market value of the award upon vesting and subject to the limits allowed under each jurisdiction’s tax regulations. Until vesting, a deferred tax asset is recognized and measured based on the fair value of the award at the date of grant (consistent with measurement for stock compensation expense). Any excess or shortfall in the tax deduction resulting from the difference between fair market value of the award between the date of grant and the date of vesting is recognized in income tax expense upon vesting.
C. | Stock Option Plans
Prior to 2017, the Company granted stock options under stock option plans approved annually by shareholders. Those plans generally allowed for the grant of qualified and non-qualified grants and outstanding options expire no more than ten years from the date of grant. All options were fully vested as of December 31, 2020. No additional shares can be granted under any of the Company's stock option plans other than the Amended 2017 Plan.
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 exercise or 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. For disqualifying dispositions, when the amount of the tax deduction is less than the cumulative amount of compensation expense recognized for the award, the amount credited to current tax expense is limited to the tax benefit associated with the tax deduction.
The following table summarizes information about stock options:
| Number of shares | Weighted average exercise price per share | Weighted average remaining contractual life | Aggregate intrinsic value | ||||||||||||||
| Outstanding at December 31, 2021 | 2,329 | $ | 44.07 | ||||||||||||||
| Options granted | — | $ | — | ||||||||||||||
| Options exercised | (539 | ) | $ | 41.48 | |||||||||||||
| Options canceled | (6 | ) | $ | 41.53 | |||||||||||||
| Outstanding at December 31, 2022 | 1,784 | $ | 44.86 | 2.29 | $ | 105,400 | |||||||||||
| Exercisable at December 31, 2022 | 1,784 | $ | 44.86 | 2.29 | $ | 105,400 |
F-17
D. | Stock Purchase Plan
In May 2002, the shareholders approved the Company’s 2002 Employee Stock Purchase Plan (the 2002 Plan), which became effective August 1, 2002. As last amended in May 2019, the Company’s 2002 Plan provides for 15,305 shares of the Company’s common stock 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 Company’s stock on the last trading day in July or (2) 85% of the fair market value of the Company’s stock on the first trading day in August of the preceding year. A total of 14,174 shares have been issued under the 2002 Plan since inception and $32,458 has been withheld from employees at December 31, 2022 in connection with the plan year ending July 31, 2023.
E. | Share-Based Compensation Expense
The fair value of employee stock purchase rights granted under the 2002 Plan is estimated on the date of grant using the Black-Scholes Model with the following assumptions:
| For the years ended December 31, | |||||||||||||
| 2022 | 2021 | 2020 | |||||||||||
| Dividend yield | 1.30 | % | 1.10 | % | 1.40 | % | |||||||
| Volatility | 29 | % | 20 | % | 32 | % | |||||||
| Risk-free interest rates | 3.02 | % | 0.08 | % | 0.15 | % | |||||||
| Expected life (years) | 1 | 1 | 1 | ||||||||||
| Weighted average fair value | $ | 27.07 | $ | 28.55 | $ | 23.26 |
The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock over a period of time commensurate to the expected life. The expected life assumption is based on the one-year offering period. 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. The expected dividend yield is based on the Company’s historical experience. The forfeiture assumption used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns.
The compensation expense for employee RSUs and PSUs is based on the fair market value of the Company’s share of common stock on the date of grant. RSUs and PSUs awarded in 2022, 2021 and 2020 were granted at a weighted-average grant date fair value of $102.65, $113.82 and $74.00, respectively.
The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was approximately $34 million, $82 million and $117 million, respectively.
As of December 31, 2022, the total unrecognized compensation cost related to stock awards is $52 million and the weighted average period over which that cost is expected to be recognized is 1.6 years.
Shares issued as a result of stock option exercises, restricted stock awards, vested RSUs, vested PSUs and employee stock plan purchases are issued as new shares outstanding by the Company.
NOTE 6. 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 RSUs. 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.
F-18
The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders.
| Net earnings attributable to shareholders | Weighted average shares | Earnings per share | |||||||||||
| 2022 | |||||||||||||
| Basic earnings attributable to shareholders | $ | 1,357,399 | 163,010 | $ | 8.33 | ||||||||
| Effect of dilutive potential common shares | — | 1,417 | — | ||||||||||
| Diluted earnings attributable to shareholders | $ | 1,357,399 | 164,427 | $ | 8.26 | ||||||||
| 2021 | |||||||||||||
| Basic earnings attributable to shareholders | $ | 1,415,492 | 169,145 | $ | 8.37 | ||||||||
| Effect of dilutive potential common shares | — | 2,105 | — | ||||||||||
| Diluted earnings attributable to shareholders | $ | 1,415,492 | 171,250 | $ | 8.27 | ||||||||
| 2020 | |||||||||||||
| Basic earnings attributable to shareholders | $ | 696,140 | 168,333 | $ | 4.14 | ||||||||
| Effect of dilutive potential common shares | — | 2,563 | — | ||||||||||
| Diluted earnings attributable to shareholders | $ | 696,140 | 170,896 | $ | 4.07 |
In 2022, 1,072 potential common shares were excluded from the computation of diluted earnings per share because the effect would have been antidilutive. Substantially all outstanding potential common shares in 2021 and 2020 were dilutive.
F-19
NOTE 7. INCOME TAXES
Income tax expense (benefit) includes the following components:
| Federal | State | Foreign | Total | ||||||||||||||
| 2022 | |||||||||||||||||
| Current | $ | 149,840 | $ | 63,140 | $ | 295,546 | $ | 508,526 | |||||||||
| Deferred | (27,904 | ) | (5,336 | ) | — | (33,240 | ) | ||||||||||
| $ | 121,936 | $ | 57,804 | $ | 295,546 | $ | 475,286 | ||||||||||
| 2021 | |||||||||||||||||
| Current | $ | 126,840 | $ | 54,484 | $ | 328,137 | $ | 509,461 | |||||||||
| Deferred | (3,981 | ) | 291 | — | (3,690 | ) | |||||||||||
| $ | 122,859 | $ | 54,775 | $ | 328,137 | $ | 505,771 | ||||||||||
| 2020 | |||||||||||||||||
| Current | $ | 37,551 | $ | 18,432 | $ | 193,996 | $ | 249,979 | |||||||||
| Deferred | 8,440 | (69 | ) | — | 8,371 | ||||||||||||
| $ | 45,991 | $ | 18,363 | $ | 193,996 | $ | 258,350 |
The components of earnings before income taxes are as follows:
| 2022 | 2021 | 2020 | |||||||||||
| United States | $ | 987,186 | $ | 823,009 | $ | 325,009 | |||||||
| Foreign | 848,705 | 1,101,607 | 631,555 | ||||||||||
| $ | 1,835,891 | $ | 1,924,616 | $ | 956,564 |
Income tax expense differs from amounts computed by applying the United States Federal income tax rate of 21% when compared to earnings before income taxes as a result of the following:
| 2022 | 2021 | 2020 | |||||||||||
| Computed “expected” tax expense | $ | 385,537 | $ | 404,169 | $ | 200,879 | |||||||
| Increase (decrease) in income taxes resulting from: | |||||||||||||
| Effect of foreign taxes | 32,293 | 46,644 | 48,584 | ||||||||||
| State income taxes, net of Federal income tax benefit | 45,665 | 43,272 | 14,507 | ||||||||||
| Nondeductible executive compensation | 8,019 | 8,981 | 4,324 | ||||||||||
| Stock compensation expense, net | 454 | (6,238 | ) | (8,461 | ) | ||||||||
| Other, net | 3,318 | 8,943 | (1,483 | ) | |||||||||
| $ | 475,286 | $ | 505,771 | $ | 258,350 |
In 2022, 2021 and 2020, the Company also benefited from U.S. Federal tax credits totaling $41.6 million, $27.9 million and, $16.7 million, respectively, principally because of withholding taxes related to the Company's foreign operations, as well as U.S. income tax deductions for Foreign-derived intangible income (FDII) of $41.7 million, $22.6 million, and $10.0 million, respectively. The Company's effective tax rate in 2021 and 2020 benefited from significant share-based compensation deductions. These amounts were offset by the effect of higher foreign tax rates of the Company's international subsidiaries, when compared to the U.S. Federal income tax rate of 21%, as well as certain expenses that are no longer deductible under the 2017 Tax Act, including certain executive compensation in excess of amounts allowed. The Company treats BEAT and GILTI as components of current income tax expense. For the years 2022, 2021 and 2020, there was no BEAT expense and GILTI expense was insignificant.
F-20
The tax effects of temporary differences and tax credits that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
| Years ended December 31, | 2022 | 2021 | |||||||
| Deferred Tax Assets: | |||||||||
| Deductible stock compensation expense, net | $ | 9,707 | $ | 11,291 | |||||
| Operating lease liabilities | 72,506 | 67,065 | |||||||
| Capitalized R&D expenses | 23,246 | — | |||||||
| Accrued third party obligations, deductible for taxes upon economic performance | 9,601 | 6,504 | |||||||
| Excess of financial statement over tax depreciation | 10,280 | 9,182 | |||||||
| Foreign currency translation adjustments | 12,184 | 8,729 | |||||||
| Retained liability for cargo claims | 1,592 | 1,430 | |||||||
| Provision for credit losses on accounts receivable | 3,550 | 2,168 | |||||||
| Total gross deferred tax assets | 142,666 | 106,369 | |||||||
| Deferred Tax Liabilities: | |||||||||
| Unremitted foreign earnings, net of related foreign tax credits | 36,542 | 41,560 | |||||||
| Operating lease assets | 68,675 | 64,080 | |||||||
| Total gross deferred tax liabilities | 105,217 | 105,640 | |||||||
| Net deferred tax assets | $ | 37,449 | $ | 729 |
Based on management’s review of the Company’s tax positions, the Company had no significant unrecognized tax benefits as of December 31, 2022 and 2021.
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 consistent with established transfer pricing methodologies and norms. 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 legal and tax advisors.
The total amount of the Company’s tax contingencies may increase in 2023. In addition, changes in state, federal, and foreign tax laws and changes, including transfer pricing 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. The Company cannot currently provide an estimate of the range of possible outcomes. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the years ended December 31, 2022, 2021 and 2020.
F-21
NOTE 8. COMMITMENTS
A. | Unconditional Purchase Obligations
The Company enters into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. Historically, the Company has met these obligations in the normal course of business within one year. In the regular course of business, the Company also enters into agreements with service providers to maintain or operate equipment, facilities or software that can be longer than one year. We also regularly have contractual obligations for specific projects related to improvements of our owned or leased facilities and information technology infrastructure. Purchase obligations outstanding as of December 31, 2022 totaled $150 million.
B. | Employee Benefits
The Company has employee savings plans under which the Company provides a discretionary matching contribution. In 2022, 2021 and 2020, the Company’s contributions under the plans were $24,774, $22,587, and $20,713, respectively.
C. | Credit Arrangements
Certain of the Company’s foreign subsidiaries maintain bank lines of credit for short-term working capital purposes. A few of these credit lines are supported by standby letters of credit issued by a United States bank, or guarantees issued by the Company to the foreign banks issuing the credit line. At December 31, 2022, borrowings under these credit lines were $57,778 and the Company was contingently liable for approximately $77,528 under outstanding standby letters of credit and guarantees. At December 31, 2022, the Company was in compliance with all restrictive covenants of these credit lines and the associated credit facilities.
The standby letters of credit and guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excise taxes are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company were to be required to perform.
NOTE 9. 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 December 31, 2022, the Company recorded $22 million in tax contingencies in other operating expenses and $22 million of interest expense in the consolidated statement of earnings, related to a non income tax contingency. Other amounts recorded for 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, including potential claims resulting from a cyber-attack in February 2022.
F-22
NOTE 10. BUSINESS SEGMENT INFORMATION
Financial information regarding 2022, 2021 and 2020 operations by the Company’s designated geographic areas is as follows:
| UNITED STATES | OTHER NORTH AMERICA | LATIN AMERICA | NORTH ASIA | SOUTH ASIA | EUROPE | MIDDLE EAST, AFRICA AND INDIA | ELIMINATIONS | CONSOLIDATED | ||||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 4,869,364 | 517,662 | 257,721 | 5,810,088 | 2,144,034 | 2,471,456 | 1,005,489 | (4,530 | ) | 17,071,284 | |||||||||||||||||||||||||
| Directly related cost of transportation and other expenses 1 | $ | 2,943,232 | 310,206 | 160,273 | 4,853,902 | 1,751,187 | 1,768,102 | 791,887 | (1,892 | ) | 12,576,897 | |||||||||||||||||||||||||
| Salaries and other operating expenses 2 | $ | 944,050 | 188,192 | 72,177 | 504,805 | 238,658 | 573,598 | 151,069 | (2,533 | ) | 2,670,016 | |||||||||||||||||||||||||
| Operating income 3 | $ | 982,082 | 19,264 | 25,271 | 451,381 | 154,189 | 129,756 | 62,533 | (105 | ) | 1,824,371 | |||||||||||||||||||||||||
| Identifiable assets at period end | $ | 3,070,697 | 209,516 | 123,003 | 675,022 | 316,777 | 938,660 | 283,872 | (27,113 | ) | 5,590,434 | |||||||||||||||||||||||||
| Capital expenditures | $ | 56,411 | 2,954 | 937 | 2,976 | 1,543 | 17,868 | 4,135 | — | 86,824 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 35,461 | 1,892 | 1,123 | 4,682 | 1,966 | 9,640 | 2,574 | — | 57,338 | ||||||||||||||||||||||||||
| Equity | $ | 2,246,417 | 31,132 | 56,416 | 274,703 | 136,944 | 263,278 | 145,269 | (40,624 | ) | 3,113,535 | |||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 4,344,825 | 440,226 | 209,161 | 6,363,054 | 2,046,569 | 2,258,911 | 865,509 | (4,738 | ) | 16,523,517 | |||||||||||||||||||||||||
| Directly related cost of transportation and other expenses 1 | $ | 2,491,947 | 245,842 | 125,940 | 5,295,612 | 1,666,792 | 1,558,705 | 675,303 | (1,986 | ) | 12,058,155 | |||||||||||||||||||||||||
| Salaries and other operating expenses 2 | $ | 1,019,236 | 123,147 | 57,779 | 515,703 | 204,574 | 494,760 | 143,581 | (2,744 | ) | 2,556,036 | |||||||||||||||||||||||||
| Operating income | $ | 833,642 | 71,237 | 25,442 | 551,739 | 175,203 | 205,446 | 46,625 | (8 | ) | 1,909,326 | |||||||||||||||||||||||||
| Identifiable assets at period end | $ | 3,699,748 | 265,872 | 122,327 | 1,587,659 | 572,980 | 1,089,963 | 350,843 | (79,463 | ) | 7,609,929 | |||||||||||||||||||||||||
| Capital expenditures | $ | 19,527 | 983 | 471 | 1,786 | 2,057 | 9,507 | 1,916 | — | 36,247 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 29,826 | 1,780 | 1,079 | 5,047 | 1,965 | 9,228 | 2,387 | — | 51,312 | ||||||||||||||||||||||||||
| Equity | $ | 2,599,804 | 111,952 | 41,743 | 224,765 | 140,129 | 294,348 | 123,598 | (38,348 | ) | 3,497,991 | |||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 2,776,537 | 325,878 | 156,163 | 3,425,510 | 961,989 | 1,455,746 | 486,331 | (3,761 | ) | 9,584,393 | |||||||||||||||||||||||||
| Directly related cost of transportation and other expenses 1 | $ | 1,568,452 | 190,326 | 93,249 | 2,744,264 | 711,004 | 992,357 | 359,002 | (1,952 | ) | 6,656,702 | |||||||||||||||||||||||||
| Salaries and other operating expenses 2 | $ | 877,117 | 100,687 | 48,114 | 332,978 | 149,269 | 375,900 | 104,968 | (1,779 | ) | 1,987,254 | |||||||||||||||||||||||||
| Operating income | $ | 330,968 | 34,865 | 14,800 | 348,268 | 101,716 | 87,489 | 22,361 | (30 | ) | 940,437 | |||||||||||||||||||||||||
| Identifiable assets at period end | $ | 2,532,324 | 186,204 | 85,085 | 876,856 | 272,106 | 752,589 | 240,984 | (18,645 | ) | 4,927,503 | |||||||||||||||||||||||||
| Capital expenditures | $ | 31,604 | 1,886 | 564 | 2,202 | 2,264 | 6,394 | 2,629 | — | 47,543 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 37,081 | 1,946 | 1,194 | 4,961 | 1,876 | 8,029 | 1,872 | — | 56,959 | ||||||||||||||||||||||||||
| Equity | $ | 1,928,945 | 67,243 | 32,273 | 241,155 | 121,411 | 196,637 | 114,369 | (38,806 | ) | 2,663,227 |
Directly related cost of transportation and other expenses totals operating expenses from airfreight services, ocean freight and ocean services and customs brokerage and other services as shown in the consolidated statements of earnings.
Salaries and other operating expenses totals salaries and related, rent and occupancy, depreciation and amortization, selling and promotion and other as shown in the consolidated statements of earnings.
In 2022, Other North America operating income includes charges of $22 million related to non-income tax contingencies.
Other than the United States, only the People’s Republic of China, including Hong Kong, represented more than 10% of the Company’s total revenue, total operating income, total identifiable assets or equity in any period presented as noted in the table below.
| 2022 | 2021 | 2020 | |||||
| Revenues | 27% | 31% | 29% | ||||
| Operating income | 19% | 22% | 29% | ||||
| Identifiable assets at year end | 10% | 17% | 14% | ||||
| Equity | 7% | 4% | 6% |
F-23
NOTE 11. CYBER-ATTACK
On February 20, 2022, management determined that the Company was the subject of a targeted cyber-attack. Upon discovering the incident, the Company shut down most of its connectivity, operating and accounting systems globally to manage the safety of its overall global systems environment and initiated its cybersecurity incident response plan. The Company's security teams, supplemented by commercial cybersecurity experts and in collaboration with law enforcement, worked to remediate this cyber-attack. The Company undertook extensive efforts to identify, contain, eradicate and methodically recover from this attack as rapidly as possible. The Company had limited ability to conduct operations for a period of approximately three weeks including but not limited to arranging for shipments of freight or managing customs and distribution activities for its customers’ shipments and performing accounting functions. The Company’s teams worked to maintain its business operations and minimize the impact on its employees, customers and operating partners, including regulatory agencies. The Company continues to incorporate learnings from the cyber-attack.
In 2022 the Company has incurred, as a result of its inability to timely process and move shipments through ports during the downtime, approximately $47 million in incremental demurrage charges, net of recoveries, where the Company has direct liability for this obligation. These costs are recorded in customs brokerage and other services expenses.
Additionally, principally in the first quarter, the Company incurred investigation, recovery, and remediation expenses, including costs to recover its operational and accounting systems and to enhance cybersecurity protections. These costs are primarily comprised of various consulting services including cybersecurity experts, outside legal advisors, and other IT professional expenses. The Company also recorded estimated liabilities for potential shipment-related claims. In 2022, the total amount recorded for these items was approximately $18 million and is recorded in other operating expenses. The Company did not incur significant capital expenditures as a result of the cyber-attack.
The Company may incur additional expenses which could include third-party expenses, increased information services costs, or indemnities to customers. When the Company’s operating systems were down, many customers worked with other providers to meet their logistics needs, resulting in lower shipment volumes in the first quarter and to a lesser extent in the second quarter for which the financial impact on revenues and operating income cannot be quantified. Such costs and the ongoing impacts from the downtime caused by the cyber-attack are not expected to have further material adverse impact on the Company’s business. The Company is unable to estimate the ultimate direct and indirect financial impacts of this cyber-attack.
F-24
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
ANNUAL REPORT
ON
FORM 10-K
FOR FISCAL YEAR ENDED
December 31, 2022
EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
EXHIBITS
| Exhibit Number | Description | |
| 21.1 | Subsidiaries of the Registrant | |
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | The cover page from the Company’s Yearly Report on Form 10-K for the year ended December 31, 2022, has been formatted in Inline XBRL |
Previous: Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES