EXPD, §1A diff (2015 → 2016)

ITEM 1A - RISK FACTORS RISK FACTORS DISCUSSION AND POTENTIAL SIGNIFICANCE International Trade The Company primarily provides services to customers engaged in international commerce. Everything that affects international trade has the potential to expand or contract the Company’s primary market and adversely impact its operating results. For example, international trade is influenced by: • currency exchange rates and currency control regulations; • interest rate fluctuations; • changes in governmental policies, such as taxation, quota restrictions, other forms of trade barriers and/or restrictions and trade accords; • changes in and application of international and domestic customs, trade and security regulations; • wars, strikes, civil unrest, acts of terrorism, and other conflicts; • changes in labor and other costs; • natural disasters and pandemics; • changes in consumer attitudes regarding goods made in countries other than their own; • changes in availability of credit; • changes in the price and readily available quantities of oil and other petroleum-related products; and • increased global concerns regarding working conditions and environmental sustainability. Service Providers As a non-asset based provider of global logistics services, the Company depends on a variety of asset-based service providers, including air, ocean and ground freight carriers. The quality and profitability of the Company depend upon effective selection, management and discipline of service providers. In recent years, many of the Company’s service providers have incurred significant operating losses and are highly leveraged with debt. Changes in the financial stability, operating capabilities and capacity of asset-based carriers and space allotment made available to the Company by asset-based carriers could affect the Company in unpredictable ways. Any combination of reduced carrier capacity, pricing volatility or more limited carrier transportation schedules could negatively impact the Company’s ability to maintain historical profitability. The Company’s carriers are subject to increasingly stringent laws, which could directly or indirectly have a material adverse effect on the Company’s business. Future regulatory developments in the U.S. and abroad could adversely affect operations and increase operating costs in transportation industries, which in turn could increase the Company’s purchased transportation costs. If the Company is unable to pass such costs on to its customers, its business and results of operations could be materially and adversely affected. Predictability of Results The Company is not aware of any accurate means of forecasting short-term customer requirements. However, long-term customer satisfaction depends upon the Company’s ability to meet these unpredictable short-term customer requirements. Personnel costs, the Company’s single largest expense, are always less flexible in the very near term as the Company must staff to meet uncertain demand. As a result, short-term operating results could be disproportionately affected. A significant portion of the Company’s revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company’s revenues are, to a large degree, impacted by factors out of the Company’s control, such as a sudden change in consumer demand for retail goods, product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of the Company’s stock. Foreign Operations The majority of the Company’s revenues and operating income comes from operations conducted outside the United States. To maintain a global service network, the Company may be required to operate in hostile locations and in dangerous situations. In addition, the Company operates in parts of the world where common business practices could constitute violations of the anti-corruption laws, rules, regulations and decrees of the United States, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and of all other countries in which the Company conducts business; as well as trade and exchange control laws, or laws, regulations and Executive Orders imposing embargoes and sanctions; and anti-boycott laws and regulations. Compliance with these laws, rules, regulations and decrees is dependent on the Company’s employees, service providers, agents, third party brokers and customers, whose individual actions could violate these laws, rules, regulations and decrees. Failure to comply could result in substantial penalties and additional expenses, damage to the Company’s reputation and restrictions on its ability to conduct business. | 10. RISK FACTORS DISCUSSION AND POTENTIAL SIGNIFICANCE Key Personnel The Company is a service business. The quality of this service is directly related to the quality of the Company’s employees. Identifying, training and retaining key employees is essential to continued growth and future profitability. Effective succession planning is an important element of the Company's programs. Failure to ensure an effective transfer of knowledge and smooth transitions involving key employees could hinder the Company's ability to execute on its business strategies and level of service. Senior management of the Company includes employees with long tenures, some of whom may elect to retire. The loss of the services of one or more key personnel could have an adverse effect on the Company’s business. The Company must continue to develop and retain management personnel to address issues of succession planning. The Company believes that its compensation programs, which have been in place since the Company became a publicly traded entity, are one of the unique characteristics responsible for differentiating its performance from that of many of its competitors. Significant changes to its compensation programs could affect the Company’s performance and ability to attract and retain key personnel. Technology The Company relies heavily and must compete based upon the flexibility and sophistication of the technologies utilized in performing its core businesses. Future results depend upon Expeditors' success in developing competitive and reliable systems to address the needs of the Company's customers and suppliers. Development and maintenance of these systems must be accomplished in a cost-effective manner and support the use of secure protocols, including integration of third party technology. The Company has begun upgrading many of its systems, including core operations and accounting. These processes are inherently complex and if not managed properly could lead to disruptions in the Company's operations or its ability to remain competitive. Network Continuity and Cybersecurity As the Company and its customers continue to increase reliance on systems and as additional features are added, the risks also increase. Any significant disruptions to the Company’s global systems or the Internet for any reason, which could include equipment or network failures; co-location facility failures; power outages; sabotage; employee error or other actions; cyber-attacks or other security breaches; geo-political activity or natural disasters; all of which could have a material negative effect on the Company's results. This could include loss of revenue; business disruptions (such as the inability to timely process shipments); loss of property, including trade secrets and confidential information; legal claims and proceedings; reporting delays or errors; interference with regulatory reporting; significant remediation costs; an increase in costs to protect the Company's systems and technology; or damage to its reputation. Growth The Company has historically relied primarily upon organic growth and has tended to avoid growth through acquisition. Future results will depend upon the Company’s ability to anticipate and adapt to constantly evolving supply chain requirements and innovations. To continue to grow organically, the Company must gain profitable market share in a highly competitive environment and successfully develop and market new service offerings. When investment opportunities arise, the Company’s success will be dependent on its ability to evaluate and integrate the acquisitions. Regulatory Environment The Company is affected by ever increasing regulations from a number of sources in the United States and in foreign locations in which the Company operates. Many of these regulations are complex and require varying degrees of interpretation, including those related to trade compliance, data privacy, employment and competition laws. The current business environment tends to stress the avoidance of risk through regulation and oversight, the effect of which is likely to be unforeseen costs and potentially unforeseen consequences. In reaction to the continuing global terrorist threat, governments around the world are continuously enacting or updating security regulations. These regulations are multi-layered, increasingly technical in nature and characterized by a lack of harmonization of substantive requirements amongst various governmental authorities. Furthermore, the implementation of these regulations, including deadlines and substantive requirements, is driven by political urgencies rather than the industries’ realistic ability to comply. Failure to consistently and timely comply with these regulations, or the failure, breach or compromise of the Company’s policies and procedures or those of its service providers or agents, may result in increased operating costs, damage to the Company’s reputation, restrictions on operations and/or fines and penalties. | 11. RISK FACTORS DISCUSSION AND POTENTIAL SIGNIFICANCE Competition The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited. Nevertheless, many of these competitors have significantly more resources than the Company, are actively pursuing acquisition opportunities and are developing new technologies to gain competitive advantages. Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities, including some carriers. The primary competitive factors are price and quality of service. Many larger customers utilize the services of multiple logistics providers. Customers regularly solicit bids from competitors in order to improve service, pricing and contractual terms such as seeking longer payment terms, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of expanded contractual terms could result in reduced revenues, reduced margins, higher operating costs or loss of market share, any of which would damage the Company’s results of operations and financial condition. Taxes The Company is subject to many taxes in the United States and foreign jurisdictions. In many of these jurisdictions, the tax laws are very complex and are open to different interpretations and application. Tax authorities frequently implement new taxes and change their tax rates and rules, including interpretations of those rules. The Company is regularly under audit by tax authorities. Although the Company believes its tax estimates are reasonable, the final determination of tax audits, including transfer pricing inquiries, could be materially different from the Company’s tax provisions and accruals and negatively impact its financial results. Litigation/Investigations As a multinational corporation, the Company is subject to formal or informal investigations from governmental authorities or others in the countries in which it does business. In addition, the Company may become subject to civil litigation with its customers, service providers and other parties with whom it does business. These investigations and litigation may require significant management time and could cause the Company to incur substantial additional legal and related costs, which may include fines, penalties or damages that could have a material impact on the Company’s results of operations and operating cash flows. Economic Conditions The global economy and capital and credit markets continue to experience uncertainty and volatility. Unfavorable changes in economic conditions may result in lower freight volumes and adversely affect the Company’s revenues and operating results, as experienced in 2009 and 2012. These conditions may adversely affect certain of the Company’s customers and services providers. Were that to occur, the Company’s revenues and net earnings could also be adversely affected. Should customers’ ability to pay deteriorate, additional bad debts may be incurred. These unfavorable conditions can create situations where rate increases charged by carriers and other service providers are implemented with little or no advanced notice. The Company often times cannot pass these rate increases on to its customers in the same time frame, if at all. As a result, the Company’s yields and margins can be negatively impacted, as experienced in 2012 and parts of 2013 and 2014, particularly with ocean freight. Catastrophic Events A disruption or failure of the Company’s systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, strike, civil unrest, pandemic or other catastrophic event could cause delays in providing services or performing other mission-critical functions. The Company’s corporate headquarters, and certain other critical business operations are in the Seattle, Washington area, which is near major earthquake faults. A catastrophic event that results in the destruction or disruption of any of the Company’s critical business or information technology systems could harm the Company’s ability to conduct normal business operations and its operating results. | 12. ITEM 1B