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Freight

EXPEDITORS INTERNATIONAL OF WASHINGTON : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS

Certain portions of this report on Form 10-Q including the sections entitled
"Overview," "Novel Coronavirus (COVID-19)," "Expeditors' Culture and Strategy,"
"International Trade and Competition," "Seasonality," "Critical Accounting
Estimates," "Results of Operations," "Income tax expense," "Currency and Other
Risk Factors" and "Liquidity and Capital Resources" contain forward-looking
statements. Words such as "will likely result," "expects", "are expected to,"
"would expect," "would not expect," "will continue," "is anticipated,"
"estimate," "project," "plan," "believe," "probable," "reasonably possible,"
"may," "could," "should," "intends," "foreseeable future" and variations of such
words and similar expressions are intended to identify such forward-looking
statements. In addition, any statements that refer to projections of future
financial performance, our anticipated growth and trends in the Company's
businesses, the anticipated impact and duration of COVID-19, and other
characterizations of future events or circumstances are forward-looking
statements. These statements must be considered in connection with the
discussion of the important factors that could cause actual results to differ
materially from the forward-looking statements. In addition to risk factors
identified in Part II, Item 1A, Risk Factors of this report, attention should be
given to the factors identified and discussed in the Company's annual report on
Form 10-K filed on February 21, 2020.

Overview

Expeditors International of Washington, Inc. (herein referred to as
"Expeditors," the "Company," "we," "us," "our") provides a full suite of global
logistics services. Our services include 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. We do not compete for overnight
courier or small parcel business. As a non-asset based carrier, we do not own or
operate transportation assets.

We derive our revenues by entering into agreements that are generally comprised
of a single performance obligation, which is that freight is shipped for and
received by our customer. Each performance obligation is comprised of one or
more of the Company's services. We typically satisfy our 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. Our three principal services are the revenue categories
presented in our financial statements: 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
our three primary sources of revenue.

We generate the major portion of our air and ocean freight revenues by
purchasing transportation services on a wholesale basis from direct
(asset-based) carriers and then reselling those services to our 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. By consolidating shipments from multiple customers and concentrating
our buying power, we are able to negotiate favorable buy rates from the direct
carriers, while at the same time offering lower sell rates than customers would
otherwise be able to negotiate themselves.

In most cases, we act as an indirect carrier. When acting as an indirect
carrier, we issue 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, we receive a
contract of carriage known as a Master Airway Bill for airfreight shipments and
a Master Ocean Bill of Lading for ocean shipments.

Customs brokerage and other services involve providing services at destination,
such as helping customers clear shipments through customs by preparing and
filing required documentation, calculating and providing for payment of
duties and other taxes on behalf of customers as well as arranging for any
required inspections by governmental agencies, and import services such as
arranging for delivery. These are complicated functions requiring technical
knowledge of customs rules and regulations in the multitude of countries in
which we have offices. We also provide other value added services at
destination, such as warehousing and distribution, time-definitive
transportation services and consulting.

In these transactions, we evaluate whether it is appropriate to record the gross
or net amount as revenue. Generally, revenue is recorded on a gross basis when
we are primarily responsible for fulfilling the promise to provide the services,
when we assume risk of loss, when we have discretion in setting the prices for
the services to the customers, and we have the ability to direct the use of the
services provided by the third party. 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 we do 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, we are not a
principal and report only commissions and fees earned in revenue.

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We manage our company along five geographic areas of responsibility: Americas;
North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each
area is divided into sub-regions that are composed of operating units with
individual profit and loss responsibility. Our business involves shipments
between operating units and typically touches more than one geographic area. The
nature of the international logistics business necessitates a high degree of
communication and cooperation among operating units. Because of this
inter-relationship between operating units, it is very difficult to examine any
one geographic area and draw meaningful conclusions as to its contribution to
our overall success on a stand-alone basis.

Our operating units share revenue using the same arms-length pricing
methodologies that we use when our 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. Our strategy closely
links compensation with operating unit profitability, which includes shared
revenues and allocated costs. Therefore, individual success is closely linked to
cooperation with other operating units within our network. The mix of services
varies by segment based primarily on the import or export orientation of local
operations in each of our regions.

Novel Coronavirus (COVID-19)

The COVID-19 pandemic has significantly affected our business operations in the
first half of 2020, and we expect these disruptive conditions to continue at
least through the remainder of the year. At this time, the main elements of its
impact on our business are summarized below:

• Governments have designated our operations as essential business in all

regions where we operate because of our important role in supply chains

operations worldwide. As such, our districts continue to serve our

customers while operating within the regulations established in those

countries.

• We activated our global business continuity plan in the first quarter and

are continuing to operate under this plan. Our business continuity plan

includes measures to protect and safeguard the health of our employees and

service providers, such as sanitization of our facilities, providing

protective equipment to employees, restricting travel and requiring all

employees to work remotely if they are able to. Our plan includes measures

to minimize adverse impacts to our operations and those of our customers’

businesses. We have identified areas of the supply chain process that can

be supported remotely and through automation, and those which require

physical operations and handling. We continue to monitor the rapidly

        changing situation and take additional actions, as needed, based on
        recommendations from governments and local and national health
        authorities. In the second quarter of 2020, we implemented and began

deploying a global recovery plan regionally following local regulations.

        Our recovery plan is intended to allow employees to gradually and safely
        move back into offices when health risks subside and governments around
        the world lift restrictions. Our districts around the world are at

different phases of the recovery plan depending on local conditions.

• Travel restrictions, government mandated lockdowns and additional

precautionary measures resulted in business and supply chain disruption,

and limited operations in China in the first quarter of 2020, and

worldwide starting in March 2020 with a sharp decrease in international

trade. We have also seen a shift in the goods we handle with a substantial

portion of shipments comprising of technology products to support social

distancing and working remotely and to a lesser degree, medical equipment

and supplies. In contrast, we have seen significant declines in shipments

from our customers in the aerospace, automotive, oil and energy and

certain portions of the retail sectors. With the exception of airfreight

exports out of North Asia, declines in freight volumes have negatively

impacted our results of operations in the first half of 2020.

• These disruptions are threatening the financial stability of our service

providers and our ability to efficiently route customer freight. Reduced

passenger flight schedules and cancellations have significantly impacted

        available belly space, limiting our ability to utilize space under our
        existing capacity agreements with carriers and requiring us to buy space
        in a tight airfreight market and utilize chartered planes. In the second
        quarter, the limited airfreight space capacity, combined with high global

demand for shipping Personal Protective Equipment (PPE), medical equipment

and supplies and technology products created such an imbalance that buy

rates increased to unprecedented levels, in particular on exports out of

North Asia. Ocean carriers have continued to reduce their capacity by

anchoring vessels and skipping ports due to the decline in demand. These

        freight market conditions create pricing volatility that further
        challenges Expeditors' ability to maintain historical unitary
        profitability.

• Many of our customers are experiencing disruptions in their revenue and

cash flow, including an increased number of bankruptcies, prompting these

customers to attempt to renegotiate contractual terms and increasing our

accounts receivable collection risk. We have continued to apply our

established credit control procedures and collection monitoring that have

historically been effective in limiting credit losses. These conditions

could result in the loss of business and additional bad debt allowances in

        the future if our customers' ability to pay further deteriorates.




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These uncertain conditions continued in July 2020, and we expect them to
continue at least through the remainder of the year. A prolonged recession in
the global economy and trade would negatively affect our operations in the
future.

Expeditors’ Culture and Strategy

From the inception of our company, management has believed that the elements
required for a successful global service organization can only be assured
through recruiting, training, and ultimately retaining superior personnel. We
believe that our greatest challenge is now and always has been perpetuating a
consistent global corporate culture, which demands:

• Total dedication to providing superior customer service;

• Compliance with our policies and procedures and government regulations;

  • Aggressive marketing of all of our service offerings;


    •   A positive, safe work environment that is inclusive and free from
        discrimination and harassment;


  • Ongoing development of key employees and management personnel;

• Creation of unlimited advancement opportunities for employees dedicated to

hard work, personal growth and continuous improvement;

• Individual commitment to the identification and mentoring of successors

        for every key position so that when change occurs, a qualified and
        well-trained internal candidate is ready to step forward; and

• Continuous identification, design and implementation of system solutions

and differentiated service offerings, both technological and otherwise, to

meet and exceed the needs of our customers while simultaneously delivering

tools to make our employees more efficient and effective.


We reinforce these values with a compensation system that rewards employees for
profitably managing the things they can control. This compensation system has
been in place since we became a publicly traded company. There is no limit to
how much a key manager can be compensated for success. We believe in a "real
world" environment where the employees of our operating units are held
accountable for the profit implications of their decisions. If these decisions
result in operating losses, management generally must make up these losses with
future operating profits, in the aggregate, before any cash incentive
compensation can be earned. Executive management, in limited circumstances,
makes exceptions at the branch operating unit level. At the same time, our
policies, processes and relevant training focus on such things as cargo
management, risk mitigation, compliance, accounts receivable collection, cash
flow and credit soundness in an attempt to help managers avoid the kinds of
errors that might end a career.

We believe that our unique culture is a critical component to our continued
success. We strongly believe that it is nearly impossible to predict events
that, individually or in the aggregate, could have a positive or a negative
impact on our future operations. As a result, management's focus is on building
and maintaining a global corporate culture and an environment where well-trained
employees and managers are prepared to identify and react to changes as they
develop and thereby help us adapt and thrive as major trends emerge.

Our business growth strategy emphasizes a focus on the right markets and, within
each market, on the right customers that lead to profitable business growth.
Expeditors' teams are aligned on the specific markets; on the targeted accounts
within those markets; and on ways that we can continue to differentiate
ourselves from our competitors.

Our ability to provide services to customers is highly dependent on good working
relationships with a variety of entities including airlines, ocean carriers,
ground transportation providers and governmental agencies. The significance of
maintaining acceptable working relationships with these entities has gained
increased importance as a result of the effect of the global pandemic, ongoing
concern over terrorism, security, changes in governmental regulation and
oversight of international trade. A good reputation helps to develop practical
working understandings that will assist in meeting security requirements while
minimizing potential international trade obstacles, especially as governments
rapidly promulgate new regulations in reaction to the global pandemic and
increase oversight and enforcement of new and existing laws. We consider our
current working relationships with these entities to be satisfactory.

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Our business is also highly dependent on the financial stability and operational
capabilities of the carriers we utilize. Carriers are highly leveraged with debt
and incurring operating losses. As a result, carriers are facing liquidity
challenges exacerbated by the global pandemic and are seeking relief under
various government support programs. This environment requires that we be
selective in determining which carriers to utilize. Further changes in the
financial stability, operating capabilities and capacity of asset-based
carriers, capacity allotments available from carriers, governmental regulations,
and/or trade accords could adversely affect our business in unpredictable ways.

As a knowledge-based global provider of logistics services, we have often
concluded over the course of our history that it is better to grow organically
rather than by acquisition. However, when we have made acquisitions, it has
generally been to obtain technology, geographic coverage or specialized industry
expertise that could be leveraged to benefit our entire network. In May 2020, we
acquired a less-than-truckload digital online shipping platform which aligns
with our focus on developing digital solutions.

International Trade and Competition

We operate in over 60 countries in the competitive global logistics industry and
our activities are closely tied to the global economy. The global economy
entered into a recession as a result of the global pandemic and related
precautionary measures including lockdown government mandates worldwide,
shutdown of manufacturing and operations for non-essential businesses and travel
restrictions. 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. Currently, the United
States and China have significantly increased tariffs on certain imports and are
engaged in trade negotiations and changes to export regulations and tariffs for
goods deemed essential to combating COVID-19. The United Kingdom and the
European Union are negotiating the terms of the United Kingdom's exit from the
European Union. We cannot predict the outcome of these proposals or
negotiations, or the effects they will have on our business. As governments
implement higher tariffs on imports, manufacturers may accelerate, to the extent
possible, shipments to avoid higher tariffs and, over time, may shift
manufacturing to other countries. Doing business in foreign locations also
subjects us 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, our business may
also be negatively affected by political developments and changes in government
personnel or policies in the United States and other countries, as well as
economic turbulence, political unrest and security concerns in the nations and
on the trade shipping lanes in which we conduct business and the future impact
that these events may have on international trade, oil prices and security
costs.

The global logistics services industry is intensely competitive and is expected
to remain so for the foreseeable future. Our pricing and terms continue to be
pressured by uncertainty in global trade and economic conditions, concerns over
airfreight capacity availability, volatile airfreight pricing, disruptions in
port services, political unrest and fluctuating currency exchange rates. We
expect these operating and competitive conditions to continue. Air carriers are
experiencing significant cash flow challenges as a result of travel restrictions
resulting in cancellation of flights. Ocean carriers have incurred substantial
operating losses in recent years, and many are highly leveraged with debt. These
financial challenges have resulted in multiple carrier acquisitions and carrier
alliance formations. Additionally, carriers continue to take delivery of new and
larger ships, which may increase capacity. Carriers also face new regulatory
requirements that became effective in 2020 requiring reductions in the sulfur in
marine fuel, which are increasing their operating and capital costs. When the
market experiences seasonal peaks or any sort of disruption, the carriers often
increase their pricing suddenly. This carrier behavior creates pricing
volatility that could impact Expeditors' ability to maintain historical unitary
profitability.

There is uncertainty as to how new regulatory requirements and volatility in oil
prices will continue to impact future buy rates. Because fuel is an integral
part of carriers' costs and impacts both our buy rates and sell rates, we would
expect our revenues and costs to be impacted as carriers adjust rates for the
effect of changing fuel prices. To the extent that future fuel prices increase
and we are unable to pass through the increases to our customers, this could
adversely affect our operating income.

The global economic and trade environments remain uncertain, including the
impacts of the pandemic. We cannot predict the impact of future changes in
global trade on our operating results, freight volumes, pricing, changes in
consumer demand, carrier stability and capacity, customers' abilities to pay or
on changes in competitors' behavior. Additionally, we cannot predict the direct
or indirect impact that further changes in consumer purchasing behavior, such as
online shopping, could have on our business. In response to governments
implementing higher tariffs on imports as well as responses to pandemics'
disruptions, some customers have begun shifting manufacturing to other countries
which could negatively impact us.

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Seasonality

Historically, our operating results have been subject to seasonal demand trends
with the first quarter being the weakest and the third and fourth quarters being
the strongest; however, there is no assurance this seasonal trend will occur in
the future or to what degree it will be impacted in 2020 by the pandemic. This
pattern has been the result of, or influenced by, numerous factors, including
weather patterns, national holidays, consumer demand, new product launches,
economic conditions, pandemics, governmental policies and inter-governmental
disputes and a myriad of other similar and subtle forces. In addition, this
historical quarterly trend has been influenced by the growth and diversification
of our international network and service offerings.

A significant portion of our revenues is derived from customers in the retail
and technology 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 our revenues
are, to a large degree, impacted by factors out of our control, such as a sudden
change in consumer demand for retail goods, changes in trade tariffs, 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, we 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 our stock. We cannot accurately forecast many of these
factors, nor can we estimate accurately the relative influence of any particular
factor and, as a result, there can be no assurance that historical patterns will
continue in future periods.

Critical Accounting Estimates

The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and judgments. We base our estimates on historical experience and
on assumptions that we believe are reasonable. Our critical accounting estimates
are discussed in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of our annual report on
Form 10-K for the year ended December 31, 2019, filed on February 21, 2020.
There have been no material changes to the critical accounting estimates
previously disclosed in that report.

Results of Operations

The following table shows the revenues, the directly related cost of
transportation and other expenses for our principal services and our overhead
expenses for the three and six months ended June 30, 2020 and 2019, including
the respective percentage changes comparing 2020 and 2019.

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The table and the accompanying discussion and analysis should be read in
conjunction with the condensed consolidated financial statements and related
notes thereto in this quarterly report.



                                          Three months ended June 30,                  Six months ended June 30,
                                                                  Percentage                                   Percentage
(in thousands)                         2020           2019          change        2020            2019           change
Airfreight services:
Revenues                            $ 1,434,590$ 741,577        93%       $ 2,143,629$ 1,456,478        47%
Expenses                              1,097,073       542,639        102         1,617,242       1,051,849         54
Ocean freight services and ocean
  services:
Revenues                                491,712       543,809        (10)          985,139       1,112,450        (11)
Expenses                                363,599       390,299        (7)           730,082         810,630        (10)
Customs brokerage and other
  services:
Revenues                                654,330       750,193        (13)        1,353,728       1,486,702        (9)
Expenses                                370,369       440,946        (16)          770,445         877,342        (12)
Overhead expenses:
Salaries and related costs              395,107       356,351         11           737,147         713,261         3
Other                                   106,858       113,143        (6)           220,899         222,746        (1)
Total overhead expenses                 501,965       469,494         7            958,046         936,007         2
Operating income                        247,626       192,201         29           406,681         379,802         7
Other income, net                         3,356         8,778        (62)           11,547          16,549        (30)
Earnings before income taxes            250,982       200,979         25           418,228         396,351         6
Income tax expense                       66,794        47,449         41           111,258         102,710         8
Net earnings                            184,188       153,530         20           306,970         293,641         5
Less net earnings attributable to
  the noncontrolling interest               319           381        (16)              757             793        (5)

Net earnings attributable to

  shareholders                      $   183,869$ 153,149        20%       $   306,213$   292,848         5%




Airfreight services:

In the second quarter of 2020, airfreight services experienced unprecedented
events in response to the global pandemic. As a result of travel restrictions
and lower passenger demand, airlines cancelled flights reducing available belly
space for cargo at a time where global demand for time-sensitive delivery of
essential PPE, medical supplies and technology equipment spiked. This caused
extreme imbalances between carrier capacity and demand, principally on exports
out of North Asia. In order to execute and meet the urgent transportation needs
of our customers we heavily utilized charter flights and purchased capacity in
advance and on the spot market, which resulted in historically high average buy
and sell rates.

Airfreight services revenues increased 93% and 47% during the three and six
months ended June 30, 2020, respectively, as compared with the same periods
for 2019, primarily due to 133% and 69% increases in average sell rates offset
by 10% and 9% declines in tonnage. Sell rates increased in all regions with the
largest increase in North Asia. Tonnage declined in all regions except North
Asia. North Asia airfreight services revenue represented 32% and 15% of the
total Company consolidated revenues in the second quarter of 2020 and 2019,
respectively. In 2020, average sell rates increased in all regions, peaking in
April and May and started declining in June.

Airfreight services expenses increased 102% and 54% during the three and six
months ended June 30, 2020, respectively, as compared with the same periods
for 2019, principally as a result of a 133% and 70% increase in average buy
rates. Buy rates increased in all regions with the largest increase in North
Asia.

The decrease in airfreight tonnage was primarily due to the global pandemic. As
a result of the global pandemic governments around the world have implemented
travel restrictions and suspended non-essential services. This has caused supply
chain disruptions for our domestic and international customers, which
correspondingly decreased our airfreight volumes. South Asia, North America and
Europe had decreases in tonnage of 45%, 15% and 14% for the three months ended
June 30, 2020 and 30%, 9% and 9% for the six months ended June 30, 2020. North
Asia had increases in tonnage of 14% and 3%, in the three months and six months
ended June 30, 2020, respectively.

These conditions created a high degree of volatility in volumes, buy and sell
rates. We are unable to predict how these uncertainties will affect our future
operations or financial results.





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Ocean freight and ocean services:

Ocean freight consolidation, direct ocean forwarding and order management are
the three basic services that constitute and are collectively referred to as
ocean freight and ocean services. Ocean freight and ocean services revenues
decreased 10% and 11% for the three and six months ended June 30, 2020 as
compared with the same periods in 2019. Ocean freight and ocean services
expenses decreased 7% and 10% for the three and six months ended June 30, 2020
as compared with the same periods in 2019. The largest component of our ocean
freight and ocean services revenue was derived from ocean freight consolidation,
which represented 63% and 66% of ocean freight and ocean services revenue for
the six months ended June 30, 2020 and 2019, respectively.



Ocean freight consolidation revenues and expenses decreased 10% and 8%,
respectively, for the three months ended June 30, 2020 as compared with the same
period in 2019, due to a 14% decline in containers shipped across all regions,
partially offset by an increase in sell and buy rates. Ocean freight
consolidation revenues and expenses decreased 15% and 14%, respectively, for the
six months ended June 30, 2020 as compared with the same period in 2019, due to
a 12% decline in containers shipped. Additionally, for the six months ended June
30, 2020, the changes in freight consolidation revenues and directly related
expenses include a revised presentation of destination services that started in
the second quarter of 2019, which decreased revenues and directly related
operating expenses in ocean freight consolidation but did not change
consolidated operating income.



Direct ocean freight forwarding revenues increased 1% and 5%, respectively,
while expenses increased 6% and 12%, for the three and six months ended June 30,
2020, principally due to higher volumes and changes in customer mix primarily in
North America. Order management revenues decreased 20% and 14% respectively, and
expenses decreased 19% and 15%, respectively for the three months ended June 30,
2020 primarily due to lower volumes in North Asia, mostly from the retail
industry.



North Asia ocean freight and ocean services revenues and expenses decreased 11%
and 10%, respectively, for the three months ended June 30, 2020, primarily due
to a decrease in container volume partially offset by higher sell and buy rates.
North Asia ocean freight and ocean services revenues and expenses decreased 22%
for the six months ended June 30, 2020, as compared with the same period in
2019, primarily due to a decrease in container volume. The decline in containers
shipped from North Asia followed decreases in trade volumes starting in 2019 and
continuing with the pandemic.



Most ocean carriers continue to reduce their capacity by anchoring vessels and
skipping ports due to the decline in demand. We expect that pricing volatility
will continue as customers solicit bids, react to governmental trade policies,
adjust to the slowdown of the global economy from the global pandemic and
carriers continue to adapt to changes in capacity, market demand and merge or
create alliances with other carriers. Carriers also face new regulatory
requirements that became effective in 2020 to reduce the use of sulfur in marine
fuel, which are increasing their operating and capital costs, which could result
in higher costs for us. These conditions could result in continued lower
operating income.

Customs brokerage and other services:

Customs brokerage and other services revenues decreased 13% and 9% and expenses
decreased 16% and 12% for the three and six months ended June 30, 2020,
respectively, as compared with the same periods in 2019, primarily due to
decreases in shipments from existing customers. Slowdowns due to the pandemic
related closures affected volumes, particularly in aerospace, automotive, oil
and energy and certain portions of the retail sectors. Customers continue to
value our brokerage services due to changing tariffs and increasing complexity
in the declaration process. Customers seek knowledgeable customs brokers with
sophisticated computerized capabilities critical to an overall logistics
management program that are necessary to rapidly respond to changes in the
regulatory and security environment.

North America revenues decreased 17% and 12% and directly related expenses
decreased 22% and 16% for the three and six months ended June 30, 2020,
respectively, as compared with the same periods for 2019, primarily as a result
of lower volumes in customs brokerage and road freight.

Overhead expenses:

Salaries and related costs increased by 11% and 3% for the three and six months
ended June 30, 2020, respectively, as compared with the same periods in 2019,
principally due to increases in commissions and bonuses earned from higher
revenues and operating income.

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Historically, the relatively consistent relationship between salaries and
operating income has been the result of a compensation philosophy that has been
maintained since the inception of our company: offer a modest base salary and
the opportunity to share in a fixed and determinable percentage of the operating
profit of the business unit controlled by each key employee. Using this
compensation model, changes in individual incentive compensation occur in
proportion to changes in our operating income, creating an alignment between
branch and corporate performance and shareholder interests.

Our management compensation programs have always been incentive-based and
performance driven. Bonuses to field management for the six months ended
June 30, 2020 were up 15% when compared to the same period in 2019. Bonuses
under the executive incentive compensation plan were consistent with the same
period in 2019, primarily due to an increase in operating income offset by a
reduction made to senior executive management bonus allocations, as well as
unused bonus allocations available for future investments in the development of
key personnel.

Because our management incentive compensation programs are also cumulative,
generally no management bonuses can be paid unless the relevant business unit
is, from inception, cumulatively profitable. Any operating losses must be offset
in their entirety by operating profits before management is eligible for a
bonus. Executive management, in limited circumstances, makes exceptions at the
branch operating unit level. Since the most significant portion of management
compensation comes from the incentive bonus programs, we believe that this
cumulative feature is a disincentive to excessive risk taking by our managers.
The outcome of any higher risk transactions, such as overriding established
credit limits, would be known in a relatively short time frame. Management
believes that when the potential and certain impact on the bonus is fully
considered in light of the short operating cycle of our services, the potential
for short-term gains that could be generated by engaging in risky business
practices is sufficiently mitigated to discourage excessive and inappropriate
risk taking. Management believes that both the stability and the long-term
growth in revenues, operating income and net earnings are a result of the
incentives inherent in our compensation programs.

Other overhead expenses decreased 6% and 1% for the three and six months ended
June 30, 2020, respectively, as compared with the same periods in 2019. The
decrease in expenses was due to a significant decrease in travel and
entertainment expense offset by an increase in bad debt expense, claims and
legal expense. We will continue to make important investments in people,
processes and technology, as well as to invest in our strategic efforts to
explore new areas for profitable growth.


Income tax expense:



Our consolidated effective income tax rate was 26.6% for the three and six
months ended June 30, 2020, as compared to 23.6% and 25.9% for the same periods
in 2019. The effect of higher average tax rates of our international
subsidiaries, when compared to U.S. federal and state tax rates, were partially
offset by U.S. foreign tax credits and U.S. income tax deductions for
Foreign-derived intangible income (FDII). Additionally, the three months ended
June 30, 2019 benefited from a state income tax refund.

Some elements of the recorded impacts of the 2017 Tax Act could be impacted by
further legislative action as well as additional interpretations and guidance
issued by the IRS or Treasury. See Note 3 to the condensed consolidated
financial statements for additional information.

Currency and Other Risk Factors

The nature of our worldwide operations necessitates dealing with a multitude of
currencies other than the U.S. dollar. This results in our being exposed to the
inherent risks of volatile international currency markets and governmental
interference. Some of the countries where we maintain offices and/or agency
relationships have strict currency control regulations, which influence our
ability to hedge foreign currency exposure. We try to compensate for these
exposures by accelerating international currency settlements among our offices
and agents. We may enter into foreign currency hedging transactions where there
are regulatory or commercial limitations on our ability to move money freely
around the world or the short-term financial outlook in any country is such that
hedging is the most time-sensitive way to mitigate short-term exchange losses.
Any such hedging activity during the three and six months ended June 30, 2020
and 2019 was insignificant. We had no foreign currency derivatives outstanding
at June 30, 2020 and December 31, 2019. During the three months ended June 30,
2020, net foreign currency losses were approximately $4 million. During the six
months ended June 30, 2020, net foreign currency gains were insignificant.
During the three and six months ended June 30, 2019, net foreign currency losses
were approximately $2 million and $4 million, respectively.

                                       20

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International air and ocean freight forwarding and customs brokerage are
intensely competitive and are expected to remain so for the foreseeable future.
There are a large number of entities competing in the international logistics
industry, including new technology-based competitors entering the industry, many
of which have significantly more resources than us; however, our primary
competition is confined to a relatively small number of companies within this
group. Expeditors must compete against both the niche players and larger
entities. The industry continues to experience consolidations into larger firms
striving for stronger and more complete multinational and multi-service
networks. However, regional and local brokers and forwarders remain a
competitive force.

The primary competitive factors in the international logistics industry continue
to be price and quality of service, including reliability, responsiveness,
expertise, convenience, and scope of operations. We emphasize quality customer
service and believe that our prices are competitive with those of others in the
industry. 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 operating income, higher operating costs,
higher claims or loss of market share, any of which would damage our results of
operations and financial condition.

Larger customers utilize more sophisticated and efficient procedures for the
management of their logistics supply chains by embracing strategies such as
just-in-time inventory management. We believe that this trend has resulted in
customers using fewer service providers with greater technological capacity and
more consistent global coverage. Accordingly, sophisticated computerized
customer service capabilities and a stable worldwide network have become
significant factors in attracting and retaining customers. Developing and
maintaining these systems and a worldwide network has added a considerable
indirect cost to the services provided to customers. Smaller and middle-tier
competitors, in general, do not have the resources available to develop
customized systems and a worldwide network.

Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents and cash
generated from operating activities. Net cash provided by operating activities
for the three and six months ended June 30, 2020 was $187 million and $352
million as compared with $156 million and $445 million for the same periods in
2019. The increase of $31 million in the three months ended June 30, 2020 was
primarily due to higher airfreight revenues offset by changes in working
capital, principally as a result of excess customer billings over collections
when compared to the same period in 2019. The decrease of $93 million in the six
months ended June 30, 2020 was primarily due to changes in working capital,
primarily as a result of increases in accounts receivable from increased
airfreight revenues during the second quarter of 2020 when compared to the same
period in 2019. At June 30, 2020, working capital was $1,570 million, including
cash and cash equivalents of $1,180 million. Other than our recorded lease
liabilities, we had no long-term obligations or debt at June 30, 2020.
Management believes that our current cash position and operating cash flows will
be sufficient to meet our capital and liquidity requirements for at least the
next 12 months and thereafter for the foreseeable future, including meeting any
contingent liabilities related to standby letters of credit and other
obligations.

As a customs broker, we make significant cash advances for a select group of our
credit-worthy customers. These cash advances are for customer obligations such
as the payment of duties and taxes to customs authorities in various countries
throughout the world. Increases in duty rates could result in increases in the
amounts we advance on behalf of our customers. Cash advances are a "pass
through" and are not recorded as a component of revenue and expense. The
billings of such advances to customers are accounted for as a direct increase in
accounts receivable from the customer and a corresponding increase in accounts
payable to governmental customs authorities. As a result of these "pass through"
billings, the conventional Days Sales Outstanding or DSO calculation does not
directly measure collection efficiency. For customers that meet certain
criteria, we have agreed to extend payment terms beyond our customary terms.
Management believes that it has established effective credit control procedures,
and historically has experienced relatively insignificant collection problems.

Our business historically has been subject to seasonal fluctuations and this is
expected to continue in the future. Cash flows fluctuate as a result of this
seasonality. Historically, the first quarter shows an excess of customer
collections over customer billings. This results in positive cash flow. The
increased activity associated with periods of higher demand (typically
commencing late second or early third quarter and continuing well into the
fourth quarter) causes an excess of customer billings over customer collections.
This cyclical growth in customer receivables consumes available cash.

                                       21

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Cash used in investing activities for the three and six months ended June 30,
2020 was $22 million and $28 million as compared with $12 million and $21
million in the same periods of 2019, primarily for capital expenditures. Capital
expenditures in the three and six months ended June 30, 2020 were related
primarily to our purchase of a less-than-truckload digital online shipping
platform, continuing investments in building and leasehold improvements and
technology and facilities equipment. Occasionally, we elect to purchase
buildings to house staff and to facilitate the staging of customers' freight.
Total anticipated capital expenditures in 2020 are currently estimated to be $60
million. This includes routine capital expenditures and investments in
technology.

Cash used in financing activities during the three and six months ended June 30,
2020 was $98 million and $359 million as compared with $250 million and $267
million for the same periods in 2019. We use the proceeds from stock option
exercises, employee stock purchases and available cash to repurchase our common
stock on the open market to limit the growth in issued and outstanding shares.
During the three and six months ended June 30, 2020, we used cash to repurchase
0.4 million and 4.4 million shares of common stock to reduce the number of total
outstanding shares, compared to 2.6 million and 3.2 million in the same periods
in 2019.

We follow established guidelines relating to credit quality, diversification and
maturities of our investments to preserve principal and maintain liquidity.
Historically, our investment portfolio has not been adversely impacted by
disruptions occurring in the credit markets. However, there can be no assurance
that our investment portfolio will not be adversely affected in the future.

We cannot predict what further impact growing uncertainties in the global
economy, political uncertainty nor the COVID-19 pandemic may have on our
operating results, freight volumes, pricing, amounts advanced on behalf of our
customers, changes in consumer demand, carrier stability and capacity,
customers’ abilities to pay or on changes in competitors’ behavior.

We maintain international unsecured bank lines of credit. At June 30, 2020, we
were contingently liable for $68 million from standby letters of credit and
guarantees. The standby letters of credit and guarantees relate to obligations
of our 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 excises are properly recorded as obligations in the accounting
records of the respective foreign subsidiaries, and there would be no need to
record additional expense in the unlikely event the parent company is required
to perform.

Our foreign subsidiaries regularly remit dividends to the U.S. parent company
after evaluating their working capital requirements and funds necessary to
finance local capital expenditures. In some cases, our ability to repatriate
funds from foreign operations may be subject to foreign exchange controls. At
June 30, 2020, cash and cash equivalent balances of $599 million were held by
our non-United States subsidiaries, of which $20 million was held in banks in
the United States. Earnings of our foreign subsidiaries are not considered to be
indefinitely reinvested outside of the United States.

© Edgar Online, source Glimpses

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