EXPEDITORS INTERNATIONAL OF WASHINGTON INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

Washington		91-1069248
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1015 Third Avenue, Seattle, Washington		98104
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code): (206) 674-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		EXPD		NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At August 2, 2021, the number of shares outstanding of the issuer’s common stock was 169,891,158.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

	June 30, 2021			December 31, 2020
Assets:
Current Assets:
Cash and cash equivalents	$	1,674,121		$	1,527,791
Accounts receivable, less allowance for credit loss of $6,104 at June 30, 2021 and $5,579 at December 31, 2020		2,647,516			1,998,055
Deferred contract costs		534,692			327,448
Other		128,933			110,250
Total current assets		4,985,262			3,963,544
Property and equipment, less accumulated depreciation and amortization of $534,790 at June 30, 2021 and $516,988 at December 31, 2020		499,282			506,425
Operating lease right-of-use assets		443,708			432,723
Goodwill		7,927			7,927
Other assets, net		16,992			16,884
Total assets	$	5,953,171		$	4,927,503
Liabilities:
Current Liabilities:
Accounts payable	$	1,408,572		$	1,136,859
Accrued expenses, primarily salaries and related costs		319,696			257,021
Contract liabilities		619,140			379,722
Current portion of operating lease liabilities		80,210			74,004
Federal, state and foreign income taxes		57,608			45,437
Total current liabilities		2,485,226			1,893,043
Noncurrent portion of operating lease liabilities		370,333			364,185
Deferred federal and state income taxes, net		13,961			7,048
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, none issued		—			—
Common stock, par value $0.01 per share. Issued and outstanding: 169,169 shares at June 30, 2021 and 169,294 shares at December 31, 2020		1,692			1,693
Additional paid-in capital		79,357			157,496
Retained earnings		3,104,471			2,600,201
Accumulated other comprehensive loss		(106,066	)		(99,753	)
Total shareholders’ equity		3,079,454			2,659,637
Noncontrolling interest		4,197			3,590
Total equity		3,083,651			2,663,227
Total liabilities and equity	$	5,953,171		$	4,927,503

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Revenues:
Airfreight services	$	1,523,569	$	1,269,654	$	2,849,484	$	1,925,252
Ocean freight and ocean services		1,098,550		489,385		2,052,462		980,725
Customs brokerage and other services		986,974		652,039		1,905,967		1,348,868
Total revenues		3,609,093		2,411,078		6,807,913		4,254,845
Operating Expenses:
Airfreight services		1,136,328		932,137		2,090,872		1,398,865
Ocean freight and ocean services		862,251		361,272		1,604,686		725,668
Customs brokerage and other services		600,054		368,078		1,150,359		765,585
Salaries and related		481,186		395,107		933,291		737,147
Rent and occupancy		45,366		41,375		90,646		83,899
Depreciation and amortization		12,675		14,109		25,662		26,769
Selling and promotion		3,172		3,113		6,242		11,356
Other		57,416		48,261		109,995		98,875
Total operating expenses		3,198,448		2,163,452		6,011,753		3,848,164
Operating income		410,645		247,626		796,160		406,681
Other Income (Expense):
Interest income		2,188		2,559		4,134		7,366
Other, net		2,649		797		5,649		4,181
Other income, net		4,837		3,356		9,783		11,547
Earnings before income taxes		415,482		250,982		805,943		418,228
Income tax expense		98,508		66,794		201,019		111,258
Net earnings		316,974		184,188		604,924		306,970
Less net earnings attributable to the noncontrolling interest		602		319		1,332		757
Net earnings attributable to shareholders	$	316,372	$	183,869	$	603,592	$	306,213
Diluted earnings attributable to shareholders per share	$	1.84	$	1.09	$	3.52	$	1.80
Basic earnings attributable to shareholders per share	$	1.87	$	1.10	$	3.57	$	1.83
Weighted average diluted shares outstanding		171,677		169,290		171,660		170,382
Weighted average basic shares outstanding		169,210		166,767		169,140		167,751

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021			2020
Net earnings	$	316,974	$	184,188	$	604,924		$	306,970
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of income taxes expense (benefit) of $221 and $(5,148) for the three months ended June 30, 2021 and 2020 and $(3,172) and $(3,974) for the six months ended June 30, 2021 and 2020.		9,159		16,410		(7,038	)		(22,439	)
Other comprehensive income (loss)		9,159		16,410		(7,038	)		(22,439	)
Comprehensive income		326,133		200,598		597,886			284,531
Less comprehensive income attributable to the noncontrolling interest		341		141		607			289
Comprehensive income attributable to shareholders	$	325,792	$	200,457	$	597,279		$	284,242

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020
Operating Activities:
Net earnings	$	316,974		$	184,188		$	604,924		$	306,970
Adjustments to reconcile net earnings to net cash from operating activities:
Provisions for losses on accounts receivable		1,090			2,389			2,289			4,209
Deferred income tax expense		1,850			9,287			10,001			4,148
Stock compensation expense		30,909			21,638			42,094			32,794
Depreciation and amortization		12,675			14,109			25,662			26,769
Other, net		346			118			897			551
Changes in operating assets and liabilities:
Increase in accounts receivable		(410,783	)		(185,055	)		(663,697	)		(168,375	)
Increase in accounts payable and accrued expenses		100,118			106,760			333,271			107,677
Increase in deferred contract costs		(150,382	)		(2,333	)		(221,640	)		(18,401	)
Increase (decrease) in contract liabilities		174,504			(595	)		254,094			20,606
(Decrease) increase in income taxes payable, net		(47,994	)		20,154			(1,356	)		30,642
Decrease (increase) in other, net		1,164			16,061			(324	)		4,131
Net cash from operating activities		30,471			186,721			386,215			351,721
Investing Activities:
Purchase of property and equipment		(6,539	)		(22,114	)		(14,930	)		(28,241	)
Other, net		138			(68	)		104			(211	)
Net cash from investing activities		(6,401	)		(22,182	)		(14,826	)		(28,452	)
Financing Activities:
Proceeds from issuance of common stock		22,711			29,187			42,468			52,586
Repurchases of common stock		(62,472	)		(30,985	)		(148,469	)		(314,225	)
Dividends paid		(98,387	)		(86,815	)		(98,387	)		(86,815	)
Payments for taxes related to net share settlement of equity awards		(13,893	)		(9,170	)		(15,168	)		(10,566	)
Net cash from financing activities		(152,041	)		(97,783	)		(219,556	)		(359,020	)
Effect of exchange rate changes on cash and cash equivalents		8,699			1,726			(5,503	)		(14,285	)
Change in cash and cash equivalents		(119,272	)		68,482			146,330			(50,036	)
Cash and cash equivalents at beginning of period		1,793,393			1,111,973			1,527,791			1,230,491
Cash and cash equivalents at end of period	$	1,674,121		$	1,180,455		$	1,674,121		$	1,180,455
Taxes Paid:
Income taxes	$	143,959		$	38,504		$	190,536		$	73,808

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

	Common Stock
For the three months ended June 30, 2021 and 2020	Shares			Par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity			Noncontrolling interest			Total equity
Balance at March 31, 2021		168,808		$	1,688		$	101,269		$	2,887,323		$	(115,486	)	$	2,874,794		$	3,856		$	2,878,650
Shares issued under employee stock plans		861			9			8,809			—			—			8,818			—			8,818
Shares repurchased under provisions of stock repurchase plan		(500	)		(5	)		(62,467	)		—			—			(62,472	)		—			(62,472	)
Stock compensation expense		—			—			30,909			—			—			30,909			—			30,909
Net earnings		—			—			—			316,372			—			316,372			602			316,974
Other comprehensive income (loss)		—			—			—			—			9,420			9,420			(261	)		9,159
Dividends paid ($0.58)		—			—			837			(99,224	)		—			(98,387	)		—			(98,387	)
Balance at June 30, 2021		169,169		$	1,692		$	79,357		$	3,104,471		$	(106,066	)	$	3,079,454		$	4,197		$	3,083,651

Balance at March 31, 2020		166,193		$	1,662		$	682		$	2,202,208		$	(169,746	)	$	2,034,806		$	2,339		$	2,037,145
Shares issued under employee stock plans		1,023			10			20,007			—			—			20,017			—			20,017
Shares repurchased under provisions of stock repurchase plan		(400	)		(4	)		(30,981	)		—			—			(30,985	)		—			(30,985	)
Stock compensation expense		—			—			21,638			—			—			21,638			—			21,638
Net earnings		—			—			—			183,869			—			183,869			319			184,188
Other comprehensive income (loss)		—			—			—			—			16,588			16,588			(178	)		16,410
Dividends paid ($0.52)		—			—			875			(87,690	)		—			(86,815	)		—			(86,815	)
Balance at June 30, 2020		166,816		$	1,668		$	12,221		$	2,298,387		$	(153,158	)	$	2,159,118		$	2,480		$	2,161,598

	Common Stock
For the six months ended June 30, 2021 and 2020	Shares			Par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity			Noncontrolling interest			Total equity
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		1,300			13			27,287			—			—			27,300			—			27,300
Shares repurchased under provisions of stock repurchase plans		(1,425	)		(14	)		(148,455	)		—			—			(148,469	)		—			(148,469	)
Stock compensation expense		—			—			42,094			—			—			42,094			—			42,094
Net earnings		—			—			—			603,592			—			603,592			1,332			604,924
Other comprehensive income (loss)		—			—			—			—			(6,313	)		(6,313	)		(725	)		(7,038	)
Dividends paid ($0.58)		—			—			935			(99,322	)		—			(98,387	)		—			(98,387	)
Balance at June 30, 2021		169,169		$	1,692		$	79,357		$	3,104,471		$	(106,066	)	$	3,079,454		$	4,197		$	3,083,651

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 effect of accounting change		—			—			—			6,074			—			6,074			—			6,074
Shares issued under employee stock plans		1,594			16			42,004			—			—			42,020			—			42,020
Shares repurchased under provisions of stock repurchase plans		(4,400	)		(44	)		(66,780	)		(247,401	)		—			(314,225	)		—			(314,225	)
Stock compensation expense		—			—			32,794			—			—			32,794			—			32,794
Net earnings		—			—			—			306,213			—			306,213			757			306,970
Other comprehensive income (loss)		—			—			—			—			(21,971	)		(21,971	)		(468	)		(22,439	)
Dividends paid ($0.52)		—			—			1,000			(87,815	)		—			(86,815	)		—			(86,815	)
Balance at June 30, 2020		166,816		$	1,668		$	12,221		$	2,298,387		$	(153,158	)	$	2,159,118		$	2,480		$	2,161,598

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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, technology, industrial and manufacturing companies around the world.

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 19, 2021.

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 have been revised to correct for immaterial errors. See Note 9 for further information.

Revenue Recognition

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. The Company's three principal services are the revenue categories presented in the condensed consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.

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. 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 satisfied nearly all performance obligations for the contract liabilities recorded as of March 31, 2021.

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 in the condensed consolidated statement of earnings.

Accounts Receivable

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 leveraging historical credit loss information and including considerations of 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 $6,104 as of June 30, 2021 and $5,579 as of December 31, 2020. Additions and write-offs have not been significant in the periods presented.

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 provides, self-insured liabilities, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, calculation of share-based compensation expense and estimates related to determining the lease term and discount rate when measuring ROU assets and lease liabilities. Actual results could be materially different from the estimated provisions and accruals recorded.

Note 2. Share-Based Compensation

The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year.

In the second quarter of 2021 and 2020, the Company awarded 307 and 459 restricted stock units (RSUs), respectively. The RSUs were granted at a weighted-average fair value of $113.82 in 2021 and $72.90 in 2020. The RSUs vest annually over 3 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 value of an RSU award is based on the Company's stock price on the date of grant. Additionally, in the second quarter of 2021 and 2020, 13 and 19 fully vested RSUs were granted to non-employee directors, respectively.

The Company also awarded 75 and 95 performance stock units (PSUs) in the second quarter of 2021 and 2020, respectively. Outstanding PSUs include performance conditions to be finally measured in 2021, 2022 and 2023. 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. 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.

The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year. No shares were issued in the three and six months ended June 30, 2021 and 2020, respectively.

The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s Amended 2017 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 condensed consolidated statements of earnings. Restricted stock units (RSUs) and performance share units (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.

Note 3. Income Taxes

During 2020 the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. It is possible that additional guidance could be issued in future periods. As this guidance is issued, the Company will evaluate the information to determine whether any additional adjustments to its tax provisions are required.

The 2017 Tax Act included 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 and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. For the three and six months ended June 30, 2021 and 2020, there was no BEAT expense and GILTI expense was insignificant.

The Company’s consolidated effective income tax rate was 23.7% and 24.9%, respectively, for the three and six months ended June 30, 2021 as compared to 26.6% for both comparable periods in 2020. The three and six months ended June 30, 2021, effective tax rate benefited from increased tax deductions related to share-based compensation and a favorable adjustment to the deferred tax liability required for unremitted foreign earnings when compared to the same periods in 2020. The effect of higher average tax rates related to 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).

The Company is subject to taxation in various states and many foreign tax jurisdictions including the People’s Republic of China, 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 consistently applied. 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 tax advisors.

The total amount of the Company’s tax contingencies may increase in 2021. In addition, changes in state, federal, and foreign tax laws, 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. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the three and six months ended June 30, 2021 and 2020.

Note 4. 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 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.

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:

	Three months ended June 30,
	Net earnings attributable to shareholders		Weighted average shares		Earnings per share
2021
Basic earnings attributable to shareholders	$	316,372		169,210	$	1.87
Effect of dilutive potential common shares		—		2,467		—
Diluted earnings attributable to shareholders	$	316,372		171,677	$	1.84
2020
Basic earnings attributable to shareholders	$	183,869		166,767	$	1.10
Effect of dilutive potential common shares		—		2,523		—
Diluted earnings attributable to shareholders	$	183,869		169,290	$	1.09

	Six months ended June 30,
	Net earnings attributable to shareholders		Weighted average shares		Earnings per share
2021
Basic earnings attributable to shareholders	$	603,592		169,140	$	3.57
Effect of dilutive potential common shares		—		2,520		—
Diluted earnings attributable to shareholders	$	603,592		171,660	$	3.52
2020
Basic earnings attributable to shareholders	$	306,213		167,751	$	1.83
Effect of dilutive potential common shares		—		2,631		—
Diluted earnings attributable to shareholders	$	306,213		170,382	$	1.80

Substantially all outstanding potential common shares as of June 30, 2021 and 2020 were dilutive.

Note 5. Shareholders' Equity

The Company has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding common stock down to 160,000 shares. During the six months ended June 30, 2021, 1,425 shares were repurchased at an average price of $104.20 per share, compared to 4,400 shares at an average price of $71.41 per share during the same period in 2020.

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.

On May 4, 2021, the Board of Directors declared a semi-annual dividend of $0.58 per share payable on June 15, 2021 to shareholders of record as of June 1, 2021. On May 5, 2020, the Board of Directors declared a semi-annual dividend of $0.52 per share payable on June 15, 2020 to shareholders of record as of June 1, 2020.

Note 6. 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. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.

Cash and cash equivalents consist of the following:

	June 30, 2021				December 31, 2020
	Cost		Fair Value		Cost		Fair Value
Cash and Cash Equivalents:
Cash and overnight deposits	$	761,806	$	761,806	$	602,112	$	602,112
Corporate commercial paper		845,471		845,527		872,287		872,350
Time deposits		66,844		66,844		53,392		53,392
Total cash and cash equivalents	$	1,674,121	$	1,674,177	$	1,527,791	$	1,527,854

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 7. 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 June 30, 2021, the amounts accrued for these 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.

Note 8. Business Segment Information

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 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.

Financial information regarding the Company’s operations by geographic area is as follows:

	UNITED STATES		OTHER NORTH AMERICA		LATIN AMERICA		NORTH ASIA		SOUTH ASIA		EUROPE		MIDDLE EAST, AFRICA AND INDIA		ELIMI- NATIONS			CONSOLI- DATED
For the three months ended June 30, 2021:
Revenues	$	997,567		101,465		46,981		1,309,382		417,718		544,949		192,186		(1,155	)		3,609,093
Directly related cost of transportation and other expenses¹	$	566,882		59,311		25,952		1,086,641		335,219		376,856		148,290		(518	)		2,598,633
Salaries and other operating expenses²	$	241,121		31,300		14,735		106,812		49,046		123,408		34,026		(633	)		599,815
Operating income	$	189,564		10,854		6,294		115,929		33,453		44,685		9,870		(4	)		410,645
Identifiable assets at period end	$	2,972,363		196,558		102,296		1,114,475		377,370		929,706		291,406		(31,003	)		5,953,171
Capital expenditures	$	2,905		64		72		400		532		2,100		466		—			6,539
Equity	$	2,163,114		80,802		36,316		318,111		146,583		255,006		128,148		(44,429	)		3,083,651
For the three months ended June 30, 2020:
Revenues	$	639,226		73,679		37,553		984,715		217,152		358,060		101,571		(878	)		2,411,078
Directly related cost of transportation and other expenses¹	$	354,619		40,814		22,701		775,572		153,194		242,170		72,868		(451	)		1,661,487
Salaries and other operating expenses²	$	207,703		25,283		12,112		97,171		39,184		95,757		25,188		(433	)		501,965
Operating income	$	76,904		7,582		2,740		111,972		24,774		20,133		3,515		6			247,626
Identifiable assets at period end	$	1,886,463		170,873		72,912		669,335		213,007		581,988		221,381		(5,782	)		3,810,177
Capital expenditures	$	19,076		1,148		216		385		182		993		114		—			22,114
Equity	$	1,399,124		71,165		29,758		306,022		108,777		168,060		116,279		(37,587	)		2,161,598


	UNITED STATES		OTHER NORTH AMERICA		LATIN AMERICA		NORTH ASIA		SOUTH ASIA		EUROPE		MIDDLE EAST, AFRICA AND INDIA		ELIMI- NATIONS			CONSOLI- DATED
For the six months ended June 30, 2021:
Revenues	$	1,872,957		195,582		91,845		2,518,430		767,484		1,011,282		352,692		(2,359	)		6,807,913
Directly related cost of transportation and other expenses¹	$	1,069,517		112,361		52,652		2,054,170		605,163		683,765		269,399		(1,110	)		4,845,917
Salaries and other operating expenses2	$	479,819		57,037		27,112		213,732		92,211		232,863		64,301		(1,239	)		1,165,836
Operating income	$	323,621		26,184		12,081		250,528		70,110		94,654		18,992		(10	)		796,160
Identifiable assets at period end	$	2,972,363		196,558		102,296		1,114,475		377,370		929,706		291,406		(31,003	)		5,953,171
Capital expenditures	$	5,930		186		125		757		1,111		5,654		1,167		—			14,930
Equity	$	2,163,114		80,802		36,316		318,111		146,583		255,006		128,148		(44,429	)		3,083,651
For the six months ended June 30, 2020:
Revenues	$	1,289,631		154,910		75,444		1,481,872		383,233		665,020		206,553		(1,818	)		4,254,845
Directly related cost of transportation and other expenses¹	$	728,578		86,104		46,467		1,160,075		271,515		450,488		147,787		(896	)		2,890,118
Salaries and other operating expenses2	$	433,647		48,995		23,861		154,604		69,092		177,611		51,138		(902	)		958,046
Operating income	$	127,406		19,811		5,116		167,193		42,626		36,921		7,628		(20	)		406,681
Identifiable assets at period end	$	1,886,463		170,873		72,912		669,335		213,007		581,988		221,381		(5,782	)		3,810,177
Capital expenditures	$	23,573		1,209		318		710		370		1,638		423		—			28,241
Equity	$	1,399,124		71,165		29,758		306,022		108,777		168,060		116,279		(37,587	)		2,161,598

¹	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 condensed consolidated statements of earnings.

²	Salaries and other operating expenses totals salaries and related, rent and occupancy, depreciation and amortization, selling and promotion and other as shown in the condensed consolidated statements of earnings.

³	See Note 9 - Correction of Immaterial Errors.

The Company’s consolidated financial results in the three and six months ended June 30, 2021 and 2020 were each significantly impacted by the effects of the global pandemic in divergent ways. In the first and second quarter of 2021, the Company experienced strong volumes and high average sell and buy rates as a result of imbalances between demand and carrier capacity and continuing effects of disruptions in supply chains originating in measures to combat the pandemic in 2020.

This is in contrast with slower activity in North Asia in the first quarter of 2020 as the pandemic resulted in temporary closures and limited operations in the Company’s China offices. Shipments were also rerouted or delayed by customers and service providers as they were taking their own precautionary measures. This was followed by significant increases in airfreight services revenues and related expenses, in the second quarter of 2020, as a result of demand for time-sensitive delivery of technology equipment and medical equipment and supplies from China, which combined with reductions in airfreight supply resulted in significantly higher average buy and sell rates.

These impacts are affecting all of the Company’s geographical segments and most notably the year-over-year comparability of the North Asia segment. For the three months ended June 30, 2021 and 2020, the People's Republic of China, including Hong Kong, represented 29% and 34%, respectively, of the Company’s total revenues and 22% and 38%, respectively, of the total operating income. For the six months ended June 30, 2021 and 2020, the People's Republic of China, including Hong Kong, represented 29% of the Company’s total revenues and 24% and 33%, respectively, of the total operating income.

Note 9. Correction of Immaterial Errors

Beginning in the first quarter 2019, the Company made changes to its process and presentation of freight services revenue and directly related transportation operating expenses with the objective that at each reporting level (reporting entity, segment and consolidated level) the gross revenue and associated directly related operating expenses be representative of the location where the services were performed, the operating expenses were incurred and where the revenues were earned. During the second quarter 2021, management identified and corrected certain immaterial errors in the Company’s historical financial statements primarily related to this process that was utilized through the first quarter of 2021. The process missed an intercompany elimination of revenues and an equal and offsetting amount of directly related transportation expenses, principally impacting airfreight services in North Asia. The errors overstated revenues and directly related transportation operating expenses by equal amounts in the consolidated statements of earnings. The errors had no impact on operating income, net earnings, and earnings per share nor any other financial statement amount. Further, the errors had no impact on the balance sheets, statements of shareholders’ equity, other comprehensive income and cash flows. These errors do not affect any of the metrics used to calculate or evaluate management’s compensation and had no impact on bonuses, commissions, share-based compensation or any other employee remuneration. Historical amounts have been revised and are presented on a comparable basis.

The below tables present the effect of the correction for the following periods:

	Three Months ended Mar 31, 2021
	As Reported		Adjustments			As Corrected
Revenues:
Airfreight services	$	1,476,961	$	(151,046	)	$	1,325,915
Ocean freight and ocean services		958,178		(4,266	)		953,912
Customs brokerage and other services		922,401		(3,408	)		918,993
Total revenues¹		3,357,540		(158,720	)		3,198,820

Directly related transportation operating expenses:
Airfreight services	$	1,105,590	$	(151,046	)	$	954,544
Ocean freight and ocean services		746,701		(4,266	)		742,435
Customs brokerage and other services		553,713		(3,408	)		550,305
Total directly related transportation operating expenses¹		2,406,004		(158,720	)		2,247,284

¹The North Asia business segment accounts for 73% of total adjustments.

	Three Months ended June 30, 2020
	As Reported		Adjustments			As Corrected
Revenues:
Airfreight services	$	1,434,590	$	(164,936	)	$	1,269,654
Ocean freight and ocean services		491,712		(2,327	)		489,385
Customs brokerage and other services		654,330		(2,291	)		652,039
Total revenues¹		2,580,632		(169,554	)		2,411,078

Directly related transportation operating expenses:
Airfreight services	$	1,097,073	$	(164,936	)	$	932,137
Ocean freight and ocean services		363,599		(2,327	)		361,272
Customs brokerage and other services		370,369		(2,291	)		368,078
Total directly related transportation operating expenses¹		1,831,041		(169,554	)		1,661,487

¹The North Asia business segment accounts for 78% of total adjustments.

	Six Months ended June 30, 2020
	As Reported		Adjustments			As Corrected
Revenues:
Airfreight services	$	2,143,629	$	(218,377	)	$	1,925,252
Ocean freight and ocean services		985,139		(4,414	)		980,725
Customs brokerage and other services		1,353,728		(4,860	)		1,348,868
Total revenues¹		4,482,496		(227,651	)		4,254,845

Directly related transportation operating expenses:
Airfreight services	$	1,617,242	$	(218,377	)	$	1,398,865
Ocean freight and ocean services		730,082		(4,414	)		725,668
Customs brokerage and other services		770,445		(4,860	)		765,585
Total directly related transportation operating expenses¹		3,117,769		(227,651	)		2,890,118

¹The North Asia business segment accounts for 76% of total adjustments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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," "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 Novel Coronavirus (COVID-19) pandemic, and other characterizations of future events or circumstances are forward-looking statements. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. 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. Attention should be given to the risk factors identified and discussed in Part I, Item 1A in the Company's annual report on Form 10-K filed on February 19, 2021. Management believes that these forward-looking statements are reasonable as of this filing date and we do not assume any obligations to update these statements except as required by law.

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 supply chain 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 revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both 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.

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. In accordance with our revenue recognition policy (see Note 1.B to the condensed consolidated financial statements in this report) freight revenue and related expenses are recorded by the office that performs the transportation service. Shipment profits are split between origin and destination offices by recording a commission fee or profit share of revenue at the destination.

The disruptions on supply chains and transportation caused by the pandemic have significantly affected our business operations and operating results in 2020 and 2021. Continued imbalances between demand and available capacity for all transportation modes have resulted in historically high average buy and sell rates and creates significant challenges for our network to meet our customers’ needs. We expect these disruptive conditions to continue over at least the remainder of the year. As discussed in more detail under “Results of Operations”, there are significant constraints on current capacity for both air freight and ocean freight. This is due to a number of factors, including significantly reduced flight schedules which limited available belly space for cargo, congestion at ports, as well as labor and equipment shortages. Air freighters and charters, container ships and gateway infrastructure are operating at near maximum capacity. While we believe these constraints are not long-term in nature, they may impact our current ability to move increased air and ocean volumes in these capacity-constrained regions. We are unable to predict how these uncertainties will affect our future operations or financial results. In an effort to protect the health and safety of our employees, we continue to operate under our global business continuity plan that we implemented in the first quarter of 2020. See Part I, Item 1A: “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 as updated herein under Part II Item 1A for additional details.

Expeditors' Culture and Strategy

We believe that our unique culture, at the center of which are our employees, 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. Global consistency and compliance is fundamental to preserving our culture and network of people, processes, technology and locations.

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 through the aggressive marketing of our service offerings. Innovative solutions, integrated platforms and data quality are vital to achieving a competitive advantage. 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 ongoing concern over supply-chain disruptions, 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 promulgate new regulations in reaction to the pandemic and increase oversight and enforcement of new and existing laws. We consider our current working relationships with these entities to be satisfactory.

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 many are incurring, or have recently incurred, operating losses. 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.

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. 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. In 2020, the United Kingdom and the European Union negotiated the terms of the United Kingdom's exit from the European Union (Brexit), which were effective on January 1, 2021. We cannot predict the outcome of changes in tariffs, or interpretations, and trade restrictions and accords and 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. The pandemic’s significant impact on supply chains along with other geo-political considerations may also drive manufacturers to relocate their operations or make changes to how they manage their supply chains and inventories in order to reduce their exposure to such disruptions in the future. 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 availability of airfreight, ocean freight and trucking capacity, volatile carrier pricing, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.

Most air carriers are experiencing significant cash flow challenges as a result of travel restrictions resulting in cancellation of flights and have incurred record operating losses in 2020 and 2021. Uncertainty over recovery of demand for passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers’ operations and financial stability long term. Prior to 2020, many ocean carriers incurred substantial operating losses, and are highly leveraged with debt. 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 ongoing impacts of the pandemic. We cannot predict the impact of future changes in global trade on our operating results, freight volumes, pricing and other operating costs, including inflationary pressures, 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 the pandemic’s disruptions, some customers have begun shifting manufacturing to other countries which could negatively impact us.

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 that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2021 by the pandemic. This historical 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, disruptions in supply-chains 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, 2020, filed on February 19, 2021. 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, 2021 and 2020, including the respective percentage changes comparing 2021 and 2020.

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,
(in thousands)	2021		2020		Percentage change	2021		2020		Percentage change
Airfreight services:
Revenues¹	$	1,523,569	$	1,269,654	20%	$	2,849,484	$	1,925,252	48%
Expenses¹		1,136,328		932,137	22		2,090,872		1,398,865	49
Ocean freight services and ocean services:
Revenues¹		1,098,550		489,385	124		2,052,462		980,725	109
Expenses¹		862,251		361,272	139		1,604,686		725,668	121
Customs brokerage and other services:
Revenues¹		986,974		652,039	51		1,905,967		1,348,868	41
Expenses¹		600,054		368,078	63		1,150,359		765,585	50
Overhead expenses:
Salaries and related costs		481,186		395,107	22		933,291		737,147	27
Other		118,629		106,858	11		232,545		220,899	5
Total overhead expenses		599,815		501,965	19		1,165,836		958,046	22
Operating income		410,645		247,626	66		796,160		406,681	96
Other income, net		4,837		3,356	44		9,783		11,547	(15)
Earnings before income taxes		415,482		250,982	66		805,943		418,228	93
Income tax expense		98,508		66,794	47		201,019		111,258	81
Net earnings		316,974		184,188	72		604,924		306,970	97
Less net earnings attributable to the noncontrolling interest		602		319	89		1,332		757	76
Net earnings attributable to shareholders	$	316,372	$	183,869	72%	$	603,592	$	306,213	97%

See Note 9 - Correction of Immaterial Errors to the unaudited condensed consolidated financial statements contained in this report.

Airfreight services:

In 2020 and continuing in the first half of 2021, airfreight services experienced unprecedented events in response to the global pandemic. As a result of travel restrictions and lower passenger demand, airlines significantly reduced flight schedules which limited available belly space for cargo at a time where global demand remained high. Demand grew in the fourth quarter of 2020 and continued to remain high in the first half of 2021, amplified by customers converting to air shipments due to disruptions in ocean transportation, placing further constraints on available capacity. These conditions have caused extreme imbalances between carrier capacity and demand, principally on exports out of North Asia and South Asia. In order to execute and meet the transportation needs of our customers we heavily utilized charter flights and purchased capacity in advance and on the spot market, which resulted in sustained high average buy and sell rates. Freighters, charters and gateway infrastructure are operating at near maximum capacity which is continuing the pressure on buy rates and limiting the ability to move additional volume.

Airfreight services revenues and expenses increased 20% and 22%, respectively, during the three months ended June 30, 2021, as compared with the same period in 2020, due to a 37% increase in tonnage offset by 14% and 12% decrease in average sell and buy rates, respectively. Tonnage increased in all regions with the largest increase coming from exports out of North America, North Asia and South Asia compared to low levels of activity in the second quarter of 2020 due to pandemic related closures in the United States. Average sell and buy rates decreased in most regions from the record high rates experienced in 2020 caused by the sudden reduction in available belly space for cargo, with the largest impacts in North America, North Asia and South Asia.

Airfreight services revenues and expenses increased 48% and 49%, respectively, during the six months ended June 30, 2021, as compared with the same period in 2020, due to a 33% increase in tonnage and 12% and 13% increase in average sell and buy rates, respectively. Tonnage increased in all regions with the largest increase coming from exports out of North America, North Asia and South Asia. This was primarily due to low levels of activity in the first half of 2020 in the United States and first quarter of 2020 in China as a result of pandemic related closures. Average sell and buy rates increased in all regions except North America where the sell rate decreased.

These conditions create a high degree of volatility in volumes, average buy rates and sell rates and are expected to continue at least for the remainder of the year as international passenger flights are not expected to return to pre-pandemic levels and additional capacity from freighters is limited. The continued historically average high buy and sell rates have significantly contributed to the growth in our expenses and revenues and financial results in the first half of 2021. These unprecedented operating conditions are not expected to be sustained long-term. We are unable to predict how these uncertainties and any future disruptions will affect our future operations or financial results.

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 increased 124% and 109%, respectively, while expenses increased 139% and 121%, for the three and six months ended June 30, 2021 as compared with the same periods three and six months ended June 30, 2020. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 77% and 63% of ocean freight and ocean services revenue for the six months ended June 30, 2021 and 2020, respectively.

Ocean freight consolidation revenues and expenses increased 177% and 178%, respectively, for the three months ended June 30, 2021 as compared with the same periods in 2020, primarily due to a 109% and 108% increase in average sell and buy rates, respectively, and a 34% increase in containers shipped. Revenues and expenses increased 156% and 157%, respectively, for the six months ended June 2021 as compared with the same periods in 2020, primarily due to a 96% and 95% increase in average sell and buy rates, respectively, and a 32% increase in containers shipped. Demand started increasing in the second half of 2020 and continued to increase through the first half of 2021 due to backlogs in supply chains, low customer inventory levels, and high consumer demand creating a severe imbalance between demand and capacity in particular on exports from North Asia and South Asia. The deficiency in available capacity continues to be affected by congestion at ports due to labor and equipment shortages, which disrupted sailing schedules, and resulted in record high average buy rates. Average sell rates and volumes increased in first half of 2021, compared to low levels of activity in China in the first quarter of 2020 and in North America in the first half of 2020 due to pandemic related closures. These extremely challenging conditions are impacting the ability to secure necessary capacity from ocean carriers, as well as the time and resources required to process shipments and meet the sharply growing demands of customers.

Containers shipped were up in all regions with the largest increase from exports out of North Asia and South Asia. North Asia Ocean freight and ocean services revenues increased 137% and 144%, respectively, while directly related expenses increased 154% and 161%, for the three and six months ended June 30, 2021 primarily due to higher average sell rates and buy rates and increases in containers shipped. South Asia ocean freight and ocean services revenues increased 219% and 169%, respectively, while directly related expenses increased 252% and 191%, respectively, for the three and six months ended June 30, 2021 for the same reasons as North Asia.

Direct ocean freight forwarding revenues increased 27% and 23%, respectively, while expenses increased 34% and 28%, for the three and six months ended June 30, 2021 principally due to higher volumes and increased ancillary services provided primarily in North Asia and Europe at higher rates. Order management revenues increased 46% and 39%, respectively, while expenses increased 50% and 41%, for the three and six months ended June 30, 2021 due to higher volumes.

Most ocean carriers experienced significant increases in market demand starting in the second half of 2020 and we expect this demand to continue through at least the end of 2021. Until port congestion, labor and equipment shortages subside, we believe there will be continued pressure on buy rates. We also expect that pricing volatility will continue as carriers adapt to changes in capacity and market demand and customers react to governmental trade policies. These conditions could result in lower operating income. The historically high average buy and sell rates have significantly contributed to the growth in our expenses and revenues in the first half of 2021. These unprecedented operating conditions are not expected to be sustained long-term.

Customs brokerage and other services:

Customs brokerage and other services revenues increased 51% and 41%, respectively, and expenses increased 63% and 50% for the three and six months ended June 30, 2021, respectively, as compared with the same period in 2020, primarily due to an increase in shipments from existing and new customers, an increase in demand for brokerage services, in part due to Brexit, and higher charges on import services due to port congestion. Road freight, warehousing and distribution services also grew as a result of higher volumes. Slowdowns due to the pandemic related closures affected volumes, particularly in aerospace, automotive, oil and energy and certain portions of the retail sectors in 2020 creating a backlog in supply chains that resulted in higher demand for services in the first half of 2021. 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 increased 57% and 44% and directly related expenses increased 78% and 60% for the three and six months ended June 30, 2021, respectively, as compared with the same period for 2020, primarily as a result of higher volumes in customs brokerage and higher charges on import services due to port congestion. Europe revenues increased 57% and 47% and directly related expenses increased 61% and 45% for the three and six months ended June 30, 2021, respectively, as compared with the same period for 2020, primarily due to an increase in demand for brokerage services, in part due to Brexit.

Overhead expenses:

Salaries and related costs increased by 22% and 27% for the three and six months ended June 30, 2021, respectively, as compared with the same period in 2020, principally due to increases in commissions and bonuses earned from higher revenues and operating income.

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 and executive management for the six months ended June 30, 2021 were up 65% when compared to the same period in 2020, primarily due to a 96% 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 increased 11% and 5%, respectively, for the three and six months ended June 30, 2021, as compared with the same periods in 2020. The increases in expenses are the result of increases from renting additional space, higher local tax expenses, certain operational expenses and technology related costs. For the six months ended June 30, 2021 increases were partially offset by a significant decrease in travel and entertainment expenses due to travel restrictions. As travel restrictions ease in the future, we expect travel and entertainment expenses to increase. 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 23.7% and 24.9%, respectively, for the three and six months ended June 30, 2021 as compared to 26.6% for the same periods in 2020. The three and six months ended June 30, 2021 effective tax rate benefited from increased tax deductions related to share-based compensation and a favorable adjustment to the deferred tax liability for unremitted foreign earnings when compared to the same periods in 2020. 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). 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, 2021 and 2020 was insignificant. We had no foreign currency derivatives outstanding at June 30, 2021 and December 31, 2020. For both the three months ended June 30, 2021 and 2020 net foreign currency losses were approximately $4 million. During the six months ended June 30, 2021 net foreign currency losses were approximately $2 million. During the six months ended June 30, 2020 net foreign currency gains were insignificant.

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 coupled with customers’ dissatisfaction with elevated rates, scarce capacity and extended transit times could result in loss of business, reduced revenues and 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, 2021 was $30 million and $386 million, respectively, as compared with $187 million and $352 million for the same periods in 2020. The decrease of $157 million for the three months ended June 30, 2021 was primarily due to increases in accounts receivables from growth in revenues and slower collections from customers. The increase of $34 million for the six months ended June 30, 2021 was primarily due to higher airfreight and ocean revenues partially offset by changes in working capital. At June 30, 2021, working capital was $2,500 million, including cash and cash equivalents of $1,674 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at June 30, 2021. 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.

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. However, there is no assurance that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2021 by the pandemic.

Cash used in investing activities for the three and six months ended June 30, 2021 was $6 million and $15 million, respectively, as compared with $22 million and $28 million for the same periods in 2020, primarily for capital expenditures. Capital expenditures in the three and six months ended June 30, 2021 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. Capital expenditures in 2020 included the purchase of a less-than-truckload digital online shipping platform. Total anticipated capital expenditures in 2021 are currently estimated to be $45 million. This includes routine capital expenditures and investments in technology.

Cash from financing activities during the three and six months ended June 30, 2021 was $152 million and $220 million, respectively, as compared with $98 million and $359 million for the same periods in 2020. 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 outstanding shares. During the three and six months ended June 30, 2021 we used cash to repurchase 0.5 million and 1.4 million shares of common stock, respectively, compared to 0.4 million and 4.4 million in the same periods in 2020.

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, 2021, we were contingently liable for $75 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, 2021, cash and cash equivalent balances of $751 million were held by our non-United States subsidiaries, of which $15 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of our exposure to these risks is presented below:

Foreign Exchange Risk

We conduct business in many different countries and currencies. Our business often results in billings issued in a country and currency that differs from that where the expenses related to the service are incurred. In the ordinary course of business, we create numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to our earnings. The principal foreign exchange risks to which Expeditors is exposed include Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.

Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on our earnings as a result of hypothetical changes in the value of the U.S. dollar, our functional currency, relative to the other currencies in which we transact business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the six months ended June 30, 2021, would have had the effect of raising operating income by approximately $53 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $43 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.

We currently do not use derivative financial instruments to manage foreign currency risk and only enter into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict our ability to move money freely. Any such hedging activity throughout the three and six months ended June 30, 2021 and 2020 was insignificant. For both the three months ended June 30, 2021 and 2020 net foreign currency losses were approximately $4 million . During the six months ended June 30, 2021 net foreign currency losses were approximately $2 million. During the six months ended June 30, 2020 net foreign currency gains were insignificant. We had no foreign currency derivatives outstanding at June 30, 2021 and December 31, 2020. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of June 30, 2021, we had approximately $171 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.

Interest Rate Risk

At June 30, 2021, we had cash and cash equivalents of $1,674 million of which $912 million was invested at various short-term market interest rates. Other than our recorded lease liabilities, we had no long-term obligations or debt at June 30, 2021. A hypothetical change in the interest rate of 10 basis points at June 30, 2021 would not have a significant impact on our earnings. In management’s opinion, there has been no material change in our interest rate risk exposure in the second quarter of 2021.

Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the pandemic, many of our employees are working remotely and are able to do so within our established internal controls over financial reporting.

We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness.

Certain enhancements to our system of internal controls have been implemented to strengthen procedures related to the matters discussed in Note 9 to the unaudited consolidated condensed financial statements contained in this report on Form 10-Q.

Our management has confidence in our internal controls and procedures. Nevertheless, our management, including Expeditors’ Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all of our control issues and instances of fraud, if any, have been detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Expeditors 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 our operations, cash flows or financial position. As of June 30, 2021, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are 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.

Item 1A. Risk Factors

In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on February 19, 2021. There have been no material changes in Expeditors' risk factors from those disclosed under Item 1A Risk Factors in our annual report on Form 10-K filed on February 19, 2021, except for the following:

Industry Risks

Any reduction in international commerce or disruption in global trade may adversely impact our business and operating results.

Expeditors primarily provides services to customers engaged in international commerce. Everything that affects international trade has the potential to expand or contract our primary market and adversely impact our operating results. For example, international trade is influenced by:

•currency exchange rates and currency control regulations;

•interest rate fluctuations;

•	changes and uncertainties in governmental policies and inter-governmental disputes, which could result in increased tariff rates, quota restrictions, trade barriers and other types of restrictions;

•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 including the potential impacts of inflation;

•increased global concerns regarding working conditions and environmental sustainability;

•changes in consumer attitudes regarding goods made in countries other than their own;

•changes in availability of credit; and

•changes in the price and readily available quantities of oil and other petroleum-related products.

Our industry is highly competitive, and failure to compete or respond to customer requirements could damage our business and results of operations.

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 Expeditors, and are actively pursuing acquisition opportunities and are developing new technologies to gain competitive advantages. Depending on the location of the shipper and the importer, we must compete against both the niche players, larger entities including carriers, and emerging technology companies. 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 and to secure favorable pricing and contractual terms such as longer payment terms, fixed-price arrangements, higher or unlimited liability limits and performance penalties. Increased competition and competitors' acceptance of expanded contractual terms coupled with customers’ dissatisfaction with elevated rates, scarce capacity and extended transit times could result in loss of business, reduced revenues, reduced margins, higher operating costs or loss of market share, any of which would damage our results of operations, cash flows and financial condition.

Operational Risks

We are dependent on our personnel and any inability to hire, develop or retain our employees may have a negative impact on our operations.

Identifying, recruiting, hiring, training and retaining employees is essential to our ability to operate and deliver our services, ability to grow and ultimately our future profitability. The global pandemic has caused disruptions to our work environment by requiring the majority of employees to work remotely. As the pandemic restrictions ease, we are requiring employees to return to the office. As a result, for those individuals that prefer working remotely, we may experience a higher degree of turnover and lower employee satisfaction in the near future. Further, this could inhibit our ability to identify, recruit and hire new employees. We cannot predict how this may affect employees’ habits, preferences nor the impact it may have on our Company’s culture and our ability to continue to retain and attract talented employees who have become accustomed to a remote work environment.

We believe that our compensation programs, which have been in place since we became a publicly traded entity, are among the unique characteristics responsible for differentiating our performance from that of many of our competitors. Significant changes to compensation programs or significant declines in our operating income or operating losses could impact our ability to attract and retain key personnel.

Effective succession planning is an important element of our programs. Failure to ensure an effective transfer of knowledge and smooth transitions involving key employees could adversely affect our business by hindering our ability to execute our business strategies and impacting our level of service. We must continue to develop and retain management personnel to address issues of succession planning.

We rely on service providers, such as air, ocean and ground freight carriers, and if they have insufficient capacity available relative to market demand, it may adversely impact our business and operating results.

As a non-asset based provider of global logistics services, Expeditors depends on a variety of asset-based service providers, including air, ocean and ground freight carriers. Our ability to deliver our services depends on service providers’ having sufficient capacity available to purchase. When market demand significantly exceeds available capacity in a given market, which has been increasingly the case for various services and markets since the beginning of the pandemic in 2020, we may not always be able to find acceptable transportation solutions to meet our customers’ needs or the routing and delivery of freight may be subject to delays that are outside of our control. Quality customer service is a key element of the Company’s success, and such challenges in meeting our customers’ needs and requirements may result in loss of business and consequently negatively affect our operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans		Maximum number of shares that may yet be purchased under the plans
April 1-30, 2021		—	$	—		—		8,877,693
May 1-31, 2021		—		—		—		9,633,363
June 1-30, 2021		500,000		124.94		500,000		9,169,128
Total		500,000	$	124.94		500,000		9,169,128

In November 2001, Expeditors' Board of Directors authorized a Discretionary Stock Repurchase Plan for the purpose of repurchasing our common stock in the open market to reduce the issued and outstanding stock down to 200 million shares. Subsequently, the Board of Directors has from time to time increased the amount of our common stock that may be repurchased. The Board of Directors last authorized repurchases down to 160 million shares of common stock in November 2018. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)	Not applicable.

(b)	Not applicable.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K.

Exhibit Number		Description
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.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, has been formatted in Inline XBRL.

SIGNATURES

Pursuant to the requirements 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.

		EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

August 5, 2021		/s/ JEFFREY S. MUSSER
		Jeffrey S. Musser, President, Chief Executive Officer and Director

August 5, 2021		/s/ BRADLEY S. POWELL
		Bradley S. Powell, Senior Vice President and Chief Financial Officer