EXPEDITORS INTERNATIONAL OF WASHINGTON INC. 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, current supply chain and transportation disruptions, 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 onFebruary 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 HouseOcean 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 MasterOcean 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.
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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 at least through the
first half of 2022. 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, but
these conditions could result in lower operating income. 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.
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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.
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 inthe 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 andChina have significantly increased tariffs on certain imports and are engaged in trade negotiations and changes to export regulations and tariffs. In 2020, theUnited Kingdom and theEuropean Union negotiated the terms of theUnited Kingdom's exit from theEuropean Union (Brexit), which were effective onJanuary 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 inthe 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. 16 -------------------------------------------------------------------------------- There is uncertainty as to how new regulatory requirements and increase 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 inthe 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 endedDecember 31, 2020 , filed onFebruary 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 nine months ended
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--------------------------------------------------------------------------------The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto in this quarterly report.
Three months ended September 30, Nine months ended September 30,
Percentage Percentage
(in thousands) 2021 2020 change 2021 2020 change
Airfreight services:
Revenues1 $ 1,628,115 $ 983,199 66% $ 4,477,599 $ 2,908,451 54%
Expenses1 1,244,381 723,340 72 3,335,253 2,122,205 57
Ocean freight services and ocean
services:
Revenues1 1,598,597 609,816 162 3,651,059 1,590,541 130
Expenses1 1,254,334 452,028 177 2,859,020 1,177,696 143
Customs brokerage and other
services:
Revenues1 1,092,549 755,698 45 2,998,516 2,104,566 42
Expenses1 686,775 438,966 56 1,837,134 1,204,551 53
Overhead expenses:
Salaries and related costs 519,611 373,613 39 1,452,902 1,110,760 31
Other 124,523 108,821 14 357,068 329,720 8
Total overhead expenses 644,134 482,434 34 1,809,970 1,440,480 26
Operating income 489,637 251,945 94 1,285,797 658,626 95
Other income, net 3,195 2,484 29 12,978 14,031 (8)
Earnings before income taxes 492,832 254,429 94 1,298,775 672,657 93
Income tax expense 132,922 62,710 112 333,941 173,968 92
Net earnings 359,910 191,719 88 964,834 498,689 93
Less net earnings attributable to
the noncontrolling interest 842 412 104 2,174 1,169 86
Net earnings attributable to
shareholders$ 359,068 $ 191,307 88%$ 962,660 $ 497,520 93% 1 See Note 9 - Correction of Immaterial Errors to the unaudited condensed consolidated financial statements contained in this
report. Airfreight services: In 2020 and continuing through the first three quarters 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 2021, amplified by a strong economy and 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 ofNorth Asia andSouth Asia . In order to execute and meet the transportation needs of our customers we further increased utilization of 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 66% and 72%, respectively, during the three months endedSeptember 30, 2021 , as compared with the same period in 2020, due to a 28% increase in tonnage and 32% and 36% increases in average sell and buy rates, respectively. Tonnage increased in all regions with the largest increase coming from exports out ofNorth America andNorth Asia . Average sell and buy rates increased in most regions. Airfreight services revenues and expenses increased 54% and 57%, respectively, during the nine months endedSeptember 30, 2021 , as compared with the same period in 2020, due to a 32% increase in tonnage and 19% and 21% increase in average sell and buy rates, respectively. Tonnage increased in all regions with the largest increase coming from exports out ofNorth Asia andNorth America . The increase in tonnage for the nine months endedSeptember 30, 2021 is also affected by low levels of activity in the first half of 2020 inthe United States and first quarter of 2020 inChina as a result of pandemic related closures. Average sell and buy rates increased in all regions. These conditions create a high degree of volatility in volumes, average buy rates and sell rates and are expected to continue at least through the first half of 2022, as international passenger flights are not expected to return to pre-pandemic levels, additional capacity from freighters is limited and disruptions in the ocean market continue to impact 18 -------------------------------------------------------------------------------- demand for airfreight. 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 three quarters 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 162% and 130%, respectively, while expenses increased 177% and 143%, for the three and nine months endedSeptember 30, 2021 as compared with the same periods in 2020. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 80% and 64% of ocean freight and ocean services revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Ocean freight consolidation revenues and expenses increased 239% and 235%, respectively, for the three months endedSeptember 30, 2021 as compared with the same periods in 2020, primarily due to a 194% and 190% increase in average sell and buy rates, respectively, and a 15% increase in containers shipped. Revenues and expenses increased 188% and 187%, respectively, for the nine months endedSeptember 30, 2021 as compared with the same period in 2020, primarily due to a 130% and 129% increase in average sell and buy rates, respectively, and a 26% increase in containers shipped. Demand started increasing in the second half of 2020 and continued to increase through the nine months endedSeptember 30, 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 fromNorth Asia andSouth Asia . The deficiency in available capacity continues to be affected by unprecedented congestion at ports due to labor and equipment shortages, which disrupts sailing schedules, and resulted in record high average buy rates. Average buy rates and sell rates spiked in the third quarter 2021 from already historically high levels due to increased demand in preparation of the holiday season exacerbating the imbalance between demand and available capacity in particular on export out ofNorth Asia andSouth Asia . Average sell rates and volumes increased in the nine months endedSeptember 30, 2021 , compared to low levels of activity inChina in the first quarter of 2020 and inNorth 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 ofNorth Asia andSouth Asia .North Asia Ocean freight and ocean services revenues increased 168% and 154%, respectively, while directly related expenses increased 181% and 169%, for the three and nine months endedSeptember 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 268% and 207%, respectively, while directly related expenses increased 310% and 237%, respectively, for the three and nine months endedSeptember 30, 2021 for the same reasons asNorth Asia . Direct ocean freight forwarding revenues increased 22%, while expenses increased 27%, for both the three and nine months endedSeptember 30, 2021 principally due to higher volumes and increased ancillary services provided at higher rates. Order management revenues increased 24% and 33%, respectively, while expenses increased 28% and 36%, for the three and nine months endedSeptember 30, 2021 due to higher volumes and higher costs. Most ocean carriers experienced significant increases in market demand starting in the second half of 2020 and we expect this demand to continue at least through the first half of 2022. 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 three and nine months endedSeptember 30, 2021 . These unprecedented operating conditions are not expected to be sustained long-term. 19
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Customs brokerage and other services:
Customs brokerage and other services revenues increased 45% and 42%, respectively, and expenses increased 56% and 53% for the three and nine months endedSeptember 30, 2021 , respectively, as compared with the same periods 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 and higher trucking, storage and labor costs. 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 nine months endedSeptember 30, 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 50% and 46% and directly related expenses increased 75% and 65% for the three and nine months endedSeptember 30, 2021 , respectively, as compared with the same periods in 2020, primarily as a result of higher volumes in customs brokerage and higher charges on import services due to port congestion.Europe revenues increased 47% and directly related expenses increased 43% and 45% for the three and nine months endedSeptember 30, 2021 , respectively, as compared with the same periods in 2020, primarily due to an increase in demand for brokerage services, in part due to Brexit.
Overhead expenses:
Salaries and related costs increased by 39% and 31% for the three and nine months endedSeptember 30, 2021 , respectively, as compared with the same periods in 2020, principally due to increases in commissions and bonuses earned from higher revenues and operating income and a 6% increase in headcount to support growing activity. 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 nine months endedSeptember 30, 2021 were up 70% when compared to the same period in 2020, primarily due to a 95% 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 14% and 8%, respectively, for the three and nine months endedSeptember 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 nine months endedSeptember 30, 2021 increases were partially offset by a 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. 20 --------------------------------------------------------------------------------
Income tax expense: Our consolidated effective income tax rate was 27.0% and 25.7%, respectively, for the three and nine months endedSeptember 30, 2021 as compared to 24.6% and 25.9% for the same periods in 2020. Both of the nine-month periods endedSeptember 30, 2021 and 2020 benefited from significant share-based compensation tax deductions which reduced the effective tax rates in those periods. In 2021, these benefits were primarily realized during the three-month period endedJune 30 , while in 2020, they principally occurred during the three-month period endedSeptember 30 . 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 theIRS orTreasury . 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 theU.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 nine months endedSeptember 30, 2021 and 2020 was insignificant. We had no foreign currency derivatives outstanding atSeptember 30, 2021 andDecember 31, 2020 . For the three months endedSeptember 30, 2021 , net foreign currency gains were less than$1 million . For the nine months endedSeptember 30, 2021 net foreign currency losses were approximately$1 million . During both the three and nine months endedSeptember 30, 2020 , net foreign currency losses were approximately$9 million . 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. This includes certain ocean carriers offering more integrated services directly to shippers. 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. 21 --------------------------------------------------------------------------------
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 nine months endedSeptember 30, 2021 was$177 million and$563 million , respectively, as compared with$162 million and$513 million for the same periods in 2020. The increases of$15 million and$50 million for the three months and nine months endedSeptember 30, 2021 , respectively, were primarily due to higher net earnings, partially offset by increases in accounts receivables from growth in revenues and slower collections from customers. AtSeptember 30, 2021 , working capital was$2,836 million , including cash and cash equivalents of$1,820 million . Other than our recorded lease liabilities, we had no long-term obligations or debt atSeptember 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 nine months endedSeptember 30, 2021 was$10 million and$25 million , respectively, as compared with$8 million and$36 million for the same periods in 2020, primarily for capital expenditures. Capital expenditures in the three and nine months endedSeptember 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$40 million . This includes routine capital expenditures and investments in technology. Cash used in financing activities during the three and nine months endedSeptember 30, 2021 was$14 million and$233 million , respectively, as compared with cash from financing activities of$121 million and cash used in financing activities of$238 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 nine months endedSeptember 30, 2021 we used cash to repurchase 0.6 million and 2.0 million shares of common stock, respectively, compared to none 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. AtSeptember 30, 2021 , we were contingently liable for$70 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. 22
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As of
Payments due by period
Less than 1 - 3 3 - 5 After
In thousands Total 1 year years years 5 years
Contractual Obligations:
Operating leases, including imputed
interest $ 519,007 98,813 159,391 111,833 148,970
Unconditional purchase obligations 320,316 320,316 - - -
Technology, equipment and
construction purchase
obligations 79,458 32,680 28,741 17,937 100
Total contractual cash obligations
We typically enter into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill. In the regular course of business, we also enter into agreements with service providers to maintain or operate equipment, facilities or software that may be longer than one year. We also regularly have contractual obligations for specific projects related to improvements of our owned or leased facilities and information technology infrastructure. Our foreign subsidiaries regularly remit dividends to theU.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. AtSeptember 30, 2021 , cash and cash equivalent balances of$951 million were held by our non-United States subsidiaries, of which$39 million was held in banks inthe United States . Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside ofthe United States .
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