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," "Highlights from Third Quarter 2022," "Industry Trends, Trade Conditions 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" or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, signs of a slowing economy and drop in demand, the uneven lifting of the Novel Coronavirus (COVID-19) pandemic restrictions around the world, 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 onMarch 15, 2022 and in Part II, Item 1A in this report. 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. OverviewExpeditors 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, 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 local pick up, storage and delivery at destination. 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. 13 -------------------------------------------------------------------------------- We manage our company along five geographic areas of responsibility:Americas ;North Asia ;South Asia ;Europe ; andMiddle East ,Africa andIndia (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), almost all freight revenue and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share of revenue at the destination.
Highlights from Third Quarter 2022
In the first quarter of 2022, our company was the subject of a targeted cyber-attack which resulted in having to shut down most of our connectivity, operating and accounting systems globally to manage the safety of our entire global systems environment. We had limited ability to conduct operations for a period of approximately three weeks, including but not limited to arranging for shipments of freight or managing customs and distribution activities for our customers' shipments. While we continued to navigate residual effects and incorporate learnings from the cyber-attack, our core systems were utilized to deliver our services throughout the second and third quarter. Beyond the loss of revenue and additional expenses incurred in the first half of the year, we do not expect to have further material adverse impact on the Company's business. In the third quarter of 2022, the COVID-19 pandemic, including the effect of ongoing quarantine requirements inChina and resulting disruptions on supply chains, continued to affect our business operations and financial results. Although we believe these disruptive conditions have diminished, we expect them to continue to some degree at least through 2022.
The significant impacts are discussed within "Results of Operations" and the financial highlights below.
• Volumes transacted in most services were down due to softening customer
demand from a slowdown in the global economy and retail customers' inventory
build-up earlier in the year.
• Average buy and sell rates, while still higher than historical levels and
higher than the third quarter of 2021, have continued declining as
imbalances between available capacity for transportation and demand and
major port congestion have eased.
• As a result of volume and rate trends above, airfreight revenues and
expenses were down compared to prior year and previous quarters in 2022,
while the year-over-year growth in ocean freight and customs brokerage and
other services significantly slowed in the third quarter of 2022 compared to
previous quarters.
• Continuing shortages in equipment, labor and warehousing space at
destinations and disruptions from COVID-19 precautionary measures, inaddition to higher inflation and fuel prices, resulted in ongoing pressure
on pricing of services at origin and destination.
• Net earnings to shareholders increased 15%, operating cash flows were
million and we returned
repurchases.
Industry Trends, Trade Conditions 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 inthe United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investment, and taxation. Periodically, governments consider a variety of changes to tariffs and impose trade restrictions and accords. Currently,the United States andChina have increased concerns affecting certain imports and exports and have implemented additional tariffs. We cannot predict the outcome of changes in tariffs, interpretations, trade restrictions and accords and the effects they will have on our business. As governments implement restrictions on imports and exports, manufacturers may change sourcing patterns to the extent possible and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental 14 -------------------------------------------------------------------------------- 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. We do not have employees, assets, or operations inRussia orUkraine . Any shipment activity is conducted with independent agents in those countries and is inconsequential to the Company. Our ability to provide services to our customers is highly dependent on good working relationships with a variety of entities, including airlines, ocean carrier lines and ground transportation providers, as well as governmental agencies. We select and engage with best-in-class, compliance-focused, efficiently run, growth-oriented partners, based upon defined value elements and are intentional in our relationship and performance management activity, reinforcing success by awarding service providers who consistently achieve at the highest levels with additional business. We consider our current working relationships with these entities to be satisfactory. However, changes in the financial stability and operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulation or deregulation efforts, modernization of the regulations governing customs brokerage, and/or changes in governmental restrictions, quota restrictions or trade accords could affect our business in unpredictable ways. Many air carriers are recovering from significant cash flow challenges and record operating losses incurred in 2020 and 2021 as a result of travel restrictions resulting in cancellation of flights. Uncertainty over recovery of demand for trans-pacific passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers' operations and financial stability long term. 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. The global economic and trade environments remain uncertain, including the ongoing impacts of the pandemic, higher inflation and oil prices and the conflict inUkraine . Starting in the second quarter and continuing in the third quarter, we saw a slowdown in the global economy and a softening of customer demand resulting in declines in average buy and sell rates compared to the previous quarter. Until supply chain congestion, labor, truck, rail and equipment shortages and COVID 19-related restrictions fully subside, we expect a continued high level of volatility in average buy and sell rates. We also expect that pricing volatility will continue as carriers adapt to lower demand, changing fuel prices and react to governmental trade policies and other regulations. Additionally, we cannot predict the direct or indirect impact that further changes in and 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 2022 by the downtime caused by the cyber-attack, impacts of a slowing economy and the continued effects of 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, just-in-time inventory models, 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 is, 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 15 -------------------------------------------------------------------------------- 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, 2021 , filed onMarch 15, 2022 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
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
Percentage Percentage
(in thousands) 2022 2021 change 2022 2021 change
Airfreight services:
Revenues $ 1,480,955 $ 1,628,115 (9)% $ 4,682,076 $ 4,477,599 5%
Expenses 1,104,812 1,244,381 (11) 3,459,861 3,335,253 4
Ocean freight services and
ocean
services:
Revenues 1,684,579 1,598,597 5 5,420,471 3,651,059 48
Expenses 1,343,355 1,254,334 7 4,345,963 2,859,020 52
Customs brokerage and other
services:
Revenues 1,196,612 1,092,549 10 3,527,209 2,998,516 18
Expenses 746,106 686,775 9 2,345,508 1,837,134 28
Overhead expenses:
Salaries and related costs 499,341 519,611 (4) 1,546,503 1,452,902 6
Other 141,609 124,523 14 437,256 357,068 22
Total overhead expenses 640,950 644,134 - 1,983,759 1,809,970 10
Operating income 526,923 489,637 8 1,494,665 1,285,797 16
Other income, net 7,933 3,195 148 20,178 12,978 55
Earnings before income taxes 534,856 492,832 9 1,514,843 1,298,775 17
Income tax expense 120,694 132,922 (9) 368,975 333,941 10
Net earnings 414,162 359,910 15 1,145,868 964,834 19
Less net (losses) earnings
attributable to
the noncontrolling
interest (47 ) 842 (106) 7,745 2,174 256
Net earnings attributable to
shareholders$ 414,209 $ 359,068 15%$ 1,138,123 $ 962,660 18% Airfreight services: In the third quarter of 2022, demand for airfreight services continued to soften but remained high relative to available capacity compared to pre-pandemic levels, which resulted in sustained high average buy and sell rates. Continued restrictions from the pandemic, such as ongoing quarantine requirements inChina , have resulted in airlines not increasing passenger flight schedules to pre-pandemic levels, which limited available belly space for cargo. Additionally, capacity was further limited due to the conflict inUkraine and the related route restrictions inAsia andEurope lanes and sanctions on Russian carriers. In order to execute and meet the transportation needs of our customers, we continued to purchase capacity in advance and on the spot market. Volumes were lower in 2022 as a result of softening demand and compared to strong volumes in the same period in 2021 from customers converting to air shipments due to ocean port congestion. 16 -------------------------------------------------------------------------------- Airfreight services revenues and expenses decreased 9% and 11%, respectively, during the three months endedSeptember 30, 2022 , as compared with the same period in 2021, due to a 13% decrease in tonnage partially offset by 4% and 2% increases in average sell and buy rates, respectively. Tonnage decreased in almost all regions due to softening demand from slowing economies, with the largest decreases coming from exports out ofNorth Asia . Compared to the same quarter in 2021, average sell rates increased as a result of increased buy rates due to imbalances in available capacity relative to demand and increased fuel costs. Airfreight services revenues and expenses increased 5% and 4%, respectively, during the nine months endedSeptember 30, 2022 , as compared with the same period in 2021, due to 25% and 23% increases in average sell and buy rates, respectively, partially offset by a 16% decrease in tonnage. Average sell rates increased as a result of increased buy rates due to imbalances in available capacity relative to demand and increased fuel costs. Average sell and buy rates increased in all regions with most significant increases on exports out ofNorth Asia andSouth Asia . Tonnage decreased due to COVID-19 related lockdowns inChina , softening demand and downtime caused by the cyber-attack with the largest decreases coming from exports out ofNorth Asia andSouth Asia . Though we continued to process air shipments on a limited basis during the downtime caused by the cyber-attack, our volumes were negatively affected. Subsequent to the downtime in March, our volumes began to recover as customers gradually returned but were negatively affected through the second quarter. These conditions including the impact of rising jet fuel costs create a high degree of volatility in average buy rates and sell rates and are expected to continue at least through the end of 2022. Furthermore, transpacific passenger flights are not expected to return to pre-pandemic levels and further disruptions in the ocean market may continue to impact demand for airfreight. The continued high average buy and sell rates have significantly contributed to the growth in our revenues, expenses and operating income compared to 2021. These unprecedented operating conditions in 2021 and in the first half of 2022 are not expected to be sustained long-term. Buy rates and sell rates have been declining since the second quarter of 2022. Should customer demand decrease further and rates return to pre-pandemic levels, it will result in a significant decrease in our revenues, expenses and operating income. 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 5% and 48%, respectively, while expenses increased 7% and 52%, respectively for the three and nine months endedSeptember 30, 2022 as compared with the same periods in 2021. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 86% and 80% of ocean freight and ocean services revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Ocean freight consolidation revenues and expenses increased 8% and 9%, respectively, for the three months endedSeptember 30, 2022 , as compared with the same period in 2021, primarily due to 20% and 21% increases in average sell and buy rates, respectively, partially offset by a 10% decrease in containers shipped. Ocean freight consolidation revenues and expenses increased 60% and 61%, respectively, for the nine months endedSeptember 30, 2022 as compared with the same period in 2021, primarily due to a 74% increase in both average sell and buy rates, partially offset by an 8% decrease in containers shipped. Rising fuel prices, congestion at ports due to labor, truck and equipment shortages and disrupted sailing schedules resulted in continued high average buy rates in 2022. While the ability to secure necessary capacity from ocean carriers and major port congestions have eased, availability of labor and equipment at ports and rail heads remains challenging in certain locations. Containers shipped were lower in all regions, most significantly inNorth Asia as a result of COVID-19 related lockdowns inChina . A slowdown in international trade and a buildup of retail inventories inthe United States resulted in softening demand which negatively affected containers shipped compared to historically high volumes in the three and nine months endedSeptember 30, 2021 .Europe andMiddle East ocean freight and ocean services revenues increased 26% and 47%, respectively, while directly related expenses increased 32% and 54%, respectively, for the three months endedSeptember 30, 2022 primarily due to higher average sell rates and buy rates.North Asia andSouth Asia ocean freight and ocean services revenues increased 40% and 62%, respectively, while directly related expenses increased 42% and 66%, respectively, for the nine months endedSeptember 30, 2022 primarily due to higher average sell rates and buy rates. Direct ocean freight forwarding revenues increased 10% and 7%, respectively, while expenses increased 11% and 9%, respectively, for the three and nine months endedSeptember 30, 2022 principally due to increased ancillary services provided at higher rates. Order management revenues decreased 23% and 5%, respectively, while expenses decreased 27% and 2%, respectively, for the three and nine months endedSeptember 30, 2022 , mainly due to lower volumes from retail customers, including those that advanced holiday related shipments to the first half of the year, and the impact of downtime and lost customers caused by the cyber-attack. Our ability to provide order management services in the first quarter of 2022 was significantly affected by limited system connectivity during the downtime caused by the cyber-attack. 17 -------------------------------------------------------------------------------- Although global economic conditions are slowing and sell and buy rates have been declining since the second quarter of 2022, we expect ocean carriers to continue to manage available capacity. Until supply-chain congestion, labor, rail, truck and equipment shortages and COVID 19-related restrictions fully subside, we expect a high level of volatility in average buy and sell rates. We also expect that pricing volatility will continue as carriers adapt to increases in fuel prices and customers react to governmental trade policies and other regulations. The high average buy and sell rates have significantly contributed to the growth in our revenues and expenses in the nine months endedSeptember 30, 2022 . Should customer demand or rates further decrease from these levels, or if we are unable to secure sufficient capacity from carriers, it will result in a significant decrease in our revenues, expenses and operating income.
Customs brokerage and other services:
Customs brokerage and other services revenues increased 10% and 18%, respectively, and expenses increased 9% and 28%, for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the same periods in 2021, primarily due to higher charges on import services due to supply chain congestion and costs related to the downtime caused by the cyber-attack. Revenues and expenses for import services increased significantly due to high drayage, storage, delivery, demurrage, and detention costs incurred at destinations caused by supply chains congestion, shortages in warehousing space and delays in retrieving and delivering cargo and were partially offset by a decrease in revenue from customs clearance due to fewer shipments. Additionally, as a result of our inability to timely process and move shipments through ports during the cyber-attack downtime, we directly incurred approximately$55 million in incremental demurrage charges for the nine months endedSeptember 30, 2022 . Road freight, warehousing and distribution services also grew due to higher volumes and higher trucking, storage and labor costs. While customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process, some customers opt to using multiple customs brokerage service providers to reduce their risk. Customers continue to 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. Additionally, as supply-chains congestion subsides and international trade slows, volumes shipped and pricing could be negatively affected resulting in lower revenues and expenses.North America revenues increased 13% and 25%, respectively, and directly related expenses increased 13% and 39% for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the same periods in 2021, primarily as a result of higher charges on import services due to port congestion. Additionally,$51 million in demurrage charges related to the downtime caused by the cyber-attack also contributed to the increase in expenses for the nine months endedSeptember 30, 2022 .
Overhead expenses:
Salaries and related costs increased 6% for the nine months endedSeptember 30, 2022 as compared with the same period in 2021, principally due to increases in commissions and bonuses earned from higher revenues and operating income and a 6% increase in headcount during the same period to support increased complexity and disruptions in global supply chains. During the three months endedSeptember 30, 2022 salaries and related costs decreased 4% due to decreases in bonus expense offset by a 6% increase in headcount during the same period. 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. Total bonuses to field and executive management for the nine months endedSeptember 30, 2022 were up 4% when compared to the same period in 2021, due to an increase in operating income offset by unused bonus allocations and reductions in bonuses awarded to senior management. 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 18 --------------------------------------------------------------------------------
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 22% for the three and nine months endedSeptember 30, 2022 , respectively, as compared with the same period in 2021. We incurred$15 million of incremental costs in relation with the cyber-attack in the nine months endedSeptember 30, 2022 . These costs comprised of various consulting services including cybersecurity experts, outside legal advisors, and other IT professional expenses; and estimated liabilities for potential shipment-related claims. The remaining increases in other overhead expenses are the result of certain operational expenses, renting additional space, bad debt, higher claims and technology and consulting related costs to support our operations. During the three months endedSeptember 30, 2022 , the Company revised earlier estimates of incremental cyber-attack costs downward by$11 million . We expect to continue to enhance the effectiveness and security of our systems and deploy additional protection technologies and processes which will result in increased expenses in the future. We will also 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 22.6% and 24.4% for the three and nine months endedSeptember 30, 2022 , as compared to 27.0% and 25.7%, respectively, for the same periods in 2021. Both periods in 2022 benefited fromU.S. income tax deductions for FDII. For the three and nine months endedSeptember 30, 2022 and 2021, there was no BEAT expense and GILTI expense was insignificant. 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 theU.S. Internal Revenue Service andDepartment of Treasury .
Currency and Other Risk Factors
The nature of our worldwide operations necessitates transacting in a multitude of currencies other than theU.S. dollar. That exposes us to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or have agency relationships have strict currency control regulations that 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, 2022 and 2021 was insignificant. We had no foreign currency derivatives outstanding atSeptember 30, 2022 andDecember 31, 2021 . For the three months endedSeptember 30, 2022 , net foreign currency gains were approximately$9 million compared to less than$1 million in the same period in 2021. During the nine months endedSeptember 30, 2022 , net foreign currency gains were approximately$17 million compared to net foreign currency losses of approximately$1 million in the same period in 2021. Historically, our business has not been adversely affected by inflation. However, starting in 2021, most countries includingthe United States experienced higher inflation than in recent years. In 2021 and continuing into 2022, our business has experienced rising labor costs, significant service provider rate increases, higher rent and occupancy and other expenses. Due to the high degree of competition in the marketplace we may not be able to increase our prices to our customers to offset this inflationary pressure, which could lead to an erosion in our margins and operating income in the future. Conversely, raising our prices to keep pace with inflationary pressure may result in a decrease in customer demand. As we are not required to purchase or maintain extensive property and equipment and have not otherwise incurred substantial interest rate-sensitive indebtedness, we currently have limited direct exposure to increased costs resulting from increases in interest rates. There is uncertainty as to how new regulatory requirements and increases in oil prices are expected to 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 increase to our customers, fuel price increases could adversely affect our operating income.
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, 2022 was$670 million and$1,643 million , respectively, as compared with$177 million and$563 million for the same periods in 2021. The increase of$493 million for the three months endedSeptember 30, 2022 , was primarily due to collection of accounts receivable and higher net earnings. AtSeptember 30, 2022 , working capital was$2,881 million , including cash and cash equivalents of$2,155 million . Other than our recorded lease liabilities, we had no long-term obligations or debt atSeptember 30, 2022 . 19 -------------------------------------------------------------------------------- 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 meeting any contingent liabilities related to standby letters of credit and other obligations. As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a "pass through" and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these "pass through" billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Our accounts receivable and consequently our customer credit exposure has also increased as a result of historically high freight rates. 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 2022 by the pandemic, the downtime caused by the cyber-attack and the impacts of the slowing down economy. Cash used in investing activities for the three and nine months endedSeptember 30, 2022 was$17 million and$69 million as compared with$10 million and$25 million for the same periods in 2021, respectively, primarily for capital expenditures. Capital expenditures in the three and nine months endedSeptember 30, 2022 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. In the first quarter of 2022 we spent$3 million on capital expenditures for technology equipment and software in relation with the remediation effort for the cyber-attack. Total anticipated capital expenditures in 2022 are currently estimated to be$80 million . Cash used in financing activities during the three and nine months endedSeptember 30, 2022 was$429 million and$1,048 million as compared with cash used in financing activities of$14 million and$233 million for the same periods in 2021. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to reduce, or limit the growth of outstanding shares. During the three and nine months endedSeptember 30, 2022 , we used cash to repurchase 4.5 million and 9.5 million shares of common stock, respectively, compared to 0.6 million and 2.0 million, respectively, during the same periods in 2021. 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, increase in oil prices, nor the 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 for short-term working capital purposes. A few of these credit lines are supported by standby letters of credit issued by aUnited States bank or guarantees issued by the Company to the foreign banks issuing the credit line. AtSeptember 30, 2022 , borrowings under these credit lines were$31 million and 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.
We have lease arrangements primarily for office and warehouse space in all
districts where we conduct business. At of
We typically enter into unconditional purchase obligations with asset-based providers (generally short-term in nature) 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
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also enter into agreements with service providers to maintain or operate
equipment, facilities or software that can be longer than one year. We also
regularly have contractual obligations for specific projects related to
improvements of our owned or leased facilities and information technology
infrastructure. Purchase obligations outstanding as of
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, 2022 , cash and cash equivalent balances of$904 million were held by our non-United States subsidiaries, of which$24 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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