Overview

Expeditors International of Washington, Inc. 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.

The COVID-19 pandemic has significantly affected our business operations for the
year ended December 31, 2020, and we expect these disruptive conditions to
continue into 2021. The significant impacts are discussed under Item 1 Business
section and below within Results of operations.

We derive our revenues by entering into agreements that are generally comprised
of a single performance obligation, which is that freight is shipped for and
received by our customer. Each performance obligation is comprised of one or
more of the Company's services. We typically satisfy our performance obligations
as services are rendered over time. A typical shipment would include services
rendered at origin, such as pick-up and delivery to port, freight services from
origin to destination port and destination services, such as customs clearance
and final delivery. Our three principal services are the revenue categories
presented in our financial statements: 1) airfreight services, 2) ocean freight
and ocean services, and 3) customs brokerage and other services. The most
significant drivers of changes in gross revenues and related transportation
expenses are volume, sell rates and buy rates. Volume has a similar effect on
the change in both gross revenues and related transportation expenses in each of
our three primary sources of revenue.

We generate the major portion of our air and ocean freight revenues by
purchasing transportation services on a wholesale basis from direct
(asset-based) carriers and then reselling those services to our customers on a
retail basis. The rate billed to our customers (the sell rate) is recognized as
revenues and the rate we pay to the carrier (the buy rate) is recognized in
operating expenses as the directly related cost of transportation and other
expenses. By consolidating shipments from multiple customers and concentrating
our buying power, we are able to negotiate favorable buy rates from the direct
carriers, while at the same time offering lower sell rates than customers would
otherwise be able to negotiate themselves.

In most cases we act as an indirect carrier. When acting as an indirect carrier,
we issue a House Airway Bill (HAWB), a House Ocean Bill of Lading (HOBL) or a
House Seaway Bill to customers as the contract of carriage. In turn, when the
freight is physically tendered to a direct carrier, we receive a contract of
carriage known as a Master Airway Bill for airfreight shipments and a Master
Ocean Bill of Lading for ocean shipments.

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



In these transactions, we evaluate whether it is appropriate to record the gross
or net amount as revenue. Generally, revenue is recorded on a gross basis when
we are primarily responsible for fulfilling the promise to provide the services,
when we assume risk of loss, when we have discretion in setting the prices for
the services to the customers, and we have the ability to direct the use of the
services provided by the third party. When revenue is recorded on a net basis,
the amounts earned are determined using a fixed fee, a per unit of activity fee
or a combination thereof. For revenues earned in other capacities, for instance,
when we do not issue a HAWB, a HOBL, or a House Seaway Bill or otherwise act
solely as an agent for the shipper, only the commissions and fees earned for
such services are included in revenues. In these transactions, we are not a
principal and report only commissions and fees earned in revenue.

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We manage our company along five geographic areas of responsibility: Americas;
North Asia; South Asia; Europe; and Middle East, Africa and India (MAIR). Each
area is divided into sub-regions that are composed of operating units with
individual profit and loss responsibility. Our business involves shipments
between operating units and typically touches more than one geographic area. The
nature of the international logistics business necessitates a high degree of
communication and cooperation among operating units. Because of this
inter-relationship between operating units, it is very difficult to examine any
one geographic area and draw meaningful conclusions as to its contribution to
our overall success on a stand-alone basis. The following chart shows revenues
by geographic areas of responsibility for the years ended December 31, 2020,
2019 and 2018:

                               [[Image Removed]]



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.F to the consolidated financial
statements in this report), almost all freight revenues 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.

North Asia is our largest export oriented region and accounted for 38% of
revenues, 44% of directly related cost of transportation and other expenses and
37% of operating income for the year ended December 31, 2020. North Asia's
directly related cost of transportation and other expenses are higher than other
segments due to the largely export nature of the operations in that region. The
People's Republic of China, including Hong Kong, represented more than 84% of
North Asia revenues, 85% of directly related cost of transportation and other
expenses and 79% operating income for the year ended December 31, 2020.



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Expeditors' Culture

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

Our business growth strategy emphasizes a focus on the right markets and, within
each market, on the right customers that lead to profitable business growth
through the aggressive marketing of our service offerings. Innovative solutions,
integrated platforms and data quality are vital to achieving a competitive
advantage. Expeditors' teams are aligned on the specific markets; on the
targeted accounts within those markets; and on ways that we can continue to
differentiate ourselves from our competitors.

Our ability to provide services to customers is highly dependent on good working
relationships with a variety of entities including airlines, ocean carriers,
ground transportation providers and governmental agencies. The significance of
maintaining acceptable working relationships with these entities has gained
increased importance as a result of ongoing concern over 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. As a
result, carriers are facing significant liquidity challenges exacerbated by the
pandemic and are seeking relief under various government support programs. This
environment requires that we be selective in determining which carriers to
utilize. Further changes in the financial stability, operating capabilities and
capacity of asset-based carriers, capacity allotments available from carriers,
governmental regulations, and/or trade accords could adversely affect our
business in unpredictable ways.

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

International Trade and Competition



We operate in over 60 countries in the competitive global logistics industry and
our activities are closely tied to the global economy. The global economy
entered into a recession as a result of the pandemic and related precautionary
measures including government lockdowns, shutdown of manufacturing and
operations for non-essential businesses and travel restrictions. International
trade is influenced by many factors, including economic and political conditions
in the United States and abroad, currency exchange rates, laws and policies
relating to tariffs, trade restrictions, foreign investments and taxation.
Periodically, governments consider a variety of changes to tariffs and trade
restrictions and accords. Currently, the United States and China have
significantly increased tariffs on certain imports and are engaged in trade
negotiations and changes to export regulations and tariffs. 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. Doing business in foreign locations also
subjects us to a variety of risks and considerations not normally encountered by
domestic enterprises. In addition to being influenced by governmental policies
and inter-governmental disputes concerning international trade, our business may
also be negatively affected by political developments and changes in government
personnel or policies in the United States and other countries, as well as
economic turbulence, political unrest and security concerns in the nations and
on the trade shipping lanes in which we conduct business and the future impact
that these events may have on international trade, oil prices and security
costs.

In 2020, the United Kingdom and the European Union negotiated the terms of the
United Kingdom's exit from the European Union (EU), which were effective on
January 1, 2021. These rules and regulations are in the process of being
implemented and are subject to further interpretation and change. The full
impact of the United Kingdom's departure, and impact to international trade is
still uncertain.

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 and ocean freight

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capacity, volatile carrier pricing, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.



Air carriers are experiencing significant cash flow challenges as a result of
travel restrictions resulting in cancellation of flights and have incurred
record operating losses in 2020. 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. These conditions have resulted in multiple carrier
acquisitions and carrier alliance formations. Carriers also face new regulatory
requirements that became effective in 2020 requiring reductions in the sulfur in
marine fuel, which are increasing their operating and capital costs. When the
market experiences seasonal peaks or any sort of disruption, the carriers often
increase their pricing suddenly. This carrier behavior creates pricing
volatility that could impact Expeditors' ability to maintain historical unitary
profitability.

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

Critical Accounting Estimates



Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP). Preparing our consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities and expenses. A summary of our significant accounting policies can
be found in Note 1 to the consolidated financial statements in this report.

Management believes that the nature of our business is such that there are few
complex challenges in accounting for operations. While judgments and estimates
are a necessary component of any system of accounting, the use of estimates is
limited primarily to the following areas:

  • accrual of loss contingencies;


  • accrual of various tax liabilities and contingencies;


  • accounts receivable valuation; and

• accrual of insurance liabilities for the portion of the related exposure

that we have self-insured.




These estimates, other than the accrual of loss contingencies and tax
liabilities and contingencies, are not highly uncertain and have not
historically been subject to significant change. Management believes that the
methods utilized in all of these areas are non-aggressive in approach and
consistent in application. Management believes that there are limited, if any,
alternative accounting principles or methods which could be applied to these
transactions. While the use of estimates means that actual future results may be
different from those contemplated by the estimates, management believes that
alternative principles and methods used for making such estimates would not
produce materially different results than those reported.

The outcome of loss contingencies, including legal proceedings and claims and
government investigations, brought against us are subject to significant
uncertainty. An estimated loss from a contingency, such as a legal proceeding,
claim or government investigation, is recorded by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a loss
contingency is made if there is at least a reasonable possibility that a
significant loss has been incurred. In determining whether a loss should be
recorded, management evaluates several factors, including advice from outside
legal counsel, in order to estimate the likelihood of an unfavorable outcome and
to make a reasonable estimate of the amount of loss or range of reasonably
possible loss. Changes in these factors could have a material impact on our
financial position, results of operations and operating cash flows for any
particular quarter or year.

Accounting for income taxes involves significant estimates and judgments. We are
subject to taxation in various states and in many foreign jurisdictions
including the People's Republic of China, including Hong Kong, Taiwan, Vietnam,
India, Mexico, Canada, Netherlands and the United Kingdom. Management believes
that our tax positions, including intercompany transfer pricing policies, are
reasonable and that they are

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consistently applied. We are under, or may be subject to, audit or examination
and assessments by the relevant authorities in respect of these particular
jurisdictions primarily for 2009 and thereafter. Sometimes audits and
examinations result in proposed assessments where the ultimate resolution could
result in significant additional tax, penalties and interest payments being
required. We establish liabilities when, despite our belief that the tax return
positions are appropriate and consistent with tax law, we conclude that we may
not be successful in realizing the tax position. In evaluating a tax position,
we determine whether it is more likely than not that the position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position and in
consultation with qualified tax advisors.

The total amount of our tax contingencies may increase in 2021. In addition,
changes in state, federal, and foreign tax laws and changes in interpretations
of these laws may increase our existing tax contingencies. The timing of the
resolution of income tax examinations can be highly uncertain, and the amounts
ultimately paid, if any, upon resolution of the issues raised by the taxing
authorities may differ significantly from the amounts recorded. It is reasonably
possible that within the next 12 months we may undergo further audits and
examinations by various tax authorities and it is also possible that we may
reach resolution related to income tax examinations in one or more
jurisdictions. These assessments or settlements could result in changes to our
contingencies related to positions on tax filings in future years and may
increase the amount of tax expense we recognize as well as the potential for
penalties and interest being incurred. Our estimate of any ultimate tax
liability contains assumptions based on our experience, judgments about
potential actions by taxing jurisdictions as well as judgments about the likely
outcome of issues that have been raised by the taxing jurisdiction. Though we
believe the estimates and assumptions used to support the evaluation of our tax
positions are reasonable, the actual amount of any change could vary
significantly depending on the ultimate timing and nature of its resolution.

As discussed in Note 1.G to the consolidated financial statements, earnings of
our foreign subsidiaries are not considered to be indefinitely reinvested
outside of the United States. See Note 7 to the consolidated financial
statements for impacts associated with U.S. tax reform under the Tax Cuts and
Jobs Act (2017 Tax Act). The 2017 Tax Act, which is also commonly referred to as
"U.S. tax reform," significantly changed U.S. corporate income tax laws by,
among other things, reducing the U.S. corporate income tax rate to 21% starting
in 2018 and creating a territorial tax system with a one-time mandatory tax on
previously undistributed foreign earnings of non-U.S. subsidiaries.

Our effective tax rate will largely depend on the mix of pretax earnings that we
generate in the U.S. as compared to the rest of the world and the impact of any
discrete items for events occurring in the period or future changes in tax
regulations and related interpretations.

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Results of Operations



This section of this Form 10-K generally discusses 2020 and 2019 items and
year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and
year-to-year comparisons between 2019 and 2018 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2019.

The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for 2020, 2019 and 2018. The table, chart and the accompanying discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto in this report.





                                                                                    Percentage
                                                                                      change
                                                                                     2020 vs.
In thousands                           2020            2019            2018            2019
Airfreight services:
Revenues                            $ 4,784,402     $ 2,929,882     $ 3,271,932        63%
Expenses                              3,679,185       2,143,999       2,410,793        72%
Ocean freight and ocean services:
Revenues                              2,353,247       2,217,554       2,251,754         6%
Expenses                              1,762,754       1,613,646       1,664,168         9%
Customs brokerage and other
services:
Revenues                              2,978,832       3,027,990       2,614,679        (2)%
Expenses                              1,746,851       1,781,313       1,443,031        (2)%
Overhead expenses:
Salaries and related costs            1,538,104       1,422,315       1,393,259         8%
Other                                   449,150         447,461         430,551         -%
Total overhead expenses               1,987,254       1,869,776       1,823,810         6%
Operating income                        940,437         766,692         796,563        23%
Other income, net                        16,127          29,102          21,766       (45)%
Earnings before income taxes            956,564         795,794         818,329        20%
Income tax expense                      258,350         203,778         198,539        27%
Net earnings                            698,214         592,016         619,790        18%
Less net earnings attributable to
the noncontrolling interest               2,074           1,621           1,591        28%
Net earnings attributable to
shareholders                        $   696,140     $   590,395     $   618,199        18%


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                               [[Image Removed]]



2020 compared with 2019

Airfreight services:

In the second quarter and continuing through the remainder of 2020, 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 for time-sensitive delivery of essential
PPE, medical supplies and technology equipment remained high. Demand grew in the
fourth quarter and a concentration of flights to key gateway hubs caused
congestion at airports that put further constraints on available capacity. These
conditions have caused extreme imbalances between carrier capacity and demand,
principally on exports out of North Asia. In order to execute and meet the
transportation needs of our customers we heavily utilized charter flights and
purchased capacity in advance and on the spot market, which resulted in
historically high average buy and sell rates.

Airfreight services revenues increased 63% in 2020, as compared with 2019,
primarily due to a 78% increase in average sell rates partially offset by a 3%
decrease in tonnage. Sell rates increased to unprecedented levels in all regions
with the largest impacts in North Asia and South Asia. Tonnage through most of
the year was affected by the decline in international trade as a result of the
pandemic. Tonnage declined in all regions except North Asia. North Asia
airfreight services revenue represented 24% and 14% of the total Company
consolidated revenues for 2020 and 2019, respectively.

Airfreight services expenses increased 72% in 2020, as compared with 2019,
primarily due to an 81% increase in average buy rates partially offset by a 3%
decrease in tonnage. Buy rates increased in all regions with the largest impacts
in North Asia and South Asia.

During the fourth quarter of 2020, we experienced record high tonnage and
continued high average sell rates and buy rates. When compared to the third
quarter of 2020, demand for airfreight grew while capacity shortages persisted
in particular on exports from North Asia. Airfreight services revenues and
expenses increased 41% and 47%, respectively, from the third quarter of 2020 to
the fourth quarter of 2020, principally

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due to 20% and 24% increase in average sell rates and buy rates and a 20%
increase in tonnage. Compared the fourth quarter 2019, airfreight services
revenues and expenses increased 104% and 116%, respectively, principally due to
99% and 104% increase in average sell rates and buy rates and a 10% increase in
tonnage. Airfreight services revenues and expenses represented 49% and 52% of
our total revenues and expenses, respectively, in the fourth quarter of 2020.

The annual decrease in airfreight tonnage was primarily due to the global
pandemic. As a result of the pandemic, governments around the world implemented
travel restrictions and suspended non-essential services. This caused supply
chain disruptions for our domestic and international customers, which
correspondingly decreased our airfreight volumes. In 2020, South Asia, North
America and Europe had decreases in tonnage of 22%, 5% and 8%, respectively,
when compared to 2019. North Asia had an increase in tonnage of 13% in 2020, as
compared with 2019.

These conditions create a high degree of volatility in volumes, buy rates and
sell rates and are expected to continue into 2021 as international passenger
flights are not expected to return to pre-pandemic levels and additional
capacity from freighters is limited. The historically high buy and sell rates
have significantly contributed to the growth in our expenses and revenues and
financial results in 2020. These unprecedented operating conditions are not
expected to be sustained long-term. We are unable to predict how these
uncertainties and any future disruptions, such as continued urgent distribution
of COVID-19 vaccines, 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 and
expenses increased 6% and 9%, respectively, in 2020, as compared with 2019. The
largest component of our ocean freight and ocean services revenue was derived
from ocean freight consolidation, which represented 66% and 65% of ocean freight
and ocean services revenue in 2020 and 2019, respectively.



Ocean freight consolidation revenues and expenses increased 8% and 10%,
respectively in 2020, as compared with 2019 primarily due to a 13% increase in
sell rates and a 15% increase in buy rates, partially offset by a 3% decrease in
containers shipped. Ocean freight volumes and pricing were impacted by the
effect of the pandemic in 2020. Starting in the first quarter of 2020 there was
a sharp decrease in international trade and low demand, primarily from
disruptions in manufacturing and store closures. During that period ocean
carriers managed their capacity to market demand resulting in increases in buy
rates. Demand increased in the second half of the year and soared in the fourth
quarter of 2020 due to backlogs in supply chains and low inventory levels,
creating a severe imbalance between demand and capacity in particular on exports
from North Asia and South Asia. The deficiency in available capacity was further
exacerbated by congestion at ports due to labor and equipment shortages, which
disrupted sailing schedules, and resulted in higher average buy rates. Sell
rates and volumes increased in the fourth quarter of 2020 as we were able to
timely adjust to market conditions and leverage our capacity agreements with
ocean carriers.



Direct ocean freight forwarding revenues and expenses increased 6% and 11% in
2020, as compared with 2019, primarily due to higher volumes, changes in
customer mix and higher costs as a result of congestion at the ports, primarily
in North America. Order management revenues and expenses decreased 2% and 1% in
2020, as compared with 2019, primarily due to lower volumes mostly from the
retail industry.



North Asia ocean freight and ocean services revenues and directly related
expenses increased 7% and 9% in 2020, as compared with 2019, primarily due to
higher average buy and sell rates, partially offset by a 1% decline in container
volumes. South Asia ocean freight and ocean services revenues and directly
related expenses increased 20% and 22% in 2020, as compared with 2019, primarily
due to higher average sell and buy rates and a 6% increase in containers
shipped. In 2020, the largest decline in container volume was in exports from
North America.

Most ocean carriers experienced significant increase in market demand in the
latter part of the year and we expect this demand to continue into 2021. Until
port congestion and equipment shortages subside, we believe there will be
continued pressure on buy rates. We also expect that pricing volatility will
continue as customers solicit bids, react to governmental trade policies, and
adjust to the continued disruptions of the global economy from the pandemic,
while carriers continue to adapt to changes in capacity and market demand and
merge or create alliances with other carriers. Carriers also face new regulatory
requirements that became effective in 2020 to reduce the use of sulfur in marine
fuel, which are increasing their operating and capital costs, which could result
in higher costs for us. These conditions could result in lower operating income.

Customs brokerage and other services:



Customs brokerage and other services revenues and expenses each decreased 2% in
2020, as compared with 2019, primarily due to decreases in shipments from
existing customers in the first three quarters of the year. Slowdowns due to the
pandemic related closures affected volumes, particularly in aerospace,
automotive, oil and energy and certain portions of the retail sectors and the
onboarding of new customers was negatively impacted. 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.

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North America revenues and directly related expenses decreased 3% and 4%, respectively in 2020, as compared with 2019, primarily as a result of lower volumes in customs brokerage.

Overhead expenses:

Salaries and related costs increased 8% in 2020, as compared with 2019, principally due to increases in commissions and bonuses earned from higher revenues and operating income.



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

Our management compensation programs have always been incentive-based and
performance driven. Bonuses to field management in 2020 were up 26% when
compared to the same period in 2019. Bonuses under the executive incentive
compensation plan were up 17%, primarily due an increase in operating income
offset by a reduction made to senior executive management bonus allocations, as
well as unused bonus allocations available for future investments in the
development of key personnel.

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

Other overhead expenses remained constant in 2020, as compared with 2019. There
was a significant decrease in travel and entertainment expense due to travel
restrictions, that was offset primarily by increases in bad debt, claims and
contingencies, indirect taxes and depreciation expense. We will continue to make
important investments in people, processes and technology, as well as to invest
in our strategic efforts to explore new areas for profitable growth.

Income tax expense:





Our consolidated effective income tax rate was 27.0% in 2020, as compared to
25.6% in 2019. The effect of higher average tax rates of our international
subsidiaries, when compared to U.S. federal and state tax rates, were partially
offset by U.S. foreign tax credits and U.S. income tax deductions for
Foreign-derived intangible income (FDII). In 2020 when compared to 2019, the
earnings of our international subsidiaries were proportionally higher than that
of our U.S. subsidiaries. In 2020 and 2019, we benefited from U.S. Federal tax
credits totaling $16.7 million and $15.7 million, respectively principally
because of withholding taxes related to our foreign operations, as well as U.S.
income tax deductions for FDII of $10 million and $9 million, respectively. In
2020, when compared to 2019, we benefited from increased tax deductions for
share-based compensation, principally stock option exercises of our employees.
These amounts were partially offset by the effect of higher foreign tax rates of
our international subsidiaries, when compared to the U.S. Federal income tax
rate of 21%, as well as certain expenses that are no longer deductible under the
2017 Tax Act, including certain executive compensation in excess of amounts
allowed. In 2019, we benefited from state income tax refunds totaling
approximately $4 million.

Some elements of the recorded impacts of the 2017 Tax Act could be impacted by
further legislative action as well as additional interpretations and guidance
issued by the IRS or Treasury. See Note 7 to the consolidated financial
statements for additional information.

The tax benefit associated with non-qualified stock option and restricted stock
unit grants is recorded when the related compensation expense is recorded
(excess tax benefits are recorded upon the exercise of non-qualified stock
options and vesting of RSUs and PSUs) while the tax benefit received for
incentive stock options and employee stock purchase plans shares cannot be
anticipated and are therefore recognized if and when a disqualifying disposition
occurs. Our effective tax rate is subject to variation and the effective tax
rate may be more or less volatile based on the amounts of pre-tax income or
loss. For example, the impact of discrete items and non-deductible expenses on
the effective rate is greater when pre-tax income is lower. Total consolidated
foreign income tax expense is composed of the income tax expense of our non-U.S.
subsidiaries as well as income based withholding taxes paid by our non-U.S.
subsidiaries on behalf of its parent for intercompany payments, including the
remittance of dividends.

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Currency and Other Risk Factors



The nature of our worldwide operations necessitates dealing with a multitude of
currencies other than the U.S. dollar. This results in our being exposed to the
inherent risks of volatile international currency markets and governmental
interference. Some of the countries where we maintain offices and/or agency
relationships have strict currency control regulations, which influence our
ability to hedge foreign currency exposure. We try to compensate for these
exposures by accelerating international currency settlements among our offices
and agents. We may enter into foreign currency hedging transactions where there
are regulatory or commercial limitations on our ability to move money freely
around the world or the short-term financial outlook in any country is such that
hedging is the most time-sensitive way to mitigate short-term exchange
losses. Any such hedging activity during 2020, 2019 and 2018 was
insignificant. We had no foreign currency derivatives outstanding at
December 31, 2020 and 2019. Net foreign currency losses were approximately $25
million, $9 million and $2 million in 2020, 2019 and 2018, respectively.

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

The primary competitive factors in the international logistics industry continue
to be price and quality of service, including reliability, responsiveness,
expertise, convenience, and scope of operations. We emphasize quality customer
service and believe that our prices are competitive with those of others in the
industry. Customers regularly solicit bids from competitors in order to improve
service, pricing and contractual terms such as seeking longer payment terms,
higher or unlimited liability limits and performance penalties. Increased
competition and competitors' acceptance of expanded contractual terms could
result in reduced revenues, reduced margins, higher operating costs, higher
claims or loss of market share, any of which would damage our results of
operations and financial condition.

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

Liquidity and Capital Resources



Our principal source of liquidity is cash and cash equivalents and cash
generated from operating activities. Net cash provided by operating activities
for the year ended December 31, 2020 was $655 million, as compared with $772
million for 2019. This $117 million decrease is primarily due to changes in
working capital, principally from excess customer billings over collections when
compared to the same period in 2019 as a result of growth in activity and high
sell rates in the fourth quarter of 2020, offset by increased earnings. At
December 31, 2020, working capital was $2,071 million, including cash and cash
equivalents of $1,528 million. We had no long-term debt at December 31, 2020.
Management believes that our current cash position and operating cash flows will
be sufficient to meet our capital and liquidity requirements for at least the
next 12 months and thereafter for the foreseeable future, including meeting any
contingent liabilities related to standby letters of credit and other
obligations.

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

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Cash used in investing activities for the year ended December 31, 2020 was $46
million, which is consistent with 2019. We had capital expenditures of $48
million in 2020 and $47 million 2019. Capital expenditures in 2020 related
primarily to our purchase of a less-than-truckload digital online shipping
platform, continuing investments in building and leasehold improvements and
technology and facilities equipment. Occasionally, we elect to purchase
buildings to house staff and to facilitate the staging of customers' freight.
Total anticipated capital expenditures in 2021 are currently estimated to be $45
million. This includes routine capital expenditures and investments in
technology.

Cash used in financing activities for the year ended December 31, 2020 was $332
million as compared with $418 million in 2019. We used the proceeds from stock
option exercises, employee stock purchases and available cash to repurchase our
common stock on the open market to reduce issued and outstanding shares. During
2020 and 2019, we used cash to repurchase 4.6 million and 5.3 million shares of
common stock, respectively, to reduce the number of total outstanding shares.
During 2020 and 2019, we paid dividends of $1.04 and $1.00 per share,
respectively.

We have a Discretionary Stock Repurchase Plan under which management is allowed
to repurchase shares to reduce the issued and outstanding stock to 160 million
shares of common stock. During 2020 we repurchased 4.6 million shares at an
average price of $72.26 per share. We had a Non-Discretionary Stock Repurchase
Plan to repurchase shares from the proceeds of stock option exercises. As of
March 31, 2019, all shares authorized under this plan have been repurchased. See
Note 5 to the consolidated financial statements for cumulative repurchases under
both repurchase plans.

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 impact ongoing uncertainties in the global economy, and
political uncertainty nor the COVID-19 pandemic may continue to 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.

At December 31, 2020, we were contingently liable for $72 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.



                                                                    Amount 

of commitment expiration per period


                                              Total
                                             amounts        Less than            1 - 3            3 - 5         After
In thousands                                committed         1 year             years            years        5 years
Standby letters of credit and guarantees   $    71,937           64,442             2,656             523         4,316



At December 31, 2020, our contractual obligations are as follows:





                                                                   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                              $ 506,454         89,317       153,574       105,987       157,576
Unconditional purchase obligations    $  82,969         82,969             -             -             -

Technology, equipment and construction purchase obligations $ 35,702 24,099 11,468

            38            97

Total contractual cash obligations $ 625,125 196,385 165,042 106,025 157,673






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 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.

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Our foreign subsidiaries regularly remit dividends to the U.S. parent company
after evaluating their working capital requirements and funds necessary to
finance local capital expenditures. In some cases, our ability to repatriate
funds from foreign operations may be subject to foreign exchange controls. At
December 31, 2020, cash and cash equivalent balances of $620 million were held
by our non-United States subsidiaries, of which $27 million was held in banks in
the United States. Earnings of our foreign subsidiaries are not considered to be
indefinitely reinvested outside of the United States.

Impact of Inflation



To date, our business has not been adversely affected by inflation. However
significant direct carrier rate increases occurred in 2020, as a result of the
disruptions caused by the pandemic, and are expected to continue in the short to
medium term. Due to the high degree of competition in the market place, these
rate increases can lead to an erosion in our margins. 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.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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