EXPEDITORS INTERNATIONAL OF WASHINGTON INC. 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 logistics solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets. We derive our revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by our customer. Each performance obligation is comprised of one or more of the Company's services. We typically satisfy our performance obligations as services are rendered over time. A typical shipment would include services rendered at origin, such as pick-up and delivery to port, freight services from origin to destination port and destination services, such as customs clearance and final delivery. Our three principal services are the revenue categories presented in our financial statements: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services. The most significant drivers of changes in gross revenues and related transportation expenses are volume, sell rates and buy rates. Volume has a similar effect on the change in both gross revenues and related transportation expenses in each of our three primary sources of revenue. We generate the major portion of our air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and then reselling those services to our customers on a retail basis. The rate billed to our customers (the sell rate) is recognized as revenues and the rate we pay to the carrier (the buy rate) is recognized in operating expenses as the directly related cost of transportation and other expenses. By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves. In most cases we act as an indirect carrier. When acting as an indirect carrier, we issue a House Airway Bill (HAWB), a HouseOcean Bill of Lading (HOBL) or a House Seaway Bill to customers as the contract of carriage. In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for airfreight shipments and a MasterOcean Bill of Lading for ocean shipments.
Customs brokerage and other services involve providing services at destination, such as helping customers clear shipments through customs by preparing and filing required documentation, calculating and providing for payment of duties and other taxes on behalf of customers as well as arranging for any required inspections by governmental agencies, and import services such as arranging for delivery. These are complicated functions requiring technical knowledge of customs rules and regulations in the multitude of countries in which we have offices. We also provide other value added services at destination, such as warehousing and distribution, time-definitive transportation services and consulting.
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.
19.
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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, 2019 ,
2018 and 2017:
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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.E 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 revenue at the
destination.
North Asia is our largest export oriented region and accounted for 31% of
revenues, 36% of directly related cost of transportation and other expenses and
33% of operating income for the year ended December 31, 2019 . 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 85% of
North Asia revenues, 86% of directly related cost of transportation and other
expenses and 81% operating income for the year ended December 31, 2019 .
20.
--------------------------------------------------------------------------------From the inception of our company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel. We believe that our greatest challenge is now, and always has been, perpetuating a consistent global corporate culture which demands:
• Total dedication to providing superior customer service;
• Compliance with our policies and procedures and government regulations;
• Aggressive marketing of all of our service offerings;
• A positive, safe work environment that is inclusive and free from
discrimination and harassment;
• Ongoing development of key employees and management personnel;
• Creation of unlimited advancement opportunities for employees dedicated to
hard work, personal growth and continuous improvement;
• Individual commitment to the identification and mentoring of successors
for every key position so that when change occurs, a qualified and
well-trained internal candidate is ready to step forward; and
• Continuous identification, design and implementation of system solutions
and differentiated service offerings, both technological and otherwise, to
meet and exceed the needs of our customers while simultaneously delivering
tools to make our employees more efficient and effective.
We reinforce these values with a compensation system that rewards employees for profitably managing the things they can control. This compensation system has been in place since we became a publicly traded company. There is no limit to how much a key manager can be compensated for success. We believe in a "real world" environment where the employees of our operating units are held accountable for the profit implications of their decisions. If these decisions result in operating losses, management generally must make up these losses with future operating profits, in the aggregate, before any cash incentive compensation can be earned. Executive management, in limited circumstances, makes exceptions at the branch operating unit level. At the same time, our policies, processes and relevant training focus on such things as cargo management, risk mitigation, compliance, accounts receivable collection, cash flow and credit soundness in an attempt to help managers avoid the kinds of errors that might end a career. We believe that our unique culture is a critical component to our continued success. We strongly believe that it is nearly impossible to predict events that, individually or in the aggregate, could have a positive or a negative impact on our future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment where well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help us adapt and thrive as major trends emerge. Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers that lead to profitable business growth.Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors. Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of 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 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. Although airline profitability has improved, many carriers remain highly leveraged with debt. Moreover, the ocean carrier industry has incurred substantial losses in recent years. Many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges. 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. 21. --------------------------------------------------------------------------------
International Trade and Competition
We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions inthe United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to tariffs and trade restrictions and accords. Currently,the United States andChina have significantly increased tariffs on certain imports and are engaged in trade negotiations. TheUnited Kingdom and theEuropean Union are negotiating the terms of theUnited Kingdom's exit from theEuropean Union . We cannot predict the outcome of these proposals or negotiations, or the effects they will have on our business. As governments implement higher tariffs on imports, manufacturers may accelerate, to the extent possible, shipments to avoid higher tariffs and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies inthe United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs. The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue. Ocean carriers have incurred substantial operating losses in recent years, and many are highly leveraged with debt. These financial challenges have resulted in multiple carrier acquisitions and carrier alliance formations. Additionally, carriers continue to take delivery of new and larger ships, which may increase capacity. Carriers also face new regulatory requirements that became effective in 2020 requiring reductions in the sulfur in marine fuel, which are increasing their operating and capital costs. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impactExpeditors' ability to maintain historical unitary profitability. There is uncertainty as to how new regulatory requirements and changes 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 we are unable to pass through any increases to our customers, this could adversely affect our operating income. We expectChina trade, and hence our operations, to be affected by the recent outbreak of Novel Coronavirus (COVID-19) that began inChina and was declared by theWorld Health Organization as a global health emergency. As precautionary measures, the government inChina extended theLunar New Year Holiday intoFebruary 2020 and has implemented travel restrictions and closures of certain centralChina ports and government offices. Additionally, factories have experienced extended closures and certain airlines are cancelling flights to and fromChina . As a result, certain of our centralChina offices have experienced closures and limited operations and shipments are being rerouted or delayed by customers and service providers, who are taking their own precautionary measures. Also, available airfreight capacity could be reduced affecting our ability to efficiently route our customers' freight. Any such conditions of operations, for an extended period of time would result in a reduction in shipments that could negatively affect our results of operations in 2020. In addition to traditional supply chain movements, we also believe this may have a further impact to global supply chains through potential shortages of raw materials, parts and supplies. The global economic and trade environments remain uncertain. 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, 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 inthe 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. 22. -------------------------------------------------------------------------------- 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 includingthe People's Republic of China , includingHong Kong ,Taiwan ,Vietnam ,India ,Mexico ,Canada ,Netherlands and theUnited Kingdom . Management believes that our tax positions, including intercompany transfer pricing policies, are reasonable and that they are 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 2020. 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.F to the consolidated financial statements, earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside ofthe United States . Accordingly, prior to the implementation of the requirements ofU.S. tax reform under the Tax Cuts and Jobs Act (2017 Tax Act) in December of 2017,U.S. Federal and State income taxes were provided for all undistributed earnings net of related foreign tax credits. See Note 7 to the consolidated financial statements for impacts associated withU.S. tax reform under the 2017 Tax Act. The 2017 Tax Act, which is also commonly referred to as "U.S. tax reform," significantly changedU.S. corporate income tax laws by, among other things, reducing theU.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 theU.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. 23. --------------------------------------------------------------------------------
Results of Operations
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 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 endedDecember 31, 2018 .
The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for 2019, 2018 and 2017. 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
2019 vs.
In thousands 2019 2018 2017 2018
Airfreight services:
Revenues $ 2,929,882 $ 3,271,932 $ 2,877,032 (10)%
Expenses 2,143,999 2,410,793 2,126,761 (11)
Ocean freight and ocean services:
Revenues 2,217,554 2,251,754 2,107,045 (2)
Expenses 1,613,646 1,664,168 1,543,740 (3)
Customs brokerage and other
services:
Revenues 3,027,990 2,614,679 1,936,871 16
Expenses 1,781,313 1,443,031 931,258 23
Overhead expenses:
Salaries and related costs 1,422,315 1,393,259 1,267,120 2
Other 447,461 430,551 351,809 4
Total overhead expenses 1,869,776 1,823,810 1,618,929 3
Operating income 766,692 796,563 700,260 (4)
Other income, net 29,102 21,766 18,335 34
Earnings before income taxes 795,794 818,329 718,595 (3)
Income tax expense 203,778 198,539 228,212 3
Net earnings 592,016 619,790 490,383 (4)
Less net earnings attributable to
the noncontrolling interest 1,621 1,591 1,038 2
Net earnings attributable to
shareholders $ 590,395 $ 618,199 $ 489,345 (4)%
24.
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2019 compared with 2018
Airfreight services:
Airfreight services revenues decreased 10% in 2019, as compared with 2018,
primarily due to a 9% decrease in sell rates and a 6% decrease in tonnage as a
result of the softening of market demand due to slowing of the global economy
and continuing inter-governmental trade disputes. North Asia , North America and
Europe revenues decreased 16%, 15% and 13%, respectively, in 2019.
Airfreight services expenses decreased 11% in 2019, respectively, as compared
with the same periods for 2018 principally as a result of a 9% decrease in buy
rates and a 6% decrease in tonnage due to available carrier capacity relative to
market demand. North Asia , North America and Europe directly related expenses
decreased 16%, 18% and 15%, respectively, in 2019.
Most regions experienced decreases in tonnage with the largest being North Asia ,
North America and Europe with declines in tonnage of 9%, 5% and 5% respectively,
in 2019. The latter part of 2018 benefited from customers accelerating shipments
in order to avoid higher tariffs.
The global airfreight market has been experiencing imbalances between carrier
capacity and demand in certain lanes, which is resulting in lower buy and sell
rates. These conditions are exacerbated by on-going inter-governmental trade
disputes and uncertainties. Customers remain focused on improving supply-chain
efficiency, reducing overall logistics costs by negotiating lower rates and
utilizing ocean freight whenever possible. We expect these trends to continue in
conjunction with carriers' efforts to manage available capacity and the
evolution of consumer purchasing behavior, such as online shopping. These
conditions could be affected by new product launches and customer responses to
governmental trade policies during periods that have historically experienced
higher demand. These conditions, should they continue to occur, could create a
higher degree of volatility in volumes and, ultimately, buy and sell rates.
25.
--------------------------------------------------------------------------------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 decreased 2% and 3%, respectively, in 2019, as compared with 2018. The largest component of our ocean freight and ocean services revenue was derived from ocean freight consolidation, which represented 65% and 68% of ocean freight and ocean services revenue in 2019 and 2018, respectively. Ocean freight consolidation revenues and expenses decreased 6% and 7%, respectively in 2019, as compared with 2018 primarily due to a 3% decline in containers shipped primarily inNorth Asia andNorth America . The 2019 decline in containers shipped began in the third quarter and accelerated in the fourth quarter with a quarterly decline of 13% compared to fourth quarter 2018. The latter part of 2018 benefited from customers accelerating shipments in order to avoid higher tariffs. The changes in freight consolidation revenues and directly related expenses also include the revised presentation of destination services in 2019, which decreased revenues and directly related operating expenses in ocean freight consolidation but did not change consolidated operating income.
Direct ocean freight forwarding revenues and expenses increased 9% and 12%,
respectively, primarily due to higher volumes in
North Asia ocean freight and ocean services revenues and directly related expenses decreased 13% and 15%, respectively, primarily due to a decrease in container volume. This was partially offset by an increase inSouth Asia ocean freight and ocean services revenues and directly related expenses of 12% and 9%, respectively, primarily due to an increase in container volume and higher sell and buy rates. We expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, and carriers adapt to changes in capacity and market demand, and merge or create alliances with other carriers. Carriers also face new regulatory requirements that become 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 increased 16% and expenses increased 23% in 2019, as compared with 2018, primarily due to increased demand for brokerage services and time-definite value added road freight services. Customers are seeking knowledgeable customs brokers with sophisticated computerized capabilities critical to an overall logistics management program, necessary to rapidly respond to changes in the regulatory and security environment. The 2019 results include the effect of changing our presentation of certain import services from a net to a gross basis and our revised presentation of destination services, which increased revenues and directly related operating expenses in customs brokerage and other services but did not change operating income.North America revenues and directly related expenses increased 23% and 33%, respectively, andEurope revenues and directly related expenses increased 4% and 6%, respectively, in 2019, as compared with 2018, primarily as a result of higher volumes in road freight and the effect of the change in presentation of certain import services. Overhead expenses: Salaries and related costs increased 2% in 2019, as compared with 2018, principally due to an increase in the number of employees, primarily inNorth America andEurope , higher base salaries and stock based compensation, partially offset by reductions in bonus earned from lower operating income. The number of employees increased primarily to support increased activity in our business operations. 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. 26. -------------------------------------------------------------------------------- Our management compensation programs have always been incentive-based and performance driven. Bonuses to field management in 2019 were up 2% when compared to the same period in 2018. Bonuses under the executive incentive compensation plan were down 12%, primarily due a decrease in operating income, a 3% 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 increased 4% in 2019, as compared with 2018. The increase in expenses was due to renting additional space, occupancy costs, technology-related fees, consulting expenses and warehouse expenses, partially offset by lower depreciation and amortization 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 25.6% in 2019, as compared to 24.3% in 2018. The effect of higher average tax rates of our international subsidiaries, when compared toU.S. federal and state tax rates, were partially offset byU.S. foreign tax credits andU.S. income tax deductions for Foreign-derived intangible income (FDII). In 2019 and 2018, we benefited fromU.S. Federal tax credits totaling$15.7 million and$20.3 million , respectively, principally because of withholding taxes related to our foreign operations, as well asU.S. income tax deductions for Foreign-derived intangible income (FDII) of$9.0 and$4.8 million , respectively. In addition, in both 2019 and 2018 we benefited from state income tax refunds totaling approximately$4 million . These amounts were partially offset by the effect of higher foreign tax rates of our international subsidiaries, when compared to theU.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. Some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by theIRS orTreasury . See Note 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.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates dealing with a multitude of currencies other than theU.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during 2019, 2018 and 2017 was insignificant. We had no foreign currency derivatives outstanding atDecember 31, 2019 and 2018. Net foreign currency losses were approximately$9 million ,$2 million and$13 million in 2019, 2018 and 2017, 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. 27. -------------------------------------------------------------------------------- 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 endedDecember 31, 2019 was$772 million , as compared with$573 million for 2018. This$199 million increase is primarily due to decreases in accounts receivable, partially offset by a decrease in earnings. AtDecember 31, 2019 , working capital was$1,602 million , including cash and cash equivalents of$1,230 million . We had no long-term debt atDecember 31, 2019 . Management believes that our current cash position and operating cash flows will be sufficient to meet our capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations. As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a "pass through" and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these "pass through" billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems. Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash. Cash used in investing activities for the year endedDecember 31, 2019 was$46 million , as compared with$48 million for 2018. We had capital expenditures of$47 million in 2019 which is consistent with 2018. Capital expenditures in 2019 related primarily to continuing investments in building and leasehold improvements and technology and facilities equipment. Occasionally, we elect to purchase buildings to house staff and to facilitate the staging of customers' freight. Total anticipated capital expenditures in 2020 are currently estimated to be$50 million . This includes routine capital expenditures and investments in technology. Cash used in financing activities for the year endedDecember 31, 2019 was$418 million as compared with$628 million in 2018. 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 2019 and 2018, we used cash to repurchase 5.3 million and 9.0 million shares of common stock, respectively, to reduce the number of total outstanding shares. During 2019 and 2018, we paid dividends of$1.00 and$0.90 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 2019, we repurchased 5.2 million shares at an average price of$72.89 per share. We had a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises. As ofMarch 31, 2019 , all shares authorized under this plan have been repurchased. During 2019, we repurchased 88 thousand shares at an average price of$74.03 per share. See Note 5 to the consolidated financial statements for cumulative repurchases under both repurchase plans. 28. -------------------------------------------------------------------------------- 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 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.
AtDecember 31, 2019 , we were contingently liable for$69 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 $ 69,489 62,745 2,952 842 2,950
At
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 $ 467,226 81,713 138,980 100,872 145,661
Unconditional purchase obligations $ 49,698 49,698 - - -
Construction, equipment and
technology purchase obligations
52 224
Total contractual cash obligations
We typically enter into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill. In the regular course of business, we also enter into agreements with service providers to maintain or operate equipment, facilities or software that 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. 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. AtDecember 31, 2019 , cash and cash equivalent balances of$457 million were held by our non-United States subsidiaries, of which$5 million was held in banks inthe United States . Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside ofthe United States .
Impact of Inflation
To date, our business has not been adversely affected by inflation. Direct carrier rate increases could occur over the short to medium-term period. 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
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