EXPEDITORS INTERNATIONAL OF WASHINGTON INC. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Certain portions of this report on Form 10-Q including the sections entitled "Overview," "Novel Coronavirus (COVID-19)," "Expeditors' Culture and Strategy," "International Trade and Competition," "Seasonality," "Critical Accounting Estimates," "Results of Operations," "Income tax expense," "Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain forward-looking statements. Words such as "will likely result," "expects", "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, the anticipated impact and duration of COVID-19, and other characterizations of future events or circumstances are forward-looking statements. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. In addition to risk factors identified in Part II, Item 1A, Risk Factors of this report, attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed onFebruary 21, 2020 .
Overview
Expeditors International of Washington, Inc. (herein referred to as "Expeditors ," the "Company," "we," "us," "our") provides a full suite of global logistics services. Our services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other 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.
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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.
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.
Novel Coronavirus (COVID-19)
The COVID-19 pandemic has significantly affected our business operations in the first half of 2020, and we expect these disruptive conditions to continue at least through the remainder of the year. At this time, the main elements of its impact on our business are summarized below:
• Governments have designated our operations as essential business in all
regions where we operate because of our important role in supply chains
operations worldwide. As such, our districts continue to serve our
customers while operating within the regulations established in those
countries.
• We activated our global business continuity plan in the first quarter and
are continuing to operate under this plan. Our business continuity plan
includes measures to protect and safeguard the health of our employees and
service providers, such as sanitization of our facilities, providing
protective equipment to employees, restricting travel and requiring all
employees to work remotely if they are able to. Our plan includes measures
to minimize adverse impacts to our operations and those of our customers'
businesses. We have identified areas of the supply chain process that can
be supported remotely and through automation, and those which require
physical operations and handling. We continue to monitor the rapidly
changing situation and take additional actions, as needed, based on
recommendations from governments and local and national health
authorities. In the second quarter of 2020, we implemented and begandeploying a global recovery plan regionally following local regulations.
Our recovery plan is intended to allow employees to gradually and safely
move back into offices when health risks subside and governments around
the world lift restrictions. Our districts around the world are atdifferent phases of the recovery plan depending on local conditions.
• Travel restrictions, government mandated lockdowns and additional
precautionary measures resulted in business and supply chain disruption,
and limited operations in
worldwide starting in
trade. We have also seen a shift in the goods we handle with a substantial
portion of shipments comprising of technology products to support social
distancing and working remotely and to a lesser degree, medical equipment
and supplies. In contrast, we have seen significant declines in shipments
from our customers in the aerospace, automotive, oil and energy and
certain portions of the retail sectors. With the exception of airfreight
exports out of
impacted our results of operations in the first half of 2020.
• These disruptions are threatening the financial stability of our service
providers and our ability to efficiently route customer freight. Reduced
passenger flight schedules and cancellations have significantly impacted
available belly space, limiting our ability to utilize space under our
existing capacity agreements with carriers and requiring us to buy space
in a tight airfreight market and utilize chartered planes. In the second
quarter, the limited airfreight space capacity, combined with high globaldemand for shipping Personal Protective Equipment (PPE), medical equipment
and supplies and technology products created such an imbalance that buy
rates increased to unprecedented levels, in particular on exports out of
anchoring vessels and skipping ports due to the decline in demand. These
freight market conditions create pricing volatility that further
challenges Expeditors' ability to maintain historical unitary
profitability.
• Many of our customers are experiencing disruptions in their revenue and
cash flow, including an increased number of bankruptcies, prompting these
customers to attempt to renegotiate contractual terms and increasing our
accounts receivable collection risk. We have continued to apply our
established credit control procedures and collection monitoring that have
historically been effective in limiting credit losses. These conditions
could result in the loss of business and additional bad debt allowances in
the future if our customers' ability to pay further deteriorates.
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These uncertain conditions continued in
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 the effect of the global pandemic, 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 rapidly promulgate new regulations in reaction to the global pandemic and increase oversight and enforcement of new and existing laws. We consider our current working relationships with these entities to be satisfactory. 15 -------------------------------------------------------------------------------- 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 incurring operating losses. As a result, carriers are facing liquidity challenges exacerbated by the global 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. InMay 2020 , we acquired a less-than-truckload digital online shipping platform which aligns with our focus on developing 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 global pandemic and related precautionary measures including lockdown government mandates worldwide, shutdown of manufacturing and operations for non-essential businesses and travel restrictions. International trade is influenced by many factors, including economic and political conditions inthe United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to tariffs and trade restrictions and accords. Currently,the United States andChina have significantly increased tariffs on certain imports and are engaged in trade negotiations and changes to export regulations and tariffs for goods deemed essential to combating COVID-19. 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 airfreight capacity availability, volatile airfreight 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. 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 volatility in oil prices will continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our buy rates and sell rates, we would expect our revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that future fuel prices increase and we are unable to pass through the increases to our customers, this could adversely affect our operating income. The global economic and trade environments remain uncertain, including the 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 pandemics' disruptions, some customers have begun shifting manufacturing to other countries which could negatively impact us. 16 --------------------------------------------------------------------------------
Seasonality
Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance this seasonal trend will occur in the future or to what degree it will be impacted in 2020 by the pandemic. This pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, pandemics, governmental policies and inter-governmental disputes and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of our international network and service offerings. A significant portion of our revenues is derived from customers in the retail and technology industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of our revenues are, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, changes in trade tariffs, product launches and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted inthe United States requires us to make estimates and judgments. We base our estimates on historical experience and on assumptions that we believe are reasonable. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our annual report on Form 10-K for the year endedDecember 31, 2019 , filed onFebruary 21, 2020 . There have been no material changes to the critical accounting estimates previously disclosed in that report.
Results of Operations
The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for the three and six months endedJune 30, 2020 and 2019, including the respective percentage changes comparing 2020 and 2019. 17 --------------------------------------------------------------------------------
The table and the accompanying discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes thereto in this quarterly report.
Three months ended June 30, Six months ended June 30,
Percentage Percentage
(in thousands) 2020 2019 change 2020 2019 change
Airfreight services:
Revenues $ 1,434,590 $ 741,577 93% $ 2,143,629 $ 1,456,478 47%
Expenses 1,097,073 542,639 102 1,617,242 1,051,849 54
Ocean freight services and ocean
services:
Revenues 491,712 543,809 (10) 985,139 1,112,450 (11)
Expenses 363,599 390,299 (7) 730,082 810,630 (10)
Customs brokerage and other
services:
Revenues 654,330 750,193 (13) 1,353,728 1,486,702 (9)
Expenses 370,369 440,946 (16) 770,445 877,342 (12)
Overhead expenses:
Salaries and related costs 395,107 356,351 11 737,147 713,261 3
Other 106,858 113,143 (6) 220,899 222,746 (1)
Total overhead expenses 501,965 469,494 7 958,046 936,007 2
Operating income 247,626 192,201 29 406,681 379,802 7
Other income, net 3,356 8,778 (62) 11,547 16,549 (30)
Earnings before income taxes 250,982 200,979 25 418,228 396,351 6
Income tax expense 66,794 47,449 41 111,258 102,710 8
Net earnings 184,188 153,530 20 306,970 293,641 5
Less net earnings attributable to
the noncontrolling interest 319 381 (16) 757 793 (5)
Net earnings attributable to
shareholders$ 183,869 $ 153,149 20%$ 306,213 $ 292,848 5% Airfreight services: In the second quarter of 2020, airfreight services experienced unprecedented events in response to the global pandemic. As a result of travel restrictions and lower passenger demand, airlines cancelled flights reducing available belly space for cargo at a time where global demand for time-sensitive delivery of essential PPE, medical supplies and technology equipment spiked. This caused extreme imbalances between carrier capacity and demand, principally on exports out ofNorth Asia . In order to execute and meet the urgent 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 93% and 47% during the three and six months endedJune 30, 2020 , respectively, as compared with the same periods for 2019, primarily due to 133% and 69% increases in average sell rates offset by 10% and 9% declines in tonnage. Sell rates increased in all regions with the largest increase inNorth Asia . Tonnage declined in all regions exceptNorth Asia .North Asia airfreight services revenue represented 32% and 15% of the total Company consolidated revenues in the second quarter of 2020 and 2019, respectively. In 2020, average sell rates increased in all regions, peaking in April and May and started declining in June. Airfreight services expenses increased 102% and 54% during the three and six months endedJune 30, 2020 , respectively, as compared with the same periods for 2019, principally as a result of a 133% and 70% increase in average buy rates. Buy rates increased in all regions with the largest increase inNorth Asia . The decrease in airfreight tonnage was primarily due to the global pandemic. As a result of the global pandemic governments around the world have implemented travel restrictions and suspended non-essential services. This has caused supply chain disruptions for our domestic and international customers, which correspondingly decreased our airfreight volumes.South Asia ,North America andEurope had decreases in tonnage of 45%, 15% and 14% for the three months endedJune 30, 2020 and 30%, 9% and 9% for the six months endedJune 30, 2020 .North Asia had increases in tonnage of 14% and 3%, in the three months and six months endedJune 30, 2020 , respectively. These conditions created a high degree of volatility in volumes, buy and sell rates. We are unable to predict how these uncertainties will affect our future operations or financial results. 18
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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 decreased 10% and 11% for the three and six months endedJune 30, 2020 as compared with the same periods in 2019. Ocean freight and ocean services expenses decreased 7% and 10% for the three and six months endedJune 30, 2020 as compared with the same periods in 2019. The largest component of our ocean freight and ocean services revenue was derived from ocean freight consolidation, which represented 63% and 66% of ocean freight and ocean services revenue for the six months endedJune 30, 2020 and 2019, respectively. Ocean freight consolidation revenues and expenses decreased 10% and 8%, respectively, for the three months endedJune 30, 2020 as compared with the same period in 2019, due to a 14% decline in containers shipped across all regions, partially offset by an increase in sell and buy rates. Ocean freight consolidation revenues and expenses decreased 15% and 14%, respectively, for the six months endedJune 30, 2020 as compared with the same period in 2019, due to a 12% decline in containers shipped. Additionally, for the six months endedJune 30, 2020 , the changes in freight consolidation revenues and directly related expenses include a revised presentation of destination services that started in the second quarter of 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 increased 1% and 5%, respectively, while expenses increased 6% and 12%, for the three and six months endedJune 30, 2020 , principally due to higher volumes and changes in customer mix primarily inNorth America . Order management revenues decreased 20% and 14% respectively, and expenses decreased 19% and 15%, respectively for the three months endedJune 30, 2020 primarily due to lower volumes inNorth Asia , mostly from the retail industry.North Asia ocean freight and ocean services revenues and expenses decreased 11% and 10%, respectively, for the three months endedJune 30, 2020 , primarily due to a decrease in container volume partially offset by higher sell and buy rates.North Asia ocean freight and ocean services revenues and expenses decreased 22% for the six months endedJune 30, 2020 , as compared with the same period in 2019, primarily due to a decrease in container volume. The decline in containers shipped fromNorth Asia followed decreases in trade volumes starting in 2019 and continuing with the pandemic. Most ocean carriers continue to reduce their capacity by anchoring vessels and skipping ports due to the decline in demand. We expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, adjust to the slowdown of the global economy from the global pandemic and carriers continue to adapt to changes in capacity, 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 continued lower operating income.
Customs brokerage and other services:
Customs brokerage and other services revenues decreased 13% and 9% and expenses decreased 16% and 12% for the three and six months endedJune 30, 2020 , respectively, as compared with the same periods in 2019, primarily due to decreases in shipments from existing customers. Slowdowns due to the pandemic related closures affected volumes, particularly in aerospace, automotive, oil and energy and certain portions of the retail sectors. 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.
Overhead expenses:
Salaries and related costs increased by 11% and 3% for the three and six months endedJune 30, 2020 , respectively, as compared with the same periods in 2019, principally due to increases in commissions and bonuses earned from higher revenues and operating income. 19 -------------------------------------------------------------------------------- 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 for the six months endedJune 30, 2020 were up 15% when compared to the same period in 2019. Bonuses under the executive incentive compensation plan were consistent with the same period in 2019, primarily due to 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 revenues, operating income and net earnings are a result of the incentives inherent in our compensation programs.
Other overhead expenses decreased 6% and 1% for the three and six months ended
Income tax expense: Our consolidated effective income tax rate was 26.6% for the three and six months endedJune 30, 2020 , as compared to 23.6% and 25.9% for the same periods in 2019. 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). Additionally, the three months endedJune 30, 2019 benefited from a state income tax refund. Some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by theIRS orTreasury . See Note 3 to the condensed consolidated financial statements for additional information.
Currency and Other Risk Factors
The nature of our worldwide operations necessitates dealing with a multitude of currencies other than theU.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and six months endedJune 30, 2020 and 2019 was insignificant. We had no foreign currency derivatives outstanding atJune 30, 2020 andDecember 31, 2019 . During the three months endedJune 30, 2020 , net foreign currency losses were approximately$4 million . During the six months endedJune 30, 2020 , net foreign currency gains were insignificant. During the three and six months endedJune 30, 2019 , net foreign currency losses were approximately$2 million and$4 million , respectively. 20 -------------------------------------------------------------------------------- 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 operating income, higher operating costs, higher claims or loss of market share, any of which would damage our results of operations and financial condition. Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management. We believe that this trend has resulted in customers using fewer service providers with greater technological capacity and more consistent global coverage. Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers. Developing and maintaining these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.
Liquidity and Capital Resources
Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and six months endedJune 30, 2020 was$187 million and$352 million as compared with$156 million and$445 million for the same periods in 2019. The increase of$31 million in the three months endedJune 30, 2020 was primarily due to higher airfreight revenues offset by changes in working capital, principally as a result of excess customer billings over collections when compared to the same period in 2019. The decrease of$93 million in the six months endedJune 30, 2020 was primarily due to changes in working capital, primarily as a result of increases in accounts receivable from increased airfreight revenues during the second quarter of 2020 when compared to the same period in 2019. AtJune 30, 2020 , working capital was$1,570 million , including cash and cash equivalents of$1,180 million . Other than our recorded lease liabilities, we had no long-term obligations or debt atJune 30, 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. 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. 21 -------------------------------------------------------------------------------- Cash used in investing activities for the three and six months endedJune 30, 2020 was$22 million and$28 million as compared with$12 million and$21 million in the same periods of 2019, primarily for capital expenditures. Capital expenditures in the three and six months endedJune 30, 2020 were 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 2020 are currently estimated to be$60 million . This includes routine capital expenditures and investments in technology. Cash used in financing activities during the three and six months endedJune 30, 2020 was$98 million and$359 million as compared with$250 million and$267 million for the same periods in 2019. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to limit the growth in issued and outstanding shares. During the three and six months endedJune 30, 2020 , we used cash to repurchase 0.4 million and 4.4 million shares of common stock to reduce the number of total outstanding shares, compared to 2.6 million and 3.2 million in the same periods in 2019. We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.
We cannot predict what further impact growing uncertainties in the global economy, political uncertainty nor the COVID-19 pandemic may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers' abilities to pay or on changes in competitors' behavior.
We maintain international unsecured bank lines of credit. AtJune 30, 2020 , we were contingently liable for$68 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of our foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the accounting records of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company is required to perform. Our foreign subsidiaries regularly remit dividends to 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. AtJune 30, 2020 , cash and cash equivalent balances of$599 million were held by our non-United States subsidiaries, of which$20 million was held in banks inthe United States . Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside ofthe United States .
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