# Expeditors International of Washington Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [Expeditors International of Washington Inc](/companies/expd.md) (CIK 746515)
- Form: 10-Q
- Filed: 2022-05-09
- Accepted by EDGAR: May 9, 2022, 12:49 ET
- Period: 2022-03-31
- Accession: 0001564590-22-018771
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/746515/000156459022018771/expd-10q_20220331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/746515/000156459022018771/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $4.66bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $461.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $121.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $346.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $2.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $2.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 169,216,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | $413.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $14.4m | us-gaap:PaymentsToAcquireProductiveAssets |
| Share repurchases | 3 months, 2022-01-01 to 2022-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-03-31 | $2.14bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $6.96bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $7.96bn | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $3.72bn | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2022-03-31 | $3.84bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,217 characters.

### Safe Harbor for Forward-Looking Statements Under Private Securities Litigation Reform Act Of 1995; Certain Cautionary Statements

Certain portions of this report on Form 10-Q including the sections entitled "Overview," "Highlights from First Quarter 2022," "Industry Trends, Trade Conditions and Competition," "Seasonality," "Critical Accounting Estimates," "Results of Operations," "Income tax expense," "Currency and Other Risk Factors" and "Liquidity and Capital Resources" contain forward-looking statements. Words such as "will likely result," "expects", "are expected to," "would expect," "would not expect," "will continue," "is anticipated," "estimate," "project," "plan," "believe," "probable," "reasonably possible," "may," "could," "should," "intends," "foreseeable future" or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any statements that refer to projections of future financial performance, our anticipated growth and trends in the Company's businesses, the anticipated impact and duration of the Novel Coronavirus (COVID-19) pandemic, current supply chain and transportation disruptions, ongoing impacts of the cyber-attack and other characterizations of future events or circumstances are forward-looking statements. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These statements must be considered in connection with the discussion of the important factors that could cause actual results to differ materially from the forward-looking statements. Attention should be given to the risk factors identified and discussed in Part I, Item 1A in the 2021 10-K and in Part II, Item 1A in this report. Management believes that these forward-looking statements are reasonable as of this filing date and we do not assume any obligations to update these statements except as required by law.

### 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, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking, and other supply chain solutions. We do not compete for overnight courier or small parcel business. As a non-asset based carrier, we do not own or operate transportation assets.

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

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

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

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

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

Our operating units share revenue using the same arms-length pricing methodologies that we use when our offices transact business with independent agents. Certain costs are allocated among the segments based on the relative value of the underlying services, which can include allocation based on actual costs incurred or estimated cost plus a profit margin. Our strategy closely links compensation with operating unit profitability, which includes shared revenues and allocated costs. Therefore, individual success is closely linked to cooperation with other operating units within our network.

The mix of services varies by segment based primarily on the import or export orientation of local operations in each of our regions. In accordance with our revenue recognition policy (see Note 1. B to the condensed consolidated financial statements in this report), almost all freight revenue and related expenses are recorded at origin and shipment profits are split between origin and destination offices by recording a commission fee or profit share of revenue at the destination.

### Highlights from First Quarter 2022

On February 20, 2022, we determined that our company was the subject of a targeted cyber-attack. Upon discovering the incident, we shut down most of our connectivity, operating and accounting systems globally to manage the safety of our entire global systems environment We had limited ability to conduct operations for a period of approximately three weeks, including but not limited to arranging for shipments of freight or managing customs and distribution activities for our customers’ shipments. While we methodically integrated our systems back into our global operations, our districts worked to maintain our business operations and minimize the impact on our employees, customers, and service providers. While we continue to navigate residual effects and incorporate learnings from the cyber-attack, our core systems are now being utilized to deliver our services. Beyond the loss of revenue and additional expenses incurred in the first quarter, the future impacts of the cyber-attack cannot be estimated. The potential loss of customers, revenues or higher costs could have a material adverse impact on our business, revenues, expenses, results of operations, cash flows and reputation.

In the first quarter of 2022 the COVID-19 pandemic, including the effect of recent lockdowns in China and resulting disruptions on supply chains, continued to significantly affect our business operations and financial results, and we expect these disruptive conditions to continue through the end of 2022. The COVID-19 pandemic may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time.

The significant impacts are discussed within “Results of Operations” and the financial highlights below.

- Revenues and directly related operating expenses increased 46% and 56%, respectively, primarily from high average buy and sell rates.
- Severe imbalances between carrier available capacity and customer demand resulted in continued high average buy and sell rates resulting in higher revenues and operating expenses.
- Significant congestion at ocean ports and airport gateways from continued shortages in equipment, labor and warehousing space at destinations and disruptions from COVID-19 precautionary measures, resulted in longer transportation times and created challenging conditions to find availability to meet customer demand.
- Volumes transacted in all services were down, impacted by the downtime caused by the cyber-attack.
- We recorded $60 million in estimated expenses from the cyber-attack including $40 million in customs brokerage and other services expenses.
- Net earnings to shareholders increased 21% and operating cash flows improved 16%.

### Industry Trends, Trade Conditions and Competition

We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, laws and policies relating to tariffs, trade restrictions, foreign investment and taxation. Periodically, governments consider a variety of changes to tariffs and trade restrictions and accords. Currently, the United States and China have significantly increased tariffs on certain imports and are engaged in trade negotiations and changes to export regulations and tariffs. We cannot predict the outcome of changes in tariffs, or interpretations, and trade restrictions and accords and the effects they will have on our business. As governments implement higher tariffs on imports, manufacturers may accelerate, to the extent possible, shipments to avoid higher tariffs and, over time, may shift manufacturing to other countries. Doing business in foreign locations also subjects us to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being influenced by governmental policies and inter-governmental disputes concerning international trade, our business may also be negatively affected by political developments and changes in government personnel or policies in the United States and other countries, as well as economic turbulence, political unrest and security concerns in the nations and on the trade shipping lanes in which we conduct business and the future impact that these events may have on international trade, oil prices and security costs. We do not have employees, assets, or operations in Russia or Ukraine. Any shipment activity is conducted with independent agents in those countries and is inconsequential to the Company.

Our ability to provide services to our customers is highly dependent on good working relationships with a variety of entities, including airlines, ocean carrier lines and ground transportation providers, as well as governmental agencies. We select and engage with best-in-class, compliance-focused, efficiently run, growth-oriented partners, based upon defined value elements and are intentional in our relationship and performance management activity, reinforcing success by awarding service providers who consistently achieve at the highest levels with additional business. We consider our current working relationships with these entities to be satisfactory. However, changes in the financial stability and operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulation or deregulation efforts, modernization of the regulations governing customs brokerage, and/or changes in governmental restrictions, quota restrictions or trade accords could affect our business in unpredictable ways. Many air carriers are experiencing significant cash flow challenges as a result of travel restrictions resulting in cancellation of flights and have received government relief and incurred record operating losses in 2020 and 2021. Uncertainty over recovery of demand for passenger air travel, in particular business travel, compared to pre-pandemic levels may impact air carriers’ operations and financial stability long term. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.

The global economic and trade environments remain uncertain, including the ongoing impacts of the pandemic, higher inflation and oil prices and the conflict in Ukraine. We cannot predict the impact of future changes in global trade on our operating results, freight volumes, pricing, inflation, 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 and purchasing behavior, such as online shopping, could have on our business. In response to governments implementing higher tariffs on imports, as well as responses to the pandemic’s disruptions, some customers have begun shifting manufacturing to other countries which could negatively impact us.

### Seasonality

Historically, our operating results have been subject to seasonal demand trends with the first quarter being the weakest and the third and fourth quarters being the strongest; however, there is no assurance that this seasonal trend will occur in the future or to what degree it will be impacted in 2022 by the downtime caused by the cyber-attack and the continued effects of the pandemic. This historical pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, pandemics, governmental policies and inter-governmental disputes and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of our international network and service offerings.

A significant portion of our revenues is derived from customers in the retail and technology industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of our revenues are, to a large degree, impacted by factors out of our control, such as a sudden change in consumer demand for retail goods, changes in trade tariffs, product launches, disruptions in supply-chains and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter and, therefore, we may not learn of a shortfall in revenues until late in a quarter.

To the extent that a shortfall in revenues or earnings was not expected by securities analysts or investors, any such shortfall from levels predicted by securities analysts or investors could have an immediate and adverse effect on the trading price of our stock. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.

### Critical Accounting Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the 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 ended December 31, 2021, filed on March 15, 2022 to the critical accounting estimates previously disclosed in that report.

### Results of Operations

The following table shows the revenues, the directly related cost of transportation and other expenses for our principal services and our overhead expenses for the three months ended March 31, 2022 and 2021, including the respective percentage changes comparing 2022 and 2021.

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.

*(in thousands)*

| Airfreight services: | Three months ended March 31, 2022 | 2021 | Percentage change |
| --- | ---: | ---: | ---: |
| Revenues1 | $1,598,555 | $1,325,915 | 21% |
| Expenses1 | 1,142,546 | 954,544 | 20 |
| **Ocean freight services and ocean services:** |  |  |  |
| Revenues1 | 1,976,246 | 953,912 | 107 |
| Expenses1 | 1,600,243 | 742,435 | 116 |
| **Customs brokerage and other services:** |  |  |  |
| Revenues1 | 1,089,497 | 918,993 | 19 |
| Expenses1 | 773,322 | 550,305 | 41 |
| **Overhead expenses:** |  |  |  |
| Salaries and related costs | 538,940 | 452,105 | 19 |
| Other | 147,487 | 113,916 | 29 |
| Total overhead expenses | 686,427 | 566,021 | 21 |
| Operating income | 461,760 | 385,515 | 20 |
| Other income, net | 9,419 | 4,946 | 90 |
| Earnings before income taxes | 471,179 | 390,461 | 21 |
| Income tax expense | 121,699 | 102,511 | 19 |
| Net earnings | 349,480 | 287,950 | 21 |
| Less net earnings attributable to the noncontrolling interest | 3,371 | 730 | 362 |
| Net earnings attributable to shareholders | $346,109 | $287,220 | 21% |

1 See Note 1A – Summary of Significant Accounting Policies to the unaudited condensed consolidated financial statements contained in this report

#### Airfreight services:

In the first quarter of 2022 airfreight services continued to experience extreme imbalances between carrier capacity and demand, principally on exports out of North Asia and South Asia. Continued restrictions from the pandemic, such as lockdowns in China, have resulted in airlines not increasing flight schedules to pre-pandemic levels, which limited available belly space for cargo at a time where global demand remained high relative to available capacity. Additionally, capacity was further limited due to the conflict in Ukraine and the related route restrictions in Asia and Europe lanes and sanctions on Russian carriers. Demand remained high in the first quarter of 2022, as customers continued converting to air shipments due to ongoing disruptions in ocean transportation, placing further constraints on available capacity, which resulted in sustained high average buy and sell rates. In order to execute and meet the transportation needs of our customers, we continued utilization of charter flights and purchased capacity in advance and on the spot market. Freighters, charters and gateway infrastructure are operating at near maximum capacity which is continuing the pressure on buy rates and limiting the ability to move additional volume. Though we continued to process air shipments during the downtime caused by the cyber-attack, it did negatively affect our volumes in the second half of the quarter.

Airfreight services revenues and expenses increased 21% and 20%, respectively, during the three months ended March 31, 2022, as compared with the same period in 2021, due to 50% and 47% increases in average sell and buy rates, respectively partially offset by an 18% decrease in tonnage. Average sell and buy rates increased due to imbalances between demand and available capacity and increased fuel costs as jet fuel pricing doubled compared to the first quarter 2021. Tonnage decreased in all regions due to the downtime caused by the cyber-attack with the largest decreases coming from exports out of North Asia and North America. Average sell and buy rates increased in all regions.

These conditions create a high degree of volatility in average buy rates and sell rates, including the impact of rising jet fuel costs, and are expected to continue at least through the end of 2022. Furthermore, international passenger flights are not expected to return to pre-pandemic levels, additional capacity from freighters is limited and disruptions in the ocean market continue to impact demand for airfreight. The continued historically high average buy and sell rates have significantly contributed to the growth in our revenues, expenses and operating income compared to the first quarter of 2021. Should customer demand decrease and rates return to pre-pandemic levels, it will result in a significant decrease in our revenues, expenses and operating income compared to 2021. These unprecedented operating conditions are not expected to be sustained long-term. We are unable to predict how these uncertainties, potential loss of business as a result of the downtime caused by the cyber-attack, and any future disruptions will affect our future operations or financial results.

#### Ocean freight and ocean services:

Ocean freight consolidation, direct ocean forwarding and order management are the three basic services that constitute and are collectively referred to as ocean freight and ocean services. Ocean freight and ocean services revenues and expenses increased 107% and 116%, respectively for the three months ended March 31, 2022 as compared with the same period in 2021. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 88% and 76% of ocean freight and ocean services revenue for the three months ended March 31, 2022 and 2021, respectively.

Ocean freight consolidation revenues and expenses both increased 137% for the three months ended March 31, 2022, as compared with the same period in 2021, primarily due to 145% and 144% increases in average sell and buy rates, respectively, and a 3% decrease in containers shipped. Demand remained strong in the first quarter of 2022 due to continued backlogs in supply chains, low customer inventory levels, and high consumer demand creating a severe imbalance between demand and available capacity in particular on exports from North Asia and South Asia. The deficiency in available capacity continues to be affected by congestion at ports due to labor and equipment shortages, which disrupts sailing schedules, and resulted in record high average buy rates. These extremely challenging conditions are impacting the ability to secure necessary capacity from ocean carriers, as well as the time and resources required to process shipments and meet the demands of customers.

Containers shipped were lower in North Asia and North America as a result of difficulties in securing additional capacity from carriers and were also affected by the downtime caused by the cyber-attack. North Asia ocean freight and ocean services revenues increased 95%, while directly related expenses increased 100% for the three months ended March 31, 2022 primarily due to higher average sell rates and buy rates. South Asia ocean freight and ocean services revenues increased 149%, while directly related expenses increased 166%, respectively, for the three months ended March 31, 2022 for the same reasons as North Asia and also due to a 3% increase in containers shipped.

Direct ocean freight forwarding revenues increased 8%, while expenses increased 12%, for the three months ended March 31, 2022 principally due to higher volumes and increased ancillary services provided at higher rates. Order management revenues increased 12%, while expenses increased 30% for the three months ended March 31, 2022 due to higher costs. Our ability to provide order management services in the first quarter 2022 was significantly affected by limited system connectivity during the downtime caused by the cyber-attack.

Ocean carriers continued to experience strong market demand relative to available capacity in the first quarter of 2022. Until port congestion, labor and equipment shortages subside, we expect current delays will continue through the end of 2022. Additionally, COVID 19-related restrictions in China are resulting in additional vessels being anchored in ports, which will result in further capacity reduction and longer dwell times at destination. We believe there will be continued pressure on buy rates. We also expect that pricing volatility will continue as carriers adapt to changes in capacity, market demand, labor availability and increases in fuel prices and customers react to governmental trade policies. The historically high average buy and sell rates have significantly contributed to the growth in our revenues and expenses in the three months ended March 31, 2022. Should customer demand or rates decrease from these levels, or if we are unable to secure sufficient capacity from carriers, it will result in a significant decrease in our revenues, expenses and operating income.

#### Customs brokerage and other services:

Customs brokerage and other services revenues increased 19% and expenses increased 41% for the three months ended March 31, 2022, respectively, as compared with the same periods in 2021, primarily due to higher charges on import services due to port congestion and costs related to the downtime caused by the cyber-attack. Revenues and expenses for import services increased significantly due to record high drayage, storage, delivery, demurrage, and detention costs incurred at destinations caused by port congestion, shortages in warehousing space and delays in retrieving and delivering cargo. Road freight, warehousing and distribution services also grew as a result of higher volumes and higher trucking, storage and labor costs. Additionally, in the first quarter 2022, as a result of our inability to timely process and move shipments through ports during the downtime, we directly incurred approximately $40 million in incremental demurrage charges. While customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process we cannot predict the effect of potential loss of business as a result of the downtime caused by the cyber-attack. Customers continue to seek knowledgeable customs brokers with sophisticated computerized capabilities critical to an overall logistics management program that are necessary to rapidly respond to changes in the regulatory and security environment.

North America revenues increased 29% and directly related expenses increased 57% for the three months ended March 31, 2022, respectively, as compared with the same periods in 2021, primarily as a result of higher charges on import services due to port congestion and $33 million in demurrage charges related to the downtime caused by the cyber-attack.

#### Overhead expenses:

Salaries and related costs increased by 19% for the three months ended March 31, 2022, respectively, as compared with the same period in 2021, principally due to increases in commissions and bonuses earned from higher revenues and operating income and a 10% increase in headcount to support growing activity.

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

Our management compensation programs have always been incentive-based and performance driven. Total bonuses to field and executive management for the three months ended March 31, 2022 were up 29% when compared to the same period in 2021, primarily due to a 20% increase in operating income and higher bonuses to field personnel.

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

Other overhead expenses increased 29% for the three months ended March 31, 2022, as compared with the same period in 2021 primarily as a result of $20 million incremental costs incurred in relation with the cyber-attack in the first quarter of 2022. These costs comprised of various consulting services including cybersecurity experts, outside legal advisors, and other IT professional expenses; and estimated liabilities for potential shipment-related claims. The remaining increases are the result of certain operational expenses, renting additional space and technology related costs to support the growth in our operations and higher local tax expenses. As we continue to recover from the cyber-attack, assess its effect on our systems and operations and deploy additional protection technologies and processes we expect to incur additional incremental charges in 2022. We will also continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.

#### Income tax expense:

Our consolidated effective income tax rate was 25.8% for the three months ended March 31, 2022 as compared to 26.3% for the same period in 2021. For the three-months ended March 31, 2022 and 2021, there was no BEAT expense and GILTI expense was insignificant. Both periods benefited from U.S. income tax deductions for FDII. Some elements of the recorded impacts of the 2017 Tax Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the IRS or Treasury.

### Currency and Other Risk Factors

The nature of our worldwide operations necessitates transacting in a multitude of currencies other than the U.S. dollar. That exposes us to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or have agency relationships have strict currency control regulations that influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three months ended March 31, 2022 and 2021 was insignificant. We had no foreign currency derivatives outstanding at March 31, 2022 and December 31, 2021. For the three months ended March 31, 2022 and 2021 net foreign currency gains were approximately $2 million and $3 million, respectively.

Historically, our business has not been adversely affected by inflation. However, starting in 2021, many countries including the United States experienced higher inflation than in recent years. In 2021 and continuing into 2022, our business has experienced rising labor costs, significant service provider rate increases, higher rent and occupancy and other expenses. Due to the high degree of competition in the marketplace we may not be able to increase our prices to our customers to offset this inflationary pressure, which could lead to an erosion in our margins and operating income in the future. Conversely, raising our prices to keep pace with inflationary pressure may result in a decrease in customer demand. As we are not required to purchase or maintain extensive property and equipment and have not otherwise incurred substantial interest rate-sensitive indebtedness, we currently have limited direct exposure to increased costs resulting from increases in interest rates.

There is uncertainty as to how new regulatory requirements and sharp increases in oil prices are expected to continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our buy rates and sell rates, we would expect our revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that future fuel prices increase and we are unable to pass through the increase to our customers, fuel price increases could adversely affect our operating income.

### Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three months ended March 31, 2022 was $414 million as compared with $356 million for the same period in 2021. The increase of $58 million for the three months ended March 31 2022 was primarily due to higher net earnings. At March 31, 2022, working capital was $3,241 million, including cash and cash equivalents of $2,140 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at March 31, 2022. 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 effects of the downtime caused by the cyber-attack, meeting any contingent liabilities related to standby letters of credit and other obligations.

As a customs broker, we make significant cash advances for a select group of our credit-worthy customers. These cash advances are for customer obligations such as the payment of duties and taxes to customs authorities in various countries throughout the world. Increases in duty rates could result in increases in the amounts we advance on behalf of our customers. Cash advances are a “pass through” and are not recorded as a component of revenue and expense. The billings of such advances to customers are accounted for as a direct increase in accounts receivable from the customer and a corresponding increase in accounts payable to governmental customs authorities. As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency. For customers that meet certain criteria, we have agreed to extend payment terms beyond our customary terms. Our accounts receivable and consequently our customer credit exposure has also increased as a result of historically high freight rates. Management believes that it has established effective credit control procedures, and historically has experienced relatively insignificant collection problems.

Our business historically has been subject to seasonal fluctuations and this is expected to continue in the future. Cash flows fluctuate as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with periods of higher demand (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.

However, there is no assurance that this seasonal trend will occur in the future or to what degree it will continue to be impacted in 2022 by the pandemic and the downtime caused by the cyber-attack.

Cash used in investing activities for the three months ended March 31, 2022 was $14 million as compared with $8 million for the same period in 2021, primarily for capital expenditures. Capital expenditures in the three months ended March 31, 2022 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. In the first quarter of 2022 we spent $3 million on capital expenditures for technology equipment and software in relation with the remediation effort for the cyber-attack. Total anticipated capital expenditures in 2022 are currently estimated to be $100 million.

Cash used in financing activities during the three months ended March 31, 2022 was $18 million as compared with cash from financing activities of $68 million for the same period in 2021. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to limit the growth in outstanding shares. During the three months ended March 31, 2021, we used cash to repurchase 0.9 million shares of common stock compared to none in 2022.

We follow established guidelines relating to credit quality, diversification and maturities of our investments to preserve principal and maintain liquidity. Historically, our investment portfolio has not been adversely impacted by disruptions occurring in the credit markets. However, there can be no assurance that our investment portfolio will not be adversely affected in the future.

We cannot predict what further impact growing uncertainties in the global economy, political uncertainty, increase in oil prices, nor the pandemic may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Beyond the loss of revenue and additional expenses incurred in the first quarter, the future impacts of the cyber-attack cannot be estimated. The potential loss of customers, revenue or higher costs could have a material adverse impact on its business, revenues, expenses, results of operations, cash flows and reputation. We are unable to estimate the ultimate direct and indirect financial impacts of this cyber-attack.

We maintain international unsecured bank lines of credit for short-term working capital purposes. A few of these credit lines are supported by standby letters of credit issued by a United States bank or guarantees issued by the Company to the foreign banks issuing the credit line. At March 31, 2022, borrowings under these credit lines were not significant and we were contingently liable for $76 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 the U.S. parent company after evaluating their working capital requirements and funds necessary to finance local capital expenditures. In some cases, our ability to repatriate funds from foreign operations may be subject to foreign exchange controls. At March 31, 2022, cash and cash equivalent balances of $1,030 million were held by our non-United States subsidiaries, of which $13 million was held in banks in the United States. Earnings of our foreign subsidiaries are not considered to be indefinitely reinvested outside of the United States.

## Market risk

As filed, 3,365 characters.

We are exposed to market risks in the ordinary course of our business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of our exposure to these risks is presented below:

### Foreign Exchange Risk

We conduct business in many different countries and currencies. Our business often results in billings issued in a country and currency that differs from that where the expenses related to the service are incurred. In the ordinary course of business, we create numerous intercompany transactions and may have receivables, payables and currencies that are not denominated in the local functional currency. This brings foreign exchange risk to our earnings. The principal foreign exchange risks to which Expeditors is exposed include Chinese Yuan, Euro, Mexican Peso, Canadian Dollar and British Pound.

Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on our earnings as a result of hypothetical changes in the value of the U.S. dollar, our functional currency, relative to the other currencies in which we transact business. All other things being equal, an average 10% weakening of the U.S. dollar, throughout the three months ended March 31, 2022, would have had the effect of raising operating income by approximately $35 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income by approximately $29 million. This analysis does not take into account changes in shipping patterns based upon this hypothetical currency fluctuation. For example, a weakening in the U.S. dollar would be expected to increase exports from the United States and decrease imports into the United States over some relevant period of time, but the exact effect of this change cannot be quantified without making speculative assumptions.

We currently do not use derivative financial instruments to manage foreign currency risk and only enter into foreign currency hedging transactions in limited locations where regulatory or commercial limitations restrict our ability to move money freely. Any such hedging activity throughout the three months ended March 31, 2022 and 2021 was insignificant. During the three months ended March 31, 2022 and 2021 net foreign currency gains were approximately of $2 million and $3 million, respectively. We had no foreign currency derivatives outstanding at March 31, 2022 and December 31, 2021. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of March 31, 2022, we had approximately $178 million of net unsettled intercompany transactions. In the regular course of business, the majority of intercompany billings are resolved within 30 days.

### Interest Rate Risk

At March 31, 2022, we had cash and cash equivalents of $2,140 million of which $60 million was invested at various short-term market interest rates. Other than our recorded lease liabilities, we had no long-term obligations or debt at March 31, 2022. A hypothetical change in the interest rate of 10 basis points at March 31, 2022 would not have a significant impact on our earnings. In management’s opinion, there has been no material change in our interest rate risk exposure in the first quarter of 2022.

## Controls and procedures

As filed, 3,764 characters.

We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.

### Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than related to the cyber-attack as discussed below.

With respect to the cyber-attack that is discussed in Note 8 to the condensed consolidated financial statements in this report, starting on February 20, 2022, we shut down most of our operating systems globally, including our accounting information systems, to manage the safety of our entire global systems environment. We engaged third-party cybersecurity experts to investigate and assist in the remediation. The Board of Directors was regularly apprised of, and directors with experience in cybersecurity participated in, the critical investigation and remediation activities. Subsequently, we restored and strengthened the security of our systems and networks and enhanced the continuous monitoring of the entire information security environment. Additionally, we have implemented various improvements to our network and processes to mitigate the risk of recurrence and severity of such incidents in the future.

During the disruption caused by the cyber-attack, we deployed interim procedures and controls to maintain our systems of internal control over financial reporting. As a result of this cyber-attack and based on information known at this date, management determined that our disclosure controls and procedures were effective and the cyber-attack did not materially affect, nor was it reasonably likely to affect the effectiveness of the Company’s internal control over financial reporting.

We are developing a new accounting system, which is being implemented on a worldwide basis over the next several years. This system is expected to improve the efficiency of certain financial and transactional processes and reporting. This transition affects the processes that constitute our internal control over financial reporting and requires testing for operating effectiveness. As a result of the pandemic, many of our employees are working remotely and are able to do so within our established internal controls over financial reporting.

Our management has confidence in our internal controls and procedures. Nevertheless, our management, including Expeditors’ Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all of our control issues and instances of fraud, if any, have been detected.

## Risk factors

As filed, 1,216 characters.

In addition to the other information set forth in this report, careful consideration should be given to the risk factors under Item 1A Risk Factors in our Annual Report on Form 10-K filed on March 15, 2022. There have been no material changes in Expeditors' risk factors from those disclosed under Item 1A Risk Factors in our annual report on Form 10-K filed on March 15, 2022, except for the following:

***Global economic uncertainty impacted trade and could affect demand for our services or the financial stability of our service providers and customers.***

The global economy entered a recession as a result of the pandemic, which initially affected trade and negatively affected demand for our services for a period of time, before rebounding in 2021. Future unfavorable economic conditions, high inflation and increasing geopolitical risks, such as the conflict in Ukraine, could result in lower freight volumes and adversely affect Expeditors' revenues, operating results and cash flows. These conditions, should they occur for an extended period of time, could adversely affect our customers and service providers. Should our customers’ ability to pay deteriorate, additional credit losses may be incurred.

Filed May 9, 2022.
Source: SEC EDGAR, the filing index for accession 0001564590-22-018771. Last ingested by Listed: Nov 4, 2026, 13:57 ET. No prices; not investment advice.