Expeditors International Of Washington Inc,
Fiscal Year 2024 Q4.

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 expense increased 82% and 102%, respectively, for the three months ended September 30, 2024 as compared with the same period in 2023. Ocean freight and ocean services revenues and expense increased 21% and 31%, respectively, for the nine months ended September 30, 2024 as compared with the same period in 2023. The largest component of our ocean freight and ocean services revenue is derived from ocean freight consolidation, which represented 70% and 66% of ocean freight and ocean services revenue for the nine months ended September 30, 2024 and 2023, respectively. Ocean freight consolidation revenues and expenses increased 125% and 142%, respectively, for the three months ended September 30, 2024, as compared with the same period in 2023, primarily due to 101% and 115% increases in average sell and buy rates, and a 12% increase in containers shipped. Average buy rates per container increased due to strong demand and longer transit times, congestion and capacity issues caused by the disruptions in the Red Sea. Importers front loaded shipments creating a peak in demand starting in June 2024 in anticipation of potential US East and Gulf Coast ports disruptions and factoring in longer transit times. These conditions boosted volumes and caused sharp increases in buy rates in the third quarter of 2024. Ocean freight consolidation revenues and expenses increased 29% and 41% for the nine months ended September 30, 2024, as compared with the same period in 2023, primarily due to increases of 24% in average sell rates and 35% in average buy rates. Overall, the sharp rise in average buy and sell rates in the third quarter offset declines in the first half of the year. Containers shipped increased 4%. We expect carrier capacity to grow more than customer demand in the near term and average buy and sell rates to decline as a result. If safe passage through the Red Sea resumes, additional capacity will become available as a result of shorter transit times, which will put additional pressure on pricing. North Asia and South Asia ocean freight and ocean services revenues increased 135% and 164% and expenses increased 161% and 210%, respectively, for the three months ended September 30, 2024, compared to the same period in 2023. North Asia and South Asia ocean freight and ocean services revenues increased 55% and 68% and expenses increased 68% and 91%, respectively, for the nine months ended September 30, 2024, compared to the same periods in 2023. Increases were primarily due to higher average sell and buy rates due to the factors above. North America ocean freight and ocean services revenues increased 7% primarily due to higher revenues on imports while expenses decreased 24% due to lower buy rates on exports and a 1% decline in containers shipped, for the three months ended September 30, 2024, compared to the same period in 2023. North America and Europe ocean freight and ocean services revenues decreased 14% and 21%, respectively, and expenses decreased 23% for both for the nine months ended September 30, 2024, compared to 2023. Decreases were primarily due to lower average sell and buy rate and declines in container shipped. Order management revenues increased 35% and 25%, respectively, and expenses increased 40% and 27%, respectively, for the three and nine months ended September 30, 2024, due to increases in volumes from new and existing customers. Direct ocean freight forwarding revenues and expenses increased 2% and 6%, respectively, for the three months ended September 30, 2024. Direct ocean freight forwarding revenues and expenses decreased 5% and 2%, respectively, for the nine months ended September 30, 2024 principally due to lower volumes and lower rates for ancillary services in the United States. Global economic conditions remain uncertain. Further, carriers are adding new vessels which will increase capacity. In addition, if safe passage through the Red Sea resumes, additional capacity will become available due to shorter transit times. These conditions could depress sell and buy rates. We expect that pricing volatility will continue as carriers adapt to fluctuations in fuel prices, new regulations, security risks and manage available capacity. As customers seek lower pricing and react to governmental trade policies and other regulations, this could result in further decreases in our revenues and operating income.

Customs brokerage and other services: Customs brokerage and other services revenues increased 10% and expenses increased 14% for the three months ended September 30, 2024, respectively, as compared with the same period in 2023, primarily due to increases in customs clearances, import services and road freight from higher shipment volumes, principally in North America. Customs brokerage and other services revenues remained flat while expenses increased 1% for the nine months ended September 30, 2024, respectively, as compared with the same period in 2023, primarily as increases in customs clearances and road freight shipments were offset by lower volumes for local drayage and storage and warehouse and distribution services, principally in North America. Import services, including charges at ports such as detention, drayage, terminal charges and delivery, decreased significantly in the first quarter 2024 as compared to the first quarter of 2023 that still had residual effects from the supply chain congestion. Road freight, warehousing and distribution services also declined in the first quarter of 2024 due to lower volumes and decreased trucking, storage and labor costs. While customers continue to value our brokerage services due to changing tariffs and increasing complexity in the declaration process, some customers are opting to use back up customs brokerage service providers as a risk reduction strategy. 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. Should international trade slow, volumes shipped and pricing could negatively impact our revenues and expenses.

Overhead expenses: Salaries and related costs increased 9% for the three months ended September 30, 2024 as compared with the same period in 2023 principally due to increases in commissions and bonuses earned from higher revenues and operating income while headcount remained flat. During the nine months ended September 30, 2024, salaries and related costs remained flat, consistent with operating income and headcount. Historically, the relatively consistent relationship between salaries and operating income has been the result of a compensation philosophy that has been maintained since the inception of our company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual incentive compensation occur in proportion to changes in our operating income, creating an alignment between branch and corporate performance and shareholder interests. Our management compensation programs have always been incentive-based and performance driven. Total bonuses to field and executive management for the nine months ended September 30, 2024, decreased 1% when compared to the same periods in 2023, primarily due to operating income remaining flat. 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 3% or $5 million for the three months ended September 30, 2024, as compared with the same period in 2023. This decrease in 2024 is primarily the result of a $14 million decrease in expenses related to indirect tax contingencies, partially offset by higher rental expenses, travel and technology related expenses. For the nine months ended September 30, 2024, other overhead expense remained flat compared to the same period in 2023 as higher rental expenses, travel and technology related expenses were offset by a $21 million decrease in expenses related to indirect tax contingencies. So long as the economic environment remains uncertain, we will be focused on aligning operational headcount and our overhead expenses commensurate with our transactional volumes. We expect to continue to enhance security and internal controls over our technology and systems and plan to deploy additional solutions which will result in increased expenses in the future. We will also continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.

Income tax expense: Our consolidated effective income tax rate was 26.4% for both the three and nine months ended September 30, 2024, as compared to 26.3% and 25.8% in the comparable periods of 2023. For the three and nine months ended September 30, 2024, and 2023, there was no BEAT expense and GILTI expense was insignificant. All periods benefited from U.S. income tax deductions for FDII as well as available U.S. Federal foreign tax credits principally from withholding taxes related to our foreign operations. We have no liability as of September 30, 2024, for the 15% corporate alternative minimum tax based on financial statement income (BMT), which became effective in 2023 in the U.S., under the Inflation Reduction Act. Some elements of the recorded impacts of the Inflation Reduction Act could be impacted by further legislative action as well as additional interpretations and guidance issued by the Internal Revenue Service or Treasury which could impact the estimates of the amounts the Company would be required to record for BMT in the future.

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 maintain strict currency control regulations that influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and nine months ended September 30, 2024 and 2023 was insignificant. We had no foreign currency derivatives outstanding at September 30, 2024 and December 31, 2023. For the three months ended September 30, 2024, net foreign currency losses were approximately $11 million compared to net foreign currency losses of less than $1 million in the same period in 2023. During the nine months ended September 30, 2024, net foreign currency gains were less than $1 million compared to net foreign currency losses of approximately $6 million in the same period in 2023. Historically, our business has not been adversely affected by inflation. Beginning in 2021 and continuing through 2024, many countries including the United States experienced increasing levels of inflation. As a result, our business continues to experience rising labor costs, service provider rate increases, higher rent and occupancy and other expenses. While buy rates for freight transportation capacity started declining in the second half of 2022, purchase prices for labor and other expenditures have continued to increase. 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 volume and customer demand for our services. 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 future 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 increase to our customers, fuel price increases could adversely affect our operating income.

Liquidity and Capital Resources Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and nine months ended September 30, 2024 was $90 million and $474 million as compared with $190 million and $895 million for the same period in 2023. The decreases of $100 million and $421 million for the three and nine months ended September 30, 2024, were primarily due to changes in working capital. At September 30, 2024, working capital was $1,707 million, including cash and cash equivalents of $1,293 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at September 30, 2024. 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. However, there is no assurance that this seasonal trend will occur in the future. Cash used in investing activities for the three and nine months ended September 30, 2024 was $13 million and $30 million as compared with $8 million and $29 million for the same periods in 2023, primarily for capital expenditures. Capital expenditures in the three and nine months ended September 30, 2024 were primarily related to continuing investments in building and leasehold improvements and technology and facilities equipment. Total anticipated capital expenditures in 2024 are currently estimated to be $50 million. This includes routine capital expenditures, leasehold and building improvements and investments in technology. Cash used in financing activities during the three and nine months ended September 30, 2024 was $76 million and $659 million as compared with $229 million and $1,247 million for the same period in 2023. We use the proceeds from stock option exercises, employee stock purchases and available cash to repurchase our common stock on the open market to reduce outstanding shares. During both the three and nine months ended September 30, 2024, we used cash to repurchase 1.2 million and 5.1 million shares of common stock, compared to 2.6 million and 10.5 million shares of common stock during the same periods in 2023. 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 ongoing uncertainties in the global economy, inflation, future interest rates, and political conflicts and uncertainty, may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers' abilities to pay or changes in competitors' behavior. We maintain international unsecured bank lines of credit for short-term working capital purposes. A few of these credit lines are supported by standby letters of credit issued by a United States bank or guarantees issued by the Company to the foreign banks issuing the credit line. At September 30, 2024, borrowings under these credit lines were $48 million and we were contingently liable for $87 million from standby letters of credit and guarantees. The standby letters of credit and guarantees primarily 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.

Airfreight services: Airfreight services revenues and expenses increased 36% and 43%, respectively, during the three months ended September 30, 2024, as compared with the same period in 2023, due to 20% and 25% increases in average sell and buy rates, respectively, and a 19% increase in tonnage. Airfreight services revenues increased 10% during the nine months ended September 30, 2024, as compared with the same period in 2023, mainly due to a 13% increase in tonnage partially offset by a 2% decrease in average sell rates. Airfreight services costs increased 13% primarily due to a 13% increase in tonnage and 1% increase in average buy rates. Average sell rates increased in North Asia, South Asia and Middle East, Africa and India as a result of higher buy rates while they decreased in North America and Europe as a result of lower buy rates. Tonnage increased during the three and nine months ended September 30,2024, as compared with the same periods in 2023, as a result of increased market demand primarily in healthcare and technology sectors compared to a slow first nine months in 2023 and some transportation shifting from ocean shipping in the second and third quarter of 2024 due to the conflicts in the Middle East. Tonnage increased in all regions during the three and nine months ended September 30, 2024. Average sell and buy rates increased during the three and nine months ended September 30, 2024 on exports out of North Asia due to high demand from international direct e-commerce. Average buy rates also increased on exports out of South Asia and India as demand for airfreight grew from manufacturing relocations in that region and shippers shifting to airfreight due to longer transits in ocean as a result of the conflicts in the Middle East. Average sell and buy rates decreased during the three months and nine months ended September 30, 2024 on exports out of North America and Europe due to excess available capacity over slower demand and still high buy rates in the first quarter of 2023. Seasonal changes in demand, impact from disruptions in the ocean market due to security and port congestion concerns and variable demand for airfreight capacity from direct e-commerce business cause volatility in average buy rates on certain lanes. Additionally, continued uncertainty in the economy including the impacts of geopolitical concerns could negatively affect demand for airfreight services which could reduce our volumes and average sell rates. These conditions could result in decreases in our revenues, expenses and operating income. We are unable to predict how these uncertainties and any future disruptions will affect our operations or financial results prospectively.

General Risks We identified material weaknesses in our internal control over financial reporting related to ineffective information technology general controls which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price. Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. As disclosed in Part II, Item 9A, during the fourth quarter of 2022, management identified material weaknesses in internal control related to certain database changes made to information technology (IT) systems that support the Company's financial reporting processes. As management continued the remediation process and reviews, we identified additional IT controls that were not designed or operated appropriately that relate to these material weaknesses. Management concluded that unauthorized changes to databases and related applications could have gone undetected as controls to review and authorize direct changes that support several key operational and accounting systems excluded certain changes from review or were not captured, and as such were either not designed properly or did not operate effectively as designed. In addition, the system logic used to record direct changes excluded certain changes from being captured for review. As a result, management concluded that our internal control over financial reporting was not effective as of December 31, 2022 and 2023 and as of the date of this report. At this time, we are not able to estimate when full remediation of these material weaknesses will be completed. The material weaknesses will not be considered fully remediated, until the applicable controls operate for a sufficient period of time and management has concluded through additional testing that these controls are operating effectively. To the extent management is unable to ultimately conclude that the identified issues have been remediated, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.