EXPEDITORS INTERNATIONAL OF WASHINGTON INC (Form: 10-Q, Received: 08/07/2019 13:52:39)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

Washington		91-1069248
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1015 Third Avenue, Seattle, Washington		98104
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code): (206) 674-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.01 par value		EXPD		NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At August 5, 2019, the number of shares outstanding of the issuer’s common stock was 170,720,139.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

	June 30, 2019			December 31, 2018
Assets:
Current Assets:
Cash and cash equivalents	$	1,082,650		$	923,735
Accounts receivable, less allowance for doubtful accounts of $13,391 at June 30, 2019 and $15,345 at December 31, 2018		1,382,070			1,581,530
Deferred contract costs		143,651			159,510
Other		103,089			70,041
Total current assets		2,711,460			2,734,816
Property and equipment, less accumulated depreciation and amortization of $465,983 at June 30, 2019 and $446,977 at December 31, 2018		499,233			504,105
Operating lease right-of-use assets		377,423			—
Goodwill		7,927			7,927
Deferred federal and state income taxes, net		33,617			40,465
Other assets, net		17,330			27,246
Total assets	$	3,646,990		$	3,314,559
Liabilities:
Current Liabilities:
Accounts payable	$	811,144		$	902,259
Accrued expenses, primarily salaries and related costs		217,463			215,813
Contract liabilities		169,055			190,343
Current portion of operating lease liabilities		61,267			—
Federal, state and foreign income taxes		19,891			18,424
Total current liabilities		1,278,820			1,326,839
Noncurrent portion of operating lease liabilities		315,776			—
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, none issued		—			—
Common stock, par value $0.01 per share. Issued and outstanding: 170,040 shares at June 30, 2019 and 171,582 shares at December 31, 2018		1,701			1,716
Additional paid-in capital		12,433			1,896
Retained earnings		2,140,935			2,088,707
Accumulated other comprehensive loss		(104,096	)		(105,481	)
Total shareholders’ equity		2,050,973			1,986,838
Noncontrolling interest		1,421			882
Total equity		2,052,394			1,987,720
Total liabilities and equity	$	3,646,990		$	3,314,559

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Revenues:
Airfreight services	$	741,577	$	801,761	$	1,456,478	$	1,532,988
Ocean freight and ocean services		543,809		530,008		1,112,450		1,050,891
Customs brokerage and other services		750,193		625,790		1,486,702		1,227,942
Total revenues		2,035,579		1,957,559		4,055,630		3,811,821
Operating Expenses:
Airfreight services		542,639		593,325		1,051,849		1,106,829
Ocean freight and ocean services		390,299		385,156		810,630		764,574
Customs brokerage and other services		440,946		336,532		877,342		662,034
Salaries and related		356,351		350,948		713,261		690,843
Rent and occupancy		40,897		38,071		82,420		74,984
Depreciation and amortization		12,677		13,576		26,070		27,498
Selling and promotion		11,643		10,788		22,719		21,753
Other		47,926		45,579		91,537		86,904
Total operating expenses		1,843,378		1,773,975		3,675,828		3,435,419
Operating income		192,201		183,584		379,802		376,402
Other Income (Expense):
Interest income		6,516		5,153		12,622		9,467
Other, net		2,262		1,167		3,927		1,791
Other income (expense), net		8,778		6,320		16,549		11,258
Earnings before income taxes		200,979		189,904		396,351		387,660
Income tax expense		47,449		48,958		102,710		110,514
Net earnings		153,530		140,946		293,641		277,146
Less net earnings attributable to the noncontrolling interest		381		341		793		849
Net earnings attributable to shareholders	$	153,149	$	140,605	$	292,848	$	276,297
Diluted earnings attributable to shareholders per share	$	0.88	$	0.79	$	1.67	$	1.54
Basic earnings attributable to shareholders per share	$	0.90	$	0.80	$	1.71	$	1.58
Weighted average diluted shares outstanding		174,466		178,603		174,953		179,120
Weighted average basic shares outstanding		171,003		174,754		171,425		175,324

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019		2018
Net earnings	$	153,530		$	140,946		$	293,641	$	277,146
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax of $82 and $15,171 for the three months ended June 30, 2019 and 2018 and $439 and $9,660 for the six months ended June 30, 2019 and 2018		(769	)		(26,051	)		596		(17,200	)
Reclassification adjustments for foreign currency realized losses, net of tax of $145 for the three and six months ended June 30, 2019		535			—			535		—
Other comprehensive income (loss)		(234	)		(26,051	)		1,131		(17,200	)
Comprehensive income		153,296			114,895			294,772		259,946
Less comprehensive income attributable to the noncontrolling interest		257			10			539		397
Comprehensive income attributable to shareholders	$	153,039		$	114,885		$	294,233	$	259,549

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Operating Activities:
Net earnings	$	153,530		$	140,946		$	293,641		$	277,146
Adjustments to reconcile net earnings to net cash from operating activities:
Provisions for losses (recoveries) on accounts receivable		1,584			528			(304	)		263
Deferred income tax expense		3,697			3,235			5,805			6,088
Stock compensation expense		23,824			18,002			37,206			29,269
Depreciation and amortization		12,677			13,576			26,070			27,498
Other, net		(29	)		56			160			104
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(28,187	)		(46,876	)		202,290			53,771
Increase (decrease) in accounts payable and accrued expenses		39,900			58,075			(82,383	)		12,231
(Increase) decrease in deferred contract costs		(13,010	)		(20,019	)		18,249			(16,612	)
Increase (decrease) in contract liabilities		13,003			20,294			(23,722	)		12,893
(Decrease) increase in income taxes payable, net		(49,606	)		(38,059	)		(32,613	)		(18,550	)
(Decrease) increase in other, net		(1,676	)		(1,202	)		791			(68	)
Net cash from operating activities		155,707			148,556			445,190			384,033
Investing Activities:
Purchase of property and equipment		(12,987	)		(12,113	)		(22,422	)		(25,909	)
Other, net		1,038			(1,564	)		1,293			(1,995	)
Net cash from investing activities		(11,949	)		(13,677	)		(21,129	)		(27,904	)
Financing Activities:
Proceeds from issuance of common stock		32,287			95,363			59,477			121,760
Repurchases of common stock		(190,589	)		(235,572	)		(234,923	)		(407,932	)
Dividends Paid		(85,184	)		(79,180	)		(85,184	)		(79,180	)
Payments for taxes related to net share settlement of equity awards		(6,674	)		(3,215	)		(6,674	)		(3,215	)
Net cash from financing activities		(250,160	)		(222,604	)		(267,304	)		(368,567	)
Effect of exchange rate changes on cash and cash equivalents		(377	)		(24,322	)		2,158			(17,807	)
Change in cash and cash equivalents		(106,779	)		(112,047	)		158,915			(30,245	)
Cash and cash equivalents at beginning of period		1,189,429			1,132,901			923,735			1,051,099
Cash and cash equivalents at end of period	$	1,082,650		$	1,020,854		$	1,082,650		$	1,020,854
Taxes Paid:
Income taxes	$	97,715		$	85,612		$	134,968		$	124,131

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

	Common Stock
For the three months ended June 30, 2019 and 2018	Shares			Par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity			Noncontrolling interest			Total equity
Balance at March 31, 2019		171,648		$	1,716		$	3,978		$	2,222,562		$	(103,986	)	$	2,124,270		$	1,164		$	2,125,434
Exercise of stock options and release of restricted shares		1,002			11			25,602			—			—			25,613			—			25,613
Shares repurchased under provisions of stock repurchase plans		(2,610	)		(26	)		(41,374	)		(149,189	)		—			(190,589	)		—			(190,589	)
Stock compensation expense		—			—			23,824			—			—			23,824			—			23,824
Net earnings		—			—			—			153,149			—			153,149			381			153,530
Other comprehensive income (loss)		—			—			—			—			(110	)		(110	)		(124	)		(234	)
Dividends paid ($0.50)		—			—			403			(85,587	)		—			(85,184	)		—			(85,184	)
Balance at June 30, 2019		170,040		$	1,701		$	12,433		$	2,140,935		$	(104,096	)	$	2,050,973		$	1,421		$	2,052,394

Balance at March 31, 2018		174,308		$	1,743		$	1,198		$	2,041,520		$	(64,992	)	$	1,979,469		$	2,797		$	1,982,266
Exercise of stock options and release of restricted shares		2,360			24			92,124			—			—			92,148			—			92,148
Shares repurchased under provisions of stock repurchase plans		(3,091	)		(31	)		(109,876	)		(125,665	)		—			(235,572	)		—			(235,572	)
Stock compensation expense		—			—			18,002			—			—			18,002			—			18,002
Net earnings		—			—			—			140,605			—			140,605			341			140,946
Other comprehensive income (loss)		—			—			—			—			(25,720	)		(25,720	)		(331	)		(26,051	)
Dividends paid ($0.45)		—			—			159			(79,339	)		—			(79,180	)		—			(79,180	)
Balance at June 30, 2018		173,577		$	1,736		$	1,607		$	1,977,121		$	(90,712	)	$	1,889,752		$	2,807		$	1,892,559


	Common Stock
For the six months ended June 30, 2019 and 2018	Shares			Par value			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity			Noncontrolling interest			Total equity
Balance at December 31, 2018		171,582		$	1,716		$	1,896		$	2,088,707		$	(105,481	)	$	1,986,838		$	882		$	1,987,720
Exercise of stock options and release of restricted shares		1,656			17			52,786			—			—			52,803			—			52,803
Shares repurchased under provisions of stock repurchase plans		(3,198	)		(32	)		(79,858	)		(155,033	)		—			(234,923	)		—			(234,923	)
Stock compensation expense		—			—			37,206			—			—			37,206			—			37,206
Net earnings		—			—			—			292,848			—			292,848			793			293,641
Other comprehensive income (loss)		—			—			—			—			1,385			1,385			(254	)		1,131
Dividends paid ($0.50)		—			—			403			(85,587	)		—			(85,184	)		—			(85,184	)
Balance at June 30, 2019		170,040		$	1,701		$	12,433		$	2,140,935		$	(104,096	)	$	2,050,973		$	1,421		$	2,052,394

Balance at December 31, 2017		176,374		$	1,764		$	546		$	2,063,512		$	(73,964	)	$	1,991,858		$	2,515		$	1,994,373
Cumulative effect of accounting change		—			—			—			(22,357	)		—			(22,357	)		(105	)		(22,462	)
Exercise of stock options and release of restricted shares		2,956			30			118,515			—			—			118,545			—			118,545
Shares repurchased under provisions of stock repurchase plans		(5,753	)		(58	)		(146,882	)		(260,992	)		—			(407,932	)		—			(407,932	)
Stock compensation expense		—			—			29,269			—			—			29,269			—			29,269
Net earnings		—			—			—			276,297			—			276,297			849			277,146
Other comprehensive income (loss)		—			—			—			—			(16,748	)		(16,748	)		(452	)		(17,200	)
Dividends paid ($0.45)		—			—			159			(79,339	)		—			(79,180	)		—			(79,180	)
Balance at June 30, 2018		173,577		$	1,736		$	1,607		$	1,977,121		$	(90,712	)	$	1,889,752		$	2,807		$	1,892,559

See accompanying notes to condensed consolidated financial statements.

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation

Expeditors International of Washington, Inc. (the Company) is a non-asset based provider of global logistics services operating through a worldwide network of offices and exclusive or non-exclusive agents. The Company’s customers include retailing and wholesaling, electronics, industrial and manufacturing companies around the world.

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K as filed with the Securities and Exchange Commission on February 22, 2019.

All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for per share data or unless otherwise specified.

Revenue Recognition

The Company derives its revenues by entering into agreements that are generally comprised of a single performance obligation, which is that freight is shipped for and received by the customer. The Company's three principal services are the revenue categories presented in the consolidated statements of earnings: 1) airfreight services, 2) ocean freight and ocean services, and 3) customs brokerage and other services.

The Company typically satisfies its 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. The Company measures the performance of its obligations as services are completed over the life of a shipment, including services at origin, freight and destination. The Company fulfills nearly all of its performance obligations within a one to two month-period and contracts with customers have an original expected duration of less than one year. The Company satisfied nearly all performance obligations for the contract liabilities recorded as of March 31, 2019 and December 31, 2018.

In 2019, the Company revised its presentation for revenue transfers between its geographic operating segments and services rendered at the destination, which moved certain revenues and directly related operating expenses for air and ocean transactions to destination services within customs brokerage and other services. These changes better align revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment net revenues or operating income. The 2019 results also include the effect of changing the presentation of certain import services from a net to a gross basis, which increased revenues and directly related operating expenses in customs brokerage and other services but did not change net revenues. The impact on reported consolidated and segment total revenues and expenses for these changes was immaterial and the prior year presentation has not been revised.

Leases

Effective January 1, 2019, the Company adopted new lease accounting guidance using a modified retrospective approach and recognizing a right-of-use (ROU) asset and lease liability on the balance sheet. On January 1, 2019, ROU assets and lease liabilities were recorded for all existing leases exceeding one-year terms and were measured at the present value of lease payments over the remaining lease term. The adoption of this accounting standard resulted in recording ROU assets and lease liabilities for operating leases of $343 million and $340 million, respectively, as of

January 1, 2019. The adoption of this standard had no impact on retained earnings on the condensed consolidated balance sheet.

In recording the ROU asset and lease liability, the Company elected to apply the following practical expedients:

•

Package of practical expedients not to reassess:

◦

Whether a contract is or contains a lease,

◦

Historical lease classification, and

◦

Initial direct costs.

•

Use of hindsight when determining the lease term.

Additionally, the Company has elected to apply the short-term lease exemption for leases with a non-cancelable period of twelve months or less and has chosen not to separate nonlease components from lease components and instead to account for each as a single lease component.

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As most of the Company's leases do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on market information available at the commencement date to determine the present value. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from lease ROU assets and lease liabilities, to the extent not considered fixed, and instead expense variable payments as incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses on the condensed consolidated statement of earnings.

Accounts Receivable

The Company maintains an allowance for doubtful accounts, which is reviewed at least monthly for estimated losses resulting from the inability of its customers to make required payments for services and advances. Additional allowances may be necessary in the future if the ability of customers to pay deteriorates. The Company has recorded an allowance for doubtful accounts in the amounts of $13,391 as of June 30, 2019 and $15,345 as of December 31, 2018. Additions and write-offs have not been significant in the periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company uses estimates primarily in the following areas: accounts receivable valuation, accrual of costs related to ancillary services the Company provides, accrual of liabilities for the portion of the related exposure that the Company has self-insured, accrual of various tax liabilities including estimates associated with the U.S. enacted Tax Cuts and Jobs Act (the 2017 Tax Act), accrual of loss contingencies, calculation of share-based compensation expense and estimates related to determining the lease term when measuring ROU assets and lease liabilities. Actual results could be materially different from the estimated provisions and accruals recorded.

Recent Accounting Pronouncement

In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), which amends existing guidance for the accounting of credit losses on financial instruments. Under the ASU, the Company will record a valuation allowance for credit losses that are expected to be incurred over the financial asset’s contractual term. This standard will be effective for the Company on January 1, 2020 and is not expected to have a material effect on the consolidated financial statements as the new credit loss model will primarily apply to the Company's accounts receivable, which are of short duration and for which the Company has not historically experienced significant credit losses. However, the Company is still evaluating the impact of the new prescribed model compared to its current methodology.

Note 2. Leases

The Company enters into lease agreements primarily for office and warehouse space in all districts where it conducts business. As of June 30, 2019, all of the Company's leases are operating leases.

Lease cost for the three and six months ended June 30, 2019 were all recorded under rent and occupancy expenses on the condensed consolidated statement of earnings and were comprised of the following:

	Three months ended June 30, 2019		Six months ended June 30, 2019
Operating lease cost	$	20,093	$	40,048
Variable lease cost		6,483		12,877
Total lease cost	$	26,576	$	52,925

Variable lease cost includes short-term lease expenses, which are insignificant.

Maturities of lease liabilities as of June 30, 2019 are as follows:

2019	$	38,857
2020		74,341
2021		64,607
2022		58,276
2023		49,930
Thereafter		169,715
Total minimum lease payments		455,726
Less imputed interest		78,683
Lease liability	$	377,043

At December 31, 2018, the last balance sheet presented before the adoption of the new accounting standard Topic 842 Leases, future minimum annual lease payments under all noncancelable leases were as follows:

2019	$	75,227
2020		62,974
2021		47,552
2022		38,352
2023		26,580
Thereafter		67,140
	$	317,825

The weighted-average remaining lease term and weighted-average discount rate as of June 30, 2019 are as follows:

Weighted-average remaining lease term (in years)			7.63
Weighted-average discount rate			4.96	%

Other information related to the Company's operating leases are as follows:

Three months ended

June 30, 2019

Six months ended

June 30, 2019

Right-of-use assets obtained in exchange for

new operating lease liabilities

43,398

62,034

Cash paid for amounts included in the

measurement of lease liabilities

20,046

39,292

Note 3.

Share-Based Compensation

The Company has historically granted the majority of its share-based awards during the second quarter of each fiscal year. In the second quarter of 2019 and 2018, the Company awarded 462 and 461 restricted stock units (RSUs), respectively, under the Omnibus Incentive Plan (2017 Plan), which was approved by shareholders in 2017. The RSUs were granted at a weighted-average fair value of $75.73 in 2019 and $69.58 in 2018. The RSUs vest annually over 3 years based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. The value of an RSU award is based on the Company's stock price on the date of grant. Additionally, in the second quarter of 2019 and 2018, 24 and 25 fully vested shares were granted to non-employee directors, respectfully.

The Company also awarded 96 and 18 performance stock units (PSUs) in the second quarter of 2019 and 2018, respectively, under the 2017 Plan. Outstanding PSUs include performance conditions to be finally measured in 2019, 2020 and 2021, respectively. The final number of PSUs will be determined using an adjustment factor of up to 2 times or down to 0.5 of the targeted PSU grant. If the minimum performance thresholds are not achieved, no shares will be issued. Each PSU will convert to one share of the Company's common stock upon vesting.

RSUs and PSUs granted under the 2017 Plan have dividend equivalent rights, which entitle holders of the awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs and are accumulated and paid in shares when the underlying awards vest.

The grant of employee stock purchase rights and the issuance of shares under the employee stock purchase plan are made in the third quarter of each fiscal year. None were issued during the three and six months ended June 30, 2019 and 2018.

The Company recognizes stock compensation expense based on the fair value of awards granted to employees and directors under the Company’s omnibus incentive, stock option, director restricted stock and employee stock purchase rights plans. This expense, adjusted for expected forfeitures, is recognized in net earnings on a straight-line basis over the service periods as salaries and related costs on the condensed consolidated statements of earnings. RSUs and PSUs awarded to certain employees meeting specific retirement eligibility criteria at the time of grant are expensed immediately as there is no substantive service period associated with those awards. For RSU awards meeting retirement eligibility criteria, approximately $5,000 of stock compensation expense was recognized for the three and six months ended June 30, 2019, and approximately $4,000 of stock compensation expense was recognized for three and six months ended June 30, 2018. For PSU awards meeting retirement eligibility criteria, approximately $5,000 of stock compensation expense was recognized during the three and six months ended June 30, 2019. There were no PSU awards granted meeting retirement eligibility criteria during 2018.

Note 4.

Income Taxes

In December 2017, the 2017 Tax Act was enacted in the United States. Beginning January 1, 2018, foreign earnings of the Company's international subsidiaries are generally exempt from U.S. Federal income tax upon repatriation. Notwithstanding these changes, certain withholding taxes and foreign exchange gains and losses will continue to be applicable upon the repatriation of foreign earnings.

During 2018 and 2019, the Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) issued additional guidelines and clarifying regulations related to the implementation of the 2017 Tax Act. The Company expects that additional guidance will continue to be issued in future periods. As this guidance is issued, the Company will continue to evaluate the information to determine whether any additional adjustments to its tax provisions are required.

The 2017 Tax Act included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. The Company treats BEAT and GILTI as components of current income tax expense. Income tax expense for the three and six months ended June 30, 2019 and 2018 had no tax expense related to GILTI.

In February 2018, the FASB issued amended guidance for reporting comprehensive income to reflect changes resulting from the 2017 Tax Act. The amendment, which had an effective date of January 1, 2019, provided the option to reclassify stranded tax effects resulting from the 2017 Tax Act within accumulated other comprehensive income (AOCI) to retained earnings. The Company elected to not reclassify stranded income tax effects from AOCI to retained earnings, including those related to implementation of the 2017 Tax Act.

Our consolidated effective income tax rate was 23.6% and 25.9% for the three and six months ended June 30, 2019, as compared to 25.8% and 28.5% for the comparable periods in 2018. The effect of higher average foreign tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were impacted by the following items. The effective tax rate in 2019 benefited from available U.S foreign tax credits associated with withholding taxes of our foreign operations, U.S. income tax deductions for Foreign-derived intangible income (FDII), and a state income tax refund. These benefits were partially offset by lower share-based compensation deductions in 2019 from stock option exercises when compared to the same periods in 2018 and higher state income tax expense when excluding the state income tax refund recorded during the second quarter of 2019. In addition, 2018 included higher income tax expense related to an estimated BEAT tax liability and an adjustment made to the provisional Transition Tax liability associated with enactment of the 2017 Tax Act.

As discussed above, 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. As a result, the amount of income tax recorded in the future may differ, possibly materially. For further information and discussion of the potential impact of the 2017 Tax Act, refer to Note 5 to the consolidated financial statements in the Company's 2018 Annual Report on Form 10-K.

Note 5. Basic and Diluted Earnings per Share

Diluted earnings attributable to shareholders per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential shares represent outstanding stock options, including purchase options under the Company's employee stock purchase plan, and unvested restricted stock units. Basic earnings attributable to shareholders per share is calculated using the weighted average number of common shares outstanding without taking into consideration dilutive potential common shares outstanding.

The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings attributable to shareholders:

	Three months ended June 30,
	Net earnings attributable to shareholders		Weighted average shares		Earnings per share
2019
Basic earnings attributable to shareholders	$	153,149		171,003	$	0.90
Effect of dilutive potential common shares		—		3,463		—
Diluted earnings attributable to shareholders	$	153,149		174,466	$	0.88
2018
Basic earnings attributable to shareholders	$	140,605		174,754	$	0.80
Effect of dilutive potential common shares		—		3,849		—
Diluted earnings attributable to shareholders	$	140,605		178,603	$	0.79

	Six months ended June 30,
	Net earnings attributable to shareholders		Weighted average shares		Earnings per share
2019
Basic earnings attributable to shareholders	$	292,848		171,425	$	1.71
Effect of dilutive potential common shares		—		3,528		—
Diluted earnings attributable to shareholders	$	292,848		174,953	$	1.67
2018
Basic earnings attributable to shareholders	$	276,297		175,324	$	1.58
Effect of dilutive potential common shares		—		3,796		—
Diluted earnings attributable to shareholders	$	276,297		179,120	$	1.54

Note 6. Shareholders' Equity

The Company has a Discretionary Stock Repurchase Plan approved by the Board of Directors that authorizes management to reduce issued and outstanding common stock down to 160,000 shares. During the six months ended June 30, 2019, 3,110 shares were repurchased at an average price of $73.45 per share, compared to 4,311 shares at an average price of $70.49 per share during the same period in 2018.

The Company also had a Non-Discretionary Stock Repurchase Plan to repurchase shares from the proceeds of stock option exercises and employee stock purchases. As of March 31, 2019, all shares authorized under this plan have been repurchased. During the six months ended June 30, 2019, 88 shares were repurchased at an average price of $74.03, compared to 1,411 at an average price of $72.21 per share during the same period in 2018.

Accumulated other comprehensive loss consisted entirely of foreign currency translation adjustments, net of related income tax effects, for all the periods presented.

On May 7, 2019, the Board of Directors declared a semi-annual dividend of $0.50 per share payable on June 17, 2019 to shareholders of record as of June 3, 2019. On May 8, 2018, the Board of Directors declared a semi-annual dividend of $0.45 per share paid on June 15, 2018 to shareholders of record as of June 1, 2018.

Note 7. Fair Value of Financial Instruments

The Company’s financial instruments, other than cash, consist primarily of cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying value of these financial instruments approximates their fair value. All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents.

Cash and cash equivalents consist of the following:

	June 30, 2019				December 31, 2018
	Cost		Fair Value		Cost		Fair Value
Cash and Cash Equivalents:
Cash and overnight deposits	$	513,328	$	513,328	$	427,307	$	427,307
Corporate commercial paper		530,565		530,991		467,300		467,760
Time deposits		38,757		38,757		29,128		29,128
Total cash and cash equivalents	$	1,082,650	$	1,083,076	$	923,735	$	924,195

The fair value of corporate commercial paper and time deposits is based on the use of market interest rates for identical or similar assets (Level 2 fair value measurement).

Note 8. Contingencies

The Company is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on the Company's operations, cash flows or financial position. As of June 30, 2019, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to the Company's operations, cash flows or financial position. At this time, the Company is unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

Note 9. Business Segment Information

The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues¹, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated in each of these geographical areas when evaluating the effectiveness of geographic management. Transactions among the Company’s various offices are conducted using the same arms-length pricing methodologies the Company uses when its 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.

Financial information regarding the Company’s operations by geographic area is as follows:

	UNITED STATES		OTHER NORTH AMERICA		LATIN AMERICA		NORTH ASIA		SOUTH ASIA		EUROPE		MIDDLE EAST, AFRICA AND INDIA		ELIMI- NATIONS			CONSOLI- DATED
For the three months ended June 30, 2019:
Revenues²	$	681,076		85,537		38,757		621,951		181,380		319,331		108,311		(764	)		2,035,579
Net revenues¹	$	294,983		35,201		16,714		134,397		48,893		98,655		33,222		(370	)		661,695
Operating income	$	87,923		8,858		2,346		64,453		15,513		9,315		3,799		(6	)		192,201
Identifiable assets at period end	$	1,819,718		176,151		73,197		580,311		193,771		581,518		229,692		(7,368	)		3,646,990
Capital expenditures	$	8,985		768		145		300		428		1,914		447		—			12,987
Depreciation and amortization	$	7,687		459		380		1,384		496		1,775		496		—			12,677
Equity	$	1,303,381		83,417		31,014		282,192		107,229		168,570		109,790		(33,199	)		2,052,394
For the three months ended June 30, 2018:
Revenues²	$	598,076		84,244		42,618		680,227		179,528		330,775		114,005		(71,914	)		1,957,559
Net revenues¹	$	271,880		34,749		15,923		140,583		44,886		102,371		33,125		(971	)		642,546
Operating income	$	63,628		10,077		2,701		70,359		13,374		16,958		6,490		(3	)		183,584
Identifiable assets at period end	$	1,488,060		153,827		54,186		540,954		157,479		526,607		217,716		(5,997	)		3,132,832
Capital expenditures	$	6,032		2,191		167		559		695		1,225		1,244		—			12,113
Depreciation and amortization	$	8,447		473		395		1,303		542		1,955		461		—			13,576
Equity	$	1,196,226		56,702		26,625		250,513		112,259		157,493		127,032		(34,291	)		1,892,559

	UNITED STATES		OTHER NORTH AMERICA		LATIN AMERICA		NORTH ASIA		SOUTH ASIA		EUROPE		MIDDLE EAST, AFRICA AND INDIA		ELIMI- NATIONS			CONSOLI- DATED
For the six months ended June 30, 2019:
Revenues²	$	1,340,859		176,947		72,936		1,254,804		358,559		632,021		220,986		(1,482	)		4,055,630
Net revenues¹	$	587,412		70,370		31,777		268,604		96,262		195,450		66,394		(460	)		1,315,809
Operating income	$	161,936		19,818		4,982		130,233		31,420		23,267		8,160		(14	)		379,802
Identifiable assets at period end	$	1,819,718		176,151		73,197		580,311		193,771		581,518		229,692		(7,368	)		3,646,990
Capital expenditures	$	15,900		996		238		644		604		2,896		1,144		—			22,422
Depreciation and amortization	$	15,909		926		812		2,791		1,032		3,606		994		—			26,070
Equity	$	1,303,381		83,417		31,014		282,192		107,229		168,570		109,790		(33,199	)		2,052,394
For the six months ended June 30, 2018:
Revenues²	$	1,161,826		164,331		78,727		1,316,816		354,678		650,755		224,542		(139,854	)		3,811,821
Net revenues¹	$	549,065		65,196		30,668		277,791		89,292		201,006		66,326		(960	)		1,278,384
Operating income	$	133,276		19,095		5,071		140,282		28,506		36,236		13,928		8			376,402
Identifiable assets at period end	$	1,488,060		153,827		54,186		540,954		157,479		526,607		217,716		(5,997	)		3,132,832
Capital expenditures	$	9,203		3,719		672		1,343		1,024		8,416		1,532		—			25,909
Depreciation and amortization	$	17,212		871		763		2,679		1,125		3,931		917		—			27,498
Equity	$	1,196,226		56,702		26,625		250,513		112,259		157,493		127,032		(34,291	)		1,892,559

Net revenues are a non-GAAP measure calculated as revenues less directly related operating expenses attributable to the Company's principal services. The Company's management believes that net revenues are a better measure than total revenues when evaluating the Company's operating segment performance since total revenues earned as a freight consolidator include the carriers' charges for carrying the shipment, whereas revenues earned in other capacities include primarily the commissions and fees earned by the Company. Net revenue is one of the Company's primary operational and financial measures and demonstrates the Company's ability to concentrate and leverage purchasing power through effective consolidation of shipments from customers utilizing a variety of transportation carriers and optimal routings.

In 2019, the Company revised its process to record the transfer, between its geographic operating segments, of revenues and the directly related cost of transportation expenses for freight service transactions between Company origin and destination locations. This change better aligns revenue reporting with the location where the services are performed, as well as the transactional reporting being developed as part of the Company’s new accounting systems and processes. The change in presentation had no impact on consolidated or segment net revenues or operating income. The 2019 results also include the effect of changing the presentation of certain import services from a net to a gross basis, which increased segment revenues and directly related operating expenses but did not change net revenues. The impact of these changes on reported segment revenues was immaterial and prior year segment revenues have not been revised.

The following table presents the calculation of consolidated net revenues:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Revenues	$	2,035,579	$	1,957,559	$	4,055,630	$	3,811,821
Expenses:
Airfreight services		542,639		593,325		1,051,849		1,106,829
Ocean freight and ocean services		390,299		385,156		810,630		764,574
Customs brokerage and other services		440,946		336,532		877,342		662,034
Net revenues	$	661,695	$	642,546	$	1,315,809	$	1,278,384

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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," "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, 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. Attention should be given to the factors identified and discussed in the Company's annual report on Form 10-K filed on February 22, 2019.

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 difference between the rate billed to our customers (the sell rate) and the rate we pay to the carrier (the buy rate) is termed “net revenue” (a non-GAAP measure), “yield” or “margin.” By consolidating shipments from multiple customers and concentrating our buying power, we are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

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

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

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

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.

Expeditors' Culture and Strategy

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 more 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 all events that, individually or in the aggregate, could have a positive or a negative impact on our future operations. As a result, management's focus is on building and maintaining a global corporate culture and an environment where well-trained employees and managers are prepared to identify and react to changes as they develop and thereby help us adapt and thrive as major trends emerge.

Our business growth strategy emphasizes a focus on the right markets and, within each market, on the right customers that lead to profitable business growth. Expeditors' teams are aligned on the specific markets; on the targeted accounts within those markets; and on ways that we can continue to differentiate ourselves from our competitors.

Our ability to provide services to customers is highly dependent on good working relationships with a variety of entities including airlines, ocean carriers, ground transportation providers and governmental agencies. The significance of maintaining acceptable working relationships with these entities has gained increased importance as a result of ongoing concern over terrorism, security, changes in governmental regulation and oversight of international trade. A good reputation helps to develop practical working understandings that will assist in meeting security requirements while minimizing potential international trade obstacles, especially as governments promulgate new regulations and increase oversight and enforcement of new and existing laws. We consider our current working relationships with these entities to be satisfactory.

Our business is also highly dependent on the financial stability and operational capabilities of the carriers we utilize. Although airline profitability has improved, many air carriers remain highly leveraged with debt. Moreover, the ocean carrier industry has incurred substantial losses in recent years. Many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges. This environment requires that we be selective in determining which carriers to utilize. Further changes in the financial stability, operating capabilities and capacity of asset-based carriers, capacity allotments available from carriers, governmental regulations, and/or trade accords could adversely affect our business in unpredictable ways.

International Trade and Competition

We operate in over 60 countries in the competitive global logistics industry and our activities are closely tied to the global economy. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to tariffs and trade restrictions and accords. Currently, the United States and China have significantly increased tariffs on certain imports and are engaged in trade negotiations. The United Kingdom and the European Union are negotiating the terms of the United Kingdom's exit from the European 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 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.

The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. Our pricing and terms continue to be pressured by uncertainty in global trade and economic conditions, concerns over volatile fuel costs, disruptions in port services, political unrest and fluctuating currency exchange rates. We expect these operating and competitive conditions to continue.

Ocean carriers have incurred substantial operating losses in recent years, and many are highly leveraged with debt. These financial challenges have resulted in multiple carrier acquisitions and carrier alliance formations. Additionally, while overall global demand has recently increased, carriers continue to take delivery of new and larger ships, which creates additional capacity. Carriers also face new regulatory requirements that become effective in 2020 requiring reductions in the sulfur in marine fuel, which is expected to increase their operating and capital costs. When the market experiences seasonal peaks or any sort of disruption, the carriers often increase their pricing suddenly. This carrier behavior creates pricing volatility that could impact Expeditors' ability to maintain historical unitary profitability.

Currently, there is uncertainty as to how new regulatory requirements and changes in oil prices will continue to impact future buy rates. Because fuel is an integral part of carriers' costs and impacts both our cargo space buy rates and our sell rates to customers, we would expect our gross revenues and costs to be impacted as carriers adjust rates for the effect of changing fuel prices. To the extent that we are unable to pass through any increases to our customers, this could adversely affect our net revenues.

The global economic environment and trade growth remain uncertain. We cannot predict the impact of future changes in global trade on our operating results, freight volumes, pricing, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior. Additionally, we cannot predict the direct or indirect impact that further changes in consumer purchasing behavior, such as online shopping, could have on our business. In response to governments implementing higher tariffs on imports, some customers have begun shifting manufacturing to other countries which could negatively impact us.

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. This pattern has been the result of, or influenced by, numerous factors, including weather patterns, national holidays, consumer demand, new product launches, economic conditions, 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 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, 2018, filed on February 22, 2019. 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 and directly related expenses for our principal services and total net revenues (a non-GAAP measure calculated as revenues less directly related operating expenses attributable to our principal services) and our expenses for the three and six months ended June 30, 2019 and 2018, expressed as percentages of net revenues. Management believes that net revenues are a better measure than total revenues when analyzing and discussing management's effectiveness in managing our principal services since total revenues earned by Expeditors as a freight consolidator include the carriers’ charges to us for carrying the shipment, whereas revenues earned by Expeditors in our other capacities include primarily the commissions and fees actually earned by us. Net revenue is one of our primary operational and financial measures and demonstrates our ability to manage sell rates to customers with our ability to concentrate and leverage our purchasing power through effective consolidation of shipments from multiple customers utilizing a variety of transportation carriers and optimal routings. Using net revenue also provides a commonality for comparison among various services.

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,
	2019					2018					2019					2018
	Amount		Percent of net revenues			Amount		Percent of net revenues			Amount		Percent of net revenues			Amount		Percent of net revenues
(in thousands)
Airfreight services:
Revenues	$	741,577				$	801,761				$	1,456,478				$	1,532,988
Expenses		542,639					593,325					1,051,849					1,106,829
Net revenues		198,938		30	%		208,436		32	%		404,629		31	%		426,159		33	%
Ocean freight services and ocean services:
Revenues		543,809					530,008					1,112,450					1,050,891
Expenses		390,299					385,156					810,630					764,574
Net revenues		153,510		23			144,852		23			301,820		23			286,317		23
Customs brokerage and other services:
Revenues		750,193					625,790					1,486,702					1,227,942
Expenses		440,946					336,532					877,342					662,034
Net revenues		309,247		47			289,258		45			609,360		46			565,908		44
Total net revenues		661,695		100			642,546		100			1,315,809		100			1,278,384		100
Overhead expenses:
Salaries and related costs		356,351		54			350,948		54			713,261		54			690,843		54
Other		113,143		17			108,014		17			222,746		17			211,139		17
Total overhead expenses		469,494		71			458,962		71			936,007		71			901,982		71
Operating income		192,201		29			183,584		29			379,802		29			376,402		29
Other income (expense), net		8,778		1			6,320		1			16,549		1			11,258		1
Earnings before income taxes		200,979		30			189,904		30			396,351		30			387,660		30
Income tax expense		47,449		7			48,958		8			102,710		8			110,514		8
Net earnings		153,530		23			140,946		22			293,641		22			277,146		22
Less net earnings attributable to the noncontrolling interest		381		—			341		—			793		—			849		—
Net earnings attributable to shareholders	$	153,149		23	%	$	140,605		22	%	$	292,848		22	%	$	276,297		22	%

Airfreight services:

Airfreight services revenues decreased 8% and 5% during the three and six months ended June 30, 2019, respectively, as compared with the same periods for 2018, primarily due to 5% and 4% declines in tonnage and lower average sell rates resulting from softening of market demand. Airfreight services expenses decreased 9% and 5% during the three and six months ended June 30, 2019, respectively, as compared with the same periods for 2018 principally as a result of 5% and 4% declines in tonnage and lower average buy rates due to increased carrier capacity relative to market demand.

Airfreight services net revenues decreased 5% for the three months ended June 30, 2019, as compared with the same period for 2018. This was due to a 5% decline in tonnage and a 4% decline in net revenue per kilo. Europe and North Asia net revenues decreased 11% and 8%, respectively, primarily due to a 5% and 6% reduction in tonnage and lower net revenue per kilo of 10% and 6%, respectively. In addition, North America net revenues decreased by 1%, primarily due to a 5% reduction in tonnage. South Asia net revenues increased 6%, primarily due to a 4% increase in tonnage.

Airfreight services net revenues decreased 5% for the six months ended June 30, 2019, as compared with the same period for 2018. This was due to 4% decline in tonnage and a decrease in net revenue per kilo. North America, North Asia and Europe net revenues decreased 6%, 9% and 5%, respectively, primarily due to a 4%, 8% and 3% reduction in tonnage.

The global airfreight market has been experiencing imbalances between carrier capacity and demand in certain lanes, which is resulting in lower buy and sell rates. These conditions are exacerbated by on-going inter-governmental trade disputes and uncertainties. Customers remain focused on improving supply-chain efficiency, reducing overall logistics costs by negotiating lower rates and utilizing ocean freight whenever possible. At the same time, customers are increasingly utilizing airfreight to improve speed to market. We expect these trends to continue in conjunction with carriers' efforts to manage available capacity and the evolution of consumer purchasing behavior, such as online shopping. These conditions could be affected by new product launches and customer responses to governmental trade policies during periods that have historically experienced higher demand. These conditions, should they continue to occur, could create a higher degree of volatility in volumes and, ultimately, buy and sell rates.

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 increased 3% and 6% for the three and six months ended June 30, 2019, respectively, as compared with the same periods in 2018, primarily due to 2% increases in container volume and higher average sell rates to customers. Ocean freight and ocean services expenses increased 1% and 6% for the three and six months ended June 30, 2019, respectively, primarily due to increased volumes and higher average buy rates as overall market demand increased and carriers managed available capacity. These increases were partially offset by the effect of our revised presentation of services rendered at the destination, which decreased revenues and directly related operating expenses in ocean freight consolidation services but did not change net revenues.

Ocean freight and ocean services net revenues increased 6% and 5% for the three and six months ended June 30, 2019, respectively, as compared with the same periods in 2018. The largest component of our ocean freight net revenue was derived from ocean freight consolidation, which represented 44% of ocean freight net revenue for the six months ended June 30, 2019 and 2018.

Ocean freight consolidation net revenues increased 4% and 5% for the three and six months ended June 30, 2019, respectively, as compared with the same period in 2018, primarily due to a 3% increase in net revenue per container and a 2% increase in volumes. Order management net revenues increased 9% and 6% for the three and six months ended June 30, 2019, respectively, mostly resulting from higher volumes in North Asia and South Asia. Direct ocean freight forwarding net revenues increased 5% for the three months ended June 2019 primarily due to increases in volumes in North Asia and Europe. Direct ocean freight forwarding net revenues increased 6% for the six months ended June 2019 primarily due to increases in volumes in North America and North Asia.

North America ocean freight and ocean services net revenues increased 2% and 4% for the three and six months ended June 30, 2019, respectively, primarily due to increases in net revenue per container and higher volumes. South Asia net revenues increased 31% and 24% for the three and six months ended June 30, 2019, respectively, as export volumes, order management volumes and net revenue per container increased. North Asia net revenues increased 5% and 6% for the three and six months ended June 30, 2019, respectively, primarily due to increases in order management and direct ocean forwarding resulting from higher volumes.

We expect that pricing volatility will continue as customers solicit bids, react to governmental trade policies, and carriers adapt to changes in capacity and market demand, merge or create alliances with other carriers. Carriers also face new regulatory requirements that become effective in 2020 to reduce the use of sulfur in marine fuel, which is expected to increase their operating and capital costs which could result in higher costs for us. These conditions could result in lower margins.

Customs brokerage and other services:

Customs brokerage and other services revenues increased 20% and 21% and expenses increased 31% and 33%, respectively, for the three and six months ended June 30, 2019, as compared with the same periods in 2018, primarily as a result of higher volumes in customs brokerage and road freight and increased costs in import services. The 2019 results include the effect of changing our presentation of certain import services from a net to a gross basis and our revised presentation of destination services, which increased revenues and directly related operating expenses in customs brokerage and other services but did not change net revenues.

Customs brokerage and other services net revenues increased 7% and 8% for the three and six months ended June 30, 2019, respectively, as compared with the same periods in 2018, primarily as a result of an increase in customs brokerage, road freight and distribution volumes. Customers continue to seek out customs brokers, such as Expeditors, with sophisticated computerized capabilities critical to an overall logistics management program, including rapid responses to changes in the regulatory and security environment.

North America net revenues increased 13% and 14% for the three and six months ended June 30, 2019, respectively, as compared with the same periods for 2018, primarily as a result of higher volumes in customs brokerage, road freight and distribution services.

Overhead expenses:

Salaries and related costs increased 2% and 3% for the three and six months ended June 30, 2019, respectively, as compared with the same periods in 2018, principally due to an increase in the number of employees, primarily in North America and Europe, and higher share-based compensation and sales commissions which were partially offset by a reduction in bonus expense. The number of employees increased primarily to support increased activity in our business operations.

Historically, the relatively consistent relationship between salaries and net revenues 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.

Bonuses to field management were up 3% in the six months ended June 30, 2019, when compared to the same period in 2018, while branch operating income increased 2%. Bonuses to executive management were down 6%. The effect of the increase in consolidated operating income of 1% for the six months ended June 30, 2019, was offset by a 3% reduction made to senior executive management bonus allocations, as well as unused allocations available for future investments in the development of key personnel.

Our management compensation programs have always been incentive-based and performance driven. Salaries and related costs as a percentage of net revenues for the three and six months ended June 30, 2019 remained unchanged at 54%, as compared to the same periods in 2018.

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, net revenues and net earnings are a result of the incentives inherent in our compensation programs.

Other overhead expenses increased 5% for the three and six months ended June 30, 2019, as compared with the same periods in 2018. The increase in expenses was due to renting additional space, occupancy costs, technology-related fees and consulting expenses, partially offset by lower depreciation and amortization expense. Other overhead expenses as a percentage of net revenues for the three and six months ended June 30, 2019, remained unchanged at 17%, compared to the same periods in 2018. We will continue to make important investments in people, processes and technology, as well as to invest in our strategic efforts to explore new areas for profitable growth.

Income tax expense:

Our consolidated effective income tax rate was 23.6% and 25.9% for the three and six months ended June 30, 2019, respectively, as compared to 25.8% and 28.5% for the comparable periods in 2018. The effect of higher average foreign tax rates of our international subsidiaries, when compared to U.S. federal and state tax rates, were impacted by the following items. The effective tax rate in 2019 benefited from available U.S foreign tax credits associated with withholding taxes of our foreign operations, U.S. income tax deductions for Foreign-derived intangible income (FDII), and a state income tax refund. These benefits were partially offset by lower share-based compensation deductions in 2019 from stock option exercises when compared to the same periods in 2018 and higher state income tax expense when excluding the state income tax refund recorded during the second quarter of 2019. In addition, 2018 included higher income tax expense related to an estimated BEAT tax liability and an adjustment made to the provisional Transition Tax liability associated with enactment of the 2017 Tax Act.

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. As a result, the amount of income tax recorded in the future may differ, possibly materially. See Note 4 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 the U.S. dollar. This results in our being exposed to the inherent risks of volatile international currency markets and governmental interference. Some of the countries where we maintain offices and/or agency relationships have strict currency control regulations, which influence our ability to hedge foreign currency exposure. We try to compensate for these exposures by accelerating international currency settlements among our offices and agents. We may enter into foreign currency hedging transactions where there are regulatory or commercial limitations on our ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to mitigate short-term exchange losses. Any such hedging activity during the three and six months ended June 30, 2019 and 2018 was insignificant. We had no foreign currency derivatives outstanding at June 30, 2019 and December 31, 2018. During the three and six months ended June 30, 2019, net foreign currency losses were approximately $2 million and $4 million, respectively. During the three and six months ended June 30, 2018, net foreign currency gains were approximately $5 million and $1 million, respectively.

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

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

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

Liquidity and Capital Resources

Our principal source of liquidity is cash and cash equivalents and cash generated from operating activities. Net cash provided by operating activities for the three and six months ended June 30, 2019 was $156 million and $445 million, respectively, as compared with $149 million and $384 million for the same periods in 2018. The increase of $7 million and $61 million in the three and six months ended June 30, 2019, respectively, was primarily due to higher earnings and changes in working capital, principally as a result of the excess of customer collections over customer billings offset by an increase in taxes paid during 2019. At June 30, 2019, working capital was $1,433 million, including cash and cash equivalents of $1,083 million. Other than our recorded lease liabilities, we had no long-term obligations or debt at June 30, 2019. Management believes that our current cash position and operating cash flows will be sufficient to meet our capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future, including meeting any contingent liabilities related to standby letters of credit and other obligations.

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

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

Cash used in investing activities for the three and six months ended June 30, 2019 was $12 million and $21 million, respectively, as compared with $14 million and $28 million in the same period of 2018, primarily for capital expenditures. Capital expenditures in the three and six months ended June 30, 2019 were related primarily to continuing investments in technology and building and leasehold improvements. Occasionally, we elect to purchase buildings to house staff and to facilitate the staging of customers’ freight. Total anticipated capital expenditures in 2019 are currently estimated to be $50 million. This includes routine capital expenditures and investments in technology.

Cash used in financing activities during the three and six months ended June 30, 2019 was $250 million and $267 million, respectively, as compared with $223 million and $369 million for the same period in 2018. 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 ended June 30, 2019, we used cash to repurchase 2.6 million and 3.2 million shares, respectively, to reduce the number of total outstanding shares, compared to 3.1 million and 5.8 million shares in the same periods in 2018.

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

We cannot predict what impact ongoing uncertainties in the global economy and political uncertainty may have on our operating results, freight volumes, pricing, amounts advanced on behalf of our customers, changes in consumer demand, carrier stability and capacity, customers’ abilities to pay or on changes in competitors' behavior.

We maintain international unsecured bank lines of credit. At June 30, 2019, we were contingently liable for $69 million from standby letters of credit and guarantees. The standby letters of credit and guarantees relate to obligations of our foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation. The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books 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.

We typically enter into short-term unconditional purchase obligations with asset-based providers reserving space on a guaranteed basis. The pricing of these obligations varies to some degree with market conditions. We only enter into agreements that management believes we can fulfill.

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 June 30, 2019, cash and cash equivalent balances of $559 million were held by our non-United States subsidiaries, of which $7 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 revenue 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 six months ended June 30, 2019, would have had the effect of raising operating income approximately $25 million. An average 10% strengthening of the U.S. dollar, for the same period, would have the effect of reducing operating income approximately $20 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 and six months ended June 30, 2019 and 2018 was insignificant. During the three and six months ended June 30, 2019, foreign currency losses were approximately $2 million and $4 million, respectively. During the three and six months ended June 30, 2018, foreign currency gains were approximately $5 million and $1 million, respectively. We had no foreign currency derivatives outstanding at June 30, 2019 and December 31, 2018. We instead follow a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. As of June 30, 2019, we had approximately $48 million of net unsettled intercompany transactions. The majority of intercompany billings are resolved within 30 days.

Interest Rate Risk

At June 30, 2019, we had cash and cash equivalents of $1,083 million, of which $569 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 June 30, 2019. A hypothetical change in the interest rate of 10 basis points at June 30, 2019 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 second quarter of 2019.

Item 4. Controls and Procedures

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.

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.

In 2018, we adopted new accounting standard Topic 606 Revenue from Contracts with Customers. The adoption of this standard resulted in changes to existing processes and systems. In particular, to capture information to measure the progress of completion of performance obligations under contracts with customers on an on-going basis and these changes are continuing in 2019 as further enhancements to our accounting information systems are introduced. In 2019, we adopted the new accounting standard Topic 842 Leases. The adoption of this accounting standard resulted in continued changes to existing processes and systems, including the implementation of a new leasing tracking and accounting system, processes and procedures associated with properly identifying and classifying leases, and the calculation and recording of leasehold right-of-use assets and lease liabilities.

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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Expeditors is involved in claims, lawsuits, government investigations and other legal matters that arise in the ordinary course of business and are subject to inherent uncertainties. Currently, in management's opinion and based upon advice from legal advisors, none of these matters are expected to have a significant effect on our operations, cash flows or financial position. As of June 30, 2019, the amounts accrued for these claims, lawsuits, government investigations and other legal matters are not significant to our operations, cash flows or financial position. At this time, we are unable to estimate any additional loss or range of reasonably possible losses, if any, beyond the amounts recorded, that might result from the resolution of these matters.

Item 1A. Risk Factors

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 February 22, 2019. 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 February 22, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans		Maximum number of shares that may yet be purchased under the plans
April 1-30, 2019		—	$	—		—		11,815,733
May 1-31, 2019		2,299,800		73.45		2,299,800		10,361,303
June 1-30, 2019		309,900		69.95		309,900		10,040,008
Total		2,609,700	$	73.03		2,609,700		10,040,008

In November 2001, Expeditors' Board of Directors authorized a Discretionary Stock Repurchase Plan for the purpose of repurchasing our common stock in the open market to reduce the issued and outstanding stock down to 200 million shares. In February 2014, the Board of Directors authorized repurchases down to 190 million shares of common stock. In February and August 2015, May 2016 and November 2018, the Board of Directors further authorized repurchases down to 188 million, 180 million, 170 million and 160 million, respectively. The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increases. This authorization has no expiration date. In the second quarter of 2019, 2,610 shares of common stock were repurchased under the Discretionary Stock Repurchase Plan.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)	Not applicable.

(b)	Not applicable.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K.

Exhibit Number		Description
10.72		Form of Performance Share Award Agreement used in connection with performance share units granted under Expeditors' 2017 Omnibus Incentive Plan
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
August 7, 2019		/s/ JEFFREY S. MUSSER
		Jeffrey S. Musser, President, Chief Executive Officer and Director
August 7, 2019		/s/ BRADLEY S. POWELL
		Bradley S. Powell, Senior Vice President and Chief Financial Officer

Exhibit 10.72

PERFORMANCE SHARE AWARD AGREEMENT

(Expeditors International of Washington, Inc. 2017 Omnibus Incentive Plan)

THIS AGREEMENT, dated as of [date] (“Agreement”), is entered into between Expeditors International of Washington, Inc., a Washington corporation (the “Company”), and [recipient], an employee of the Company or an affiliate of the Company (“Participant”). This Agreement sets forth the terms and conditions of a Performance Share Award representing the right to receive shares of Common Stock (“Common Stock”), par value $.01 per share, of the Company granted by the Company pursuant to its 2017 Omnibus Incentive Plan, which was approved by shareholders on May 2, 2017 (the “Plan”). Capitalized terms that are not defined in this Agreement shall have the meaning ascribed to such terms in the Plan.

Subject to the terms and conditions of the Plan and the Agreement, the Company grants to Participant a Performance Share Award entitling Participant to the number of Performance Share Units (sometimes referred to herein as “PSUs”) equal to the “Target Award Number” set forth below. The Target Award Number shall be adjusted upward or downward following the end of the Performance Period based on performance, as provided in the Exhibit A to this Agreement, which Exhibit is made a part of this Agreement. The number of PSUs that Participant will receive under the Agreement, after giving effect to such adjustment, is referred to herein as the “Final Award Number.” Each PSU represents the right to receive one share of Common Stock, subject to the vesting requirements and distribution provisions of the Agreement and the terms of the Plan. The shares of Common Stock distributable to Participant with respect to PSUs granted hereunder are referred to as the “Shares”. The performance periods over which the Final Award Number will be determined (the “Performance Period”) are set forth below.

The Company and the Participant agree as follows:

1.Performance Share Award. The Company, effective as of the date of this Agreement, hereby grants to Participant Performance Share Units as set forth below and subject to the terms and conditions set forth in this Agreement and the Plan:

(a)Target Award Number; Final Award Number. The Target Award Number shall consist of two (2) tranches (Tranche A and Tranche B). Seventy-five percent of the total Target Award Number is allocated to Tranche A; and twenty-five percent of the total Target Award Number is allocated to Tranche B, in each case as set forth in 1(b) below. The potential Final Award Number for each tranche ranges from a maximum number equal to 200% of the Tranche Target Award Number to zero in the event the threshold level of performance for that tranche is not achieved (see Exhibit A).

(b)Performance Criteria; Performance Period. Performance criteria for Tranche A are based on Cumulative EPS and performance criteria for Tranche B are based on Net Revenues, in each case as set forth in Exhibit A. The Performance Periods for purposes of determining whether, and the extent to which the PSUs within each tranche will vest and become payable hereunder, and the Target Number of Shares for each Tranche subject to this Award are:

4813-2820-8955\7

Performance Period	Target Number in Tranche

Tranche A: January 1, 2021 to December 31, 2021	[###]

Tranche B January 1, 2021 to December 31, 2021	[###]

(c)Vesting Date. Except as otherwise provided herein, the “Vesting Date” for Performance Share Units (to the extent they become vested based on satisfaction of performance goals) shall be the last day of the performance period. Provided Participant remains continuously employed by the Company or an Affiliate through the Vesting Date, and subject to earlier settlement/payout with respect to Performance Share Units that become vested under Section 3(b) below in the event of Disability or death, vested Performance Share Units will be settled and Shares delivered as soon as administratively feasible following the Vesting Date, but in no event later than March 15^th of the year following the calendar year in which the Vesting Date occurs.

2.Rights of Participant with Respect to the Performance Share Units.

(a)No Shareholder Rights. Performance Share Units granted pursuant to this Agreement do not and shall not entitle Participant to any rights of a shareholder of Common Stock. The rights of Participant with respect to the Performance Share Units shall remain forfeitable at all times prior to the date on which such rights become vested, and the restrictions with respect to Performance Share Units lapse, in accordance with Sections 1 and 3 hereof.

(b)Dividend Equivalents. As long as Participant holds Performance Share Units granted pursuant to this Agreement, the Company shall credit to Participant, on each date that the Company pays a cash dividend to holders of Common Stock generally, an additional number of Performance Share Units (“Additional Performance Share Units”) equal to the number of Performance Share Units and Additional Performance Share Units previously credited to Participant under this Agreement multiplied by the dollar amount of the cash dividend paid per share of Common Stock by the Company on such date, divided by the Fair Market Value of a share of Common Stock on such date. Any fractional Performance Share Unit resulting from such calculation shall be included in the Additional Performance Share Units. A report showing the number of Additional Performance Share Units so credited shall be sent to Participant periodically, as determined by the Company. The Additional Performance Share Units so credited shall be subject to the same terms and conditions as the Performance Share Units with respect to which such Additional Performance Share Units were credited, and the Additional Performance Share Units shall be forfeited in the event that the Performance Share Units with respect to which such additional Performance Share Units were credited are forfeited. Further, for avoidance of doubt, Participant will be eligible to receive Additional Performance Share Units with respect to unvested Performance Share Units only if Participant remains in continuous employment with the Company or an Affiliate through the applicable dividend record date as declared by the Board. Additional Performance Share Units are subject to income and payroll tax withholding by the Company.

(c)Issuance of Shares; Conversion of Performance Share Units. No Shares of Common Stock shall be issued to Participant prior to the date on which the Performance Share Units vest, and the restrictions with respect to the Performance Share Units lapse, in accordance with Section 1 or Section 3 hereof. Neither this Section 2(c) nor any action taken pursuant to or in accordance with this Section 2(c) or any other provision of the Plan or this Performance Share Award agreement shall be construed to create a trust of any kind. After any Performance Share Units vest pursuant to Section 1 or Section 3 hereof, the Company shall promptly cause to be issued, in either certificated or uncertificated form, Shares of Common Stock registered in Participant’s name or in the name of Participant’s legal representatives, beneficiaries or heirs, as the case may be, in payment of such vested Performance Share Units and any Additional

Performance Share Units and shall cause such certificated or uncertificated shares to be delivered to Participant or Participant’s legal representatives, beneficiaries or heirs, as the case may be (including for this purpose a delivery of Shares to a deceased Participant’s brokerage account maintained in connection with Awards under the Plan). Any fractional Performance Share Unit credited to the Participant at the time of final settlement of this Performance Share Unit Award will be rounded up to the next whole unit. In no event shall issuance of Shares occur later than March 15^th of the year following the calendar year in which PSUs vest (and the restrictions with respect to such PSUs lapse).

3.Vesting; Forfeiture.

(a)Termination of Employment. In the event that Participant’s employment with the Company and its Affiliates is terminated prior to a Tranche Vesting Date, the Participant’s right to receive any Shares (including the right to receive any Shares relating to Additional Performance Share Units) corresponding to that Tranche Vesting Date shall be immediately and irrevocably forfeited, unless such termination is by reason of:

(1)

Participant’s permanent disability (within the meaning of Section 409A(a)(2)(C)(i) of the Code (“Disability”);

(2)

Participant’s death;

(3)

Participant’s Retirement (as defined in Section 3(c) below).

(4)

Participant’s Involuntary Termination without Cause (as defined in Section 3(d) below) or

(5)

Participant’s Voluntary Termination for Good Reason (as defined in Section 3(d) below.

(b)Death and Disability. In the event of Participant’s death or Disability (as defined in Section 3(a) above) prior to the commencement or completion of a Performance Period, the Participant or Participant’s estate shall be entitled to receive a payment/settlement with respect to a prorated portion of PSUs corresponding to such Performance Period based on, and assuming that, performance would be achieved at the target level, as set forth in Exhibit A to this Agreement. The prorated number of PSUs for the Performance Period shall be determined by dividing the number of days during the performance period prior to Participant’s death or Disability by the total number of days in the Performance Period. Notwithstanding the foregoing, in the event the Participant is eligible for “Retirement,” as defined in Section 3(c), at the time of his or her death or Disability, then no proration will occur and the Participant or Participant’s estate shall be entitled to receive a payment/settlement with respect to the full amount of PSUs corresponding to such Performance Period, again assuming that performance would be achieved at the target level. Such settlement of PSUs will occur as soon as administratively feasible following death or Disability but in all cases by the later of (i) the end of the year in which such death or Disability occurs and (ii) the date that is 2 ½ months following such death or Disability. If a payment/settlement is made pursuant to this Section 3(b), no payment/settlement shall be made pursuant to Section 1 of this Agreement.

(c)Retirement. In the event Participant terminates employment as a result of Retirement prior to the commencement or completion of a Performance Period, then the PSUs corresponding to such Performance Period shall be eligible to become vested at the end of the Performance Period based on actual achievement of performance goals as specified in Exhibit A. “Retirement” shall mean the voluntary or involuntary termination of Participant’s employment for any reason other than for Cause, Disability or death (i) at such time or after Participant has attained age 55 and completed at least ten years of service (measured from his or her most recent hire date) as an employee of the Company and/or an Affiliate of the Company, or (ii) after having completed at least thirty years of continuous service (measured from his or her most recent hire date) as an employee of the Company and/or an Affiliate of the Company, and in either case, so long as Participant has at all times that Performance Share Units are outstanding under this Agreement complied with the terms of any applicable confidentiality, non-disclosure and/or non-competition agreement between the Company and the Participant. Settlement of such PSUs shall occur as soon as administratively feasible following the end of the Performance Period (but in no event later than March 15^th of the year following the calendar year in which the last day of the Performance Period occurs). If a payment/settlement is made pursuant to this Section 3(c), no payment/settlement shall be made pursuant to Section 1 of this Agreement.

(d)Involuntary Termination without Cause or Voluntary Termination for Good Reason (not in connection with a Change in Control). The following provisions apply if Participant terminates employment as a result of an Involuntary Termination (as defined below) without Cause (as defined in the Plan) or a Voluntary Termination for Good Reason (as defined below) and such termination is not a Qualifying Termination as defined in the Plan (in connection with a Change in Control). If Participant’s employment is terminated as a result of an Involuntary Termination without Cause or a Voluntary Termination for Good Reason prior to the commencement or completion of a Performance Period, then (i) unvested PSUs granted during the prior six month period will be forfeited; (ii) provided that Participant timely executes a waiver and release of claims against the Company in a form acceptable to the Company, a prorated portion (based on service completed at the time of termination) of unvested PSUs will be eligible to become vested at the end of the applicable Performance Period, based on actual achievement of performance goals as specified in Exhibit A; and (iii) all other unvested PSUs shall be forfeited. The prorated number of PSUs shall be determined by dividing the number of days in the period commencing on the date of grant and ending on the date of termination, by the total number of days in the period commencing on the date of grant and ending on the last day of the Performance Period. “Involuntary Termination without Cause” means termination of Participant’s employment by the Company’s exercise of unilateral authority in circumstances where Participant was willing and able to continue employment and such termination was not for Cause (as defined in the Plan). “Voluntary Termination for Good Reason” means Participant’s voluntary termination of employment as a result of (i) a material diminution of Participant’s annual base compensation, authority, duties or responsibilities; (ii) a material change in Participant’s reporting relationship, including a requirement that Participant report to a corporate officer or employee instead of reporting directly to the Board; (iii) a material change in the geographic location at which Participant must perform the duties of his or her position; or (iv) any other action or inaction that constitutes a material breach by the Company of the agreement under which Participant serves (e.g. an employment agreement), and in each case Participant has advised the Company in writing of the condition set forth above within ninety (90) days of the initial existence of the condition and the Company has not remedied the condition with thirty (30) days of receipt of such notice. Notwithstanding the foregoing, the provisions in the Section 3(d) will apply only if Participant has at all times that Performance Share Units are outstanding under this Agreement complied with the terms of any applicable confidentiality, non-disclosure and/or non-competition agreement between the Company and the Participant. Settlement of such PSUs shall occur as soon as administratively feasible following the end of the Performance Period (but in no event later than March 15^th of the year following the calendar year in which the last day of the Performance Period occurs). If a payment/settlement is made pursuant to this Section 3(d), no payment/settlement shall be made pursuant to Section 1 of this Agreement.

(e)Change in Control - Qualifying Termination. Notwithstanding the foregoing provisions, in the event that a Change in Control (as defined in the Plan) occurs, the provisions of the Plan will govern the treatment of Performance Share Units, provided that for purposes of determining any prorated portion of the Award pursuant to Section 8 of the Plan, the prorated number of PSUs shall be determined by dividing the number of days in the period commencing on the date of grant and ending on the date of the Change in Control, by the total number of days in the period commencing on the date of grant and ending on the last day of the Performance Period.

4.Restrictions on Transfer. Performance Share Units shall not be transferable other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, Participant may, in the manner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of Participant and receive any property distributable with respect to Performance Share Units upon the death of Participant. Each right under this Agreement shall be exercisable during Participant’s lifetime only by Participant or, if permissible under applicable law, by Participant’s legal representative. Performance Share Units and any rights under this Agreement may not be sold, assigned, transferred, pledged, alienated, attached or otherwise encumbered and any purported sale, assignment, transfer, pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company or any Affiliate.

5.Income Tax Matters. In order to comply with all applicable federal, foreign, state or local income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, foreign, state or local payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant. Upon vesting of the Performance Share Units and the lapse of the restrictions with respect to the Performance Share Units under the terms of this Award Agreement, Participant shall be obligated to pay any applicable withholding taxes arising from such vesting and lapse of restrictions and payment with respect to Performance Share Units.

6.Securities Matters. No Shares of Common Stock shall be issued pursuant to this Agreement prior to such time as counsel to the Company shall have determined that the issuance of such shares will not violate any securities or other laws, rules or regulations. The Company shall not be required to deliver any Shares of Common Stock until the requirements of any applicable securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied. In addition, the grant of these Performance Share Units and/or the delivery of any Shares of Common Stock under this Agreement are subject to the Company’s executive compensation clawback policies as they may exist at the time of grant of this Award and as the Company may adopt in the future to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (or any other applicable law) and any applicable rules and regulations of the Securities and Exchange Commission or applicable stock exchange.

7.Tax Consequences. Participant agrees that the Company does not have a duty to design or administer the Plan or its other compensation programs in a manner that minimize the Participant’s tax liabilities. Participant will not make any claim against the Company, or any of its officers, directors, employees or Affiliates related to tax liabilities arising from Performance Share Units or the Participant’s other compensation.

8.Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares or other securities of the Company or other similar corporate transaction or event affects the Common Stock such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of shares subject to Performance Share Units.

9.General Provisions.

(a)Section 409A. This Performance Share Award is intended to be exempt from Section 409A of the Code (“Section 409A”) under Treas. Reg. Section 1.409A-1(b)(4) and this Agreement and the Plan will be construed and administered accordingly. Notwithstanding the foregoing, to the extent it is determined that any payment due hereunder is (i) deferred compensation subject to Section 409A, and (ii) is payable to a specified employee (as that term is defined in Section 409A), and (iii) is payable on account of the specified employee’s separation from service (as that term is defined in Section 409A), payment of any part of such amount that would have been made during the six (6) months following the separation from service shall not then be paid but shall rather be paid on the first day of the seventh (7th) month following the separation from service.

(1)

For this purpose, specified employees shall be identified by the Company on a basis consistent with regulations issued under Section 409A, and consistently applied to all plans, programs, contracts, etc. maintained by the Company that are subject to Section 409A.

(2)

For this purpose, “termination of employment” shall be defined as “separation from service” as that term is defined under Section 409A.

(3)

To the extent that Section 409A is applicable to this Agreement, this Agreement shall be construed and administered to comply with the rules of Section 409A. Neither the Company nor any of its officers, directors, agents or affiliates shall be obligated, directly or indirectly, to any participant or any other person for any taxes, penalties, interest or like amounts that may be imposed on the participant or other person on account of any amounts under this Plan or on account of any failure to comply with any Code section.

(b)Interpretations. This Agreement is subject in all respects to the terms of the Plan. Terms used herein which are defined in the Plan shall have the respective meanings ascribed to such terms in the Plan, unless otherwise defined herein. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan shall govern. Any question of administration or interpretation arising under this Agreement shall be determined by the Committee, and such determination shall be final and conclusive upon all parties in interest.

(c)No Right to Employment. The grant of Performance Share Units shall not be construed as giving Participant the right to be retained as an employee of the Company or any Affiliate. In addition, the Company or an Affiliate may at any time dismiss Participant from employment, free from any liability or any claim under this Agreement, unless otherwise expressly provided in this Agreement or the Plan.

(d)Headings. Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.

(e)Severability. If any provision of this Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction under any law deemed to be applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable law, or if it cannot be so construed or amended without, in the determination of the Committee, materially altering the purpose or intent of this Agreement, such provision shall be stricken as to such jurisdiction or this Agreement, and the remainder of this Agreement shall remain in full force and effect.

(f)Governing Law. The internal law, and not the law of conflicts, of the State of Washington will govern all questions concerning the validity, construction and effect of this Agreement. Any claim or action brought with respect to this Award shall be brought in a federal or state court located in Seattle, Washington.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above.


EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.
By:


	Date:


	Participant

	Date:

Exhibit A

PERFORMANCE SHARE AWARD AGREEMENT
Expeditors International of Washington, Inc. 2017 Omnibus Incentive Plan)

This Exhibit A to the Performance Share Award Agreement sets forth the manner in which the Committee will determine whether, and the extent to which, Performance Share Units that will become vested, and thus the number of Shares of Common Stock that will become payable with respect to the Award.

Definitions

Capitalized terms used but not defined herein shall have the same meanings assigned to them in the Plan and the Performance Share Award Agreement. The following terms used in this Exhibit A shall have the meanings set forth below:

“Cumulative EPS” shall equal the Company’s diluted earnings attributable to shareholders per share for the 2019 fiscal year of the Company included in the Performance Period. The Company’s diluted earnings attributable to shareholders per share for any such fiscal year of the Company during the Performance Period shall be as set forth in the audited consolidated financial statements of the Company and its subsidiaries.

“Net Revenues” means the net revenues for the 2020 fiscal year of the Company included in the Performance Period, as reported in the Company’s Annual Report on Form 10-K in the Financial Highlights table under Item 6 – Selected Financial Data. Net Revenues are a non-GAAP measure calculated as revenues less directly related operations expenses attributable to the Company's principal services. The Company's management believes that net revenues are a better measure than total revenues when evaluating the Company's operating segment performance since total revenues earned as a freight consolidator include the carriers' charges for carrying the shipment, whereas revenues earned in other capacities include primarily the commissions and fees earned by the Company. Net revenue is one of the Company's primary operational and financial measures and demonstrates the Company's ability to concentrate and leverage purchasing power through effective consolidation of shipments from customers utilizing a variety of transportation carriers and optimal routings.

“Cumulative EPS Threshold Performance” means Cumulative EPS of $[###] per share.

“Cumulative EPS Target Performance” means Cumulative EPS of $[###] per share.

“Cumulative EPS Maximum Performance” means Cumulative EPS of $[###] per share.

“Determination Date” means the date on which the Final Award Number is determined, which date shall not be later than 60 days after the last day of the Performance Period.

“Final Award Number” means the number of Shares that become payable in settlement of this Performance Share Award determined based on performance in accordance with this Exhibit A, and Final Award Number for an individual Tranche means the number of Shares that become payable in settlement of that Tranche determined in accordance with this Exhibit A.

“Net Revenues Threshold Performance” means Net Revenues of $[###] billion.

“Net Revenues Target Performance” means Net Revenues of $[###] billion.

“Net Revenues Maximum Performance” means Net Revenues of $[###] billion.

“Performance Period” has the meaning set forth in Section 1(b) of this Performance Share Award.

“Target Award Number” for each Tranche means the target number set forth in Section 1(b) of the Award Agreement.

“Target Award Number Percentage” means, for each Tranche, the percentage of the Target Award Number for such Tranche that may become vested, determined in accordance with this Exhibit A.

Determination of Final Award Number

Each Participant has been granted a number of Units equal to the Target Award Number. Seventy-Five percent (75%) of the Target Award Number is allocated to Tranche A and twenty-five percent (25%) is allocated to Tranche B, as set forth in Section 1(b) of the Performance Share Award Agreement.

The Target Award Number for each Tranche will be adjusted upward or downward following the end of the Performance Period on the Determination Date, depending on whether, and the extent to which, the Cumulative EPS Target and the Net Revenues Target, as applicable, have been met. The Final Award Number for each Tranche will be determined by multiplying (i) the Target Award Number Percentage for the Tranche by (ii) the Target Award Number for the Tranche. The Target Award Number Percentage will be determined in accordance with the following:

•

If Cumulative EPS Target Performance is achieved, 100% of the Target Number for Tranche A will become vested. If Cumulative EPS Maximum Performance (or greater) is achieved, 200% of the Target Number for Tranche A will become vested. If Cumulative EPS Threshold Performance is achieved, 50% of the Target Number for Tranche A will become vested. If Cumulative EPS Threshold Performance is not achieved, 0% of the Target Number for Tranche A will become vested. The Final Award Number for Tranche A will be determined by linear interpolation for performance between Cumulative EPS Threshold Performance and Cumulative EPS Target Performance, or between Cumulative EPS Target Performance and Cumulative EPS Maximum Performance, as applicable.

•

If Net Revenues Target Performance is achieved, 100% of the Target Number for Tranche B will become vested. If Net Revenues Maximum Performance (or greater) is achieved, 200% of the Target Number for Tranche B will become vested. If Net Revenues Threshold Performance is achieved, 50% of the Target Number for Tranche B will become vested. If Net Revenues Threshold Performance is not achieved, 0% of the Target Number for Tranche B will become vested. The Final Award Number for Tranche B will be determined by linear interpolation for performance between Net Revenues Threshold Performance and Net Revenues Target Performance, or between Net Revenues Target Performance and Net Revenues Maximum Performance, as applicable.

The Final Award Number for each Participant shall be determined by the Committee on the Determination Date. The Committee shall have no discretion to increase the amount determined on the basis of the objective performance criteria set forth herein but shall retain discretion to reduce such amount.

Committee Determinations

The Committee shall make all determinations necessary to arrive at the Final Award Number for each Tranche for each Participant. Any determination by the Committee pursuant to this Exhibit A will be binding upon each Participant and the Company.

No Fractional Units

In the event the Final Award Number is a number of Units that is not a whole number, then the Final Award Number shall be rounded up to the nearest whole number.

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Jeffrey S. Musser, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Expeditors International of Washington, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019

/S/ JEFFREY S. MUSSER

Jeffrey S. Musser

President, Chief Executive Officer and Director

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Bradley S. Powell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Expeditors International of Washington, Inc.;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019

/S/ BRADLEY S. POWELL

Bradley S. Powell

Senior Vice President and Chief Financial Officer

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Expeditors International of Washington, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jeffrey S. Musser, President, Chief Executive Officer and Director, and Bradley S. Powell, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 7, 2019	/S/ JEFFREY S. MUSSER
August 7, 2019	Jeffrey S. Musser President, Chief Executive Officer and Director

August 7, 2019	/S/ BRADLEY S. POWELL
August 7, 2019	Bradley S. Powell Senior Vice President and Chief Financial Officer