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UTIW > SEC Filings for UTIW > Form 10-Q on 10-Dec-2013All Recent SEC Filings

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Form 10-Q for UTI WORLDWIDE INC


10-Dec-2013

Quarterly Report


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

As used in this Quarterly Report on Form 10-Q, the terms "we," "us," "our," "UTi" and the "company" refer to UTi Worldwide Inc. and its subsidiaries as a consolidated entity, except where it is noted or the context makes clear the reference is only to UTi Worldwide Inc.

Forward-Looking Statements, Uncertainties and Other Factors

Except for historical information contained herein, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which involve certain risks and uncertainties. These forward-looking statements are identified by the use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "projects," "project," "projected," "projections," "plans," "planned," "seeks," "anticipates," "anticipated," "should," "could," "may," "will," "designed to," "foreseeable future," "believe," "believes," "scheduled," and other similar expressions which generally identify forward-looking statements and include all statements not of an historical fact. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying any forward-looking statements. Many important factors may cause the company's results to differ materially from those discussed in any such forward-looking statements, including but not limited to volatility with respect to global trade, particularly as it relates to global airfreight, ocean freight and contract logistics and distribution markets; global economic, political and market conditions and unrest, including those in Africa (excluding North Africa), Asia Pacific and EMENA (which is comprised of Europe, Middle East and North Africa); risks associated with the company's ongoing business transformation initiative (which initiative includes the implementation of our new freight forwarding operating system), including risks of unanticipated difficulties and delays and additional costs and expenses and that we might not achieve the costs savings we anticipate and the risk that we might incur in the future severance and other charges as a result of such initiative in addition to what we currently expect; changes in interest and foreign currency exchange rates; risks that we may be required to record impairment charges to our goodwill or additional increases to our valuation allowance on deferred tax assets; risks associated with the profitability of certain operations and changes in statutory tax rates worldwide, changes in the geographic composition of the company's worldwide taxable income, changes in the company's unrecognized tax positions, and the impact of audit settlements with local tax authorities; volatile fuel costs; transportation capacity, pricing dynamics and the ability of the company to secure space on third party aircraft, ocean vessels and other modes of transportation; material interruptions in transportation services; risks of international operations; risks associated with, and the potential for penalties, fines, costs and expenses the company may incur as a result of, the ongoing publicly announced governmental investigations into the international air freight and air cargo transportation industry and other related investigations and lawsuits; risks of adverse legal judgments or other liabilities not limited by contract or covered by insurance; the company's ability to retain clients; the financial condition of the company's clients; the company's ability to satisfy financial covenants in connection with its credit facilities and note purchase agreement in the future and its ability to obtain waivers with respect to the covenants if needed and/or otherwise amend, refinance, renew or replace its credit facilities, note purchase agreement and other indebtedness on commercially reasonable terms or at all; disruptions caused by epidemics, natural disasters, conflicts, strikes, wars and terrorism; the other risks and uncertainties described herein and in the company's other filings with the Securities and Exchange Commission (SEC); and other factors outside the company's control. Although UTi believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, UTi cannot assure any reader that the results contemplated in forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by UTi or any other person that UTi's objectives or plans will be achieved. Accordingly, investors are cautioned not to place undue reliance on UTi's forward-looking statements. UTi undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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In addition to the risks, uncertainties and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, the risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013 filed with the SEC (together with any amendments thereto and additions and changes thereto contained in our filings with the SEC since the filing of the our Annual Report on Form 10-K, including, without limitation, in our Quarterly Report on Form 10-Q for the quarters ended April 31, 2013 and July 31, 2013) and those set forth above. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.

Overview

We are an international, non-asset-based supply chain services and solutions company that provides airfreight and ocean freight forwarding, contract logistics, customs brokerage, distribution, inbound logistics, truckload brokerage and other supply chain management services. We serve our clients through a worldwide network of freight forwarding offices, and contract logistics and distribution centers.

Freight Forwarding Segment. We do not own or operate aircraft or vessels and, consequently, contract with commercial carriers to arrange for the shipment of cargo. A majority of our freight forwarding business is conducted through non-committed space allocations with carriers. We arrange for, and in many cases provide, pick-up and delivery service between the carrier and the location of the shipper or recipient.

We provide airfreight forwarding services in two principal forms (i) as an indirect carrier, and occasionally (ii) as an authorized agent for airlines. When we act as an indirect carrier with respect to shipments of freight, we typically issue a House Airway Bill (HAWB) upon instruction from our client (the shipper). The HAWB serves as the contract of carriage between us and the shipper. When we tender freight to the airline (the direct carrier), we receive a Master Airway Bill. The Master Airway Bill serves as the contract of carriage between us and the air carrier. Because we provide services across a broad range of clients on commonly traveled trade lanes, when we act as an indirect carrier we typically consolidate individual shipments into larger shipments, optimizing weight and volume combinations for lower-cost shipments on a consolidated basis. We typically act as an indirect carrier with respect to shipments tendered to us by our clients, however, in certain circumstances; we occasionally act as an authorized agent for airlines. In such circumstances, we are not an indirect carrier and do not issue a HAWB, but rather we arrange for the transportation of individual shipments directly with the airline. In these instances, as compensation for arrangement for these shipments, the carriers pay us a management fee.

We provide ocean freight forwarding services in two principal forms (i) as an indirect carrier, sometimes referred to as a Non-Vessel Operating Common Carrier (NVOCC), and (ii) as an ocean freight forwarder nominated by our client (ocean freight forwarding agent). When we act as an NVOCC with respect to shipments of freight, we typically issue a House Ocean Bill of Lading (HOBL) to our client (the shipper). The HOBL serves as the contract of carriage between us and the shipper. When we tender the freight to the ocean carrier (the direct carrier), we receive a contract of carriage known as a Master Ocean Bill of Lading. The Master Ocean Bill of Lading serves as the contract of carriage between us and the ocean carrier. When we act as an ocean freight forwarding agent, we typically do not issue a HOBL but rather we receive management fees for managing the transaction as an agent, including booking and documentation between our client and the underlying carrier (contracted by the client).

Regardless of the forms through which we provide airfreight and ocean freight services, if we provide the client with ancillary services, such as the preparation of export documentation, we receive additional fees.

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As part of our freight forwarding services, we provide customs brokerage services in the United States (U.S.) and most of the other countries in which we operate. Within each country, the rules and regulations vary, along with the levels of expertise required to perform the customs brokerage services. We provide customs brokerage services in connection with a majority of the shipments which we handle as both an air and ocean freight forwarder. We also provide customs brokerage services in connection with shipments forwarded by our competitors. In addition, other companies may provide customs brokerage services in connection with the shipments we forward.

As part of our customs brokerage services, we prepare and file formal documentation required for clearance through customs agencies, obtain customs bonds, facilitate the payment of import duties on behalf of the importer, arrange for payment of collect freight charges, assist with determining and obtaining the best commodity classifications for shipments and perform other related services. We determine our fees for our customs brokerage services based on the volume of business transactions for a particular client, and the type, number and complexity of services provided. Revenues from customs brokerage and related services are recognized upon completion of the services. Other revenue in our freight forwarding segment is primarily comprised of international road freight shipments.

A significant portion of our expenses are variable and adjust to reflect the level of our business activities. Other than purchased transportation costs, staff costs are our single largest variable expense and, other than the incentive compensation component thereof, they are generally less flexible than purchased transportation costs in the near term as we must staff to meet uncertain future demand. Staff costs and other operating expenses in our Freight Forwarding segment are largely driven by total shipment counts rather than volumes stated in kilograms for airfreight or containers for ocean freight, which are most commonly expressed as twenty foot units (TEUs).

Contract Logistics and Distribution Segment. Our contract logistics services primarily relate to value-added warehousing and the subsequent distribution of goods and materials in order to meet clients' inventory needs and production or distribution schedules. Our services include receiving, deconsolidation and decontainerization, sorting, put away, consolidation, assembly, cargo loading and unloading, assembly of freight and protective packaging, warehousing services, order management, and customized distribution and inventory management services. Our outsourced services include inspection services, quality centers and manufacturing support. Our inventory management services include materials sourcing services pursuant to contractual, formalized repackaging programs and materials sourcing agreements. Contract logistics revenues are recognized when the service has been completed in the ordinary course of business.

We also provide a range of distribution, consultation, outsourced management services, planning and optimization services, and other supply chain management services. We receive fees for the other supply chain management services that we perform. Distribution and other contract logistics revenues are recognized when the service has been completed in the ordinary course of business.

Freight Forwarding Operating System. On September 1, 2013, we deployed our global freight forwarding operating system in the United States. As of that date, based on a variety of factors, including but not limited to operational acceptance testing and other operational milestones having been achieved, we considered it ready for its intended use. Amortization expense with respect to the system began effective September 2013, and accordingly, we recorded amortization expense related to the new application of approximately $3.3 million during the third quarter ended October 31, 2013. Going forward, we expect that we will incur additional amortization expense over a seven-year useful life for our global freight forwarding operating system, which we expect will be approximately $23.0 million per year, or $5.8 million per fiscal quarter.

Effect of Foreign Currency Translation on Comparison of Results. Our reporting currency is the U.S. dollar. However, due to our global operations, we conduct and will continue to conduct business in currencies other than our reporting currency. The conversion of these currencies into our reporting currency for reporting purposes is affected by movements in these currencies against the U.S. dollar. A depreciation of these currencies against the U.S. dollar results in lower revenues reported; however, as applicable costs are also converted from these currencies, costs would also be lower. Similarly, the opposite effect occurs if these currencies appreciate against the U.S. dollar. Additionally, the assets and liabilities of our international operations are denominated in each country's local currency. As such, when

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the values of those assets and liabilities are translated into U.S. dollars, foreign currency exchange rates may adversely impact the net carrying value of our assets. These translation effects are included as a component of accumulated other comprehensive income or loss in shareholders' equity. We have historically not attempted to hedge this equity risk and we cannot predict the effects of foreign currency exchange rate fluctuations on our future operating results.

Acquisitions. We did not complete any acquisitions during the three and nine months ended October 31, 2013 and 2012, respectively.

Seasonality. Historically, our results for our operating segments have been subject to seasonal trends when measured on a quarterly basis. Our first and fourth fiscal quarters are traditionally weaker compared with our other fiscal quarters. This trend is dependent on numerous factors, including the markets in which we operate, holiday seasons, climate, economic conditions and many other factors. A substantial portion of our revenue is derived from clients in industries whose shipping patterns are tied closely to consumer demand for certain products or are based on just-in-time production schedules. We cannot accurately predict the timing of these factors, nor can we accurately estimate the impact of any particular factor, and thus, we can give no assurance that these historical seasonal patterns will continue in future periods.

Discussion of Operating Results

The following discussion of our operating results explains material changes in our consolidated results of operations for the three and nine month periods ended October 31, 2013 compared to the three and nine month periods ended October 31, 2012. The discussion should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this quarterly report and our audited consolidated financial statements and notes thereto for the fiscal year ended January 31, 2013, which are included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013, on file with the SEC. Our unaudited consolidated financial statements included in this report have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

Our year-over-year comparative results were, in many cases, materially impacted by foreign currency fluctuations between comparable periods, particularly the year-over-year exchange rate fluctuations between the euro and South African rand (ZAR), on the one hand, and the U.S. dollar, on the other hand. In order to enhance the ability of investors to analyze our performance over comparable periods, we have provided in certain instances comparative information and variances excluding the impact of these foreign currency fluctuations where the effect of foreign currency translation is material to our comparative results. This information is among the information we use as a basis for evaluating our performance on a comparable basis over time, in allocating resources and in planning and forecasting of future periods. This information, however, is not intended to be considered in isolation or as a substitute for, or superior to, the relevant measures prepared and presented in accordance with U.S. GAAP, which are also presented. We calculate the effects of foreign currency fluctuations by subtracting (i) our current-period financial results as reported in local currencies, translated at current-period foreign currency exchange rates, from
(ii) our current-period financial results as reported in local currency, as translated at the prior-period foreign currency exchange rates.

Segment Operating Results. The factors for determining the reportable segments include the manner in which management evaluates the performance of the company combined with the nature of the individual business activities. Our reportable business segments are (i) Freight Forwarding and (ii) Contract Logistics and Distribution. The Freight Forwarding segment includes airfreight forwarding, ocean freight forwarding, customs brokerage and other related services. The Contract Logistics and Distribution segment includes all operations providing contract logistics, distribution and other related services. Certain corporate costs, enterprise-led costs, and various holding company expenses within the group structure are presented separately.

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We believe that for our Freight Forwarding segment, net revenues (a non-GAAP financial measure we use to describe revenues less purchased transportation costs) are a better measure of growth in our freight forwarding business than revenues because our revenues and our purchased transportation costs for our services as an indirect air and ocean carrier include the carriers' charges to us for carriage of the shipment. Our revenues and purchased transportation costs are also impacted by changes in fuel and similar surcharges, which have little relation to the volume or value of our services provided. When we act as an indirect air and ocean carrier, our net revenues are determined by the differential between the rates charged to us by the carrier and the rates we charge our clients plus the fees we receive for our ancillary services. Revenues derived from freight forwarding generally are shared between the points of origin and destination, based on a standard formula. Our revenues in our other capacities include only management fees earned by us and are substantially similar to net revenues for the Freight Forwarding segment in this respect.

For segment reporting purposes by geographic region, airfreight and ocean freight forwarding revenues for the movement of goods is attributed to the country where the shipment originates. Revenues for all other services (including contract logistics and distribution services) are attributed to the country where the services are performed.

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Three months ended October 31, 2013 compared to three months ended October 31, 2012

The following tables and discussion and analysis address the operating results attributable to our reportable segments for the three months ended October 31, 2013 compared to the three months ended October 31, 2012:

Freight Forwarding



                                                                   Freight Forwarding
                                                             Three months ended October 31,
                                                                                                      Change
                                            2013             2012            Change Amount          Percentage
Revenues:
Airfreight forwarding                     $ 342,447        $ 344,757        $        (2,310 )                (1 )%
Ocean freight forwarding                    334,622          323,247                 11,375                   4
Customs brokerage                            37,948           29,655                  8,293                  28
Other                                        63,429           68,290                 (4,861 )                (7 )

Total revenues                              778,446          765,949                 12,497                   2

Purchased transportation costs:
Airfreight forwarding                       263,162          265,280                 (2,118 )                (1 )
Ocean freight forwarding                    279,388          271,604                  7,784                   3
Customs brokerage                             7,317            1,375                  5,942                 432
Other                                        46,796           48,097                 (1,301 )                (3 )

Total purchased transportations costs       596,663          586,356                 10,307                   2

Net revenues:
Airfreight forwarding                        79,285           79,477                   (192 )                -
Ocean freight forwarding                     55,234           51,643                  3,591                   7
Customs brokerage                            30,631           28,280                  2,351                   8
Other                                        16,633           20,193                 (3,560 )               (18 )

Total net revenues                          181,783          179,593                  2,190                   1

Yields:
Airfreight forwarding                          23.2 %           23.1 %
Ocean freight forwarding                       16.5 %           16.0 %
Staff costs                                 108,985          102,476                  6,509                   6
Depreciation                                  4,269            3,858                    411                  11
Amortization of intangible assets             4,404            1,006                  3,398                 338
Severance and other                           6,083              833                  5,250                 630
Other operating expenses                     44,390           46,302                 (1,912 )                (4 )

Operating income                          $  13,652        $  25,118        $       (11,465 )               (46 )%

Airfreight Forwarding. Airfreight forwarding revenues decreased $2.3 million, or 1%, for the three months ended October 31, 2013, compared to the corresponding prior year period; however, when the effects of foreign currency fluctuations are excluded, airfreight forwarding revenues decreased $0.7 million, compared to the corresponding prior year period. When the effects of foreign currency fluctuations are excluded from our results, a decrease in airfreight forwarding revenues of $29.0 million was attributable to a decline in our selling rates compared to the prior year comparable period, reflecting the continued weak airfreight environment compared to the same period in the prior year. Offsetting this decrease were increases of (i) $20.5 million attributable to a 9% increase of airfreight forwarding volumes (measured in terms of total kilograms) for the three months ended October 31, 2013, and (ii) $7.8 million attributable to increased fuel surcharges, compared to the corresponding prior year period. On a sequential basis, airfreight tonnage increased 2% for the third quarter of fiscal 2014 compared to the second quarter of fiscal 2014.

Airfreight forwarding net revenues were largely unchanged for the three months ended October 31, 2013 when compared to the corresponding prior year period; however, when the effects of foreign currency fluctuations are excluded, airfreight forwarding net revenues increased $0.7 million compared to the corresponding prior year period. Changes in net revenues are primarily a function of volume movements and the expansion or contraction in yields, which is the difference between our selling rates and the carrier rates incurred by us. The $0.7 million increase in airfreight forwarding net revenues when calculated on a basis which excludes the effects of foreign currency fluctuations was caused by an

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increase of $6.5 million attributable to the slight increase of airfreight forwarding volumes during the period mentioned above, which increase was partially offset by a $5.8 million decrease attributable to a decline in our selling rates which exceeded the corresponding decline in our carrier rates.

Airfreight yields for the three months ended October 31, 2013 were 23.2%, which was comparable to airfreight yields in the corresponding prior year period. On a sequential basis, airfreight yields of 23.2% for the third quarter of fiscal 2014 were 60 basis points higher when compared to airfreight yields of 22.6% for the second quarter of fiscal 2014.

Ocean Freight Forwarding. Ocean freight forwarding revenues increased $11.4 million, or 4%, for the three months ended October 31, 2013, compared to the corresponding prior year period; however, when the effects of foreign currency fluctuations are excluded, ocean freight forwarding revenues increased $27.0 million, or 8%. When the effects of foreign currency fluctuations are excluded, an increase in ocean freight volumes generated a $33.8 million increase in ocean freight forwarding revenues, which increase was offset by a $6.8 million decrease attributable to lower selling rates caused in part by reduced carrier rates. Ocean freight volumes (which we measure in terms of TEUs) increased 11% during the three months ended October 31, 2013 compared to the corresponding . . .

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