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UTIW > SEC Filings for UTIW > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for UTI WORLDWIDE INC

Form 10-Q for UTI WORLDWIDE INC


6-Jun-2014

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included in this Quarterly Report which address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. In some cases, readers can identify forward-looking statements by the use of forward-looking terms such as "may," "will," "should," "could," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential" "projects," or "continue" and other similar expressions or the negative of these terms or other comparable terms. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Factors that might cause or contribute to a material difference include, but are not limited to, 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, 2014 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 our Annual Report on Form 10-K), those discussed elsewhere in this Quarterly Report, and the following: the Company's ability to maintain sufficient liquidity and capital resources to fund its business; the Company's ability to complete its business transformation initiatives in the timeframe anticipated or at all and achieve the expected benefits; the Company's ability to generate sufficient cash to service its debt and other obligations; delays or inability to pay by the Company's customers; dilution caused by the conversion of the Company's issuance of Convertible Preference Shares and Convertible Senior Notes; volatility with respect to global trade; global economic, political and market conditions and unrest, including those in 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 include unanticipated difficulties, delays, additional costs and expenses as well as potential delays processing trade receivables or billing customers; 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; changes in interest and foreign exchange rates, particularly with respect to the South African rand; 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 investigations by the governments of Brazil and Singapore into the international air freight and air cargo transportation industry; risks of adverse legal judgments or other liabilities not limited by contract or covered by insurance; the Company's ability to retain clients while facing increased competition; the financial condition of the Company's clients; disruptions caused by epidemics, natural disasters, conflicts, strikes, wars and terrorism; the impact of changes in the Company's effective tax rates; the ability to remediate the material weakness in internal controls and maintain effective internal controls over financial reporting; 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. All forward-looking statements included in this Quarterly Report speak only as of the date of this Quarterly Report. All of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligation to update any such forward-looking statements, except as required by law.

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, 2014 filed with the SEC (together with any amendments thereto and additions and changes thereto contained in our filings with the SEC since the

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filing of the our Annual Report on Form 10-K) 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.

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.

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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, which we refer to as 1View or the 1View system, in the United States and, as of that date, we considered it ready for its intended use. The percentage of total global freight forwarding transactions on the system increased to approximately 77% as of April 30, 2014. In certain countries, particularly in the U.S., we experienced invoicing delays following the implementation of the freight forwarding operating system in such country, which delays led to higher than normal receivables and weaker cash collections. We cannot give assurance that we will not face similar issues as we implement the system in additional countries.

Matters Impacting Full Fiscal Year 2015. We believe the macroeconomic and freight environments which negatively impacted our business in fiscal year 2014 will continue to be challenging during the entire 2015 fiscal year. As a result of these and other factors, we expect to continue to incur net losses for the next several quarters.

We expect costs associated with the implementation of our 1View system to continue to negatively impact our operating results for the remainder of fiscal year 2015. This is due, in part, to the fact that in order to achieve the full benefits of our 1View system, the system needs to be implemented in both the country of shipment origin and shipment destination and that the costs associated with implementation are duplicative of existing costs until both origin and destination countries utilize the 1View system.

We currently expect to incur an aggregate of approximately $18.0 million in duplicative and implementation costs during fiscal year 2015 related to our business transformation initiatives. This does not include severance costs. We expect severance and other costs to be approximately $18.0 million to $20.0 million in fiscal year 2015. Our actual costs in fiscal 2015 may exceed our estimated costs.

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

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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 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 months ended April 30, 2014 and 2013, 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 primarily due to lower volumes during those periods when compared to our other quarters, however, this 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.

Fiscal 2015 Refinancing. As previously disclosed, in March 2014 we undertook the following steps to address the liquidity and covenant challenges which we were then experiencing (we refer to these steps collectively as the Fiscal 2015 Refinancing). These steps included, but were not limited to:

We completed a private offering of our $400.0 million principal amount of convertible senior notes due 2019 (which we refer to as the 2019 Notes). After deducting fees and expenses, we received net proceeds from the offering of the 2019 Notes of $386.1 million.

We completed a private offering of our Series A 7.0% Convertible Preference Shares (the Convertible Preference Shares) to an affiliate of our largest shareholder, P2 Capital, in the aggregate principal amount of $175.0 million. We expect that dividends on the Convertible Preference Shares will be paid in kind quarterly starting on June 1, 2014 until March 1, 2017. The dividend rate is 7.0% unless we pay cash dividends on the Convertible Preference Shares in the limited circumstances provided by their terms, in which case the dividend rate is 8.0%. We currently expect to pay dividends in-kind on the Convertible Preference Shares.

Certain of our U.S. and Canadian subsidiaries entered into a credit agreement with Citibank, N.A., Citigroup Global Markets Inc., Morgan Stanley Senior Funding, Inc. and Bank of the West for a new senior secured asset-based revolving credit facility (CitiBank Credit Facility) that provides commitments of up to $150.0 million, as more fully described below.

We (i) repaid all of the $200.0 million aggregate principal amount of our private placement notes which we issued on January 25, 2013 (the 2013 Notes) and paid to the holders thereof a make-whole payment with respect to such prepayment in the amount of approximately $20.8 million,
(ii) refinanced indebtedness which was then outstanding under certain of our previously outstanding credit facilities and we terminated those credit facilities, and (iii) in connection with the termination of certain facilities, provided cash collateral of approximately $50.0 million for outstanding letters of credit and bank guarantees thereunder.

In connection with the Fiscal 2015 Refinancing, the 2011 Royal Bank of Scotland (2011 RBS Facility) and certain other facilities were terminated in March 2014 and we provided cash collateral in the amount of $50.0 million to secure the letters of credit and bank guarantees which were outstanding thereunder and which remain outstanding as of April 30, 2014. The usage of such cash is restricted pursuant to the agreements.

In connection with the prepayment of the 2013 Notes and the termination of the various credit facilities, in the first quarter of fiscal year 2015 we incurred a non-cash charge of $1.0 million related to unamortized debt issuance costs.

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Discussion of Operating Results

The following discussion of our operating results explains material changes in our consolidated results of operations for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. 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, 2014, which are included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014, 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.

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 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 April 30, 2014 compared to three months ended April 30, 2013

The following tables and discussion and analysis address the operating results attributable to our reportable segments for the three months ended April 30, 2014 compared to the three months ended April 30, 2013:

Freight Forwarding



                                                                    Freight Forwarding
                                                               Three months ended April 30,
                                           2014            2013           Change Amount         Change Percentage
Revenues:
Airfreight forwarding                    $ 321,401       $ 323,829       $        (2,428 )                      (1 )%
Ocean freight forwarding                   263,132         303,778               (40,646 )                     (13 )
Customs brokerage                           44,327          29,818                14,509                        49
Other                                       55,010          62,091                (7,081 )                     (11 )

Total revenues                             683,870         719,516               (35,646 )                      (5 )

Purchased transportation costs:
Airfreight forwarding                      244,665         250,472                (5,807 )                      (2 )
Ocean freight forwarding                   217,360         256,975               (39,615 )                     (15 )
Customs brokerage                           11,008           1,342                 9,666                       720
Other                                       40,792          41,174                  (382 )                      (1 )

Total purchased transportations costs      513,825         549,963               (36,138 )                      (7 )

Net revenues:
Airfreight forwarding                       76,736          73,357                 3,379                         5
Ocean freight forwarding                    45,772          46,803                (1,031 )                      (2 )
Customs brokerage                           33,319          28,476                 4,843                        17
Other                                       14,218          20,917                (6,699 )                     (32 )

Total net revenues                         170,045         169,553                   492                        -

Yields:
Airfreight forwarding                         23.9 %          22.7 %
Ocean freight forwarding                      17.4 %          15.4 %

Staff costs                                109,519         105,068                 4,451                         4
Depreciation                                 4,429           4,283                   146                         3
Amortization of intangible assets            6,051           1,120                 4,931                       440
Severance and other                            568             236                   332                       141
Other operating expenses                    47,247          46,048                 1,199                         3

Operating income                         $   2,231       $  12,798       $       (10,566 )                     (83 )%
. . .
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