| • FORM 10-Q • CONSULTING AGREEMENT • NON-EMPLOYEE DIRECTORS SHARE INCENTIVE PLAN, AS AMENDED • NON-EMPLOYEE DIRECTOR COMPENSATION POLICY, AS AMENDED • 2009 LONG-TERM INCENTIVE PLAN, AS AMENDED • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 • 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended July 31, 2012 Or
For the transition period from to 000-31869 (Commission File Number)
UTi Worldwide Inc. (Exact name of Registrant as Specified in its Charter)
(Addresses of Principal Executive Offices) 562.552.9400 (Registrant’s Telephone Number, Including Area Code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x At September 3, 2012, the number of shares outstanding of the issuer’s ordinary shares was 103,747,229.
Table of ContentsReport on Form 10-Q For the Quarter Ended July 31, 2012 Table of Contents
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UTi Worldwide Inc. Consolidated Statements of Income For the three and six months ended July 31, 2012 and 2011 (in thousands, except share and per share amounts)
See accompanying notes to the consolidated financial statements.
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Table of ContentsUTi Worldwide Inc. Consolidated Statements of Comprehensive (Loss)/Income For the three and six months ended July 31, 2012 and 2011 (in thousands)
See accompanying notes to the consolidated financial statements.
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Table of ContentsUTi Worldwide Inc. Consolidated Balance Sheets As of July 31, 2012 and January 31, 2012 (in thousands)
See accompanying notes to the consolidated financial statements.
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Table of ContentsUTi Worldwide Inc. Consolidated Statements of Cash Flows For the six months ended July 31, 2012 and 2011 (in thousands)
See accompanying notes to the consolidated financial statements.
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Table of ContentsUTi Worldwide Inc. Notes to the Consolidated Financial Statements For the three and six months ended July 31, 2012 and 2011 (Unaudited)
Basis of Presentation. The accompanying unaudited consolidated financial statements of UTi Worldwide Inc. and its subsidiaries (the Company, we, us, or UTi) contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated balance sheets as of July 31, 2012 and January 31, 2012, and the consolidated statements of income and comprehensive income for the three and six months ended July 31, 2012 and 2011 and the consolidated statements of cash flows for the six months ended July 31, 2012 and 2011. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for the three and six months ended July 31, 2012 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending January 31, 2013 or any other future periods. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012. All amounts in the notes to the consolidated financial statements are presented in thousands except for share and per share data. Income Taxes. Under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270, Interim Reporting, and ASC 740, Income Taxes, the Company is required to adjust its effective tax rate for each quarter to be consistent with its estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of ASC 270 and ASC 740 can result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. The Company records a provision for estimated additional tax and interest and penalties that may result from tax authorities disputing uncertain tax positions taken at the largest amount that is greater than 50% likely of being realized. The Company recognizes accrued interest and penalties related to uncertain tax positions in interest and other expense, respectively. For further information, see Note 12, “Uncertain Tax Positions.” Segment Reporting. The Company’s 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. Foreign Currency Translation. Included in other income, net, are net losses of $272 and $300 on foreign exchange for the three and six months ended July 31, 2012, respectively. Included in other income, net, are net gains of $223 and $399 on foreign exchange for the three and six months ended July 31, 2011, respectively. Concentration of Credit Risks and Other. The Company maintains its primary cash accounts with established banking institutions around the world. The Company estimates that approximately $248,321 of these deposits were not insured by the Federal Deposit Insurance Corporation (FDIC) or similar entities outside of the United States (U.S.) as of July 31, 2012.
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Table of ContentsPharma Property Development Agreements. During the fiscal year ended January 31, 2012, the Company entered into various agreements providing for the development of a logistics facility to be used in the Company’s pharmaceutical distribution business in South Africa. In addition to a property development agreement, the Company signed an agreement to purchase the property at the conclusion of the development at the project’s total cost, which includes interest on the financing for the project, subject to certain conditions being met, including among other items, the property having been registerable for transfer and having been ready for beneficial occupation as described under the development agreement. In addition to the other documents for the transaction, the Company also entered into a lease agreement for the property and facility following the conclusion of its development, should the property not be saleable to the Company at that time. Together these agreements are referred to as the Pharma Property Development Agreements. Based on these agreements, the Company has recorded the costs incurred by the developer as property, plant and equipment and a corresponding long term payable to the developer. As of July 31, 2012 and January 31, 2012, included in both property, plant and equipment and long-term borrowings, were $56,451 and $37,351, respectively, under this arrangement. The Company currently estimates that its total capital commitments under this arrangement, including land, warehouse-related equipment and capitalized interest will be approximately $69,000. The property development activities are expected to be conducted into the Company’s fourth quarter of fiscal year 2013. Fair Values of Financial Instruments. The estimated fair values of financial instruments have been determined using available market information and other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and estimation methodologies may be material to the estimated fair value amounts. The Company’s principal financial instruments are cash and cash equivalents, trade receivables, bank lines of credit, long-term deposits, short-term borrowings, trade payables and other accrued liabilities, long-term borrowings, forward contracts and other derivative instruments. With the exception of the Company’s senior unsecured guaranteed notes, the carrying values of these financial instruments approximate fair values either because of the short maturities of these instruments, or because the interest rates are based upon variable reference rates. As discussed further in Note 11, “Borrowings”, on July 9, 2009, the Company issued $55,000 of senior unsecured guaranteed notes bearing an interest rate of 8.06%. As of July 31, 2012, the fair value of these notes was $48,565, compared to book value of $45,833. In addition, as discussed further in Note 11, “Borrowings”, on June 24, 2011, the Company issued $150,000 of senior unsecured guaranteed notes bearing an interest rate of 3.67% per annum. As of July 31, 2012, the fair value of these notes was $154,230, compared to a book value of $150,000 for this period. Recent Accounting Pronouncements Standards Issued But Not Yet Effective. New pronouncements issued but not effective until after July 31, 2012 are not expected to have a material impact on the Company’s consolidated financial statements. Proposed Amendments to Current Accounting Standards. Updates to existing accounting standards and exposure drafts, such as exposure drafts related to revenue recognition, lease accounting, loss contingencies, and fair value measurements, that have been issued or proposed by FASB or other standards setting bodies that do not require adoption until a future date, are being evaluated by the Company to determine whether adoption will have a material impact on the Company’s consolidated financial statements.
The Company did not complete any acquisitions during the six months ended July 31, 2012. All previously acquired businesses were primarily engaged in providing logistics management, including international air and ocean freight forwarding, customs brokerage, contract logistics services and transportation management services. The results of acquired businesses have been included in the Company’s consolidated financial statements from the effective dates of acquisition.
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Earnings per share are calculated as follows:
Weighted-average diluted shares outstanding exclude 3,473,595 and 3,041,818 shares for the three and six months ended July 31, 2012, respectively, and exclude 2,096,076 and 1,127,599 shares for the three and six months ended July 31, 2011, respectively, because such shares either represent stock awards having an exercise price greater than the average market price of the Company’s common stock during the relevant period, or do not result in incremental shares when applying the treasury stock method under ASC 260, Earnings per Share.
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Certain information regarding changes in equity and non-controlling interests are as follows:
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Certain information regarding the Company’s operations by segment is summarized as follows:
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For reporting purposes by segment and 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 services, are attributed to the country where the services are performed. The following table shows the revenues attributable to the Company’s geographic regions, EMENA (which is comprised of Europe, Middle East and North Africa), the Americas, Asia Pacific and Africa (excluding North Africa):
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The following table shows long-lived assets attributable to the Company’s geographic regions:
The following table shows long-lived assets attributable to specific countries:
Corporate assets totaling $29,078 and $27,920 as of July 31, 2012 and January 31, 2012, respectively, have been excluded from the long-lived assets tables above. The following table shows revenues attributable to specific countries:
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Table of ContentsThe following table shows revenues and purchased transportation costs attributable to the Company’s principal services:
Goodwill. The changes in the carrying amount of goodwill by reportable segment for the six months ended July 31, 2012 are as follows:
In accordance with ASC 350, Intangibles – Goodwill and Other, the Company reviews goodwill and other intangible assets for impairment annually at the end of the second quarter of each fiscal year, or more often if events or circumstances indicate that impairment may have occurred. No impairment was recognized during the six months ended July 31, 2012. The Company’s accumulated goodwill impairment charge since its adoption of ASC 350 was $100,494 at July 31, 2012 and January 31, 2012, all of which is included in the Company’s Contract Logistics and Distribution segment.
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Table of ContentsOther Intangible Assets. Amortizable intangible assets at July 31, 2012 and January 31, 2012 relate primarily to amounts incurred for internally-developed software by the Company for internal use and the estimated fair values of client relationships acquired with respect to certain acquisitions. The carrying values of amortizable intangible assets at July 31, 2012 and January 31, 2012 were as follows:
The following table shows the expected amortization expense for these intangible assets for each of the next five fiscal years ending January 31:
In addition to the amortizable intangible assets, the Company also had $912 and $913 of intangible assets not subject to amortization at July 31, 2012 and January 31, 2012, respectively, related primarily to acquired trade names.
The following table shows the supplemental cash flow information and supplemental non-cash investing and financing activities:
UTi is a holding company which relies on dividends or advances from its subsidiaries to meet its financial obligations and to pay dividends on its ordinary shares. The ability of UTi’s subsidiaries to pay dividends to the Company and UTi’s ability to receive distributions is subject to applicable local laws and other restrictions including, but not limited to, applicable tax laws and limitations contained in some of the Company’s bank credit facilities and in the note purchase agreements for the Company’s outstanding senior notes. Such laws and restrictions could limit the payment of dividends and distributions to the Company which would restrict UTi’s ability to continue operations. In general, UTi’s subsidiaries cannot pay dividends in excess of their retained earnings and most countries require that the subsidiaries pay a distribution tax on all dividends paid. In addition, the amount of dividends that UTi’s subsidiaries could declare may be limited in certain countries by exchange controls. Total net assets which may not be transferred to the Company in the form of loans, advances, or cash dividends by the Company’s subsidiaries without the consent of a third party, were less than 10% of the Company’s consolidated total net assets as of the end of the most recent fiscal quarter.
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In connection with ASC 450, Contingencies, the Company has not accrued for material loss contingencies relating to the investigations and legal proceedings disclosed below because we believe that, although unfavorable outcomes in the investigations or proceedings may be reasonably possible, they are not considered by our management to be probable and reasonably estimable. From time to time, claims are made against the Company or the Company may make claims against others, including in the ordinary course of our business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting the Company from engaging in certain activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s consolidated results of operations for that period or future periods. As of the date of these consolidated financial statements, the Company is not a party to any material litigation except as described below. Industry-Wide Anti-Trust Investigations. In 2007, in connection with the U.S. Department of Justice’s (U.S. DOJ) investigation into the pricing practices in the international freight forwarding industry, the Company responded to a grand jury subpoena requesting documents and the U.S. DOJ executed a search warrant on the Company’s offices in Long Beach, California, and served one of the Company’s subsidiaries with a subpoena requesting numerous documents and other materials. In addition to its previous request for documents regarding air freight forwarding, the U.S. DOJ also requested that the Company produce various documents regarding ocean freight forwarding. The Company believes it is a subject of the U.S. DOJ investigation. On March 28, 2012, the Company was notified by the European Commission (EC) that it had adopted a decision against the Company and two of its subsidiaries relating to alleged anti-competitive behavior in the market for freight forwarding services in the European Union/European Economic Area. The decision of the EC imposes a fine of Euro 3,068 (or approximately $3,764 at July 31, 2012) against the Company. The Company believes that neither the Company nor its subsidiaries violated European competition rules. In June 2012, the Company lodged an appeal against the decision and the amount of the fine before the European Union’s General Court. In May 2009, the Company learned that the Brazilian Ministry of Justice was investigating possible alleged cartel activity in the international air and ocean freight forwarding market. On August 6, 2010, the Company received notice of an administrative proceeding from the Brazilian Ministry of Justice. The administrative proceeding initiates a proceeding against the Company, its Brazilian subsidiary and two of its employees, among many other forwarders and their employees, alleging possible anti-competitive behavior contrary to Brazilian rules on competition. The Company intends to respond to this proceeding within 30 days after the last defendant in this global proceeding has been notified, which has not yet occurred. From time to time the Company receives additional requests for information, documents and interviews from various governmental agencies with respect to these investigations, and the Company has provided, and expects to continue to provide in the future, further responses as a result of such requests. The Company (along with several other global logistics providers) has been named as a defendant in a federal antitrust class action lawsuit filed on January 3, 2008 in the U.S. District Court of the Eastern District of New York (Precision Associates, Inc., et. al. v. Panalpina World Transport (Holding) Ltd., et. al.). This lawsuit alleges that the defendants engaged in various forms of anti-competitive practices and seeks an unspecified amount of treble monetary damages and injunctive relief under U.S. antitrust laws.
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Table of ContentsThe Company has incurred, and may in the future incur, significant legal fees and other costs in connection with these governmental investigations and lawsuits. If the U.S. DOJ, or any other regulatory body concludes that the Company or any of its subsidiaries have engaged in anti-competitive behavior or if the Company does not prevail in related civil litigation, the Company could incur significant additional legal fees and other costs and penalties, which could include substantial fines, penalties and/or criminal sanctions against us and/or certain of our current or former officers, directors and employees, and the Company could be liable for damages. Any of these fees, costs, penalties, damages, sanctions or liabilities could have a material adverse effect on the Company and its financial results. As of the date of this filing, except for the decision and fine imposed by the EC, an estimate of any possible loss or range of loss cannot be made. In the case of the decision and fine imposed by the EC, the possible loss ranges from no loss, in the event of a successful appeal by the Company, to the full amount of the fine. South African Revenue Service Matter. The Company was previously involved in a dispute with the South African Revenue Service (SARS) with respect to the Company’s use of “owner drivers” for the collection and delivery of cargo in South Africa. SARS claimed that the Company was liable for employee taxes in respect of these owner drivers. The Company believed that the owner drivers were not “employees” and that accordingly there was no tax liability in respect of these owner drivers in terms of the South African income tax act. During the fourth quarter ended January 31, 2012, in anticipation of a settlement, the Company recorded a charge for $3,106 relating to this matter. No additional charges are expected in connection with this matter. In April 2012, the Company signed a formal settlement agreement with SARS relating to this matter for all years through 2012, and settled the matter with a cash payment for an amount approximating the accrual. Per Transport Litigation. The Company is involved in litigation in Italy (in various cases filed in 2000 in the Court of Milan) and England (in a case filed on April 13, 2000 in the High Court of Justice, London) with the former ultimate owner of Per Transport SpA and related entities, in connection with its April 1998 acquisition of Per Transport SpA and its subsequent termination of the employment services of the former ultimate owner as a consultant. The suits seek monetary damages, including compensation for termination of the former ultimate owner’s consulting agreement. The Company has brought counter-claims for monetary damages in relation to warranty claims under the purchase agreement. The maximum total of all such actual and potential claims, albeit duplicated in several proceedings, is estimated to be approximately $11,650 based on exchange rates as of July 31, 2012. In connection with the Per Transport litigation, legal proceedings have also been brought against a former director and officer of the Company and a current employee of the Company. The Company has agreed to indemnify these individuals in connection with these proceedings.
The Company sponsors defined benefit plans for eligible employees in certain countries. Under these plans, employees are entitled to retirement benefits based on years of service and the employee’s final average salary on attainment of qualifying retirement age. Net periodic benefit cost for the Company’s defined benefit plans consists of:
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Table of ContentsFor the three months ended July 31, 2012 and 2011, the Company contributed approximately $141 and $191, respectively, to its defined benefit plans. For the six months ended July 31, 2012 and 2011, the Company contributed approximately $715 and $875, respectively, to its defined benefit plans.
On June 8, 2009, the Company’s shareholders approved the 2009 Long Term Incentive Plan (2009 LTIP). The plan provides for the issuance of a variety of awards, including stock options, share appreciation rights (sometimes referred to as SARs), restricted shares, restricted share units (RSUs), deferred share units and performance awards. A total of 6,250,000 shares were originally reserved for issuance under the 2009 LTIP, subject to adjustments as provided for in the plan. In addition to the 2009 LTIP, at July 31, 2012, the Company had stock based compensation awards outstanding under the following plans: the 2004 Long Term Incentive Plan (2004 LTIP), the 2000 Stock Option Plan, the 2000 Employee Share Purchase Plan, the 2004 Non-Employee Directors Share Incentive Plan (2004 Directors Incentive Plan) and the Non-Employee Directors Share Option Plan (Directors Option Plan). Under the 2004 Directors Incentive Plan, the Company may grant non-qualified stock options, share appreciation rights, restricted shares, RSUs and deferred share units. Since the adoption of the 2009 LTIP, no additional awards may be made pursuant to the 2004 LTIP. In addition, the Company no longer grants awards under the 2000 Stock Option Plan and the Directors Option Plan. Vesting of these awards occurs over different periods, depending on the terms of the individual award, however expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period. Under the 2000 Employee Share Purchase Plan (ESPP), eligible employees may purchase shares of the Company’s stock at the end of an offering period through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation subject to an annual maximum of $25. Commencing February 1, 2011, the purchase price under the plan was set at 100% of the fair market value of the Company’s ordinary shares on the last day of each offering period. Employee Share-Based Compensation Activity A summary of share-based compensation activity applicable to employee shared-based plans for the six months ended July 31, 2012 are as follows:
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Non-Employee Share-Based Compensation Activity. A summary of share-based compensation activity applicable to the non-employee director share-based plans for the six months ended July 31, 2012 is as follows:
In connection with its share-based compensation plans, the Company recorded approximately $3,481 and $3,670 of share-based compensation expense for the three months ended July 31, 2012 and 2011, respectively and approximately $7,050 and $7,368 of share-based compensation expense for the six months ended July 31, 2012 and 2011, respectively. As of July 31, 2012, the Company had approximately $28,071 of total unrecognized compensation related to share-based compensation to be expensed through July 2017.
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Bank Lines of Credit. The Company utilizes a number of financial institutions to provide it with borrowings and letters of credit, guarantees and working capital facilities. Certain of these credit facilities are used for working capital, for issuing letters of credit to support the working capital and operational needs of various subsidiaries and to support various customs bonds and guarantees and for general corporate purposes. In other cases, customs bonds and guarantees are issued directly by various financial institutions. In some cases, the use of a particular credit facility is restricted to the country in which it originates. These particular credit facilities may restrict distributions by the subsidiary operating in such country. The following table presents information about the facility limits, aggregate amount of borrowings outstanding as well as availability for borrowings under various bank lines, letters of credit and other credit facilities as of July 31, 2012:
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Table of ContentsThe 2011 RBS Facility provides for an aggregate availability of up to $50,000 in letters of credit and matures on June 24, 2013. The 2011 Nedbank Facility provides for a $40,000 committed standby letter of credit facility and a $35,000 cash draw facility and matures on June 24, 2016 for letter of credit items and no sooner than June 2014 for cash draw items. The 2011 Bank of the West Facility provides for up to $50,000 availability (subject to a $30,000 sublimit for certain letters of credit) for both cash withdrawals and letters of credit and matures on June 24, 2014. The 2011 RBS Facility, the 2011 Nedbank Facility and the 2011 Bank of the West Facility are referred to, collectively, as the “2011 Credit Facilities”. The Company’s obligations under the 2011 Credit Facilities are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). 2009 South African Facilities Agreement. On July 9, 2009, certain of the Company’s subsidiaries operating in South Africa entered into a South African credit facility pursuant to an agreement (as amended, the “South African Facilities Agreement”) with Nedbank Limited, acting through its Corporate Banking Division, which agreement was amended by a First Addendum to Facilities Agreement dated April 4, 2012. The South African Facilities Agreement provides for a ZAR 525,000 revolving credit facility, which is comprised of a ZAR 300,000 working capital facility and a ZAR 225,000 letter of credit, guarantee and forward exchange contract facility. The South African Facilities Agreement also provides the Company’s South African operations with a ZAR 250,000 revolving asset-based finance facility, which includes a capital lease line. The obligations of the Company’s subsidiaries under the South African Facilities Agreement are guaranteed by selected subsidiaries registered in South Africa. In addition, certain of the Company’s operating assets in South Africa, and the rights and interests of the South African branch of one of our subsidiaries in various intercompany loans made to a South African subsidiary and to a South African partnership, are pledged as collateral under the South African Facilities Agreement. The South African Facilities Agreement provides the Company with the option to request that the lenders increase their commitments under the revolving credit facility and the revolving asset-based finance facility in an aggregate amount up to ZAR 225,000 subject to the approval of such lenders and the satisfaction of certain conditions precedent. The South African Facilities Agreement matures in July 2016. In addition to the facilities provided under the 2011 Credit Facilities and the South African Facilities Agreement, the Company utilizes a number of other financial institutions to provide it with incremental letters of credit, guarantees and working capital capacity. In some cases the use of particular facilities is restricted to the country in which they originated and in some cases the particular facilities may restrict distributions by the subsidiary operating in the country. Short-term Borrowings. The Company also has a number of short-term borrowings issued by various parties, not covered under the facilities listed above. The total of such bank borrowings at July 31, 2012 and January 31, 2012 was $967 and $1,019, respectively. Long-term Borrowings. The following table presents information about the aggregate amount of the Company’s indebtedness pursuant to its outstanding senior unsecured guaranteed notes as of July 31, 2012:
On July 9, 2009, the Company issued $55,000 of senior unsecured guaranteed notes (the “2009 Notes”). The 2009 Notes bear interest at a rate of 8.06% per annum, payable semi-annually on the 9th
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Table of Contentsday of February and August. The Company is required to repay approximately $9,167, or such lesser principal amount as then outstanding, on August 9, 2012 and each February 9th and August 9th thereafter up to and including August 9, 2014. The 2009 Notes mature on August 9, 2014. On June 24, 2011, the Company issued $150,000 (principal amount of senior unsecured guaranteed notes (the “2011 Notes”). The 2011 Notes bear interest at a rate of 3.67% per annum, payable semi-annually, on the 24th day of February and August of each year up to and including August 24, 2018. Pursuant to the 2011 Notes, principal payments of $9,000 each are due on February 24th and August 24th of 2014, principal payments of $19,000 each are due on February 24th and August 24th of 2015, 2016 and 2017, and principal payments of $9,000 each are due on February 24th and August 24th of 2018. The 2011 Notes have a maturity date of August 24, 2018. The 2009 Notes and the 2011 Notes are guaranteed by the Subsidiary Guarantors. Pharma Property Development Agreements. In connection with the Pharma Property Development Agreements, as of July 31, 2012, the Company has included $56,451 in long-term borrowings as a result of this arrangement; $9,019 of such borrowings bear interest at a rate per annum equal to Nedbank’s publicly quoted prime rate. The remainder of the borrowings bear interest at a rate per annum equal to Nedbank’s publicly quoted prime rate minus 0.8%. The Company has received a commitment for long-term replacement financing upon the completion of the development and the Company’s expected purchase of the property, and is continuing to evaluate additional options for replacement financing. The Company intends to ultimately refinance the borrowings on a long-term basis.
The Company recognizes interest and penalties related to uncertain tax positions as interest and other expense, respectively. During the quarter ended July 31, 2012, the Company reached a settlement with a state tax authority and as a result reduced its liabilities for uncertain tax positions by $329. The Company further reduced its liabilities for uncertain tax positions by $333 due to expiration of the statute of limitations. It is reasonably possible that the total amounts of unrecognized tax benefits as of July 31, 2012 will decrease by up to $2,032 during the next twelve months due to the expiration of the statute of limitations in various jurisdictions. This reduction would have a favorable impact on the Company’s provision for income taxes.
Fair Value Measurements on Recurring Basis. The Company measures the fair value of certain assets and liabilities on a recurring basis based upon a fair value hierarchy in accordance with ASC 820, Fair Value Measurements and Disclosures, as follows:
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Table of ContentsThe following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2012 and January 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
The Company’s forward exchange contracts are over-the-counter derivatives, which are valued using pricing models that rely on currency exchange rates, and therefore, are classified as Level 2. The following table presents the changes in Level 3 instruments measured on a recurring basis for the three months ended July 31, 2012 and 2011:
The following table presents the changes in Level 3 instruments measured on a recurring basis for the six months ended July 31, 2012 and 2011:
Fair Value Measurements on Non-Recurring Basis. Certain assets and liabilities are not measured at fair value, but are recognized and disclosed at fair value on a non-recurring basis. During the six months ended July 31, 2012 and 2011, such measurements of fair value related primarily to the identifiable assets and liabilities with respect to business combinations and to the evaluation of impairment which involves comparing the fair value of the Company’s reporting units to their recorded value, including goodwill and intangible assets.
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Table of ContentsFor business combinations, the Company uses inputs other than quoted prices that are observable, such as interest rates, cost of capital and market comparable royalty rates, which are applied to income and market valuation approaches, and therefore, are classified as Level 2. In the evaluation of impairment, the Company uses a Discounted Cash Flow (DCF) model, corroborated by comparative market multiples, where appropriate, to determine the current fair value of its reporting units. A number of significant assumptions and estimates that use unobservable inputs are involved in the application of the DCF model to forecast operating cash flows, and therefore, are classified as Level 3.
The Company generally utilizes forward exchange contracts to reduce its exposure to foreign currency denominated assets and liabilities. Foreign exchange contracts purchased are primarily denominated in the currencies of the Company’s principal markets. The Company does not enter into derivative contracts for speculative purposes. As of July 31, 2012, the Company had contracted to sell the following amounts under forward exchange contracts with maturities within 60 days of July 31, 2012: $7,565 in Euro; $46,162 in U.S. dollars; $1,240 in British Pound Sterling; and, $2,256 in other currencies. As of July 31, 2011, the Company had contracted to sell the following amounts under forward exchange contracts with maturities within 60 days of July 31, 2011: $8,884 in Euro; $3,953 in U.S. dollars; $1,109 in British Pound Sterling; and, $1,852 in other currencies. Changes in the fair value of forward exchange contracts are recorded within purchased transportation costs in the consolidated statements of income. The Company does not designate foreign currency derivatives as hedges. Foreign currency derivative assets included in trade receivables were $245 and $415 at July 31, 2012 and January 31, 2012, respectively. Foreign currency liability derivatives included in trade payables and other accrued liabilities were $158 and $646 at July 31, 2012 and January 31, 2012, respectively. The Company recorded net gains on foreign currency derivatives of $29 and $87 for the three and six months ended July 31, 2012, respectively. The Company recorded net losses on foreign currency derivatives of $109 and net gains on foreign currency derivatives of $94 for the three and six months ended July 31, 2011, respectively.
During the three and six months ended July 31, 2012, the Company incurred severance and other costs of $2,124 and $3,824, respectively. During the three and six months ended July 31, 2011, the Company incurred severance and other costs of $3,483 and $8,332, respectively. These charges were not incurred pursuant to a plan of termination as defined in ASC 420, Exit or Disposal Cost Obligations or ASC 715, Compensation – Retirement Benefits. Severance. During the three months ended July 31, 2012, the Company incurred charges for employee severance costs of $1,509, $283 and $332 within the Freight Forwarding segment, the Contract Logistics and Distribution segment, and at corporate, respectively. These charges for the three months ended July 31, 2011 were $2,124, $612 and $747 within the Freight Forwarding segment, the Contract Logistics and Distribution segment, and at corporate, respectively. During the six months ended July 31, 2012, the Company incurred charges for employee severance costs of $2,176, $1,109 and $539 within the Freight Forwarding segment, the Contract Logistics and Distribution segment, and at corporate, respectively. These charges for the six months ended July 31, 2011 were $4,097, $1,574 and $747 within the Freight Forwarding segment, the Contract Logistics and Distribution segment, and at corporate, respectively.
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Table of ContentsCharges incurred for employee severance for the three and six months ended July 31, 2012 and 2011, were primarily related to certain business transformation initiatives, which include redefining business processes, developing the Company’s next generation freight forwarding operating system and rationalizing business segments to a consistent organizational structure on a worldwide basis. Although the Company has not adopted a formal plan of termination pursuant to ASC 420 or ASC 715, the Company expects to incur severance costs related to these transformation activities through the fiscal year ending January 31, 2015. The amount, timing and nature of such costs are not yet determinable and will likely not be determinable until the later stages of the transformation effort. Facility exit costs. Amounts charged for facility exit costs for the six months ended July 31, 2011 were $1,914. These charges were incurred in the Company’s Contract Logistics and Distribution segment in connection with the closure of certain underutilized contract logistics facilities in Europe. No facility exit costs were incurred by the Company’s Freight Forwarding segment or corporate for the three and six months ended July 31, 2012.
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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; global economic, political and market conditions, including those in Africa, Asia Pacific and EMENA (which is comprised of Europe, Middle East and North Africa); risks associated with the company’s business transformation initiative, which include unanticipated difficulties and delays and additional costs and expenses; risks that we may be required to record impairment charges to our goodwill; 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 foreign exchange rates; 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; the financial condition of the company’s clients; disruptions caused by epidemics, natural disasters, conflicts, 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. 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 the company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012 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 company’s Annual Report on Form 10-K/A, including, without limitation, in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2012), 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.
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Table of ContentsOverview 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. The company serves its clients through a worldwide network of freight forwarding offices, and contract logistics and distribution centers. 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 are less flexible than purchased transportation costs in the near term as we must staff to meet uncertain future demand. Staff costs and other operating costs 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). Freight Forwarding Segment. As a freight forwarder, we conduct business as an indirect carrier for our clients or occasionally as an authorized agent for airlines and ocean carriers. We typically act as an indirect carrier with respect to shipments of freight unless the volume of freight to be shipped over a particular route is not large enough to warrant consolidating such freight with other shipments. When we act as an indirect carrier with respect to shipments of freight, we typically issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to our clients as the contract of carriage. When we tender the freight to the airline or ocean carrier (the 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. 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. When we act as an authorized agent for the airline or ocean carrier, we are not an indirect carrier and do not issue an HAWB or HOBL, but rather we arrange for the transportation of individual shipments directly with the airline or ocean carrier. In these instances, as compensation for arranging for the shipments, the carriers pay us a commission. If we provide the client with ancillary services, such as the preparation of export documentation, we receive an additional fee. As part of our freight forwarding services, we provide customs brokerage services in the U.S. and most of the other countries in which we operate. Within each country, the rules and regulations vary, along with the level of expertise that is 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 which 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 revenues in our freight forwarding segment are primarily comprised of international road freight shipments. 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
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Table of Contentsservices 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 within our company between the points of origin and destination, based on a standard formula. Our revenues in our other capacities includes only commissions and fees earned by us and are substantially similar to net revenues for the Freight Forwarding segment in this respect. 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, 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. Multi-year Business Transformation Initiative. We have undertaken a multi-year business transformation initiative to establish a single set of global processes for our freight forwarding business and our global financial management. We anticipate current and future capital expenditures related to the development of software in the aggregate of approximately $120.0 million, in connection with these initiatives, the majority of which is nearing completion. We expect to incur depreciation expense and amortization expense over a five-year to seven-year useful life, beginning once the applications are considered substantially ready for their intended use. We expect these applications to be substantially ready for their intended use during the second half of fiscal 2013 or the first half of our fiscal 2014, depending upon a variety of circumstances, including but not limited to operational acceptance testing and other operational milestones having been achieved. 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 would result 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 functional 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. Acquisitions affect the comparison of our results between periods prior to when acquisitions are made and to the comparable periods in subsequent years, depending on the date of acquisition (e.g. acquisitions made on February 1, the first day of the first quarter of our fiscal year, will only affect a comparison with the prior year’s results and will not affect a comparison to the following years’ results). The results of acquired businesses are included in our consolidated financial statements
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Table of Contentsfrom the effective dates of the respective acquisitions. We consider the operating results of an acquired business during the first twelve months following the date of acquisition to be an “acquisition impact” or “benefit from acquisitions”. Thereafter we consider the growth in an acquired business’s results to be “organic growth”. The company did not complete any acquisitions during the six months ended July 31, 2012. Seasonality. Historically, our operating results 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 numerous other factors. A substantial portion of our revenues are derived from clients in industries whose shipping patterns are tied closely to consumer demand 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 Results The following discussion of our operating results explains material changes in our consolidated results for the three and six month periods of fiscal 2013 compared to the three and six month periods of fiscal 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, 2012, which are included in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012, 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, 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 excluding the impact of these foreign currency fluctuations. This information is among the information the company uses as a basis for evaluating company 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. In certain instances where the effect of foreign currency translation is material to our comparative results, we calculate variances so as to exclude the effects of foreign currency fluctuations. We calculate the effects of foreign currency fluctuations by subtracting (i) our current-period financial results as currently reported in local currencies, translated at current-period foreign currency exchange rates, from (ii) our current-period financial results as currently 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. The company’s 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. Included in corporate are certain administration and support functions, eliminations and various holding company activities within the group structure. 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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Table of ContentsThree months ended July 31, 2012 compared to three months ended July 31, 2011 The following tables and discussion and analysis address the operating results attributable to our reportable segments for the three months ended July 31, 2012 compared to the three months ended July 31, 2011: Freight Forwarding
Airfreight Forwarding. Airfreight forwarding revenues decreased $95.3 million, or 20%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, airfreight forwarding revenues decreased $66.2 million, or 14%. The weak airfreight environment continued to weigh on results for the three months ended July 31, 2012. Trends apparent throughout the industry in the first quarter of fiscal 2013 continued into the second quarter, with shippers increasingly favoring ocean freight over airfreight and moving less weight per airfreight shipment. Excluding the effects of foreign currency fluctuations, (i) $38.5 million of the decrease in revenues was attributable to a decline of airfreight forwarding volumes (which we measure in terms of total kilograms), (ii) $15.0 million of the decrease was attributable to reduced fuel surcharges and (iii) $12.7 million was attributable to a decline of our selling rates, caused in part by lower carrier rates incurred by us. Airfreight forwarding volumes decreased 11% for the three months ended July 31, 2012, compared to the corresponding prior year period, reflecting a continued weak
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Table of Contentsairfreight environment compared to the same period in the prior year. Airfreight forwarding tonnage declined significantly in the East-West trade lanes, with less of a decline experienced in the intra-Asia trade lanes and in the trade lanes involving the Middle East and Latin America. On a sequential basis, airfreight tonnage improved slightly, increasing 4% over the first quarter of fiscal 2013. Airfreight forwarding net revenues decreased $16.1 million, or 16%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, airfreight forwarding net revenues decreased $9.3 million, or 9%. 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. Excluding the effects of foreign currency fluctuations, net revenues decreased by $11.3 million over the corresponding prior year period due to a decline of airfreight forwarding volumes, which amount was partially offset by a $2.0 million improvement in yields. Airfreight yields for the three months ended July 31, 2012 increased approximately 120 basis points to 22.6% compared to 21.4% for the corresponding prior year period. On a sequential basis, airfreight yields of 22.6% for the three months ended July 31, 2012 were 180 basis points higher when compared to airfreight yields of 20.8% for the first quarter of fiscal 2013. Ocean Freight Forwarding. Ocean freight forwarding revenues decreased $15.8 million, or 5%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, ocean freight forwarding revenues increased $12.4 million, or 4%. Ocean freight volumes (which we measure in terms of TEUs) increased 2% over the corresponding prior year period. Excluding the effects of foreign currency fluctuations, (i) $8.0 million of the increase in ocean freight forwarding revenues was attributable to an increase in ocean freight volumes and (ii) $4.4 million of the increase was attributable to an increase in our selling rates caused in part by increased carrier rates. Ocean freight forwarding net revenues decreased $2.4 million, or 4%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, ocean freight forwarding net revenues increased $1.8 million, or 3%. Excluding the effects of foreign currency fluctuations, (i) $0.4 million of the increase in ocean freight forwarding net revenues was attributable to yield improvement and (ii) $1.4 million of the increase was attributable to increased volumes. On the same basis, net revenues per TEU increased 1% on both a year-over-year and sequential basis.
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Table of ContentsCustoms Brokerage and Other. Customs brokerage revenues decreased $2.7 million, or 8%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, customs brokerage revenues increased $0.7 million, or 2%. Other freight forwarding related revenues, which are primarily comprised of international road freight shipments and distribution, decreased $17.8 million, or 22%, for the three months ended July 31, 2012, compared to the corresponding prior year period. However, excluding the effects of foreign currency fluctuations, other freight forwarding related revenues decreased $10.2 million, or 12%. The decrease was caused by a decline in volumes and related fuel surcharges for international road freight and distribution. Customs brokerage net revenues decreased $2.8 million, or 9%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, customs brokerage net revenues increased $0.4 million, or 1%. Other freight forwarding related net revenues increased $0.9 million, or 4%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other freight forwarding related net revenues increased $2.9 million, or 13%. Staff Costs. Staff costs in our freight forwarding segment decreased $7.0 million, or 6%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, staff costs in our freight forwarding segment increased $2.2 million. As a percentage of freight forwarding segment revenues, staff costs were approximately 14% for the three months ended July 31, 2012 compared to 13% in the corresponding prior year period. Movements of staff costs in our freight forwarding segment are typically driven by changes in total shipment counts rather than changes in volumes. The number of airfreight shipments declined 4%, in the three months ended July 31, 2012 compared to the corresponding prior year period, the decline was significantly less than the corresponding 11% tonnage decline, as our clients moved fewer kilos per shipment. This had a negative impact on productivity in our freight forwarding segment in the short term. The number of ocean freight shipments was consistent over the comparative periods. Severance and Other. During the three months ended July 31, 2012 and 2011, we incurred severance and other costs in the freight forwarding segment of $1.5 million and $2.1 million, respectively, comprised primarily of severance charges. These charges were primarily related to our business transformation initiatives, which include redefining business processes, developing our next generation freight forwarding operating system and rationalizing business segments to a more common organizational structure on a worldwide basis. Although a formal plan of termination has not been adopted pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 420, Exit or Disposal Cost Obligations (ASC 420) or ASC 715, Compensation – Retirement Benefits (ASC 715), the company expects to incur severance costs related to these transformation activities through the fiscal year ending January 31, 2015. The amount, timing and nature of such costs are not yet determinable and will likely not be determinable until the later stages of the transformation effort. Other Operating Expenses. Other operating costs in the freight forwarding segment decreased $6.6 million, or 13%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other operating costs decreased $1.8 million.
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Table of ContentsContract Logistics and Distribution
Contract Logistics. Contract logistics revenues decreased $9.0 million, or 4%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, contract logistics revenues increased $8.5 million, or 4%. The increase in contract logistics revenues, excluding the effects of foreign currency fluctuations, was primarily the result of organic growth which came from increased client volumes in the Africa and Asia-Pacific regions, partially offset by declining volumes in the Americas and EMENA regions. Contract logistics purchased transportation costs increased $1.3 million, or 2%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, purchased transportation costs increased $4.0 million, or 8%. In addition to purchased transportation costs related directly to the contract logistics operations, purchased transportation costs within our Contract Logistics and Distribution segment includes materials sourcing costs which we incur pursuant to formalized repackaging programs and materials sourcing agreements. These sourcing activities increased slightly during the three months ended July 31, 2012 when compared to the corresponding prior year period, resulting in an increase in materials sourcing costs of $4.4 million, or 8%. Distribution. Distribution revenues increased $6.8 million, or 5%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, distribution revenues increased $13.9 million, or 10%. Excluding the effects of foreign currency fluctuations, an increase in distribution revenues of $8.8 million was primarily due to increased client volumes in our Americas region distribution business. Distribution purchased transportation costs increased $6.8 million, or 7%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, distribution purchased transportation costs increased $9.2 million, or 10%. The increase was primarily due to increased domestic freight volumes as well as related fuel surcharges, particularly in the Americas region. Other. Other contract logistics and distribution revenues decreased $7.8 million, or 18%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of
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Table of Contentsforeign currency fluctuations, other contract logistics and distribution revenues decreased $1.5 million, or 4%. The decrease of other contract logistics and distribution revenues was primarily the result of decreased volumes handled in certain of our transportation management operations. Other purchased transportation costs decreased $1.2 million, or 11%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other purchased transportation costs increased $0.3 million. Staff Costs. Staff costs in our Contract Logistics and Distribution segment decreased $13.4 million, or 11%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, staff costs in our Contract Logistics and Distribution segment decreased $2.9 million, or 2%. The decrease in staff costs after excluding the effects of foreign currency fluctuations was partially attributable to ongoing improvements in operations, particularly those in the EMENA region. Severance and Other. During the three months ended July 31, 2012, we incurred severance and other costs of $0.3 million in our Contract Logistics and Distribution segment. Amounts charged for severance and exit costs during the three months ended July 31, 2011 were $0.6 million. Other Operating Expenses. Other operating expenses in our Contract Logistics and Distribution segment decreased $2.8 million, or 3%, for the three months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other operating expense in our Contract Logistics and Distribution segment increased $7.4 million, or 9%. This increase in other operating expenses after excluding the effect of foreign currency fluctuations was caused in part by a new Africa region distribution client, and by increased service requirements associated with other new client sites and increased logistics volumes. Corporate Staff Costs. Staff costs at corporate were $8.9 million for the three months ended July 31, 2012, compared to $6.3 million for the corresponding prior year period. The increase in staff costs at corporate was primarily due to our continuing organizational realignment associated with our business transformation initiatives. As a result of those initiatives, resources have been transferred from local and regional roles to corporate led functions. Other operating expenses at corporate were $4.5 million for the three months ended July 31, 2012, compared to $4.4 million for corresponding prior year period. Interest Expense, Net. Interest income relates primarily to interest earned on our cash deposits, while interest expense consists primarily of interest on our credit facilities, our senior unsecured guaranteed notes, of which $195.8 million of principle was outstanding as of July 31, 2012, and our capital lease obligations. Interest income decreased $1.7 million, or 33% and interest expense decreased $3.1 million, or 34%, for the three months ended July 31, 2012, compared to the corresponding prior year period. Net interest expense was lower for the three months ended July 31, 2012, compared to the corresponding prior year period, primarily due to a reduced level of average borrowings outstanding throughout the quarter. The movements in interest income and interest expense are primarily due to a change in the mix of total net deposits and borrowings outstanding during the comparative periods, as well as interest rate movements. Other Income and Expenses, Net. Other income and expenses primarily relate to foreign currency gains and losses on certain of our intercompany loans, and various other taxes not related to income taxes. Provision for Income Taxes. Our effective income tax rate for the three months ended July 31, 2012 was 33.2% compared to 31.2% for the corresponding prior year period. Our provision for income taxes in the three months ended July 31, 2012 was $10.0 million based on pretax income of $30.3 million compared to our provision for income taxes for the corresponding prior year period of $11.3 million based on pretax income of $36.1 million. The factors decreasing our provision for income taxes in absolute
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Table of Contentsdollars in the three months ended July 31, 2012 relative to the corresponding prior year period of fiscal 2012 were: (i) lower valuation allowances recorded in certain jurisdictions in the three months ended July 31, 2012 as compared to the same period in 2011 which decreased our current year provision year over year by approximately $1.8 million, and partially offset by (ii) higher statutory blended rates and increased nondeductible expenses and other tax items incurred across various jurisdictions which increased our provision by $0.5 million. These factors resulted in an aggregate decrease in our provision of $1.3 million in three months ended July 31, 2012 as compared to corresponding prior year period of fiscal 2012. Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $1.3 million for the three months ended July 31, 2012, compared to $2.0 million for the corresponding prior year period. Effective October 31, 2011, we acquired the remaining outstanding shares of an Israeli subsidiary, of which we already held a controlling financial interest from previous activities in Israel. This acquisition contributed to a decrease of non-controlling interests of $0.1 million for the three months ended July 31, 2012, over the corresponding prior year period.
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Table of ContentsSix months ended July 31, 2012 compared to six months ended July 31, 2011 The following tables and discussion and analysis address the operating results attributable to our reportable segments for the six months ended July 31, 2012 compared to the six months ended July 31, 2011: Freight Forwarding
Airfreight Forwarding. Airfreight forwarding revenues decreased $153.2 million, or 17%, for the six months ended July 31, 2012, compared to the corresponding prior year period. Our results for this and our other products and segments for the six months ended July 31, 2012, were negatively impacted by a weaker Euro and ZAR when compared to the corresponding prior year period. Excluding the effects of foreign currency fluctuations, airfreight forwarding revenues decreased $112.0 million, or 12%. Excluding the effects of foreign currency fluctuations, (i) $87.9 million of the decrease in revenues was attributable to a decline of airfreight forwarding volumes (which we measure in terms of total kilograms), (ii) $16.3 million of the decrease was attributable to reduced fuel surcharges, and (iii) $7.8 million of the decrease was attributable to a decline of our selling rates caused in part by lower carrier rates incurred by us. Airfreight forwarding volumes decreased 13% for the six months ended July 31, 2012, compared to the corresponding prior year period, reflecting a continued weak airfreight environment compared to the same period in the prior year, which weighed negatively on tonnage statistics throughout the six month period.
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Table of ContentsAirfreight forwarding net revenues decreased $25.6 million, or 14%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, airfreight forwarding net revenues decreased $16.4 million, or 9%. 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. Excluding the effects of foreign currency fluctuations, airfreight forwarding net revenues decreased $24.8 million over the corresponding prior year period due to a decline of airfreight forwarding volumes, which amount was partially offset by $8.4 million improvement in yields. Airfreight yields for the six months ended July 31, 2012 increased approximately 80 basis points to 21.7% compared to 20.9% for the corresponding prior year period. Ocean Freight Forwarding. Ocean freight forwarding revenues decreased $12.7 million, or 2%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, ocean freight forwarding revenues increased $25.9 million, or 4%. Ocean freight volumes (which we measure in terms of TEUs) increased 3% over the corresponding prior year period. Excluding the effects of foreign currency fluctuations, (i) $16.5 million of the increase in ocean freight forwarding revenues was attributable to an increase in ocean freight forwarding volumes and (ii) $9.4 million of the increase was attributable to an increase in our selling rates caused in part by increased carrier rates incurred by us. Ocean freight forwarding net revenues increased $0.5 million for the six months ended July 31, 2012, compared to the corresponding prior year period, however, excluding the effects of foreign currency translations, ocean freight forwarding net revenues increased $6.1 million, or 6%. Ocean freight yields for the six months ended July 31, 2012 increased approximately 50 basis points to 17.3% compared to 16.8% for the corresponding prior year period. Excluding the effects of foreign currency fluctuations, (i) $3.2 million of the increase in ocean freight forwarding net revenues was attributable to yield improvement, and (ii) $2.9 million of the increase was attributable to an increase in volumes. Customs Brokerage and Other. Customs brokerage revenues decreased $4.7 million, or 7%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, customs brokerage revenues were comparable to the prior period. Other freight forwarding related revenues, which are primarily comprised of international road freight shipments and distribution, decreased $29.2 million, or 18%, for the six months ended July 31, 2012, compared to the corresponding prior year period. However, excluding the effects of foreign currency fluctuations, other freight forwarding related revenues decreased $17.6 million, or 11%. The decrease was caused by a decline in volumes and related fuel surcharges for international road freight and distribution. Customs brokerage net revenues decreased $4.7 million, or 8%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, customs brokerage net revenues decreased $0.2 million. Other freight forwarding related net revenues increased $1.3 million, or 3%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other freight forwarding related net revenues increased $4.0 million, or 10%.
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Table of ContentsStaff Costs. Staff costs in our freight forwarding segment decreased $10.2 million, or 5%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, staff costs in our freight forwarding segment increased $2.8 million. As a percentage of freight forwarding segment revenues, staff costs were approximately 14% for the six months ended July 31, 2012 compared to 13% in the corresponding prior year period. Movements of staff costs in our freight forwarding segment are typically driven by changes in total shipment counts rather than changes in volumes. The number of airfreight shipments declined 5%, in the six months ended July 31, 2012 compared to the corresponding prior year period, the decline was significantly less than the corresponding 13% tonnage decline in the three months ended July 31, 2012 compared to the corresponding prior year period, as our clients moved fewer kilos per shipment. This had a negative impact on productivity in our freight forwarding segment. The number of ocean freight shipments was consistent over the comparative period. Severance and Other. During the six months ended July 31, 2012 and 2011, we incurred severance and other costs in the freight forwarding segment of $2.2 million and $4.1 million, respectively, comprised primarily of severance charges. These charges were primarily related to our business transformation initiatives, which include redefining business processes, developing our next generation freight forwarding operating system and rationalizing business segments to a more common organizational structure on a worldwide basis. Although a formal plan of termination has not been adopted pursuant to ASC 420 or ASC 715, the company expects to incur severance costs related to these transformation activities through the fiscal year ending January 31, 2015. The amount, timing and nature of such costs are not yet determinable and will likely not be determinable until the later stages of the transformation effort. Other Operating Expenses. Other operating costs in the freight forwarding segment decreased $8.6 million, or 9%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other operating costs decreased $2.0 million.
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Table of ContentsContract Logistics and Distribution
Contract Logistics. Contract logistics revenues decreased $6.4 million, or 2%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, contract logistics revenues increased $19.4 million, or 5%. The increase in contract logistics revenues, excluding the effects of foreign currency fluctuations, was primarily the result of organic growth which came primarily from new business wins in the Africa and Asia Pacific regions. Contract logistics purchased transportation costs increased $6.1 million, or 6%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, purchased transportation costs increased $10.0 million, or 10%. In addition to purchased transportation costs related directly to the contract logistics operations, purchased transportation costs within our Contract Logistics and Distribution segment includes materials sourcing costs which we incur pursuant to formalized repackaging programs and materials sourcing agreements. These sourcing activities increased slightly during the six months ended July 31, 2012 when compared to the corresponding prior year period, resulting in an increase of materials sourcing costs of $7.7 million, or 8%. The remaining increase of $2.3 million was due to increased volumes and fuel surcharges compared to the corresponding prior year period. Distribution. Distribution revenues increased $26.3 million, or 10%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, distribution revenues increased $37.8 million, or 14%. An increase of $19.8 million, excluding the effects of foreign currency fluctuations, was primarily due to increased client volumes in our Americas region distribution business. Additionally, new client business in our Africa region distribution operations, contributed approximately $5.7 million, excluding the effects of foreign currency fluctuations, for the period. The majority of these increased volumes in our Africa region were handled internally rather than through purchased transportation, resulting in an increase in staff costs and other operating costs incurred within the segment. Distribution purchased transportation costs increased $16.0 million, or 9%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, distribution purchased transportation costs increased $19.6 million, or 11%. The increase was primarily due to increased domestic freight volumes as well as related fuel surcharges, particularly in the Americas region.
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Table of ContentsOther. Other contract logistics and distribution revenues decreased $12.2 million, or 15%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, other contract logistics and distribution revenues decreased $2.8 million, or 3%. The decrease of other contract logistics and distribution revenues was primarily the result of decreased transportation volumes handled in certain of our transportation management operations. Staff Costs. Staff costs in our Contract Logistics and Distribution segment decreased $14.3 million, or 6%, for the six months ended July 31, 2012, compared to the corresponding prior year period; however, excluding the effects of foreign currency fluctuations, staff costs in our Contract Logistics and Distribution segment increased $1.6 million, or 1%. Excluding the effects of foreign currency fluctuations, increased service requirements associated with increased contract logistics and distribution volumes over the comparable six month period was offset by a decrease in staff costs partially attributable to ongoing improvements in operations, including those in Europe. Severance and Other. During the six months ended July 31, 2012, we incurred severance and other costs of $1.1 million in the Contract Logistics and Distribution segment, primarily related to employee severance costs. Amounts charged for severance and exit costs during the six months ended July 31, 2011 were $3.5 million, of which $1.6 million was primarily related to employee severance costs, while $1.9 million was primarily related to facility exit costs. Corporate Staff Costs. Staff costs at corporate were $17.8 million for the six months ended July 31, 2012, compared to $13.3 million for the corresponding prior year period. The increase in staff costs at corporate was primarily due to our continuing organizational realignment associated with our business transformation initiatives. As a result of those initiatives, resources have been transferred from local and regional roles to corporate led functions. Other operating expenses at corporate were $8.7 million for the six months ended July 31, 2012, compared to $9.7 million for corresponding prior year period. Interest Expense, Net. Interest income relates primarily to interest earned on our cash deposits, while interest expense consists primarily of interest on our credit facilities, our senior unsecured guaranteed notes, of which $195.8 million of principle was outstanding as of July 31, 2012, and our capital lease obligations. Interest income decreased $2.4 million, or 25% and interest expense decreased $5.2 million, or 29%, for the six months ended July 31, 2012, compared to the corresponding prior year period. Net interest expense was lower for the six months ended July 31, 2012, compared to the corresponding prior year period, primarily due to a reduced level of average borrowings outstanding throughout the six month period. The movements in interest income and interest expense are primarily due to a change in the mix of total net deposits and borrowings outstanding during the comparative periods, as well as interest rate movements. Other Income and Expenses, Net. Other income and expenses primarily relate to foreign currency gains and losses on certain of our intercompany loans, and various other taxes not related to income taxes. Provision for Income Taxes. Our effective income tax rate for the six months ended July 31, 2012 was 32.4% compared to 30.5% for the corresponding prior year period. Our provision for income taxes in the six months ended July 31, 2012 was $16.5 million based on pretax income of $51.0 million compared to
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Table of Contentsour provision for income taxes for the corresponding prior year period of $15.5 million based on pretax income of $50.8 million. The factors increasing our provision for income taxes in absolute dollars in the six months ended July 31, 2012 relative to the six months ended July 31, 2011 were: (i) higher blended statutory rates and certain nondeductible expenses and other tax items across various jurisdictions which increased our provision by approximately $2.0 million, and (ii) offset by a reduction in unbenefitted losses across various jurisdictions which decreased our provision by approximately $1.0 million. These factors resulted in an aggregate increase in our provision of $1.0 million in six months ended July 31, 2012 as compared to the corresponding prior year period. Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $2.7 million for the six months ended July 31, 2012, compared to $3.7 million for the corresponding prior year period. Effective October 31, 2011, we acquired the remaining outstanding shares of an Israeli subsidiary, of which we already held a controlling financial interest from previous activities in Israel. This acquisition contributed to a decrease of non-controlling interests of $0.4 million for the six months ended July 31, 2012 over the corresponding prior year period. The following tables show the revenues and net revenues attributable to our geographic regions:
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