United States
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended July 31, 2003
or
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from __________ to __________ |
000-31869
(Commission File Number)
UTi Worldwide Inc.
| British Virgin Islands (State or Other Jurisdiction of Incorporation or Organization) |
N/A (IRS Employer Identification Number) |
|
| 9 Columbus Centre, Pelican Drive Road Town, Tortola British Virgin Islands |
c/o UTi, Services, Inc. 19443 Laurel Park Road, Suite 111 Rancho Dominguez, CA 90220 USA |
|
| (Addresses of Principal Executive Offices) | ||
310.604.3311
(Registrant’s Telephone Number, Including Area Code)
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
At September 12, 2003, the number of shares outstanding of the issuer’s ordinary shares was 30,682,883.
UTi Worldwide Inc.
Report on Form 10-Q
For the Quarter Ended July 31, 2003
Table of Contents
PART I. Financial Information |
1 | |||
Item 1. Financial Statements |
1 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
21 | |||
Item 4. Controls and Procedures |
22 | |||
PART II. Other Information |
22 | |||
Item 1. Legal Proceedings |
22 | |||
Item 4. Submission of Matters to a Vote of Security Holders |
23 | |||
Item 6. Exhibits and Reports on Form 8-K |
23 | |||
Signature |
25 | |||
Exhibits |
26 |
- i -
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Income Statements
For the Three and Six Months Ended July 31, 2003 and 2002
(in thousands, except share and per share amounts)
| Three months ended | Six months ended | ||||||||||||||||
| July 31, | July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| (Unaudited) | |||||||||||||||||
Gross revenue |
$ | 362,025 | $ | 274,819 | $ | 688,813 | $ | 510,477 | |||||||||
Freight consolidation costs |
217,166 | 187,286 | 412,535 | 346,015 | |||||||||||||
Net revenue |
144,859 | 87,533 | 276,278 | 164,462 | |||||||||||||
Staff costs |
80,134 | 43,988 | 150,554 | 83,608 | |||||||||||||
Depreciation and amortization |
3,751 | 2,490 | 7,219 | 4,827 | |||||||||||||
Amortization of intangible assets |
158 | — | 306 | — | |||||||||||||
Other operating expenses |
45,778 | 29,609 | 92,068 | 56,669 | |||||||||||||
Operating income |
15,038 | 11,446 | 26,131 | 19,358 | |||||||||||||
Interest income |
1,728 | 1,154 | 3,225 | 1,908 | |||||||||||||
Interest expense |
(1,355 | ) | (1,164 | ) | (2,716 | ) | (2,288 | ) | |||||||||
Gains/(losses) on foreign exchange |
453 | 56 | 324 | (315 | ) | ||||||||||||
Pretax income |
15,864 | 11,492 | 26,964 | 18,663 | |||||||||||||
Income tax expense |
(4,070 | ) | (3,216 | ) | (6,754 | ) | (5,294 | ) | |||||||||
Income before minority interests |
11,794 | 8,276 | 20,210 | 13,369 | |||||||||||||
Minority interests |
(378 | ) | (537 | ) | (820 | ) | (873 | ) | |||||||||
Net income |
$ | 11,416 | $ | 7,739 | $ | 19,390 | $ | 12,496 | |||||||||
Basic earnings per share |
$ | 0.38 | $ | 0.31 | $ | 0.64 | $ | 0.49 | |||||||||
Diluted earnings per share |
$ | 0.36 | $ | 0.30 | $ | 0.62 | $ | 0.48 | |||||||||
Number of weighted average shares
used for per share calculations: |
|||||||||||||||||
Basic shares |
30,232,198 | 25,274,891 | 30,194,917 | 25,267,661 | |||||||||||||
Diluted shares |
31,432,216 | 25,877,748 | 31,306,056 | 25,823,315 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
- 1 -
Condensed Consolidated Balance Sheets
As of July 31, 2003 and January 31, 2003
(in thousands, except share amounts)
| July 31, | January 31, | |||||||||
| 2003 | 2003 | |||||||||
| (Unaudited) | ||||||||||
ASSETS |
||||||||||
Cash and cash equivalents, including $4,000 of
restricted cash |
$ | 149,574 | $ | 168,125 | ||||||
Trade receivables (net of allowance for doubtful
receivables of $13,344 and $11,943 as of July 31,
2003 and January 31, 2003, respectively) |
275,091 | 247,893 | ||||||||
Deferred income tax assets |
4,089 | 1,592 | ||||||||
Other current assets |
34,620 | 30,492 | ||||||||
Total current assets |
463,374 | 448,102 | ||||||||
Property, plant and equipment, net |
49,880 | 44,566 | ||||||||
Goodwill and other intangible assets, net |
131,302 | 125,641 | ||||||||
Investments |
822 | 847 | ||||||||
Deferred income tax assets |
2,228 | 1,227 | ||||||||
Other non-current assets |
9,004 | 6,692 | ||||||||
Total assets |
$ | 656,610 | $ | 627,075 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY |
||||||||||
Bank lines of credit |
$ | 31,804 | $ | 33,458 | ||||||
Short-term borrowings |
2,772 | 9,121 | ||||||||
Current portion of capital lease obligations |
2,320 | 2,539 | ||||||||
Trade payables and other accrued liabilities |
248,409 | 236,548 | ||||||||
Income taxes payable |
10,024 | 8,083 | ||||||||
Deferred income tax liabilities |
995 | 489 | ||||||||
Total current liabilities |
296,324 | 290,238 | ||||||||
Long-term borrowings |
102 | 199 | ||||||||
Capital lease obligations |
7,324 | 7,111 | ||||||||
Deferred income tax liabilities |
1,957 | 1,643 | ||||||||
Retirement fund obligations |
1,111 | 1,016 | ||||||||
Minority interests |
3,404 | 2,699 | ||||||||
Commitments and contingencies |
||||||||||
Shareholders’ equity: |
||||||||||
Common stock - ordinary shares of no par
value: 30,669,607 and 30,551,124 shares issued and
outstanding as of July 31, 2003 and January 31,
2003, respectively |
312,815 | 311,161 | ||||||||
Retained earnings |
80,473 | 63,973 | ||||||||
Accumulated other comprehensive loss |
(46,900 | ) | (50,965 | ) | ||||||
Total shareholders’ equity |
346,388 | 324,169 | ||||||||
Total liabilities and shareholders’ equity |
$ | 656,610 | $ | 627,075 | ||||||
See accompanying notes to condensed consolidated financial statements.
- 2 -
Consolidated Statements of Cash Flows
For the Six Months Ended July 31, 2003 and 2002
(in thousands)
| Six months ended | |||||||||||
| July 31, | |||||||||||
| 2003 | 2002 | ||||||||||
| (Unaudited) | |||||||||||
OPERATING ACTIVITIES: |
|||||||||||
Net income |
$ | 19,390 | $ | 12,496 | |||||||
Adjustments to reconcile net income to net cash provided
by operations: |
|||||||||||
Stock compensation costs |
87 | 91 | |||||||||
Depreciation and amortization |
7,219 | 4,827 | |||||||||
Amortization of intangible assets |
306 | — | |||||||||
Deferred income taxes |
1,490 | 49 | |||||||||
(Gain)/loss on disposal of property, plant and equipment |
(47 | ) | 121 | ||||||||
Other |
820 | 873 | |||||||||
Changes in operating assets and liabilities: |
|||||||||||
Increase in trade receivables and other current assets |
(20,776 | ) | (21,817 | ) | |||||||
Increase in trade payables and other current liabilities |
5,341 | 18,600 | |||||||||
Net cash provided by operating activities |
13,830 | 15,240 | |||||||||
INVESTING ACTIVITIES: |
|||||||||||
Purchases of property, plant and equipment |
(9,018 | ) | (4,542 | ) | |||||||
Proceeds from disposal of property, plant and equipment |
312 | 307 | |||||||||
Increase in other non-current assets |
(1,077 | ) | (25 | ) | |||||||
Acquisitions and contingent earn-out
payments |
(8,044 | ) | (6,606 | ) | |||||||
Purchases of other investments |
(170 | ) | — | ||||||||
Net cash used in investing activities |
(17,997 | ) | (10,866 | ) | |||||||
FINANCING ACTIVITIES: |
|||||||||||
Decrease in bank lines of credit |
(1,653 | ) | (7,259 | ) | |||||||
Decrease in short-term borrowings |
(6,346 | ) | (57 | ) | |||||||
Long-term borrowings — repaid |
(116 | ) | (968 | ) | |||||||
Repayments of capital lease obligations |
(1,739 | ) | (2,263 | ) | |||||||
Decrease in minority interests |
(327 | ) | (170 | ) | |||||||
Net proceeds from the issuance of ordinary shares |
1,567 | 426 | |||||||||
Dividends paid |
(2,890 | ) | (1,929 | ) | |||||||
Net cash used in financing activities |
(11,504 | ) | (12,220 | ) | |||||||
Net decrease in cash and cash equivalents |
(15,671 | ) | (7,846 | ) | |||||||
Cash and cash equivalents at beginning of period |
168,125 | 87,594 | |||||||||
Effect of foreign exchange rate changes on cash |
(2,880 | ) | (483 | ) | |||||||
Cash and cash equivalents at end of period |
$ | 149,574 | $ | 79,265 | |||||||
See accompanying notes to condensed consolidated financial statements.
- 3 -
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended July 31, 2003 and 2002 (Unaudited)
NOTE 1. Presentation of Financial Statements
The accompanying unaudited condensed consolidated financial statements include the accounts of UTi Worldwide Inc. and its subsidiaries (UTi or the Company). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain reclassifications have been made to conform prior year data to the current year presentation. Operating results for the three and six months ended July 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2004 or any other future periods.
The balance sheet at January 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 20-F for the year ended January 31, 2003 on file with the Securities and Exchange Commission.
All dollar amounts in the notes are presented in thousands except for share and per share data.
Pro Forma Information – Stock Options
As of July 31, 2003, the Company had five stock-based employee compensation plans which are accounted for using the intrinsic value method under the recognition and measurement principles of Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related Interpretations. Compensation costs are recorded in net income for stock options that have an exercise price below the market value of the underlying common stock on the date of grant. As required by Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123, the following table shows the estimated effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
- 4 -
| Three months ended | Six months ended | ||||||||||||||||
| July 31, | July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income as reported |
$ | 11,416 | $ | 7,739 | $ | 19,390 | $ | 12,496 | |||||||||
Stock-based employee
compensation expense included
in reported net income, net of
income taxes |
42 | 46 | 87 | 91 | |||||||||||||
Total stock-based compensation
expense determined under the
fair value based method, net of
income taxes |
(1,032 | ) | (791 | ) | (2,083 | ) | (1,452 | ) | |||||||||
Pro forma net income |
$ | 10,426 | $ | 6,994 | $ | 17,394 | $ | 11,135 | |||||||||
Earnings per share, as reported: |
|||||||||||||||||
Basic earnings per share |
$ | 0.38 | $ | 0.31 | $ | 0.64 | $ | 0.49 | |||||||||
Diluted earnings per share |
$ | 0.36 | $ | 0.30 | $ | 0.62 | $ | 0.48 | |||||||||
Earnings per share, pro forma: |
|||||||||||||||||
Basic earnings per share |
$ | 0.34 | $ | 0.28 | $ | 0.58 | $ | 0.44 | |||||||||
Diluted earnings per share |
$ | 0.33 | $ | 0.27 | $ | 0.56 | $ | 0.43 | |||||||||
Pro Forma Information – Acquisitions
Effective May 1, 2003 and July 1, 2003, the Company acquired 100% of the issued and outstanding shares of IndAir Carriers (Pvt) Ltd. and 50% of the issued and outstanding shares of Kite Logistics (Pty) Limited, respectively. Effective October 1, 2002 and November 1, 2002, the Company acquired 100% of the issued and outstanding share capital of Standard Corporation and Zeracon Limited, respectively. The following table shows the supplemental pro forma information as though the Company’s acquisitions had occurred February 1, 2002.
| Three months ended July 31 | Six months ended July 31 | |||||||||||||||||||||||||
| Diluted | Diluted | |||||||||||||||||||||||||
| Gross | Net | earnings | Gross | Net | earnings | |||||||||||||||||||||
| revenue | income | per share * | revenue | income | per share * | |||||||||||||||||||||
2003: |
||||||||||||||||||||||||||
As reported |
$ | 362,025 | $ | 11,416 | $ | 0.36 | $ | 688,813 | $ | 19,390 | $ | 0.62 | ||||||||||||||
Acquisitions |
9,754 | 89 | 0.00 | 19,936 | 113 | 0.00 | ||||||||||||||||||||
Total |
$ | 371,779 | $ | 11,505 | 0.37 | $ | 708,749 | $ | 19,503 | 0.62 | ||||||||||||||||
2002: |
||||||||||||||||||||||||||
As reported |
$ | 274,819 | $ | 7,739 | $ | 0.30 | $ | 510,477 | $ | 12,496 | $ | 0.48 | ||||||||||||||
Acquisitions |
57,702 | (1,117 | ) | (0.04 | ) | 90,137 | (293 | ) | (0.01 | ) | ||||||||||||||||
Total |
$ | 332,521 | $ | 6,622 | 0.25 | $ | 600,614 | $ | 12,203 | 0.47 | ||||||||||||||||
| * | Earnings per share were calculated using 31,432,216 and 31,306,056 diluted ordinary shares for the three and six months ended July 31, 2003, respectively, and 26,042,132 and 25,987,699 diluted ordinary shares for the three and six months ended July 31, 2002, respectively. |
- 5 -
NOTE 2. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections. SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 as of February 1, 2003 and such adoption had no impact on its consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted the provisions of SFAS No. 146 as of February 1, 2003 and such adoption did not have a material impact on its consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and to amend the disclosure requirements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years ending after December 15, 2003, while certain disclosure provisions are effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for its year ended January 31, 2003 and the interim disclosure provisions in its financial reports for its year beginning February 1, 2003. The adoption of this statement did not have a material impact on its consolidated financial position or results of operations.
NOTE 3. Earnings per Share
| Three months ended | Six months ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 11,416 | $ | 7,739 | $ | 19,390 | $ | 12,496 | ||||||||
Weighted average number of
ordinary shares |
30,232,198 | 25,274,891 | 30,194,917 | 25,267,661 | ||||||||||||
Basic earnings per share |
$ | 0.38 | $ | 0.31 | $ | 0.64 | $ | 0.49 | ||||||||
- 6 -
| Three months ended | Six months ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Diluted earnings per share: |
||||||||||||||||
Net income |
$ | 11,416 | $ | 7,739 | $ | 19,390 | $ | 12,496 | ||||||||
Weighted average number of
ordinary shares |
30,232,198 | 25,274,891 | 30,194,917 | 25,267,661 | ||||||||||||
Incremental shares required for
diluted earnings per share related
to employee stock options |
1,200,018 | 602,857 | 1,111,139 | 555,654 | ||||||||||||
Diluted weighted average number
of shares |
31,432,216 | 25,877,748 | 31,306,056 | 25,823,315 | ||||||||||||
Diluted earnings per share |
$ | 0.36 | $ | 0.30 | $ | 0.62 | $ | 0.48 | ||||||||
Cash dividends paid per share |
$ | 0.095 | $ | 0.075 | $ | 0.095 | $ | 0.075 | ||||||||
The above number of shares excludes any contingently issuable ordinary shares. For the three and six months ended July 31, 2003, there were 137,500 and 149,500 options outstanding, respectively, which were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the ordinary shares.
NOTE 4. Other Comprehensive Income
| Three months ended | Six months ended | |||||||||||||||||
| July 31, | July 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net income |
$ | 11,416 | $ | 7,739 | $ | 19,390 | $ | 12,496 | ||||||||||
Other comprehensive (loss)/income,
net of tax: |
||||||||||||||||||
Foreign exchange translation
adjustments |
(567 | ) | 3,432 | 4,065 | 6,959 | |||||||||||||
Comprehensive income |
$ | 10,849 | $ | 11,171 | $ | 23,455 | $ | 19,455 | ||||||||||
NOTE 5. Segment Information
The Company operates in four geographic segments comprised of Europe, the Americas, Asia Pacific and Africa. For segmental reporting purposes by geographic region, gross airfreight and ocean freight forwarding revenues for the movement of goods is attributed to the country where the shipment originates. Gross revenues, as well as net revenues, for all other services are attributed to the country where the services are performed. Net revenues for airfreight and ocean freight forwarding related to the movement of the goods are prorated between the country of origin and the destination country, based on a standard formula. Certain unaudited information regarding UTi’s operations by geographic segment is summarized in the following tables.
- 7 -
| Three months ended July 31, 2003 | ||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||
| Europe | Americas | Pacific | Africa | Corporate | Total | |||||||||||||||||||
Gross revenue from external
customers |
$ | 104,435 | $ | 114,281 | $ | 96,169 | $ | 47,140 | $ | — | $ | 362,025 | ||||||||||||
Net revenue |
$ | 31,513 | $ | 65,147 | $ | 21,147 | $ | 27,052 | $ | — | $ | 144,859 | ||||||||||||
Staff costs |
18,132 | 38,518 | 8,897 | 13,198 | 1,389 | 80,134 | ||||||||||||||||||
Depreciation and amortization |
1,074 | 1,022 | 550 | 742 | 363 | 3,751 | ||||||||||||||||||
Amortization of intangible assets |
— | 149 | — | 9 | — | 158 | ||||||||||||||||||
Other operating expenses |
9,174 | 21,432 | 5,412 | 8,357 | 1,403 | 45,778 | ||||||||||||||||||
Operating income/(loss) |
$ | 3,133 | $ | 4,026 | $ | 6,288 | $ | 4,746 | $ | (3,155 | ) | 15,038 | ||||||||||||
Interest income |
1,728 | |||||||||||||||||||||||
Interest expense |
(1,355 | ) | ||||||||||||||||||||||
Gains on foreign exchange |
453 | |||||||||||||||||||||||
Pretax income |
15,864 | |||||||||||||||||||||||
Income tax expense |
(4,070 | ) | ||||||||||||||||||||||
Income before minority interests |
$ | 11,794 | ||||||||||||||||||||||
Capital expenditures |
$ | 1,022 | $ | 1,189 | $ | 824 | $ | 901 | $ | 699 | $ | 4,635 | ||||||||||||
Segment assets at quarter-end |
$ | 148,609 | $ | 172,031 | $ | 128,177 | $ | 147,306 | $ | 60,487 | $ | 656,610 | ||||||||||||
| Three months ended July 31, 2002 | ||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||
| Europe | Americas | Pacific | Africa | Corporate | Total | |||||||||||||||||||
Gross revenue from external
customers |
$ | 93,229 | $ | 68,561 | $ | 79,375 | $ | 33,654 | $ | — | $ | 274,819 | ||||||||||||
Net revenue |
$ | 24,927 | $ | 23,634 | $ | 17,340 | $ | 21,632 | $ | — | $ | 87,533 | ||||||||||||
Staff costs |
13,341 | 13,771 | 7,175 | 8,585 | 1,116 | 43,988 | ||||||||||||||||||
Depreciation and amortization |
844 | 503 | 487 | 462 | 194 | 2,490 | ||||||||||||||||||
Other operating expenses |
7,050 | 7,406 | 4,912 | 9,264 | 977 | 29,609 | ||||||||||||||||||
Operating income/(loss) |
$ | 3,692 | $ | 1,954 | $ | 4,766 | $ | 3,321 | $ | (2,287 | ) | 11,446 | ||||||||||||
Interest income |
1,154 | |||||||||||||||||||||||
Interest expense |
(1,164 | ) | ||||||||||||||||||||||
Gains on foreign exchange |
56 | |||||||||||||||||||||||
Pretax income |
11,492 | |||||||||||||||||||||||
Income tax expense |
(3,216 | ) | ||||||||||||||||||||||
Income before minority interests |
$ | 8,276 | ||||||||||||||||||||||
Capital expenditures |
$ | 2,806 | $ | 470 | $ | 459 | $ | 1,275 | $ | 26 | $ | 5,036 | ||||||||||||
Segment assets at quarter-end |
$ | 124,249 | $ | 100,886 | $ | 103,324 | $ | 89,403 | $ | 28,872 | $ | 446,734 | ||||||||||||
- 8 -
| Six months ended July 31, 2003 | ||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||
| Europe | Americas | Pacific | Africa | Corporate | Total | |||||||||||||||||||
Gross revenue from external
customers |
$ | 203,368 | $ | 217,395 | $ | 180,002 | $ | 88,048 | $ | — | $ | 688,813 | ||||||||||||
Net revenue |
$ | 58,997 | $ | 122,446 | $ | 40,258 | $ | 54,577 | $ | — | $ | 276,278 | ||||||||||||
Staff costs |
34,383 | 71,688 | 17,060 | 24,788 | 2,635 | 150,554 | ||||||||||||||||||
Depreciation and amortization |
2,115 | 2,002 | 1,062 | 1,404 | 636 | 7,219 | ||||||||||||||||||
Amortization of intangible assets |
— | 297 | — | 9 | — | 306 | ||||||||||||||||||
Other operating expenses |
17,691 | 41,026 | 10,319 | 20,561 | 2,471 | 92,068 | ||||||||||||||||||
Operating income/(loss) |
$ | 4,808 | $ | 7,433 | $ | 11,817 | $ | 7,815 | $ | (5,742 | ) | 26,131 | ||||||||||||
Interest income |
3,225 | |||||||||||||||||||||||
Interest expense |
(2,716 | ) | ||||||||||||||||||||||
Gains on foreign exchange |
324 | |||||||||||||||||||||||
Pretax income |
26,964 | |||||||||||||||||||||||
Income tax expense |
(6,754 | ) | ||||||||||||||||||||||
Income before minority interests |
$ | 20,210 | ||||||||||||||||||||||
Capital expenditures |
$ | 1,977 | $ | 3,429 | $ | 1,384 | $ | 2,337 | $ | 699 | $ | 9,826 | ||||||||||||
Segment assets at quarter-end |
$ | 148,609 | $ | 172,031 | $ | 128,177 | $ | 147,306 | $ | 60,487 | $ | 656,610 | ||||||||||||
| Six months ended July 31, 2002 | ||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||
| Europe | Americas | Pacific | Africa | Corporate | Total | |||||||||||||||||||
Gross revenue from external
customers |
$ | 172,467 | $ | 130,103 | $ | 144,529 | $ | 63,378 | $ | — | $ | 510,477 | ||||||||||||
Net revenue |
$ | 46,729 | $ | 45,342 | $ | 32,181 | $ | 40,210 | $ | — | $ | 164,462 | ||||||||||||
Staff costs |
24,727 | 27,020 | 13,812 | 15,974 | 2,075 | 83,608 | ||||||||||||||||||
Depreciation and amortization |
1,603 | 1,141 | 946 | 872 | 265 | 4,827 | ||||||||||||||||||
Other operating expenses |
13,378 | 14,349 | 9,450 | 17,023 | 2,469 | 56,669 | ||||||||||||||||||
Operating income/(loss) |
$ | 7,021 | $ | 2,832 | $ | 7,973 | $ | 6,341 | $ | (4,809 | ) | 19,358 | ||||||||||||
Interest income |
1,908 | |||||||||||||||||||||||
Interest expense |
(2,288 | ) | ||||||||||||||||||||||
Losses on foreign exchange |
(315 | ) | ||||||||||||||||||||||
Pretax income |
18,663 | |||||||||||||||||||||||
Income tax expense |
(5,294 | ) | ||||||||||||||||||||||
Income before minority interests |
$ | 13,369 | ||||||||||||||||||||||
Capital expenditures |
$ | 3,548 | $ | 894 | $ | 937 | $ | 2,517 | $ | 26 | $ | 7,922 | ||||||||||||
Segment assets at quarter-end |
$ | 124,249 | $ | 100,886 | $ | 103,324 | $ | 89,403 | $ | 28,872 | $ | 446,734 | ||||||||||||
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The following table shows the gross revenue and net revenue attributable to the Company’s principal services.
| Three months ended | Six months ended | ||||||||||||||||
| July 31, | July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Gross revenues: |
|||||||||||||||||
Airfreight forwarding |
$ | 167,971 | $ | 152,053 | $ | 327,052 | $ | 283,110 | |||||||||
Ocean freight forwarding |
88,589 | 70,375 | 162,911 | 133,323 | |||||||||||||
Customs brokerage |
17,207 | 15,501 | 32,241 | 29,498 | |||||||||||||
Contract logistics |
56,601 | 14,057 | 107,908 | 25,471 | |||||||||||||
Other |
31,657 | 22,833 | 58,701 | 39,075 | |||||||||||||
| $ | 362,025 | $ | 274,819 | $ | 688,813 | $ | 510,477 | ||||||||||
Net revenues: |
|||||||||||||||||
Airfreight forwarding |
$ | 48,216 | $ | 38,331 | $ | 93,146 | $ | 72,612 | |||||||||
Ocean freight forwarding |
18,931 | 16,608 | 34,989 | 31,436 | |||||||||||||
Customs brokerage |
16,183 | 14,531 | 30,448 | 27,947 | |||||||||||||
Contract logistics |
47,139 | 8,880 | 90,517 | 15,538 | |||||||||||||
Other |
14,390 | 9,183 | 27,178 | 16,929 | |||||||||||||
| $ | 144,859 | $ | 87,533 | $ | 276,278 | $ | 164,462 | ||||||||||
NOTE 6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by reportable segment for the six months ended July 31, 2003 are as follows:
| Asia | ||||||||||||||||||||
| Europe | Americas | Pacific | Africa | Total | ||||||||||||||||
Balance as of February 1, 2003 |
$ | 23,827 | $ | 34,908 | $ | 43,732 | $ | 14,177 | $ | 116,644 | ||||||||||
Acquisitions and contingent earn-out
payments made |
575 | 308 | 1,055 | 3,341 | 5,279 | |||||||||||||||
Reduction due to reversal of valuation allowance on deferred taxes |
— | (4,002 | ) | — | — | (4,002 | ) | |||||||||||||
Foreign currency translation and
other adjustments |
678 | 364 | 1,245 | 403 | 2,690 | |||||||||||||||
Balance as of July 31, 2003 |
$ | 25,080 | $ | 31,578 | $ | 46,032 | $ | 17,921 | $ | 120,611 | ||||||||||
The amortized intangible assets as of July 31, 2003 relate primarily to the estimated fair value of the customer contracts and customer relationships acquired with Standard Corporation and Kite Logistics (Pty) Limited and had a gross carrying amount of $11,195, accumulated amortization expense of $504 and a net value of $10,691. Amortization expense totaled $158 and $306 for the three and six months ended July 31, 2003, respectively, and we expect the amortization expense for these intangible assets to be approximately $711 per year for each of the next five years.
The purchase price allocations for IndAir Carriers (Pvt) Ltd. and Kite Logistics (Pty) Limited have not been finalized as of July 31, 2003.
- 10 -
NOTE 7. Supplemental Cash Flow Information
The following table shows the supplemental non-cash investing and financing activities and the supplemental cash flow information.
| Six months ended | |||||||||
| July 31, | |||||||||
| 2003 | 2002 | ||||||||
Non-cash activities: |
|||||||||
Additions to capital leases |
$ | 808 | $ | 3,380 | |||||
Cash (received)/paid: |
|||||||||
Interest, net |
(500 | ) | 325 | ||||||
Income taxes |
3,899 | 3,232 | |||||||
NOTE 8. Contingencies
The Company is subject to legal proceedings and claims, which arise in the ordinary course of its business.
The Company is involved in litigation in Italy and England 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 of the former ultimate owner as a consultant. The suits seek monetary damages, including compensation for termination of the owner’s consulting agreement. The Company has brought counter-claims for monetary damages in relation to warranty claims under the purchase agreement. The Company has been advised that proceedings to recover amounts owing by the former ultimate owner and other entities owned by him, to third parties may be instituted against the Company. It is alleged that Per Transport SpA guaranteed certain obligations of these other entities owned by the former ultimate owner. The Company believes that these guarantees are the responsibility of the former ultimate owner. These guarantees were made prior to its acquisition, were not disclosed to the Company during its acquisition negotiations nor were they disclosed in the audited statutory financial statements of Per Transport SpA. Civil and criminal proceedings have also been instituted against the former ultimate owner in relation to these guarantees. The total of all such actual and potential claims is approximately $16.9 million, based on exchange rates as of July 31, 2003. The Company believes that it has adequate defenses in relation to these claims if these proceedings are brought against it.
The Company is one of seven defendants named in a lawsuit filed on July 30, 2001 in the U.S. Bankruptcy Court for the Southern District of New York. The plaintiff, the committee of unsecured creditors of FMI Forwarding (formerly known as Intermaritime Forwarding), alleges under a theory of fraudulent conveyance that UTi paid inadequate consideration for certain assets of Intermaritime Forwarding and also alleges that UTi is liable for debts of FMI Forwarding on a successor liability theory. The plaintiff seeks recovery in an amount up to $4.6 million. The Company believes that it will ultimately prevail in this matter.
A former customer, De La Rue International, filed a complaint against the Company in the Superior Court of Gwinnett County, Georgia on April 21, 2003 alleging that the Company was negligent, that it breached its contractual obligations and that it fraudulently concealed the fact that three shipments in
- 11 -
August and September 1999 were not properly and timely reported to U.S. Customs for clearance. The plaintiff is asking for damages in excess of $2.0 million.
The Company is one of approximately 83 defendants named in two class action lawsuits which were originally filed on September 19, 1995 and subsequently consolidated in the District Court of Brazaria County, Texas (23rd Judicial District) where it is alleged that various defendants sold chemicals that were utilized in the Gulf War by the Iraqi army which caused personal injuries to U.S. armed services personnel and their families, including birth defects. The lawsuits were brought on behalf of the military personnel who served in the Gulf War and their families and the plaintiffs are seeking in excess of $1 billion in damages. To date, the plaintiffs have not obtained class certification. The Company believes they are a defendant in the suit because an entity that sold the Company assets in 1993 is a defendant. The Company believes it will prevail in this matter because the alleged actions giving rise to the claims occurred prior to our purchase of the assets. The Company further believes that it will ultimately prevail in this matter since it never manufactured chemicals and the plaintiffs have been unable to thus far produce evidence that the Company acted as a freight forwarder for cargo that included chemicals used by the Iraqi army.
In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations or financial position of the Company.
- 12 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
UTi Worldwide Inc. and its subsidiaries (which we refer to as UTi, or sometimes as the company) is an international, non-asset-based supply chain management company that provides services through a global network of branch offices and logistics centers and additional independent agent-owned offices. Our services include air and ocean freight forwarding, customs brokerage, contract logistics and other logistics-related services, including consulting, the coordination of purchase orders and customized management services.
During the three months ended July 31, 2003 (which we refer to as the second quarter of fiscal 2004), the operating results of IndAir Carriers (Pvt) Ltd. and Kite Logistics (Pty) Limited are included in the company’s financial statements since the effective dates of the acquisitions. Effective May 1, 2003, the company acquired 100% of the issued and outstanding shares of IndAir Carriers (Pvt) Ltd. for an initial purchase price of approximately $1.7 million. Effective July 1, 2003, the company acquired 50% of the issued and outstanding shares of Kite Logistics (Pty) Limited for an initial purchase price of approximately $5.3 million.
Our reporting currency is the United States 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 United States dollar. Accordingly, we experience the effects of changes in foreign currency exchange rates on our results of operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this quarterly report and our audited consolidated financial statements and notes thereto for the year ended January 31, 2003, which are included in our annual report on Form 20-F for the year ended January 31, 2003, on file with the Securities and Exchange Commission. The company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Seasonality
Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. Our first fiscal quarter is traditionally weaker compared with our other fiscal quarters. This trend is dependent on numerous factors, including the markets in which we operate, holiday seasons, consumer demand, climate, economic conditions and numerous other factors beyond our control. There can be no assurance that our historic operating patterns will continue in future periods as we cannot influence or forecast many of these factors.
Forward-Looking Statements
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, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, the company’s current business plan and strategy and strategic operating plan. These forward-looking statements are
- 13 -
identified by their use of such terms and phrases as “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projected,” “projections,” “plans,” “anticipates,” “anticipated,” “should,” “designed to,” “foreseeable future,” “believe,” “believes” and “scheduled” and similar expressions. The company’s actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Important factors that the company believes might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q (filed as Exhibit 99.3 to the company’s Form 10-Q for the three months ended April 30, 2003, and incorporated herein by reference), which are incorporated in this Form 10-Q by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q. 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 Securities Exchange Act of 1934.
Discussion of Results
Our business operates in four geographic segments comprised of Europe, the Americas, Asia Pacific and Africa. Gross revenue is recognized in the region in which the shipment originates. Our gross revenue by geographic segment is set forth in the following table (in thousands):
| Three months ended July 31, | Six months ended July 31, | ||||||||||||||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||||||||
| Gross | % of | Gross | % of | Gross | % of | Gross | % of | ||||||||||||||||||||||||||
| revenue | total | revenue | total | revenue | total | revenue | total | ||||||||||||||||||||||||||
Europe |
$ | 104,435 | 29 | % | $ | 93,229 | 34 | % | $ | 203,368 | 29 | % | $ | 172,467 | 34 | % | |||||||||||||||||
Americas |
114,281 | 32 | 68,561 | 25 | 217,395 | 32 | 130,103 | 26 | |||||||||||||||||||||||||
Asia Pacific |
96,169 | 26 | 79,375 | 29 | 180,002 | 26 | 144,529 | 28 | |||||||||||||||||||||||||
Africa |
47,140 | 13 | 33,654 | 12 | 88,048 | 13 | 63,378 | 12 | |||||||||||||||||||||||||
Total |
$ | 362,025 | 100 | % | $ | 274,819 | 100 | % | $ | 688,813 | 100 | % | $ | 510,477 | 100 | % | |||||||||||||||||
Gross revenue increased $87.2 million, or 32%, and $178.3 million, or 35%, for the three and six months ended July 31, 2003 as compared to the comparable prior year periods, respectively primarily due to increases in gross revenue from our operations excluding gross revenue attributable to Standard Corporation (which we refer to as Standard), which the company acquired effective October 1, 2002, the contribution to gross revenue from the operations of Standard and the effect of the weakening dollar versus primarily the euro and South African rand. We estimate that, using currency exchange rates in effect for the first half of fiscal 2003, our gross revenues for the first half of fiscal 2004 would have reflected a growth rate of 26% on a constant currency basis. Of this increase, we estimate that acquisitions accounted for less than two-thirds of the growth for the first half of fiscal 2004 versus the comparable period in the prior fiscal year on a constant currency basis.
We believe that net revenue is a better measure than gross revenue of the importance to us of our various services since our gross revenue for our services as an indirect air and ocean carrier includes the carriers’ charges to us for carriage of the shipment. When we act as an indirect air and ocean carrier, our net revenue is determined by the differential between the rates charged to us by the carrier and the rates we charge our customers plus the fees we receive for our ancillary services. Net revenue derived from freight forwarding generally is shared between the points of origin and destination. Our gross revenue in our other capacities, including contract logistics, includes only commissions and fees earned by us and is substantially the same as our net revenue. The following table shows our net
- 14 -
revenues and our operating expenses for the periods presented, expressed as a percentage of total net revenues.
| Three months ended | Six months ended | ||||||||||||||||
| July 31, | July 31, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net revenues: |
|||||||||||||||||
Airfreight forwarding |
33 | % | 44 | % | 34 | % | 44 | % | |||||||||
Ocean freight forwarding |
13 | 19 | 12 | 19 | |||||||||||||
Customs brokerage |
11 | 17 | 11 | 17 | |||||||||||||
Contract logistics |
33 | 10 | 33 | 10 | |||||||||||||
Other |
10 | 10 | 10 | 10 | |||||||||||||
Total net revenues |
100 | 100 | 100 | 100 | |||||||||||||
Staff costs |
55 | 50 | 54 | 51 | |||||||||||||
Depreciation and amortization |
3 | 3 | 3 | 3 | |||||||||||||
Amortization of intangible assets |
* | — | * | — | |||||||||||||
Other operating expenses |
32 | 34 | 33 | 34 | |||||||||||||
Operating income |
10 | 13 | 9 | 12 | |||||||||||||
Interest income |
1 | 1 | 1 | 1 | |||||||||||||
Interest expense |
(1 | ) | (1 | ) | (1 | ) | (1 | ) | |||||||||
Gains/(losses) on foreign exchange |
* | * | * | * | |||||||||||||
Pretax income |
10 | 13 | 10 | 11 | |||||||||||||
Income tax expense |
(3 | ) | (4 | ) | (2 | ) | (3 | ) | |||||||||
Minority interests |
* | * | * | * | |||||||||||||
Net income |
8 | % | 9 | % | 7 | % | 8 | % | |||||||||
| * | Less than one percent. |
Three months ended July 31, 2003 compared to three months ended July 31, 2002
Net revenue increased $57.4 million, or 65% to $144.9 million for the second quarter of fiscal 2004 compared to $87.5 million for the three months ended July 31, 2002 (which we refer to as the second quarter of fiscal 2003). Net revenue for the second quarter of fiscal 2004 benefited from acquisitions made during the last half of fiscal 2003, primarily Standard, which had net revenues of $40.1 million for the current quarter, and from acquisitions made during the second quarter of fiscal 2004, which added $1.0 million of net revenue during the second quarter of fiscal 2004. Additionally, net revenue was favorably impacted by foreign currency exchange rates for the second quarter of fiscal 2004 versus the comparable period in the prior year, primarily in the Africa and Europe regions. We estimate that, using currency exchange rates in effect for the second quarter of fiscal 2003, our net revenues for the second quarter of fiscal 2004 would have reflected a growth rate of 58% on a constant currency basis. On a constant currency basis excluding the impact of acquisitions, net revenue grew 10% during the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003.
Airfreight forwarding net revenue increased $9.9 million, or 26%, to $48.2 million for the second quarter of fiscal 2004 compared to $38.3 million for the second quarter of fiscal 2003, with all regions reporting increased airfreight forwarding net revenues over the prior year, primarily due to improved yields (i.e., airfreight forwarding net revenue divided by airfreight forwarding gross revenue) and favorable exchange rates. While the airfreight forwarding net revenue in Europe and Africa regions benefited from the impact of the foreign currency exchange rates for the second quarter of fiscal 2004 versus the second quarter of fiscal 2003, Europe’s airfreight forwarding net revenue increase also resulted from a higher yield, but was tempered by lower export volumes, while Africa’s airfreight forwarding net revenue benefited from higher volumes as compared to the second quarter of fiscal 2003, but was partially offset by a lower yield. Airfreight forwarding net revenue in the Asia Pacific region increased primarily because of both higher volumes and a higher yield. The Americas region experienced a decline in
- 15 -
airfreight export volumes, but the decline in volumes was offset by a higher yield, resulting in an overall increase in net airfreight forwarding revenues for the region.
Ocean freight forwarding net revenue increased $2.3 million, or 14%, to $18.9 million for the second quarter of fiscal 2004 compared to $16.6 million for the same prior year period, with all regions reporting increases. The ocean freight forwarding net revenue for the Europe and Africa regions benefited from, primarily, the stronger euro and South African rand, respectively, versus the United States dollar during the second quarter of fiscal 2004 as compared to the comparable prior year quarter. The Asia Pacific region reported increased net ocean freight forwarding revenue during the second quarter of fiscal 2004 as compared to the prior year comparable period due primarily to increases in volumes, but this increase in volume was partially offset by the decline in ocean freight forwarding yield caused by the general price increases from ocean carriers which were generally passed through to customers as submitted by the shipping lines.
Customs brokerage net revenue increased $1.7 million, or 11%, to $16.2 million for the second quarter of fiscal 2004 compared to $14.5 million for the same prior year period. Customs brokerage net revenue increased primarily as a result of an increase in the amount of clearances that we processed during the second quarter of fiscal 2004 compared with the second quarter of fiscal 2003.
Contract logistics net revenue increased $38.2 million, or 431%, to $47.1 million for the second quarter of fiscal 2004 compared to $8.9 million for the second quarter of fiscal 2003. This increase was primarily due to the contribution from the Standard acquisition, which contributed approximately $33.1 million of contract logistics net revenue in the second quarter of fiscal 2004.
Other net revenue, which includes revenue from our other logistics-related services such as road freight and other transportation services, consulting, order management, planning and optimization services, increased $5.2 million, or 57%, to $14.4 million for the second quarter of fiscal 2004 compared to $9.2 million for the second quarter of fiscal 2003. This increase is primarily due to the contribution of Standard of approximately $7.0 million, partially offset by declines in other net revenue in the Europe region during the quarter as the road freight business in that region continued to be negatively impacted by its reorganization which was started in the quarter ended April 30, 2003.
Staff costs increased $36.1 million, or 82%, to $80.1 million for the second quarter of fiscal 2004 from $44.0 million for the same prior year period. Staff costs also increased as a percentage of net revenue, from 50% in the second quarter of fiscal 2003 to 55% in the second quarter of fiscal 2004. The increase was due primarily to costs associated with our addition of personnel in connection with the Standard acquisition, as well as the Zeracon acquisition, which was completed in November 2002, and higher reported costs in the Europe and Africa regions over the prior year as a result of the stronger euro and South African rand, respectively, as compared to the United States dollar during the quarter. Standard’s contract logistics business has historically experienced higher staff costs as a percentage of net revenues than our freight forwarding operations so we expect staff costs to generally be higher as a percentage of net revenues as compared to our historic trends. This, however, will vary according to customer demand and seasonality in our freight forwarding operations, among other factors.
Depreciation and amortization expense increased $1.3 million, or 51% to $3.8 million for the second quarter of fiscal 2004 from $2.5 million in the comparable prior year period. As a percentage of net revenue, it remained constant at 3%, for the second quarter of fiscal 2004 as compared to the comparable quarter in the prior year.
Amortization of intangible assets increased $0.2 million, or 100%, in the second quarter of fiscal 2004 versus the second quarter of fiscal 2003, as it relates to intangible assets acquired with Standard in the
- 16 -
third quarter of fiscal 2003 and, to a lesser degree, the intangible assets acquired with Kite Logistics effective July 1, 2003.
Other operating expenses increased by $16.2 million, or 55%, to $45.8 million in the second quarter of fiscal 2004 compared to $29.6 million for the second quarter of fiscal 2003. These expenses increased primarily as a result of the acquisition of Standard and the increased costs reported by the Europe and Africa regions as a result of the weakening United States dollar against the euro and South African rand, respectively, during the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003. Included in other operating expenses for the second quarter of fiscal 2004 are facilities and communications costs of $16.4 million compared to $10.5 million of such costs for the same prior year period. The balance of the other operating expenses is comprised of selling, general and administrative costs. For the second quarter of fiscal 2004, selling, general and administrative costs were $29.4 million compared to $19.1 million for the same prior year period. When expressed as a percentage of net revenue, other operating expenses declined to 32% for the second quarter of fiscal 2004 from 34% the comparable prior year period.
Interest income increased $0.5 million, or 50%, to $1.7 million in the second quarter of fiscal 2004, as compared to $1.2 million in the second quarter of fiscal 2003, primarily due to higher cash balances on deposit during the second quarter of fiscal 2004.
Interest expense, which consisted primarily of interest on our credit facilities and capitalized lease obligations, increased $0.2 million, or 16%, to $1.4 million in the second quarter of fiscal 2004, as compared to $1.2 million in the second quarter of fiscal 2003, primarily due to higher interest rates on borrowings in South Africa during the second quarter of fiscal 2004, as well as the effect of the weakening U.S. dollar as compared to the South African rand during the current quarter.
The effective income tax rate decreased to 26% in the second quarter of fiscal 2004 compared to 28% in the same prior year period. This decrease was primarily due to an increase in the taxable income from the Asia Pacific region, which historically has lower tax rates than the company’s average tax rate, partially offset by an increase in the taxable income from the Americas region which historically has higher tax rates than the company’s average tax rate. In addition, we had higher interest income and gains on foreign exchange, which were in low tax jurisdictions, in the second quarter of fiscal 2004 compared to the comparable prior year period. Our overall effective tax rate is impacted by the geographic composition of our worldwide earnings and is therefore subject to change.
Net income increased 48% to $11.4 million in the second quarter of fiscal 2004 as compared to $7.7 million in the comparable prior year period for the reasons listed above.
Six months ended July 31, 2003 compared to six months ended July 31, 2002
Net revenue increased $111.8 million, or 68% to $276.3 million for the six months ended July 31, 2003 (which we refer to as the first half of fiscal 2004) compared to $164.5 million for the six months ended July 31, 2002 (which we refer to as the first half of fiscal 2003). Net revenue for the first half of fiscal 2004 benefited from acquisitions made during the last half of fiscal 2003, primarily Standard, which had net revenues of $75.2 million for the first half of fiscal 2004, and from acquisitions made during the second quarter of fiscal 2004. Additionally, net revenue was favorably impacted by foreign currency exchange rates for first half of fiscal 2004 versus the comparable period in the prior year, primarily in the Africa and Europe regions. We estimate that, using currency exchange rates in effect for the first half of fiscal 2003, our net revenues for the first half of fiscal 2004 would have reflected a growth rate of 63% on a constant currency basis. On a constant currency basis excluding the impact of acquisitions, net revenue grew approximately 16% during the first half of fiscal 2004 as compared to the first half of fiscal 2003.
- 17 -
Airfreight forwarding net revenue increased $20.5 million, or 28%, to $93.1 million for the first half of fiscal 2004 compared to $72.6 million for the first half of fiscal 2003, with all regions reporting increased airfreight forwarding net revenues over the comparable period in the prior year generally due to improved yields, favorable exchange rates and higher volumes in total. The increase in the Asia Pacific region was primarily due to higher volumes and to a higher airfreight forwarding yield in the first half of fiscal 2004 as compared to the first half of fiscal 2003. The Africa region also had higher airfreight volumes and benefited to a lesser degree from the weakening dollar as compared to the South African rand during the first half of fiscal 2004 as compared to the first half of fiscal 2003. Although airfreight export volumes in the Europe and Americas regions were down in the first half of fiscal 2004 versus the first half of fiscal 2003, both regions reported an increase in airfreight forwarding net revenue because of higher airfreight yields and, for the Europe region, the weakening dollar as compared to the euro.
Ocean freight forwarding net revenue increased $3.6 million, or 11%, to $35.0 million for the first half of fiscal 2004 compared to $31.4 million for the first half of fiscal 2003, with increases in the Asia Pacific and Europe regions partially offset by decreases in Africa and the Americas regions. The Asia Pacific region reported increased net ocean freight forwarding revenue during the first half of fiscal 2004 as compared to the prior year comparable period due primarily to increases in volumes, partially offset by a lower ocean freight yield due to the general price increases from ocean carriers effective May 1, 2003 which were generally passed through to customers as submitted by the shipping lines. The Europe region also reported increased net ocean freight forwarding revenue during the first half of fiscal 2004 as compared to first half of fiscal 2003 primarily as a result of the weakened dollar as compared to the euro during the first half of fiscal 2004 versus the comparable prior year period, as volumes were down slightly during the first half of fiscal 2004 as compared to first half of fiscal 2003, but the ocean freight yield improved slightly. While the Americas region’s volumes increased, pricing pressures depressed net ocean freight forwarding revenue in the region during the first half of fiscal 2004 as compared to the prior year comparable period along with the May 1, 2003 price increases, which squeezed the ocean freight yield. Net ocean freight forwarding revenue was also down in Africa, primarily as a result of lower volumes in the first half of fiscal 2004 as compared to the first half of fiscal 2003. Such lower volumes in Africa were partially offset by reported increases in ocean freight forwarding net revenue resulting from the stronger South African rand versus the United States dollar during the first half of fiscal 2004 as compared to the comparable prior year period.
Customs brokerage net revenue increased $2.5 million, or 9%, to $30.4 million for the first half of fiscal 2004 compared to $27.9 million for the first half of fiscal 2003. Customs brokerage net revenue increased primarily as a result of an increase in the amount of clearances that we processed during the first half of fiscal 2004 compared with the first half of fiscal 2003.
Contract logistics net revenue increased $75.0 million, or 483%, to $90.5 million for the first half of fiscal 2004 compared to $15.5 million for the first half of fiscal 2003. This increase was primarily due to the contributions from the Standard acquisition, which contributed approximately $65.7 million of contract logistics net revenue in the first half of fiscal 2004.
Other net revenue, which includes revenue from our other logistics-related services such as road freight and other transportation services, consulting, order management, planning and optimization services, increased $10.3 million, or 61%, to $27.2 million for the first half of fiscal 2004 compared to $16.9 million for the first half of fiscal 2003. This increase is primarily due to the contribution of Standard of approximately $9.5 million and increased net other revenues reported in the Africa region as a result of the stronger South African rand as compared to the United States dollar during the first half of fiscal 2004 as compared to the first half of fiscal 2003, partially offset by declines in other net revenue in the
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Europe region during the first half of fiscal 2004 as the road freight business in that region was negatively impacted by its reorganization.
Staff costs increased $67.0 million, or 80%, to $150.6 million for the first half of fiscal 2004 from $83.6 million for the first half of fiscal 2003. Staff costs also increased as a percentage of net revenue to 54% in the first half of fiscal 2003 from 51% in the first half of fiscal 2003, which, dependent on many factors including customer demand and seasonality, is a trend that we expect may continue. The increase was due primarily to costs associated with our addition of personnel in connection with the Standard acquisition and higher reported costs in the Europe and Africa regions over the prior year as a result of the stronger euro and South African rand, respectively, as compared to the United States dollar during the first half of fiscal 2004 as compared to the first half of fiscal 2003.
Depreciation and amortization expense increased $2.4 million, or 50% to $7.2 million for the first half of fiscal 2004 from $4.8 million in the comparable prior year period. As a percentage of net revenue, it remained constant at 3%, for the first half of fiscal 2004 as compared to the comparable period in the prior year.
Amortization of intangible assets increased $0.3 million, or 100%, in the first half of fiscal 2004 versus the first half of fiscal 2003, as it relates to intangible assets acquired with Standard in the third quarter of fiscal 2003 and, to a lesser degree, intangible assets acquired with Kite Logistics effective July 1, 2003.
Other operating expenses increased by $35.4 million, or 62%, to $92.1 million in the first half of fiscal 2004 compared to $56.7 million for the same prior year period. These expenses increased primarily as a result of the acquisition of Standard and the increased costs reported by the Europe and Africa regions as a result of the weakening United States dollar against the euro and South African rand, respectively during the first half of fiscal 2004 as compared to the first half of fiscal 2003. Included in other operating expenses for the first half of fiscal 2004 are facilities and communications costs of $31.6 million compared to $20.2 million of such costs for the same prior year period. The balance of the other operating expenses is comprised of selling, general and administrative costs. For the first half of fiscal 2004, selling, general and administrative costs were $60.5 million compared to $36.5 million for the same prior year period. When expressed as a percentage of net revenue, other operating expenses declined to 33% for the first half of fiscal 2004 versus 34% in the comparable prior year period.
Interest income increased $1.3 million, or 69%, to $3.2 million in the first half of fiscal 2004, as compared to $1.9 million in the first half of fiscal 2003, primarily due to higher cash balances on deposit during the first half of fiscal 2004.
Interest expense, which consisted primarily of interest on our credit facilities and capitalized lease obligations, increased $0.4 million, or 19%, to $2.7 million in the first half of fiscal 2004, as compared to $2.3 million in the first half of fiscal 2003, primarily due to higher interest rates on borrowings in South Africa during the first half of fiscal 2004, as well as the effect of the weakening U.S. dollar as compared to the South African rand during the current quarter.
The effective income tax rate decreased to 25% in the first half of fiscal 2004 compared to 28% in the same prior year period. This decrease was primarily due to an increase in the taxable income from the Asia Pacific region, which historically has lower tax rates than the company’s average tax rate, partially offset by an increase in the taxable income from the Americas region which historically has higher tax rates than the company’s average tax rate. In addition, we had higher interest income and gains on
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foreign exchange, which were in low tax jurisdictions, in the first half of fiscal 2004 compared to the comparable prior year period. Our overall effective tax rate is impacted by the geographic composition of our worldwide earnings and is therefore subject to change.
Net income increased 55% to $19.4 million in the first half of fiscal 2004 as compared to $12.5 million in comparable prior year period for the reasons listed above.
Liquidity and Capital Resources
Historically, we have used our internally generated cash flow from operations along with the net proceeds from the issuance of share capital to fund our working capital requirements, capital expenditures, acquisitions and debt service.
In the first half of fiscal 2004, we generated $13.8 million of cash from our operating activities. This resulted from net income of $19.4 million plus depreciation and amortization expense and amortization of intangible assets of $7.5 million and other items totaling $2.4 million, offset by a net increase in working capital of approximately $15.5 million. The net increase in working capital consisted of an increase in trade receivables and other current assets of $20.8 million offset by a lower increase in trade payables and other current liabilities of $5.3 million and was attributable primarily to increased revenues and related disbursements from our freight forwarding operations during June and July 2003.
During the first half of fiscal 2004, we used approximately $18.0 million of cash in our investing activities. Approximately $9.0 million of cash was used for capital expenditures, approximately half of which was for computer hardware and software purchases. We elected to pay cash for certain capital assets instead of leasing them during the first half of fiscal 2004, as we historically have done, because of the low interest rates being received on our cash deposits during the current year-to-date. The balance of the cash used in our investing activities was used primarily for acquisitions and earn-out payments made in the first half of fiscal 2004 related to acquisitions made in prior years, including $7.0 million for the current year acquisitions of IndAir Carriers and Kite Logistics, and increases in long-term deposits.
Our financing activities during the first half of fiscal 2004 used $11.5 million of cash, primarily due to reductions on our bank lines of credit and short-term borrowings totaling $8.0 million, repayments of capital lease obligations of $1.7 million and cash dividends paid of approximately $2.9 million, partially offset by net proceeds from the issuance of ordinary shares of $1.6 million. These activities, in addition to foreign exchange rate changes, resulted in a net decrease in our cash and cash equivalents to $149.6 million at July 31, 2003 from $168.1 million at January 31, 2003.
We have various bank credit facilities established in countries where such facilities are required for our business. At July 31, 2003 these facilities provided for individual lines of credit ranging from approximately $0.1 million to $38.6 million, and in total provided for guarantees, which are a necessary part of our business, of $53.0 million and a total borrowing capacity of approximately $145.0 million at July 31, 2003. Due to the global nature of our business, we utilize a number of financial institutions to provide these various facilities. Consequently, the use of a particular credit facility is normally restricted to the country in which it originated and a particular credit facility may restrict distributions by the subsidiary operating in the country. Our borrowings under these facilities totaled $31.8 million at July 31, 2003. Most of our borrowings are secured by grants of security interests in accounts receivable and other assets, including pledges of stock of our subsidiaries. The interest rates on these facilities vary and ranged from 2.5% to 17.8% at July 31, 2003. These rates are generally linked to the prime lending rate in each country where we have facilities. We use our credit facilities to primarily fund our working capital needs as well as to provide for customs bonds and guarantees and forward
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exchange transactions. While the majority of our borrowings are due and payable within one year, we believe we will be able to renew such facilities on commercially reasonable terms.
Our two largest facilities are with Nedcor Bank Limited and General Electric Capital Corporation. Our facility with Nedcor Bank Limited totals 24.3 million British pounds sterling (equivalent to approximately $39.1 million as of July 31, 2003). This facility is primarily used for guarantees and standby letters of credit to secure banking facilities and performance undertakings of our subsidiary companies. The facility is available on an ongoing basis until further notice, subject to Nedcor Bank’s credit review procedures and may be terminated by the bank at any time. The facility is secured by cross guarantees and indemnities of selected subsidiary companies. UTi, United States, Inc., our U.S. operating company, has a revolving credit facility with General Electric Capital Corporation which provides for up to $29.0 million of borrowings based on a formula of eligible accounts receivable. The credit facility is secured by substantially all of the assets of the U.S. operating company and its subsidiaries as well as a pledge of the stock of the U.S. operating company and its subsidiaries. The maturity date of this credit facility was recently extended to November 2003 and the facility contains financial and other covenants and restrictions applicable to our U.S. operations and a change of control provision applicable to changes at our U.S. holding company level. This agreement limits the right of the U.S. operating company to distribute funds to holding companies. We are currently evaluating our alternatives with regard to this credit facility with General Electric Capital Corporation, including possibly seeking an extension of the facility or replacing the facility with a new credit facility. In the event we are unable to extend the facility or obtain a satisfactory replacement for the facility, we believe we have sufficient working capital in order to fund our U.S. operations without disruption or adverse consequences. At July 31, 2003, we had approximately $60.2 million of available, unused borrowing capacity under our various bank credit facilities.
We believe that with our current cash position, various bank credit facilities and operating cash flows, we should have sufficient means to meet our working capital and liquidity requirements as our operations are currently conducted for at least the next twelve months.
Critical Accounting Policies and Estimates
The company’s financial statements are prepared in conformity with U.S. GAAP. The preparation thereof requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from those estimates.
There have been no significant changes in the company’s critical accounting policies during the first half of fiscal 2004.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
The nature of our operations necessitates dealing in many foreign currencies. Our results are subject to fluctuations due to changes in exchange rates. We attempt to limit our exposure to changing foreign exchange rates through both operational and financial market actions. We provide services to
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customers in locations throughout the world and, as a result, operate with many currencies including the key currencies of North America, Latin America, Africa, Asia Pacific and Europe.
Our short-term exposures to fluctuating foreign currency exchange rates are related primarily to intercompany transactions. The duration of these exposures is minimized through our use of an intercompany netting and settlement system that settles all of our intercompany trading obligations once per month. In addition, selected exposures are managed by financial market transactions in the form of forward foreign exchange contracts (typically with maturities at the end of the month following the purchase of the contract). Forward foreign exchange contracts are primarily denominated in the currencies of our principal markets. We will normally generate foreign exchange gains and losses through normal trading operations. We do not enter into derivative contracts for speculative purposes.
We do not hedge our foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our consolidated net income.
Interest Rate Risk
We are subject to changing interest rates because our debt consists primarily of short-term working capital lines, with interest rates generally linked to the prime lending rate in each country where we have credit facilities. We do not undertake any specific actions to cover our exposure to interest rate risk and we are not a party to any interest rate risk management transactions. We do not purchase or hold any derivative financial instruments for trading or speculative purposes.
As of July 31, 2003, there had been no material changes in our exposure to market risks since January 31, 2003 as described in our annual report on Form 20-F on file with the SEC. For a discussion of the company’s market risks associated with foreign currencies and interest rates, see “Quantitative and Qualitative Disclosures about Market Risk” in the Part I, Item 11, “Operating and Financial Review and Prospects,” of the company’s Annual Report on Form 20-F for the fiscal year ended January 31, 2003.
Item 4. Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of the company’s management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of the company’s “disclosure controls and procedures,” as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report the company’s disclosure controls and procedures are effective in enabling the company to record, process, summarize and report information required to be included in the company’s periodic SEC filings within the required time period.
There have been no significant changes in the company’s internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we are a defendant or plaintiff in various legal proceedings, including litigation arising in the ordinary course of our business. There were no material developments during the second quarter of fiscal 2004 in any of the legal proceedings previously disclosed under Item 8. Financial
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Information – Legal or Arbitration Proceedings found on page 41 of the company’s annual report on Form 20-F for the year ended January 31, 2003 on file with the Securities and Exchange Commission.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders (members) on June 30, 2003 at which meeting our shareholders elected three class “C” Directors to our Board of Directors for a term of three years and until their respective successors are duly elected and approved an amendment to the UTi Worldwide Inc. 2000 Stock Option Plan to increase the number of ordinary shares available for issuance thereunder from 2,359,109 to 3,859,109.
The following individuals were elected as class “C” directors and received the number of votes indicated below:
| Name of Nominee | Votes For | Votes Against | Abstentions | |||||||||
William H. Davidson |
27,528,573 | — | 984,266 | |||||||||
Roger I. MacFarlane |
27,465,383 | — | 1,048,356 | |||||||||
Matthys J. Wessels |
27,465,348 | — | 1,048,391 | |||||||||
For the approval of the amendment to the UTi Worldwide Inc. 2000 Stock Option Plan, 25,674,236 votes were cast in favor, 2,677,595 were cast against and there were 164,908 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
| Exhibit | Description | ||
| 10.1 | 2000 Stock Option Plan, as Amended* | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | ||
| 99.1 | Cautionary Statements*** | ||
| * | Filed as Exhibit B to the company’s Definitive Proxy Statement (No. 000-31869) on June 3, 2003 and incorporated herein by reference. | |
| ** | Pursuant to Commission Release No. 33-8238, these certifications will be treated as “accompanying” this quarterly report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange |
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| Act and these certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference. | ||
| *** | Filed as Exhibit 99.3 to the company’s Quarterly Report on Form 10-Q (No. 000-31869) on June 16, 2003 and incorporated herein by reference. |
(b) Reports on Form 8-K
| Item | Filing Date | Description | |||
| 5 | May 28, 2003 | News release dated May 23, 2003 regarding the company’s determination that a majority of its outstanding shares were held directly or indirectly by U.S. residents and, accordingly, the company becoming subject to reporting obligations of domestic registrants. | |||
| 7,9 | June 16, 2003 | News release dated June 10, 2003 and transcript of investor conference call held June 10, 2003 regarding the company’s financial results for its first fiscal quarter. | |||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| UTi Worldwide Inc. | ||||
| Date: September 15, 2003 | By: | /s/ Roger I. MacFarlane | ||
| Roger I. MacFarlane | ||||
| Chief Executive Officer | ||||
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EXHIBIT INDEX
| Exhibit | Description | ||
| 10.1 | 2000 Stock Option Plan, as Amended* | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | ||
| 99.1 | Cautionary Statements*** | ||
| * | Filed as Exhibit B to the company’s Definitive Proxy Statement (No. 000-31869) on June 3, 2003 and incorporated herein by reference. | |
| ** | Pursuant to Commission Release No. 33-8238, these certifications will be treated as “accompanying” this quarterly report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and these certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference. | |
| *** | Filed as Exhibit 99.3 to the company’s Quarterly Report on Form 10-Q (No. 000-31869) on June 16, 2003 and incorporated herein by reference. |
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