Description
Filed with the SEC from Oct 18 to Oct 24:
UTi Worldwide (UTIW)
P2 Capital Partners disclosed that it owns 8,658,553 shares (8.3%) after it bought 3,639,524 shares in the period from Sept. 24 through Oct. 17 at prices ranging from $13.74 to $13.78 per share.
BUSINESS OVERVIEW
Business Overview
Our primary services include air and ocean freight forwarding, contract logistics, customs brokerage, distribution, inbound logistics, truckload brokerage and other supply chain management services, including consulting, the coordination of purchase orders and customized management services. Through our supply chain planning and optimization services, we assist our clients in designing and implementing solutions that improve the predictability and visibility and reduce the overall costs of their supply chains.
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 customers 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. Airfreight forwarding services accounted for approximately 35%, 35% and 33% of our consolidated revenues in our fiscal years ended January 31, 2012, 2011 and 2010 (which we refer to as fiscal 2012, 2011 and 2010, respectively). Ocean freight forwarding services accounted for approximately 25%, 26% and 25% of our consolidated revenues for fiscal 2012, 2011 and 2010, respectively.
As part of our freight forwarding services, we provide customs brokerage services in the United States (U.S.) and most of the other countries in which we operate. Within each country, the rules and regulations vary, along with the 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. Customs brokerage services accounted for approximately 3% of our consolidated revenues in each of fiscal 2012, 2011 and 2010. Other revenue in our freight forwarding segment is primarily comprised of international road freight shipments. Other revenue within our freight forwarding services accounted for approximately 6%, 6% and 5% of our consolidated revenues in fiscal 2012, 2011 and 2010, respectively.
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. 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 equivalent units (TEUs).
Contract Logistics and Distribution Segment. Our contract logistics services primarily relate to value-added warehousing and the subsequent distribution of goods and materials in order to meet clients’ inventory needs and production or distribution schedules. Our services include receiving, deconsolidation and decontainerization, sorting, put away, consolidation, assembly, cargo loading and unloading, assembly of freight and protective packaging, warehousing services, order management, and customized distribution and inventory management services. Our outsourced services include inspection services, quality centers and manufacturing support. Our inventory management services include materials sourcing services pursuant to contractual, formalized repackaging programs and materials sourcing agreements. Contract logistics revenues are recognized when the service has been completed in the ordinary course of business. Contract logistics services accounted for approximately 17%, 16% and 18% of our consolidated revenues in fiscal 2012, 2011 and 2010, respectively.
We also provide a range of distribution, consultation, outsourced management services, planning and optimization services, and other supply chain management services. Distribution services accounted for approximately 11%, 11% and 12% of our consolidated revenues for the fiscal years ended 2012, 2011 and 2010, respectively. We receive fees for the other supply chain management services that we perform. Other services within our contract logistics and distribution segment consist primarily of supply chain management services, and accounted for approximately 3%, 4% and 4% of our consolidated revenues in fiscal 2012, 2011 and 2010, respectively.
Financial Information about Services and Segments
The factors for determining the company’s 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.
Additional information regarding our operations by geographic segment and revenue attributable to our principal services is set forth in Note 20, “Segment Reporting” in our consolidated financial statements included in this annual report and in Part II, Item 7 of this report appearing under the caption, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We conduct a majority of our business outside of the U.S. and we anticipate revenue from foreign operations will continue to account for a significant amount of our future revenue. Our global operations are directly related to and are dependent upon, the volume of international trade and are subject to various factors, risks and uncertainties, including those included in Part I, Item 1A of this annual report appearing under the caption, “Risk Factors.”
Seasonality
Historically, our results for our operating segments have been subject to seasonal trends when measured on a quarterly basis. Our first and fourth fiscal quarters are traditionally weaker compared with our other fiscal quarters. This trend is dependent on numerous factors, including the markets in which we operate, holiday seasons, climate, economic conditions and many other factors. A substantial portion of our revenue is derived from clients in industries whose shipping patterns are tied closely to consumer demand for certain products or are based on just-in-time production schedules. We cannot accurately predict the timing of these factors, nor can we accurately estimate the impact of any particular factor, and thus we can give no assurance that these historical seasonal patterns will continue in future periods.
Environmental Regulation
In the U.S., the company is subject to federal, state and local provisions regulating the discharge of materials into the environment or otherwise seeking to protect the environment. Similar laws apply in many other jurisdictions in which the company operates. Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the company cannot predict what impact future environmental regulations may have on its business. The company does not currently anticipate making any material capital expenditures for environmental compliance purposes in the reasonably foreseeable future.
As a freight forwarder, we are indirectly impacted by the increasingly stringent federal, state, local and foreign laws and regulations protecting the environment, including the imposition of additional taxes on airlines and ocean carriers. Future regulatory developments in the U.S. and abroad could adversely affect operations and increase operating costs in the airline and ocean carrier industry. The European Union (EU) has issued a directive to member states to include aviation in its Greenhouse Gas Emissions Trading Scheme (ETS), which has required airlines, since January 2010, to monitor their emissions of carbon dioxide. Since January 2012 the EU ETS has required airlines to have emissions allowances equal to the amount of their carbon dioxide emissions to operate flights to and from member states of the European Union, including flights between the U.S. and the European Union. Non-EU governments have challenged the application of the EU ETS to their airlines; however, European courts have rejected these challenges and European authorities have indicated they intend to require airlines based outside the EU to comply with the EU ETS. Under the EU ETS, airlines are required to purchase emissions allowances to cover EU flights that exceed their free emissions allowances, which could indirectly result in substantial additional costs for us that we may not be able to pass on to our clients.
Other regulatory actions that may be taken in the future by the U.S. government, foreign governments (including the European Union), or the International Civil Aviation Organization to address climate change or limit the emission of greenhouse gases by the aviation sector are unknown at this time. Climate change legislation has been introduced in the U.S. Congress, including a proposal to require transportation fuel producers and importers to acquire allowances sufficient to offset the emissions resulting from combustion of their fuels. We cannot predict, however, if any such legislation will pass the Congress or, if passed and enacted into law, how it would specifically apply to the aviation industry. In addition, effective January 14, 2010, the Administrator of the U.S. Environmental Protection Agency (EPA) found that current and projected concentrations of greenhouse gases in the atmosphere threaten the public health and welfare. Although legal challenges and legislative proposals are expected that may invalidate this endangerment finding and the EPA’s assertion of authority under the Clean Air Act, the finding could result in EPA regulation of commercial aircraft emissions if EPA finds, as expected, that such emissions contribute to greenhouse gas pollution.
The impact to us, both directly and indirectly, and our industry from any additional legislation or regulations addressing climate change may be adverse and could be significant, particularly if regulators were to conclude that emissions from commercial aircraft and ocean vessels cause significant harm to the atmosphere or have a greater impact on climate change than other industries. Potential actions may include, but are not limited to, the imposition of requirements on airlines and ocean carriers to purchase emission offsets or credits; required participation in emissions allowance trading (such as required in the European Union); and substantial taxes on emissions.
Currency Risk
The nature of the company’s worldwide operations requires the company to transact with a multitude of currencies other than the U.S. dollar. This results in exposure to the inherent risks of the international currency markets and governmental interference. Some of the countries where the company maintains offices or agency relationships have strict currency control regulations which influence the company’s ability to hedge foreign currency exposure. The company attempts to compensate for these exposures by facilitating international currency settlements among its offices and agents.
Sales and Marketing
We market our services through an organization consisting of 954 full-time salespersons as of January 31, 2012, who receive assistance from our senior management and regional and local managers. In connection with our sales process and in order to serve the needs of our clients, some of which utilize only our freight forwarding and/or contract logistics services and for others who utilize a wider variety of our supply chain solutions and services, our sales force is divided into two specialized sales groups. One of these sales groups focuses primarily on marketing our air and ocean freight forwarding, contract logistics and customs brokerage services as individual products; and the other group focuses on marketing a combination of our services as comprehensive supply chain solutions.
Our sales and marketing efforts are directed at both global and local clients. Our smaller specialized global solutions sales and marketing teams focus their efforts on obtaining and developing large volume global accounts with multiple shipping locations which require comprehensive solutions. These accounts typically impose numerous requirements on their providers, such as electronic data interchange, Internet-based tracking and monitoring systems, proof of delivery capabilities, customized shipping reports and a global network of offices. The requirements imposed by our large volume global accounts often limit the competition for these accounts to large freight forwarders, third-party logistics providers and integrated carriers with global operations. Our global solutions sales and marketing teams also target companies operating in specific industries with unique supply chain requirements, such as the pharmaceutical, retail, apparel, chemical, automotive and high technology electronics industries.
Our local sales and marketing teams focus on selling to and servicing small and medium-sized clients who are primarily interested in selected services, such as freight forwarding, contract logistics and customs brokerage. They may also support the global sales and marketing team on larger accounts. No single client accounted for more than 4% of our consolidated revenues in fiscal 2012, 2011 or 2010.
Competition
Competition within the freight forwarding, contract logistics, distribution, and supply chain management industries is intense. There are a large number of companies competing in one or more segments of the industry. However, there are a limited number of international firms that have the worldwide capabilities to provide the breadth of services we offer. We also encounter competition from regional and local third-party logistics providers, integrated transportation companies operate their own aircraft, cargo sales agents and brokers, surface freight forwarders and carriers, airlines, ocean carriers, associations of shippers organized to consolidate their members’ shipments to obtain lower freight rates, and Internet-based freight exchanges. We believe it is becoming increasingly difficult for smaller regional competitors or providers with more limited service or information technology offerings to compete, which we expect will result in further industry consolidation.
In the competitive and fragmented domestic ground transportation services business in North America, we compete primarily with truckload carriers, intermodal transportation service providers, less-than-truckload carriers, railroads and third party transportation brokers. We compete in this business primarily on the basis of service, efficiency and freight rates.
We believe the ability to develop and deliver innovative solutions to meet our clients’ global supply chain needs is a critical factor in the ongoing success of the company. We achieve this through the appropriate use of technology and by leveraging our industry experience worldwide. This experience was obtained through strategic acquisitions and by attracting, retaining, and motivating highly qualified personnel with knowledge in the various segments of global logistics.
Generally, we believe that companies in our industry must be able to provide their clients with integrated, global supply chain solutions. Among the factors that we believe are impacting our industry are the outsourcing of supply chain activities, increased global trade and sourcing, and the need for advanced information technology systems that facilitate real-time access to shipment data, client reporting and transaction analysis. Furthermore, as supply chain management becomes more complicated, we believe companies are increasingly seeking full service solutions from a single or limited number of partners that are familiar with their requirements, processes and procedures and that can provide services globally.
We seek to compete in our industry by using our global network, proprietary information technology systems, relationships with transportation providers, and expertise in contract logistics services to improve our clients’ visibility into their supply chains while reducing their logistics costs.
CEO BACKGROUND
Brian D. Belchers
66 2006 Brian D. Belchers served as a consultant since January 2004, although he does not provide consulting services to the Company. From May 2000 to January 2004, Mr. Belchers served as Vice President of Cap Gemini, a management consulting firm. From October 1982 to May 2000, Mr. Belchers was a Partner at Ernst & Young LLP. Mr. Belchers has also served as a director of Sage Publications, Inc., a privately held corporation, since 2005. Mr. Belchers, as a Rhodes Scholar, graduated with a Masters of Arts in political science and economics from Oxford University. Mr. Belchers received a Bachelor of Commerce degree from the University of Natal and was a qualified chartered accountant in South Africa.
Mr. Belchers’ qualifications to serve on our Board of Directors include, among other skills and qualifications, his nearly 40 years of senior management and consulting experience with a focus on information technology, change management and business process improvement.
Roger I. MacFarlane
67 1995 Roger I. MacFarlane served as our Chief Executive Officer from May 2000 to January 2009. He has been a director since our formation in 1995, and was appointed Chairman of the Board of Directors in January 2009. From 1995 to April 2000, Mr. MacFarlane served as our Chief Executive Officer of the Americas Region and was responsible for overseeing our operations in North and South America. From 1993 to 1995, Mr. MacFarlane served as the Chief Executive Officer of the Americas Division of one of our predecessor corporations, and was responsible for overseeing its operations in North and South America. Mr. MacFarlane received a Bachelor of Arts degree and an L.L.B. degree from the University of Cape Town.
Mr. MacFarlane’s qualifications to serve on our Board of Directors include, among other skills and qualifications, his 40 years of experience in the international logistics, transportation and supply chain industry and his many years of senior management and director experience with the Company and its predecessors.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are an international, non-asset-based supply chain services and solutions company that provides air and ocean freight forwarding, contract logistics, customs clearances, distribution, inbound logistics, truckload brokerage and other supply chain management services.
The company’s operations are principally managed by core business operations. The factors for determining the reportable segments include the manner in which management evaluates the performance of the company combined with the nature of the individual business activities. Our operations are aligned into the following reportable segments: (i) Freight Forwarding and (ii) Contract Logistics and Distribution. Included in Corporate are certain administration and support functions, eliminations and various holding company activities within the group structure.
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 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 equivalent 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 customers 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 United States (U.S.) and most of the other countries in which we operate. Within each country, the rules and regulations vary, along with the 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 revenue in our freight forwarding segment is primarily comprised of international road freight shipments.
A significant portion of our expenses are variable and adjust to reflect the level of our business activities. Other than purchased transportation costs, staff costs are our single largest variable expense and are less flexible than purchased transportation costs in the near term. 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 equivalent units (TEUs).
Contract Logistics and Distribution Segment. Our contract logistics services primarily relate to value-added warehousing and the subsequent distribution of goods and materials in order to meet clients’ inventory needs and production or distribution schedules. Our services include receiving, deconsolidation and decontainerization, sorting, put away, consolidation, assembly, cargo loading and unloading, assembly of freight and protective packaging, warehousing services, order management, and customized distribution and inventory management services. Our outsourced services include inspection services, quality centers and manufacturing support. Out 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 $100.0 million to $105.0 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 our 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 local currency. As such, when the values of those assets and liabilities are translated into U.S. dollars, foreign currency exchange rates may adversely impact the net carrying value of our assets. These translation effects are included as a component of accumulated other comprehensive income or loss in shareholders’ equity. We have historically not attempted to hedge this equity risk and we cannot predict the effects of foreign currency exchange rate fluctuations on our future operating results.
Acquisitions. We have grown in the past and may grow, in the future, through acquisitions. We completed one acquisition during fiscal 2012, which was not material to our operations taken as a whole. In the past our acquisitions have had a significant impact on the comparability of our operating results, increasing revenues and expenses, over the respective prior comparable periods and to subsequent years, depending on the date of acquisition (i.e., acquisitions made on February 1, the first day of our fiscal year, will only affect a comparison with the prior year’s results). The results of acquired businesses are included in our consolidated financial statements from the effective dates of their respective acquisitions. We consider the operating results of an acquired company during the year following the date of its acquisition to be an “acquisition impact” or a “benefit from acquisitions.” Thereafter, we consider the growth in an acquired company’s results to be organic growth. Historically, we have financed acquisitions with a combination of cash from operations, share issuances and borrowings. We may borrow additional money or issue additional ordinary shares in the future to finance acquisitions. From time-to-time we enter into non-binding letters of intent with potential acquisition targets and we are often in various stages of due diligence and preliminary negotiations with respect to potential acquisition targets. Readers are urged to carefully read the cautionary statements relating to acquisitions, contained under the heading “Risk Factors”, contained in Item 1A of this Form 10-K.
Effective October 31, 2011, we acquired the remaining outstanding shares of UTi Logistics Israel, Ltd. (UTi Israel), of which we already held a controlling financial interest from previous activities in Israel. We have been consolidating the financial results of UTi Israel from the time the controlling financial interest was obtained. The purchase price for the previously unheld shares totaled $12.0 million. An amount of $8.6 million, representing the estimated difference between the consideration paid and the non-controlling interest adjusted has been recognized in equity attributable to us as the change in ownership interest did not affect our controlling financial interest in UTi Israel.
On August 11, 2010, we received notification that the minority partner of a partnership in South Africa elected to exercise its right to require us to purchase such partner’s interest at the calculated redemption value of $8.3 million. The redemption value, which was paid on August 26, 2010, was substantially less than the fair value of the minority partner’s interest in the partnership. The carrying value of the related non-controlling interest was $14.0 million and the difference between the carrying value of the related non-controlling interest and the redemption value paid was recorded by us as a component of shareholders’ equity.
On May 25, 2010 and December 21, 2009, we acquired the remaining outstanding shares of UTI Inventory Management Solutions (IMS) Limited, formerly EMAsu2, Ltd. (EMA Ireland) and UTI IMS Limited Partnership, formerly Exel MPL A.V.B.A., LP (EMA Israel), respectively, for a combined total of $7.1 million and eliminated minority partners in Ireland and Israel. The combined purchase price includes contingent consideration estimated at $0.6 million based on projected net revenues from a specific shared client for the four years ending January 31, 2014.
Decision by the European Commission. On March 28, 2012, we were notified by the EC that the EC had adopted a decision against us and two of our subsidiaries. The EC’s decision imposes a fine of 3.1 million euro (or approximately $4.1 million based on exchange rates in effect as of the date of this filing) against us. As of the date of this filing, we have not yet received the full text of the EC’s decision. We believe that neither we nor our subsidiaries violated European competition rules. We are evaluating our alternatives with respect to the decision and fine, including whether to challenge the decision and the amount of the fine before the European Union’s General Court. As of the date of this filing, we have not made a determination as to any future action which we might take.
Discussion of Operating Results
The following discussion of our operating results explains material changes in our consolidated results of operations for fiscal 2012 and fiscal 2011 compared to the respective prior fiscal years. The discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties, and our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including, but not limited to, those factors described in Part I, Item 1A under the heading, “Risk Factors,” and elsewhere in this report. We disclaim any obligation to update information contained in any forward-looking statement. Our consolidated financial statements included in this report have been prepared in U.S. dollars and in accordance with U.S. GAAP.
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.
We believe that for our Freight Forwarding segment, net revenue (a Non-GAAP measure we use to describe revenue less purchased transportation costs) is a better measure of growth in our freight forwarding business than revenue because our revenues and our purchased transportation costs for our services as an indirect air and ocean carrier includes 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 revenue is 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. Revenue derived from freight forwarding generally is shared between the points of origin and destination, based on a standard formula. Our revenue in our other capacities includes only commissions and fees earned by us and is substantially similar to net revenue for the Freight Forwarding segment in this respect.
Contract logistics. Contract logistics revenues increased $88.6 million, or 12%, for fiscal 2012, compared to fiscal 2011. The increase is primarily due to increased volumes compared to the corresponding prior year period. Foreign currency fluctuations contributed approximately $11.2 million to the increase in contract logistics revenues. Volumes were higher in fiscal 2012 compared to fiscal 2011 due to new business wins and increased client activity, primarily in automotive, consumer and retail and mining. As of January 31, 2012, we operated 240 contract logistics and distribution facilities, including leased facilitates and those managed from client facilities. This compares to 244 contract logistics and distribution facilities as of January 31, 2011. During fiscal 2012, we closed certain underutilized contract logistics facilities in Europe.
Contract logistics purchased transportation costs increased $41.3 million, or 26%, for fiscal 2012 compared to fiscal 2011. In addition to transportation costs related directly to the contract logistics operations, purchased transportation costs within our Contract Logistics and Distribution segment also includes materials sourcing costs which we incur pursuant to formalized repackaging programs and materials sourcing agreements. These sourcing activities increased during fiscal 2012 when compared to fiscal 2011, resulting in an increase of $14.9 million, or 9%. Foreign currency fluctuations contributed approximately $3.2 million to the increase in contract logistics purchase transportation costs. The remainder of the increase was due to increased volumes and fuel surcharges compared to the corresponding prior year period.
Distribution. Distribution revenues increased $60.5 million, or 12%, for fiscal 2012, compared to fiscal 2011, primarily due to increased domestic freight volumes as well as related fuel surcharges, particularly in the United States. Foreign currency fluctuations did not have a material impact on the change.
Distribution purchased transportation costs increased $41.3 million, or 12%, for fiscal 2012, compared to fiscal 2011, primarily due to increased domestic freight volumes as well as related fuel surcharges, particularly in the United States. Foreign currency fluctuations did not have a material impact on the change.
Staff Costs. Staff costs in our contract logistics and distribution segment increased $32.0 million, or 7%, for fiscal 2012, compared to fiscal 2011. The increase in staff costs in our contract logistics and distribution segment was primarily due to increased service requirements associated with new client sites and increased volumes. Foreign currency fluctuations contributed approximately $4.7 million to the increase.
Severance and Other. During fiscal 2012, we incurred severance and other costs of $5.7 million in the contract logistics and distribution segment, which was comprised of severance charges and facility exit costs of $3.3 million and $2.4 million, respectively. Amounts charged for severance and exit costs during fiscal 2012 were primarily incurred in connection with the closure of certain underutilized contract logistics facilities in Europe.
Intangible Assets Impairment. In connection with the preparation of the company’s financial statements for the fiscal year ended January 31, 2012, we performed an evaluation of the recoverability of its long-lived assets and recorded a non-cash impairment charge of $5.2 million for a client relationship in the Contract Logistics and Distribution segment. The intangible asset impairment relates to substantially all of the unamortized valuation of a client relationship from an acquisition in fiscal 2004. The intangible asset became impaired because the company recently learned of the non-renewal of a client contract beginning in July 2012 where the company was not prepared to lower its returns to retain the business. The total costs of our acquisitions are allocated to assets acquired, including a client relationship, based upon their estimated fair values at the date of acquisition. Renewal assumptions, which are included in the factors considered when determining fair value, are amended from time to time during our evaluation of the recoverability of our long-lived assets. The carrying amount of the asset was reduced to fair value, as determined using a discounted cash flow analysis.
Other Operating Expenses. Other operating costs in the contract logistics and distribution segment increased $30.8 million, or 10%, for fiscal 2012, compared to fiscal 2011, primarily due to increased volumes over the comparative prior year period. Foreign currency fluctuations also contributed approximately $2.5 million to the increase.
Corporate
Staff Costs. Staff costs at corporate were $29.0 million for fiscal 2012, compared to $25.3 million for fiscal 2011. The increase in staff costs at corporate was primarily due to our continuing organizational realignment associated with our business transformation initiative, resources have been transferred from local and regional roles to corporate led functions. Other operating expenses at corporate were $19.2 million for fiscal 2012, compared to $21.4 million for fiscal 2011.
Severance and Other. The company is involved in a dispute with the South African Revenue Service with respect to the company’s use of “owner drivers” for the collection and delivery of cargo in South Africa. The South African Revenue Service is claiming that the company is liable for employee taxes in respect of these owner drivers. The company is presently engaged in formal settlement discussions with the South African Revenue Service. Although a settlement has not been reached as of the date of the filing of this report, during the fourth quarter ended January 31, 2012, the company recorded a charge for $3.1 million representing an estimated settlement value for all years under review. The aggregate amount claimed by the South African Revenue Service for all years under review is approximately $9.2 million based on exchange rates as of January 31, 2012.
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 $205.0 million of principle was outstanding as of January 31, 2012, and our capital lease obligations. Interest income increased $3.7 million, or 25% and interest expense increased $1.4 million, or 4%, for fiscal 2012, compared to fiscal 2011. 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 withholding taxes and various other taxes not related to income taxes. Other expense, net of income, was $0.2 million for fiscal 2012, compared to net other income of $1.2 million for fiscal 2011.
Provision for income taxes. Our effective income tax rate for fiscal 2012 was 31% compared to 31% in fiscal 2011. Our provision for income taxes in fiscal 2012 was $35.7 million based on pretax income of $114.6 million compared to our provision for income taxes in fiscal 2011 of $33.2 million based on pretax income of $107.9 million. The factors increasing our provision for income taxes in absolute dollars year over year were: (i) increased profitability in fiscal 2012 relative to fiscal 2011 across various jurisdictions, which increased our provision by approximately $2.9 million, (ii) higher valuation allowances recorded in certain jurisdictions which increased our provision year over year by approximately $1.3 million when excluding the Spain matter discussed below, (iii) certain nondeductible expenses and other tax items incurred in fiscal 2012 which increased our 2012 provision by approximately $3.0 million compared to our fiscal 2011 provision, and (iv) releases of uncertain tax positions in fiscal 2011 which had the impact of benefiting the provision by $4.1 million in fiscal 2011, which did not occur in fiscal 2012. The above factors resulted in an aggregate increase in our fiscal 2012 provision of $11.3 million over our fiscal 2011 provision.
These increases in our provision for taxes for fiscal 2012 were partially offset by a net reduction of approximately $8.9 million in our fiscal 2012 tax provision compared to our fiscal 2011 provision due to the amalgamation of certain of the company’s subsidiaries in Spain. During fiscal 2012, the company completed an amalgamation of its subsidiaries in Spain which provided for the deductibility of goodwill associated with the 2002 purchase of the entities by the company. The company recorded a deferred tax asset of approximately $18.9 million associated with such goodwill. A valuation allowance of approximately $10.0 million was established against this deferred tax asset to recognize the amount that was more likely than not recoverable.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are an international, non-asset-based supply chain services and solutions company that provides airfreight and ocean freight forwarding, contract logistics, customs brokerage, distribution, inbound logistics, truckload brokerage and other supply chain management services. 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 services as an indirect air and ocean carrier include the carriers’ charges to us for carriage of the shipment. Our revenues and purchased transportation costs are also impacted by changes in fuel and similar surcharges, which have little relation to the volume or value of our services provided. When we act as an indirect air and ocean carrier, our net revenues are determined by the differential between the rates charged to us by the carrier and the rates we charge our clients plus the fees we receive for our ancillary services. Revenues derived from freight forwarding generally are shared 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 from 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.
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.
Customs Brokerage and Other. Customs brokerage revenues decreased $2.7 million, or Â8%, 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 Â22%, 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.
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 dollars 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.
CONF CALL
Jeff Misakian - Vice President, Investor Relations
Thank you, Irene, and good morning, everyone. Welcome to UTi Worldwide’s fiscal 2013 second quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Contract Logistics and Distribution, is also here and available to answer questions during the Q&A session.
Before we begin the presentation, I would like to point out that certain statements made in today’s call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the company’s actual results to differ materially from those discussed in any forward-looking statements.
These risks and uncertainties are described in further detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces.
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.
Now, I would like to turn the call over to Eric Kirchner. Eric?
Eric Kirchner - Chief Executive Officer
Thank you, Jeff. Good morning, everyone. Weak macro economic forces weight on the industry throughout the second quarter. Many of the trends seen in the first quarter continued to effect industry performance in the second quarter and our results were no exception.
The uncertain environment and weak consumer demand have made companies increasingly careful in their production and in their freight and logistics spend. Currency translation also had a material impact on our second quarter results as the U.S. dollar strengthened against most other currencies and in particular the South African rand.
Our freight forwarding segment was negatively impacted by these macro economic forces, primarily because of the weak airfreight environment. Since the third quarter of last year airfreights been disproportionately affected as clients continue to ship in smaller quantities and increasingly favor ocean freight is the cheaper mode of transit.
Tonnage has declined significantly in the key east/west trade lanes, but less so in the intra-Asia lanes and those evolving the Middle East and Latin America. Our overall freight volumes in the fiscal 2013 second quarter declined at a slightly lesser rate than in the first quarter as comparisons to last year became easier.
In contrast, ocean freight volumes have grown modest all year. Our ocean freight TEUs increased in the second quarter at about the same rate of growth seen in the first quarter.
Net revenue per unit of freight forwarding was challenged by currency and higher ocean carrier rates. Ocean rates have risen significantly this year and had stayed at elevated levels, especially on trans-Pacific lanes. This had a detrimental effect on net revenue per TEU in the quarter.
We continue to have constructive dialogs with our carrier partners and clients to manage the impact of these higher rates, but the typical lag affect had a negative impact on the second quarter. Lawrence will review these details in a moment.
Operating expenses in freight forwarding declined less than net revenue as operating costs are more closely tied to shipments rather than tonnage or TEUs. As a result, productivity levels fell in the second quarter compared to the same period last year. While we don’t control external factors, we do remain vigilant in controlling costs and driving increased sales.
Contract Logistics and Distribution was again the more consistent segment with revenues and net revenues slightly higher on a year-over-year basis when adjusted for currency. However, revenue performance varied by region.
In the Americas and EMENA macro economic forces led to lower volumes and less new business. Our operations in Africa and Asia-Pacific on the other hand, continued to grow in local currencies with new business and higher client activity relative to the second quarter last year.
Our Contract Logistics and Distribution teams have continued to do a good job controlling costs, while improving marginal businesses and underperforming client contracts. As you can see, this led to an increase in operating income and margin for that segment in the second quarter, in spite of slowing economies and currency headwinds.
I’ll now ask Lawrence to walk through the financial results. Lawrence?
Lawrence Samuels - Chief Financial Officer
Thank you, Eric. Net income attributable to common shareholders in the fiscal 2013 second quarter was $0.18 per diluted share. Excluding severance costs, adjusted net income was $0.20 per diluted share in the fiscal 2013 second quarter, compared to $0.24 per diluted share recorded in the same period last year.
Currency changes had a bigger impact on our second quarter results than we have seen in recent quarters. The U.S. dollar strengthened against most currencies, particularly against the South African rand. This had a significant effect on reported revenues and expenses in the second quarter.
The weaker rand also had a larger impact on the bottom line, reducing operating income by $4.7 million and net income by approximately $0.03 per diluted share in the second quarter.
As we told you previously, the weakening of the rand began late in the third quarter of last year and it is likely to be effect in our comparative result through at least the third quarter of this year.
Revenues and net revenues decreased 10.9% and 8.4%, respectively, in the fiscal 2013 second quarter, compared to the same period last year. The decrease in revenues reflect the impact of currency and the weaker airfreight environment, partially offset by greater activity in Contract Logistics and Distribution in Asia, Pacific and Africa.
On an organic basis, revenues declined 3.3%, while net revenues rose 0.7% compared to the same period last year.
As noted earlier, we incurred severance costs of $2.1 million in the second quarter of fiscal 2013, compared to $3.5 million in the same period last year.
We have provided reconciliations of GAAP to non-GAAP results in the tables in today’s press release and posted more details on our website. The rest of my remarks will refer to our results as adjusted to exclude these severance costs.
Adjusted operating expenses in the fiscal 2013 second quarter were 7.3% lower than the same period last year. The impact of currency reduced reported expenses significantly in the fiscal 2013 second quarter.
On an organic basis, adjusted operating expenses would have been 1.7% higher than the same period last year. Our adjusted operating margin in the fiscal 2013 second quarter was 8.7%, compared to 9.7% in the second quarter last year.
Revenues from freight forwarding segments were down 14.6%, primarily due to currency effects and an 11% decline in airfreight tonnage shipped during the second quarter. Airfreight tonnage improved slightly on a sequential basis during the second quarter, increasing 4% over the first quarter.
The month of July was down 8% compared to the same month last year as comparisons eased. Tonnage in August was down in the mid single-digit range compared to last year, a modest improvement over July.
Ocean freight TEUs were up 2.5% in the quarter continuing the modest growth seen this year. The month of July was up 3% compared to the same month last year. Ocean freight volumes in August were similar to last year.
Net revenues in freight forwarding decreased 9.8% in the fiscal 2013 second quarter, primarily due to currency effects and the airfreight tonnage decline. Net revenue per kilo declined 6%, while net revenue per TEU fell 7% in the second quarter compared to the same period last year, primarily due to currency effects.
Adjusting for currency, net revenue per kilo was up 2% and net revenue per TEU increased 1%, compared to the second quarter last year. Compared to the first quarter net revenue per TEU was down 8%, while net revenue per kilo increased 1%.
Adjusted operating profit in freight forwarding decreased 18% in the fiscal 2013 second quarter compared to the same period last year. The freight forwarding adjusted operating margin in the second quarter was 15.9%, compared to 17.4% a year ago. The decline in profit and margin was primarily due to the lower airfreight volumes, which were partially offset by the higher ocean freight volumes.
Contract Logistics and Distribution revenues and net revenues decreased 2.5% and 7.2%, respectively, over the same period a year ago, primarily due to currency. On an organic basis, revenues increased 5.3% and net revenues rose 3.1% over the same period last year.
As Eric mentioned activity was higher in our Africa and Asia-Pacific regions, partially offset by decreased business in the Americas and EMENA.
Adjusted operating profit in Contract Logistics and Distribution increased 2.8% in the second quarter of fiscal 2013 compared to the same period last year. The adjusted operating margin in Contract Logistics and Distribution was 9.1% in the second quarter, compared to 8.2% reported in the second quarter last year.
The increases in profitability and margin primarily reflect greater client activity and ongoing improvements in operations offset by currency. Our effective tax rate was 33% in the second quarter of fiscal 2013. We continue to expect that our effective tax rate for the full fiscal year will be in the region of 32%.
With that, I’ll turn the call back to Eric for closing remarks. Eric?
Eric Kirchner - Chief Executive Officer
Thank you, Lawrence. Clearly external environment remains challenging, most economies are slowing and some are already in recession. The uncertain atmosphere has led many companies to reduce their production, which impacts their level of spending on freight and logistics.
Air freight continues to lag behind other modes. It was encouraging to see some sequential improvement but the freight remark -- freight market remains weak and we see no signs of peak season this year.
Ocean freight’s been steadier which is encouraging. Clients continue to prefer this mode for now, but we’re seeing no signs of peak in ocean freight either.
Contract Logistics and Distribution has remained stable with topline growth in local currencies and bottom line improvement. As we’ve noted before, this business faces some headwinds as well with slowing economies and reduced spending.
You all know by now that ocean carrier rates have risen materially this year and so far these rates have remained at elevated levels. Even though supply is expected to outstrip demand for the foreseeable future, rates may remain high as carriers seek to restore and maintain profitability. It remains to be seen how long these higher rate increases can be sustained, but we still could see some pressure on net revenue per TEU in the near-term.
Airfreight rates are less of a concern, but the industry may experience a short-term spike in the fall with several tech product launches expected. As always, we plan to manage this environment through our targeted growth strategies, pricing initiatives and productivity measures like better buying and increased use of gateways, while tightly controlling costs.
Our transformation efforts continue to make progress. We launched the pilot in the Netherlands and key lessons learned there are being integrated into our deployment planning. You’ll recall that we’re engaged in a comprehensive business process transformation, not simply an IT project.
We’ve been training our global operating process and global finance teams in the Netherlands in preparation for subsequent deployment and building on the experience of streamlining operations while improving system performance and functionality. All projects of this size and scope result in fine tuning as they evolve.
We identified the opportunity to advance deployment of the finance system and process changes, ahead of next steps in the freight forwarding operating system rollout. We implemented the finance changes in six countries and the system is up and running.
This gives us the option of continuing the finance system and process changes either in conjunction with or independent of the freight forwarding operating system. We also continue to make strides in our procurement strategies, gateway initiatives and product updates. We remain on track to achieve the long-term operating margin goals that we disclosed at our Investor Day.
With that, I’ll turn the call back to Jeff to direct the Q&A period. Jeff?
Jeff Misakian - Vice President, Investor Relations
Thank you, Eric. We will now open up the call for your questions. As a reminder, we ask that you limit your questions to one initially to allow as many as possible to have an opportunity to participate. Irene, may we have the first question please?
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Fund Letters
