TOP CONTRIBUTORS

Andrew Liyana

Adam Farren

UTIW AT A GLANCE

P/E ► -45.8   EV/EBITDA ► 26.0 HIGH ROA ► -0.3% AVG ROE ► -4.1% AVG Debt to Equity ► 1.34 AVG Current Ratio ► 1.38 AVG Interest Coverage Ratio ► 0.303 AVG

 

 

 

 

 

 

UTi Worldwide (NASDAQ: UTIW) is a shipping company that helps companies move goods between international manufacturers and markets. Outsourcing to a third-party logistics firm like UTi allows a company to focus on their core business rather than devoting personnel and resources to supply chain management. When companies expand into international markets and outsource production, their operations become more complicated, and UTi handles details like language translation, tariff variations, and custom clearing operations.

In the fiscal year ending January 2007, UTi had a global network of roughly 440 facilities in which it consolidated shipments, and over 200 packaging and distribution centers in 65 countries.^[1] UTi Worldwide has operations in an additional 78 countries through relationships with independent, agent-owned offices. UTi's 2006 and 2007 net revenues grew, helped by the popularity of outsourcing supply-chain services, expanding international shipping (57% of FY 2007 net revenues were generated outside the U.S.), and increased technological demands by shipping customers.^[2]

As the need for third-party logistics firms has grown, so has the number of competitors in UTi's space. Shipping goods internationally creates potential government and global economic risks, as the changing of tariff or trade regulations (possibly resulting from terrorist acts) could impact UTi Worldwide's business. Also, volatility in exchange rates can impact the significant revenue and assets produced from foreign operations.^[3]

Business Overview

UTi Worldwide makes money when companies outsource their supply-chain management to the firm. UTi uses an expansive global network, company-designed software, relationships with transportation carriers, and general expertise to provide supply-chain management services to customers at an expense less than the firms can achieve on their own^[4]. UTi Worldwide uses a sales team to target companies in the pharmaceutical, retail, apparel, chemical, automotive, and high technology electronics industries^[5]. While no customer accounts for more than 3% of gross revenue^[6], Wal-Mart Stores (WMT) recently announced that the retailer will bring-in house the logistics service that UTi Worldwide was performing. Effective, March 1, 2008, this departure will shave annual revenue by $60 million and earnings per share by 3-4 cents^[7].

UTi Worldwide typically provides services to a customer with complex international shipping needs^[8]. For instance, an American retailer obtains raw materials from Australia and outsources manufacturing services to China. UTi Worldwide can manage the supply-chain needs of this firm by facilitating movement of materials from Australia to China and finally to the United States. By doing so, the American firm can have lower cost of sales and satisfy time schedules. UTi Worldwide charges its customers based on the complexity of services and the size and distance of goods being transported.

Operating Segments

Clients can use one or more of UTi Worldwide's logistic services to fulfill supply-chain management and international shipping needs. These services can be divided into 5 main categories.

1. Airfreight Forwarding (39% of gross revenues, 27% of net revenues for FY 2007) provides shipping services via aircraft internationally. UTi Worldwide usually acts as an indirect carrier, in which it consolidates customer's shipments, and buys cargo space from a third-party carrier to ship them. UTi Worldwide will also be an agent, in which the company passes individual shipments to an airline for sourcing. In return, the airline pays UTi Worldwide a commission. UTi Worldwide only handles international shipments, with exception to domestic operations in South Africa^[9].
2. Ocean Freight Forwarding (26%, 12%) ships customers' goods in third-party vessels. UTi Worldwide will buy cargo space on a ship. Using its large shipping volume, UTi Worldwide can negotiate lower prices than its customers could alone. Similar to airfreight forwarding, UTi Worldwide condenses shipments on containers to maximize shipping efficiences^[10].
3. Contract Logistics (15%, 36%) performs services for customers such as deconsolidating shipments, sorting, packaging, storing, and loading and unloading cargo. These services add value to clients by providing warehousing and distribution services to satisfy inventory needs and production or distribution schedules^[11].
4. Distribution and Other Supply Chain Management (18%, 18%) maintains an asset-light business model (owns a few transportation units) to provide customized inventory management and domestic ground transportation of shipments. UTi Worldwide charges a fee on services performed^[12].
5. Customs Brokerage (2%, 7%) works in connection with air and ocean freight services to allow clients access to customs clearing and help with payment of tariffs. UTi Worldwide charges customers based on the volume and complexity of transactions^[13].

Net Revenue by Segment & Total Operating Income^[14]

Financial Overview & Performance

^[15]

Comparing 2007 with 2006^[16] For the year ended January 31, 2007 (Fiscal year 2007), net revenues rose 27% to $1.2 billion from $966.4 million the previous year. Organic growth ($146.2 million) and acquisitions ($119.5 million) contributed to the gain, while unfavorable exchange rates (-$7.6 million) negatively affected net revenue.

• Airfreight Forwarding: Net revenues rose 13% to $329.6 million as the segment experienced higher volumes in the Europe and Asia Pacific regions.
• Ocean freight Forwarding: Increases in yields, which is the difference between what UTi Cargo pays to ship goods and what it receives from clients, and a rise in volume helped boost net revenue 13% to $38.6 million.
• Customs Brokerage: Organic growth in the Americas contributed to a 7% rise in net revenue to $84.1 million.
• Contract Logistics: Growth in operations in the Americas was $57.8 million and acquisitions contributed $13.3 million to increase the contract logistics' business segment revenue 18% to $439 million. Unfavorable Exchange Rates shed a few million.
• Distribution & Other Supply Chain Management: Rising 109% to $225.2 million, the bulk of net revenue's increase came from the acquisition of Market Transport Services in March of 2006.
• Staff Costs:Labor costs rose 17% to $643 million as UTi Worldwide hired more people to keep pace with business growth, and to a lesser degree, from the acquisition of Market Transport Services. Share-based compensation declined year over year.

Comparing 2006 with 2005^[17] For the year ended January 31, 2006 (Fiscal Year 2006), net revenue increased 25%, or $192.6 million, over the previous year's $773.8 million. Organic growth contributed $149.2 million, while acquisitions ($40.1 million) and favorable exchange rates ($3.3 million) covered the remainder of the $192.6 million increase.

• Airfreight Forwarding: The 15% rise to $291 million in net revenue resulted primarily from increase organic growth in UTi Worldwide's Europe and Asia Pacific regions. The company also benefited from a weak U.S. Dollar.
• Ocean Freight Forwarding: An increase in shipment volumes in all regions led to a 20% increase to 118.3 million for the ocean freight forwarding segment of UTi Worldwide.
• Customs Brokerage: Organic growth in Africa and Europe boosted net revenue 4% to 78.5 million in Fiscal Year 2006.
• Contract Logistics: The 44% rise to $370.7 million in net revenue can be mostly attributed to organic growth in all regions, particularly the Americas region. Acquisitions (Perfect Logistics, IHD, Unigistix) accounted for the one-third of the increase in net revenue.
• Distribution and other Supply Chain Management: Increase sales in the Americas and Africa regions, along with acquisitions of Concentrek and Maertens, led to a 21% rise to $107.8 in net revenues for fiscal year 2006.
• Staff Costs: Staff expenses rose 27% to $547.2 million primarily from adding employees to accommodate the expansion of UTi Worldwide's business. 13% of the increase can be linked to the 4 acquisitions made by UTi Worldwide.

Growth Strategy & Acquisitions

UTi Worldwide plans to grow through improving technological solutions, expanding global networks, and acquiring smaller transportation companies. Acquisitions play a key role in UTi Worldwide's in adding to services offered, and the logistics company has made several purchases in the past couple years. The company has made several small acquisitions, such as Span, Chronic Solutions Company, and Newlog^[18]. In November of 2006, UTi Worldwide made a larger purchase by buying Span for $197.1 million. While the company used $200 million in debt to finance the acquisition, UTi Worldwide has not been aggressive using debt^[19]. The company had $211 million in long-term debt on its books in October of 2007^[20].

Geographical Distribution of Sales

^[21] Revenue from 2007 compared to 2006 increased in all regions due to higher shipping volumes. The Americas segment was also boosted by acquisitions in Market Transport Services and Concentrak. Asia Pacific, where UTi Worldwide experiences the highest operating profit margin, saw large increases in export volume out of China and Hong Kong^[22].

Key Trends & Forces

• UTi faces increased competition from full-service transportation services: Transportation companies like YRC Worldwide (YRCW) and Conway Inc (CNW) have formed new logistics branches to complement their existing transportation of goods business. UTi does not own its own shipping vehicles, and so it depends on buying available cargo space from third-party carriers. These carriers are increasingly funneling business to themselves through their own logistic branches and cutting out the middle man (UTi Worldwide). UTi must find other vendors for cargo space while also vying with additional competitors for its logistics service.

• UTi's Margins are sensitive to global economic conditions: A slowing U.S. or world economy would result in lower total shipping tonnage, impacting UTi's revenues. UTi ships products for the retail, apparel, chemical, automotive, and high technology electronics industries^[23]. A decline in consumer demand of goods in the United States could adversely effect shipping volume and UTi's revenue. UTi Worldwide also moves raw materials and finished products from manufacturing sites. If the global economy were to slow, less products would be shipped internationally, and UTi's growth may stall. The blue line in the 'TSI Image' shows the U.S. Transportation Service Index. The Index measures the movement of freight. As one can see, during weaker GDP periods (early 90's, 1995, and 2000-01), total freight shipments were down to flat.

• Vulnerability to government trade policy and regulations: UTi Worldwide moves shipments internationally. Political and economic instability in a variety of countries could increase tariffs, prevent trade, or add regulations (i.e. required documents/inspections). These factors, which UTIW cannot control for but must mitigate, could decrease international shipping volumes and/or increase the cost of shipping between nations. This could potentially hurt UTi's balance sheet.^[25]

• UTi benefits from increased dependency on third-party logistics firms: Simply, more businesses today have international operations, and each day new companies decide to expand to additional markets. Globalization drives demand for international shipping and for UTi's services. The current trend in business moves beyond geographic boundaries to a truly global economy, and this is promising for UTi's long-term outlook.^[26].

• UTi benefits from increased global outsourcing of production: Many companies manufacture products in locations far from the markets where they intend to sell. As global outsourcing booms, the volume of international shipping increases. This rise in volume enhances the value of the market in which UTi Worldwide competes, and continued increases in the international movement of goods will boost UTi's balance sheet^[27]. The following tables shows how imports and exports have continued to rise over the past three years.

U.S. Exports^[28]

U.S. Imports^[29]

• Foreign Currency Risks: UTi Worldwide generates over 50% of revenue outside the Americas^[30]. The company also holds many assets and liabilities in foreign local currencies, but reports in terms of dollars. If a foreign currency depreciates, this could adversely affect the value of those assets held abroad. In addition, fluctuating exchange rates can shift shipping movement, which could disrupt UTi Worldwide's operations^[31].

Competition

UTi Worldwide competes with a variety of asset-based and non-asset based logistic and brokerage service companies. Asset based logistic companies, which do own transportation vehicles, include YRC Worldwide (YRCW) and Conway Inc (CNW). Non-asset logistics, like UTi Worldwide, do not own ships, planes, or trucks, and include C.H. Robinson Worldwide (CHRW), Expeditors International of Washington (EXPD) and Pacer International (PACR). These firms compete for shipping orders and logistic management from customers primarily based on price, reliability, technological solutions, and breadth of services available. Due to UTi Worldwide's size and focus on clients with multiple shipping locations, smaller, regional competitors cannot easily compete for UTi Worldwide's customers^[32].

Air Delivery & Freight Service^{[33][34][35][36][37][38]}

^143 if one adds 78 countries with only independent-offices being ran

Competitive Strengths

Management sees a greater number customers shifting to logistic companies that have global and comprehensive technological solutions. UTi Worldwide's existing global network, self-produced software, relationship with transportation carriers, and logistics expertise are its competitive advantages. UTi Worldwide has made several acquisitions to increase services available, and is developing software to link all operations^[39].

References

1. ↑ UTi Company Website
2. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
3. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
4. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Industry", Page 1-2
5. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Sales and Marketing", Page 5
6. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Sales and Marketing", Page 5
7. ↑ Yahoo! Finance
8. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Sales & Marketing", Page 5
9. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Business Overview", Page 3-4
10. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Business Overview", Page 3-4
11. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Business Overview", Page 3-4
12. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Business Overview", Page 3-4
13. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Business Overview", Page 3-4
14. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Selected Financial Data", Page 33
15. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Selected Financial Data", Page 33
16. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Year 2007 compared to 2006", Page 42-43
17. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Year 2006 compared to 2005", Page 44
18. ↑ UTi Worldwide (UTIW) Form 10-Q, Fiscal Year 2008 3rd Quarter, "Acquisitions", Page 6
19. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Acquisitions", Page 2
20. ↑ UTi Worldwide (UTIW) Form 10-Q, Fiscal Year 2008 3rd Quarter, "Consolidated Balance Sheet", Page 2
21. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Geographic Operating Segments Results", Page 39
22. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Geographic Operating Segments Results", Page 39
23. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Sales and Marketing", Page 5
24. ↑ Bureau of Transportation Statistics
25. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
26. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
27. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Industry", Page 1-2
28. ↑ US Government Census Department
29. ↑ US Government Census Department
30. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
31. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Risk Factors", Page 11-23
32. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Sales & Marketing", Page 5
33. ↑ Hoovers
34. ↑ Yahoo! Finance
35. ↑ CHRW Company Website
36. ↑ Hoovers
37. ↑ Hoovers
38. ↑ PACER International (PACR) From 10-K FY 2006, "Our Service Offerings" Page 4-6
39. ↑ UTi Worldwide (UTIW) Form 10-K, Fiscal Year 2007, "Industry", Page 2