UTi announces major restructuring
UTi Worldwide said today it was implementing a severe restructuring plan to streamline the company and reduce costs in the face of a global economic downturn and integration challenges associated with several acquisitions.
The Rancho Dominguez, Calif.-based freight forwarder and contract logistics provider said it planned to exit underperforming business, cancel certain long-term initiatives and right-size operations to reduce overhead.
The moves are expected to slash expenses by about $105 million to $110 million, with an associated drop in net revenues of $75 million to $80 million. Operating profits are projected to improve to $30 million to $40 million. The company said it expects to cut global staff by about 7 percent as part of the cost reduction plan, most of which will be implemented in the first half of fiscal 2009 (which begins in April).
After posting strong results in fiscal year 2007, UTi began to experience a decline in profits last year and issued a glooming outlook for its 2008 fiscal year earnings due on March 27.
The company downgraded its earnings forecast to between 98 cents and $1.02 per diluted share, minus restructuring charges, due to slower than expected revenues, narrower yields and a slowing economy. Including those charges, it expects to report earnings in the 90-cent to 94-cent-per-share range.
In fiscal year 2007, UTi’s net income increased 95 percent to $108 million, with operating income gaining 61 percent to $157 million and net revenues climbing 25 percent to $1.2 billion. For the first three quarters of UTi’s fiscal year 2008, net income was down 4 percent to $80.7 million and operating income declined 2 percent to $123.6 million. Net revenue increased 22 percent to $1.1 billion. Operating expenses in the third quarter increased 26 percent to $342 million, primarily to support the company’s growth.
UTi has also recently filed reports with the Securities and Exchange Commission restating financial results for 2004-2006, and the quarterly periods of 2007.
Cost reduction measures announced by UTi include:
' Exiting the company’s retail distribution business in Africa, the surface distribution operation of its Integrated Logistics business in the Americas, and other non-core underperforming operations.
' Canceling various long-term initiatives, such as development of logistics capabilities in certain industry verticals.
' Scaling back air freight charters, which it said will allow better leverage of overall air volumes on scheduled aircraft and improve yields.
' Exiting loss-making contracts, including the above-mentioned contract logistics operation in the Americas. In its fiscal third quarter report, UTi said it incurred staff costs of $3.4 million associated with this operation and had not realized any revenue due to an ongoing contract dispute with the client.
' Realigning corporate and regional functions to reduce overhead and increase oversight of core forwarding, contract logistics and distribution functions.
“UTi has grown significantly in the past five years. This rapid expansion has led to increases in expenses that have outpaced net revenue growth,” Chief Executive Roger MacFarlane said in a statement.
“Our past efforts have not been as successful as we expected in reversing this trend. In addition, pressure on yields, particularly in air freight, and underperforming operations were worse than expected. On top of this, we are facing a slowdown in our clients’ businesses. We have taken far-reaching actions to address these issues and to enable us to be more agile in today’s economy. The steps we are taking are designed to reduce costs and improve profitability, while at the same time, move decision-making closer to our clients and increase accountability. We will continue our CLIENTasONE journey, but with greater discipline and focus on execution,” MacFarlane said.
UTi will take pre-tax restructuring charges of $15 million to $20 million, of which $9 million is to be recorded in the fiscal 2008 fourth quarter. About 70 percent of the restructuring charges will be in cash for severance and employee termination costs.
As part of the realignment, MacFarlane will absorb the function of chief operating officer within his current role as chief executive officer, John S. Hextall will become president of the global Freight Forwarding operations and William T. Gates has been appointed president of the global Contract Logistics and Distribution operations.
Separately, the company said Ron Glickman, senior vice president of quality processes and integration, will assume the role of chief information officer and current CIO Walter Mapham will take a leadership role in client solutions. Mapham is expected to retire from the executive leadership of the company during the next 12 months.
The company also said Chairman J. Simon Stubbings will retire at the end of his term in June. M.J. “Tiger” Wessels will become chairman then and phase out his day-to-day management responsibilities.
In a client note, Bear Stearns analyst Ed Wolfe said, “We have difficulty understanding from UTIW’s press release whether management is truly committed to reshaping UTIW back to its forwarding roots with logistics as a support function for forwarding, or whether it is simply shutting down the current underperforming logistics units to fix the current issues, leaving the business susceptible to future logistics issues. We have been concerned about management’s seeming excessive interest with the logistics business, which it seems to be pulling back from. We need to hear more during the conference call but our sense is management is clearly feeling pressure from shareholders and this will be its last opportunity to right the ship or the company will likely be sold.” ' Eric Kulisch