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HPOL > SEC Filings for HPOL > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for HARRIS INTERACTIVE INC

Form 10-Q for HARRIS INTERACTIVE INC


14-Nov-2012

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding expectations, beliefs, plans, objectives, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, "may", "should", "expects", "plans", "anticipates", "feel", "believes", "estimates", "predicts", "potential", "continue", "consider", "possibility", or the negative of these terms or other comparable terminology . All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. Actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include but are not limited to, those discussed in the Risk Factors section set forth in reports or documents the Company files from time to time with the Securities and Exchange Commission ("SEC"), such as its Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed by the Company with the SEC on September 25, 2012. Risks and uncertainties also include quarterly variations in financial results, actions of competitors, and the Company's ability to sustain and grow its revenue base, maintain and improve cost efficient operations, develop and maintain products and services attractive to the market, maintain compliance with financial covenants under its credit agreement, obtain additional cash resources should it be necessary to do so, and maintain compliance with certain Nasdaq listing requirements.

Note: Amounts shown below are in thousands of U.S. Dollars for our continuing operations, unless otherwise noted. Also, references herein to "we", "our", "us", "its", the "Company" or "Harris Interactive" refer to Harris Interactive Inc. and its subsidiaries, unless the context specifically requires otherwise.

Overview

Harris Interactive is a leading global market research firm that uses web-based, telephone and other research methodologies to provide clients with information about the views, behaviors and attitudes of people worldwide.

For the three months ended September 30, 2012:

Revenue from services was $33,010, down 12.6% from the same prior year period. Excluding foreign exchange rate differences, revenue was down 10.6% from last fiscal year's first quarter. The decrease was driven by declines in the U.S., U.K. and Canada as a result of bookings declines in those operations throughout fiscal 2012.

Bookings were up 4.1% compared with the same prior year period, excluding foreign exchange rate differences. The increase was driven mainly by increased bookings in Germany and Canada.

Operating income was $1,829, compared with an operating loss of $4,259 for the same prior year period. Operating loss for the three months ended September 30, 2011 included $5,440 in restructuring and other charges, compared with no such charges for the three months ended September 30, 2012.

We had $10,623 in cash at September 30, 2012, down from $11,456 at June 30, 2012.

Our outstanding debt at September 30, 2012 was $4,794, down from $5,993 at June 30, 2012 as a result of a quarterly principal payment made during the first quarter of fiscal 2013.


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Significant Events

Restructuring and Other Charges

Fiscal 2012

During the three months ended September 30, 2011, we took actions designed to re-align the cost structure of our U.S. and U.K. operations. Specifically, we:

Reduced headcount at our U.K. facilities by a total of 56 full-time employees and incurred $1,008 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July 2011 and all actions were completed at that time. Related cash payments were completed in January 2012.

Reduced headcount at our U.S. facilities by a total of 23 full-time employees and incurred $389 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July and August 2011 and all actions were completed at those respective times. Related cash payments were completed in February 2012.

Reduced our occupancy of leased office space at our Rochester, New York, Princeton, New Jersey, Brentford, United Kingdom, and Ottawa, Canada facilities. We incurred $4,084 in lease exit costs associated with the remaining lease obligations, all of which involve cash payments. All actions associated with the leased office space reductions were completed by September 2011, and all cash payments will be completed in June 2020.

The following table summarizes the restructuring charges recognized in our unaudited consolidated statements of comprehensive income for the three months ended September 30:

                                             2012       2011
                      Termination benefits   $  -      $ 1,397
                      Lease commitments         -        4,084
                      Changes in estimate       -          (41 )

                                             $  -      $ 5,440

The following table summarizes activity during the three months ended September 30, 2012 with respect to our remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:

                                   Balance,                                                                                Balance,
                                   July 1,          Costs          Changes in          Cash            Non-Cash          September 30,
                                     2012          Incurred         Estimate         Payments         Settlements            2012
Termination benefits              $      298      $       -       $         -       $     (236 )     $          -       $            62
Lease commitments                      6,278              -                 -             (612 )                -                 5,666

Remaining reserve                 $    6,576      $       -       $         -       $     (848 )     $          -       $         5,728


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Discontinued Operations

The revenue from services and loss attributable to our Asian operations, which ceased in September 2011 and are reported in discontinued operations, were as follows for the three months ended September 30, 2011:

Revenue from services $ 493 Loss from discontinued operations (1,820 )

The assets and liabilities of the discontinued operations were as follows:

                                                             At
                                                          June 30,
                                                            2012
              Cash and cash equivalents                   $      -
              Accounts receivable, net                           -
              Prepaid expenses and other current assets          -
              Property, plant and equipment, net                 -
              Other intangibles, net                             -
              Other assets                                       -

              Assets from discontinued operations         $      -
              Accounts payable                            $      -
              Accrued expenses                                  181
              Deferred revenue                                   -

              Liabilities from discontinued operations    $     181

There were no assets or liabilities of the discontinued operations at September 30, 2012.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of our consolidated financial statements in fiscal 2013 include:

Revenue recognition,

Impairment of other intangible assets,

Income taxes,

Stock-based compensation,

HIpoints loyalty program, and

Contingencies and other accruals.

In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain.

During the three months ended September 30, 2012, there were no changes to the items that we disclosed as our critical accounting policies and estimates in management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed by us with the SEC on September 25, 2012.


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Results of Operations

Three Months Ended September 30, 2012 Versus Three Months Ended September 30, 2011

The following table sets forth the results of our operations, expressed both as a dollar amount and as a percentage of revenue from services, for the three months ended September 30, 2012 and 2011, respectively:

                                                 2012            %            2011            %
Revenue from services                          $ 33,010         100.0 %     $ 37,769         100.0 %

Operating expenses:
Cost of services                                 19,455          58.9         23,630          62.6
Selling, general and administrative              10,778          32.7         11,665          30.9
Depreciation and amortization                       948           2.9          1,293           3.4
Restructuring and other charges                      -             -           5,440          14.4

Operating income (loss)                           1,829           5.5         (4,259 )       (11.3 )
Interest expense, net                               101           0.3            157           0.4

Income (loss) from continuing operations
before taxes                                      1,728           5.2         (4,416 )       (11.7 )
Provision (benefit) for income taxes                (15 )        (0.0 )         (280 )        (0.7 )

Income (loss) from continuing operations          1,743           5.2         (4,136 )       (11.0 )
Loss from discontinued operations, net of
tax                                                  -             -          (1,820 )        (4.8 )

Net income (loss)                              $  1,743           5.2       $ (5,956 )       (15.8 )

Revenue from services. Revenue from services decreased by $4,759, or 12.6%, to $33,010 for the three months ended September 30, 2012 compared with the same prior year period. Excluding foreign currency exchange rate differences, revenue from services decreased by 10.6% compared with the same prior year period. As more fully described below, revenue from services was impacted by several factors.

North American revenue decreased by $3,487 to $25,332 for the three months ended September 30, 2012 compared with the same prior year period, a decrease of 12.1%. By country, North American revenue for the three months ended September 30, 2012 was comprised of:

Revenue from U.S. operations of $20,423, down 11.5% compared with $23,078 for the same prior year period. The decrease was primarily due to the continued revenue impact from bookings declines in our U.S. operations throughout fiscal 2012.

Revenue from Canadian operations of $4,909, down 14.5% compared with $5,741 for the same prior year period. In local currency (Canadian Dollar), Canadian revenue decreased by 13.1% compared with the same prior year period. The decrease was primarily due to the revenue impact from bookings declines in our Canadian operations throughout fiscal 2012.

European revenue decreased by $1,272 to $7,678 for the three months ended September 30, 2012 compared with the same prior year period, a decrease of 14.2%. By country, European revenue for the three months ended September 30, 2012 was comprised of:

Revenue from U.K. operations of $2,713, down 28.6% compared with $3,802 for the same prior year period. In local currency (British Pound), U.K. revenue decreased by 27.0% compared with the same prior year period. The decrease was primarily due to the expected impact of our U.K. restructuring actions during the first three months of fiscal 2012, discussed above under "Restructuring and Other Charges", which were designed to scale back our U.K. business to focus on core markets and key solutions areas.


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Revenue from French operations of $2,961, down 4.3% compared with $3,094 for the same prior year period. In local currency (Euro), French revenue increased by 7.4% compared with the same prior year period. The increase was primarily due to the revenue impact from bookings increases in our French operations during the first three months of fiscal 2013.

Revenue from German operations of $2,004, down 2.5% compared with $2,054 for the same prior year period. In local currency (Euro), German revenue increased by 9.6% compared with the same prior year period. The increase was primarily due to the revenue impact from bookings increases in our German operations during the first three months of fiscal 2013.

Cost of services. Cost of services was $19,455 or 58.9% of total revenue for the three months ended September 30, 2012, compared with $23,630 or 62.6% of total revenue for the same prior year period. Cost of services for the three months ended September 30, 2012 was principally impacted by direct labor savings derived from the restructuring actions discussed above under "Restructuring and Other Charges" and our more selective approach to accepting work based on expected project profitability.

Selling, general and administrative. Selling, general and administrative expense for the three months ended September 30, 2012 was $10,778 or 32.7% of total revenue, compared with $11,665 or 30.9% of total revenue for the same prior year period. Selling, general and administrative expense was principally impacted by the following:

a $745 decrease in payroll-related expense, mainly due to headcount reductions made throughout fiscal 2012, and

a $424 decrease in rent expense, mainly due to space reductions made throughout fiscal 2012.

Depreciation and amortization. Depreciation and amortization was $948 or 2.9% of total revenue for the three months ended September 30, 2012, compared with $1,293 or 3.4% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the three months ended September 30, 2012 when compared with the same prior year period is the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2012 combined with decreased capital spending as part of our overall focus on controlling costs.

Restructuring and other charges. See above under "Restructuring and Other Charges" for a discussion regarding restructuring and other charges for the three months ended September 30, 2011. There were no restructuring or other charges for the three months ended September 30, 2012.

Interest expense, net. Net interest expense was $101 or less than 1% of total revenue for the three months ended September 30, 2012, compared with $157 or less than 1% of total revenue for the same prior year period. Interest expense for the three months ended September 30, 2012 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments.

Income taxes. We recorded an income tax benefit in continuing operations of $15 for the three months ended September 30, 2012, compared with an income tax benefit of $280 for the same prior year period. The tax benefit for both periods was comprised primarily of tax benefits related to pre-tax losses in certain of our international jurisdictions.

A full valuation allowance continues to be recorded at September 30, 2012 against our U.S. and U.K. net deferred tax assets. We will continue to assess the realizability of our deferred tax assets and will adjust the valuation allowances should all or a portion of the deferred tax assets become realizable in the future.


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Significant Factors Affecting our Performance

Key Operating Metrics

We closely track certain key operating metrics, specifically bookings and secured revenue. These key operating metrics enable us to measure the current and forecasted performance of our business relative to historical trends.

Key operating metrics for continuing operations for the three months ended September 30, 2012 and the four preceding fiscal quarters were as follows (U.S. Dollar amounts in millions):

                                Q1          Q2          Q3          Q4          Q1
                              FY2012      FY2012      FY2012      FY2012      FY2013
            Bookings          $  32.1     $  45.2     $  39.5     $  28.5     $  33.9
            Secured revenue   $  39.0     $  45.1     $  50.5     $  42.5     $  43.4

Additional information regarding each of the key operating metrics noted above is as follows:

Bookings are defined as the contract value of revenue-generating projects that are anticipated to take place during the next four fiscal quarters for which a firm client commitment was received during the current period, less any adjustments to prior period bookings due to contract value adjustments or project cancellations during the current period.

Monitoring bookings enhances our ability to forecast long-term revenue and to measure the effectiveness of our marketing and sales initiatives. However, we also are mindful that bookings often vary significantly from quarter to quarter. Information concerning our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenue over time. There are no third-party standards or requirements governing the calculation of bookings. New bookings involve estimates and judgments regarding new contracts and renewals, as well as extensions and additions to existing contracts. Subsequent cancellations, suspensions and other matters may affect the amount of bookings previously reported.

Bookings for the three months ended September 30, 2012 were $33.9 million, an increase of 5.6% compared with $32.1 million for the same prior year period. Excluding foreign exchange rate differences, bookings were up 4.1% over the same prior year period. Bookings in local currency compared with the same prior year period were principally impacted by the following:

a 2.0% decrease in U.S. bookings, mainly as a result of our more selective approach to accepting work based on expected project profitability,

a 2.0% increase in Canadian bookings, mainly as a result of timing differences,

a 1.1% increase in U.K. bookings, mainly as a result of the stabilization of our U.K. business during fiscal 2012,

a 9.9% increase in French bookings, mainly as a result of timing differences, and

a 93.5% increase in German bookings, mainly as a result of continued success in winning work at new and existing clients.

Secured Revenue (formerly referred to as ending sales backlog) is defined as prior period secured revenue plus current period bookings, less revenue recognized on outstanding projects as of the end of the period.

Secured revenue helps us manage our future staffing levels more accurately and is also an indicator of the effectiveness of our marketing and sales initiatives. Based on our experience, projects included in secured revenue at the end of a fiscal period generally convert to revenue from services during the following twelve months.

Secured revenue for the three months ended September 30, 2012 was $43.4 million, an increase of 11.2% compared with $39.0 million for the same prior year period. Foreign exchange rate differences had an inconsequential impact on


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secured revenue when compared with the same prior year period. The increase is primarily due to increased bookings and timing differences compared with the same prior year period.

Financial Condition, Liquidity and Capital Resources

Cash and Cash Equivalents

The following table sets forth net cash provided by operating activities, net
cash used in investing activities, and net cash used in financing activities,
for the three months ended September 30:



                                                       2012          2011
         Net cash provided by operating activities   $    306      $    175
         Net cash used in investing activities            (58 )         (19 )
         Net cash used in financing activities         (1,117 )      (1,217 )

Net cash provided by operating activities. Net cash provided by operating activities was $306 for the three months ended September 30, 2012, compared with $175 provided by operating activities for the same prior year period. The increase was primarily due to our net income for the three months ended September 30, 2012, offset by working capital timing differences compared with the same prior year period.

Net cash used in investing activities. Net cash used in investing activities was $58 for the three months ended September 30, 2012, compared with $19 for the same prior year period. Investing activities for the three months ended September 30, 2012 and 2011 consisted solely of capital expenditures.

Net cash used in financing activities. Net cash used in financing activities was $1,117 for the three months ended September 30, 2012, compared with $1,217 for the same prior year period. The primary use of cash during both periods was to make required principal payments on our outstanding debt.

Working Capital

At September 30, 2012, we had cash and cash equivalents of $10,623 compared with $11,456 at June 30, 2012. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash, cash equivalents and marketable securities on hand, additional cash that may be generated from our operations, and funds to the extent available through our credit facilities discussed below. While we believe that our available sources of cash, including funds available through our revolving line that are subject to certain minimum cash balance requirements, will support known or reasonably likely cash requirements over the next 12 months, including quarterly principal payments of $1,199 and interest payments due under our credit agreement, our ability to generate cash from our operations is dependent upon our ability to profitably generate revenue, which requires that we continually develop profitable new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of our revenue, we have had to find significant amounts of replacement and additional revenue as client relationships and work for continuing clients change and will likely have to continue to do so in the future. Our ability to profitably generate revenue depends not only on execution of our business plans, but also on general market factors outside of our control. As many of our clients treat all or a portion of their market research expenditures as discretionary, our ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve.

Our capital requirements depend on numerous factors, including but not limited to, market acceptance of our products and services, the resources we allocate to the continuing development of new products and services, our technology infrastructure and online panel, and the marketing and selling of our products and services. We are able to control or defer certain capital and other expenditures in order to help preserve cash if necessary. We expect to incur capital expenditures of between $1,000 and $1,500 during the fiscal year ending June 30, 2013.


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Credit Facilities

The required principal repayments under our credit agreement for the remainder of fiscal 2013 and the succeeding fiscal year are set forth in Note 8, "Borrowings", to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. At September 30, 2012, we were in compliance with all of the covenants under our credit agreement, had no outstanding borrowings under our revolving line of credit, and had $351 in outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings.

Interest Rate Swap

The principal terms of our interest rate swap are described in Note 8, "Borrowings", to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements and Contractual Obligations

At September 30, 2012, we did not have any transaction, agreement, or other contractual arrangement constituting an "off-balance sheet arrangement" as defined in Item 303(a)(4) of Regulation S-K.

There have been no material changes outside the ordinary course of business during the three months ended September 30, 2012 to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed by us with the SEC on September 25, 2012.

Recent Accounting Pronouncements

See Note 3, "Recent Accounting Pronouncements", to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of the impact of recently issued accounting pronouncements on our unaudited consolidated financial statements at September 30, 2012 and for the three months then ended, as well as the expected impact on our consolidated financial statements for future periods.

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