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| MLNK > SEC Filings for MLNK > Form 10-Q on 11-Jan-2013 | All Recent SEC Filings |
11-Jan-2013
Quarterly Report
The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in Part II-Item 1A below and elsewhere in this report and the risks discussed in the Company's Annual Report on Form 10-K filed with the SEC on January 11, 2013. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.
Restatement of Previously Issued Financial Statements
As previously reported in the Company's Current Report on Form 8-K dated June 9, 2012, the Audit Committee, in consultation with management and the Board of Directors, concluded that the Company's previously issued financial statements for the fiscal years ended July 31, 2009 through 2011 and the first two quarters of fiscal year 2012, and selected unaudited financial data for fiscal years 2007 and 2008, should no longer be relied upon. Accordingly, the Company's consolidated financial statements for the fiscal years ended July 31, 2011, 2010 and 2009 have been restated. The restatement adjustments reduced revenue and established a liability for the portion of vendor rebates and cost mark-ups that had not been aligned consistently with client contracts. In addition, the restated financial statements also include other adjustments to correct certain immaterial errors for previously unrecorded adjustments identified in audits of prior years' financial statements. The previously unrecorded audit adjustments were recorded as part of the restatement process although none of these adjustments was individually material. These restatement adjustments, when combined with the other adjustments, decreased revenues by $0.2 million, decreased net income by $24 thousand, and did not change basic and diluted earnings per share, which remained at $0.03 for the three months ended October 31, 2011. For details on the effects of the restatement and other adjustments on certain line items within our previously reported condensed consolidated financial statements for the quarter ended October 31, 2011, please refer to Note 3, Restatement of Previously Issued Financial Statements.
Throughout the remainder of Management's Discussion and Analysis of Financial Condition and Results of Operations, all referenced amounts give effect to the restatement.
Overview
ModusLink Global Solutions, Inc. executes comprehensive supply chain and logistics services that improve clients' revenue, cost, sustainability and customer experience objectives. ModusLink Global Solutions provides services to leading companies in consumer electronics, communications, computing, medical devices, software, luxury goods and retail. The Company's operations are supported by a global footprint that includes more than 30 sites in 15 countries across North America, Europe, and the Asia regions.
Management evaluates operating performance based on net revenue, operating income (loss), and net income (loss), and, across its segments, on the basis of "adjusted operating income (loss)," which is defined as operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, impairment of goodwill and long-lived assets, share-based compensation, restructuring and other charges not related to our baseline operating results. See Note 10 of the accompanying notes to the condensed consolidated financial statements included in Item 1 above for segment information, including a reconciliation of adjusted operating income (loss) to net income (loss).
We have developed a long-term set of strategic initiatives and an operating plan focused on increasing both revenue and profitability. We view the continued development of our global operational infrastructure and footprint as a primary source of differentiation in the market place. We believe that by leveraging our global footprint, we will be able to optimize our clients' supply chains using multi-facility, multi-geographic solutions.
Our focus during fiscal year 2013 remains consistent with the continued execution against our long-term strategic plan, and the implementation of the following initiatives which are designed to achieve our long-term goals:
Drive sales growth through a combination of existing client penetration and targeting new markets. Historically, a significant portion of our revenue from our supply chain business has been generated from clients in the computing and software markets. These markets are mature and, as a result, gross margins in these markets tend to be low. To address this, in addition to the computing and software markets, we have expanded our sales focus to include additional markets within technology, such as communications and consumer electronics, and outside of technology, such as medical devices. We believe these markets are experiencing faster growth than our historical markets, and represent opportunities to realize higher gross margins on our services. Companies in these markets often have significant need for a supply chain partner who will be an extension to their business models.
Increase the value delivered to clients through service expansion. During fiscal year 2013, we have continued to focus on further developing our e-Business, repair services and certain other offerings, which we believe will increase the overall value of the supply chain solutions we deliver to our existing clients and to new clients. We expect that these services will enhance our gross margins and drive profitability. Furthermore, we believe that the addition of new services to existing clients will strengthen our relationship with clients, and further integrate us with their businesses.
Drive operational efficiencies throughout our organization. Our strategy is to operate an integrated supply chain system infrastructure that extends from front-end order management through distribution and returns management. This end-to-end solution enables clients to link supply and demand in real time, improve visibility and performance throughout the supply chain, and provide real-time access to information for greater collaboration and making informed business decisions. We believe that our clients benefit from our global integrated business solution. We also reduce our operating costs while implementing operational efficiencies throughout the Company. We expect that our lean sigma continuous improvement program will drive further operational efficiencies in the future. The lean sigma continuous improvement program is aimed at reducing our overall costs, increasing efficiencies and improving capacity utilization. The program consists of standardized training for the Company's employees in the lean sigma fundamentals (which include six sigma and "lean" methodology approaches) including standard tools to support the identification and elimination of waste and variability and applying these methods to operational and administrative tasks. As noted, the training enables employees to identify and implement projects to improve efficiency, productivity and eliminate waste through ongoing improvement efforts. We believe this initiative will yield improved process standardization and operating efficiency gains, as well as lower our long-term operating costs.
Among the key factors that will influence our performance are successful execution and implementation of our strategic initiatives, global economic conditions, especially in the technology sector, demand for our clients' products, the effect of product form factor changes, technology changes, revenue mix and demand for outsourcing services.
For the three months ended October 31, 2012, the Company reported net revenue of $200.7 million, operating loss of $8.1 million, loss from continuing operations before income taxes of $9.8 million, net loss of $10.7 million and a gross margin percentage of 9.3%. We currently conduct business in many countries including the Netherlands, Hungary, France, Ireland, Czech Republic, Singapore, Taiwan, China, Malaysia, Japan, Australia, India, and Mexico, in addition to our United States operations. At October 31, 2012, we had cash and cash equivalents and available-for-sale securities of $58.5 million, and working capital of $105.5 million.
As a large portion of our revenue comes from outsourcing services provided to clients such as hardware manufacturers, software publishers, telecommunications carriers, broadband and wireless service providers and consumer electronics companies, our operating performance has been and may continue to be adversely affected by declines in the overall performance of the technology sector and the sustained economic uncertainty affecting the world economy. In addition, the drop in consumer demand for products of certain clients has had and may continue to have the effect of reducing our volumes and adversely affecting our revenue performance. The market for our services is very competitive. We also face pressure from our clients to continually realize efficiency gains in order to help our clients maintain their profitability objectives. Increased competition and client demands for efficiency improvements may result in price reductions, reduced gross margins and, in some cases, loss of market share. In addition, our profitability varies based on the types of services we provide and the regions in which we perform them. Therefore the mix of revenue derived from our various services and locations can impact our gross margin results. Also, form factor changes, which we describe as the reduction in the amount of materials and product components used in our clients' completed packaged product, can also have the effect of reducing our revenue and gross margin opportunities. As a result of these competitive and client pressures the gross margins in our business are low. During the three months ended October 31, 2012, our gross margin percentage was 9.3%. Increased competition arising from industry consolidation and/or low demand for our clients' products and services may hinder our ability to maintain or improve our gross margins, profitability and cash flows. We must continue to focus on margin improvement, through implementation of our strategic initiatives, cost reductions and asset and employee productivity gains in order to improve the profitability of our business and maintain our competitive position. We generally react to margin and pricing pressures in several ways, including efforts to target new markets, expand our service offerings, improve the efficiency of our processes and to lower our infrastructure costs. We seek to lower our cost to service clients by moving work to lower-cost venues, establishing facilities closer to our clients or to our clients' end markets to gain efficiencies, and other actions designed to improve the productivity of our operations.
Historically, a limited number of key clients have accounted for a significant percentage of our revenue. For the three months ended October 31, 2012, sales to Hewlett-Packard accounted for approximately 28% of our consolidated net revenue. For the three months ended October 31, 2011, sales to Hewlett-Packard and Advanced Micro Devices accounted for approximately 33% and 11%, respectively, of our consolidated net revenue. We expect to continue to derive the vast majority of our operating revenue from sales to a small number of key clients. In general, we do not have any agreements which obligate any client to buy a minimum amount of services from us or designate us as an exclusive service provider. Consequently, our sales are subject to demand variability by our clients. The level and timing of orders placed by our clients vary for a variety of reasons, including seasonal buying by end-users, the introduction of new technologies and general economic conditions.
Basis of Presentation
The Company has six operating segments: Americas; Asia; Europe; e-Business; ModusLink PTS and TFL. The Company has four reportable segments: Americas; Asia; Europe and TFL. The Company reports the ModusLink PTS operating segment in aggregation with the Americas operating segment as part of the Americas reportable segment. In addition to its four reportable segments, the Company reports an All other category. The All other category represents the e-Business operating segment. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal and finance which are not allocated to the Company's reportable segments and administration costs related to the Company's venture capital activities.
All significant intercompany transactions and balances have been eliminated in consolidation.
Results of Operations
Three months ended October 31, 2012 compared to the three months ended October 31, 2011
Net Revenue:
Three Months
Three Months As a % of Ended As a % of
Ended Total October 31, Total
October 31, Net 2011 Net
2012 Revenue (As Restated) Revenue $ Change % Change
(in thousands)
Americas $ 63,909 31.8 % $ 69,511 33.8 % $ (5,602 ) (8.1 )%
Asia 56,375 28.1 % 60,739 29.5 % (4,364 ) (7.2 )%
Europe 68,930 34.4 % 57,605 28.0 % 11,325 19.7 %
TFL 3,605 1.8 % 8,079 3.9 % (4,474 ) (55.4 )%
All other 7,837 3.9 % 9,974 4.8 % (2,137 ) (21.4 )%
Total $ 200,656 100.0 % $ 205,908 100.0 % $ (5,252 ) (2.6 )%
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Net revenue decreased by approximately $5.3 million during the three months ended October 31, 2012, as compared to the same period in the prior year. This decrease was primarily a result of lower volumes from certain client programs and the unfavorable impact of foreign currency translation, partially offset by an increase in new business as compared to the prior year period. Approximately $122.1 million of the net revenue for the three months ended October 31, 2012 related to the procurement and re-sale of materials on behalf of our clients as compared to $121.0 million for the three months ended October 31, 2011.
During the three months ended October 31, 2012, net revenue in the Americas region decreased by approximately $5.6 million. This decrease resulted primarily from lower order volumes from existing client programs, partially offset by new business as compared to the prior year period. Within the Asia region, the net revenue decrease of approximately $4.4 million resulted from lower order volumes from existing client programs and the unfavorable impact of foreign exchange. Within the Europe region, net revenue increased by approximately $11.3 million primarily due to higher volumes from certain client programs and new business. Net revenue for TFL and E-business decreased by approximately $4.5 million and $2.1 million, respectively, due to increased competition in the market.
A significant portion of our client base operates in the technology sector, which is intensely competitive and very volatile. Our clients' order volumes vary from quarter to quarter for a variety of reasons, including market acceptance of their new product introductions and overall demand for their products including seasonality factors. This business environment, and our mode of transacting business with our clients, does not lend itself to precise measurement of the amount and timing of future order volumes, and as a result, future consolidated and segment sales volumes and revenues could vary significantly from period to period. We sell primarily on a purchase order basis, rather than pursuant to contracts with minimum purchase requirements. These purchase orders are generally for quantities necessary to support near-term demand for our clients' products.
Cost of Revenue:
Three Months
Three Months As a % of Ended As a % of
Ended Segment October 31, Segment
October 31, Net 2011 Net
2012 Revenue (As Restated) Revenue $ Change % Change
(in thousands)
Americas $ 61,841 96.8 % $ 65,385 94.1 % $ (3,544 ) (5.4 )%
Asia 42,929 76.1 % 45,022 74.1 % (2,093 ) (4.6 )%
Europe 67,257 97.6 % 53,803 93.4 % 13,454 25.0 %
TFL 3,546 98.4 % 8,379 103.7 % (4,833 ) (57.7 )%
All other 6,400 81.7 % 7,848 78.7 % (1,448 ) (18.5 )%
Total $ 181,973 90.7 % $ 180,437 87.6 % $ 1,536 0.9 %
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Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management services as well as costs for salaries and benefits, contract labor, consulting, fulfillment and shipping, and applicable facilities costs. Cost of revenue increased by approximately $1.5 million for the three months ended October 31, 2012, as compared to the three months ended October 31, 2011. Gross margin for the first quarter of fiscal 2012 was 9.3% as compared to 12.4% in the prior year quarter. This decrease is attributable to an unfavorable geographic, product and customer mix.
For the three months ended October 31, 2012, the Company's gross margin
percentages within the Americas, Asia and Europe regions were 3.2%, 23.9% and
2.4%, as compared to 5.9%, 25.9% and 6.6%, respectively, for the same period of
the prior year. The decrease in gross margin within the Americas, Asia, and
Europe regions is primarily attributable to an unfavorable product and customer
mix. The increase in gross margin at TFL to 1.6% as compared to (3.7)% in the
same period of the prior year is primarily due to favorable product mix and
reduced labor costs.
As a result of the lower overall cost of delivering the Company's services in the Asia region, particularly China, we expect gross margin levels in Asia to continue to exceed those earned in the Americas and Europe regions. However, we expect that there will continue to be pressure on gross margin levels in Asia as the market, particularly China, matures.
Selling, General and Administrative Expenses:
Three Months As a % of Three Months As a % of
Ended Segment Ended Segment
October 31, Net October 31, Net
2012 Revenue 2011 Revenue $ Change % Change
(in thousands)
Americas $ 3,742 5.9 % $ 3,948 5.7 % $ (206 ) (5.2 )%
Asia 5,610 10.0 % 5,930 9.8 % (320 ) (5.4 )%
Europe 5,046 7.3 % 5,490 9.5 % (444 ) (8.1 )%
TFL 883 24.5 % 1,048 13.0 % (165 ) (15.7 )%
All other 759 9.7 % 1,024 10.3 % (265 ) (25.9 )%
Sub-total 16,040 8.0 % 17,440 8.5 % (1,400 ) (8.0 )%
Corporate-level activity 8,984 - 4,758 - 4,226 88.8 %
Total $ 25,024 12.5 % $ 22,198 10.8 % $ 2,826 12.7 %
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Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense and marketing expenses. Selling, general and administrative expenses during the three months ended October 31, 2012 increased by approximately $2.8 million compared to the three-month period ended October 31, 2011, primarily as a result of a $4.1 million increase in audit, legal and other professional fees associated with the Company's Security and Exchange Commission inquiry and financial restatement process. This increase was partially offset by a $0.9 million decrease in costs within the Company's IT organization resulting from cost reduction activities and a $0.4 million reduction in share-based compensation expense.
Amortization of Intangible Assets:
Three Months As a % of Three Months As a % of
Ended Segment Ended Segment
October 31, Net October 31, Net
2012 Revenue 2011 Revenue $ Change % Change
(in thousands)
Americas $ 38 0.1 % $ 38 0.1 % $ - -
Asia - - - - - -
Europe - - - - - -
TFL - - 47 0.6 % (47 ) (100.0 )%
All other 247 3.2 % 247 2.5 % - -
Total $ 285 0.1 % $ 332 0.2 % $ (47 ) (14.2 )%
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The intangible asset amortization relates to certain amortizable intangible assets acquired by the Company in connection with its acquisition of ModusLink OCS, ModusLink PTS and TFL. The remaining intangible assets are being amortized over lives ranging from 1 to 4 years.
Restructuring, net:
Three Months As a % of Three Months As a % of
Ended Segment Ended Segment
October 31, Net October 31, Net
2012 Revenue 2011 Revenue $ Change % Change
(in thousands)
Americas $ 326 0.5 % $ 260 0.4 % $ 66 25.4 %
Asia 664 1.2 % 495 0.8 % 169 34.1 %
Europe 454 0.7 % - - 454 -
TFL 9 0.2 % - - 9 -
All other 26 0.3 % - - 26 -
Sub-total $ 1,479 0.7 % $ 755 0.4 % 724 95.9 %
Corporate-level activity - - - - - -
Total $ 1,479 0.7 % $ 755 0.4 % $ 724 95.9 %
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The $1.5 million restructuring charge recorded during the three months ended October 31, 2012 primarily consisted of approximately $0.3 million, $0.7 million, and $0.5 million of employee-related costs in Americas, Asia, and Europe, respectively, related to the workforce reduction of 62 employees in our global supply chain operations.
The $0.8 million restructuring charge recorded during the three months ended October 31, 2011 consisted of approximately $0.2 million related to the workforce reduction of 9 employees in Raleigh, North Carolina and $0.5 million for the workforce reduction of 144 employees in China. Also, approximately $0.1 million of the restructuring charge related to certain contractual obligations in connection with the restructuring of facilities in Raleigh, North Carolina.
Interest Income/Expense:
During the three months ended October 31, 2012 and 2011, interest income was $0.1 million in each period.
During the three months ended October 31, 2012 and 2011, interest expense totaled approximately $0.1 million for both periods. In both periods, interest expense related primarily to the Company's stadium obligation.
Other Gains (Losses), net:
The Company recorded foreign exchange losses of approximately $1.0 million during the three months ended October 31, 2012. These net losses primarily related to realized and unrealized losses from foreign currency exposures and . . .
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