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| HPOL > SEC Filings for HPOL > Form 10-Q on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Quarterly Report
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 December 31, 2012:
• Revenue from services was $37,087, down 5.2% from the same prior year period. Excluding foreign exchange rate differences, revenue was down 5.0% from last fiscal year's second quarter. The decrease was driven primarily by revenue declines in the U.S., Canada and U.K.
• Bookings were up 5.5% compared with the same prior year period, excluding foreign exchange rate differences. The increase was driven mainly by increased bookings in the U.S., Canada and France.
• Operating income was $3,019, compared with operating income of $2,302 for the same prior year period.
• We had $11,085 in cash at December 31, 2012, down from $11,456 at June 30, 2012.
• Our outstanding debt at December 31, 2012 was $3,596, down from $5,993 at June 30, 2012 as a result of quarterly principal payments made during the first two quarters of fiscal 2013.
Significant Events
Restructuring and Other Charges
Fiscal 2012
During the three months ended December 31, 2011, we continued to take actions designed to re-align the cost structure of our U.S. operations. Specifically, we reduced headcount at our U.S. facilities by a total of 10 full-time employees and incurred $260 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in October and December 2011 and all actions were completed at those respective times. Related cash payments were completed in March 2012.
Our results for the six months ended December 31, 2011 also reflect charges taken during the three months ended September 30, 2011 in connection with 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 operations for the three and six months ended December 31:
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Termination benefits $ - $ 260 $ - $ 1,657
Lease commitments - - - 4,084
Changes in estimate - - - (41 )
$ - $ 260 $ - $ 5,700
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The following table summarizes activity during the six months ended December 31, 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 December 31,
2012 Incurred Estimate Payments Settlements 2012
Termination benefits $ 298 $ - $ - $ (298 ) $ - $ -
Lease commitments 6,278 - - (1,098 ) - 5,180
Remaining reserve $ 6,576 $ - $ - $ (1,396 ) $ - $ 5,180
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For the three and six months ended December 31, 2010, other charges reflected in the "Restructuring and other charges" line shown on our unaudited consolidated statements of operations included $331 in costs associated with reorganizing the operational structure of our Canadian operations. A corresponding liability was recorded in the "Accrued expenses" line shown in our unaudited statement of financial position at that time. In October 2011, our obligation to fund those costs lapsed and accordingly, a credit of $331 was recognized for the three and six months ended December 31, 2011.
Discontinued Operations
The revenues and losses attributable to our Asian operations, which ceased in
September 2011 and are reported in discontinued operations are as follows:
For the Three For the Six
Months Ended Months Ended
December 31, December 31,
2012 2011 2012 2011
Revenues $ - $ - $ - $ 493
Loss from discontinued operations, net of tax - (190 ) - (2,011 )
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The balance sheet of the discontinued operations consisted solely of $181 in accrued expenses at June 30, 2012. There were no assets or liabilities of the discontinued operations at December 31, 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 six months ended December 31, 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.
Results of Operations
Three Months Ended December 31, 2012 Versus Three Months Ended December 31, 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 December 31, 2012 and 2011, respectively:
2012 % 2011 %
Revenue from services $ 37,087 100.0 % $ 39,115 100.0 %
Operating expenses:
Cost of services 21,898 59.0 24,380 62.3
Selling, general and administrative 11,207 30.2 11,308 28.9
Depreciation and amortization 963 2.6 1,197 3.1
Restructuring and other charges - - (72 ) (0.2 )
Operating income 3,019 8.1 2,302 5.9
Interest expense, net 69 0.2 204 0.5
Income from continuing operations before taxes 2,950 7.9 2,098 5.4
Provision for income taxes 58 0.1 283 0.7
Income from continuing operations 2,892 7.8 1,815 4.6
Loss from discontinued operations, net of tax - - (190 ) (0.5 )
Net income $ 2,892 7.8 $ 1,625 4.2
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Revenue from services. Revenue from services decreased by $2,028, or 5.2%, to $37,087 for the three months ended December 31, 2012 compared with the same prior year period. Excluding foreign currency exchange rate differences, revenue from services decreased by 5.1% 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 $1,660 to $28,144 for the three months ended December 31, 2012 compared with the same prior year period, a decrease of 5.6%. By country, North American revenue for the three months ended December 31, 2012 was comprised of:
• Revenue from U.S. operations of $23,037, down 3.1% compared with $23,770 for the same prior year period. The decrease was primarily due to the continued revenue impact from bookings declines in our U.S. operations during the latter part of fiscal 2012.
• Revenue from Canadian operations of $5,107, down 15.4% compared with $6,034 for the same prior year period. In local currency (Canadian Dollar), Canadian revenue decreased by 17.7% compared with the same prior year period. The decrease was primarily due to our more selective approach to accepting work based on expected project profitability and a slowdown in the wholesale side of the business.
European revenue decreased by $368 to $8,943 for the three months ended December 31, 2012 compared with the same prior year period, a decrease of 4.0%. By country, European revenue for the three months ended December 31, 2012 was comprised of:
• Revenue from U.K. operations of $2,829, down 25.7% compared with $3,809 for the same prior year period. In local currency (British Pound), U.K. revenue decreased by 27.2% compared with the same prior year period. The decrease was primarily due to the expected impact of our U.K. restructuring actions taken during the first three months of fiscal 2012, which were designed to focus on core markets and key solutions areas.
• Revenue from French operations of $3,902, down 1.0% compared with $3,942 for the same prior year period. In local currency (Euro), French revenue increased by 5.0% 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 six months of fiscal 2013, resulting from our success in selling to new and existing clients across several industry sectors.
Cost of services. Cost of services was $21,898 or 59.0% of total revenue for the three months ended December 31, 2012, compared with $24,380 or 62.3% of total revenue for the same prior year period. Cost of services for the three months ended December 31, 2012 was principally impacted by direct labor savings derived from the restructuring actions taken during fiscal 2012 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 December 31, 2012 was $11,207 or 30.2% of total revenue, essentially flat compared with $11,308 or 28.9% of total revenue for the same prior year period but up on a percentage basis due to the year over year decline in revenue.
Depreciation and amortization. Depreciation and amortization was $963 or 2.6% of total revenue for the three months ended December 31, 2012, compared with $1,197 or 3.1% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the three months ended December 31, 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 December 31, 2011. There were no restructuring or other charges for the three months ended December 31, 2012.
Interest expense, net. Net interest expense was $69 or less than 1% of total revenue for the three months ended December 31, 2012, compared with $204 or less than 1% of total revenue for the same prior year period. The decrease in interest expense for the three months ended December 31, 2012 when compared with the same prior year period 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 provision in continuing operations of $58 for the three months ended December 31, 2012, compared with an income tax provision in continuing operations of $283 for the same prior year period. The tax provisions for both periods were primarily attributable to pre-tax income in certain of our international jurisdictions.
A full valuation allowance continues to be recorded at December 31, 2012 against our U.S. and U.K. net deferred tax assets. If we continue our recent trend of pre-tax book income in the U.S., we believe that, based on consideration of all sources of available evidence, including recent historical profitable operating performance and other positive and negative evidence such as financial and taxable income projections, market environment, and other factors, a determination may result that a valuation allowance is no longer needed. We give the most weight to the existence of cumulative losses in recent years in our evaluation of the need for a full valuation allowance. Any reversal of our valuation allowance will favorably impact our results of operations in the period of reversal. We are currently unable to determine when that reversal might occur, but 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.
Six Months Ended December 31, 2012 Versus Six Months Ended December 31, 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 six months
ended December 31, 2012 and 2011, respectively:
2012 % 2011 %
Revenue from services $ 70,097 100.0 % $ 76,884 100.0 %
Operating expenses:
Cost of services 41,353 59.0 48,010 62.4
Selling, general and administrative 21,985 31.4 22,973 29.9
Depreciation and amortization 1,911 2.7 2,490 3.2
Restructuring and other charges - - 5,368 7.0
Operating income (loss) 4,848 6.9 (1,957 ) (2.5 )
Interest expense, net 170 0.2 361 0.5
Income (loss) from continuing operations before
taxes 4,678 6.7 (2,318 ) (3.0 )
Provision for income taxes 43 0.1 3 0.0
Income (loss) from continuing operations 4,635 6.6 (2,321 ) (3.0 )
Loss from discontinued operations, net of tax - - (2,011 ) (2.6 )
Net income (loss) $ 4,635 6.6 $ (4,332 ) (5.6 )
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Revenue from services. Revenue from services decreased by $6,787, or 8.8%, to $70,097 for the six months ended December 31, 2012 compared with the same prior year period. Excluding foreign currency exchange rate differences, revenue from services decreased by 7.7% 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 $5,146 to $53,477 for the six months ended December 31, 2012 compared with the same prior year period, a decrease of 8.8%. By country, North American revenue for the six months ended December 31, 2012 was comprised of:
• Revenue from U.S. operations of $43,460, down 7.2% compared with $46,848 for the same prior year period. The decrease was primarily due to the continued revenue impact from bookings declines in our U.S. operations during the latter part of fiscal 2012.
• Revenue from Canadian operations of $10,017, down 14.9% compared with $11,775 for the same prior year period. In local currency (Canadian Dollar), Canadian revenue decreased by 15.4% compared with the same prior year period. The decrease was primarily due to our more selective approach to accepting work based on expected project profitability and a slowdown in the wholesale side of the business.
European revenue decreased by $1,643 to $16,620 for the six months ended December 31, 2012 compared with the same prior year period, a decrease of 9.0%. By country, European revenue for the six months ended December 31, 2012 was comprised of:
• Revenue from U.K. operations of $5,542, down 27.2% compared with $7,611 for the same prior year period. In local currency (British Pound), U.K. revenue decreased by 27.1% compared with the same prior year period. The decrease was primarily due to the expected impact of our U.K. restructuring actions taken during the first three months of fiscal 2012, which were designed to focus on core markets and key solutions areas.
• Revenue from French operations of $6,863, down 2.5% compared with $7,037 for the same prior year period. In local currency (Euro), French revenue increased by 6.1% 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 six months of fiscal 2013, resulting from our success in selling to new and existing clients across several industry sectors.
• Revenue from German operations of $4,215, up 16.6% compared with $3,613 for the same prior year period. In local currency (Euro), German revenue increased by 23.9% 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, resulting from our success in selling to new and existing clients across several industry sectors.
Cost of services. Cost of services was $41,353 or 59.0% of total revenue for the six months ended December 31, 2012, compared with $48,010 or 62.4% of total revenue for the same prior year period. Cost of services for the six months ended December 31, 2012 was principally impacted by direct labor savings derived from the restructuring actions taken during fiscal 2012 and our more selective approach to accepting work based on expected project profitability.
Selling, general and administrative. Selling, general and administrative expense for the six months ended December 31, 2012 was $21,985 or 31.4% of total revenue, compared with $22,973 or 29.9% of total revenue for the same prior year period. Selling, general and administrative expense was principally impacted by an $872 decrease in payroll-related expense, mainly due to headcount reductions made throughout fiscal 2012.
Depreciation and amortization. Depreciation and amortization was $1,911 or 2.7% of total revenue for the six months ended December 31, 2012, compared with $2,490 or 3.2% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the six months ended December 31, 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 six months ended December 31, 2011. There were no restructuring or other charges for the six months ended December 31, 2012.
Interest expense, net. Net interest expense was $170 or less than 1% of total revenue for the six months ended December 31, 2012, compared with $361 or less than 1% of total revenue for the same prior year period. The decrease in interest expense for the six months ended December 31, 2012 when compared with the same prior year period 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 provision in continuing operations of $43 for the six months ended December 31, 2012, compared with an income tax provision in continuing operations of $3 for the same prior year period. The tax provisions for both periods were primarily attributable to pre-tax income in certain of our international jurisdictions.
A full valuation allowance continues to be recorded at December 31, 2012 against our U.S. and U.K. net deferred tax assets. If we continue our recent trend of pre-tax book income in the U.S., we believe that, based on consideration of all sources of available evidence, including recent historical profitable operating performance and other positive and negative evidence such as financial and taxable income projections, market environment, and other factors, a determination may result that a valuation allowance is no longer needed. We give the most weight to the existence of cumulative losses in recent years in our evaluation of the need for a full valuation allowance. Any reversal of our valuation allowance will favorably impact our results of operations in the period of reversal. We are currently unable to determine when that reversal might occur, but 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.
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 December 31, 2012 and the four preceding fiscal quarters were as follows (U.S. Dollar amounts in millions):
Q2 Q3 Q4 Q1 Q2
FY2012 FY2012 FY2012 FY2013 FY2013
. . .
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