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MLNK > SEC Filings for MLNK > Form 10-Q on 10-Jun-2013All Recent SEC Filings

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Form 10-Q for MODUSLINK GLOBAL SOLUTIONS INC


10-Jun-2013

Quarterly Report


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

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 for the fiscal year ended July 31, 2012 and Quarterly Reports on Form 10-Q for the quarters ended October 31, 2012 and January 31, 2013 filed with the SEC. 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.

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, and retail. The Company's operations are supported by a global footprint that includes more than 25 sites across North America, Europe, and the Asia Pacific region. We believe that by leveraging our global footprint, we will be able to optimize our clients' supply chains using multi-facility, multi-geographic solutions.

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).

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.

We believe the scope of our service offerings, including e-Business and repair services 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 present the opportunity for greater gross margins and profitability.


Table of Contents

MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

We 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 strive to reduce our operating costs while implementing operational efficiencies throughout the Company.

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 April 30, 2013, the Company reported net revenue of $173.0 million, operating loss of $6.8 million, loss from continuing operations before income taxes of $7.9 million, net loss of $8.3 million and a gross margin percentage of 8.9%. For the nine months ended April 30, 2013, the Company reported net revenue of $573.5 million, operating loss of $22.6 million, loss from continuing operations before income taxes of $28.5 million, net loss of $31.5 million and a gross margin percentage of 9.5%. 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 April 30, 2013, we had cash and cash equivalents and available-for-sale securities of $71.2 million, and working capital of $120.2 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 and nine months ended April 30, 2013, our gross margin percentage was 8.9% and 9.5%, respectively. 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 areas where our clients' products are manufactured 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 nine months ended April 30, 2013, sales to Hewlett-Packard accounted for approximately 28% of our consolidated net revenue. For the nine months ended April 30, 2012, sales to Hewlett-Packard and Advanced Micro Devices accounted for approximately 31% and 10%, 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.


Table of Contents

MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Basis of Presentation

The Company has five operating segments: Americas; Asia; Europe; e-Business and ModusLink PTS. The Company has three reportable segments: Americas; Asia; and Europe. 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 three 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 April 30, 2013 compared to the three months ended April 30,
2012

Net Revenue:

                                                       As a %                           As a %
                                    Three Months         of          Three Months         of
                                       Ended           Total            Ended           Total
                                     April 30,          Net           April 30,          Net
                                        2013          Revenue            2012          Revenue       $ Change        % Change
                                                                         (In thousands)
Americas                           $       64,496         37.3 %    $       58,825         33.9 %    $   5,671             9.6 %
Asia                                       48,133         27.8 %            56,642         32.6 %       (8,509 )         (15.0 %)
Europe                                     51,952         30.0 %            50,706         29.2 %        1,246             2.5 %
All Other                                   8,435          4.9 %             7,380          4.3 %        1,055            14.3 %

Total                              $      173,016        100.0 %    $      173,553        100.0 %    $    (537 )          (0.3 %)

Net revenue decreased by approximately $0.5 million during the three months ended April 30, 2013, as compared to the same period in the prior year. Revenue from new programs was $23.8 million during the third quarter of fiscal 2013, as compared to $21.1 million in the year-ago period. The increase in revenue from new programs was primarily due to an engagement with a consumer electronics client that contributed to revenue in all regions. The increase in revenue from new programs was more than offset by a decrease in revenues in our base business from $152.5 million in the prior year period to $149.3 million in the current quarter. The Company defines new programs as client programs that have been executed for fewer than 12 months. Base business is defined as client programs that have been executed for 12 months or more. Approximately $105.0 million of the net revenue for the three months ended April 30, 2013 related to the procurement and re-sale of materials as compared to $105.2 million for the three months ended April 30, 2012.

During the three months ended April 30, 2013, net revenue in the Americas region increased by approximately $5.7 million. This increase resulted primarily from revenue from a new program with a consumer electronics client, partially offset by the effects of lower order volumes from an existing client that is reorganizing its supply chain operations. In the Asia region, the net revenue decrease of $8.5 million was driven primarily by the effects of lower order volumes from certain existing programs related to the personal computer market, partially offset by revenue contributions from a new program with a consumer electronics client. Within the Europe region, the net revenue increase of approximately $1.2 million was primarily driven by increased revenue from a significant client program in the consumer products market. Net revenue for All Other increased by approximately $1.1 million due to higher order volumes from a consumer electronics client as compared to the same period in the prior year within e-Business.

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.


Table of Contents

MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Cost of Revenue:



                                                     As a %                            As a %
                                  Three Months         of           Three Months         of
                                     Ended           Segment           Ended           Segment
                                   April 30,           Net           April 30,           Net
                                      2013           Revenue            2012           Revenue       $ Change        % Change
                                                                        (In thousands)
Americas                         $       60,496          93.8 %    $       57,834          98.3 %    $   2,662             4.6 %
Asia                                     39,376          81.8 %            45,147          79.7 %       (5,771 )         (12.8 %)
Europe                                   50,507          97.2 %            48,038          94.7 %        2,469             5.1 %
All Other                                 7,262          86.1 %             6,606          89.5 %          656             9.9 %

Total                            $      157,641          91.1 %    $      157,625          90.8 %    $      16              -

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 for the three months ended April 30, 2013, was unchanged compared to the three months ended April 30, 2012. On a consolidated basis, gross margin for the third quarter of fiscal year 2013 was 8.9% as compared to 9.2% in the prior year quarter. The decrease in gross margin was primarily due to unfavorable revenue mix, partially offset by favorable effects of the Company's cost reduction actions.

For the three months ended April 30, 2013, the Company's gross margin percentages within the Americas, Asia and Europe regions were 6.2%, 18.2% and 2.8%, as compared to 1.7%, 20.3% and 5.3%, respectively, for the same period of the prior year. The increase in gross margin within the Americas region is attributed to favorable revenue mix and the impact of cost reduction programs at certain facilities. The decrease in gross margin within the Asia and Europe regions is attributed to unfavorable revenue mix.

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 in China, matures.

Selling, General and Administrative Expenses:



                                                         As a %                            As a %
                                      Three Months         of           Three Months         of
                                         Ended           Segment           Ended           Segment
                                       April 30,           Net           April 30,           Net
                                          2013           Revenue            2012           Revenue       $ Change        % Change
                                                                            (In thousands)
Americas                             $        3,264           5.1 %    $        4,111           7.0 %    $    (847 )         (20.6 %)
Asia                                          5,159          10.7 %             6,870          12.1 %       (1,711 )         (24.9 %)
Europe                                        4,790           9.2 %             5,754          11.3 %         (964 )         (16.8 %)
All Other                                       591           7.0 %               962          13.0 %         (371 )         (38.6 %)

Sub-total                                    13,804           8.0 %            17,697          10.2 %       (3,893 )         (22.0 %)
Corporate-level activity                      5,483            -                4,710            -             773            16.4 %

Total                                $       19,287          11.1 %    $       22,407          12.9 %    $  (3,120 )         (13.9 %)

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 April 30, 2013 decreased by approximately $3.1 million compared to the three-month period ended April 30, 2012, primarily as a result of cost reduction activities within the Company's sales, marketing and IT organizations and lower professional fees. Within the sales and marketing organizations, expenses decreased $1.9 million primarily due to lower compensation and travel expenses. In the Company's IT organization, expenses decreased by $0.8 million primarily due to lower compensation and maintenance expenses. In addition, selling, general and administrative expenses decreased by $1.4 million due to lower professional and other fees primarily associated with the Company's annual meeting and evaluation of strategic alternatives. These decreases were partially offset by a $0.7 million increase in legal fees primarily related to the Company's Securities and Exchange Commission inquiry and litigation and a $0.4 million increase in share-based compensation.


Table of Contents

MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Amortization of Intangible Assets:



                                                   As a %                             As a %
                               Three Months          of           Three Months          of
                                   Ended           Segment            Ended           Segment
                                 April 30,           Net            April 30,           Net
                                   2013            Revenue            2012            Revenue         $ Change         % Change
                                                                        (In thousands)
Americas                       $          38            0.1 %     $          38            0.1 %     $       -                -
Asia                                      -              -                   -              -                -                -
Europe                                    -              -                   -              -                -                -
All Other                                245            2.9 %               247            3.3 %             (2 )           (0.8 %)

Total                          $         283            0.2 %     $         285            0.2 %     $       (2 )           (0.7 %)

The intangible asset amortization relates to certain amortizable intangible assets acquired by the Company in connection with its acquisition of ModusLink OCS and ModusLink PTS. Amortization expense was essentially flat as compared to the prior year period. The remaining intangible assets are being amortized over lives ranging from 1 to 4 years.

Impairment of Long-lived Assets:



                                                   As a %                            As a %
                               Three Months          of          Three Months          of
                                   Ended           Segment           Ended           Segment
                                 April 30,           Net           April 30,           Net
                                   2013            Revenue           2012            Revenue        $ Change        % Change
                                                                       (In thousands)
Americas                       $          -              -       $          -              -        $      -               -
Asia                                      -              -                  -              -               -               -
Europe                                    -              -               1,128            2.2 %        (1,128 )        (100.0 %)
All Other                                 -              -                  -              -               -               -

Total                          $          -              -       $       1,128            0.6 %     $  (1,128 )        (100.0 %)

The Company conducts its goodwill impairment test on July 31 of each fiscal year. In addition, if and when events or circumstances change that would reduce the fair value of any of its reporting units below its carrying value, an interim test would be performed. In making this assessment, the Company relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data.

During the third quarter of fiscal year 2012, indicators of potential impairment caused the Company to conduct an interim impairment test for the fixed assets of its facility in Kildare, Ireland. These indicators included declining revenues and increasingly adverse trends that resulted in further deterioration of current operating results and future prospects of the Kildare facility. These adverse trends included declines in sales volumes resulting from the loss of certain client programs, pricing pressure from existing clients, and the emergence and growth of new competitors for the services performed in Kildare.

As a result of the impairment test, in connection with preparation of financial statements for the quarter ended April 30, 2012, the Company concluded that Kildare's fixed assets were impaired and recorded a $1.1 million non-cash impairment charge. This charge has been recorded as a component of "impairment of long-lived assets" in the accompanying condensed consolidated statements of operations. The impairment charge did not affect the Company's liquidity or cash flows.


Table of Contents

               MODUSLINK GLOBAL SOLUTIONS, INC. AND SUBSIDIARIES

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS



Restructuring, net:



                                                          As a %                              As a %
                                     Three Months           of           Three Months           of
                                         Ended            Segment            Ended            Segment
                                       April 30,            Net            April 30,            Net                                %
                                         2013             Revenue            2012             Revenue          $ Change          Change
                                                                                (In thousands)
Americas                             $          37              -        $           4              -         $       33            825.0 %
Asia                                           (21 )            -                    4              -                (25 )         (625.0 %)
Europe                                       2,509             4.8 %               (99 )          (0.2 %)          2,608          (2634.3 %)
All Other                                       40             0.5 %                69             0.9 %             (29 )          (42.0 %)

Sub-total                                    2,565             1.5 %               (22 )            -              2,587         (11759.1 %)
Corporate-level activity                        -               -                   -               -                 -                -

Total                                $       2,565             1.5 %     $         (22 )            -         $    2,587         (11759.1 %)

During the three months ended April 30, 2013, the Company recorded a net . . .

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