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ModusLink (MLNK) Files 10-K; Concludes Statement Review, Issues Results

January 11, 2013 4:37 PM EST Send to a Friend
ModusLink Global Solutions Inc. (Nasdaq: MLNK) filed with the Securities and Exchange Commission (SEC) an annual report on Form 10-K for the fiscal year ended July 31, 2012, which includes a restatement of the Company’s financial statements for fiscal years 2009 through 2011 and unaudited selected financial data for fiscal years 2007 and 2008, as well as unaudited interim financial statements for the four fiscal quarters of each of 2010 and 2011, and the first two quarters of fiscal 2012. The Company also filed a Form 10-Q for the third quarter of fiscal 2012 ended April 30, 2012 and a Form 10-Q for the first quarter of fiscal 2013 ended October 31, 2012. With these filings, the Company has become current in its SEC reporting as required under NASDAQ Listing Rules.

Results of Restatement

The restated periods from fiscal 2007 through the first two quarters of fiscal 2012 include cumulative downward adjustments to revenue of $32.9 million, or 0.6% of restated aggregate revenue of $5.4 billion. These restated periods include cumulative downward adjustments to net income of $18.0 million on a restated aggregate net loss of $231.1 million, inclusive of $231.6 million of impairments related to goodwill and intangible assets. Details related to the restatement are contained in the Company’s Form 10-K for the fiscal year ended July 31, 2012, filed with the SEC earlier today.

“The restatement process took longer than we originally expected due to the volume of work involved and number of historical periods reviewed,” said Francis J. Jules, chairman of the board of directors of ModusLink Global Solutions. “We undertook a comprehensive process designed to ensure that our financial statements are accurate and are strengthening our financial controls to prevent this from reoccurring. We thank our shareholders for their patience as we worked to complete this necessary and extensive review.

“As we continue to navigate through a challenging business environment, management is focused on executing a turnaround plan to improve operational and financial results. Our actions are well underway and include reducing operating costs, increasing our focus on our core services, improving our balance sheet and appointing new leadership. While executing on our plan, we continue to provide the high level of service our clients have come to expect from us. We are confident that we have the right plan in place to improve results, and ModusLink remains committed to building long-term, sustainable value for our shareholders,” said Jules.

Executing on Additional Turnaround Actions

Following the conclusion of the restatement process, the management team is continuing to execute its turnaround plan to improve operational and financial results. Actions include:

* Reducing operating costs – The Company plans to reduce total annualized employee costs by $20 million to $24 million, or by 13% to 16%, with the majority of the reductions being implemented in the first half of fiscal 2013. This includes actions taken in the first quarter of fiscal 2013, which have reduced total annualized employee costs by $7.3 million. In the full year fiscal 2013, the Company expects to record between $13 million and $16 million of restructuring costs associated with cost reduction actions.As part of these cost reduction actions, ModusLink is consolidating its business unit structure and centralizing key functions. The Company has combined its Integrated Service Group, which includes Aftermarket Services and e-Business solutions, with its Supply Chain operations. This consolidation enables ModusLink to centralize key functions where such resources were previously organized regionally or for a specific facility. These actions are expected to result in improved efficiencies and cost reduction.

* Increasing focus on core services – The Company is increasing its focus on its core global supply chain and logistics business. As part of this focus, ModusLink intends to sell its Tech for Less operations and is in advanced discussions with a third party regarding a transaction. The Company will continue to offer a strong remarketing capability to its clients through partnerships. Although the proceeds from a sale are not material to its cash position, ModusLink believes a sale would immediately improve the Company’s profitability. In fiscal 2012, the Tech for Less operations generated revenue of $25.9 million and an operating loss of $11.0 million.
* Strengthening balance sheet – The Company is working to reduce operating expenses and working capital needs to improve cash flow, without compromising client service. In addition, during the first quarter of fiscal 2013, ModusLink took steps to support the Company’s financial flexibility and established an asset secured revolving credit facility, which replaced a credit facility that expired on October 31, 2012. At October 31, 2012, no debt was outstanding and the amount available under the new credit facility was approximately $36.0 million.
* Appointing new leadership – The Company is at an advanced stage in its CEO search and expects to announce a new CEO in the near future. In addition, during the first quarter of fiscal 2013, the Company appointed Scott Crawley to the role of President, Global Operations and he is now responsible for the management of ModusLink’s worldwide operations. Crawley joined ModusLink in August 2011 as President, Integrated Services and is among the half of ModusLink’s executive leadership team that has joined the Company since the beginning of fiscal 2011.

Status of Strategic Alternative Review Process

As previously announced, the Company’s Board of Directors has been exploring strategic alternatives. As part of the review process, the Company and its financial advisors engaged in detailed reviews and discussions with both potential financial and strategic partners. The Board has now completed this process and concluded that the best opportunity to enhance the value of its operating business is the continued execution of the Company’s business plan, including the turnaround actions discussed above, and it is not currently pursuing the sale of its operations. The Board believes that the Company possesses a strong platform for growth and world class capabilities that are not appropriately valued in the market today.

In the course of the strategic alternatives review, the Company was presented with proposals by parties attracted to the Company due to its non-operating assets, in particular its tax attributes. The Board intends to continue to review such opportunities and to explore ways to accelerate the realization of the value of the Company’s federal net operating loss carry forwards, which had a balance of $2.0 billion at July 31, 2012.

Financial Summary – First Quarter Fiscal 2013

* Net revenue of $200.7 million, compared to $205.9 million in the first quarter of fiscal 2012
* Gross margin as a percentage of revenue of 9.3%, compared to 12.4% in the first quarter of fiscal 2012
* SG&A expenses of $25.0 million, compared to $22.2 million in the same quarter of fiscal 2012. Included in SG&A for the first quarter of fiscal 2013 were expenses of $4.1 million related primarily to the restatement process and other corporate actions.
* Operating loss of $8.1 million, compared to operating income of $2.2 million in the first quarter of fiscal 2012.
* Net loss of $10.7 million, or $(0.24) per share, compared to net income of $1.1 million, or $0.03 per share, in the first quarter of fiscal 2012
* Non-GAAP operating loss of $2.2 million, compared to income of $7.9 million in the first quarter of fiscal 2012

“As we entered fiscal 2013, we continued to face industry and client-specific challenges particularly from those programs related to notebook computers and microprocessors,” said Steven G. Crane, chief financial officer, ModusLink Global Solutions. “We are encouraged, however, by the growth in revenue from new programs, which more than doubled in the fiscal first quarter compared to the same period of last year, and we expect to achieve growth in revenue from new programs for fiscal 2013. Moving forward, we remain focused on executing on our stated plans to improve operational and financial performance.”

Consolidated Financial Results – First Quarter Fiscal 2013

ModusLink reported net revenue of $200.7 million for the first quarter of fiscal 2013, a decrease of 2.6% compared to net revenue of $205.9 million reported in the first quarter of fiscal 2012. The decline was primarily due to lower unit volumes from significant client programs related to notebook computers and microprocessors, which impacted financial results in each of the Company’s geographical segments.

Revenue generated from new programs for the first quarter of fiscal 2013 was $39.0 million, an increase of 169.0% compared to the first quarter of fiscal 2012 (1). The increase in revenue from new programs was primarily driven by a previously disclosed large new client program in the consumer products market, which drove total revenue growth in Europe, and a new program for a consumer electronics company.

Gross profit for the first quarter of fiscal 2013 was $18.7 million, or 9.3% of revenue, compared to $25.5 million, or 12.4% of revenue, in the first quarter of fiscal 2012. The decline was primarily driven by unfavorable revenue mix.

Operating loss for the first quarter of fiscal 2013 was $8.1 million, compared to operating income of $2.2 million in the first quarter of fiscal 2012. The operating loss was due to lower gross margin and higher selling general and administrative costs, and restructuring expenses, compared to the same period in fiscal 2012.

Included in the Company’s operating results for the first quarter of fiscal 2013 were selling, general and administrative expenses (SG&A) of $25.0 million, compared to $22.2 million in the same quarter of fiscal 2012. Included in SG&A for the first quarter of fiscal 2013 were expenses of $4.1 million related primarily to the restatement process and other corporate actions.

Restructuring charges for the first quarter of fiscal 2013 were $1.5 million related to reductions in the Company’s indirect labor workforce, compared to $0.8 million in the first quarter of the previous year related to employee severance costs and actions to restructure facilities.

Other income (expense) was an expense of $1.7 million in the first quarter of fiscal 2013, compared to income of $0.8 million in the first quarter of fiscal 2012. The $2.5 million change was primarily the result of foreign exchange transaction losses recognized in the first quarter of fiscal 2013, compared to foreign exchange transaction gains in the first quarter of fiscal 2012.

Net income (loss) for the first quarter of fiscal 2013 was a loss of $10.7 million, or $(0.24) per share, compared to net income of $1.1 million, or $0.03 per share, for the same period in fiscal 2012.

Excluding net charges related to depreciation, amortization of intangible assets, share-based compensation and restructuring, the Company reported non-GAAP operating loss of $2.2 million for the first quarter of fiscal 2013, compared to income of $7.9 million for the same period in fiscal 2012.

As of October 31, 2012, the Company had working capital of $105.5 million, which included cash, cash equivalents and marketable securities totaling $58.4 million. The Company concluded the quarter with no outstanding bank debt.

For the first quarter of fiscal 2013, cash flow from operating activities was $8.8 million and additions to property and equipment were $2.1 million, resulting in free cash flow from operations of $6.6 million, an improvement compared to $3.5 million in the same period in 2012.

Outlook

The Company’s outlook takes into account the macroeconomic environment and the challenges that certain of its clients tied to the market for personal computers are experiencing. Based on these factors, the Company expects revenue for the second quarter of fiscal 2013 to be in line with, or modestly higher than, revenue of $178 million reported in the second quarter of fiscal 2012.

In the second quarter of fiscal 2013, the Company expects to report a lower cash position compared to the first quarter of fiscal 2013 due to expenses primarily related to the restatement process and its restructuring actions, and begin to increase its cash position in the second half of the fiscal year.

Financial Summary – Fourth Quarter Fiscal 2012

* Net revenue of $177.1 million, compared to $198.7 million in the fourth quarter of fiscal 2011
* Gross margin, as a percentage of revenue, of 4.3%, compared to 8.9% in the fourth quarter of fiscal 2011. Inventory write-downs negatively impacted gross margin by 400 basis points or 4.0% of revenue.
* Operating loss of $23.4 million, compared to operating loss of $4.4 million in the fourth quarter of fiscal 2011
* Non-GAAP operating loss of $17.5 million, compared to non-GAAP operating income of $1.5 million in the fourth quarter of fiscal 2011

“Revenue in the fourth fiscal quarter was primarily affected by lower unit volumes, including those from a significant client with programs related to notebook computers, and the previously disclosed discontinuation of certain client programs,” said Crane. “During fiscal 2012, our cash position was primarily impacted by operating losses, which include expenses related to restructuring, the restatement and other corporate actions, as well as significant working capital needs for two new client programs. We expect to reverse these trends by reducing operating expenses and working capital needs,” concluded Crane.

Consolidated Financial Results – Fourth Quarter Fiscal 2012

ModusLink reported net revenue of $177.1 million for the fourth quarter of fiscal 2012, a decrease of 10.9% compared to net revenue of $198.7 million reported in the fourth quarter of fiscal 2011. The decline was primarily due to lower unit volumes including those from a significant client with programs related to notebook computers as well as lower volumes from certain discontinued client programs.

Revenue generated from new programs for the fourth quarter of fiscal 2012 was $22.8 million, an increase of 47.5% compared to $15.4 million in the fourth quarter of fiscal 2011(1). Driving the increase was a large new client supply chain program in Europe and a significant new client program for aftermarket services, both of which commenced in the third quarter of fiscal 2012.

Gross profit for the fourth quarter of fiscal 2012 was $7.6 million, or 4.3% of revenue, compared to $17.6 million, or 8.9% of revenue, in the fourth quarter of fiscal 2011. Negatively impacting gross margin was unfavorable revenue mix as well as a $3.4 million write-down of inventory in the Company’s Tech for Less operations, and $3.6 million inventory write-off related to a canceled client program. Combined, the inventory adjustments negatively impacted gross margin by 400 basis points or 4.0% of revenue.

SG&A expenses for the fourth quarter of fiscal 2012 were $29.1 million, compared to $21.4 million in the same quarter of fiscal 2011. The increase was primarily due to $2.1 million of higher costs related to severance expenses, $4.6 million of expenses related to the restatement process, review of strategic alternatives and other activities, and a $0.6 million increase related to investments in sales and marketing.

Restructuring expenses for the fourth quarter of 2012 were $1.6 million related to cost reduction actions, compared with a credit of $0.4 million in the fourth quarter of fiscal 2011 related to a recovery of costs associated with a facility that had been restructured in a previous year.

Operating loss for the fourth quarter of fiscal 2012 was $23.4 million, compared to operating loss of $4.4 million in the fourth quarter of fiscal 2011.

Other income was $5.2 million in the fourth quarter of fiscal 2012 compared to an expense of $2.9 million in the fourth quarter of fiscal 2011. Included in other income for the fourth quarter of fiscal 2012 was foreign exchange transaction gains of $1.4 million and $4.3 million of gains from the derecognition of accrued pricing liabilities. Other expense for the fourth quarter of fiscal 2011 was comprised primarily of losses associated with the Company’s @Ventures portfolio.

Net loss for the fourth quarter of fiscal 2012 was $20.2 million, or $(0.46) per share, compared to net loss of $4.5 million, or $(0.10) per share, for the same period in fiscal 2011.

Excluding net charges related to depreciation, amortization of intangible assets, share-based compensation, restructuring and impairment of goodwill, the Company reported non-GAAP operating loss of $17.5 million for the fourth quarter of fiscal 2012, compared to non-GAAP operating income of $1.5 million for the same period in fiscal 2011.

As of July 31, 2012, the Company had working capital of $113.5 million, compared to $152.4 million at July 31, 2011. Included in working capital as of July 31, 2012 were cash, cash equivalents and marketable securities totaling $52.4 million compared to $111.2 million at July 31, 2011. The reduction in cash was primarily due to operating losses and significant working capital needs for two new client programs. The Company concluded the quarter with no outstanding bank debt.

Financial Summary – Third Quarter Fiscal 2012

* Net revenue of $178.6 million, compared to $206.6 million in the third quarter of fiscal 2011
* Gross margin, as a percentage of revenue, of 8.6%, compared to 9.5% in the third quarter of fiscal 2011
* Operating loss of $11.0 million, compared to operating loss of $2.2 million in the third quarter of fiscal 2011
* Non-GAAP operating loss of $4.2 million, compared to non-GAAP operating income of $3.7 million in the third quarter of fiscal 2011

Consolidated Financial Results – Third Quarter Fiscal 2012

ModusLink reported net revenue of $178.6 million for the third quarter of fiscal 2012, a decrease of 13.6%, compared to net revenue of $206.6 million reported in the third quarter of fiscal 2011. The decline in revenue was primarily due to client-specific conditions previously disclosed by the Company as well as the economic environment, especially in Europe.

Revenue from new programs in the third quarter of fiscal 2012 was $21.1 million, compared to $20.9 million in the same period in fiscal 2011.(1)

Gross profit for the third quarter of fiscal 2012 was $15.4 million, or 8.6% of revenue, compared to $19.7 million, or 9.5% of revenue, in the third quarter of fiscal 2011. The decrease in gross margin as a percentage of revenue was primarily due to lower revenue.

Included in the Company’s operating results for the third quarter of fiscal 2012 were SG&A expenses of $23.5 million, compared to $20.8 million in the same quarter of fiscal 2011. The increase in SG&A was primarily due to professional fees related to the Company’s evaluation of strategic alternatives, the previously disclosed SEC inquiry, planned investments in sales and marketing, and other expenses.

ModusLink reported impairment of long-lived assets of $2.1 million for the third quarter of fiscal 2012. These non-cash charges primarily relate to a solution center in Europe that had experienced lower volumes from client programs managed in that facility, and its Tech for Less operations. Restructuring expenses for the third quarter of fiscal 2012 were $0.5 million related to the Company’s cost reduction initiatives.

Operating loss for the third quarter of fiscal 2012 was $11.0 million, compared to operating loss of $2.2 million in the third quarter of fiscal 2011.

Other income for the third quarter of fiscal 2012 was $3.7 million, compared to $5.1 million in the third quarter of fiscal 2011. Other income for the third quarter of fiscal 2012 included a $2.8 million impairment charge associated with the Company’s @Ventures portfolio, which was offset by a gain of $7.5 million as a result of the derecognition of accrued pricing liabilities. Other income for the third quarter of fiscal 2011 included foreign exchange transaction losses of $1.5 million, offset by a gain of $7.2 million as a result of the derecognition of accrued pricing liabilities.

Net loss for the third quarter of fiscal 2012 was $6.1 million, or $(0.14) per share, compared to net income of $1.5 million, or $0.03 per share, for the same period in fiscal 2011.

Excluding net charges related to depreciation, amortization of intangible assets, impairment of goodwill and intangible assets, share-based compensation, and restructuring, the Company reported a non-GAAP operating loss of $4.2 million for the third quarter of fiscal 2012, compared to non-GAAP operating income of $3.7 million for the same period in fiscal 2011.




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