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ModusLink Global Solutions Reports Financial Results for Second Quarter of Fiscal 2012

ModusLink Global Solutions, Inc. (NASDAQ: MLNK) today reported financial results for its second quarter of fiscal year 2012 ended January 31, 2012.

Financial Summary

  • Net revenue of $178.6 million, compared to $234.2 million in the second quarter of fiscal 2011
  • Gross margin, as a percentage of revenue, of 9.0%, compared to 10.0% in the second quarter of fiscal 2011
  • Operating loss of $13.5 million, compared to operating loss of $26.3 million in the second quarter of fiscal 2011. Operating loss for the second quarter of fiscal 2011 included non-cash impairment charges of $27.2 million
  • Non-GAAP operating loss of $4.0 million, compared to Non-GAAP operating income of $8.1 million in the second quarter of fiscal 2011
  • Working capital of $169.8 million, compared to $184.2 million at July 31, 2011

Consolidated Financial Results

“We saw challenging economic and client-specific conditions affect revenue in the second quarter,” said Joseph C. Lawler, president and chief executive officer of ModusLink Global Solutions. “Revenue was primarily affected by the adverse economic environment in Europe, a client in the Americas that discontinued its product and certain clients in the computing market that experienced short-term supply constraints that mainly affected results in Asia.”

“Despite these challenges, we continued to make progress executing our plan to grow revenue from new programs and achieve our cost reduction objectives. We have developed the highest level of sales opportunities since before the global economic recession. In addition, compared to the same period last year, the estimated annualized revenue from new programs closed in the first half of the fiscal year increased more than 50 percent, and we expect this to benefit revenue in future quarters. Through our cost reduction plan, we remain on track to achieve our stated objectives of annualized cost savings of $30 to $40 million,” continued Lawler.

ModusLink reported net revenue of $178.6 million for the second quarter of fiscal 2012, a decrease of 23.7%, compared to net revenue of $234.2 million reported in the second quarter of fiscal 2011. The decline was primarily due to the adverse economic environment in Europe, a client in the Americas that discontinued its product and certain clients in the computing market experiencing negative impacts related to supply constraints. Revenue from the Company’s base business in the second quarter of fiscal 2012 was $164.4 million, compared to $205.2 million in the same period a year ago. Revenue from new programs in the second quarter of fiscal 2012 was $14.1 million, compared to $29.0 million in the same period last year.(1)

Gross profit for the second quarter of fiscal 2012 was $16.1 million, or 9.0% of revenue, compared to $23.4 million, or 10.0% of revenue, in the second 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 second quarter of fiscal 2012 were selling, general and administrative expenses of $24.6 million, compared to $20.5 million in the same quarter of fiscal 2011. The increase in SG&A expenses was primarily due to one-time costs associated with the contested 2011 annual meeting, the planned one-time costs for consulting related to the Company’s investment and cost reduction plan and the previously announced investments in sales and marketing.

Restructuring expenses for the second quarter of fiscal 2012 were $4.6 million, compared to $0.4 million in the second quarter of fiscal 2011. These expenses related to the Company’s actions to reduce facility and employee costs associated with facilities in Ireland, France, the Netherlands, China and the U.S.

Operating loss for the second quarter of fiscal 2012 was $13.5 million, compared to operating loss of $26.3 million in the second quarter of fiscal 2011. Results for the second quarter of fiscal 2011 included non-cash goodwill and intangible asset impairment charges of $27.2 million.

Other income for the second quarter of fiscal 2012 was $0.6 million, compared to an expense of $0.8 million in the second quarter of fiscal 2011. The improvement was primarily the result of foreign exchange transaction gains in the second quarter of fiscal 2012, compared to foreign exchange transaction losses in the second quarter of 2011.

Net loss for the second quarter of fiscal 2012 was $12.6 million, or ($0.29) per share, compared to net loss of $28.3 million, or ($0.65) 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 $4.0 million for the second quarter of fiscal 2012, compared to non-GAAP operating income of $8.1 million for the same period in fiscal 2011.

As of January 31, 2012, the Company had working capital of $169.8 million, which included cash, cash equivalents and marketable securities totaling $95.8 million.

For the second quarter of fiscal 2012, net cash used for operating activities was $10.0 million, compared to cash flow from operating activities of $11.2 million in the same period in 2011. Cash used for operating activities in the second quarter of fiscal 2012 reflected the net loss reported during the period as well as working capital requirements related to new business.

Outlook

ModusLink has a cautious outlook based on the economic and client-specific conditions that its clients experienced in the second quarter of fiscal 2012. However, for the third quarter of fiscal 2012, the Company expects revenue to be similar to revenue reported in the second quarter of fiscal 2012, despite the third quarter historically being seasonally lower on a sequential basis. The Company’s expectations for the third quarter assume the effects of supply constraints recently experienced by certain computing clients will begin to abate and revenue from new programs will improve on a sequential basis as a result of the Company’s sales and marketing activities.

Conference Call Information

As previously announced, ModusLink Global Solutions, Inc. will hold a conference call to discuss its fiscal 2012 second quarter results at 5:00 p.m. ET on March 7, 2012. Investors can listen to the conference call on the Internet at www.ir.moduslink.com. To listen to the live call, go to the website at least 15 minutes prior to the start time to download and install the necessary audio software.

About ModusLink Global Solutions, Inc.

ModusLink Global Solutions, Inc. designs and executes global value chain strategies to solve clients’ cost, time-to-market, customer satisfaction and revenue objectives. Our supply chain, aftermarket, e-Business and entitlement management solutions support the end-to-end product lifecycles of the world’s leading technology and consumer goods companies. ModusLink has more than 25 years of experience executing complex supply chain processes such as sourcing, configuration and fulfillment. We can manage these critical functions seamlessly with a client’s global e-Business initiative or an integrated aftermarket program, including alternative channel recovery for at-risk inventory. Backed by a footprint of more than 25 solution centers in 15 countries, ModusLink clients can react quickly to shifting market dynamics impacting value chain performance and revenues. For more information about ModusLink's flexible, scalable and sustainable solutions, visit www.moduslink.com or www.valueunchained.com, the blog for value chain professionals.

(1) New programs defined as client programs that have been executed for fewer than 12 months. Base business defined as client programs that have been executed for 12 months or more.

Non-GAAP Information

The Company believes that its non-GAAP measure of operating income/(loss) ("non-GAAP operating income/(loss)") provides investors with a useful, supplemental measure of the Company’s operating performance by excluding the impact of non-cash charges and restructuring activities. Each of the excluded items was excluded because it may be considered to be of a non-operational or non-cash nature. Historically, the Company has recorded significant impairment and restructuring charges. These charges, as well as charges related to depreciation, amortization of intangible assets and stock-based compensation, have been excluded for the purpose of enhancing the understanding by both management and investors of the underlying baseline operating results and trends of the business, which management uses to evaluate our financial performance for purposes of planning and forecasting future periods. Non-GAAP operating income/(loss) does not have any standardized definition and, therefore, is unlikely to be comparable to similar measures presented by other reporting companies. Non-GAAP operating income/(loss) should not be evaluated in isolation of, or as a substitute for, the Company’s financial results prepared in accordance with United States generally accepted accounting principles. The Company’s usage of non-GAAP operating income/(loss), and the underlying methodology in excluding certain charges, is not necessarily an indication of the results of operations that may be expected in the future, or that the Company will not, in fact, incur such charges in future periods. A table reconciling the Company’s non-GAAP operating income/(loss) to its GAAP operating income/(loss) and its GAAP net income/(loss) is included in the statement of operations information in this release.

ModusLink Global Solutions is a registered trademark of ModusLink Global Solutions, Inc. All other company names and products are trademarks or registered trademarks of their respective companies.

This release contains forward-looking statements, which address a variety of subjects including, for example, the expected results of the Company’s plans to grow revenue from new programs and achieve its cost reduction objectives; the Company’s assessment of its future potential sales opportunities; the assessment and estimate of the Company’s annualized revenue for new programs closed in the first half of fiscal 2012 compared with the prior year period; the Company’s prospects of achieving annualized savings of $30 million to $40 million; the timing and impact of the expected benefits of the Company’s investment and cost reduction plan; the Company’s expectation as to the abatement of its clients’ supply constraints; the Company’s expectation as to revenue from new programs and total revenue in the third fiscal quarter of fiscal 2012 compared to new business revenue and total revenue, respectively, in the second fiscal quarter of fiscal 2012. All statements other than statements of historical fact, including without limitation, those with respect to the Company’s goals, plans, expectations and strategies set forth herein are forward-looking statements. The following important factors and uncertainties, among others, could cause actual results to differ materially from those described in these forward-looking statements: the Company’s success, including its ability to meet its revenue, operating income and cost savings targets, maintain and improve its cash position, expand its operations and revenue, lower its costs, improve its gross margins, reach and sustain profitability, reach its long-term objectives and operate optimally, depends on its ability to execute on its business strategy, including the announced investment and costs savings plan and the continued and increased demand for and market acceptance of its services; global economic conditions, especially in the technology sector are uncertain and subject to volatility; demand for our clients’ products may decline or may not achieve the levels anticipated by our clients; the Company's management may face strain on managerial and operational resources as they try to oversee the expanded operations; the Company may not realize the expected benefits of its restructuring and cost cutting actions; the Company may not be able to expand its operations in accordance with its business strategy; the Company’s cash balances may not be sufficient to allow the Company to meet all of its business and investment goals; the Company may experience difficulties integrating technologies, operations and personnel in accordance with its business strategy; the Company derives a significant portion of its revenue from a small number of customers and the loss of any of those customers could significantly damage the Company’s financial condition and results of operations; the Company frequently sells to its supply chain management clients on a purchase order basis rather than pursuant to contracts with minimum purchase requirements, and therefore its sales and the amount of projected revenue that is actually realized are subject to demand variability; the Company’s pipeline of sales opportunities represents potential sales transactions and estimated annual revenue therefrom and there can be no assurance that such sales efforts will be successful or that the potential revenue will be realized; risks inherent with conducting international operations; tax rate expectations are based on current tax law and current expected income and may be affected by the jurisdictions in which profits are determined to be earned and taxed, changes in estimates of credits, benefits and deductions, the resolution of issues arising from tax audits with various tax authorities, including payment of interest and penalties and the ability to realize deferred tax assets; the mergers and acquisitions and IPO markets are inherently unpredictable and liquidity events for companies in the Company’s venture capital portfolio may not occur; and increased competition and technological changes in the markets in which the Company competes. For a detailed discussion of cautionary statements that may affect the Company’s future results of operations and financial results, please refer to the Company's filings with the Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Forward-looking statements represent management's current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements made by us.

ModusLink Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
                         
(Unaudited)
 
Three months ended Six months ended
January 31, January 31,

2012

    2011     Fav (Unfav) 2012     2011    

Fav (Unfav)

 
Net revenue $ 178,588 $ 234,150 (23.7 %) $ 384,739 $ 470,529 (18.2 %)
Cost of revenue 162,521 210,759 22.9 % 343,179 424,784 19.2 %
           
Gross profit   16,067     23,391   (31.3 %)   41,560     45,745   (9.1 %)
9.0 % 10.0 % (1.0 %) 10.8 % 9.7 % 1.1 %
Operating expenses:
Selling, general and administrative 24,607 20,458 (20.3 %) 46,805 43,009 (8.8 %)
Amortization of intangible assets 332 1,679 80.2 % 663 3,358 80.3 %
Impairment of goodwill & intangible assets - 27,166 100.0 % - 27,166 100.0 %
Restructuring, net   4,597     412   (1015.8 %)   5,352     1,201   (345.6 %)
Total operating expenses   29,536     49,715   40.6 %   52,820     74,734   29.3 %
 
Operating loss (13,469 ) (26,324 ) 48.8 % (11,260 ) (28,989 ) 61.2 %
 
Other income (expense)   566     (774 ) 173.1 %   1,397     (3,425 ) 140.8 %
 
Loss from continuing operations before taxes (12,903 ) (27,098 ) 52.4 % (9,863 ) (32,414 ) (69.6 %)
Income tax expense   380     1,132   66.4 %   2,251     2,441   7.8 %
Loss from continuing operations (13,283 ) (28,230 ) 52.9 % (12,114 ) (34,855 ) 65.2 %
 
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations   670     (104 ) 744.2 %   670     (149 ) 549.7 %
 
Net loss $ (12,613 ) $ (28,334 ) 55.5 % $ (11,444 ) $ (35,004 ) 67.3 %
 
Basic and diluted loss per share:
Loss from continuing operations $ (0.31 ) $ (0.65 ) 52.3 % $ (0.28 ) $ (0.81 ) 65.4 %
Income from discontinued operations   0.02     -   100.0 %   0.02     -   100.0 %
 
Basic and diluted loss per share $ (0.29 ) $ (0.65 ) 55.4 % $ (0.26 ) $ (0.81 ) 67.9 %
 
 
Shares used in computing basic loss per share   43,434     43,279     43,367     43,284  
 
Shares used in computing diluted loss per share   43,434     43,279     43,367     43,284  
 
 
ModusLink Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations Information
(In thousands)
                 
(Unaudited)
 
Three months ended Six months ended
January 31, January 31, January 31, January 31,
2012 2011 2012 2011

Net revenue:

Americas $ 59,619 $ 76,269 $ 129,285 $ 157,092
Asia 51,370 62,794 112,252 120,292
Europe 50,560 78,101 108,013 155,799
TFL 8,888 7,782 16,967 17,527
All other   8,150     9,204     18,222     19,819  
$ 178,588   $ 234,150   $ 384,739   $ 470,529  
 

Operating loss:

Americas $ (2,969 ) $ (17,997 ) $ (3,139 ) $ (21,494 )
Asia 4,748 8,226 14,048 13,082
Europe (7,312 ) 486 (9,100 ) 1,141
TFL (1,211 ) (13,567 ) (2,606 ) (14,571 )
All other   (33 )   213     987     1,002  
(6,777 ) (22,639 ) 190 (20,840 )
Other reconciling items   (6,691 )   (3,685 )   (11,450 )   (8,149 )
$ (13,468 ) $ (26,324 ) $ (11,260 ) $ (28,989 )
 

Non-GAAP operating income (loss):

Americas $ (1,170 ) $ 101 $ 91 $ (913 )
Asia 6,032 10,115 17,038 16,974
Europe (2,362 ) 2,179 (2,771 ) 4,297
TFL (988 ) (1,951 ) (2,303 ) (2,618 )
All other   453     714     1,943     1,987  
1,965 11,158 13,998 19,727
Other reconciling items   (5,970 )   (3,035 )   (10,091 )   (6,901 )
$ (4,005 ) $ 8,123   $ 3,907   $ 12,826  
 

Note: The Company defines non-GAAP operating income (loss) as total operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, impairment of goodwill and long-lived assets, share-based compensation, and restructuring.

 
TABLE RECONCILING NON-GAAP OPERATING INCOME (LOSS) TO GAAP OPERATING LOSS AND NET LOSS
 
NON-GAAP operating income (loss) $ (4,005 ) $ 8,123 $ 3,907 $ 12,826
 
Adjustments:
Depreciation (3,536 ) (4,196 ) (7,272 ) (8,193 )
Amortization of intangible assets (332 ) (1,679 ) (663 ) (3,358 )
Impairment of goodwill & intangible assets - (27,166 ) - (27,166 )
Stock-based compensation (998 ) (994 ) (1,880 ) (1,897 )
Restructuring, net   (4,597 )   (412 )   (5,352 )   (1,201 )
GAAP operating loss $ (13,468 ) $ (26,324 ) $ (11,260 ) $ (28,989 )
Other income (expense), net 565 (774 ) 1,397 (3,425 )
Income tax expense (380 ) (1,132 ) (2,251 ) (2,441 )
Income (loss) from discontinued operations   670     (104 )   670     (149 )
Net loss $ (12,613 ) $ (28,334 ) $ (11,444 ) $ (35,004 )
 
 
ModusLink Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
             
(In thousands)
 
(Unaudited)
 
January 31, July 31, January 31,
2012 2011 2011
Assets:
Cash and cash equivalents $ 95,618 $ 111,225 $ 154,217
Available-for-sale securities 132 131 222
Trade accounts receivable, net 156,195 146,411 140,892
Inventories, net 94,675 77,102 79,667
Prepaid and other current assets   10,325   10,876   12,084
Total current assets   356,945   345,745   387,082
 
Property and equipment, net 43,371 47,299 49,942
Investments in affiliates 12,352 12,016 12,997
Goodwill 3,058 3,058 3,058
Intangible assets, net 4,029 4,699 6,798
Other assets   10,318   9,545   10,307
$ 430,073 $ 422,362 $ 470,184
Liabilities:
Current portion of capital lease obligations $ 29 $ 43 $ 38
Accounts payable 135,970 114,588 111,205
Current portion of accrued restructuring 4,978 1,456 2,123
Accrued income taxes - 180 -
Accrued expenses 37,776 36,384 38,755
Other current liabilities 6,934 7,029 6,949
Current liabilities of discontinued operations   1,452   1,817   1,686
Total current liabilities   187,139   161,497   160,756
 
Long-term portion of accrued restructuring 109 8 484
Long-term portion of capital lease obligations 32 22 10
Other long-term liabilities 15,755 15,773 15,791
Non-current liabilities of discontinued operations   983   1,883   2,587
16,879 17,686 18,872
Stockholders' equity   226,055   243,179   290,556
$ 430,073 $ 422,362 $ 470,184
 

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