ModusLink Concludes Restatement, Alternatives Review Processes, Says Isn't Pursuing Sale of Operations
ModusLink Global Solutions™ Inc. (NASDAQ: MLNK) today 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
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