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ModusLink Reports Financial Results for Second Quarter of Fiscal 2014

ModusLink Global Solutions, Inc. (NASDAQ: MLNK) today reported financial results for its second quarter of fiscal year 2014 ended January 31, 2014. Results for that period are summarized in the following paragraphs. For a full discussion of the results, please see the Company's quarterly report on Form 10-Q, which can be accessed through www.moduslink.com.

Second Quarter Financial Summary

  • Net revenue of $194.0 million, a decrease of 4.6% compared to the second quarter of fiscal 2013
  • Gross margin of 11.6%, a 1.6 percentage point improvement compared to 10.0% in the second quarter of fiscal 2013
  • SG&A expenses of $19.6 million, a 17.5% reduction compared to the second quarter of fiscal 2013
  • Operating income of $1.2 million compared to operating loss of $8.5 million in the second quarter of fiscal 2013
  • Adjusted EBITDA of $8.6 million compared to $5.4 million in the second quarter of fiscal 2013
  • Net income of $1.1 million, or $0.02 per diluted share, compared with net loss of $12.6 million, or $0.29 per share, in the second quarter of fiscal 2013

ModusLink reported net revenue of $194.0 million for the second quarter of fiscal 2014, compared to $203.4 million in the second quarter of fiscal 2013. Operating income for the second quarter of fiscal 2014 improved to $1.2 million, compared to an operating loss of $8.5 million in the second quarter of the previous year. Net income for the second quarter of fiscal 2014 improved to $1.1 million, or $0.02 per diluted share, compared to a net loss of $12.6 million, or $0.29 per share.

The decline in net revenue for the second quarter of fiscal 2014 was primarily driven by lower revenue from a software client that reorganized its supply chain and in the same period last year experienced high unit volumes due to a major product launch. The lower revenue from the software client primarily affected results in Europe, and was partially offset by significant revenue growth from a consumer electronics client, which primarily benefited results in the Americas and Europe. The improvement in gross margin, operating income and Adjusted EBITDA for the second quarter of fiscal 2014 was primarily driven by the Company’s cost reduction actions and lower professional fees.

For the second quarter of fiscal 2014, Adjusted EBITDA was $8.6 million compared to $5.4 million for the same period in fiscal 2013. EBITDA represents earnings before interest, income tax expense, depreciation and amortization, and Adjusted EBITDA represents EBITDA excluding certain items. Please refer to the non-GAAP information and table reconciling the Company’s Adjusted EBITDA to its GAAP net income/(loss) below.

About ModusLink Global Solutions

ModusLink Global Solutions, Inc. (NASDAQ: MLNK) executes comprehensive supply chain and logistics services that are designed to improve clients’ revenue, cost, sustainability and customer experience objectives. ModusLink is a trusted and integrated provider to the world’s leading companies in consumer electronics, communications, computing, medical devices, software and retail. The Company’s operations are supported by more than 25 sites across North America, Europe, and the Asia/Pacific region. For details on ModusLink's flexible and scalable solutions visit www.moduslink.com and www.valueunchained.com, the blog for supply chain professionals.

Non-GAAP Information

In addition to the financial measures prepared in accordance with generally accepted accounting principles, the Company uses Adjusted EBITDA, a non-GAAP financial measure, to assess its performance. EBITDA represents earnings before interest, income tax expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA excluding the effects of professional fees associated with our SEC inquiry and financial restatement, strategic alternatives and other professional fees, executive severance and employee retention, restructuring, share-based compensation, impairments of goodwill and long-lived assets, unrealized foreign exchange gains or losses, net, other non-operating gains or losses, net, equity in losses of affiliates and impairments, and discontinued operations.

We believe that providing Adjusted EBITDA to investors is useful as this measure provides important supplemental information of our performance to investors and permits investors and management to evaluate the operating performance of our core supply chain business. We use Adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board of Directors, determining a component of incentive compensation for executive officers and other key employees based on operating performance and evaluating short-term and long-term operating trends in our core supply chain business. We believe that the Adjusted EBITDA financial measure assists in providing an enhanced understanding of our underlying operational measures to manage the core supply chain business, to evaluate performance compared to prior periods and the marketplace, and to establish operational goals. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision making.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with U.S. GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

A table reconciling the Company’s EBITDA and Adjusted EBITDA to its GAAP net income/(loss) is included 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. 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 ability to execute on its business strategy, including its cost reduction plans and the continued and increased demand for and market acceptance of its services, which could negatively affect the Company’s 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; uncertainties and volatility relating to global economic conditions, especially in the technology sector; unanticipated declines in, or failure to achieve the anticipated levels of, the demand for our clients’ products; potential strains on managerial and operational resources resulting from expanded operations; failure to realize expected benefits of restructuring and cost-cutting actions; inability to expand operations in accordance with the Company’s business strategy; insufficient cash balances that could prevent the Company from meeting business or investment goals; difficulties integrating technologies, operations and personnel in accordance with the Company’s business strategy; customer losses; demand variability in supply chain management clients, to which the Company sells on a purchase order basis rather than pursuant to contracts with minimum purchase requirements; risks inherent with conducting international operations; changes in tax rates in jurisdictions where profits are determined to be earned and taxed; changes in estimates of tax credits, benefits and deductions; unfavorable 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; adverse conditions in the mergers and acquisitions or IPO markets, which could prevent liquidity for securities in the Company’s venture capital portfolio; 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 Balance Sheets
(in thousands)
January 31, July 31, January 31,
  2014   2013   2013
Cash and cash equivalents $ 75,274 $ 77,916 $ 51,804
Accounts receivable, net 145,480 142,098 151,573
Inventories 68,890 61,322 83,053
Prepaid and other current assets   10,774   9,750   12,090
Total current assets   300,418   291,086   298,520
Property and equipment, net 28,911 34,290 38,193
Investments in affiliates 8,071 7,970 9,556
Goodwill 3,058 3,058 3,058
Other intangible assets, net 1,204 1,764 2,327
Other assets   5,389   5,528   6,671
Total assets $ 347,051 $ 343,696 $ 358,325
Accounts payable $ 112,236 $ 110,148 $ 125,472
Accrued restructuring 1,686 4,670 4,575
Accrued expenses 37,840 34,748 40,422
Other current liabilities   25,735   26,865   28,981
Total current liabilities   177,497   176,431   199,450
Long-term portion of accrued restructuring 273 494 -
Other long-term liabilities   9,243   9,866   11,178
Total liabilities   187,013   186,791   210,628
Stockholders' equity:   160,038   156,905   147,697
Total liabilities and stockholders' equity $ 347,051 $ 343,696 $ 358,325
ModusLink Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended Six months ended
January 31, January 31,
  2014     2013   Fav (Unfav)   2014     2013   Fav (Unfav)
Net revenue $ 194,011 $ 203,436 (4.6 %) $ 385,426 $ 400,487 (3.8 %)
Cost of revenue   171,431     183,158   6.4 %   340,851     361,585   5.7 %
Gross profit   22,580     20,278   11.4 %   44,575     38,902   14.6 %
11.6 % 10.0 % 1.6 % 11.6 % 9.7 % 1.9 %
Operating expenses:
Selling, general and administrative 19,572 23,721 17.5 % 37,687 47,862 21.3 %
Amortization of intangible assets 280 285 1.8 % 560 569 1.6 %
Impairment of long-lived assets 500 - 500 -
Restructuring, net   993     4,798   79.3 %   1,972     6,268   68.5 %
Total operating expenses   21,345     28,804   25.9 %   40,719     54,699   25.6 %
Operating income (loss) 1,235 (8,526 ) 114.5 % 3,856 (15,797 ) 124.4 %
Other income (expense), net   581     (2,491 ) 123.3 %   (231 )   (3,832 ) 94.0 %
Income (loss) from continuing operations before taxes 1,816 (11,017 ) 116.5 % 3,625 (19,629 ) 118.5 %
Income tax expense 753 674 (11.7 %) 1,890 1,583 (19.4 %)
Equity in losses of affiliates, net of tax   -     726       134     1,036    
Income (loss) from continuing operations 1,063 (12,417 ) 108.6 % 1,601 (22,248 ) 107.2 %
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations   1     (133 ) 100.8 %   80     (960 ) 108.3 %
Net income (loss) $ 1,064   $ (12,550 ) 108.5 % $ 1,681   $ (23,208 ) 107.2 %
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.02 $ (0.29 ) 107.1 % $ 0.03 $ (0.51 ) 106.1 %
Income (loss) from discontinued operations   0.00     (0.00 ) 100.6 %   0.00     (0.02 ) 107.1 %
Net income (loss) $ 0.02   $ (0.29 ) 107.1 % $ 0.03   $ (0.53 ) 106.1 %
Shares used in computing basic income (loss) per share:
Basic 51,498 43,654 51,467 43,629
Diluted 51,811 43,654 51,539 43,629
ModusLink Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations Information by Operating Segment
(in thousands)
Three months ended Six months ended
January 31, January 31, January 31, January 31,
  2014     2013     2014     2013  

Net revenue:

Americas $ 78,787 $ 67,731 $ 155,362 $ 131,641
Asia 47,530 60,356 92,920 116,731
Europe 56,751 67,818 117,367 136,748
All other   10,943     7,531     19,777     15,367  
Total net revenue $ 194,011   $ 203,436   $ 385,426   $ 400,487  

Operating income (loss):

Americas $ 2,080 $ (446 ) $ 5,568 $ (2,470 )
Asia 5,808 5,585 11,659 12,754
Europe (2,149 ) (3,900 ) (4,495 ) (7,748 )
All other   (76 )   (955 )   509     (538 )
Total segment operating income (loss) 5,663 284 13,241 1,998
Other reconciling items   (4,428 )   (8,810 )   (9,385 )   (17,795 )
Total operating income (loss) $ 1,235   $ (8,526 ) $ 3,856   $ (15,797 )
ModusLink Global Solutions, Inc. and Subsidiaries
Reconciliation of Selected Non-GAAP Measures to GAAP Measures
(in thousands)

Net Income (Loss) to Adjusted EBITDA1

Three months ended Six months ended
January 31, January 31, January 31, January 31,
  2014     2013     2014     2013  
Net income (loss) $ 1,064 $ (12,550 ) $ 1,681 $ (23,208 )
Interest income (65 ) (88 ) (167 ) (166 )
Interest expense 199 101 412 199
Income tax expense 753 674 1,890 1,583
Depreciation 3,097 3,239 6,571 6,849
Amortization of intangible assets   280     285     560     569  
EBITDA 5,328 (8,339 ) 10,947 (14,174 )
SEC inquiry and financial restatement costs 1,438 2,955 3,217 6,636
Strategic alternatives and other professional fees 39 1,100 55 1,390
Executive severance and employee retention - 437 - 1,038
Restructuring 993 4,798 1,972 6,268
Share-based compensation 638 422 1,150 915
Impairment of goodwill and long-lived assets 500 - 500 -
Unrealized foreign exchange (gains) losses, net (626 ) 1,683 (348 ) 2,267
Other non-operating (gains) losses, net 110 (56 ) (361 ) 237
Equity in losses of affiliates and impairments 177 2,226 311 2,536
Discontinued operations   (1 )   133     (80 )   960  
Adjusted EBITDA $ 8,596   $ 5,359   $ 17,363   $ 8,073  

1 The Company defines Adjusted EBITDA as net income (loss) excluding net charges related to interest income, interest expense, income tax expense, depreciation, amortization of intangible assets, SEC inquiry and restatement costs, strategic alternatives and other professional fees, executive severance and employee retention, restructuring, share-based compensation, impairment of goodwill and long-lived assets, unrealized foreign exchange (gains) losses, net, other non-operating (gains) losses, net, equity in losses of affiliates and impairments and discontinued operations.

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