NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ModusLink Global Solutions, Inc. (together with its consolidated subsidiaries, ModusLink Global Solutions or the
Company), through its wholly owned subsidiaries, ModusLink Corporation (ModusLink) and ModusLink PTS, Inc. (ModusLink PTS), is a leader in global supply chain business process management serving clients in markets
such as consumer electronics, communications, computing, medical devices, software, and retail. The Company designs and executes critical elements in its clients global supply chains to improve speed to market, product customization,
flexibility, cost, quality and service. These benefits are delivered through a combination of industry expertise, innovative service solutions, integrated operations, proven business processes, expansive global footprint and world-class technology.
The Company has an integrated network of strategically located facilities in various countries, including numerous sites
throughout North America, Europe and Asia. The Company previously operated under the names CMGI, Inc. and CMG Information Services, Inc. and was incorporated in Delaware in 1986.
(2)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The accompanying consolidated financial statements reflect the application of certain significant accounting policies described below.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the results of its wholly-owned and majority- owned subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation. The Company accounts for investments in businesses in which it owns between 20% and 50% of the voting interest using the equity method, if the Company has the ability to exercise significant influence over the investee
company. All other investments in privately held businesses over which the Company does not have the ability to exercise significant influence, or for which there is not a readily determinable market value, are accounted for under the cost method of
accounting.
Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the
Company evaluates its estimates including those related to revenue recognition, allowance for doubtful accounts, inventories, fair value of its trading and available-for-sale securities, intangible assets, income taxes, restructuring, valuation of
long-lived assets, impairments, contingencies, restructuring charges, litigation, pension obligations and the fair value of stock options and share bonus awards granted under the Companys stock based compensation plans. Accounting estimates
are based on historical experience and various assumptions that are considered reasonable under the circumstances. However, because these estimates inherently involve judgments and uncertainties, actual results could differ materially from those
estimated.
Revenue Recognition
The Companys revenue primarily comes from the sale of supply chain management services to its clients. Amounts billed to clients under these arrangements include revenue attributable to the services
performed as well as for materials procured on the Companys clients behalf as part of its service to them. Other sources of revenue include the sale of products and other services. Revenue is recognized for services when the services are
performed and for product sales when the products are shipped or in certain cases when products are built and title had transferred, if the client has also contracted with us for warehousing and/or logistics services for a separate fee, assuming all
other applicable revenue recognition criteria are met.
The Company recognizes revenue in accordance with the provisions of
the Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (ASC Topic 605). Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of
loss have passed or services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. The Companys shipping terms vary by client and can include FOB
48
shipping point, which means that risk of loss passes to the client when it is shipped from the Companys location, as well as other terms such as ex-works, meaning that title and risk of
loss transfer upon delivery of product to the customers designated carrier. The Company also evaluates the terms of each major client contract relative to a number of criteria that management considers in making its determination with respect
to gross versus net reporting of revenue for transactions with its clients. Managements criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory
risk. The Company records all shipping and handling fees billed to clients as revenue, and related costs as cost of sales, when incurred.
The Company applies the provisions of ASC Topic 985, Software (ASC Topic 985), with respect to certain transactions involving the sale of software products by the Companys
e-Business operations.
The Company applies the guidance of Accounting Standards Codification (ASC) 605-25
Revenue Multiple-Element Arrangements for determining whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to
the separate units of accounting. Under this guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables
and allocate arrangement consideration using the relative selling price method. For those contracts which contain multiple deliverables, management must first determine whether each service, or deliverable, meets the separation criteria. In general,
a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has standalone value to the client. Each deliverable that meets the separation criteria is considered a separate unit of accounting. Management
allocates the total arrangement consideration to each separate unit of accounting based on the relative selling price of each separate unit of accounting. After the arrangement consideration has been allocated to each separate unit of accounting,
management applies the appropriate revenue recognition method for each separate unit of accounting as described previously based on the nature of the arrangement. In general, revenue is recognized upon completion of the last deliverable. All
deliverables that do not meet the separation criteria are combined into one unit of accounting and the appropriate revenue recognition method is applied.
Accounts Receivable and Allowance for Doubtful Accounts
The Companys
unsecured accounts receivable are stated at original invoice amount less an estimate made for doubtful receivables based on a monthly review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering each customers financial condition, credit history and current economic conditions. The Company writes off accounts receivable when management deems them uncollectible and records
recoveries of accounts receivable previously written off when received. When accounts receivable are considered past due, the Company generally does not charge interest on past due balances.
Foreign Currency Translation
All assets and liabilities of the Companys foreign subsidiaries, whose functional currency is the local currency, are translated to U.S. dollars at the rates in effect at the balance sheet date. All
amounts in the Consolidated Statements of Operations are translated using the average exchange rates in effect during the year. Resulting translation adjustments are reflected in the accumulated other comprehensive income (loss) component of
stockholders equity. Settlement of receivables and payables in a foreign currency that is not the functional currency result in foreign currency transaction gains and losses. Foreign currency transaction gains and losses are included in
Other gains (losses), net in the Consolidated Statements of Operations.
Cash, Cash Equivalents and Short-term
Investments
The Company considers all highly liquid investments with original maturities of three months or less at the
time of purchase to be cash equivalents. Investments with maturities greater than three months to twelve months at the time of purchase are considered short- term investments. Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Cash and bank deposits
|
|
$
|
24,987
|
|
|
$
|
29,566
|
|
Money market funds
|
|
|
85,683
|
|
|
|
101,224
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,670
|
|
|
$
|
130,790
|
|
|
|
|
|
|
|
|
|
|
49
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, current liabilities and the revolving line of
credit approximate fair value because of the short maturity of these instruments. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Companys current
incremental borrowing rates for similar types of borrowing arrangements. The fair values of the Companys Trading Securities are estimated using quoted market prices. The fair value of the Companys Notes payable is $63.9 million as
of July 31, 2017, which represents the value at which its lenders could trade its debt with in the financial markets, and does not represent the settlement value of these long-term debt liabilities to us. The fair value of the Notes payable
could vary each period based on fluctuations in market interest rates, the Companys stock price, as well as changes to the Companys credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of the
reporting dates.
The defined benefit plans have assets invested in insurance contracts and bank managed portfolios.
Conservation of capital with some conservative growth potential is the strategy for the plans. The Companys pension plans are outside the United States, where asset allocation decisions are typically made by an independent board of trustees.
Investment objectives are aligned to generate returns that will enable the plans to meet their future obligations. The Company acts in a consulting and governance role in reviewing investment strategy and providing a recommended list of investment
managers for each plan, with final decisions on asset allocation and investment manager made by local trustees.
ASC Topic 820
provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or
liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to
measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets
|
|
Level 2:
|
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price
the assets or liabilities
|
Investments
Marketable securities held by the Company which meet the criteria for classification as trading securities or available-for-sale are
carried at fair value. Gains and losses on securities classified as trading are reflected in other income (expense) in the Companys Consolidated Statements of Operations. Unrealized holding gains and losses on securities classified as
available-for-sale are carried net of income taxes, when applicable, as a component of accumulated other comprehensive income (loss) in the Consolidated Statements of Stockholders Equity.
The Company maintained interests in a small number of privately held companies primarily through its various venture capital funds. The
Companys venture capital investment portfolio, @Ventures, invested in early-stage technology companies. These investments are generally made in connection with a round of financing with other third-party investors. Investments in which the
Companys interest is less than 20% and which are not classified as available-for-sale securities, are accounted for under the cost method of accounting, and are carried at the lower of cost or net realizable value. Under this method, the
investment balance, originally recorded at is cost, is only adjusted for impairments to the investment. Gains and losses realized upon the sale of the investment are reflected in Gains on investments in affiliates, net of tax in the
Companys Consolidated Statements of Operations. If it is determined that the Company exercises significant influence over the investee company, then the equity method of accounting is used. For those investments in which the Companys
voting interest is between 20% and 50%, the equity method of accounting is generally used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Companys share of net earnings or losses of the
investee company as they occur, limited to the extent of the Companys investment in, advances to and commitments for the investee.
The Company assesses the need to record impairment losses on its investments and records such losses when the impairment of an investment is determined to be other than temporary in nature. The process of
assessing whether a particular equity investments net realizable value is less than its carrying cost requires a significant amount of judgment. This valuation process is based primarily on information that the Company obtains from these
privately held companies who are not subject to the same disclosure and audit requirements as the reports required of U.S. public companies. As such, the timeliness and completeness of the
50
data may vary. Based on the Companys evaluation, it recorded impairment charges related to its investments in privately held companies of approximately $42 thousand and $7.3 million for the
fiscal years ended July 31, 2016 and 2015, respectively. These impairment losses are reflected in Impairment of investments in affiliates in the Companys Consolidated Statements of Operations.
At the time an equity method investee issues its stock to unrelated parties, the Company accounts for that share issuance as if the
Company has sold a proportionate share of its investment. The Company records any gain or loss resulting from an equity method investees share issuance in its Consolidated Statements of Operations.
Funds held for clients
Funds held for clients represent assets that are restricted for use solely for the purposes of satisfying the obligations to remit clients customer funds to the Companys clients. These funds
are classified as a current asset and a corresponding other current liability on the Companys Consolidated Balance Sheets.
Inventory
Inventories are stated at the lower of cost or market. Cost is
determined by both the moving average and the first-in, first-out methods. Materials that the Company typically procures on behalf of its clients that are included in inventory include materials such as compact discs, printed materials, manuals,
labels, hardware accessories, hard disk drives, consumer packaging, shipping boxes and labels, power cords and cables for client-owned electronic devices.
Inventories consisted of the following:
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|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
24,129
|
|
|
$
|
28,506
|
|
Work-in-process
|
|
|
713
|
|
|
|
590
|
|
Finished goods
|
|
|
9,527
|
|
|
|
11,174
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,369
|
|
|
$
|
40,270
|
|
|
|
|
|
|
|
|
|
|
The Company continuously monitors inventory balances and records inventory provisions for any excess of
the cost of the inventory over its estimated market value. The Company also monitors inventory balances for obsolescence and excess quantities as compared to projected demands. The Companys inventory methodology is based on assumptions about
average shelf life of inventory, forecasted volumes, forecasted selling prices, contractual provisions with its clients, write-down history of inventory and market conditions. While such assumptions may change from period to period, in determining
the net realizable value of its inventories, the Company uses the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or the Company experiences a higher incidence of
inventory obsolescence because of rapidly changing technology and client requirements, additional inventory provisions may be required. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory
and cannot be reversed due to subsequent increases in demand forecasts. Accordingly, if inventory previously written down to its net realizable value is subsequently sold, gross profit margins may be favorably impacted.
Long-Lived Assets, Goodwill and Other Intangible Assets
The Company follows ASC Topic 360, Property, Plant, and Equipment (ASC Topic 360). Under ASC Topic 360, the Company tests certain long-lived assets or group of assets for
recoverability whenever events or changes in circumstances indicate that the Company may not be able to recover the assets carrying amount. ASC Topic 360 defines impairment as the condition that exists when the carrying amount of a long-lived
asset or group, including property and equipment and other definite-lived intangible assets, exceeds its fair value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual
disposition of that asset or group cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the
long-lived asset or group over its fair value. Management may use third party valuation experts to assist in its determination of fair value.
51
The Company is required to test goodwill for impairment annually or if a triggering event
occurs in accordance with the provisions of ASC Topic 350, Goodwill and Other (ASC Topic 350). The Companys policy is to perform its annual impairment testing for all reporting units with goodwill on July 31 of
each fiscal year. As a result of the annual impairment analysis and in connection with the preparation of its annual financial statements for the fiscal year ended July 31, 2015, the Company concluded that its remaining goodwill was fully impaired
and recorded a $3.1 million non-cash goodwill impairment charge.
The Companys valuation methodology for assessing
impairment of long-lived assets, goodwill and other intangible assets requires management to make judgments and assumptions based on historical experience and on projections of future operating performance. Management may use third party valuation
advisors to assist in its determination of the fair value of reporting units subject to impairment testing. The Company operates in highly competitive environments and projections of future operating results and cash flows may vary significantly
from actual results. If the assumptions used in estimating the valuations of the Companys reporting units for purposes of impairment testing differ materially from actual future results, the Company may record impairment charges in the future
and our financial results may be materially adversely affected.
Restructuring Expenses
The Company follows the provisions of ASC Topic 420, Exit or Disposal Cost Obligations, which addresses financial accounting
and reporting for costs associated with exit or disposal activities. The statement requires companies to recognize costs associated with exit or disposal activities when a liability has been incurred rather than at the date of a commitment to an
exit or disposal plan. The Company records liabilities that primarily include estimated severance and other costs related to employee benefits and certain estimated costs related to equipment and facility lease obligations and other service
contracts. These contractual obligations principally represent future obligations under non-cancelable real estate leases. Restructuring estimates relating to real estate leases involve consideration of a number of factors including: potential
sublet rental rates, estimated vacancy period for the property, brokerage commissions and certain other costs. Estimates relating to potential sublet rates and expected vacancy periods are most likely to have a material impact on the Companys
results of operations in the event that actual amounts differ significantly from estimates. These estimates involve judgment and uncertainties, and the settlement of these liabilities could differ materially from recorded amounts.
Property and Equipment
Property, plant and equipment are stated at cost. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation and amortization
is provided on the straight-line basis over the estimated useful lives of the respective assets. The Company capitalizes certain computer software development costs when incurred in connection with developing or obtaining computer software for
internal use. The estimated useful lives are as follows:
|
|
|
Buildings
|
|
32 years
|
Machinery & equipment
|
|
3 to 5 years
|
Furniture & fixtures
|
|
5 to 7 years
|
Automobiles
|
|
5 years
|
Software
|
|
3 to 8 years
|
Leasehold improvements
|
|
Shorter of the remaining lease term or the estimated useful life of the asset
|
Income Taxes
Income taxes are accounted for under the provisions of ASC Topic 740, Income Taxes (ASC Topic 740), using the asset and liability method whereby deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. ASC Topic 740 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax
assets will not be realized in future periods. This methodology is subjective and requires significant estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.
In accordance with ASC Topic 740, the Company applies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a companys financial statements. ASC Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken
on a tax return, in
52
order for those tax positions to be recognized in the financial statements. In accordance with the Companys accounting policy, interest and penalties related to uncertain tax positions is
included in the income tax expense line of the Consolidated Statements of Operations. See Note 14, Income Taxes, for additional information.
Earnings (Loss) Per Share
The following table reconciles earnings per
share for the fiscal years ended July 31, 2017, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except per share data)
|
|
Net loss
|
|
$
|
(25,827
|
)
|
|
$
|
(61,281
|
)
|
|
$
|
(18,429
|
)
|
Weighted average common shares outstanding
|
|
|
55,134
|
|
|
|
51,934
|
|
|
|
51,940
|
|
Weighted average common equivalent shares arising from dilutive stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and potential common shares
|
|
|
55,134
|
|
|
|
51,934
|
|
|
|
51,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.47
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.35
|
)
|
Approximately 14.2 million, 21.1 million and 21.6 million common stock equivalent shares
relating to the effects of outstanding stock options and restricted stock were excluded from the denominator in the calculation of diluted earnings per share for the fiscal years ended July 31, 2017, 2016 and 2015, respectively, as their effect
would be anti-dilutive due to the fact that the Company recorded a net loss for those periods. Approximately 11.4 million and 16.5 million and 16.6 million common shares outstanding associated with the convertible Notes, using the
if-converted method, were excluded from the denominator in the calculation of diluted earnings (loss) per share for the fiscal years ended July 31, 2017, 2016 and 2015, respectively.
Share-Based Compensation Plans
The Company recognizes share-based compensation in accordance with the provisions of ASC Topic 718, Compensation Stock Compensation (ASC Topic 718) which requires the
measurement and recognition of compensation expense for all share- based payment awards made to employees and directors including employee stock options and employee stock purchases based on estimated fair values.
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The Company estimates forfeitures at the time of grant and revises those estimates, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
The Company uses a binomial-lattice option-pricing model (binomial-lattice
model) for valuation of share-based awards with time-based vesting. The Company believes that the binomial-lattice model is an accurate model for valuing employee stock options since it reflects the impact of stock price changes on option
exercise behavior. For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance milestones when the achievement of each individual performance milestone
becomes probable. For share-based awards based on market conditions, specifically, the Companys stock price, the compensation cost and derived service periods are estimated using the Monte Carlo valuation method. The Company uses third party
analyses to assist in developing the assumptions used in its binomial-lattice model and Monte Carlo valuations and the resulting fair value used to record compensation expense. The Companys determination of fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by the Companys stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the
Companys expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Any significant changes in these assumptions may materially affect the estimated fair value of the
share-based award.
Major Clients and Concentration of Credit Risk
For the fiscal year ended July 31, 2017, 2016 and 2015, the Companys 10 largest clients accounted for approximately 70%, 71%
and 76% of consolidated net revenue, respectively. Sales to a consumer electronics client (Client A) accounted for approximately 15%, 13%, and 10% of the Companys consolidated net revenue for the fiscal years ended July 31,
2017, 2016 and
53
2015, respectively. Sales to another consumer electronics client (Client B) accounted for approximately 10%, 13%, and 19% of the Companys consolidated net revenue for the fiscal
years ended July 31, 2017, 2016 and 2015, respectively. The Europe reportable segment reports revenue associated with Client A. All four reportable segments report revenues associated with Client B. A computing market client accounted for
approximately 13% and 3% of the Companys Net Accounts Receivable balance as of July 31, 2017 and 2016, respectively. A consumer electronics client accounted for approximately 11% and 16% of the Companys Net Accounts Receivable balance as
of July 31, 2017 and 2016, respectively. To manage risk, the Company performs ongoing credit evaluations of its clients financial condition. The Company generally does not require collateral on accounts receivable. The Company maintains an
allowance for doubtful accounts based on its assessment of the collectability of accounts receivable.
Financial instruments
which potentially subject the Company to concentrations of credit risk are cash, cash equivalents and accounts receivable. The Companys cash equivalent portfolio is diversified and consists primarily of short-term investment grade securities
placed with high credit quality financial institutions. Cash and cash equivalents are maintained at accredited financial institutions, and those and the balances associated with Funds Held for Clients are at times without and in excess of federally
insured limits. The Company has never experienced any losses related to these balances and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with financial institutions.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is
based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain
or fulfill a contract. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods or a cumulative effect approach. The Company is evaluating the potential effects on the consolidated financial
statements.
In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial StatementsGoing Concern
(Subtopic
205-40),
which amends the accounting guidance related to the evaluation of an entitys ability to continue as a going concern. The amendment establishes managements responsibility to
evaluate whether there is substantial doubt about an entitys ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The update also gives guidance to determine
whether to disclose information about relevant conditions and events when there is substantial doubt about an entitys ability to continue as a going concern. This guidance will be effective for the Company as of the first quarter of fiscal
year 2018. The new guidance is not anticipated to have an effect on the Companys consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest (Subtopic 835-30)Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be
presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. The Company adopted this guidance beginning in the first quarter of fiscal year 2017. Upon adoption, an entity must apply the guidance
retrospectively to all prior periods presented in the financial statements. As such, the prior year consolidated balance sheets were also adjusted.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330), which provides guidance related to inventory measurement. The new standard requires entities to
measure inventory at the lower of cost and net realizable value thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard is effective for the Company beginning in the
first quarter of fiscal year 2018. The adoption of the guidance is not expected to have material impact on the Companys financial statement disclosures, results of operations and financial position.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to
classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance allowed for adoption on either a prospective or retrospective basis. The
Company had elected to early adopt this guidance on a prospective basis and, as a result, prior consolidated balance sheets were not retrospectively adjusted. The adoption of this guidance did increase the assets and liabilities balance on the
Companys consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU
No. 2016-02, Leases, which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to todays accounting. This ASU will be effective for
54
the Company beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the effect the guidance will have on the Companys financial statement disclosures,
results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts
with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this update relate to when another party, along with the Company, are involved in providing a good or service to a customer and
are intended to improve the operability and understandability of the implementation guidance on principal versus agent. Revenue recognition guidance requires companies to determine whether the nature of its promise is to provide that good or service
to the customer (i.e., the Company is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the Company is an agent). This ASU will be effective for the Company beginning in the first quarter of
fiscal year 2019. The Company is currently in the process of assessing what impact this new update may have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This ASU will be effective for the
Company beginning in the first quarter of fiscal year 2018. The adoption of the guidance is not expected to have material impact on the Companys financial statement disclosures, results of operations and financial position.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. When cash, cash equivalents, restricted cash and restricted cash
equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the
nature of their restricted cash and restricted cash equivalent balances, which is similar to what is required today for Securities and Exchange Commission Registrants. This ASU will be effective for the Company beginning in the first quarter of
fiscal year 2019. The Company is currently in the process of assessing what impact this new standard may have on its combined financial statements but does not believe that implementing this standard will have a significant impact on the
Companys current presentation and disclosures.
In March 2017, the FASB issued ASU No. 2017-07,
CompensationRetirement Benefits (Topic 715), which requires that the service cost component of net periodic pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other
components be presented separately as non-operating income (expense). This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently in the process of assessing what impact this new standard
may have on its consolidated financial statements.
The
Companys unsecured accounts receivable are stated at original invoice amount less an estimate made for doubtful receivables based on a monthly review of all outstanding amounts. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering each customers financial condition, credit history and current economic conditions. The Company writes off accounts receivable when management deems them uncollectible and
records recoveries of accounts receivable previously written off when received. When accounts receivable are considered past due, the Company generally does not charge interest on past due balances. The allowance for doubtful accounts consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
489
|
|
|
$
|
57
|
|
|
$
|
63
|
|
Provisions charged to expense
|
|
|
132
|
|
|
|
458
|
|
|
|
|
|
Accounts written off
|
|
|
(5
|
)
|
|
|
(26
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616
|
|
|
$
|
489
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal 2013, as a part of its working capital management, the Company
entered into a factoring agreement with a third party financial institution for the sale of certain accounts receivables without recourse. The activity under this agreement is accounted for as a sale of accounts receivable under ASC 860
Transfers and Servicing. This agreement relates exclusively to the accounts receivables of one of the Companys significant clients. The amount sold varies each month based on the amount of underlying receivables and cash flow
requirements of the Company. The factoring agreement is permitted under the Companys Credit Facility agreement.
55
The total amount of accounts receivable factored was $41.1 million and $0.9 million for the
years ended July 31, 2017 and 2016, respectively. The cost incurred on the sale of these receivables was immaterial for years ended July 31, 2017 and 2016, respectively. The cost of selling these receivable is dependent upon the number of
days between the sale date of the receivable and the date the clients invoice is due and the interest rate. The interest rate associated with the sale of these receivables is equal to LIBOR plus 0.85%. The expense associated with the sale of
these receivables is recorded as a component of selling, general and administrative expense in the accompanying consolidated statements of operations.
(4)
|
PROPERTY AND EQUIPMENT
|
Property and equipment at cost, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Buildings
|
|
$
|
24,476
|
|
|
$
|
24,344
|
|
Machinery and equipment
|
|
|
24,504
|
|
|
|
24,676
|
|
Leasehold improvements
|
|
|
14,815
|
|
|
|
14,735
|
|
Software
|
|
|
48,536
|
|
|
|
44,579
|
|
Other
|
|
|
22,126
|
|
|
|
24,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,457
|
|
|
|
132,490
|
|
Less: Accumulated depreciation and amortization
|
|
|
(115,902
|
)
|
|
|
(110,219
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
18,555
|
|
|
$
|
22,271
|
|
|
|
|
|
|
|
|
|
|
Assets under capital leases which are included in the amounts above are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Machinery and equipment
|
|
$
|
492
|
|
|
$
|
370
|
|
Other
|
|
|
13
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505
|
|
|
|
488
|
|
Less: Accumulated depreciation and amortization
|
|
|
(431
|
)
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
The Company recorded depreciation expense of $8.2 million, $8.1 million and $8.7 million for the fiscal
years ended July 31, 2017, 2016 and 2015, respectively. Depreciation expense within the Americas, Asia, Europe, and e-Business was $1.2 million, $1.9 million, $1.8 million, and $0.6 million, respectively, for the year ended July 31, 2017,
$1.5 million, $3.2 million, $2.6 million, and $0.8 million, respectively, for the year ended July 31, 2016, and $2.3 million, $3.2 million, $2.5 million, and $0.6 million, respectively, for the year ended July 31, 2015. Amortization of
assets recorded under capital leases is included in the depreciation expense amounts.
During the year ended, July 31,
2017, the Company recorded impairment charges totaling $0.2 million across multiple segments. During the year ended, July, 2016, the Company recorded an impairment charge of $0.3 million to adjust the carrying value of its building in Kildare,
Ireland to its estimated fair value. During the year ended July 31, 2015, the Company recorded $0.3 million in impairment charges related to the write-down of leasehold improvements associated with the planned closure of a facility. These
charges are reflected in impairment of goodwill and long-lived assets in the Consolidated Statements of Operations.
Trading securities
During the year ended July 31, 2017, the Company received $8.0 million in proceeds associated with the sale of
publicly traded securities (Trading Securities), which included a $0.9 million cash gain. During the year ended July 31, 2017, the Company recognized $2.2 million in net non-cash net gains associated with its Trading Securities.
During the year ended July 31,
56
2016, the Company sold $57.2 million in publicly traded securities, with a realized gain of $6.4 million. During the year ended July 31, 2016, the Company received proceeds of $59.3 million
associated with the sale of publicly traded securities. However, $2.1 million of these proceeds are related to trades executed during the year ended July 31, 2015. During the year ended July 31, 2016, the Company acquired publicly traded
securities of $1.2 million. During the year ended July 31, 2016, the Company recognized $12.3 million in net non-cash losses associated with its Trading Securities.
As of July 31, 2017, the Company had $11.9 million in investments in Trading Securities. As of July 31, 2016, the Company had $16.8 million in investments in Trading Securities, $12.6 million of
which were the publicly traded convertible debentures. The Companys purchases of the publicly traded convertible debentures were on the open market. The chairman of the board of the company issuing the publicly traded convertible debentures is
also the chairman of the board of ModusLink Global Solutions, Inc. The Trading Securities were classified within Level 1 of the fair value hierarchy.
Investments in affiliates
The Company maintained interests in a small
number of privately held companies. As of July 31, 2017 and 2016, the value of these investments was fully impaired. As of July 31, 2017, the Company is not committed to fund any follow-on investments in any of the portfolio companies.
Investments in which the Companys interest is less than 20% and which are not classified as available-for-sale securities, are accounted for under the cost method of accounting, and are carried at the lower of cost or net realizable value.
Under this method, the investment balance, originally recorded at is cost, is only adjusted for impairments to the investment. Gains and losses realized upon the sale of the investment are reflected in Gains on investments in affiliates, net
of tax in the Companys Consolidated Statements of Operations. For the fiscal years ended July 31, 2017, 2016 and 2015, the Company recorded gains of $1.3 million, $0.8 million and $0.2 million, respectively, associated with its cost
method investments. If it is determined that the Company exercises significant influence over the investee company, then the equity method of accounting is used. For those investments in which the Companys voting interest is between 20% and
50%, the equity method of accounting is generally used. Under this method, the investment balance, originally recorded at cost, is adjusted to recognize the Companys share of net earnings or losses of the investee company as they occur,
limited to the extent of the Companys investment in, advances to and commitments for the investee.
During the year
ended July 31, 2015, the Company became aware in various quarters that there may be indicators of impairment for certain investments in the portfolio of companies. During the same year, the Company performed evaluations of its portfolio
companies and determined that due to market conditions and their recent performance the portfolio companies were unable to secure potential investors or buyers to fund them as a going concern. As a result, these investments were impaired and the
Company recorded impairment charges of $7.3 million during the year ended July 31, 2015.
(6)
|
GOODWILL AND INTANGIBLE ASSETS
|
The Company conducted its annual goodwill impairment test on July 31 of each fiscal year ended July 31, 2015. In addition, if and when events or circumstances changed that would more likely than
not 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 relied on a number of factors including operating results, business plans, economic
projections, anticipated future cash flows, transactions and marketplace data. The Companys reporting units are the same as the operating segments: Americas, Asia, Europe and e-Business.
If the carrying value of a reporting unit exceeds its fair value, the Company calculates the implied fair value of the reporting
units goodwill and compares it to the carrying value. If the carrying value of goodwill exceeds its implied fair value, an impairment charge is recorded for the difference. The fair value of a reporting unit is primarily based on a discounted
cash flow (DCF) method. The DCF approach requires that the Company forecast future cash flows for the reporting unit and discount the cash flow streams based on a weighted average cost of capital that is derived, in part, from comparable
companies within similar industries. The DCF calculations also include a terminal value calculation that is based upon an expected long-term growth rate for the applicable reporting unit. The Company believes that the use of the income approach is
appropriate due to lack of comparability to guideline companies and the lack of comparable transactions under the market approach. The income approach incorporates many assumptions including future growth rates, discount factors, expected capital
expenditures and income tax cash flows. The carrying values of each reporting unit include assets and liabilities which relate to the reporting units operations. During the fourth quarter of fiscal year 2015, the Company completed its annual
impairment analysis of goodwill and determined that the fair value of the reporting unit, derived from forecasted cash flows, did not exceed its carrying value. As a result of the annual impairment analysis and in connection with the preparation of
its annual financial statements for the fiscal year ended July 31, 2015, the Company concluded that its remaining goodwill was fully impaired and recorded a $3.1 million non-cash goodwill impairment charge. The impairment charge was not
deductible for tax purposes. The impairment charge did not affect the
57
Companys liquidity or cash flows and had no effect on the Companys compliance with the financial covenants under its credit agreement.
The intangible asset amortization relates to certain amortizable intangible assets acquired by the Company in connection with its
acquisitions. The intangible assets were fully amortized as of July 31, 2015. Amortization expense for intangible assets for the fiscal years ended July 31, 2015 was $0.7 million.
The
following tables summarize the activity in the restructuring accrual for the fiscal years ended July 31, 2017, 2016, and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Related
Expenses
|
|
|
Contractual
Obligations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2014
|
|
$
|
1,687
|
|
|
$
|
598
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
5,063
|
|
|
|
324
|
|
|
|
5,387
|
|
Restructuring adjustments
|
|
|
(193
|
)
|
|
|
(64
|
)
|
|
|
(257
|
)
|
Cash paid
|
|
|
(4,949
|
)
|
|
|
(691
|
)
|
|
|
(5,640
|
)
|
Non-cash adjustments
|
|
|
(171
|
)
|
|
|
(76
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2015
|
|
|
1,437
|
|
|
|
91
|
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
6,025
|
|
|
|
1,536
|
|
|
|
7,561
|
|
Restructuring adjustments
|
|
|
(108
|
)
|
|
|
(32
|
)
|
|
|
(140
|
)
|
Cash paid
|
|
|
(5,244
|
)
|
|
|
(641
|
)
|
|
|
(5,885
|
)
|
Non-cash adjustments
|
|
|
(36
|
)
|
|
|
1
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2016
|
|
|
2,074
|
|
|
|
955
|
|
|
|
3,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1,853
|
|
|
|
439
|
|
|
|
2,292
|
|
Restructuring adjustments
|
|
|
(416
|
)
|
|
|
91
|
|
|
|
(325
|
)
|
Cash paid
|
|
|
(3,357
|
)
|
|
|
(1,419
|
)
|
|
|
(4,776
|
)
|
Non-cash adjustments
|
|
|
(54
|
)
|
|
|
20
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2017
|
|
$
|
100
|
|
|
$
|
86
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other costs for the year ended July 31, 2017 primarily included continuing charges
for personnel reductions and facility consolidations in an effort to streamline operations across our global supply chain operations. The payments of employee-related charges were substantially completed during the fiscal year ended July 31,
2017. The remaining contractual obligations include facility lease obligations for vacant space resulting from the previous restructuring activities of the Company. The Company anticipates that these contractual obligations will be substantially
fulfilled by the end of December 2017.
During the fiscal year ended July 31, 2017, the Company recorded a net
restructuring charge of $2.0 million. Of this amount, $1.5 million primarily related to the workforce reduction of 78 employees across all operating segments, and $0.5 million related to contractual obligations.
During the fiscal year ended July 31, 2016, the Company recorded a net restructuring charge of $7.4 million. Of this amount, $5.9
million primarily related to the workforce reduction of 228 employees across all operating segments, and $1.5 million related to contractual obligations.
During the fiscal year ended July 31, 2015, the Company recorded a net restructuring charge of $5.1 million. Of this amount, $4.9 million primarily related to the workforce reduction of 235 employees
across all operating segments, and $0.2 million related to contractual obligations
58
The net restructuring charges for the fiscal years ended July 31, 2017, 2016 and 2015
would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
563
|
|
|
$
|
4,812
|
|
|
$
|
4,718
|
|
Selling, general and administrative
|
|
|
1,404
|
|
|
|
2,609
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,967
|
|
|
$
|
7,421
|
|
|
$
|
5,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the restructuring accrual by operating segment for the fiscal years ended
July 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Asia
|
|
|
Europe
|
|
|
e-Business
|
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2014
|
|
$
|
195
|
|
|
$
|
274
|
|
|
$
|
1,750
|
|
|
$
|
66
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1,073
|
|
|
|
1,056
|
|
|
|
3,158
|
|
|
|
100
|
|
|
|
5,387
|
|
Restructuring adjustments
|
|
|
(164
|
)
|
|
|
(59
|
)
|
|
|
7
|
|
|
|
(41
|
)
|
|
|
(257
|
)
|
Cash paid
|
|
|
(869
|
)
|
|
|
(1,106
|
)
|
|
|
(3,655
|
)
|
|
|
(10
|
)
|
|
|
(5,640
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
88
|
|
|
|
(234
|
)
|
|
|
(101
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2015
|
|
|
235
|
|
|
|
253
|
|
|
|
1,026
|
|
|
|
14
|
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1,885
|
|
|
|
2,293
|
|
|
|
2,353
|
|
|
|
1,030
|
|
|
|
7,561
|
|
Restructuring adjustments
|
|
|
|
|
|
|
(46
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
(140
|
)
|
Cash paid
|
|
|
(1,258
|
)
|
|
|
(1,563
|
)
|
|
|
(2,895
|
)
|
|
|
(169
|
)
|
|
|
(5,885
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
(43
|
)
|
|
|
8
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2016
|
|
|
862
|
|
|
|
894
|
|
|
|
398
|
|
|
|
875
|
|
|
|
3,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
500
|
|
|
|
972
|
|
|
|
698
|
|
|
|
122
|
|
|
|
2,292
|
|
Restructuring adjustments
|
|
|
(162
|
)
|
|
|
(154
|
)
|
|
|
(75
|
)
|
|
|
66
|
|
|
|
(325
|
)
|
Cash paid
|
|
|
(1,172
|
)
|
|
|
(1,672
|
)
|
|
|
(984
|
)
|
|
|
(948
|
)
|
|
|
(4,776
|
)
|
Non-cash adjustments
|
|
|
23
|
|
|
|
(40
|
)
|
|
|
(14
|
)
|
|
|
(3
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2017
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
112
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
The following schedules reflect the components of Accrued expenses and Other Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Accrued taxes
|
|
$
|
2,272
|
|
|
$
|
3,068
|
|
Accrued compensation
|
|
|
10,678
|
|
|
|
9,590
|
|
Accrued interest
|
|
|
1,366
|
|
|
|
1,346
|
|
Accrued audit, tax and legal
|
|
|
2,759
|
|
|
|
2,544
|
|
Accrued contract labor
|
|
|
1,632
|
|
|
|
2,966
|
|
Accrued other
|
|
|
19,191
|
|
|
|
18,226
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,898
|
|
|
$
|
37,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Accrued pricing liabilities
|
|
$
|
18,882
|
|
|
$
|
18,882
|
|
Other
|
|
|
7,259
|
|
|
|
8,227
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,141
|
|
|
$
|
27,109
|
|
|
|
|
|
|
|
|
|
|
59
As of July 31, 2017 and 2016, the Company had accrued pricing liabilities of
approximately $18.9 million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the
treatment of vendor rebates in its pricing policies. Where the retention of a rebate or a mark-up was determined to have been inconsistent with a client contract (collectively referred to as pricing adjustments), the Company concluded
that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have been affected. A corresponding liability for the same amount was recorded in that
period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay all of the accrued pricing liabilities, due in part to the nature of the interactions with its clients. The remaining accrued
pricing liabilities at July 31, 2017 will be derecognized when there is sufficient information for the Company to conclude that such liabilities have been extinguished, which may occur through payment, legal release, or other legal or factual
determination.
Notes Payable
On March 18, 2014, the Company entered into an indenture (the Indenture) with Wells Fargo Bank, National Association, as
trustee, relating to the Companys issuance of $100 million of 5.25% Convertible Senior Notes (the Notes). The Notes bear interest at the rate of 5.25% per year, payable semi-annually in arrears on March 1 and
September 1 of each year, beginning on September 1, 2014. The Notes will mature on March 1, 2019, unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.
Holders of the Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option
at any time prior to the close of business or the business day immediately preceding the maturity date. Each $1,000 of principal of the Notes will initially be convertible into 166.2593 shares of our common stock, which is equivalent to an initial
conversion price of approximately $6.01 per share, subject to adjustment upon the occurrence of certain events, or, if the Company obtains the required consent from its stockholders, into shares of the Companys common stock, cash or a
combination of cash and shares of its common stock, at the Companys election. If the Company has received stockholder approval, and it elects to settle conversions through the payment of cash or payment or delivery of a combination of cash and
shares, the Companys conversion obligation will be based on the volume weighted average prices (VWAP) of its common stock for each VWAP trading day in a 40 VWAP trading day observation period. The Notes and any of the shares of
common stock issuable upon conversion have not been registered. As of July 31, 2017, the if-converted value of the Notes did not exceed the principal value of the Notes.
Holders will have the right to require the Company to repurchase their Notes, at a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, upon the occurrence
of certain fundamental changes, subject to certain conditions. No fundamental changes occurred during the year ended July 31, 2017.
The Company may not redeem the Notes prior to the mandatory date, and no sinking fund is provided for the Notes. The Company will have the right to elect to cause the mandatory conversion of the Notes in
whole, and not in part, at any time on or after March 6, 2017, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive),
including the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the Notes, during any 30 consecutive trading day period ending on, and including, the trading day immediately
preceding the date on which the Company notifies holders of its election to mandatorily convert the notes.
Per the Indenture,
if the Notes are assigned a restricted CUSIP or the Notes are not otherwise freely tradable by holders at any time during the three months immediately preceding as of the 365th day after the last date of original issuance of the Notes, the Company
shall pay additional interest on the Notes at a rate equal to 0.50% per annum of the principal amount of Notes outstanding until the restrictive legend on the Notes has been removed. The restrictive legend was removed on August 26, 2015
and, as such, the Company paid $0.2 million in additional interest associated with this restriction.
The Company has valued
the debt using similar nonconvertible debt as of the original issuance date of the Notes and bifurcated the conversion option associated with the Notes from the host debt instrument and recorded the conversion option of $28.1 million in
stockholders equity prior to the allocation of debt issuance costs. The initial value of the equity component, which reflects the equity conversion feature, is equal to the initial debt discount. The resulting debt discount on the Notes is
being accreted to interest expense at the effective interest rate over the estimated life of the Notes. The equity component is included in the additional paid-in-capital portion of stockholders equity on the Companys consolidated
balance sheet. In addition, the debt issuance costs of $3.4 million are allocated between the liability and equity components in proportion to the allocation of the proceeds. During the first quarter of fiscal year 2017, the Company adopted ASU
No. 2015-03. As such, the issuance costs allocated to the liability component ($2.5 million) are capitalized as a reduction of the principal amount of the Notes payable on the
60
Companys balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Notes. The issuance costs allocated to the equity component is
recorded as a reduction to additional paid-in capital.
During the year ended July 31, 2017, the Company purchased $2.0
million in face value of the Notes in the open market at a purchase price of $1.8 million. The gain of $0.1 million on this transaction is presented as a component of other gains and losses. The fair value of the Companys Notes payable,
calculated as of the closing price of the traded securities, was $63.9 million and $51.0 million as of July 31, 2017 and July 31, 2016, respectively. This value does not represent the settlement value of these long-term debt liabilities to
the Company. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of
the reporting dates. As of July 31, 2017 and July 31, 2016, the net carrying value of the Notes was $59.8 million and $57.2 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Carrying amount of equity component (net of allocated debt issuance costs)
|
|
$
|
26,961
|
|
|
$
|
27,099
|
|
Principal amount of Notes
|
|
$
|
67,625
|
|
|
$
|
69,625
|
|
Unamortized debt discount
|
|
|
(7,227
|
)
|
|
|
(11,443
|
)
|
Unamortized debt issuance costs
|
|
|
(640
|
)
|
|
|
(1,013
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
59,758
|
|
|
$
|
57,169
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2017, the remaining period over which the unamortized discount will be amortized is
19 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Interest expense related to contractual interest coupon
|
|
$
|
3,651
|
|
|
$
|
5,159
|
|
|
$
|
5,310
|
|
Interest expense related to accretion of the discount
|
|
|
3,919
|
|
|
|
4,967
|
|
|
|
4,473
|
|
Interest expense related to debt issuance costs
|
|
|
347
|
|
|
|
439
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,917
|
|
|
$
|
10,565
|
|
|
$
|
10,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended July 31, 2017, 2016 and 2015, the Company recognized interest expense of $7.9
million, $10.6 million and $10.1 million associated with the Notes, respectively. The effective interest rate on the Notes, including amortization of debt issuance costs and accretion of the discount, is 13.9%. The notes bear interest of 5.25%.
PNC Bank Credit Facility
On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the Borrowers) entered into a revolving credit and security agreement (the Credit Agreement), as
borrowers and guarantors, with PNC Bank and National Association, as lender and as agent, respectively.
The Credit Agreement
has a five (5) year term which expires on June 30, 2019. It includes a maximum credit commitment of $50.0 million, is available for letters of credit (with a sublimit of $5.0 million) and has a $20.0 million uncommitted accordion feature.
The actual maximum credit available under the Credit Agreement varies from time to time and is determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable and
eligible inventory minus reserves determined by the Agent (including other reserves that the Agent may establish from time to time in its permitted discretion), all as specified in the Credit Agreement.
Generally, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at the Borrowers option, either
(a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two or three months (as selected by the Borrowers) plus a margin of 2.25% per annum or (b) a base rate determined by reference to the
highest of (1) the base commercial lending rate publicly announced from time to time by PNC Bank, National Association, (2) the sum of the Federal Funds Open Rate in effect on such day plus one half of one percent (0.5%) per annum, or
(3) the LIBOR rate (adjusted to reflect any required bank reserves) in effect on such day plus 1.00% per annum. In addition to paying interest on outstanding principal under the Credit Agreement, the Borrowers are required to pay a
commitment fee, in respect of the unutilized commitments thereunder, of 0.25% per annum, paid quarterly in arrears. The Borrowers are also required to pay a customary letter of credit fee equal to the applicable margin on revolving credit LIBOR
loans and fronting fees.
61
Obligations under the Credit Agreement are guaranteed by the Borrowers existing and
future direct and indirect wholly-owned domestic subsidiaries, subject to certain limited exceptions; and the Credit Agreement is secured by security interests in substantially all the Borrowers assets and the assets of each subsidiary
guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0% of the voting equity
interests of any direct first tier foreign entity owned by either Borrower or by a subsidiary guarantor. The Company is not a borrower or a guarantor under the Credit Agreement.
The Credit Agreement contains certain customary negative covenants, which include limitations on mergers and acquisitions, the sale of
assets, liens, guarantees, investments, loans, capital expenditures, dividends, indebtedness, changes in the nature of business, transactions with affiliates, the creation of subsidiaries, changes in fiscal year and accounting practices, changes to
governing documents, compliance with certain statutes, and prepayments of certain indebtedness. The Credit Agreement also contains certain customary affirmative covenants (including periodic reporting obligations) and events of default, including
upon a change of control. The Credit Agreement requires compliance with certain financial covenants providing for maintenance of specified liquidity, maintenance of a minimum fixed charge coverage ratio and/or maintenance of a maximum leverage ratio
following the occurrence of certain events and/or prior to taking certain actions, all as more fully described in the Credit Agreement. The Company believes that the Credit Agreement provides greater financial flexibility to the Company and the
Borrowers and may enhance their ability to consummate one or several larger and/or more attractive acquisitions and should provide the Companys clients and/or potential clients with greater confidence in the Companys and the
Borrowers liquidity. During the year ended July 31, 2017, the Company did not meet the criteria that would cause its financial covenants to be applicable. As of July 31, 2017 and 2016, the Company did not have any balance outstanding
on the PNC Bank credit facility.
(10)
|
COMMITMENTS AND CONTINGENCIES
|
The Company leases facilities and certain other machinery and equipment under various non-cancelable operating leases and executory contracts expiring through December 2021. Certain non-cancelable leases
are classified as capital leases and the leased assets are included in property, plant and equipment, at cost. Future annual minimum payments, including restructuring related obligations as of July 31, 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
Capital
Lease
Obligations
|
|
|
Purchase
Obligations
|
|
|
Convertible
Notes
Interest &
Principal
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
For the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
9,947
|
|
|
$
|
64
|
|
|
$
|
30,998
|
|
|
$
|
3,550
|
|
|
$
|
44,559
|
|
2019
|
|
|
6,318
|
|
|
|
101
|
|
|
|
|
|
|
|
71,175
|
|
|
|
77,594
|
|
2020
|
|
|
3,398
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
3,453
|
|
2021
|
|
|
2,358
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
2,413
|
|
2022
|
|
|
2,160
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
2,190
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,181
|
|
|
$
|
305
|
|
|
$
|
30,998
|
|
|
$
|
74,725
|
|
|
$
|
130,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent and equipment lease expense charged to continuing operations was $15.6 million, $17.3 million
and $19.7 million for the fiscal years ended July 31, 2017, 2016 and 2015, respectively.
From time to time, the Company
agrees to provide indemnification to its clients in the ordinary course of business. Typically, the Company agrees to indemnify its clients for losses caused by the Company. As of July 31, 2017, the Company had no recorded liabilities with
respect to these arrangements.
Purchase obligations represent an estimate of all open purchase orders and contractual
obligations in the ordinary course of business for which the Company has not received the goods or services. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule,
and adjust the Companys requirements based on its business needs prior to the delivery of goods or performance of services.
Legal
Proceedings
On June 8, 2015, Sean Peters, a former employee filed a complaint (the Complaint) against
ModusLink Corporation (together, the parties) in Superior Court of California asserting claims, among other things, for failure to pay wages, breach of
62
contract, wrongful retaliation and termination, fraud, violations of California Business and Professions Code Section 17200, et seq., and civil penalties pursuant to California Labor Code
Sections and pursuant to the California Private Attorney General Act, seeking over $1.0 million in damages, attorneys fees and costs and penalties. ModusLink filed an Answer to the Complaint making a general denial and asserting various
affirmative defenses. The parties agreed to mediate the matter and on June 29, 2017, the parties attended a confidential mediation. At mediation ModusLink Corporation and its insurance carrier agreed to pay an immaterial amount to settle the
matter.
On May 12, 2017, the Excise Tax Branch of the Internal Revenue Service issued a claim associated with the
Companys compliance with the self-assessment of excise tax on Ozone Depleting Chemicals. The Company is objecting to the assessment on a number of technical and substantive grounds, and plans to vigorously defend itself against this claim.
Currently the Company is unable to determine the probability of an unfavorable outcome or a range of outcomes. Accordingly, the Company has not recorded a reserve associated with this matter.
(11)
|
DEFINED BENEFIT PENSION PLANS
|
During the year ended July 31, 2017, the Company terminated the defined benefit pension plan (the Taiwan Plan) covering certain of its employees in its Taiwan facility. As of the Taiwan
Plan termination date, the fair value of the Taiwan Plan assets were in excess of the project benefit obligation. The Company received $0.9 million in cash proceeds associated with the termination of this defined benefit pension plan. The
termination of this defined benefit pension plan did not result in a gain or loss for the year ended July 31, 2017.
As of
July 31, 2017, the Company sponsored two defined benefit pension plans covering certain of its employees in its Netherlands facility and one unfunded defined benefit pension plan covering certain of its employees in Japan. Pension costs are
actuarially determined.
The plan assets are primarily related to the defined benefit plan associated with the Companys
Netherlands facility. It consists of an insurance contract that guarantees the payment of the funded pension entitlements. Insurance contract assets are recorded at fair value, which is determined based on the cash surrender value of the insured
benefits which is the present value of the guaranteed funded benefits. Insurance contracts are valued using unobservable inputs, primarily by discounting expected future cash flows relating to benefits paid from a notional investment portfolio in
order to determine the cash surrender value of the policy. The following table presents the plan assets measured at fair value on a recurring basis as of July 31, 2017 and 2016, classified by fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2017
|
|
|
Asset
Allocations
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Insurance contract
|
|
$
|
20,726
|
|
|
|
98
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,726
|
|
Other investments
|
|
|
478
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,204
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2016
|
|
|
Asset
Allocations
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Insurance contract
|
|
$
|
24,012
|
|
|
|
94
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,012
|
|
Other investments
|
|
|
1,461
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,473
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The aggregate change in benefit obligation and plan assets related to these plans was as
follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
31,667
|
|
|
$
|
25,617
|
|
Service cost
|
|
|
700
|
|
|
|
632
|
|
Interest cost
|
|
|
573
|
|
|
|
637
|
|
Actuarial (gain) loss
|
|
|
(6,814
|
)
|
|
|
5,351
|
|
Employee contributions
|
|
|
103
|
|
|
|
120
|
|
Benefits and administrative expenses paid
|
|
|
(157
|
)
|
|
|
(269
|
)
|
Adjustments
|
|
|
|
|
|
|
156
|
|
Settlements
|
|
|
(279
|
)
|
|
|
(55
|
)
|
Effect of curtailment
|
|
|
|
|
|
|
(941
|
)
|
Currency translation
|
|
|
1,671
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
27,464
|
|
|
|
31,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
25,473
|
|
|
|
19,350
|
|
Actual return on plan assets
|
|
|
(5,005
|
)
|
|
|
5,556
|
|
Employee contributions
|
|
|
104
|
|
|
|
120
|
|
Employer contributions (withdrawals), net
|
|
|
(342
|
)
|
|
|
539
|
|
Settlements
|
|
|
(279
|
)
|
|
|
(55
|
)
|
Benefits and administrative expenses paid
|
|
|
(157
|
)
|
|
|
(269
|
)
|
Currency translation
|
|
|
1,410
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
21,204
|
|
|
|
25,473
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
889
|
|
Current liability
|
|
|
(12
|
)
|
|
|
(68
|
)
|
Noncurrent liability
|
|
|
(6,248
|
)
|
|
|
(7,015
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in statement of financial position as a noncurrent asset (liability)
|
|
$
|
(6,260
|
)
|
|
$
|
(6,194
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation was approximately $25.5 million and $29.0 million at July 31,
2017 and 2016, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets
was as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Projected benefit obligation
|
|
$
|
27,464
|
|
|
$
|
31,667
|
|
Accumulated benefit obligation
|
|
$
|
25,531
|
|
|
$
|
29,031
|
|
Fair value of plan assets
|
|
$
|
21,204
|
|
|
$
|
24,584
|
|
64
Components of net periodic pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
700
|
|
|
$
|
632
|
|
|
$
|
658
|
|
Interest costs
|
|
|
573
|
|
|
|
637
|
|
|
|
604
|
|
Expected return on plan assets
|
|
|
(457
|
)
|
|
|
(491
|
)
|
|
|
(537
|
)
|
Amortization of net actuarial (gain) loss
|
|
|
201
|
|
|
|
222
|
|
|
|
64
|
|
Curtailment gain
|
|
|
|
|
|
|
(844
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs
|
|
$
|
1,017
|
|
|
$
|
156
|
|
|
$
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount included in accumulated other comprehensive income expected to be recognized as a component of
net periodic pension costs in fiscal year 2018 is approximately $4.7 million related to amortization of a net actuarial loss and prior service cost.
Assumptions:
Weighted-average assumptions used to determine benefit
obligations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
2.47
|
%
|
|
|
1.72
|
%
|
|
|
2.46
|
%
|
Rate of compensation increase
|
|
|
1.93
|
%
|
|
|
1.92
|
%
|
|
|
1.95
|
%
|
Weighted-average assumptions used to determine net periodic pension cost was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
1.69
|
%
|
|
|
1.95
|
%
|
|
|
3.05
|
%
|
Expected long-term rate of return on plan assets
|
|
|
1.69
|
%
|
|
|
2.41
|
%
|
|
|
3.02
|
%
|
Rate of compensation increase
|
|
|
1.91
|
%
|
|
|
1.83
|
%
|
|
|
2.41
|
%
|
The discount rate reflects the Companys best estimate of the interest rate at which pension
benefits could be effectively settled as of the valuation date. It is based on the Mercer Yield Curve for the Eurozone as per July 31, 2017 for the appropriate duration of the plan.
To develop the expected long-term rate of return on assets assumptions consideration is given to the current level of expected returns on
risk free investments, the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for the future returns of each asset class. The expected return for each asset class was then
weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
Benefit payments:
The
following table summarizes expected benefit payments from the plans through fiscal year 2026. Actual benefit payments may differ from expected benefit payments. The minimum required contributions to the plans are expected to be approximately $0.2
million in fiscal year 2018.
|
|
|
|
|
|
|
Pension Benefit
Payments
|
|
|
|
(in thousands)
|
|
For the fiscal years ended July 31:
|
|
|
|
|
2018
|
|
|
168
|
|
2019
|
|
|
211
|
|
2020
|
|
|
210
|
|
2021
|
|
|
252
|
|
2022
|
|
|
254
|
|
Next 5 years
|
|
|
2,095
|
|
65
The current target allocations for plan assets are primarily insurance contracts. The market
value of plan assets using Level 3 inputs is approximately $21.2 million.
Valuation Technique:
Benefit obligations are computed using the projected unit credit method. Benefits are attributed to service based on the plans
benefit formula. Cumulative gains and losses in excess of 10% of the greater of the pension benefit obligation or market-related value of plan assets are amortized over the expected average remaining future service of the current active membership.
(12)
|
OTHER GAINS (LOSSES), NET
|
The following schedule reflects the components of Other gains (losses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
July
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Foreign currency exchange gain (losses)
|
|
$
|
199
|
|
|
$
|
(593
|
)
|
|
$
|
1,796
|
|
Gains (losses) on Trading Securities
|
|
|
3,128
|
|
|
|
(5,920
|
)
|
|
|
13,611
|
|
Other, net
|
|
|
(127
|
)
|
|
|
756
|
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,200
|
|
|
$
|
(5,757
|
)
|
|
$
|
15,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gains (losses), net totaled approximately $3.2 million for the fiscal years ended July 31,
2017. The balance consists primarily of $2.2 million and $0.9 million, in net non-cash and cash gains, respectively, associated with its Trading Securities, and $0.2 million in net realized and unrealized foreign exchange gains, offset by other gain
and losses.
Other gains (losses), net totaled approximately $(5.8) million for the fiscal years ended July 31, 2016. The
balance consists primarily of $(12.3) million and $6.4 million, in net non-cash and cash gains and (losses), respectively, associated with its Trading Securities, $0.8 million in non-cash gains associated with the repurchase of the Companys
Notes and $(0.6) million in net realized and unrealized foreign exchange losses, offset by other gain and losses.
Other gains
(losses), net totaled approximately $15.0 million for the fiscal years ended July 31, 2015. The balance consists primarily of $12.8 million and $0.8 million, in net non-cash and cash gains, respectively, associated with its Trading Securities
and $1.8 million in net realized and unrealized foreign exchange gains, offset by other gain and losses.
(13)
|
SHARE-BASED PAYMENTS
|
Stock Option
Plans
During the fiscal year ended July 31, 2017, the Company had outstanding awards for stock options under two
plans: the 2010 Incentive Award Plan (the 2010 Plan) and the 2005 Non-Employee Director Plan (the 2005 Plan). Historically, the Company has had the 2004 Stock Incentive Plan (the 2004 Plan), the 2002 Non-Officer
Employee Stock Incentive Plan (the 2002 Plan), and the 2000 Stock Incentive Plan (the 2000 Plan). Options granted under the 2010 Plan are generally exercisable as to 25% of the shares underlying the options beginning one year
after the date of grant, with the option being exercisable as to the remaining shares in equal monthly installments over the next three years. The Company may also grant awards other than stock options under the 2010 Plan. Options granted under the
2005 plan are exercisable in equal monthly installments over three years, and have a term of ten years. As of December 2010, no additional grants may be issued under this plan. Stock options granted under all other plans have contractual terms of
seven years.
During the fiscal year ended July 31, 2013, under the 2010 Plan, the Company issued to certain officers
options that vest based on market conditions, specifically, the performance of the Companys stock (the Market Options). The Market Options have a seven-year term and vest and become exercisable as to 20% of the total number of
shares subject to the Market Option on each of the first five anniversaries of the grant date, subject to a minimum average share price being achieved as of each such vesting date (the Price Performance Threshold), which shall be
(i) 1.5 times the exercise price, (ii) 2 times the exercise price, (iii) 2.5 times the exercise price, (iv) 3 times the exercise price and (v) 3.5 times the exercise price, respectively. If the specified minimum average
share price for the applicable anniversary date is not achieved, 20% of the total number of shares subject to the Market Option shall not vest and become exercisable but may vest on the subsequent anniversary date if the minimum average share price
related to the earlier anniversary date is achieved or exceeded on the subsequent anniversary date. These options were no longer outstanding as of July 31, 2017.
66
Under the 2010 Plan, pursuant to which the Company may grant stock options, stock
appreciation rights, restricted stock awards and other equity-based awards for the issuance of (i) 5,000,000 shares of common stock of the Company plus (ii) the number of shares subject to outstanding awards under the Companys 2000
Plan, 2002 Plan and 2004 Plan (collectively, the Prior Plans) that expire or are forfeited following December 8, 2010, the effective date of the 2010 Plan. As of December 8, 2010, the Company ceased making any further awards
under its Prior Plans. As of December 8, 2010, the effective date of the 2010 Plan, there were an additional 2,922,258 shares of common stock underlying equity awards issued under the Companys Prior Plans. This amount represents the
maximum number of additional shares that may be added to the 2010 Plan should these awards expire or be forfeited subsequent to December 8, 2010. Any awards that were outstanding under the Prior Plans as of the effective date continued to be
subject to the terms and conditions of such Prior Plan. As of July 31, 2017, 5,299,305 shares were available for future issuance under the 2010 Plan.
The Board of Directors administers all stock plans, approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option and may delegate this
authority to a committee of the Board or to certain officers of the Company in accordance with SEC regulations and applicable Delaware law.
Employee Stock Purchase Plan
The Company offers to its employees an Employee Stock Purchase Plan, (the ESPP) under which an aggregate of 600,000 shares of the Companys stock may be issued. Employees who elect to
participate in the ESPP instruct the Company to withhold a specified amount through payroll deductions during each quarterly period. On the last business day of each applicable quarterly payment period, the amount withheld is used to purchase the
Companys common stock at a purchase price equal to 85% of the lower of the market price on the first or last business day of the quarterly period. During the fiscal years ended July 31, 2017, 2016 and 2015, the Company issued
approximately 11,000, 30,000 and 15,000 shares, respectively, under the ESPP. Approximately 136,000 shares are available for future issuance as of July 31, 2017.
Stock Option Valuation and Expense Information
The following table
summarizes share-based compensation expense related to employee stock options, employee stock purchases and nonvested shares for the fiscal years ended July 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
|
$
|
53
|
|
|
$
|
96
|
|
|
$
|
171
|
|
Selling, general and administrative
|
|
|
628
|
|
|
|
1,030
|
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
681
|
|
|
$
|
1,126
|
|
|
$
|
1,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates the fair value of stock option awards on the date of grant using a binomial-lattice
model. No employee stock options were granted during the fiscal year ended July 31, 2017. The weighted-average grant date fair value of employee stock options granted during the fiscal years ended July 31, 2016, and 2015 was $1.11 and
$1.59, respectively, using the binomial-lattice model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
55.80
|
%
|
|
|
56.30
|
%
|
Risk-free interest rate
|
|
|
1.28
|
%
|
|
|
1.24
|
%
|
Expected term (in years)
|
|
|
4.41
|
|
|
|
4.41
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The volatility assumption for fiscal years 2016 and 2015 is based on the weighted-average of the
historical volatility of the Companys common shares for a period equal to the expected term of the stock option awards.
The weighted-average risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates, as of the month
of the grants.
The expected term of employee stock options represents the weighted-average period the stock options are
expected to remain outstanding and is based on historical option activity. The determination of the expected term of employee stock options assumes
67
that employees exercise behavior is comparable to historical option activity. The binomial-lattice model estimates the probability of exercise as a function of time based on the entire
history of exercises and cancellations on all past option grants made by the Company. The expected term generated by these probabilities reflects actual and anticipated exercise behavior of options granted historically.
As share-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal years ended July 31,
2017, 2016 and 2015 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
Stock Options
A summary of option activity for the fiscal year ended July 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in thousands, except exercise price and years)
|
|
Stock options outstanding, July 31, 2016
|
|
|
1,368
|
|
|
$
|
4.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(795
|
)
|
|
|
4.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding, July 31, 2017
|
|
|
573
|
|
|
|
4.36
|
|
|
|
2.70
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable, July 31, 2017
|
|
|
532
|
|
|
$
|
4.40
|
|
|
|
2.60
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2017, unrecognized share-based compensation related to stock options was
approximately $0.1 million. This cost is expected to be expensed over a weighted average period of 0.9 years. The aggregate intrinsic value of options exercised during the fiscal years ended July 31, 2017, 2016 and 2015 was immaterial.
As of July 31, 2017, there were 0.6 million stock options that were vested and expected to vest in the future with
a weighted- average remaining contractual term of 2.71 years. The aggregate intrinsic value of these awards is immaterial.
Nonvested Stock
Nonvested stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture
until the fulfillment of specified conditions. Nonvested stock is expensed ratably over the term of the restriction period, ranging from one to five years unless there are performance restrictions placed on the nonvested stock, in which case the
nonvested stock is expensed using graded vesting. Nonvested stock compensation expense for the fiscal years ended July 31, 2017, 2016 and 2015 was $0.5 million, $0.7 million and $0.6 million, respectively.
A summary of the activity of the Companys nonvested stock for the fiscal year ended July 31, 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant Date
Fair
Value
|
|
|
|
(share amounts in thousands)
|
|
Nonvested stock outstanding, July 31, 2016
|
|
|
258
|
|
|
$
|
2.48
|
|
Granted
|
|
|
296
|
|
|
|
|
|
Vested
|
|
|
(245
|
)
|
|
|
2.45
|
|
Forfeited
|
|
|
(13
|
)
|
|
|
3.05
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock outstanding, July 31, 2017
|
|
|
296
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of nonvested shares is determined based on the market price of the Companys common
stock on the grant date. The total grant date fair value of nonvested stock that vested during the fiscal years ended July 31, 2017, 2016 and 2015 was approximately $0.6 million, $1.0 million and $0.3 million, respectively. As of July 31,
2017, there was approximately $0.2 million of total unrecognized compensation cost related to nonvested stock to be recognized over a weighted-average period of 0.4 years.
68
(14) INCOME TAXES
The components of loss from continuing operations before provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
Ended
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Income (loss) from operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(34,884
|
)
|
|
$
|
(69,861
|
)
|
|
$
|
(8,476
|
)
|
Foreign
|
|
|
10,475
|
|
|
|
13,234
|
|
|
|
(7,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from operations before income taxes
|
|
$
|
(24,409
|
)
|
|
$
|
(56,627
|
)
|
|
$
|
(16,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense have been recorded in the Companys consolidated financial
statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
Ended
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Income tax expense from continuing operations
|
|
|
2,696
|
|
|
|
5,443
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
2,696
|
|
|
$
|
5,443
|
|
|
$
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense from continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
Ended
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
2,298
|
|
|
|
3,090
|
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,298
|
|
|
|
3,090
|
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
398
|
|
|
|
2,353
|
|
|
|
(2,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398
|
|
|
|
2,353
|
|
|
|
(2,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
2,696
|
|
|
$
|
5,443
|
|
|
$
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities have been classified on the Consolidated Balance Sheets in
accordance with the nature of the item giving rise to the temporary differences. During the year ended July 31, 2016, the Company elected to early adopt ASU No. 2015-17, which requires companies to classify all deferred tax assets and
liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance allows for adoption on either a prospective or retrospective basis. As of July 31, 2017, the Company recorded
a non-current deferred tax asset of $1.9 million and a non-current deferred tax liability of $0.7 million in Other Assets, and Other Long-term Liabilities, respectively. As of July 31,
69
2016, the Company recorded a non-current deferred tax asset of $2.3 million and a non-current deferred tax liability of $0.8 million in Other Assets and Other Long-term Liabilities, respectively.
The components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
|
July 31, 2016
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and reserves
|
|
$
|
12,193
|
|
|
$
|
12,240
|
|
Tax basis in excess of financial basis of investments in affiliates
|
|
|
18,332
|
|
|
|
19,051
|
|
Tax basis in excess of financial basis for intangible and fixed assets
|
|
|
7,689
|
|
|
|
8,455
|
|
Net operating loss and capital loss carry forwards
|
|
|
751,435
|
|
|
|
744,357
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
789,649
|
|
|
|
784,103
|
|
Less: valuation allowance
|
|
|
(771,884
|
)
|
|
|
(760,906
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
17,765
|
|
|
$
|
23,197
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Financial basis in excess of tax basis for intangible and fixed assets
|
|
$
|
(784
|
)
|
|
$
|
(861
|
)
|
Convertible Debt
|
|
|
(2,655
|
)
|
|
|
(4,241
|
)
|
Undistributed accumulated earnings of foreign subsidiaries
|
|
|
(13,150
|
)
|
|
|
(16,554
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(16,589
|
)
|
|
|
(21,656
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,176
|
|
|
$
|
1,541
|
|
|
|
|
|
|
|
|
|
|
Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of
July 31, 2017 will be allocated as follows (in thousands):
|
|
|
|
|
Income tax benefit recognized in the consolidated statement of operations
|
|
$
|
(756,423
|
)
|
Additional paid in capital
|
|
|
(15,461
|
)
|
|
|
|
|
|
|
|
$
|
(771,884
|
)
|
|
|
|
|
|
The net change in the total valuation allowance for the fiscal year ended July 31, 2017 was an
increase of approximately $11.0 million. This increase is primarily due to the U.S. valuation allowance as well as the valuation allowance provided for Taiwan and France for the year ended July 31, 2017. A valuation allowance has been recorded
against the gross deferred tax asset in the U.S and certain foreign subsidiaries since management believes that after considering all the available objective evidence, both positive and negative, historical and prospective, it is more likely than
not that certain assets will not be realized. The net change in the total valuation allowance for the fiscal year ended July 31, 2016 was an increase of approximately $10.3 million.
The Company has certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes
(collectively, the Tax Benefits). The Companys ability to use these Tax Benefits could be substantially limited if it were to experience an ownership change, as defined under Section 382 of the Internal Revenue
Code of 1986, as amended (the Code). In general, an ownership change would occur if there is a greater than 50-percentage point change in ownership of securities by stockholders owning (or deemed to own under Section 382 of the
Code) five percent or more of a corporations securities over a rolling three-year period.
On October 17, 2011, the
Companys Board of Directors adopted a Tax Benefit Preservation Plan between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (as amended from time to time, the Tax Plan). The Tax Plan reduces
the likelihood that changes in the Companys investor base would have the unintended effect of limiting the Companys use of its Tax Benefits. The Tax Plan is intended to require any person acquiring shares of the Companys securities
equal to or exceeding 4.99% of the Companys outstanding shares to obtain the approval of the Board of Directors. This would protect the Tax Benefits because changes in ownership by a person owning less than 4.99% of the Companys stock
are considered and included in
70
one or more public groups in the calculation of ownership change for purposes of Section 382 of the Code. On October 9, 2014, the Tax Plan was amended by the Companys
Board of Directors to extend the expiration of the Tax Plan until October 17, 2017. Following the stockholders approval of the Protective Amendment (as described in the following paragraphs) at the Companys 2014 Annual Meeting, the
Tax Plan was further amended so that it expired at the close of business on December 31, 2014.
On December 29,
2014, the Company filed an Amendment to its Restated Certificate of Incorporation (the Protective Amendment) with the Delaware Secretary of State to protect the significant potential long-term tax benefits presented by its net operating
losses and other tax benefits (collectively, the NOLs). The Protective Amendment was approved by the Companys stockholders at the Companys 2014 Annual Meeting of Stockholders held on December 9, 2014. As a result of the
filing of the Protective Amendment with the Delaware Secretary of State, the Company amended its Tax Benefit Preservation Plan so that it expired at the close of business on December 31, 2014.
The Protective Amendment limits certain transfers of the Companys common stock, to assist the Company in protecting the long-term
value of its accumulated NOLs. The Protective Amendments transfer restrictions generally restrict any direct or indirect transfers of the common stock if the effect would be to increase the direct or indirect ownership of the common stock by
any person (as defined in the Protective Amendment) from less than 4.99% to 4.99% or more of the common stock, or increase the percentage of the common stock owned directly or indirectly by a Person owning or deemed to own 4.99% or more of the
common stock. Any direct or indirect transfer attempted in violation of the Protective Amendment will be void as of the date of the prohibited transfer as to the purported transferee. The Board of Directors of the Company has discretion to grant
waivers to permit transfers otherwise restricted by the Protective Amendment.
In accordance with the Protective Amendment,
Handy & Harman (HNH), a related party, requested, and the Company granted HNH and its affiliates, a waiver under the Protective Amendment to permit their acquisition of up to 45% of the Companys outstanding shares of
common stock in the aggregate (subject to proportionate adjustment, the 45% Cap), in addition to acquisitions of common stock in connection with the exercise of certain warrants of the Company (the Warrants) held by Steel
Partners Holdings L.P. (SPH), an affiliate of HNH, as well as a limited waiver under Section 203 of the Delaware General Corporation Law for this purpose. Notwithstanding the foregoing, HNH and its affiliates (and any group of which
HNH or any of its affiliates is a member) are not permitted to acquire securities that would result in an ownership change of the Company for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, that would have
the effect of impairing any of the Companys NOLs. The foregoing waiver was approved by the independent directors of the Company.
The Company has net operating loss carryforwards for federal and state tax purposes of approximately $2.1 billion and $209.8 million, respectively, at July 31, 2017. The federal net operating losses
will expire from fiscal year 2022 through 2037 and the state net operating losses will expire from fiscal year 2018 through 2037. The Company has a foreign net operating loss carryforward of approximately $84.1 million, of which $58.8 million has an
indefinite carryforward period. In addition, the Company has an immaterial amount of capital loss carryforwards for federal and state tax purposes. The federal and state capital losses will expire in fiscal year 2018.
The Companys ModusLink Corporation subsidiary has undistributed earnings from its foreign subsidiaries of approximately $39.1
million at July 31, 2017, of which approximately $2.0 million is considered to be permanently reinvested due to certain restrictions under local laws as well as the Companys plans to reinvest such earnings for future expansion in certain
foreign jurisdictions. The amount of taxes attributable to the permanently undistributed earnings is estimated at $0.7 million. The Company has recorded a deferred tax liability of $13.2 million on the remaining $37.1 million of undistributed
earnings that are not considered to be permanently reinvested.
71
Income tax expense attributable to income from continuing operations differs from the
expense computed by applying the U.S. federal income tax rate of 35% to income (loss) from continuing operations before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Computed expected income tax expense (benefit)
|
|
$
|
(8,106
|
)
|
|
$
|
(19,368
|
)
|
|
$
|
(5,653
|
)
|
Increase (decrease) in income tax expense resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
10,978
|
|
|
|
22,907
|
|
|
|
2,067
|
|
Foreign dividends
|
|
|
2,724
|
|
|
|
4,730
|
|
|
|
732
|
|
Foreign tax rate differential
|
|
|
(2,386
|
)
|
|
|
(1,082
|
)
|
|
|
1,262
|
|
Capitalized costs
|
|
|
|
|
|
|
|
|
|
|
(478
|
)
|
Nondeductible goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
1,070
|
|
Nondeductible expenses
|
|
|
20
|
|
|
|
262
|
|
|
|
417
|
|
Foreign withholding taxes
|
|
|
239
|
|
|
|
762
|
|
|
|
(19
|
)
|
Reversal of uncertain tax position reserves
|
|
|
(481
|
)
|
|
|
(2,768
|
)
|
|
|
|
|
Other
|
|
|
(292
|
)
|
|
|
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
$
|
2,696
|
|
|
$
|
5,443
|
|
|
$
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of the Companys tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in several tax jurisdictions. The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of
deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves when necessary. Based on the evaluation of current tax positions,
the Company believes it has appropriately accrued for exposures.
The Company operates in multiple taxing jurisdictions, both
within and outside of the United States. At July 31, 2017, 2016 and 2015, the total amount of the liability for unrecognized tax benefits, including interest, related to federal, state and foreign taxes was approximately $0.7 million, $1.2
million and $3.9 million, respectively. To the extent the unrecognized tax benefits are recognized, the entire amount would impact income tax expense.
The Company files income tax returns in the U.S., various states and in foreign jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended
July 31, 2013 through July 31, 2017. To the extent the Company has tax attribute carryforwards, the tax year in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax
authorities to the extent utilized in a future period. In addition, a number of tax years remain subject to examination by the appropriate government agencies for certain countries in the Europe and Asia regions. In Europe, the Companys 2009
through 2016 tax years remain subject to examination in most locations while the Companys 2005 through 2016 tax years remain subject to examination in most Asia locations.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Balance as of beginning of year
|
|
$
|
994
|
|
|
$
|
3,756
|
|
|
$
|
1,028
|
|
Additions for current year tax positions
|
|
|
|
|
|
|
19
|
|
|
|
2,884
|
|
Currency translation
|
|
|
18
|
|
|
|
|
|
|
|
(156
|
)
|
Reductions for lapses in statute of limitations
|
|
|
(331
|
)
|
|
|
(27
|
)
|
|
|
|
|
Reductions of prior year tax positions
|
|
|
|
|
|
|
(2,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
681
|
|
|
$
|
994
|
|
|
$
|
3,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Companys accounting policy, interest related to income taxes is included in
the provision of income taxes line of the Consolidated Statements of Operations. For the fiscal year ended July 31, 2017, the Company has not recognized any material interest expense related to uncertain tax positions. As of July 31, 2017,
2016 and 2015, the Company had recorded liabilities for increases (decreases) in interest expense related to uncertain tax positions in the amount of ($168,000), $40,000 and $48,000, respectively. The Company did not accrue for penalties related to
income tax positions as there were no income tax positions that required the Company to accrue penalties. The Company does not expect that any unrecognized tax benefits will reverse in the next twelve months.
72
(15)
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
The components of accumulated other comprehensive income, net of income taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
items
|
|
|
Pension
items
|
|
|
Unrealized
gains
(losses) on
securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Accumulated other comprehensive income (loss) at July 31, 2016
|
|
$
|
6,131
|
|
|
$
|
(4,206
|
)
|
|
$
|
94
|
|
|
$
|
2,019
|
|
Foreign currency translation adjustment
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
1,391
|
|
Pension liability adjustments
|
|
|
|
|
|
|
830
|
|
|
|
|
|
|
|
830
|
|
Net unrealized holding gain on securities
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
1,391
|
|
|
|
830
|
|
|
|
73
|
|
|
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at July 31, 2017
|
|
$
|
7,522
|
|
|
$
|
(3,376
|
)
|
|
$
|
167
|
|
|
$
|
4,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fiscal years ended July 31, 2017, the Company recorded approximately $0.3 million in taxes
related to other comprehensive income. In the fiscal years ended July 31, 2016, the Company recorded an immaterial amount in taxes related to other comprehensive income. In the fiscal years ended July 31, 2015, the Company recorded
approximately $0.5 million in taxes related to other comprehensive income.
(16)
|
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
|
Cash used for operating activities reflect cash payments for interest and income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cash paid for interest
|
|
$
|
3,783
|
|
|
$
|
6,111
|
|
|
$
|
5,281
|
|
Cash paid for income taxes
|
|
$
|
2,500
|
|
|
$
|
3,287
|
|
|
$
|
2,078
|
|
Cash paid for taxes can be higher than income tax expense as shown on the Companys consolidated
statements of operations due to prepayments made in certain jurisdictions as well as to the timing of required payments in relation to recorded expense, which can cross fiscal years.
Non-cash Activities
Non-cash financing activities during the fiscal years
ended July 31, 2017, 2016 and 2015 included the issuance of approximately 0.3 million, 0.2 million and 0.1 million shares, respectively, of nonvested common stock, valued at approximately $0.5 million, $0.6 million and $0.5
million, respectively, to certain employees of the Company. Non-cash financing activities during the fiscal year ended July 31, 2016 also included the issuance of 2.7 million shares of the Companys common stock, valued at $3.1 million,
associated with the repurchase of the Companys Notes. See Note 17 for further details.
(17)
|
STOCKHOLDERS EQUITY
|
Preferred
Stock
The Companys board of directors has the authority, subject to any limitations prescribed by Delaware law, to
issue shares of preferred stock in one or more series and to fix and determine the designation, privileges, preferences and rights and the qualifications, limitations and restrictions of those shares, including dividend rights, conversion rights,
voting rights, redemption rights, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of the series, without any further vote or action by the stockholders. Any shares of the
Companys preferred stock so issued may have priority over its common stock with respect to dividend, liquidation and other rights. The Companys board of directors may authorize the issuance of preferred stock with voting rights or
conversion features that could adversely affect the voting power or other rights of the holders of its common stock. Although the issuance of preferred stock could provide us with flexibility in connection with possible acquisitions and other
corporate purposes, under some circumstances, it could have the effect of delaying, deferring or preventing a change of control.
Common
Stock
Each holder of the Companys common stock is entitled to:
|
|
|
one vote per share on all matters submitted to a vote of the stockholders, subject to the rights of any preferred stock that may be outstanding;
|
73
|
|
|
dividends as may be declared by the Companys board of directors out of funds legally available for that purpose, subject to the rights of any
preferred stock that may be outstanding; and
|
|
|
|
a pro rata share in any distribution of the Companys assets after payment or providing for the payment of liabilities and the liquidation
preference of any outstanding preferred stock in the event of liquidation.
|
Holders of the Companys
common stock have no cumulative voting rights, redemption rights or preemptive rights to purchase or subscribe for any shares of its common stock or other securities. All of the outstanding shares of common stock are fully paid and nonassessable.
The rights, preferences and privileges of holders of its common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any existing series of preferred stock and any series of preferred stock that the Company
may designate and issue in the future. There are no redemption or sinking fund provisions applicable to the Companys common stock.
On March 12, 2013, stockholders of the Company approved the sale of 7,500,000 shares of newly issued common stock to Steel Partners Holdings L.P. (Steel Partners) at a price of $4.00 per
share, resulting in aggregate proceeds of $30.0 million before transaction costs. The Company incurred $2.3 million of transaction costs, which consisted primarily of investment banking and legal fees, resulting in net proceeds from the sale of
$27.7 million. In addition, as part of the transaction, the Company issued Steel Partners a warrant to acquire an additional 2,000,000 shares at an exercise price of $5.00 per share. These warrants expire after a term of five years after issuance.
All the warrants were outstanding as of July 31, 2017.
Pursuant to the investment agreement, the Company agreed to grant
Steel Partners certain registration rights. The Company agreed to file a resale registration statement on Form S-3 as soon as practicable after it is eligible to do so, covering the shares of common stock purchased by Steel Partners and the shares
of common stock issuable upon exercise of the warrants. The Company is required to keep the resale registration statement effective for three years following the date it is declared effective. Steel Partners also has the right, until such time as it
owns less than one-third of the common stock originally issued to it under the investment agreement, to require that the Company file a prospectus supplement or amendment to cover sales of common stock through a firm commitment underwritten public
offering. The underwriters of any underwritten offering have the right to limit the number of shares to be included in any such offering. In addition, the Company has agreed to certain piggyback registration rights. If the Company
registers any securities for public sale, Steel Partners has the right to include its shares in the registration, subject to certain exceptions. The underwriters of any underwritten offering have the right to limit the number of Steel Partners
shares to be included in any such offering for marketing reasons. The Company has agreed to pay the expenses of Steel Partners in connection with any registration of the securities issued in the Steel Partners investment and to provide customary
indemnification to Steel Partners in connection with such registration.
On July 21, 2016, the Company entered into an
agreement with Highbridge International LLC and Highbridge Tactical Credit & Convertibles Master Fund, L.P. (together Highbridge) for the repurchase of 5.25% Convertible Senior Notes of the Company. The consideration paid to
Highbridge included 2,656,336 newly issued shares of the Companys common stock, par value $0.01 per share (valued based on the closing price of the ModusLink Common Stock on July 21, 2016), a cash payment of $18.5 million and a cash
payment in the amount of the unpaid interest ($0.6 million). The transaction was executed in a private transaction and closed on July 27, 2016. The Notes were cancelled following closing.
(18)
|
FAIR VALUE MEASUREMENTS
|
ASC Topic 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets
|
|
Level 2:
|
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price
the assets or liabilities
|
The carrying value of cash and cash equivalents, accounts receivable, funds held for
clients, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. The carrying
74
value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Companys current incremental borrowing rates for similar types of
borrowing arrangements. The fair values of the Companys Trading Securities are estimated using quoted market prices. The Company values foreign exchange forward contracts using observable inputs which primarily consist of an income approach
based on the present value of the forward rate less the contract rate multiplied by the notional amount. The defined benefit plans have 100% of their assets invested in bank-managed portfolios of debt securities and other assets. Conservation of
capital with some conservative growth potential is the strategy for the plans. The Companys pension plans are outside the United States, where asset allocation decisions are typically made by an independent board of trustees. Investment
objectives are aligned to generate returns that will enable the plans to meet their future obligations. The Company acts in a consulting and governance role in reviewing investment strategy and providing a recommended list of investment managers for
each plan, with final decisions on asset allocation and investment manager made by local trustees.
Assets and Liabilities that are
Measured at Fair Value on a Recurring Basis
The following tables present the Companys financial assets measured at
fair value on a recurring basis as of July 31, 2017 and 2016, classified by fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,898
|
|
|
$
|
11,898
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
85,683
|
|
|
|
85,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
4,209
|
|
|
$
|
4,209
|
|
|
$
|
|
|
|
$
|
|
|
Marketable corporate bonds
|
|
|
12,559
|
|
|
|
12,559
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
101,224
|
|
|
|
101,224
|
|
|
|
|
|
|
|
|
|
The following table presents the pension plan assets measured at fair value on a recurring basis as of
July 31, 2017 and 2016, classified by fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2017
|
|
|
Asset
Allocations
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Insurance contract
|
|
$
|
20,726
|
|
|
|
98
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,726
|
|
Other investments
|
|
|
478
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,204
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2016
|
|
|
Asset
Allocations
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Insurance contract
|
|
$
|
24,012
|
|
|
|
94
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,012
|
|
Other investments
|
|
|
1,461
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,473
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a summary of the changes in the fair value of the pension plan assets for
the years ended July 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Fair value of plan assets at beginning of year
|
|
|
25,473
|
|
|
|
19,350
|
|
Actual return on plan assets
|
|
|
(5,005
|
)
|
|
|
5,556
|
|
Employee contributions
|
|
|
104
|
|
|
|
120
|
|
Employer contributions (withdrawals), net
|
|
|
(342
|
)
|
|
|
539
|
|
Settlements
|
|
|
(279
|
)
|
|
|
(55
|
)
|
Benefits and administrative expenses paid
|
|
|
(157
|
)
|
|
|
(269
|
)
|
Currency translation
|
|
|
1,410
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
21,204
|
|
|
|
25,473
|
|
|
|
|
|
|
|
|
|
|
75
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available,
investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable
market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is
recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to impairment based on the Companys own judgments about the
assumptions that market participants would use in pricing the assets and on observable market data, when available.
Fair Value of Financial
Instruments
The Companys financial instruments not measured at fair value on a recurring basis include cash and cash
equivalents, accounts receivable, accounts payable, funds held for clients and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their
short-term nature.
Included in trading securities in the accompanying balance sheet are marketable equity securities and
marketable corporate bonds. These instruments are valued at quoted market prices in active markets. Included in cash and cash equivalents in the accompanying balance sheet are money market funds. These are valued at quoted market prices in active
markets.
The following table presents the Companys debt not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
|
July 31, 2016
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Fair Value
Hierarchy
|
|
|
|
(In thousands)
|
|
Notes payable
|
|
$
|
59,758
|
|
|
$
|
63,852
|
|
|
$
|
57,169
|
|
|
$
|
50,957
|
|
|
|
Level 1
|
|
The fair value of the Companys Notes payable represents the value at which its lenders could trade
its debt within the financial markets, and does not represent the settlement value of these long-term debt liabilities to us. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as
changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of the reporting dates.
(19) SEGMENT INFORMATION
The Company has four operating segments: Americas; Asia; Europe; and e-Business. Based on the information provided to the Companys
chief operating decision-maker (CODM) for purposes of making decisions about allocating resources and assessing performance and quantitative thresholds, the Company has determined that it has four reportable segments: Americas, Asia,
Europe and e-Business. During the prior year, the Company had determined that it had three reportable segments: Americas; Asia; and Europe. e-Business was reported as a part of the All Other category in the prior year. 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 Companys reportable segments. The Corporate-level balance sheet
information includes cash and cash equivalents, trading securities, Notes payables and other assets and liabilities which are not identifiable to the operations of the Companys operating segments. All significant intra-segment amounts have
been eliminated.
Management evaluates segment performance based on segment net revenue, operating income (loss) and
adjusted operating income (loss), which is defined as the operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, goodwill and long-lived asset impairment, share-based compensation and
restructuring. These items are excluded because they may be considered to be of a non-operational or non-cash nature. Historically, the Company has recorded significant impairment and restructuring charges and therefore management uses adjusted
operating income to assist in evaluating the performance of the Companys core operations.
76
Summarized financial information of the Companys continuing operations by operating
segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
92,324
|
|
|
$
|
106,143
|
|
|
$
|
200,929
|
|
Asia
|
|
|
158,048
|
|
|
|
167,861
|
|
|
|
163,262
|
|
Europe
|
|
|
159,085
|
|
|
|
151,842
|
|
|
|
160,602
|
|
e-Business
|
|
|
27,163
|
|
|
|
33,177
|
|
|
|
36,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
436,620
|
|
|
$
|
459,023
|
|
|
$
|
561,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
(10,342
|
)
|
|
$
|
(14,731
|
)
|
|
$
|
(4,407
|
)
|
Asia
|
|
|
5,620
|
|
|
|
(855
|
)
|
|
|
10,003
|
|
Europe
|
|
|
(9,008
|
)
|
|
|
(13,825
|
)
|
|
|
(6,479
|
)
|
e-Business
|
|
|
(1,185
|
)
|
|
|
(4,384
|
)
|
|
|
(2,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment operating income (loss)
|
|
|
(14,915
|
)
|
|
|
(33,795
|
)
|
|
|
(3,250
|
)
|
Corporate-level activity
|
|
|
(4,846
|
)
|
|
|
(6,777
|
)
|
|
|
(11,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(19,761
|
)
|
|
|
(40,572
|
)
|
|
|
(14,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
4,648
|
|
|
|
16,055
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(24,409
|
)
|
|
$
|
(56,627
|
)
|
|
$
|
(16,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
21,876
|
|
|
$
|
28,280
|
|
Asia
|
|
|
63,819
|
|
|
|
89,242
|
|
Europe
|
|
|
64,639
|
|
|
|
75,952
|
|
e-Business
|
|
|
20,703
|
|
|
|
22,884
|
|
|
|
|
|
|
|
|
|
|
Sub-totalsegment assets
|
|
|
171,037
|
|
|
|
216,358
|
|
Corporate
|
|
|
110,261
|
|
|
|
131,574
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
281,298
|
|
|
$
|
347,932
|
|
|
|
|
|
|
|
|
|
|
Summarized financial information of the Companys net revenue from external customers by group of
services is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Supply chain services
|
|
$
|
409,457
|
|
|
$
|
425,846
|
|
|
$
|
524,793
|
|
e-Business services
|
|
|
27,163
|
|
|
|
33,177
|
|
|
|
36,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
436,620
|
|
|
$
|
459,023
|
|
|
$
|
561,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2017, approximately $9.3 million, $3.3 million, $3.6 million $2.4 million and $2.2
million of the Companys long-lived assets were located in the U.S.A., Netherlands, Ireland, Singapore and China, respectively. As of July 31, 2016, approximately $5.2 million, $3.0 million, $3.5 million, $2.9 million and $3.0 million of
the Companys long-lived assets were located in the U.S.A., Netherlands, Ireland, Singapore and China, respectively.
For
the fiscal year ended July 31, 2017, the Companys net revenues within U.S.A., China, Netherlands and Czech Republic were $95.1 million, $128.3 million, $70.8 million and $79.8 million, respectively. For the fiscal year ended July 31,
2016, the Companys net revenues within U.S.A., China, Netherlands and Czech Republic were $110.9 million, $140.2 million, $68.1 million and $75.7 million, respectively. For the fiscal year ended July 31, 2015, the Companys net
revenues within U.S.A., China, Netherlands and Czech Republic were $205.0 million, $134.5 million, $71.9 million and $80.6 million, respectively.
77
(20) RELATED PARTY TRANSACTIONS
On December 24, 2014, the Company entered into a Management Services Agreement with SP Corporate Services LLC (SP
Corporate), effective as of January 1, 2015 (as amended, the Management Services Agreement). SP Corporate is an indirect wholly owned subsidiary of Steel Partners Holdings L.P. (Steel Holdings) and is a related
party. Pursuant to the Management Services Agreement, SP Corporate provided the Company and its subsidiaries with the services of certain employees, including certain executive officers, and other corporate services.
The Management Services Agreement had an initial term of six months. On June 30, 2015, the Company entered into an amendment that
extended the term of the Management Services Agreement to December 31, 2015 and provided for automatic renewal for successive one year periods, unless and until terminated in accordance with the terms set forth therein, which include, under
certain circumstances, the payment by the Company of certain termination fees to SP Corporate. On March 10, 2016, the Company entered into a Second Amendment to the Management Services Agreement with SPH Services, Inc. (SPH
Services) pursuant to which SPH Services assumed rights and responsibilities of SP Corporate and the services provided by SPH Services to the Company were modified pursuant to the terms of the amendment. SPH Services is the parent of SP
Corporate and an affiliate of SPH Group Holdings LLC. On March 10, 2016, the Company entered into a Transfer Agreement with SPH Services pursuant to which the parties agreed to transfer to the Company certain individuals who provide corporate
services to the Company. SPH Services has since changed its name to Steel Services Ltd. (Steel Services).
During
the year ended July 31, 2017, pursuant to the Management Services Agreement, the Company paid a fixed monthly fee of $175,000 in consideration for the services and incremental costs as incurred. A third amendment to the Management Services
Agreement, effective September 1, 2017, reduced the fixed monthly fee paid by the Company to Steel Services under the Management Services Agreement from $175,000 per month to $95,641 per month. The monthly fee is subject to review and
adjustment by agreement between the Company and Steel Services for periods commencing in fiscal 2016 and beyond. Additionally, the Company may be required to reimburse Steel Services and its affiliates for all reasonable and necessary business
expenses incurred on the Companys behalf in connection with the performance of the services under the Management Services Agreement. Total expenses incurred related to this agreement for the twelve months ended July 31, 2017 and 2016 were
$2.3 million and $2.2 million, respectively. As of July 31, 2017 and 2016, amounts due to SP Corporate and Steel Services were $0.3 million and $0.5 million, respectively.
The Related Party Transactions Committee of the Board (the Related Party Transactions Committee) approved the entry into the
Management Services Agreement (and the first and second amendments thereto) and the Transfer Agreement. The Audit Committee of the Board approved the third amendment to the Management Services Agreement. The Related Party Transactions Committee held
the responsibility to review, approve and ratify related party transactions from November 20, 2014, until October 11, 2016. On October 11, 2016, the Board adopted a Related Person Transaction Policy that is administered by the Audit
Committee and applies to all related party transactions. As of October 11, 2016, the Audit Committee reviews all related party transactions on an ongoing basis and all such transactions must be approved or ratified by the Audit Committee.
Mutual Securities, Inc. (Mutual Securities) serves as the broker and record-keeper for all the transactions
associated with the Trading Securities. An officer of SP Corporate and of the General Partner of Steel Partners Holdings L.P., is a registered principal of Mutual Securities. Commissions charged by Mutual Securities are generally commensurate with
commissions charged by other institutional brokers, and the Company believes its use of Mutual Securities is consistent with its desire to obtain best price and execution. During the year ended July 31, 2017, Mutual Securities received an
immaterial amount in commissions associated with these transactions. During the year ended July 31, 2016, Mutual Securities received $0.1 million in commissions associated with these transactions.
78
(21) SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth selected quarterly financial information for the fiscal years ended July 31, 2017 and 2016. The
operating results for any given quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
Oct. 31, 16
|
|
|
Jan. 31, 17
|
|
|
Apr. 30, 17
|
|
|
Jul. 31, 17
|
|
|
Oct. 31, 15
|
|
|
Jan. 31, 16
|
|
|
Apr. 30, 16
|
|
|
Jul. 31, 16
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
Net revenue
|
|
$
|
121,327
|
|
|
$
|
117,568
|
|
|
$
|
97,948
|
|
|
$
|
99,777
|
|
|
$
|
141,089
|
|
|
$
|
119,966
|
|
|
$
|
96,460
|
|
|
$
|
101,508
|
|
Cost of revenue
|
|
|
111,994
|
|
|
|
106,370
|
|
|
|
89,406
|
|
|
|
92,485
|
|
|
$
|
128,637
|
|
|
$
|
116,311
|
|
|
$
|
94,286
|
|
|
$
|
95,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,333
|
|
|
|
11,198
|
|
|
|
8,542
|
|
|
|
7,292
|
|
|
|
12,452
|
|
|
|
3,655
|
|
|
|
2,174
|
|
|
|
6,477
|
|
Total operating expenses
|
|
|
14,975
|
|
|
|
12,702
|
|
|
|
13,785
|
|
|
|
14,664
|
|
|
|
14,021
|
|
|
|
15,318
|
|
|
|
14,671
|
|
|
|
21,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,642
|
)
|
|
|
(1,504
|
)
|
|
|
(5,243
|
)
|
|
|
(7,372
|
)
|
|
|
(1,569
|
)
|
|
|
(11,663
|
)
|
|
|
(12,497
|
)
|
|
|
(14,843
|
)
|
Total other income (expense)
|
|
|
(2,352
|
)
|
|
|
(1,075
|
)
|
|
|
763
|
|
|
|
(1,984
|
)
|
|
|
(12,354
|
)
|
|
|
(2,338
|
)
|
|
|
(260
|
)
|
|
|
(1,103
|
)
|
Income tax expense
|
|
|
(1,049
|
)
|
|
|
(723
|
)
|
|
|
(819
|
)
|
|
|
(105
|
)
|
|
|
(850
|
)
|
|
|
(206
|
)
|
|
|
(408
|
)
|
|
|
(3,979
|
)
|
Gains on investments in affiliates, net of tax
|
|
|
500
|
|
|
|
396
|
|
|
|
232
|
|
|
|
150
|
|
|
|
|
|
|
|
259
|
|
|
|
316
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,543
|
)
|
|
$
|
(2,906
|
)
|
|
$
|
(5,067
|
)
|
|
$
|
(9,311
|
)
|
|
$
|
(14,773
|
)
|
|
$
|
(13,948
|
)
|
|
$
|
(12,849
|
)
|
|
$
|
(19,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.38
|
)
|
(22) SUBSEQUENT EVENTS
Subsequent to July 31, 2017, and prior to the issuance of these financial statements, the Company sold $11.9 million in Trading Securities. During this period, the Company received approximately
$13.7 in cash proceeds associated with the trading activities.
Subsequent to July 31, 2017, and prior to the issuance of
these financial statements, the Company completed the sale of its facility in Kildare, Ireland for the sale price of approximately $4.5 million, less legal and administrative expense.
79