RESULTS OF OPERATIONS
Consolidated Results by Segment
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Three Months Ended February 2, 2014
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Three Months Ended January 27, 2013
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(in thousands)
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Total
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Staffing Services
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Computer Systems
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Other
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Total
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Staffing Services
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Computer Systems
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Other
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Net revenue
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Staffing service revenue
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$
|
392,269
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|
$
|
392,269
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|
|
$
|
—
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|
|
$
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—
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|
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$
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474,362
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$
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474,362
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|
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$
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—
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$
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—
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Other revenue
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44,879
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—
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15,520
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29,359
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45,843
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20,226
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25,617
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Net revenue
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437,148
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392,269
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|
15,520
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29,359
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520,205
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474,362
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20,226
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25,617
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Expenses
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Direct cost of staffing services revenue
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341,460
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341,460
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—
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—
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411,993
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411,993
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—
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—
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Cost of other revenue
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37,278
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—
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13,145
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24,133
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39,753
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—
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17,815
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21,938
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Selling, administrative and other operating costs
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64,150
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54,266
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5,277
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4,607
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68,047
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57,943
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5,529
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4,575
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Amortization of purchased intangible assets
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319
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25
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|
|
215
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79
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345
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|
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12
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|
214
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119
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Restructuring costs
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1,361
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|
657
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|
704
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—
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|
740
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|
285
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|
|
455
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—
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Segment operating income (loss)
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(7,420
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)
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(4,139
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)
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(3,821
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)
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540
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(673
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)
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4,129
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(3,787
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)
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(1,015
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)
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Corporate general and administrative
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2,958
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2,290
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Restatement, investigations and remediation
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4,668
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13,820
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Operating loss
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(15,046
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)
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(16,783
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)
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Other income (expense), net
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(979
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)
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269
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Income tax provision
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1,049
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576
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Net loss
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$
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(17,074
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)
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$
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(17,090
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)
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NON-GAAP PROFORMA TABLE
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Three Months Ended February 2, 2014
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Three Months Ended January 27, 2013
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(in thousands)
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Total
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Staffing Services
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Computer Systems
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Other
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Total
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Staffing Services
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Computer Systems
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Other
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Net revenue
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$
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437,148
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|
|
$
|
392,269
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|
|
$
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15,520
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|
|
$
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29,359
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|
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$
|
520,205
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$
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474,362
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$
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20,226
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$
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25,617
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Recognition of previously unrecognized revenue
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(5,048
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)
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(5,048
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)
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—
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—
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(9,113
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)
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(9,113
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)
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—
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—
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Additions to unrecognized revenue
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6,160
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6,160
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—
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—
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6,571
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6,571
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—
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—
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Net non-GAAP proforma adjustment
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1,112
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1,112
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—
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—
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(2,542
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)
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(2,542
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)
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—
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—
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Non-GAAP proforma net revenue
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438,260
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393,381
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15,520
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29,359
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517,663
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471,820
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20,226
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25,617
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Expenses
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Direct cost of staffing services revenue
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341,460
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341,460
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—
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—
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411,993
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411,993
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—
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—
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Cost of other revenue
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37,278
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—
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13,145
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24,133
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39,753
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—
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17,815
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21,938
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Selling, administrative and other operating costs
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64,150
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54,266
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|
5,277
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|
|
4,607
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|
68,047
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|
|
57,943
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|
|
5,529
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|
|
4,575
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Amortization of purchased intangible assets
|
319
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|
|
25
|
|
|
215
|
|
|
79
|
|
|
345
|
|
|
12
|
|
|
214
|
|
|
119
|
|
Restructuring costs
|
1,361
|
|
|
657
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|
|
704
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|
|
—
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|
|
740
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|
|
285
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|
|
455
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|
|
—
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Non-GAAP proforma segment operating income (loss)
|
(6,308
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)
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(3,027
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)
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(3,821
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)
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|
540
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|
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(3,215
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)
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|
1,587
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(3,787
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)
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(1,015
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)
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|
|
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|
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Non-GAAP proforma operating loss
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(13,934
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)
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|
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(19,325
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)
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|
|
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|
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Non-GAAP proforma net loss
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$
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(15,962
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)
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|
|
|
|
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$
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(19,632
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)
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Consolidated Results of Operations (Q1 2014 vs. Q1 2013)
Net revenue
: Net revenue in the first quarter of fiscal 2014
decreased
$83.1 million
to
$437.1 million
from
$520.2 million
in fiscal 2013, and proforma net revenue
decreased
$79.4 million
or
15.3%
to
$438.3 million
from
$517.7 million
in fiscal 2013. The change in revenue was the result of
decreased
Staffing Services revenues of
$82.1 million
(proforma of
$78.4 million
) resulting primarily from fewer contingent workers on assignment at a few large customers whose current demand levels are lower than in the prior year, lower revenues resulting from our exit of certain customers as part of our continued focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, slightly lower managed services revenue, and
$3.7 million
higher net staffing Unrecognized Revenue. In addition, Computer Systems revenues
decreased
$4.7 million
from several large directory assistance implementations reaching the end of the maintenance periods over which the projects were being amortized, lower transaction volumes, and lower pricing and maintenance levels. These decreases were partially offset by higher information technology infrastructure services revenue driven primarily by new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods, and a $1.2 million deferral of revenue in 2013.
Direct cost of staffing services revenue
: Direct cost of Staffing Services revenue in the first quarter of fiscal 2014
decreased
$70.5 million
, or
17.1%
, to
$341.5 million
from
$412.0 million
in fiscal 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, although at higher proforma margins, and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in 2014 was
13.0%
and
13.2%
from
13.1%
and
12.7%
in 2013, respectively. The direct margin and proforma direct margin
increased
by
0.5%
primarily due to
higher
traditional staffing margins. This
increase
was offset by a
0.6%
decrease in the GAAP direct margin due to higher net staffing Unrecognized Revenue in the first quarter of fiscal 2014 from 2013.
Cost of other revenue
: Cost of other revenue in the first quarter of fiscal 2014 decreased
$2.5 million
, or
6.2%
, to
$37.3 million
from
$39.8 million
in fiscal 2013. This
decrease
was primarily a result of Computer Systems segment lower revenue, restructuring activities, and decreased data acquisition costs, partially offset by our ongoing investment in developing our directory assistance software platform into full-featured call center software (“OnDemand”). This decrease was partially offset by increased costs for our information technology infrastructure services primarily due to higher volume.
Selling, administrative and other operating costs
: Selling, administrative and other operating costs in the first quarter of fiscal 2014
decreased
$3.8 million
, or
5.7%
, to
$64.2 million
from
$68.0 million
in fiscal 2013 primarily in our Staffing Services segment. The first quarter of fiscal 2013 included a $3.0 million indirect tax recovery related to multiple years. Adjusting for the indirect tax recovery, selling, administrative and other operating costs would have
decreased
$6.8 million
, or
9.7%
, in response to the decline in staffing revenues.
Restructuring costs
: Restructuring costs in the first quarter of fiscal 2014 were comprised of workforce reductions in our Computer Systems and Staffing Services segments. Due to the continued decline in the directory assistance business within the Computer Systems business, we reduced headcount in North America incurring severance related restructuring costs. We also reduced headcount in our Staffing Services segment in North America and India in connection with the sale of our vendor management system software related assets.
Restructuring costs in the first quarter of fiscal 2013 were comprised of workforce reductions in our Computer Systems and Staffing Services Segments. Due to the continued decline in the Computer Systems business both domestically and internationally, we reduced headcount in North America, the United Kingdom and Germany, incurring primarily severance related restructuring costs. We also reduced headcount in our Staffing Services segment in connection with our focus on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable.
Restatement, investigations and remediation:
Restatement, investigations and remediation costs were comprised of financial and legal consulting, audit and related costs of the restatement, related investigations, and completing delayed filings required under SEC regulations and in the first quarter of fiscal 2014 amounted to
$4.7 million
compared to
$13.8 million
in fiscal 2013. The
decreased
costs were a result of the significant work performed to complete the restatement, audits and filing of delayed SEC reports during the first quarter of fiscal 2013, compared with fiscal 2014 when efforts were expended on completing the financial audits for fiscal years 2011 through 2013.
Operating loss
: Operating loss in the first quarter of fiscal 2014 of
$15.0 million
included restatement, investigations and remediation costs of
$4.7 million
and restructuring costs of
$1.4 million
as we reduced headcount in response to lower revenue levels, the sale of our vendor management system software related assets and reorganization of our North American staffing operations. Without these items we would have had an operating loss of
$8.9 million
and a proforma loss of
$7.8 million
.
Operating loss in the first quarter of fiscal 2013 of $16.8 million included restatement, investigations, and remediation costs of $13.8 million, a $3.0 million indirect tax recovery related to multiple years, and restructuring costs of $0.7 million as we reduced headcount in response to lower revenue levels. Without these items we would have had operating loss of $5.3 million and a proforma operating loss of $7.8 million.
The changes in operating loss and proforma operating loss in the first quarter of fiscal 2014 from 2013 were due to the above reasons and a
$4.2 million
impact from lower Staffing Services revenue.
Other income (expense), net
: Other expense in the first quarter of fiscal 2014 increased
$1.3 million
to
$1.0 million
from income of
$0.3 million
in fiscal 2013, primarily related to foreign exchange gains and losses.
Income tax provision
: Income tax provision was
$1.0 million
compared to
$0.6 million
in the first quarter of fiscal 2014 and 2013, respectively. The provision in both periods primarily related to locations outside of the United States.
Results of Operations by Segment (Q1 2014 vs. Q1 2013)
Staffing Services
Net revenue
: The segment’s net revenue in the first quarter of fiscal 2014
decreased
$82.1 million
to
$392.3 million
from
$474.4 million
in fiscal 2013, and proforma net revenue
decreased
by
$78.4 million
, or
16.6%
, to
$393.4 million
from
$471.8 million
in fiscal 2013. This
decrease
is primarily due to fewer contingent workers on assignment at a few large customers whose current demand levels are lower than in the prior year, lower revenues resulting from our exit of certain customers as part of our continued focus on exiting or reducing business levels with customers where profitability or business terms are unfavorable, slightly lower managed services revenue, and
$3.7 million
higher net staffing Unrecognized Revenue.
Direct cost of staffing services revenue
: The segment's direct cost of Staffing Services revenue in the first quarter of fiscal 2014
decreased
$70.5 million
, or
17.1%
, to
$341.5 million
from
$412.0 million
in fiscal 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, although at higher proforma margins, and lower managed service program costs consistent with the related decrease in revenues. Direct margin of Staffing Services revenue as a percent of staffing revenue and proforma staffing revenue in 2014 was
13.0%
and
13.2%
from
13.1%
and
12.7%
in 2013, respectively. The direct and proforma margin
increased
by
0.5%
primarily due to
higher
traditional staffing margins. This
increase
was offset by a
0.6%
decrease in the GAAP direct margin due to higher net staffing Unrecognized Revenue in the first quarter of fiscal 2014 from 2013.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the first quarter of fiscal 2014
decreased
$3.6 million
, or
6.3%
, to
$54.3 million
from
$57.9 million
in fiscal 2013. As a percent of staffing revenue and proforma staffing revenue in the first quarter of fiscal 2014 these costs were
13.8%
and
13.8%
from
12.2%
and
12.3%
in fiscal 2013, respectively. The first quarter of fiscal 2013 included a $3.0 million indirect tax recovery related to multiple years. Adjusting for the indirect tax recovery, the segment’s selling, administrative and other operating costs would have been a
decrease
of
$6.6 million
, or
11.0%
, in response to the decline in staffing revenues and reorganization of our North American staffing operations.
Restructuring costs
: Restructuring costs in the first quarter of fiscal 2014 were primarily comprised of workforce reductions in connection with the sale of our vendor management system software and related assets in the United States and India. Restructuring costs in the first quarter of fiscal 2013 were in connection with our focus on achieving acceptable operating income from our traditional time and materials staffing services in North America and exiting or reducing business levels with customers where profitability or business terms are unfavorable.
Segment operating income (loss)
: The segment’s operating results in the first quarter of 2014
decreased
by
$8.2 million
to a loss of
$4.1 million
from income of
$4.1 million
in fiscal 2013, and proforma operating results
decreased
$4.6 million
to a loss of
$3.0 million
from income of
$1.6 million
in fiscal 2013. The decrease in operating results is primarily due to lower direct margins of
$7.9 million
and 2013 including a $3.0 million indirect tax recovery, partially offset by a
decrease
in selling, administrative and other operating costs of
$6.6 million
in response to the decline in staffing revenues and reorganization of our North American staffing operations.
Computer Systems
Net revenue
: The segment’s net revenue in the first quarter of fiscal 2014
decreased
$4.7 million
, or
23.3%
, to
$15.5 million
from
$20.2 million
in fiscal 2013. This
decrease
was primarily the result of several large directory assistance implementations reaching the end of the maintenance periods over which the projects were being amortized, lower transaction volumes, and lower pricing and maintenance levels.
Cost of other revenue
: The segment’s cost of revenue in the first quarter of fiscal 2014
decreased
$4.7 million
, or
26.2%
, to
$13.1 million
from
$17.8 million
in fiscal 2013. This decrease was primarily a result of lower revenue, the impact of the segment's restructuring activities of $1.0 million, and decreased data acquisition costs of $0.5 million, partially offset by our ongoing investment in developing our directory assistance software platform into full-featured call center software (“OnDemand”).
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the first quarter of fiscal 2014
decreased
$0.2 million
or
4.6%
, to
$5.3 million
from
$5.5 million
in fiscal 2013. This decrease resulted from lower administrative costs in response to decreased business levels offset by higher selling costs as we increased efforts to sell our full-featured call center software ("OnDemand").
Restructuring costs
: Restructuring costs in the first quarter of fiscal 2014 was comprised of workforce reduction severance costs in the United States due to the continued decline in the directory assistance business. Restructuring costs in the first quarter of fiscal 2013 were comprised of headcount reduction severance costs in North America, the United Kingdom and Germany due to the continued decline in the directory assistance business both domestically and internationally.
Segment operating loss
: The segment’s operating loss in the first quarter of fiscal 2014 and 2013 remained consistent at
$3.8 million
primarily from the impact of the segment's restructuring activities and lower revenues offset by lower costs, offset by our continued investment in developing our directory assistance software platform into full-featured call center software and our related sales efforts.
Other
Net revenue
: The segment’s net revenue in the first quarter of fiscal 2014
increased
$3.8 million
, or
14.6%
, to
$29.4 million
from
$25.6 million
in fiscal 2013. The
increase
is primarily due to higher information technology infrastructure services revenue driven primarily by new customers and to a lesser extent from net expanded business with existing customers at billing rates that remained relatively consistent between the periods, and a $1.2 million deferral of revenue in the first quarter of 2013.
Cost of other revenue
: The segment’s cost of other revenue in the first quarter of fiscal 2014
increased
$2.2 million
, or
10.0%
, to
$24.1 million
from
$21.9 million
in fiscal 2013. The
increase
is primarily due to higher volume.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs remained consistent at
$4.6 million
in the first quarter of fiscal 2014 and 2013.
Segment operating income (loss)
: The segment’s operating results in the first quarter of fiscal 2014
increased
$1.5 million
to income of
$0.5 million
from a loss of
$1.0 million
in fiscal 2013, primarily due to a $1.2 million deferral of revenue in 2013 and higher revenue and margins in 2014.
FINANCIAL CONDITION
CASH FLOWS
Cash flows from operating, investing and financing activities, as reflected in our Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
February 2,
2014
|
|
January 27,
2013
|
Net cash provided by operating activities
|
$
|
22,703
|
|
|
$
|
11,786
|
|
Net cash provided by (used in) investing activities
|
1,889
|
|
|
(2,159
|
)
|
Net cash used in financing activities
|
(22,532
|
)
|
|
(10,168
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
178
|
|
|
(438
|
)
|
Net increase (decrease) in cash and cash equivalents
|
$
|
2,238
|
|
|
$
|
(979
|
)
|
Cash Flows - Operating Activities
The net cash provided by operating activities in the first quarter of fiscal 2014 was
$22.7 million
(
$24.3 million
provided by operating activities offset by
$1.6 million
in connection with the restatement, investigations and remediation costs), an
increase
of
$10.9 million
from
$11.8 million
(
$27.0 million
provided by operating activities offset by
$15.2 million
in connection with the restatement, investigations and remediation costs) in 2013.
The net cash used in operating activities in the first quarter of fiscal 2014, exclusive of changes in operating assets and liabilities was
$13.0 million
; the net loss of
$17.1 million
included non-cash charges for depreciation and amortization of
$3.4 million
and unrealized foreign exchange loss of
$0.6 million
. The cash used in operating activities in the first quarter of fiscal 2013, exclusive of changes in operating assets and liabilities was
$14.3 million
; the net loss of
$17.1 million
included non-cash charges for depreciation and amortization of
$4.2 million
, offset by a deferred income tax benefit of
$1.0 million
. Cash provided by changes in operating assets and liabilities in the first quarter of fiscal 2014 was
$35.7 million
, net, principally due to the decrease in the level of accounts receivable of
$41.5 million
and prepaid insurance and other assets of
$5.5 million
, offset by decreases in the level of accounts payable of
$8.3 million
and accrued expenses of
$4.6 million
. Cash provided by changes in operating assets and liabilities in the first quarter of fiscal 2013 was
$26.1 million
, net, principally due to the decrease in the level of accounts receivable of
$38.9 million
and restricted cash related to customer contracts of
$4.4 million
, offset by decreases in accounts payable of
$6.1 million
, prepaid insurance and other assets of
$5.9 million
and income taxes of
$5.8 million
.
Cash Flows - Investing Activities
The net cash provided by investing activities in the first quarter of fiscal 2014 was
$1.9 million
, principally from the proceeds from sale of software related assets of
$3.0 million
partially offset by the purchases of property, equipment and software of
$1.5 million
. The net cash used in investing activities in the first quarter of fiscal 2013 was
$2.2 million
, principally from the purchase of property, equipment and software of
$2.4 million
.
Cash Flows - Financing Activities
The net cash used in financing activities in the first quarter of fiscal 2014 was
$22.5 million
, compared to
$10.2 million
in the first quarter of fiscal 2013. In 2014, net repayments of borrowings for the accounts receivable securitization program and other borrowing totaled
$22.3 million
compared to net repayments of
$9.9 million
in 2013.
LIQUIDITY AND CAPITAL RESOURCES
Credit Markets and Availability of Credit
At February 2, 2014, we had short-term credit facilities which provided for borrowing and issuance of letters of credit of up to an aggregate of $245.0 million, including our $200.0 million accounts receivable securitization program (“Short-Term Financing Program”) and our $45.0 million revolving credit agreement (“Short-Term Credit Facility”). Available borrowing under the Short-Term Financing Program is based on eligible receivable levels. Borrowings under the Short-Term Credit Facility require full cash collateralization.
As of February 2, 2014, we had total outstanding short-term borrowings of $145.0 million and were required to maintain $31.8 million in cash collateral. At February 2, 2014, the available borrowing under the short-term borrowing facilities included $20.4 million under the Short-Term Financing Program and $19.8 million under the Short-Term Credit Facility.
Securitization Program
The Short-Term Financing Program provides for maximum borrowing of $200.0 million under a credit agreement secured by receivables from the Staffing Services business that are sold to a wholly-owned, consolidated, bankruptcy-remote subsidiary and are available first to satisfy the lender. The program expires on December 31, 2016 and the benchmark interest rate for which interest is charged on the sale of receivables is a LIBOR index. The program is subject to termination under certain circumstances including the default rate on receivables, as defined, exceeding a specified threshold or the rate of collections on receivables failing to meet a specified threshold. At February 2, 2014, we were in compliance with the program covenants.
At February 2, 2014 and November 3, 2013, we had outstanding borrowing under the program of $120.0 million and $142.0 million, respectively, which bore a weighted average annual interest rate of 1.6% and 1.5%, during the first quarter of fiscal 2014 and 2013, respectively, inclusive of certain facility and program fees.
Credit Facilities
The Short-Term Credit Facility provides for borrowing in various currencies secured by cash collateral covering 105% of certain baseline amounts. The facility is subject to a facility fee and borrowings bear various interest rate options calculated using a combination of LIBOR and prime rates plus a margin over those rates. The facility expires on March 31, 2015. At February 2, 2014, we were in compliance with the facility covenants.
At February 2, 2014 and November 3, 2013, we had drawn under the facility $22.2 million and $22.3 million, respectively, in various currencies used to hedge our net investment in certain foreign subsidiaries and $3.0 million in letters of credit outstanding. During the first quarter of fiscal 2014 and 2013, borrowings bore a weighted average annual interest rate of 1.9% and 1.8%, respectively, inclusive of the facility fee.