RESULTS OF OPERATIONS
Consolidated Results by Segment
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Three Months Ended May 4, 2014
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Three Months Ended April 28, 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
|
|
Total
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Staffing Services
|
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Computer Systems
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Other
|
Net revenue
|
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|
|
|
|
|
|
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|
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|
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Staffing service revenue
|
$
|
406,733
|
|
|
$
|
406,733
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476,729
|
|
|
$
|
476,729
|
|
|
$
|
—
|
|
|
$
|
—
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Other revenue
|
44,752
|
|
|
—
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|
|
15,405
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|
|
29,347
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|
|
42,995
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|
|
—
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|
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18,752
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|
|
24,243
|
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Net revenue
|
451,485
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|
|
406,733
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|
|
15,405
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29,347
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|
|
519,724
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476,729
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18,752
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24,243
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Expenses
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Direct cost of staffing services revenue
|
345,899
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|
345,899
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|
|
—
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|
|
—
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|
|
413,116
|
|
|
413,116
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|
|
—
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|
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—
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Cost of other revenue
|
38,656
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—
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|
|
14,590
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|
|
24,066
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39,873
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—
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|
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16,742
|
|
|
23,131
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Selling, administrative and other operating costs
|
62,575
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|
|
53,175
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|
|
4,911
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|
4,489
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|
|
72,612
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|
|
62,058
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|
|
6,024
|
|
|
4,530
|
|
Amortization of purchased intangible assets
|
240
|
|
|
25
|
|
|
214
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|
|
1
|
|
|
346
|
|
|
12
|
|
|
215
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|
|
119
|
|
Restructuring costs
|
598
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|
|
577
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|
|
(81
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)
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|
102
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|
|
948
|
|
|
133
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|
|
815
|
|
|
—
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|
Segment operating income (loss)
|
3,517
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|
|
7,057
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|
|
(4,229
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)
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|
689
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|
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(7,171
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)
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|
1,410
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(5,044
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)
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(3,537
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)
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Corporate general and administrative
|
2,279
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|
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|
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|
|
2,380
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Restatement, investigations and remediation
|
593
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|
|
|
|
|
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|
|
7,387
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|
|
|
|
|
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Operating income (loss)
|
645
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|
|
|
|
|
|
|
|
|
|
|
(16,938
|
)
|
|
|
|
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Other income (expense), net
|
(1,762
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)
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|
|
|
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|
|
|
60
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|
|
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|
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Income tax provision
|
2,378
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|
|
|
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|
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|
|
583
|
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Net loss
|
$
|
(3,495
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)
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|
|
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|
|
$
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(17,461
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)
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NON-GAAP PROFORMA
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Three Months Ended May 4, 2014
|
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Three Months Ended April 28, 2013
|
(in thousands)
|
Total
|
|
Staffing Services
|
|
Computer Systems
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|
Other
|
|
Total
|
|
Staffing Services
|
|
Computer Systems
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|
Other
|
Net revenue
|
$
|
451,485
|
|
|
$
|
406,733
|
|
|
$
|
15,405
|
|
|
$
|
29,347
|
|
|
$
|
519,724
|
|
|
$
|
476,729
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|
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$
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18,752
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|
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$
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24,243
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Recognition of previously unrecognized revenue
|
(6,348
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)
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|
(6,190
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)
|
|
—
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|
|
(158
|
)
|
|
(8,632
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)
|
|
(8,632
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)
|
|
—
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|
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—
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Additions to unrecognized revenue
|
4,549
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|
4,537
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|
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—
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|
12
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|
|
11,969
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|
8,164
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—
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|
|
3,805
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Net non-GAAP proforma adjustment
|
(1,799
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)
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|
(1,653
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)
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—
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|
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(146
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)
|
|
3,337
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|
|
(468
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)
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|
—
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|
|
3,805
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|
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|
|
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Non-GAAP proforma net revenue
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449,686
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|
|
405,080
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|
15,405
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|
|
29,201
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|
|
523,061
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|
|
476,261
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|
18,752
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|
|
28,048
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Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Direct cost of staffing services revenue
|
345,899
|
|
|
345,899
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|
|
—
|
|
|
—
|
|
|
413,116
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|
|
413,116
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|
|
—
|
|
|
—
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|
Cost of other revenue
|
38,656
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|
|
—
|
|
|
14,590
|
|
|
24,066
|
|
|
39,873
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|
|
—
|
|
|
16,742
|
|
|
23,131
|
|
Selling, administrative and other operating costs
|
62,575
|
|
|
53,175
|
|
|
4,911
|
|
|
4,489
|
|
|
72,612
|
|
|
62,058
|
|
|
6,024
|
|
|
4,530
|
|
Amortization of purchased intangible assets
|
240
|
|
|
25
|
|
|
214
|
|
|
1
|
|
|
346
|
|
|
12
|
|
|
215
|
|
|
119
|
|
Restructuring costs
|
598
|
|
|
577
|
|
|
(81
|
)
|
|
102
|
|
|
948
|
|
|
133
|
|
|
815
|
|
|
—
|
|
Non-GAAP proforma segment operating income (loss)
|
1,718
|
|
|
5,404
|
|
|
(4,229
|
)
|
|
543
|
|
|
(3,834
|
)
|
|
942
|
|
|
(5,044
|
)
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP proforma operating loss
|
(1,154
|
)
|
|
|
|
|
|
|
|
(13,601
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-GAAP proforma net loss
|
$
|
(5,294
|
)
|
|
|
|
|
|
|
|
$
|
(14,124
|
)
|
|
|
|
|
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Consolidated Results of Operations (Q2 2014 vs. Q2 2013)
Net revenue
: Net revenue in the second quarter of fiscal 2014
decreased
$68.2 million
to
$451.5 million
from
$519.7 million
in fiscal 2013, and proforma net revenue
decreased
$73.4 million
, or
14.0%
, to
$449.7 million
from
$523.1 million
in fiscal 2013. The change in revenue was the result of
decreased
Staffing Services revenues of
$70.0 million
(proforma of
$71.2 million
) resulting from fewer contingent workers on assignment primarily at our largest enterprise customers where current demand levels are lower than in the prior year, 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, and with respect to GAAP results
$1.2 million
lower net staffing Unrecognized Revenue. In addition, Computer Systems revenues
decreased
$3.4 million
from lower directory assistance software services revenue resulting from approximately 13% lower transaction volumes at slightly lower rates and lower maintenance and system revenue, while sales of our full-featured call center software (“OnDemand”) were flat. These decreases were partially offset by higher information technology infrastructure services revenue driven primarily by a
$3.8 million
deferral of revenue in 2013.
Direct cost of staffing services revenue
: Direct cost of Staffing Services revenue in the second quarter of 2014
decreased
$67.2 million
, or
16.3%
, to
$345.9 million
from
$413.1 million
in 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, 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
15.0%
and
14.6%
, respectively, from
13.3%
for both in 2013. The direct margin and proforma direct margin percentage
increased
by
1.3%
primarily due to
higher
traditional staffing margins. The
increase
in the GAAP direct margin percentage included an additional
0.4%
impact due to lower net staffing Unrecognized Revenue in the second quarter of 2014 from 2013.
Cost of other revenue
: Cost of other revenue in the second quarter of 2014 decreased
$1.2 million
, or
3.1%
, to
$38.7 million
from
$39.9 million
in 2013. This
decrease
was primarily a result of Computer Systems segment lower delivery costs in response to lower directory assistance revenue, while costs of our call center revenue increased slightly and continued at negative margins. This decrease was partially offset by increased costs for our information technology infrastructure services at similar margins and primarily due to higher volume.
Selling, administrative and other operating costs
: Selling, administrative and other operating costs in the second quarter of 2014
decreased
$10.0 million
, or
13.8%
, to
$62.6 million
from
$72.6 million
in 2013 primarily due to $8.2 million lower traditional staffing recruiting and indirect costs in response to lower revenue and restructuring, $1.8 million lower vendor management system development costs resulting from the divestiture of Procurestaff in the first quarter of 2014, and $1.3 million lower administrative costs in our Computer Systems segment, partially offset by increases in other selling, administrative and other operating costs.
Restructuring costs
: Restructuring costs in the second quarter of 2014 were primarily comprised of workforce reductions in our Staffing Services segment in North America in response to lower revenue levels and our traditional staffing services reorganization.
Restructuring costs in the second quarter of 2013 were primarily comprised of workforce reductions in our Computer Systems segment in response to declining directory assistance revenue.
Restatement, investigations and remediation:
Costs in the second quarter of 2014 amounted to
$0.6 million
compared to
$7.4 million
in 2013. The
decreased
costs were a result of the substantial completion of the restatement in the second quarter of 2013 and completion of delayed filings during the first quarter of 2014.
Operating income (loss)
: Operating income in the second quarter of 2014 of
$0.6 million
results from the above reasons and included restatement, investigations and remediation costs of
$0.6 million
and restructuring costs of
$0.9 million
($0.3 million reflected in corporate general and administrative) as we reduced headcount in response to lower revenue levels and our staffing segment reorganization. Excluding these items we would have had operating income of
$2.1 million
and a proforma income of
$0.3 million
.
Operating loss in the second quarter of 2013 of
$16.9 million
included restatement, investigations, and remediation costs of
$7.4 million
, and restructuring costs of
$0.9 million
as we reduced headcount in response to lower revenue levels. Without these items we would have had an operating loss of
$8.6 million
and a proforma operating loss of
$5.3 million
.
Other income (expense), net
: Other expense in the second quarter of 2014 increased
$1.9 million
to
$1.8 million
from income of
$0.1 million
in 2013, primarily related to non-cash foreign exchange gains and losses on intercompany balances.
Income tax provision
: Income tax provision was
$2.4 million
compared to
$0.6 million
in the second quarter of 2014 and 2013, respectively. The provision in both periods primarily related to locations outside of the United States.
Results of Operations by Segment (Q2 2014 vs. Q2 2013)
Staffing Services
Net revenue
: The segment’s net revenue in the second quarter of fiscal 2014
decreased
$70.0 million
to
$406.7 million
from
$476.7 million
in fiscal 2013, and proforma net revenue
decreased
$71.2 million
, or
14.9%
, to
$405.1 million
from
$476.3 million
in 2013. This
decrease
is due to fewer contingent workers on assignment primarily at our largest enterprise customers where current demand levels are lower than in the prior year, 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, and with respect to GAAP results
$1.2 million
lower net staffing Unrecognized Revenue.
Direct cost of staffing services revenue
: The segment's direct cost of Staffing Services revenue in the second quarter of 2014
decreased
$67.2 million
, or
16.3%
, to
$345.9 million
from
$413.1 million
in 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, 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
15.0%
and
14.6%
, respectively, from
13.3%
for both in 2013. The direct margin and proforma direct margin percentage
increased
by
1.3%
primarily due to
higher
traditional staffing margins. The
increase
in the GAAP direct margin percentage included an additional
0.4%
impact due to lower net staffing Unrecognized Revenue in the second quarter of 2014 from 2013.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the second quarter of 2014
decreased
$8.9 million
, or
14.3%
, to
$53.2 million
from
$62.1 million
in 2013, primarily due to $8.2 million lower traditional staffing recruiting and indirect costs in response to the lower revenue and restructuring and $1.8 million lower vendor management system development costs resulting from the divestiture of Procurestaff in the first quarter of 2014, partially offset by increases in other selling, administrative and other operating costs. As a percent of staffing revenue and proforma staffing revenue these costs were
13.1%
for both in the second quarter of 2014 and
13.0%
for both in the second quarter of 2013.
Restructuring costs
: Restructuring costs in the second quarter of 2014 were primarily comprised of workforce reductions in response to lower revenue levels and our traditional staffing services reorganization. Restructuring costs in the second quarter of 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 were unfavorable.
Segment operating income
: The segment’s operating income in the second quarter of 2014
increased
by
$5.7 million
to
$7.1 million
from
$1.4 million
in 2013, and proforma operating income
increased
$4.5 million
to
$5.4 million
from
$0.9 million
in 2013. The increase in operating income is primarily due to a
decrease
in selling, administrative and other operating costs of
$8.9 million
in response to the decline in traditional staffing revenues and reorganization of our North American staffing operations, partially offset by lower direct margins of
$4.0 million
.
Computer Systems
Net revenue
: The segment’s net revenue in the second quarter of fiscal 2014
decreased
$3.4 million
, or
17.8%
, to
$15.4 million
from
$18.8 million
in fiscal 2013. This
decrease
was primarily the result of approximately 13% lower transaction volumes at slightly lower rates and lower maintenance and system revenue, while sales of our full-featured call center software ("OnDemand") were flat.
Cost of other revenue
: The segment’s cost of other revenue in the second quarter of 2014
decreased
$2.1 million
, or
12.9%
, to
$14.6 million
from
$16.7 million
in 2013. This decrease was primarily a result of lower delivery costs in response to lower directory assistance revenue, while costs of our call center revenue increased slightly and continued at negative margins.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the second quarter of 2014
decreased
$1.1 million
, or
18.5%
, to
$4.9 million
from
$6.0 million
in 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 second quarter of 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 second quarter of 2014 decreased
$0.8 million
, or
16.2%
, to
$4.2 million
from
$5.0 million
in 2013. The decrease in operating loss resulted primarily from the impact of the segment's restructuring activities and lower administrative costs.
Other
Net revenue
: The segment’s net revenue in the second quarter of fiscal 2014
increased
$5.1 million
, to
$29.3 million
from
$24.2 million
in fiscal 2013, and proforma net revenue increased by
$1.2 million
, or
4.1%
, to
$29.2 million
from
$28.0 million
in 2013. The
increase
is primarily due to information technology infrastructure services higher revenue driven primarily by a
$3.8 million
deferral of revenue in 2013, and by new customers and to a lesser extent from net expanded business with existing customers.
Cost of other revenue
: The segment’s cost of other revenue in the second quarter of 2014
increased
$1.0 million
, or
4.0%
, to
$24.1 million
from
$23.1 million
in 2013. The
increase
is primarily in response to higher information technology infrastructure services volume.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs remained consistent at
$4.5 million
in the second quarter of 2014 and 2013.
Segment operating income (loss)
: The segment’s operating results in the second quarter of 2014
increased
$4.2 million
to income of
$0.7 million
from a loss of
$3.5 million
in 2013, and proforma operating income increased
$0.2 million
to
$0.5 million
from $
0.3 million
in 2013, primarily due to increased information technology infrastructure services at similar margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 4, 2014
|
|
Six Months Ended April 28, 2013
|
(in thousands)
|
Total
|
|
Staffing Services
|
|
Computer Systems
|
|
Other
|
|
Total
|
|
Staffing Services
|
|
Computer Systems
|
|
Other
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staffing service revenue
|
$
|
799,002
|
|
|
$
|
799,002
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
951,091
|
|
|
$
|
951,091
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other revenue
|
89,631
|
|
|
—
|
|
|
30,925
|
|
|
58,706
|
|
|
88,838
|
|
|
—
|
|
|
38,978
|
|
|
49,860
|
|
Net revenue
|
888,633
|
|
|
799,002
|
|
|
30,925
|
|
|
58,706
|
|
|
1,039,929
|
|
|
951,091
|
|
|
38,978
|
|
|
49,860
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of staffing services revenue
|
687,359
|
|
|
687,359
|
|
|
—
|
|
|
—
|
|
|
825,109
|
|
|
825,109
|
|
|
—
|
|
|
—
|
|
Cost of other revenue
|
75,934
|
|
|
—
|
|
|
27,735
|
|
|
48,199
|
|
|
79,626
|
|
|
—
|
|
|
34,557
|
|
|
45,069
|
|
Selling, administrative and other operating costs
|
126,725
|
|
|
107,441
|
|
|
10,188
|
|
|
9,096
|
|
|
140,659
|
|
|
120,001
|
|
|
11,553
|
|
|
9,105
|
|
Amortization of purchased intangible assets
|
559
|
|
|
50
|
|
|
429
|
|
|
80
|
|
|
691
|
|
|
24
|
|
|
429
|
|
|
238
|
|
Restructuring costs
|
1,959
|
|
|
1,234
|
|
|
623
|
|
|
102
|
|
|
1,688
|
|
|
418
|
|
|
1,270
|
|
|
—
|
|
Segment operating income (loss)
|
(3,903
|
)
|
|
2,918
|
|
|
(8,050
|
)
|
|
1,229
|
|
|
(7,844
|
)
|
|
5,539
|
|
|
(8,831
|
)
|
|
(4,552
|
)
|
Corporate general and administrative
|
5,237
|
|
|
|
|
|
|
|
|
4,670
|
|
|
|
|
|
|
|
Restatement, investigations and remediation
|
5,261
|
|
|
|
|
|
|
|
|
21,207
|
|
|
|
|
|
|
|
Operating loss
|
(14,401
|
)
|
|
|
|
|
|
|
|
(33,721
|
)
|
|
|
|
|
|
|
Other income (expense), net
|
(2,741
|
)
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
|
|
Income tax provision
|
3,427
|
|
|
|
|
|
|
|
|
1,159
|
|
|
|
|
|
|
|
Net loss
|
$
|
(20,569
|
)
|
|
|
|
|
|
|
|
$
|
(34,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-GAAP PROFORMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 4, 2014
|
|
Six Months Ended April 28, 2013
|
(in thousands)
|
Total
|
|
Staffing Services
|
|
Computer Systems
|
|
Other
|
|
Total
|
|
Staffing Services
|
|
Computer Systems
|
|
Other
|
Net revenue
|
$
|
888,633
|
|
|
$
|
799,002
|
|
|
$
|
30,925
|
|
|
$
|
58,706
|
|
|
$
|
1,039,929
|
|
|
$
|
951,091
|
|
|
$
|
38,978
|
|
|
$
|
49,860
|
|
Recognition of previously unrecognized revenue
|
(5,300
|
)
|
|
(5,075
|
)
|
|
—
|
|
|
(225
|
)
|
|
(11,115
|
)
|
|
(11,115
|
)
|
|
—
|
|
|
—
|
|
Additions to unrecognized revenue
|
4,545
|
|
|
4,533
|
|
|
—
|
|
|
12
|
|
|
13,151
|
|
|
8,105
|
|
|
—
|
|
|
5,046
|
|
Net non-GAAP proforma adjustment
|
(755
|
)
|
|
(542
|
)
|
|
—
|
|
|
(213
|
)
|
|
2,036
|
|
|
(3,010
|
)
|
|
—
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP proforma net revenue
|
887,878
|
|
|
798,460
|
|
|
30,925
|
|
|
58,493
|
|
|
1,041,965
|
|
|
948,081
|
|
|
38,978
|
|
|
54,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of staffing services revenue
|
687,359
|
|
|
687,359
|
|
|
—
|
|
|
—
|
|
|
825,109
|
|
|
825,109
|
|
|
—
|
|
|
—
|
|
Cost of other revenue
|
75,934
|
|
|
—
|
|
|
27,735
|
|
|
48,199
|
|
|
79,626
|
|
|
—
|
|
|
34,557
|
|
|
45,069
|
|
Selling, administrative and other operating costs
|
126,725
|
|
|
107,441
|
|
|
10,188
|
|
|
9,096
|
|
|
140,659
|
|
|
120,001
|
|
|
11,553
|
|
|
9,105
|
|
Amortization of purchased intangible assets
|
559
|
|
|
50
|
|
|
429
|
|
|
80
|
|
|
691
|
|
|
24
|
|
|
429
|
|
|
238
|
|
Restructuring costs
|
1,959
|
|
|
1,234
|
|
|
623
|
|
|
102
|
|
|
1,688
|
|
|
418
|
|
|
1,270
|
|
|
—
|
|
Non-GAAP proforma segment operating income (loss)
|
(4,658
|
)
|
|
2,376
|
|
|
(8,050
|
)
|
|
1,016
|
|
|
(5,808
|
)
|
|
2,529
|
|
|
(8,831
|
)
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP proforma operating loss
|
(15,156
|
)
|
|
|
|
|
|
|
|
(31,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP proforma net loss
|
$
|
(21,324
|
)
|
|
|
|
|
|
|
|
$
|
(32,515
|
)
|
|
|
|
|
|
|
Consolidated Results of Operations (Q2 2014 YTD vs. Q2 2013 YTD)
Net revenue
: Net revenue in the first six months of fiscal 2014
decreased
$151.3 million
to
$888.6 million
from
$1,039.9 million
in fiscal 2013, and proforma net revenue
decreased
$154.1 million
, or
14.8%
, to
$887.9 million
from
$1,042.0 million
in 2013. The change in revenue was the result of
decreased
Staffing Services revenues of
$152.1 million
(proforma of
$149.6 million
) resulting from fewer contingent workers on assignment primarily at our largest enterprise customers where demand levels are lower than in the prior year, 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, and with respect to GAAP results
$2.5 million
higher net staffing Unrecognized Revenue. In addition, Computer Systems revenues
decreased
$8.1 million
from several large directory assistance implementations reaching the end of the maintenance periods over which the projects were being amortized, approximately 23% lower transaction volumes, and lower pricing and maintenance levels. These decreases were partially offset by higher information technology infrastructure services revenue driven primarily by a
$5.0 million
deferral of revenue in 2013, and by new customers and to a lesser extent from net expanded business with existing customers.
Direct cost of staffing services revenue
: Direct cost of Staffing Services revenue in the first six months of 2014
decreased
$137.7 million
, or
16.7%
, to
$687.4 million
from
$825.1 million
in 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, 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
14.0%
and
13.9%
from
13.2%
and
13.0%
in 2013, respectively. The direct and proforma margin percentage
increased
by
0.9%
primarily due to
higher
traditional staffing margins. This
increase
was offset by a
0.1%
decrease in the GAAP direct margin percentage due to higher net staffing Unrecognized Revenue in the first six months of 2014 from 2013.
Cost of other revenue
: Cost of other revenue in the first six months of 2014
decreased
$3.7 million
, or
4.6%
, to
$75.9 million
from
$79.6 million
in 2013. This
decrease
was primarily a result of Computer Systems segment lower delivery costs in response to lower directory assistance revenue, restructuring activities, and decreased data acquisition costs, while costs of our call center software ("OnDemand") increased slightly and continued at negative margins. This decrease was partially offset by increased costs for our information technology infrastructure services at similar margins and primarily due to higher volume.
Selling, administrative and other operating costs
: Selling, administrative and other operating costs in the first six months of 2014
decreased
$14.0 million
, or
9.9%
, to
$126.7 million
from
$140.7 million
in 2013 due to $15.9 million lower traditional staffing recruiting and indirect costs in response to the lower revenue and restructuring, $2.8 million lower vendor management system development costs resulting from the divestiture of Procurestaff in the first quarter of 2014, $1.9 million lower administrative costs in our Computer Systems segment, partially offset by increases in other selling, administrative and other operating costs. The first six months of 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
$17.0 million
, or
11.8%
.
Restructuring costs
: Restructuring costs in the first six months of 2014 were primarily comprised of workforce reductions in our Staffing Services segment resulting from our divestiture of Procurestaff and our traditional staffing restructuring and lower revenue in our Computer Systems segment in response to declining directory assistance revenue.
Restructuring costs in the first six months of 2013 were comprised of workforce reductions in our Computer Systems and Staffing Services segments in response to lower revenue and 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:
Costs in the first six months of 2014 amounted to
$5.3 million
compared to
$21.2 million
in 2013. The
decreased
costs were a result of the substantial completion of the restatement in the second quarter of 2013 and completion of delayed filings during the first quarter of 2014.
Operating loss
: Operating loss in the first six months of 2014 of
$14.4 million
results from the above reasons and included restatement, investigations and remediation costs of
$5.3 million
and restructuring costs of
$2.3 million
($0.3 million reflected in corporate general and administrative) primarily in our Staffing Services segment in connection with workforce reductions in response to lower revenue levels and our staffing segment reorganization and the sale of our vendor management system assets and the continued decline in the directory assistance business within the Computer Systems business, and with respect to GAAP results
$2.8 million
lower Unrecognized Revenue between 2014 and 2013. Excluding these items we would have had an operating loss of
$6.8 million
and a proforma loss of
$7.6 million
.
Operating loss in the first six months of 2013 of
$33.7 million
included restatement, investigations, and remediation costs of
$21.2 million
, a $3.0 million indirect tax recovery related to multiple years, and restructuring costs of
$1.7 million
. Without these items we would have had an operating loss of
$13.8 million
and a proforma operating loss of
$11.8 million
.
Other income (expense), net
: Other expense in the first six months of 2014 increased
$3.0 million
to
$2.7 million
from income of
$0.3 million
in 2013, primarily related to non-cash foreign exchange gains and losses on intercompany balances.
Income tax provision
: Income tax provision was
$3.4 million
compared to
$1.2 million
in the first six months of 2014 and 2013, respectively. The provision in both periods primarily related to locations outside of the United States.
Results of Operations by Segment (Q2 2014 YTD vs. Q2 2013 YTD)
Staffing Services
Net revenue
: The segment’s net revenue in the first six months of fiscal 2014
decreased
$152.1 million
to
$799.0 million
from
$951.1 million
in fiscal 2013, and proforma net revenue
decreased
$149.6 million
, or
15.8%
, to
$798.5 million
from
$948.1 million
in 2013. This
decrease
is due to fewer contingent workers on assignment primarily at our largest enterprise customers where current demand levels are lower than in the prior year, 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, and with respect to GAAP results
$2.5 million
higher net staffing Unrecognized Revenue.
Direct cost of staffing services revenue
: The segment's direct cost of Staffing Services revenue in the first six months of 2014
decreased
$137.7 million
, or
16.7%
, to
$687.4 million
from
$825.1 million
in 2013. This
decrease
was primarily the result of fewer contingent staff on assignment, 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
14.0%
and
13.9%
from
13.2%
and
13.0%
in 2013, respectively. The direct and proforma margin percentage
increased
by
0.9%
primarily due to
higher
traditional staffing margins. This
increase
was offset by a
0.1%
decrease in the GAAP direct margin percentage due to higher net staffing Unrecognized Revenue in the first six months of fiscal 2014 from 2013.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the first six months of 2014
decreased
$12.6 million
, or
10.5%
, to
$107.4 million
from
$120.0 million
in 2013 primarily due to $15.9 million lower traditional staffing recruiting and indirect costs in response to the lower revenue and restructuring and $2.8 million lower vendor management system development costs resulting from the divestiture of Procurestaff in the first quarter of 2014. As a percent of staffing revenue and proforma staffing revenue in the first six months of 2014 these costs were
13.4%
and
13.5%
from
12.6%
and
12.7%
in 2013, respectively. The first quarter of 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
decrease
d
$15.6 million
, or
12.7%
.
Restructuring costs
: Restructuring costs in the first six months of 2014 were primarily comprised of workforce reductions resulting from our divestiture of Procurestaff and our traditional staffing restructuring and lower revenue. Restructuring costs in the first six months of 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
: The segment’s operating income in the first six months of 2014
decreased
by
$2.6 million
to
$2.9 million
from
$5.5 million
in 2013, and proforma operating income
decreased
$0.1 million
to
$2.4 million
from
$2.5 million
in 2013. The decrease in operating income is primarily due to lower direct margins of
$14.4 million
(
$11.9 million
proforma) and a $3.0 million indirect tax recovery in 2013 related to multiple years, partially offset by a
decrease
in selling, administrative and other operating costs of
$15.6 million
from the reorganization of our North American staffing operations and in response to the decline in traditional staffing revenues. Without the 2013 indirect tax recovery, operating income in the first six months would have been an increase of
$0.4 million
and proforma operating income an increase of
$2.9 million
.
Computer Systems
Net revenue
: The segment’s net revenue in the first six months of fiscal 2014
decreased
$8.1 million
, or
20.7%
, to
$30.9 million
from
$39.0 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, approximately 23% lower transaction volumes, and lower pricing and maintenance levels.
Cost of other revenue
: The segment’s cost of other revenue in the first six months of 2014
decreased
$6.9 million
, or
19.7%
, to
$27.7 million
from
$34.6 million
in 2013. This
decrease
was primarily a result of $7.9 million lower delivery costs in response to lower directory assistance revenue, while costs of our call center software (“OnDemand”) increased slightly and continued at negative margins.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs in the first six months of 2014
decreased
$1.4 million
, or
11.8%
, to
$10.2 million
from
$11.6 million
in 2013. This
decrease
resulted primarily from $1.9 million lower administrative costs in response to decreased business levels offset by $0.8 million higher selling costs as we increased efforts to sell our full-featured call center software ("OnDemand").
Restructuring costs
: Restructuring costs in the first six months of 2014 was comprised of workforce reduction severance costs in response to lower revenue. Restructuring costs in the first six months of 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 six months of 2014
decreased
$0.7 million
, or
8.8%
, to
$8.1 million
from
$8.8 million
in 2013. This decrease was primarily from lower revenues and related lower costs, offset by our increased sales efforts related to our full-featured call center software ("OnDemand").
Other
Net revenue
: The segment’s net revenue in the first six months of fiscal 2014
increased
$8.8 million
, to
$58.7 million
from
$49.9 million
in fiscal 2013, and proforma net revenue increased by
$3.6 million
, or
6.5%
, to
$58.5 million
from
$54.9 million
in 2013. The
increase
is primarily due to information technology infrastructure services including a $5.0 million deferral of revenue in the first six months of 2013, and by new customers and to a lesser extent from net expanded business with existing customers.
Cost of other revenue
: The segment’s cost of other revenue in the first six months of 2014
increased
$3.1 million
, or
6.9%
, to
$48.2 million
from
$45.1 million
in 2013. The
increase
is primarily in response to higher information technology infrastructure services volume.
Selling, administrative and other operating costs
: The segment’s selling, administrative and other operating costs remained consistent at
$9.1 million
in the first six months of 2014 and 2013.
Segment operating income (loss)
: The segment’s operating results in the first six months of 2014
increased
$5.8 million
to income of
$1.2 million
from a loss of
$4.6 million
in 2013, and proforma operating income increased $0.5 million to $1.0 million from $0.5 million in 2013, primarily due to increased information technology infrastructure services at similar margins.
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:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(in thousands)
|
May 4, 2014
|
|
April 28, 2013
|
Net cash provided by (used in) operating activities
|
$
|
21,181
|
|
|
$
|
(389
|
)
|
Net cash provided by (used in) investing activities
|
1,086
|
|
|
(3,885
|
)
|
Net cash provided by (used in) financing activities
|
(17,033
|
)
|
|
13,888
|
|
Effect of exchange rate changes on cash and cash equivalents
|
204
|
|
|
(187
|
)
|
Net increase in cash and cash equivalents
|
$
|
5,438
|
|
|
$
|
9,427
|
|
Cash Flows - Operating Activities
The net cash provided by operating activities in the six months ended May 4, 2014 was
$21.2 million
(
$25.4 million
provided by operating activities offset by
$4.2 million
in connection with the restatement, investigations and remediation costs), an
increase
of
$21.6 million
from net cash used in operating activities of
$0.4 million
(
$23.1 million
provided by operating activities offset by
$23.5 million
in connection with the restatement, investigations and remediation costs) in 2013.
The net cash used in operating activities in the six months ended May 4, 2014, exclusive of changes in operating assets and liabilities was
$10.2 million
; the net loss of
$20.6 million
included non-cash charges for depreciation and amortization of
$7.0 million
, unrealized foreign exchange loss of
$1.8 million
and deferred taxes of $1.4 million. The cash used in operating activities in the six months ended April 28, 2013, exclusive of changes in operating assets and liabilities was
$29.8 million
; the net loss of
$34.6 million
included non-cash charges for depreciation and amortization of
$7.8 million
, offset by a deferred income tax benefit of
$2.0 million
and unrealized foreign currency exchange gain of
$1.5 million
. Cash provided by changes in operating assets and liabilities in the six months ended May 4, 2014 was
$31.4 million
, net, principally due to the decrease in the level of accounts receivable of
$41.0 million
and prepaid insurance and other assets of
$7.2 million
, offset by decreases in the level of accrued expenses of
$12.9 million
and accounts payable of
$3.9 million
. Cash provided by changes in operating assets and liabilities in the six months ended April 28, 2013 was
$29.4 million
, net, principally due to the decrease in the level of accounts receivable of
$41.7 million
and restricted cash related to customer contracts of
$8.1 million
, offset by decreases in accounts payable of
$10.5 million
, prepaid insurance and other assets of
$8.0 million
and income taxes of
$4.3 million
.
Cash Flows - Investing Activities
The net cash provided by investing activities in the first six months of fiscal 2014 was
$1.1 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
$2.6 million
. The net cash used in investing activities in the first six months of fiscal 2013 was
$3.9 million
, principally from the purchase of property, equipment and software of
$4.2 million
.
Cash Flows - Financing Activities
The net cash used in financing activities in the six months ended May 4, 2014 was
$17.0 million
, compared to net cash provided of
$13.9 million
in the six months ended April 28, 2013. In 2014, net repayments of borrowings for the accounts receivable securitization program and other borrowing totaled
$19.6 million
compared to a net increase in borrowings of
$10.0 million
in 2013.
LIQUIDITY AND CAPITAL RESOURCES
Credit Markets and Availability of Credit
At May 4, 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 May 4, 2014, we had total outstanding short-term borrowings of $147.5 million and were required to maintain $28.8 million in cash collateral. At May 4, 2014, the available borrowing under the short-term borrowing facilities included $18.2 million under the Short-Term Financing Program and $22.5 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 May 4, 2014, we were in compliance with the program covenants.
At May 4, 2014 and November 3, 2013, we had outstanding borrowing under the program of $125.0 million and $142.0 million, respectively, which bore a weighted average annual interest rate of 1.6% during the first six months of 2014 and 2013, 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 May 4, 2014, we were in compliance with the facility covenants.
At May 4, 2014 and November 3, 2013, we had drawn under the facility $22.5 million and $22.3 million, respectively, in various currencies used to hedge our net investment in certain foreign subsidiaries. During the first six months of fiscal 2014 and 2013, borrowings bore a weighted average annual interest rate of 1.9% and 2.0%, respectively, inclusive of the facility fee.