| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | (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 Company’s 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
Revenue
Recognition
The Supply
Chain business’ 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
Company’s 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.
IWCO
recognizes revenue for the majority of its products upon the
transfer of title and risk of ownership, which is generally upon
the delivery of the product to the United States Postal Service
(“USPS”). IWCO does not have contractual purchase
commitments from customers. IWCO receives purchase orders for all
customer transactions and prices each order based upon the
customer’s most recently agreed to pricing grid/rate
card.
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 Company’s shipping terms vary by
client and can include FOB shipping point, which means that risk of
loss passes to the client when it is shipped from the
Company’s location, as well as other terms such
as ex-works,
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
Company’s e-Business
The Company
applies the guidance of Accounting Standards Codification
(“ASC”) 605-25
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company’s 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 customer’s 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 Company’s 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, July 31,
(In
thousands)
Cash and bank
deposits $ 44,952 $ 24,987
Money market
funds 47,186 85,683
$ 92,138 $ 110,670
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. We believe that the carrying value of our long-term
debt approximates fair value because the stated interest rates of
this debt is consistent with current market rates. The carrying
value of capital lease obligations approximates fair value, as
estimated by using discounted future cash flows based on the
Company’s current incremental borrowing rates for similar
types of borrowing arrangements. The fair values of the
Company’s Trading Securities are estimated using quoted
market prices. The fair value of the Company’s Notes
payable is $66.7 million as of July 31, 2018, 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 debt liabilities to us. The fair value of the Notes
payable could vary each period based on fluctuations in market
interest rates, the Company’s stock price, as well as changes
to the Company’s 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 Company’s
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 available-for-sale
The Company
maintained interests in a small number of privately held companies
primarily through its various venture capital funds. The
Company’s 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 Company’s
interest is less than 20% and which are not classified
as available-for-sale
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 investment’s 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 data may
vary. Based on the Company’s evaluation, it recorded
impairment charges related to its investments in privately held
companies of approximately $42 thousand for the fiscal year
ended July 31, 2016. These impairment losses are reflected in
“Impairment of investments in affiliates” in the
Company’s 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 investee’s
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 client’s
customer funds to the Company’s clients. These funds are
classified as a current asset and a corresponding other current
liability on the Company’s Consolidated Balance
Sheets.
Inventory
We value the
inventory at the lower of cost or net realizable value. Cost is
determined by both moving averages and
the first-in, first-out
IWCO’s
inventory consists primarily of raw material (paper) used to
produce direct mail packages and work-in-process, “step-up” work-in-process non-cash
Inventories
consisted of the following:
July
31, 2018 July
31, 2017
(In
thousands)
Raw materials $ 23,208 $ 31,071
Work-in-process 16,147 713
Finished goods 8,431 2,585
$ 47,786 $ 34,369
Business
Combinations and Valuation of Goodwill and Other Acquired
Intangible Assets
We allocate
the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed, and intangible assets acquired based
on their estimated fair values. The excess of the fair value of
purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. Such valuations
require management to make significant estimates and assumptions,
especially with respect to intangible assets. Significant estimates
in valuing certain intangible assets may include, but are not
limited to, future expected cash flows, acquired technology and
tradenames, useful lives, and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable
and, as a result, actual results may differ from estimates. During
the measurement period, which is not to exceed one year from the
acquisition date, we may record adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill.
Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to earnings.
Accounting
for Impairment of 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 asset’s
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 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.
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 Company’s policy is to perform its annual
impairment testing for its reporting units on July 31, of each
fiscal year.
Acquired
finite-lived intangible assets are amortized over their estimated
useful lives. We evaluate the recoverability of our intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of such assets may not be
recoverable. The evaluation is performed at the lowest level for
which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities. If the carrying amount of
property and equipment and intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair
value.
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
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 7 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 company’s
financial statements. ASC Topic 740 prescribes a recognition
threshold of more-likely-than-not,
Earnings
(Loss) Per Share
The following
table reconciles earnings (loss) per share for the fiscal years
ended July 31, 2018, 2017 and 2016.
Twelve Months
Ended
July
31,
2018 2017 2016
(In thousands, except
per share data)
Net income
(loss) $ 36,715 $ (25,827 ) $ (61,281 )
Less: Preferred dividends
on redeemable preferred stock (1,335 ) — —
Net income (loss)
attributable to common stockholders 35,380 (25,827 ) (61,281 )
Effect of dilutive
securities:
5.25% Convertible Senior
Notes 7,079 — —
Redeemable preferred
stock 1,335 — —
Net income (loss)
attributable to common stockholders after assumed
conversions $ 43,794 $ (25,827 ) $ (61,281 )
Weighted average common
shares outstanding 59,179 55,134 51,934
Weighted average common
equivalent shares arising from dilutive stock options, restricted
stock, convertible notes and convertible preferred stock 22,720 — —
Weighted average number
of common and potential common shares 81,899 55,134 51,934
Basic net earning (loss)
per share attributable to common stockholders: $ 0.60 $ (0.47 ) $ (1.18 )
Diluted net earning
(loss) per share attributable to common stockholders: $ 0.53 $ (0.47 ) $ (1.18 )
Approximately
0.5 million, 14.2 million and 21.1 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, 2018, 2017 and 2016,
respectively. The common stock equivalent shares excluded during
the year ended July 31, 2018 were primarily excluded as the
options were out-of-the-money. if-converted
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 Company’s 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 Company’s
determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by the
Company’s stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables
include, but are not limited to the Company’s 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, 2018, 2017 and 2016, the
Company’s 10 largest clients accounted for approximately 44%,
70% and 71% of consolidated net revenue, respectively. No clients
accounted for more than 10% of the Company’s consolidated net
revenue for the fiscal year ended July 31, 2018. No clients
accounted for greater than 10% of the Company’s Net Accounts
Receivable balance as of July 31, 2018. A computing market
client accounted for approximately 13% and 3% of the
Company’s Net Accounts Receivable balance as of July 31,
2017 and 2016, respectively. A consumer electronics client
accounted for approximately 11% and 16% of the Company’s 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 Company’s 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 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 Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue
The standard
allows two methods of adoption: (i) retrospectively to each
prior period presented (“full retrospective method”),
or (ii) retrospectively with the cumulative effect recognized
in retained earnings as of the date of adoption (“modified
retrospective method”). The Company will adopt the new
standard using the modified retrospective method at the beginning
of its first quarter of fiscal 2019.
The Company
and its outside consultants has substantially completed the process
of evaluating the potential effects on the consolidated financial
statements and establishing new accounting policies and internal
controls necessary to support the requirements of the new standard.
Based on the analysis to date, the Company has identified the
following potential impacts:
•
ModusLink’s revenue primarily comes from the sale of
supply chain management services to its clients. Amounts billed to
customers under these arrangements include revenue attributable to
the services performed as well as for materials procured on the
customer’s behalf as part of its service to them. Under
existing guidance, revenue was recognized for services when the
services were performed and for product sales when the products
were shipped or in certain cases when products were completed and
title had transferred, if the client had also contracted with us
for warehousing and/or logistics services for a separate fee,
assuming all other applicable revenue recognition criteria were
met.
Under the new
standard, the majority of our arrangements will consist of two
distinct performance obligations (i.e., a warehousing/inventory
management service and a separate kitting/packaging/assembly
service), each of which will be recognized over time as services
are performed using an input method based on the level of efforts
expended. For the majority of the Company’s contracts under
which the Company previously recognized revenue for services when
the services were performed, the Company does not expect a material
change in the manner and timing of revenue recognition as the input
method corresponds with the transfer of value to the customer under
the previous standard. However, for the limited population of
contracts where the Company previously recognized revenues upon
completion of all services and historically recognized revenue at a
point in time (generally upon product shipment), the timing of
revenue recognition will change in comparison to existing guidance
as the Company’s performance enhances assets that the
customer controls.
The Company
has estimated that the impact of this change in the manner and
timing of revenue recognition will result in an estimated increase
to retained earnings of approximately $1.0 million to
$2.0 million and the recording of an unbilled asset in the
same amount. The Company is currently refining this estimate and
will record in the Company’s first quarter report on
Form 10-Q.
•
We also recognize revenue from the sale of software in
the Company’s e-Business operations.
The Company
has determined that it does not have any in process perpetual
license arrangements at the date of adoption, as the balances at
July 31, 2018 relate to maintenance renewal periods only. The
Company did not identify any changes to the timing and manner of
revenue recognition related to software contracts where the only
performance obligation is the provision of software
maintenance.
•
IWCO’s revenue is generated through the provision of
data-driven marketing solutions, primarily through providing direct
mail products to customers. Revenue recognized related to
IWCO’s marketing solutions offerings, which typically consist
of a single integrated performance obligation, was recognized at a
point in time when the products were complete under existing
guidance. Under the new standard, the majority of IWCO’s
marketing solutions contracts will be recognized over time as the
Company performs because the products have no alternative use to
the Company and the Company has an enforceable right to payment for
performance completed to date.
The Company
has estimated that the impact of this change in the manner and
timing of revenue recognition will result in an estimated
adjustment to retained earnings of approximately $4.5 million
to $6.0 million and the recording of an unbilled asset in the
same amount. The Company is currently refining this estimate and
will record in the Company’s first quarter report on
Form 10-Q.
In addition,
the new standard will require incremental contract acquisition
costs (such as certain sales commissions) for customer contracts to
be capitalized and amortized on a systematic basis that is
consistent with the transfer to the customer of the goods or
services to which the sales commissions or other costs relate.
Currently, these costs are expensed as incurred. The Company has
identified certain commissions programs where it expects that
incremental costs will be capitalized and recognized over a period
of greater than one year. As of the date of adoption, the total
commission expense that has been incurred under the commissions
programs that have been identified by the Company is not material
and the Company does not expect to record an adjustment for
commissions at the date of adoption.
The Company
will be required to record cumulative effect adjustments to
retained earnings (net of tax) upon adopting the new standard as of
the fiscal year commencing August 1, 2018. The most
significant of these adjustments will be to establish an asset and
increase retained earnings related to the ModusLink supply chain
management services contracts and IWCO marketing solutions
contracts as noted above, given the changes to the manner and
timing of revenue recognition upon adoption. The Company has not
identified any other material adjustments that would need to be
recorded at the time of adoption. Currently, the Company expects
the cumulative effect adjustment to be within the range of
$5.5 million to $8.0 million. The Company expects to
finalize its estimates and record the cumulative effect adjustment
for inclusion in the Company’s first quarter report on
Form 10-Q.
In addition,
the Company has determined the adoption of the standard will result
in several additional disclosures, including but not limited to
additional information around performance obligations, the timing
of revenue recognition, remaining performance obligations at period
end, contract assets and liabilities and significant judgments made
that impact the amount and timing of revenue from our contracts
with customers. These additional disclosures will be included in
the Company’s first quarter report on
Form 10-Q.
This
discussion of the expected effects of the Company’s adoption
of ASC 606 represents management’s best estimates of the
effects of adopting ASC 606 at the time of the preparation of this
Annual Report on Form 10-K.
In August
2014, the FASB issued ASU No. 2014-15 205-40),
In July 2015,
the FASB issued ASU No. 2015-11,
In February
2016, the FASB issued ASU No. 2016-02,
In March
2016, the FASB issued ASU No. 2016-09,
In November
2016, the FASB issued ASU No. 2016-18,
In March
2017, the FASB issued ASU No. 2017-07, non-operating |
