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| PRGX > SEC Filings for PRGX > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in the Company's Condensed Consolidated Statements of Operations
(Unaudited) for the periods indicated:
Three Months Ended
March 31,
2009 2008
Revenues 100.0 % 100.0 %
Cost of revenues 66.7 62.7
Gross margin 33.3 37.3
Selling, general and administrative expenses 25.4 26.6
Operating income 7.9 10.7
Interest expense, net 1.7 2.1
Earnings before income taxes 6.2 8.6
Income taxes 1.4 1.2
Net earnings 4.8 % 7.4 %
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Accounts Payable Services
Revenues. Domestic and International Accounts Payable Services revenues for
the three months ended March 31, 2009 and 2008 were as follows (in millions):
2009 2008
Domestic Accounts Payable Services revenue $ 23.3 $ 28.2
International Accounts Payable Services revenue 16.0 20.1
Total Accounts Payable Services revenue $ 39.3 $ 48.3
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Total Accounts Payable Services revenues for the quarter ended March 31, 2009
decreased by $9.0 million, or 18.7%, compared to the quarter ended March 31,
2008.
Domestic Accounts Payable Service revenues decreased by $4.9 million, or
17.6%, in the first quarter of 2009 compared to the first quarter of 2008. The
vast majority of the Company's recovery audit clients are in the retail industry
segment. Thus, the Company's operations are subject to the economic pressures
the retail industry is currently facing. The current economic conditions which
have adversely impacted the U.S. retail industry have negatively impacted the
Company's revenues. Many of the Company's clients' purchases have declined
making it more difficult to offset recovery claims. In addition, the liquidity
of the Company's clients' vendor partners can significantly impact claim
production, the claim approval process and the ability of clients to offset or
otherwise make recoveries from their vendors. Management expects that if the
retail industry economic conditions continue to erode, it could have negative
impacts on Company revenues. Management is also aware of speculation regarding
an increase in retailer bankruptcies, which, if correct, could adversely impact
future revenues. In addition, the 2008 first quarter included a small amount of
revenue earned from the finalization of auditing Medicare payments in California
under the CMS demonstration program and there were no such revenues in the first
quarter of 2009.
Revenues in the International Accounts Payable Services segment for the three
months ended March 31, 2009 decreased by $4.1 million, or 20.1%, compared to the
same period in 2008. The reported international revenues were adversely impacted
by strengthening of the U.S. dollar relative to foreign currencies throughout
the world during the latter half of 2008 and the first quarter of 2009. On a
constant dollar basis adjusted for changes in foreign exchange ("FX") rates,
International Accounts Payable Services revenues increased by 2.4% during the
first quarter of 2009 as compared to the first quarter of 2008.
The Company intends to maximize the value it delivers to its historical base
of clients by identifying and auditing new categories of potential errors. The
Company also intends to increase its emphasis on using its technology and
professional experience to assist its clients in achieving objectives that do
not directly involve recovery of past overpayments. These objectives are related
to such things as transaction accuracy and compliance, managing trade and vendor
promotional programs, purchasing effectiveness, M&A due diligence analysis, and
processing efficiency in the procure-to-pay value chain.
The Company also expects future revenues from its participation as a
subcontractor in three of the Medicare RAC program's four geographic regions;
however, the magnitude of such revenues is not predictable and management does
not expect any revenues in 2009 from its work under the subcontracts.
Cost of Revenues ("COR"). COR consists principally of commissions and other
forms of variable compensation paid or payable to the Company's auditors based
primarily upon the level of overpayment recoveries and/or profit margins derived
therefrom, fixed auditor salaries, compensation paid to various types of hourly
support staff, and salaried operational and client service managers. Also
included in COR are other direct and indirect costs incurred by these personnel,
including office rent, travel and entertainment, telephone, utilities,
maintenance and supplies, clerical assistance, and depreciation. A significant
portion of the components comprising COR is variable and will increase or
decrease with increases and decreases in revenues.
Domestic and International Accounts Payable Services COR for the three months
ended March 31, 2009 and 2008 were as follows (in millions):
2009 2008
Domestic Accounts Payable Services COR $ 14.6 $ 15.7
International Accounts Payable Services COR 11.6 14.6
Total Accounts Payable Services COR $ 26.2 $ 30.3
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COR as a percentage of revenue for Domestic Accounts Payable Services was
62.7% and 55.7% for the three months ended March 31, 2009 and 2008,
respectively. This equates to gross margin percentages of 37.3% and 44.3%,
respectively, for the Domestic Accounts Payable Services segment.
The total Domestic Accounts Payable Services gross margin percentage decline
in the first quarter of 2009 compared to the first quarter of 2008 was partially
attributable to comparable dollar amounts of fixed costs incurred during the
periods while experiencing a decline in revenues in 2009 as described above.
Also negatively impacting COR in the first quarter of 2009 were costs related to
the Company's CMS RAC subcontracts for which there was no revenue in the first
quarter of 2009.
COR as a percentage of revenue for International Accounts Payable Services
was 72.5% and 72.6% for the three months ended March 31, 2009 and 2008,
respectively. This equates to gross margin percentages of 27.5% and 27.4%,
respectively. The reported dollar reduction in International Accounts Payable
Services COR was primarily attributable to the previously discussed change in FX
rates since the first quarter of 2008. COR as a percentage of revenue has
historically, and continues to be, higher in the International Accounts Payable
Services segment compared to the Domestic segment because of differences in the
service delivery models which, in turn, are principally attributable to scale.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses of the
Accounts Payable Services segments include the expenses of sales and marketing
activities, information technology services and allocated corporate data center
costs, human resources, legal, accounting, administration, foreign currency
transaction gains and losses, gains and losses on assets disposals, depreciation
of property and equipment and amortization of intangibles related to the
Accounts Payable Services segments.
Domestic and International Accounts Payable Services SG&A for the three months ended March 31, 2009 and 2008 were as follows (in millions):
2009 2008
Domestic Accounts Payable Services SG&A $ 3.4 $ 4.3
International Accounts Payable Services SG&A 2.8 1.9
Total Accounts Payable Services SG&A $ 6.2 $ 6.2
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Domestic Accounts Payable Services SG&A expenses for the quarter ended
March 31, 2009 decreased by $0.9 million, or 20.9%, from the same period in
2008. Domestic Accounts Payable Services SG&A expenses as a percentage of
revenues for Domestic Accounts Payable were 14.6% and 15.2% for the three months
ended March 31, 2009 and 2008, respectively. This decrease resulted primarily
from the Company's continued focus on managing its expenses. Specifically, the
Company undertook additional reductions in the first quarter 2009 primarily
related to non-auditor compensation and occupancy related costs.
International Accounts Payable Services SG&A includes foreign currency
transaction gains and losses, including the gains and losses related to
intercompany balances. Gains and losses result from the re-translation of the
foreign subsidiaries payable to the U.S. parent from their local currency to
their U.S. dollar equivalent and substantial changes from period to period in FX
rates can significantly impact the amount of such gains and losses. During the
three months ended March 31, 2009, the Company recognized $0.6 million of FX
losses related to intercompany balances as compared to $0.6 million of FX gains
for the same period in 2008.
International Accounts Payable Services SG&A excluding the FX gains and
losses related to intercompany balances decreased by $0.3 million, or 12.0%, for
the three months ended March 31, 2009 compared to the same period in 2008. The
2009 decrease primarily resulted from reductions in professional fees and travel
costs.
Corporate Support
Corporate Support SG&A represents the unallocated portion of SG&A expenses
which are not specifically attributable to Domestic or International Accounts
Payable Services and include the expenses of information technology services,
the corporate data center, human resources, legal, accounting, treasury,
administration, hedging activities and stock-based compensation charges.
Corporate Support SG&A totaled the following for the three months ended
March 31, 2009 and 2008 (in millions):
2009 2008 Corporate Support SG&A $ 3.8 $ 6.6
For the period ended March 31, 2009, total Corporate Support SG&A expenses
decreased by $2.8 million when compared to the same period of 2008. The first
quarter of 2009 includes a negligible net charge of stock-based compensation
expense as compared to $3.0 million of stock-based compensation expense included
in the first quarter of 2008. Excluding the stock-based compensation charges for
both periods, Corporate Support SG&A increased by $0.2 million, or 5.6%, in the
first quarter of 2009 as compared to the same period in 2008.
Other Items
Interest Expense. Net interest expense was $0.7 million and $1.0 million for
the three months ended March 31, 2009 and 2008, respectively. The decrease in
interest expense resulted from the $26.3 million of debt repayments made during
2008. Interest expense in the first quarter of 2009 primarily related to the
term loan under the Company's senior credit facility with an outstanding balance
of $17.8 million as of March 31, 2009.
Income Tax Expense. The Company's effective income tax expense rates as
indicated in the accompanying Condensed Consolidated Financial Statements
(Unaudited) do not reflect amounts that would normally be expected because of
the Company's valuation allowance against its deferred tax assets. Reported
income tax expense for the three month periods ended March 31, 2009 and 2008
primarily results from taxes on income of foreign subsidiaries.
Liquidity and Capital Resources
As of March 31, 2009, the Company had $24.5 million in cash and cash
equivalents and no borrowings under the revolver portion of its credit facility.
The revolver had approximately $15.9 million of calculated availability for
borrowings, however, management does not currently anticipate any borrowings
under the revolver. As of March 31, 2009, the Company was in compliance with all
of its debt covenants.
Operating Activities. Net cash provided by (used in) operating activities was
$0.4 million and $(0.4 million) during the first quarter of 2009 and 2008,
respectively. Significant amounts of cash were generated in both first quarter
periods from operating income after consideration of the charges which do not
necessarily use cash in the same period as the charges are recognized. Such
charges are itemized in the Company's Condensed Consolidated Statements of Cash
Flows included in Item 1 of this Form 10-Q and include depreciation and
amortization and stock-based compensation expense. Operating income, excluding
these charges, decreased by $5.2 million in the first quarter of 2009 compared
to the first quarter of 2008. This decrease was offset by an approximate $5.8
million decreased use of cash related to net changes in assets and liabilities
on the Company's balance sheet. Details of these changes are itemized in the
Company's Condensed Consolidated Statements of Cash Flows included in Item 1 of
this Form 10-Q. The most significant differences between the 2009 and 2008 first
quarter asset and liability changes reflected in the Condensed Consolidated
Statements of Cash Flows relate to the final settlements resulting from the CMS
demonstration project in 2008.
Investing Activities and Depreciation Expense. Depreciation and amortization
expense for the three months ended March 31, 2009 and 2008 amounted to
$1.3 million and $1.4 million, respectively. Net cash used in investing
activities was $0.7 million and $0.4 million during the three months ended
March 31, 2009 and 2008, respectively. Cash used in investing activities for
both periods was solely attributable to capital expenditures. The increase in
capital expenditure spending in the first quarter of 2009 compared to the first
quarter of 2008 was primarily related to investments to upgrade the Company's
information technology infrastructure.
Capital expenditures are discretionary and management currently expects
future capital expenditures to increase over the next several quarters as the
Company continues to enhance its healthcare audit systems in preparation for its
performance of the CMS RAC subcontracts and other healthcare audits. Changes in
operating plans and results could change these expectations.
Financing Activities and Interest Expense. Net cash used in financing
activities was $1.6 million and $22.3 million for the three months ended
March 31, 2009 and 2008, respectively. During the first quarter of 2009, the
Company made a mandatory payment of $1.3 million on its term loan, reduced its
capital lease obligations by $0.1 million and repurchased 78,754 shares of its
outstanding common stock for approximately $0.2 million. During the first
quarter of 2008, the Company reduced the balance of its term loan by
$22.2 million. This amount included $7.2 million of mandatory payments as well
as a voluntary prepayment of $15.0 million. The Company also reduced its capital
lease obligations by $0.1 million during the first quarter of 2008.
Management believes that the Company will have sufficient borrowing capacity
and cash generated from operations to fund its capital and operational needs for
at least the next twelve months; however, current projections reflect that the
Company's core Accounts Payable Services business will continue to decline.
Therefore, the Company must continue to successfully manage its expenses and
grow its other business lines in order to stabilize and increase revenues and
improve profitability.
Secured Credit Facility
In September 2007, the Company entered into an amended and restated credit
facility with Ableco LLC ("Ableco") consisting of a $20 million revolving credit
facility and a $45 million term loan which was funded in October 2007. The
principal portion of the $45 million term loan with Ableco must be repaid in
quarterly installments of $1.25 million each commencing in April 2008. The loan
agreement also requires an annual additional payment contingently payable based
on an excess cash flow calculation as defined in the agreement. During the first
quarter of 2008, the Company reduced the balance on its term loan by
$22.2 million. This reduction included $7.2 million of mandatory payments as
well as a voluntary payment of $15.0 million. During the first quarter of 2008,
the Company entered into an amendment of its credit facility, permitting the
$15.0 million pre-
payment without penalty and increasing the initial borrowing capacity under the
revolver portion of its facility by $10 million.
The Company reduced the balance on its term loan by $1.3 million during the
first quarter of 2009. In March 2009, the Company entered into the second
amendment of its credit facility, lowering certain of the debt covenant
thresholds through March 10, 2010 and revising the borrowing base calculation,
which had the effect of reducing the borrowing capacity under the revolver
portion of the facility by $6.5 million as of March 31, 2009. The borrowing
capacity is reduced over the term of the credit facility and availability is
based on eligible accounts receivable and other factors. Availability under the
revolver at March 31, 2009 was $15.9 million.
The remaining balance of the term loan is due on September 17, 2011. Interest
on the term loan balance is payable monthly and accrues at the Company's option
at either prime plus 2.0% or at LIBOR plus 4.75%, but under either option may
not be less than 9.75%. Interest on outstanding balances under the revolving
credit facility, if any, will accrue at the Company's option at either prime
plus 0.25% or at LIBOR plus 2.25%. The Company must also pay a commitment fee of
0.5% per annum, payable monthly, on the unused portion of the revolving credit
facility. As of March 31, 2009, there were no outstanding borrowings under the
revolving credit facility. The weighted-average interest rates on term loan
balances outstanding under the credit facility during the first quarter 2009 and
2008, including fees, were 11.1% and 10.1%, respectively.
Due to the $15 million voluntary payment made in the first quarter of 2008,
the annual additional contingent payment based on 2008 excess cash flow due in
April 2009 was not required.
The credit facility is guaranteed by each of the Company's direct and
indirect domestic wholly owned subsidiaries and certain of its foreign
subsidiaries and is secured by substantially all of the Company's assets
(including the stock of the Company's domestic subsidiaries and two-thirds of
the stock of certain of the Company's foreign subsidiaries). The credit facility
will mature on September 17, 2011.
Stock Repurchase Program
In February 2008, the Board of Directors of the Company approved a stock
repurchase program. Under the terms of the program, the Company may repurchase
up to $10 million of its common stock from time to time through March 30, 2009.
In March 2009, the Company's Board of Directors extended the stock repurchase
program through March 31, 2010. The second amendment to the Company's secured
credit facility permits the Company to repurchase up to $5.0 million of the
Company's common stock during the period from April 1, 2009 to March 31, 2010.
For the quarter ended March 31, 2009, the Company repurchased 78,754 shares at
an average price of $3.13 for a total purchase price of approximately
$0.2 million. This equates to approximately 0.4% of the then outstanding shares.
2006 Management Incentive Plan
At the annual meeting of shareholders held on August 11, 2006, the
shareholders of the Company approved a proposal granting authorization to issue
up to 2.1 million shares of the Company's common stock under the Company's 2006
Management Incentive Plan ("2006 MIP"). On September 29, 2006, an aggregate of
682,301 Performance Units were awarded under the 2006 MIP to the seven executive
officers of the Company. At Performance Unit settlement dates (which vary by
participant), participants are paid in common stock and in cash. Participants
will receive a number of shares of Company common stock equal to 60% of the
number of Performance Units being paid out, plus a cash payment equal to 40% of
the fair market value of that number of shares of common stock equal to the
number of Performance Units being paid out. On March 28, 2007, an additional
executive officer of the Company was granted 20,000 Performance Units under the
2006 MIP. The awards contain certain anti-dilution and change of control
provisions. Also, the number of Performance Units awarded were automatically
adjusted on a pro-rata basis upon the conversion into common stock of the
Company's senior convertible notes and Series A convertible preferred stock.
During 2006 and 2007, an additional 1,558,557 Performance Units were granted as
a result of this automatic adjustment provision.
All Performance Units must be settled before April 30, 2016. On April 30,
2009, an aggregate of 323,478 Performance Units were settled by six executive
officers. Such settlements resulted in the issuance of 194,084 shares
of common stock and cash payments totaling $0.4 million. As of May 1, 2009,
total Performance Unit awards outstanding are 1,444,243 with an aggregate
intrinsic value of $4.4 million.
Executive Severance Payments
The July 31, 2005 retirements of the Company's former Chairman, President and
CEO, John M. Cook, and the Company's former Vice Chairman, John M. Toma,
resulted in an obligation to pay retirement benefits of approximately
$7.6 million (present value basis) to be paid in monthly cash installments
principally over a three-year period, beginning February 1, 2006. On March 16,
2006, the terms of the applicable severance agreements were amended in
conjunction with the Company's financial restructuring. Pursuant to the terms of
the severance agreements, as amended (1) the Company's obligations to pay
monthly cash installments to Mr. Cook and Mr. Toma were extended from 36 months
to 58 months and from 24 months to 46 months, respectively; however, the total
dollar amount of monthly cash payments to be made to each remained unchanged,
and (2) the Company agreed to pay a fixed sum of $150,000 to defray the fees and
expenses of the legal counsel and financial advisors to Messrs. Cook and Toma.
The original severance agreements, and the severance agreements, as amended,
also provide for an annual reimbursement, beginning on or about February 1,
2007, to Mr. Cook and Mr. Toma for the cost of health insurance for themselves
and their respective spouses (not to exceed $25,000 and $20,000, respectively,
subject to adjustment based on changes in the Consumer Price Index), continuing
until each reaches the age of 80. At March 31, 2009, accrued payroll and related
expenses and noncurrent compensation obligations include $1.4 million and $1.6
million, respectively, related to these obligations.
Off Balance Sheet Arrangements
As of March 31, 2009, the Company did not have any material off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of the SEC's Regulation S-K.
Critical Accounting Policies
The Company's significant accounting policies have been fully described in
Note 1 of Notes to Consolidated Financial Statements of the Company's Annual
Report on Form 10-K for the year ended December 31, 2008. Certain of these
accounting policies are considered "critical" to the portrayal of the Company's
. . .
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