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| SRT > SEC Filings for SRT > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2008.
Unless otherwise noted in this report, any description of "us" or "we" refers to StarTek, Inc. and our subsidiaries. Financial information in this report is presented in U.S. dollars.
BUSINESS DESCRIPTION AND OVERVIEW
StarTek is a provider of business process outsourcing services to the communications industry. We partner with our clients to meet their business objectives and improve customer retention, increase revenues and reduce costs through an improved customer experience. Our solutions leverage industry knowledge, best business practices, skilled agents, proven operational excellence and flexible technology. The StarTek comprehensive service suite includes customer care, sales support, complex order processing, accounts receivable management, technical support and other industry-specific processes. We operate our business within three reportable segments, based on the geographic regions in which our services are rendered: (1) the U.S., (2) Canada and (3) Offshore. As of September 30, 2009, our U.S. segment included the operations of our thirteen facilities in the U.S.; our Canada segment
included the operations of our five facilities in Canada; and our Offshore segment included the operations of a facility in Makati City, Philippines. As of September 30, 2008, there were fourteen, six and one operating centers in the U.S., Canada and Offshore segments, respectively. We use gross profit as our measure of profit and loss for each business segment and do not allocate selling, general and administrative expenses to our business segments.
We endeavor to achieve site optimization at all of our locations by routinely evaluating site performance. If local economic conditions, prevailing wage rates, local labor pool availability and quality, or other factors, negatively impact the long-term financial viability of a location, management will from time to time make the decision to close a facility. As a result, we may incur impairment losses or restructuring charges in connection with the closure. Likewise, management is continually in pursuit of opportunities to open new locations in economically viable geographic markets, subject to client demand, in order to improve profitability and grow the business.
SIGNIFICANT DEVELOPMENTS DURING THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2009
In February 2009, we closed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions, namely recruiting challenges in this location, which impacted the profitability of the site and management determined it was in our long-term interest to close the location. This closure resulted in approximately $2.5 million and $7.8 million less revenue during the three and nine months ended September 30, 2009, respectively, and increased gross profit by $0.3 million and $0.4 million during the three and nine months ended September 30, 2009, respectively, compared to the comparable periods ended September 30, 2008 due to negative gross profit at this facility in 2008. We also incurred restructuring charges of approximately $4.4 million during the nine months ended September 30, 2009 related to the closure, which is discussed in further detail below.
On February 25, 2009, we entered into an agreement to sell the assets of Domain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc. ("Mr. Stephenson") in exchange for cash of $7.075 million. The assets of Domain.com consist of domain names, trademarks and corporation names. We conducted an auction for the assets and received bids from multiple parties, including Mr. Stephenson. Mr. Stephenson presented the highest bid, which represented the selling price, of $7.075 million and the sale was completed effective February 25, 2009. Mr. Stephenson is one of our co-founders, has managed the Domain.com subsidiary since 2006 and owns approximately 20% of our common shares outstanding. Because the transaction involves a related party, the Audit Committee of our Board of Directors considered and approved the transaction. The results of operations and cash flows of Domain.com have been reported as discontinued operations.
In July 2009, we entered into a lease agreement for the rental of a facility in Heredia, Costa Rica. The lease has an initial term of five years with a tenant option for an additional five years. The facility is approximately 37,000 square feet and we expect to open the facility for operations during the first quarter of 2010. Total lease commitments for the rental of this facility are approximately $4.5 million over the term of the lease.
In August 2009, we entered into an agreement with the landlord at our closed facility in Petersburg, Virginia to buy-out the remaining lease obligation. We closed the facility in December 2008 and recorded restructuring costs associated with the remaining lease obligations at the facility. The original lease was due to expire in 2013. The buy-out was $0.8 million dollars, which was paid in August 2009. There was no impact on our condensed consolidated statements of operations during the period related to the buy-out and we do not expect to incur any additional charges related to the Petersburg closure.
SUBSEQUENT EVENT
In October 2009, we entered into an agreement with the landlord at our closed facility in Hawkesbury, Ontario to buy-out the remaining lease obligation. We closed the facility in August 2007 and recorded restructuring costs associated with the remaining lease obligations at the facility. The original lease was due to expire in 2012. The buy-out was $1.125 million Canadian dollars, which was paid in October 2009. There was no impact on our condensed consolidated statements of operations during the three or nine months ended September 30, 2009 related to the buy-out. We do not expect to incur any additional charges related to the Hawkesbury closure.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008
The following table presents selected items from our Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of revenue for the periods indicated.
% Change
Three Months Ended % of Three Months Ended % of Q3 2008 to
September 30, 2009 Revenue September 30, 2008 Revenue Q3 2009
Revenue $ 72,462 100.0 % $ 68,937 100.0 % 5.1 %
Cost of services 58,988 81.4 % 60,728 88.1 % -2.9 %
Gross profit 13,474 18.6 % 8,209 11.9 % 64.1 %
Selling, general and
administrative expenses 11,084 15.3 % 10,205 14.8 % 8.6 %
Impairment losses and
restructuring charges - 0.0 % 346 0.5 % -100.0 %
Operating income (loss) 2,390 3.3 % (2,342 ) -3.4 % NM
Net interest and other
(expense) income (38 ) -0.1 % (304 ) -0.4 % NM
Income (loss) from
continuing operations
before income taxes 2,352 3.2 % (2,646 ) -3.8 % NM
Income tax expense
(benefit) 557 0.7 % (1,143 ) -1.6 % NM
Net income (loss) from
continuing operations 1,795 2.5 % (1,503 ) -2.2 % NM
Income from discontinued
operations, net of tax - 0.0 % (407 ) -0.6 % -100.0 %
Net income (loss) $ 1,795 2.5 % $ (1,910 ) -2.8 % NM
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The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
For the Three Months Ended September 30,
2009 2008
(in 000s) (% of Total) (in 000s) (% of Total)
United States:
Revenue $ 50,490 69.7 % $ 47,293 68.6 %
Cost of services 40,642 68.9 % 39,818 65.6 %
Gross profit $ 9,848 73.1 % $ 7,475 91.1 %
Gross profit % 19.5 % 15.8 %
Canada:
Revenue $ 18,799 25.9 % $ 21,592 31.3 %
Cost of services 15,399 26.1 % 20,350 33.5 %
Gross profit $ 3,400 25.2 % $ 1,242 15.1 %
Gross profit % 18.1 % 5.8 %
Offshore:
Revenue $ 3,173 4.4 % $ 52 0.1 %
Cost of services 2,947 5.0 % 560 0.9 %
Gross profit $ 226 1.7 % $ (508 ) -6.2 %
Gross profit % 7.1 % -976.9 %
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Revenue
Revenue increased by $3.5 million, or 5.1%, from $68.9 million in the third quarter of 2008 to $72.5 million in the third quarter of 2009. The increase was driven by a $3.2 million increase in revenue in our U.S. segment. Of this increase, $5.6 million was from two new sites that were opened in mid-2008 (Mansfield, Ohio and Jonesboro, Arkansas). In addition, a site that transitioned to a new customer during 2009 contributed approximately $1.7 million of additional revenue in the third quarter of 2009 compared to the third quarter of 2008. These increases were partially offset by $3.2 million less revenue from site closures in Big Spring, Texas and Petersburg, Virginia in August 2008 and December 2008, respectively. The remainder of the offset was driven by decreases in the number of average full-time equivalent agents and utilization at other U.S. locations. In the third quarter of 2009, average full-time equivalent agents decreased by 4.8% from the third quarter of 2008 due to layoffs and hiring freezes in certain locations in order to address certain discrepancies in our hiring practices. The hiring freezes have since been lifted. Revenues in our Canadian segment declined by $2.8 million in the third quarter of 2009 compared to the same period in 2008. Of this decrease, $2.5 million was due to the site closure in Regina, Saskatchewan. The remainder was due to a decline of 6.8% in average full-time equivalent agents at our other Canadian locations. Revenue from our Offshore segment increased from $0.1 million in the third quarter of 2008 to $3.2 million in the third quarter of 2009 from our site in Makati City, Philippines which opened in September 2008 and continues to ramp.
Cost of Services and Gross Profit
Cost of services decreased by $1.7 million, or 2.9%, from $60.7 million in the third quarter of 2008 to $59.0 million in the third quarter of 2009. Cost of services in the U.S. increased by approximately $0.8 million, of which $0.2 million was related to the net addition of new sites year over year, as discussed above. Gross profit as a percentage of revenue in the U.S. increased from 15.8% in the third quarter of 2008 to 19.5% in the third quarter of 2009. This increase was driven by higher utilization, which we define as average full-time equivalent agents divided by available seat capacity, which increased from 65% in the third quarter of 2008 to 77% in the third quarter of 2009. Cost of services in Canada declined by $5.0 million in the third quarter of 2009 from the third quarter of 2008, of which $2.8 million was due to the closure of the facility in Regina, Saskatchewan and $1.9 million was due to improvements in the Canadian to U.S. dollar exchange rate. The remaining decrease in the Canadian segment was due to fewer agents, as described above. Cost of services for our Offshore segment increased by approximately $2.4 million due to the opening of our Makati City, Philippines location.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.9 million, or 8.6%, from $10.2 million in the third quarter of 2008 to $11.1 million in the third quarter of 2009. As a percentage of revenue, selling, general and administrative expenses increased from 14.8% to 15.3%. The increase was driven by an increase of $0.5 million in salary expense and $0.4 million in hiring expense in the third quarter of 2009 compared to the third quarter of 2008 due to investments in personnel in support of growth efforts.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges declined from $0.3 million in the third quarter of 2008 to $0 in the third quarter of 2009. In the third quarter of 2008, we recorded $0.3 million in restructuring charges related to the closure of our Big Spring, Texas location in August 2008. We did not incur any impairment losses or restructuring charges during the third quarter of 2009.
Operating Income (Loss)
We had operating income of $2.4 million during the three months ended September 30, 2009 and an operating loss of $2.3 million during the three months ended September 30, 2008. Operating income (loss) as a percentage of revenue was 3.3% for the three months ended September 30, 2009 compared to (3.4%) for the three months ended September 30, 2008. The increase was a result of higher revenue, lower cost of services and lower impairment and restructuring charges, partially offset by an increase in selling, general and administrative expenses, as discussed previously.
Net Interest and Other (Expense) Income
Net interest and other expense declined to approximately $0.04 million during the third quarter of 2009 from $0.3 million in the third quarter of 2008. The decrease was primarily due to $0.4 million recorded in 2008 for an other-than-temporary impairment of an investment. No such impairments were recorded during the third quarter of 2009. This decrease was partially offset by lower interest and investment income in the third quarter of 2009, compared to the third quarter of 2008, due to fewer investments held during the period.
Income Tax
The quarterly effective tax rate for continuing operations changed from an income tax benefit of $1.1 million, or an effective rate of 43.2%, during the three months ended September 30, 2008, to income tax expense of $0.6 million, or an effective rate of 23.7%, during the three months ended September 30, 2009. The change was due primarily to the effects of work opportunity credits, depending on the amount of income or loss for the respective quarter, which reduced the rate and associated tax expense in 2009 and increased the rate and associated tax benefit in 2008.
Loss from Discontinued Operations, net of tax
Loss from discontinued operations was $0 during the third quarter of 2009 and approximately $0.4 million during the third quarter of 2008. The loss in 2008 was due to the write-off of the principal on a note receivable related to the sale of our supply chain management services platform in December 2005 for which approximately $0.7 million related to the principal of the note receivable, less an associated tax benefit of approximately $0.2 million. This was partially offset by the removal of income from discontinued operations related to the sale of our Domain.com subsidiary in February 2009.
Net Income (Loss)
Net income was $1.8 million for the third quarter of 2009 compared to a net loss of approximately $1.9 million during the third quarter of 2008. The increase in net income was primarily due to higher revenue, lower cost of services, the absence of impairment and restructuring charges and a loss from discontinued operations, partially offset by higher selling, general and administrative expenses, as discussed previously.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008
% change
Nine Months Nine Months YTD Sept.
Ended September % of Ended September % of 30, 2008 to
30, 2009 Revenue 30, 2008 Revenue 2009
Revenue $ 216,463 100.0 % $ 198,987 100.0 % 8.8 %
Cost of services 179,137 82.8 % 173,007 86.9 % 3.5 %
Gross profit 37,326 17.2 % 25,980 13.1 % 43.7 %
Selling, general and
administrative expenses 31,665 14.6 % 30,522 15.3 % 3.7 %
Impairment losses and
restructuring charges 6,437 3.0 % 5,954 3.0 % 8.1 %
Operating loss (776 ) -0.4 % (10,496 ) -5.2 % NM
Net interest and other
(expense) income (216 ) -0.1 % 96 0.0 % NM
Loss from continuing
operations before income
taxes (992 ) -0.5 % (10,400 ) -5.2 % NM
Income tax benefit (126 ) -0.1 % (3,906 ) -2.1 % NM
Net loss from continuing
operations (866 ) -0.4 % (6,494 ) -3.3 % NM
Income (loss) from
discontinued operations,
net of tax 4,640 2.1 % (266 ) -0.1 % NM
Net income (loss) $ 3,774 1.7 % $ (6,760 ) -3.4 % NM
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The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
For the Nine Months Ended September 30,
2009 2008
(in 000s) (% of Total) (in 000s) (% of Total)
United States:
Revenue $ 151,887 70.2 % $ 129,018 64.9 %
Cost of services 123,157 68.8 % 107,298 62.0 %
Gross profit $ 28,730 77.0 % $ 21,720 83.6 %
Gross profit % 18.9 % 16.8 %
Canada:
Revenue $ 57,212 26.4 % $ 69,917 35.1 %
Cost of services 48,798 27.2 % 65,149 37.7 %
Gross profit $ 8,414 22.5 % $ 4,768 18.4 %
Gross profit % 14.7 % 6.8 %
Offshore:
Revenue $ 7,364 3.4 % $ 52 0.0 %
Cost of services 7,182 4.0 % 560 0.3 %
Gross profit $ 182 0.5 % $ (508 ) -2.0 %
Gross profit % 2.5 %
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Revenue
Revenue increased by $17.5 million, or 8.8%, from $199.0 million in the nine months ended September 30, 2008 to $216.5 million in the nine months ended September 30, 2009. The increase was driven by revenues from the U.S. segment and the Offshore segment which increased by $22.9 million and $7.3 million, respectively. The increase in U.S. revenue was due to three new U.S. facilities added in 2008, partially offset by the closure of two U.S. facilities. The net impact of these openings and closures was $14.0 million in additional revenue. U.S. revenue also increased due to the full ramp of a site which transitioned to a new customer and contributed $5.2 million of additional revenue in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The remaining increase of $3.7 million at the remaining U.S. facilities was driven by an increase in the number of average full-time equivalent agents. The offshore facility in Makati City, Philippines opened in September 2008, and as such contributed minimal
revenue during the first nine months of 2008 and contributed $7.4 million in the first nine months of 2009. Revenue from Canada decreased by $12.7 million in the first nine months of 2009 compared to the same period in 2008 due primarily to the closure of our Regina, Saskatchewan facility in February 2009, which had approximately $7.8 million less revenue in the nine months ended September 30, 2009, compared to the same period in 2008. In addition, revenue decreased by approximately $0.9 million due to changes in the foreign exchange rate between the U.S. dollar and Canadian dollar. The remainder of the decrease in the Canadian segment was due to a decrease in the number of average full-time equivalent agents.
Cost of Services and Gross Profit
Cost of services increased by $6.2 million, or 3.6%, from $173.0 million in the nine months ended September 30, 2008 to $179.2 million in the nine months ended September 30, 2009. Cost of services in the U.S. increased by approximately $15.6 million, of which $8.0 million related to the net addition of new sites year over year, as discussed above. Cost of services at our other U.S. facilities also increased during the first nine months of 2009 compared to the first nine months of 2008 due to a greater number of agents, as described above. In addition, cost of services increased by approximately $6.9 million due to the opening of the Makati City, Philippines location. These increases to cost of services were offset by lower cost of services in Canada due in part to the closure of the Regina location, which accounted for $8.2 million of the decrease. Additionally, cost of services decreased by $5.8 million in the first nine months of 2009 compared to the first nine months of 2008 due to a stronger U.S. to Canadian dollar exchange rate. The remaining decrease in the Canadian segment was due to fewer agents, as described above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.1 million, or 3.6%, from $30.5 million in the first nine months of 2008 to $31.6 million in the first nine months of 2009. The increase year-over-year was primarily due to $0.6 million in expense associated with the settlement of the federal securities class action lawsuit, $0.9 million in payroll expense, $0.2 million in other legal expense and $0.2 million in rent expense. These increases were partially offset by declines in depreciation expense of $0.6 million and training expense of $0.2 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges were $6.4 million and $6.0 million for the nine months ended September 30, 2009 and 2008, respectively. Restructuring charges were $4.7 million during the nine months ended September 30, 2009, related primarily to the closure of our Regina, Saskatchewan facility in February 2009 for which we incurred approximately $4.4 million of charges. The costs relate primarily to the building lease costs through the remainder of the lease term, or July 2013. Accrued restructuring costs were valued using a discounted cash flow model and the cash flows consist of the future lease payment obligations required under the lease agreements and property taxes through the remainder of the lease term. We assumed that we could not sublease the vacant facilities for the remainder of the lease term. In the future, if we are able to sublease the facilities, we may be required to record a gain in the Condensed Consolidated Statements of Operations. The remainder of the restructuring charges during the first nine months of 2009 were due to adjustments in our estimated liability for our other restructuring plans. We recorded $1.9 million in restructuring charges in the first nine months of 2008 related to the closure of our Hawkesbury, Ontario facility in 2007 and our Big Spring, Texas facility in August 2008.
We recorded approximately $1.7 million in impairment losses during the first nine months of 2009 due to the impairment of certain long-lived assets for which the carrying value of those assets is not recoverable. These assets are located in a facility for which we are uncertain about our ability to generate future cash flows to support the carrying value of these assets. The long-lived assets include computer and telephone equipment, furniture and fixtures, leasehold improvements and software. We recorded $4.1 million in impairment losses in the first nine months of 2008 due to impairment of certain long-lived assets ($2.3 million in the U.S. segment and $1.8 million in the Canadian segment).
Operating Loss
We incurred operating losses of approximately $0.8 million and $10.5 million for the nine months ended September 30, 2009 and 2008, respectively. Operating loss as a percentage of revenue was (0.4%) for the nine months ended September 30, 2009 compared to (5.2%) for the nine months ended September 30, 2008. The decline in the loss period over period was driven by an increase in revenue in the nine months ended September 30, 2009, partially offset by higher impairment and restructuring charges, cost of services and selling, general and administrative costs, as discussed previously.
Net Interest and Other (Expense) Income
Net interest and other expense was approximately $0.2 million during the first nine months of 2009, compared to net interest and other income of approximately $0.1 million in the first nine months of 2008. The change was due primarily to a decrease in interest and
investment income of approximately $0.9 million in the first nine months of 2009 compared to the first nine months of 2008 due to a decline in our investment balance during these periods, partially offset by less interest expense, which declined by approximately $0.3 million in the first nine months of 2009 compared to the first nine months of 2008. In addition, we recorded approximately $0.4 million related to an other-than-temporary impairment on investments during the first nine months of 2008.
Income Tax
The year-to-date effective tax rate for continuing operations decreased from 37.6% during the nine months ended September 30, 2008 to 12.7% during the nine months ended September 30, 2009. The primary reasons for the decrease to the rate between periods is 1) a larger impact from the change in the Canadian statutory tax rates in 2009 compared to 2008, 2) state income tax expense in . . .
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