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| SRT > SEC Filings for SRT > Form 10-Q on 7-Aug-2012 | All Recent SEC Filings |
7-Aug-2012
Quarterly Report
The following discussion and analysis should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q, the Consolidated Financial Statements and related Notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, 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, 2011.
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, Inc. is a global provider of business process outsourcing services with over 9,000 employees, whom we refer to as Brand Warriors, who have been committed to making a positive impact on our clients' business results for 25 years. Our company mission is to enable and empower our Brand Warriors to advance our clients' brands every day to bring value to our stakeholders. We accomplish this by aligning with our clients' business objectives, resulting in a trusted partnership. The StarTek Advantage System is the sum total of our culture, customized solutions, and processes that enhance our clients' customers' experience. The StarTek Advantage System is focused on improving customer experience and reducing total cost of ownership for our clients. StarTek has proven results for the multiple services we provide including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs. We manage programs using a variety of multi-channel customer interaction capabilities including voice, chat, email, IVR and back-office support. StarTek has delivery centers in the U.S., Philippines, Canada, Costa Rica, Honduras and through our StarTek@Home workforce.
We seek to become a valuable partner by helping our clients effectively handle their customers throughout the customer lifecycle. Through this effort we will return value to our stakeholders. Our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused, flexible and responsive to their business needs. In addition, we offer creative industry-based solutions to meet our clients' ever changing business needs. The end result is the delivery of a customer experience which requires little effort by our client's customers. To become a leader in the market, our strategy is to:
- grow our existing client base by deepening and broadening our relationships,
- add new clients and continue to diversify our client base,
- improve the profitability of our business through operational improvements, increased utilization and right-sizing our Domestic operation,
- expand our global delivery platform to meet our client needs, and
- broaden our service offerings by providing more innovative and technology-enabled solutions.
During the quarter ended March 31, 2012, we revised our business segments in order to better align them with our strategic approach to the regions in which our services are rendered. Over the past several years, we have closed and opened several operating centers which have changed the way in which management and our chief operating decision maker evaluate performance and allocate resources. We consolidated our U.S. and Canadian segments into our Domestic segment and created two new segments, Asia Pacific and Latin America, which were previously reported in our Offshore segment. As of June 30, 2012, our Domestic segment included the operations of five facilities in the U.S. and two facilities in Canada. Our Asia Pacific segment included the operations of two facilities in the Philippines and our Latin America segment included one facility in Costa Rica and one in Honduras.
In 2010, 2011 and thus far in 2012, we received lower call volumes in our Domestic facilities, which adversely affected our results. Partially offsetting lower call volumes in North America has been strong demand for our offshore call center services, primarily in our Asia Pacific segment. We have observed that our clients are decreasing the number of agents handling calls by leveraging call disposition technology and there continues to be a shift toward outsourced and offshore providers. While the increased use of call disposition technology has somewhat adversely impacted our 2012 financial results, the shift toward outsourced and offshore providers has positively impacted our business due to our expanded presence in the Philippines, Costa Rica and Honduras. Part of our strategy, as noted above, is to further expand our geographic footprint offshore and near-shore to capitalize on this trend and to diversify geographic risk. We also believe our clients and potential clients are seeking front and back-office business processes to increase operating efficiencies in order to enhance their customer experience. We believe we are positioned to benefit from this trend as we have developed a comprehensive suite of services which includes front and back-office offerings for our clients.
SIGNIFICANT DEVELOPMENTS DURING THE THREE MONTHS ENDED JUNE 30, 2012
Jonesboro, Arkansas and Decatur, Illinois
In February 2012, we received written customer notification that they would be reducing business in our Jonesboro, Arkansas and Decatur, Illinois facilities. The reductions resulted in approximately $5.9 million less revenue during the second quarter of 2012, compared to the second quarter of 2011, and decreased gross profit by $1.1 million, compared to the second quarter of 2011. In the first quarter of 2012, we incurred approximately $3.6 million in impairment losses related to these two facilities as the carrying values of the long-lived assets were not recoverable by future cash flows. We continue to negotiate new business for the Jonesboro facility. However, we do not anticipate securing new business for the Decatur facility and consequently recorded a $0.5 million restructuring reserve in the second quarter of 2012.
Enid, Oklahoma
As of June 30, 2012 we have reclassified the Enid Oklahoma facility as assets held for sale as we have committed to sell the facility. It was determined that the fair market value was greater than the net book value therefore we have reclassed $0.9 million to assets held for sale.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2012 AND JUNE 30, 2011
Effective January 1, 2012, we changed our method of allocating certain site human resource, recruiting and facilities costs, whereby these costs that are directly related to hiring, employment and maintenance at our facilities (not our corporate offices) are now recorded in cost of services rather than selling, general and administrative expenses. We have reclassified 2011 information to conform to this presentation and the effect of the reclassification for the three months ended June 30, 2011 was a $1.8 million increase to cost of services and a corresponding decrease to selling, general and administrative expenses ($1.4 million Domestic segment, $0.3 million Asia Pacific segment and $0.1 million Latin America segment).
The following table presents selected items from our Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) in thousands of dollars and as a percentage of revenue for the periods indicated.
Three Months Three Months % Change Q2
Ended June 30, % of Ended June 30, % of 2011 to Q2
2012 Revenue 2011 Revenue 2012
Revenue $ 44,421 100.0 % $ 57,139 100.0 % -22.3 %
Cost of services 41,150 92.6 % 52,652 92.1 % -21.8 %
Gross profit 3,271 7.4 % 4,487 7.9 % -27.1 %
Selling, general and administrative expenses 7,329 16.5 % 11,380 19.9 % -35.6 %
Impairment losses and restructuring charges 467 1.1 % 3,272 5.7 % -85.7 %
Operating loss (4,525 ) -10.2 % (10,165 ) -17.8 % NM
Net interest and other income 84 0.2 % (12 ) 0.0 % NM
Loss before income taxes (4,441 ) -10.0 % (10,177 ) -17.8 % NM
Income tax expense 163 0.4 % 525 0.9 % NM
Net loss $ (4,278 ) -9.6 % $ (9,652 ) -16.9 % 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 June 30,
2012 2011
(in 000s) (% of Total) (in 000s) (% of Total)
Domestic:
Revenue $ 21,609 48.6 % $ 43,139 75.5 %
Cost of services 21,186 51.5 % 39,197 74.4 %
Gross profit $ 423 12.9 % $ 3,896 86.8 %
Gross profit % 2.0 % 9.0 %
Asia Pacific:
Revenue $ 18,709 42.1 % $ 12,100 21.2 %
Cost of services 15,530 37.7 % 11,102 21.1 %
Gross profit $ 3,179 97.2 % $ 965 21.5 %
Gross profit % 17.0 % 8.0 %
Latin America:
Revenue $ 4,103 9.2 % $ 1,900 3.3 %
Cost of services 4,434 10.8 % 2,353 4.5 %
Gross loss $ (331 ) -10.1 % $ (374 ) -8.3 %
Gross loss % -8.1 % -19.7 %
Total:
Revenue $ 44,421 100.0 % $ 57,139 100.0 %
Cost of services 41,150 100.0 % 52,652 100.0 %
Gross profit $ 3,271 100.0 % $ 4,487 100.0 %
Gross profit % 7.4 % 7.9 %
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Revenue
Revenue decreased by $12.7 million, or 22.3%, from $57.1 million in the second quarter of 2011 to $44.4 million in the second quarter of 2012. The decrease was driven by a $21.5 million decline in revenue in our Domestic segment. Of that decrease, approximately $14.6 million is attributable to four site closures that occurred over the past year in Enid, Oklahoma, Decatur, Illinois, Collinsville, Virginia and Kingston, Ontario. In addition, the downsizing of our facility in Cornwall, Ontario during 2011 resulted in approximately $2.5 million less revenue in the second quarter of 2012, compared to the second quarter of 2011. The ramp-down of business in our Jonesboro, Arkansas facility resulted in $2.9 million less revenue in the second quarter of 2012, compared to the second quarter of 2011. Revenue in our Asia Pacific segment increased by $6.6 million in the second quarter of 2012, compared to the second quarter of 2011. The increase was due primarily to the ramp of new business in both Philippines locations. The total number of Asia Pacific full-time equivalent agents increased by approximately 83% in the second quarter of 2012, compared to the second quarter of 2011. Revenue in our Latin America segment increased by $2.2 million in the second quarter of 2012, compared to the second quarter of 2011. The revenue increase was due to new business in our Honduras location which opened in the fall of 2011, and the ramp-up of additional business in our Costa Rica facility. Full-time equivalent agents ("FTE") in our Latin America segment increased by 226% in the second quarter of 2012, compared to the second quarter of 2011. Our client base was more diversified during the quarter ended June 30, 2012, compared to the quarter ended June 30, 2011, as the growth in Asia Pacific and Latin America was fueled by higher call volumes from two clients, offset by lower call volumes domestically from our largest client.
Cost of Services and Gross Profit
Cost of services declined $11.5 million, or 21.8%, from $52.6 million in the second quarter of 2011 to $41.1 million in the second quarter of 2012. Gross profit as a percentage of revenue decreased from 7.9% in the second quarter of 2011 to 7.4% in the second quarter of 2012. Domestic cost of services decreased by approximately $18.0 million due primarily to a $12.0 million decline related to the site closures and ramp-downs mentioned above. Domestic gross profit as a percentage of revenue decreased from 9.0% in the second quarter of 2011 to 2.0% in the second quarter of 2012 due to the site closures and ramp-downs. Cost of services in the Asia Pacific segment increased by approximately $4.4 million, or 40%. The increase was due to higher cost of services in our Makati and Ortigas facilities, compared to the second quarter of 2011, due to new business launches in those facilities. Asia Pacific gross profit as a percentage of revenue increased from 8.0% in the second quarter of 2011 to 17.0% in the second quarter of 2012. The improvement was due to the higher utilization from the greater number of FTEs serving new business launched over the past year. Cost of services in Latin America increased by approximately $2.1 million, or 88%. The increase was primarily due to the opening of a new facility in Honduras in 2011, as well as an increase in FTE in Costa Rica mentioned above resulting from new business launches. Latin America gross profit as a percentage of revenue increased from (19.7%) to (8.1%) due to the higher FTE and utilization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $4.0 million, or 35.6%, from $11.4 million in the second quarter of 2011 to $7.3 million in the second quarter of 2012. The decrease in selling, general and administrative expenses was due primarily to decreases in severance expense of $2.6 million, legal expenses of $1.0 million and other miscellaneous costs of $0.4 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges totaled $0.5 million and $3.3 million for the three months ended June 30, 2012 and 2011, respectively. The $0.5 million of restructuring charges in the second quarter of 2012 in our Domestic segment was related to lease, utilities, maintenance, and security expense that will continue to be incurred for the Decatur, Illinois location.
Operating Loss
We reported an operating loss of $4.5 million in the second quarter of 2012 and $10.2 million in the second quarter of 2011. Operating loss as a percentage of revenue was (12.0%) for the second quarter of 2012 compared to (17.8%) for the second quarter of 2011. The change in operating loss was due to lower gross profit, lower selling, general and administrative expenses and lower impairment and restructuring charges in 2012, as previously discussed.
Income Tax
Income tax benefit for the three months ended June 30, 2012 and 2011 was $0.2 million and $0.5 million, respectively. The income tax benefit is primarily related to taxable losses from our Canadian operations due to a full valuation allowance recorded on our U.S. deferred tax assets and tax holidays in the Philippines, Costa Rica and Honduras.
Net Loss
Net loss was $4.3 million for the second quarter of 2012 and $9.7 million for the second quarter of 2011. The decreased net loss was due to lower gross profit, lower selling, general and administrative expenses and lower impairment and restructuring charges in 2012, partially offset by lower income tax benefit, as previously discussed.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2012 AND JUNE 30, 2011
Effective January 1, 2012, we changed our method of allocating certain site human resource, recruiting and facilities costs, whereby these costs that are directly related to hiring, employment and maintenance at our facilities (not our corporate offices) are now recorded in cost of services rather than selling, general and administrative expenses. We have reclassified 2011 information to conform to this presentation and the effect of the reclassification for the six months ended June 30, 2011 was a $3.5 million increase to cost of services and a corresponding decrease to selling, general and administrative expenses ($2.7 million Domestic segment, $0.6 million Asia Pacific segment and $0.2 million Latin America segment).
The following table presents selected items from our Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) in thousands of dollars and as a percentage of revenue for the periods indicated.
Six Months Six Months % Change
Ended June 30, % of Ended June 30, % of YTD June 30,
2012 Revenue 2011 Revenue 2011 to 2012
Revenue $ 95,280 214.5 % $ 116,649 204.1 % -18.3 %
Cost of services 86,672 195.1 % 106,455 186.3 % -18.6 %
Gross profit 8,608 19.4 % 10,194 17.8 % -15.6 %
Selling, general and administrative expenses 15,653 35.2 % 19,380 33.9 % -19.2 %
Impairment losses and restructuring charges 3,553 8.0 % 3,272 5.7 % 8.6 %
Operating loss (10,598 ) -23.9 % (12,458 ) -21.8 % NM
Net interest and other income 187 0.4 % 6 0.0 % NM
Loss before income taxes (10,411 ) -23.4 % (12,452 ) -21.8 % NM
Income tax expense 2 0.0 % 246 0.4 % NM
Net loss $ (10,409 ) -23.4 % $ (12,206 ) -21.4 % NM
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The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
For the Six Months Ended June 30,
2012 2011
(in 000s) (% of Total) (in 000s) (% of Total)
Domestic:
Revenue $ 48,960 51.4 % $ 90,649 77.7 %
Cost of services 47,693 55.0 % 81,730 76.8 %
Gross profit $ 1,267 14.7 % $ 8,919 87.5 %
Gross profit % 2.6 % 9.8 %
Asia Pacific:
Revenue $ 38,265 40.2 % $ 23,000 19.7 %
Cost of services 30,242 34.9 % 20,670 19.4 %
Gross profit $ 8,023 93.2 % $ 2,330 22.9 %
Gross profit % 21.0 % 10.1 %
Latin America:
Revenue $ 8,055 8.5 % $ 3,000 2.6 %
Cost of services 8,737 10.1 % 4,055 3.8 %
Gross loss $ (682 ) -7.9 % $ (1,055 ) -10.3 %
Gross loss % -8.5 % -35.2 %
Total:
Revenue $ 95,280 100.0 % $ 116,649 100.0 %
Cost of services 86,672 100.0 % 106,455 100.0 %
Gross profit $ 8,608 100.0 % $ 10,194 100.0 %
Gross profit % 9.0 % 8.7 %
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Revenue
Revenue decreased by $21.4 million, or 18.3%, from $116.6 million in the six months ended June 30, 2011 to $95.3 million in the six months ended June 30, 2012. The decrease was driven by a $41.7 million decline in revenue in our Domestic segment. Of that decrease, $27.0 million is attributable to five site closures that occurred over the past year in Alexandria, Virginia, Collinsville, Virginia, Decatur Illinois, Enid, Oklahoma and Kingston, Ontario. In addition, the downsizing of our facility in Cornwall, Ontario during 2011 resulted in approximately $6.2 million less revenue in the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The ramp-down of business in our Jonesboro, Arkansas facility resulted in $4.4 million less revenue in the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The remaining change in revenue is attributable to decreased business with our largest client. Revenue in our Asia Pacific segment increased by $15.3 million in the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The increase was due to the ramp of new business in both Philippines facilities. Revenue in our Latin America segment increased by $5.1 million in the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The revenue increase was due to new business in our Honduras location, which opened in the fall of 2011, and the ramp-up of additional business in our Costa Rica facility. Our client base was more diversified during the six months ended June 30, 2012, compared to the six months ended June 30, 2011, as the growth in Asia Pacific and Latin America was fueled by higher call volumes from two clients, offset by lower call volumes domestically from our largest client.
Cost of Services and Gross Profit
Cost of services declined $19.8 million, or 18.6%, from $106.5 million in the first half of 2011 to $86.7 million in the first half of 2012. Gross profit as a percentage of revenue increased from 8.7% in the first half of 2011 to 9% in the first half of 2012. Domestic cost of services decreased by approximately $34.0 million due primarily to a $24.1 million decline related to the site closures and ramp-downs mentioned above. Domestic gross profit as a percentage of revenue decreased from 9.8% in the first half of 2011 to 2.6% in the first half of 2012 due to the site closures and ramp-downs. Cost of services in the Asia Pacific segment increased by approximately $9.6 million, or 46%. The increase was due to higher cost of services in our Makati and Ortigas facilities, compared to the first half of 2011, due to new business launches in those facilities. Asia Pacific gross profit as a percentage of revenue increased from 10.1% in the first half of 2011 to 21.0% in the first half of 2012. The improvement was due to the higher utilization as a result of new business launched over the past year. Cost of services in Latin America increased by approximately $4.7 million, or 115%. The increase was primarily due to the opening of a new facility in Honduras in 2011, as well as an increase in FTEs in Costa Rica mentioned above resulting from new business launches. Latin America gross profit as a percentage of revenue increased from (35.2%) to (8.5%) due to the higher FTE and utilization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $3.7 million, or 19.2%, from $19.3 million in the first half of 2011 to $15.7 million in the first half of 2012. The decrease in selling, general and administrative expenses was primarily due to a decrease in severance expense $2.4 million, legal fees of $1.0 million and other miscellaneous costs of $0.3 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges totaled $3.6 million and $3.3 for the six months ended June 30, 2012 and 2011, respectively. We incurred $3.1 million of impairment losses in the first half of 2012 in our Domestic segment related to long-lived assets such as computer equipment, software, equipment and furniture and fixtures for which the future cash flows did not support the carrying value of the assets in our Decatur, Illinois and Jonesboro, Arkansas facilities. Additionally, we incurred $0.5 million of restructuring charges in the first half of 2012 in our Domestic segment related to lease, utilities, maintenance, and security expense that will continue to be incurred for the Decatur, Illinois location.
Operating Loss
We reported an operating loss of $10.6 million in the first half of 2012 and $12.5 million in the first half of 2011. Operating loss as a percentage of revenue was (11.1%) for the first half of 2012 compared to (10.7%) for the first half of 2011. The change in operating loss was due to lower gross profit, lower selling, general and administrative expenses in 2012, as previously discussed.
Income Tax
Income tax benefit for the first half 2012 and 2011 was $0.0 million and $0.2 million, respectively. The income tax benefit is primarily related to taxable losses from our Canadian operations due to a full valuation allowance recorded on our U.S. deferred tax assets and tax holidays in the Philippines, Costa Rica and Honduras.
Net Loss
Net loss was $10.4 million for the first half of 2012 and $12.2 million for the first half of 2011. The decreased net loss was due to lower gross profit, lower selling, general and administrative expenses, and income tax benefit in 2012, as previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2012, working capital totaled $32.0 million and our current ratio was 2.47:1, compared to working capital at December 31, 2011, of $32.8 million and a current ratio of 2.40:1.
We have historically financed our operations, liquidity requirements, capital expenditures, and capacity expansion primarily through cash flows from operations, and to a lesser degree, through various forms of debt and leasing arrangements. In addition to funding basic operations, our primary uses of cash typically relate to capital expenditures to upgrade our existing information technologies and service offerings and investment in our facilities. During the six months ended June 30, 2012 and 2011, we drew and re-paid approximately $10.7 million and $0, respectively. Due to the timing of our collections of large billings with our major customers, we have historically needed to draw on our line of credit for ongoing operating activities.
On February 28, 2012, we terminated our secured line of credit with UMB Bank, which was effective through August 1, 2012, and replaced it with a secured revolving credit facility with Wells Fargo Bank. The Credit Agreement is effective February 28, 2012 through February 28, 2015. The amount that we may borrow under the Credit Agreement is subject to a borrowing base calculation, and has an initial availability of $10 million, with the flexibility to borrow up to $20 million at our option. Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR index plus 2.50% to 3.00% depending on the calculation of the fixed charge coverage ratio, as defined in the Credit Agreement. We granted Wells Fargo a security interest in all of our cash and . . .
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