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| SRT > SEC Filings for SRT > Form 10-Q on 6-Nov-2012 | All Recent SEC Filings |
6-Nov-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", "our" or "we" refers to StarTek, Inc. and its 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 approximately 10,000 employees, whom we refer to as Brand Warriors, who have been committed to making a positive impact on our clients' business results for over 25 years. Our company mission is to enable and empower our employees 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 expect to 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 clients' 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 clients' needs, and
- broaden our service offerings by providing more innovative and technology-enabled solutions.
Over the past several years, we have closed and opened several operating centers which has changed the way in which management and our chief operating decision maker evaluate performance and allocate resources. As a result, during the quarter ended March 31, 2012, we revised our business segments, consistent with our management of the business and internal financial reporting structure. Specifically, 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 September 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 facility 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 NINE MONTHS ENDED SEPTEMBER 30, 2012
Jonesboro, Arkansas and Decatur, Illinois
In February 2012, we received written customer notifications that they would be reducing business in our Jonesboro, Arkansas and Decatur, Illinois facilities. The reductions resulted in approximately $15.1 million less revenue during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, and decreased gross profit by $2.3 million, compared to 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 have successfully secured new business for the Jonesboro facility. However, we are not pursuing new business for the Decatur facility and consequently have recorded a $0.5 million restructuring reserve in the second quarter of 2012.
Enid, Oklahoma
As of September 30, 2012, we 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 no adjustment was made to the net book value and we have reclassified $0.9 million to assets held for sale.
Regina, Saskatchewan
During the third quarter of 2012, we recorded an additional $0.7 million restructuring reserve for a location closed in the second quarter of 2010. This additional reserve was required due to the reassessment of early lease termination timing. The reserve now reflects our lease obligation through the first quarter of 2013. Even though the lease expires July 31, 2013, management believes the probability is high that early termination will occur prior to first quarter of 2013.
Grand Junction, Colorado
During the third quarter of 2012, we transitioned from one facility to another facility previously occupied. This move resulted in the reversal of a portion of a restructuring reserve recorded in the fourth quarter of 2010 related to the Grand Junction, Colorado facility that has been re-opened.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 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 September 30, 2011 was a $1.6 million increase to cost of services and a corresponding decrease to selling, general and administrative expenses ($1.0 million Domestic segment, $0.5 million Asia Pacific segment and $0.1 million Latin America segment).
The following table presents selected items from our Condensed Consolidated Statements of Comprehensive Loss in thousands of dollars and as a percentage of revenue for the periods indicated.
Three Months Three Months Q3 2011
Ended September % of Ended September % of to Q3
30 , 2012 Revenue 30 , 2011 Revenue 2012
Revenue $ 47,675 100.0 % $ 51,701 100.0 % -7.8%
Cost of services 41,575 87.2 % 49,591 95.9 % -16.2%
Gross profit 6,100 12.8 % 2,110 4.1 % 189.1%
Selling, general
and
administrative
expenses 6,924 14.5 % 8,636 16.7 % -19.8%
Impairment losses
and restructuring
charges 533 1.1 % 291 0.6 % 83.2%
Operating loss (1,357 ) -2.8 % (6,817 ) -13.2 % NM
Net interest and
other income 108 0.2 % 5 0.0 % NM
Loss before
income taxes (1,249 ) -2.6 % (6,812 ) -13.2 % NM
Income tax
(expense )
benefit 20 0.0 % 17 0.0 % NM
Net loss $ (1,229 ) -2.6 % $ (6,795 ) -13.1 % 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,
2012 2011
(in 000s) (% of Total) (in 000s) (% of Total)
Domestic:
Revenue $ 23,106 48.5 % $ 35,201 68.1 %
Cost of services 21,220 51.0 % 34,244 69.1 %
Gross profit $ 1,886 30.9 % $ 957 45.4 %
Gross profit % 8.2 % 2.7 %
Asia Pacific:
Revenue $ 19,818 41.6 % $ 14,300 27.7 %
Cost of services 15,569 37.4 % 12,438 25.1 %
Gross profit $ 4,249 69.7 % $ 1,862 88.2 %
Gross profit % 21.4 % 13.0 %
Latin America:
Revenue $ 4,751 10.0 % $ 2,200 4.3 %
Cost of services 4,786 11.5 % 2,909 5.9 %
Gross profit $ (35 ) -0.6 % $ (709 ) -33.6 %
Gross profit % -0.7 % -32.2 %
Total:
Revenue $ 47,675 100.0 % $ 51,701 100.0 %
Cost of services 41,575 100.0 % 49,591 100.0 %
Gross profit $ 6,100 100.0 % $ 2,110 100.0 %
Gross profit % 12.8 % 4.1 %
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Revenue
Revenue decreased by $4.0 million, or 7.8%, from $51.7 million in the third quarter of 2011 to $47.7 million in the third quarter of 2012. The decrease was driven by a $12.1 million decline in revenue in our Domestic segment. Of that decrease, approximately $9.8 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 $0.5 million less revenue in the third quarter of 2012, compared to the third quarter of 2011. The ramp-down of business in our Jonesboro, Arkansas facility resulted in $3.0 million less revenue in the third quarter of 2012, compared to the third quarter of 2011. These reductions were partially offset by growth in two domestic locations driven by higher volumes received from our largest client. Revenue in our Asia Pacific segment increased by $5.5 million in the third quarter of 2012, compared to the third 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 43% in the third quarter of 2012, compared to the third quarter of 2011. Revenue in our Latin America segment increased by $2.6 million in the third quarter of 2012, compared to the third 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 138% in the third quarter of 2012, compared to the third quarter of 2011. Our client base was more diversified during the quarter ended September 30, 2012, compared to the quarter ended September 30, 2011, as the growth in Asia Pacific and Latin America was fueled by higher call volumes from two clients who have not historically been among our largest clients, which was more than offset by lower call volumes domestically from our largest client.
Cost of Services and Gross Profit
Cost of services declined $8.0 million, or 16.2%, from $49.6 million in the third quarter of 2011 to $41.6 million in the third quarter of 2012. Gross profit as a percentage of revenue increased from 4.1% in the third quarter of 2011 to12.8% in the third quarter of 2012. Domestic cost of services decreased by approximately $13.0 million due primarily to a $12.0 million decline related to the site closures and ramp-downs mentioned above as well as improved efficiencies in existing domestic locations. Domestic gross profit as a percentage of revenue increased from 2.7% in the third quarter of 2011 to 8.2% in the third quarter of 2012 due to improved performance across several locations. Cost of services in the Asia Pacific segment increased by approximately $3.1 million, or 25.2%. The increase was due to higher cost of services in our Makati and Ortigas, Philippines facilities, compared to the third quarter of 2011, due to new business launches in those facilities. Asia Pacific gross profit as a percentage of revenue increased from 13.0% in the third quarter of 2011 to 21.4% in the third 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 $1.9 million, or 64.5%. 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 (32.2%) to (0.7%) due to the higher FTE and utilization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.7 million, or 19.8%, from $8.6 million in the third quarter of 2011 to $6.9 million in the third quarter of 2012. The decrease in selling, general and administrative expenses was due primarily to decreases in staff related costs of $1.2 million and depreciation of $0.5 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges totaled $0.5 million and $0.3 million for the three months ended September 30, 2012 and 2011, respectively. The $0.5 million of restructuring charges in the third quarter of 2012 in our Domestic segment was related to revised estimates of our expected lease term for our Regina, Saskatchewan site, which was partially offset by the restructuring charge reversal for our Grand Junction, Colorado site that was re-opened in the third quarter of 2012, as previously discussed.
Operating Loss
We reported an operating loss of $1.4 million in the third quarter of 2012 and $6.8 million in the third quarter of 2011. Operating loss as a percentage of revenue was 2.8% for the third quarter of 2012 compared to 13.2% for the third quarter of 2011. The change in operating loss was due to higher gross profit and lower selling, general and administrative expenses, partially offset by higher impairment and restructuring charges in 2012, as previously discussed.
Income Tax
Income tax benefit was negligible for the three months ended September 30, 2012 and 2011 primarily 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 $1.2 million for the third quarter of 2012 and $6.8 million for the third quarter of 2011. The decreased net loss was due to higher gross profit and lower selling, general and administrative expenses, partially offset by higher impairment and restructuring charges in 2012, as previously discussed.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 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 nine months ended September 30, 2011 was a $5.1 million increase to cost of services and a corresponding decrease to selling, general and administrative expenses ($3.8 million Domestic segment, $1.1 million Asia Pacific segment and $0.2 million Latin America segment).
The following table presents selected items from our Condensed Consolidated Statements of Comprehensive Loss in thousands of dollars and as a percentage of revenue for the periods indicated.
Nine Months
Ended Nine Months YTD Sept
September 30, % of Ended September % of 30, 2011
2012 Revenue 30, 2011 Revenue to 2012
Revenue $ 142,955 100.0 % $ 168,350 100.0 % -15.1 %
Cost of services 128,246 89.7 % 156,049 92.7 % -17.8 %
Gross profit 14,709 10.3 % 12,301 7.3 % 19.6 %
Selling, general and
administrative
expenses 22,579 15.8 % 28,013 16.6 % -19.4 %
Impairment losses
and restructuring
charges 4,086 2.9 % 3,563 2.1 % 14.7 %
Operating loss (11,956 ) -8.4 % (19,275 ) -11.4 % NM
Net interest and
other income 295 0.2 % 11 0.0 % NM
Loss before income
taxes (11,661 ) -8.2 % (19,264 ) -11.4 % NM
Income tax (expense)
benefit 22 0.0 % 263 0.2 % NM
Net loss $ (11,639 ) -8.1 % $ (19,001 ) -11.3 % 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,
2012 2011
(in 000s) (% of Total) (in 000s) (% of Total)
Domestic:
Revenue $ 72,066 50.4 % $ 125,850 74.8 %
Cost of services 68,912 53.7 % 115,978 74.3 %
Gross profit $ 3,154 21.4 % $ 9,872 80.3 %
Gross profit % 4.4 % 7.8 %
Asia Pacific:
Revenue $ 58,083 40.6 % $ 37,300 22.2 %
Cost of services 45,811 35.7 % 33,107 21.2 %
Gross profit $ 12,272 83.4 % $ 4,193 34.1 %
Gross profit % 21.1 % 11.2 %
Latin America:
Revenue $ 12,806 9.0 % $ 5,200 3.1 %
Cost of services 13,523 10.5 % 6,964 4.5 %
Gross profit $ (717 ) -4.9 % $ (1,764 ) -14.3 %
Gross profit % -5.6 % -33.9 %
Total:
Revenue $ 142,955 100.0 % $ 168,350 100.0 %
Cost of services 128,246 100.0 % 156,049 100.0 %
Gross profit $ 14,709 100.0 % $ 12,301 100.0 %
Gross profit % 10.3 % 7.3 %
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Revenue
Revenue decreased by $25.4 million, or 15.1%, from $168.4 million in the nine months ended September 30, 2011 to $143.0 million in the nine months ended September 30, 2012. The decrease was driven by a $53.8 million decline in revenue in our Domestic segment. Of that decrease, $36.9 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 $6.6 million less revenue in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The ramp-down of business in our Jonesboro, Arkansas facility resulted in $7.4 million less revenue in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The remaining change in revenue is attributable to decreased business with our largest client. Revenue in our Asia Pacific segment increased by $20.8 million in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The increase was due primarily to the ramp of new business in both Philippines facilities. Revenue in our Latin America segment increased by $7.6 million in the nine months ended September 30, 2012, compared to the nine months ended September 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 nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, as the growth in Asia Pacific and Latin America was fueled by higher call volumes from two clients who have not historically been among our largest clients, which was more than offset by lower call volumes domestically from our largest client.
Cost of Services and Gross Profit
Cost of services declined $27.8 million, or 17.8%, from $156.0 million in the nine months ended September 30, 2011 to $128.2 million in the nine months ended September 30, 2012. Gross profit as a percentage of revenue increased from 7.3% in the nine months ended September 30, 2011 to 10.3% in the nine months ended September 30, 2012. Domestic cost of services decreased by approximately $47.1 million due primarily to a $41.3 million decline related to the site closures and ramp-downs mentioned above. Domestic gross profit as a percentage of revenue decreased from 7.8% in the nine months ended September 30, 2011 to 4.4% in the nine months ended September 30, 2012 due to the site closures and ramp-downs. Cost of services in the Asia Pacific segment increased by approximately $12.7 million, or 38.4%. The increase was due to higher cost of services in our Makati and Ortigas, Philippines facilities, compared to the nine months ended September 30, 2011, due to new business launches in those facilities. Asia Pacific gross profit as a percentage of revenue increased from 11.2% in the nine months ended September 30, 2011 to 21.1% in the nine months ended September 30, 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 $6.6 million, or 94.2%. 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 (33.9%) to (5.6%) due to the higher FTE and utilization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $5.4 million, or 19.4%, from $28.0 million in the nine months ended September 30, 2011 to $22.6 million in the nine months ended September 30, 2012. The decrease in selling, general and administrative expenses was primarily due to a decrease in severance expense of $2.4 million, staff related expense of $1.6 million, legal fees of $1.0 million and depreciation of $0.7 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges totaled $4.0 million and $3.6 million for the nine months ended September 30, 2012 and 2011, respectively. The $4.0 million expense in 2012 consisted of the following activities in our Domestic segment (amounts may not total due to rounding of individual components):
· $3.1 million of impairment losses 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;
· $0.5 million of restructuring charges related to lease, utilities, maintenance, and security expense that will continue to be incurred for the Decatur, Illinois location;
· $0.5 million of restructuring charges related to revised estimates of our expected lease term for our Regina, Saskatchewan site; partially offset by
· a reversal of $0.2 million of restructuring charges related to our Grand Junction, Colorado site that was re-opened in the third quarter of 2012.
Operating Loss
We reported an operating loss of $12.0 million in the nine months ended September 30, 2012 and $19.3 million in the nine months ended September 30, 2011. Operating loss as a percentage of revenue was 8.4% for the nine months ended September 30, 2012 compared to 11.4% for the nine months ended September 30, 2011. The change in operating loss was due to higher gross profit and lower selling, general and administrative expenses, partially offset by higher impairment losses and restructuring charges in 2012, as previously discussed.
Income Tax
Income tax benefit for the nine months ended September 30, 2012 and 2011 was $0.0 million and $0.3 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
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