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CVG > SEC Filings for CVG > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for CONVERGYS CORP

Form 10-Q for CONVERGYS CORP


30-Jul-2013

Quarterly Report


MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in Millions Except Per Share Amounts)

BACKGROUND
Convergys Corporation (we, the Company or Convergys) is a global leader in customer management, focused on bringing value to our clients through every customer interaction. Over half of the Fortune 50 companies trust us to care for their most important asset: their customers. Our business model allows us to deliver consistent, quality service at the scale and in the geographies that meet our clients' business needs and pro-actively partner to solve client business challenges through our account management model. We leverage our breadth and depth of capabilities to help leading companies create quality customer experiences across multiple channels, while increasing revenue and reducing their cost to serve.
Operations and Structure
Prior to May 2012, we had two reportable segments, Customer Management and Information Management. In March 2012, we signed a definitive agreement to sell the Information Management line of business to NEC Corporation for $449.0 in cash. The sale closed in May 2012, for which we received $462.6 in cash, including $12.9 for working capital adjustments. As a result of the sale of the Information Management business, the operating results and assets and liabilities related to Information Management have been reflected as discontinued operations for all periods presented. The total gain on the sale of the Information Management business amounted to $99.8 pretax and $16.2, net of taxes, at December 31, 2012. During the three and six months ended June 30, 2013, we recorded an additional gain of $1.4 and loss of $3.7, respectively, net of tax, related to the gain on sale as certain contingencies settled. As of December 31, 2012, we maintained one reportable segment, reflecting the internal financial reporting structure and operating focus of our management team and chief operating decision maker.
On April 30, 2013, we acquired New Zealand-based Datacom's contact center operations with facilities in Kuala Lumpur, Malaysia and Manila, Philippines for $20.0 AUD (approximately 20 USD). The acquisition added 15 Asian languages to Convergys' language capabilities and approximately 1,000 employees, working in three Southeast Asia contact centers, to Convergys' global operations. Convergys handles more than 4 billion customer contacts per year. We have approximately 81,000 employees in over 70 locations across the globe and in our work-at-home environment. We provide multilingual, multichannel customer care with global service delivery infrastructure that operates 24 hours a day, 365 days a year.
Agent-related revenues, which accounted for more than 92% of revenues for the six months ended June 30, 2013, are typically recognized as the services are performed based on staffing hours or the number of contacts handled by service agents using contractual rates. Remaining revenues are derived from the sale of premise-based and hosted automated self-care and technology solutions and provision of professional services. Revenues from the sale of these solutions and provision of services are typically recognized as the services are provided over the duration of the contract using contractual rates. Additional Information
The Company files annual, quarterly and current reports and proxy statements with the SEC. These filings are available to the public over the Internet on the SEC's website at http://www.sec.gov and on the Company's website at http://www.convergys.com. You may also read and copy any document we file with the SEC at its public reference facilities in Washington, D.C. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also inspect reports, proxy statements and other information about Convergys at the offices of the NYSE Euronext, 11 Wall Street, New York, New York 10005.

FORWARD-LOOKING STATEMENTS
This report contains statements, estimates, or projections that constitute "forward-looking statements" as defined under U.S. federal securities laws. In some cases, one can identify forward looking statements by terminology such as "will," "expect," "estimate," "think," "forecast," "guidance," "outlook," "plan," "lead," "project" or other comparable terminology. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks include, but are not limited to: (i) the loss of a significant client or significant business from a client;
(ii) the future financial performance of major industries that we serve; (iii) our inability to protect personally identifiable data against unauthorized access or unintended release; (iv) our inability to maintain and upgrade our technology and network equipment in a timely manner; (v) international business and political risks, including economic weakness and operational disruption as a result of natural events, political unrest, war, terrorist attacks or other civil disruption; (vi) the failure to meet expectations regarding the tax treatment of the Information Management transaction; (vii) higher than


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expected costs of providing transition services and other support to the Information Management business and (viii) those factors contained in our periodic reports filed with the SEC, including in the "Risk Factors" section of our most recent Annual Report on Form 10-K. The forward-looking information in this document is given as of the date of the particular statement and we assume no duty to update this information. Our filings and other important information are also available on the investor relations page of our web site at www.convergys.com.

RESULTS OF OPERATIONS

Revenues
                         Three Months Ended                        Six Months Ended
                              June 30,                                 June 30,
                     2013       2012      Change      %       2013       2012      Change      %
Revenues:
Communications     $ 301.1    $ 295.2    $  5.9       2     $ 593.9    $ 590.4    $  3.5       1
Technology            47.6       42.6       5.0      12        92.2       84.4       7.8       9
Financial Services    45.5       52.5      (7.0 )   (13 )      91.6      105.1     (13.5 )   (13 )
Other                110.1      100.8       9.3       9       220.1      208.7      11.4       5
Total Revenues     $ 504.3    $ 491.1    $ 13.2       3     $ 997.8    $ 988.6    $  9.2       1

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012 Consolidated revenues for the second quarter of 2013 were $504.3 compared to $491.1 for the comparable period last year. Revenues from communications clients increased 2% from the second quarter 2012, reflecting volume increases and new programs with several existing clients, partially offset by volume declines with our largest client. Revenues from technology clients increased 12% from the second quarter of 2012, reflecting new programs with an existing client. Revenues from financial services clients decreased 13% from the second quarter of 2012, primarily reflecting a program completion with one client. Other revenues, which are comprised of clients outside the Company's three largest industries, increased 9% from the second quarter of 2012. This increase is attributable to volume increases and new programs with existing clients. Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Consolidated revenues for the first half of 2013 were $997.8, a 1% increase from the first half of 2012. Revenues from the communications vertical increased 1% from the first half of 2012 reflecting volume increases and new programs with several existing clients, partially offset by volume declines with our largest client. Revenues from the technology vertical increased 9% from the first half of 2012, primarily due to new programs with existing clients. Revenues from the financial services vertical decreased 13% from the first half of 2012, primarily reflecting a program completion with one client. Other revenues, which are comprised of clients outside of the Company's three largest industries, increased 5% from the first half of 2012 due to volume increases and new programs with existing clients.


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Operating Costs and Expenses
                           Three Months Ended                                Six Months Ended
                                June 30,                                         June 30,
                    2013          2012         Change        %        2013         2012        Change       %
Operating Costs:
Cost of
providing
services and
products sold    $   327.3     $   316.5     $    10.8        3     $ 645.5     $   634.2     $  11.3       2
Selling, general
and
administrative       119.9         114.1           5.8        5       234.5         238.8        (4.3 )    (2 )
Research and
development
costs                  2.2           2.5          (0.3 )    (12 )       4.3           6.4        (2.1 )   (33 )
Depreciation          21.2          20.5           0.7        3        42.1          40.8         1.3       3
Amortization           1.4           1.8          (0.4 )    (22 )       2.6           3.7        (1.1 )   (30 )
Restructuring          1.1           7.6          (6.5 )     NM         1.1           7.6        (6.5 )    NM
Asset
impairments            1.1          88.6         (87.5 )     NM         1.1          88.6       (87.5 )    NM
Total costs and
expenses         $   474.2     $   551.6     $   (77.4 )    (14 )   $ 931.2     $ 1,020.1     $ (88.9 )    (9 )

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012 Consolidated total operating costs and expenses for the second quarter of 2013 of $474.2 decreased 14% from $551.6. Total operating costs and expenses for the three months ended 2013 include a $7.5 non-cash pension settlement charge, included with Selling, general and administrative costs. Based upon changes in the funded status of the plan, the restriction that previously limited retirees to receiving only 50% of their asset value through lump sum distributions was lifted. Therefore, in 2013, retirees are eligible to request remaining balances. As we exceeded the threshold of lump sum payments to recognize a settlement charge in the second quarter of 2013, additional settlement charges may be recognized in subsequent quarters of 2013 as additional lump sum payments are made. Second quarter 2013 also includes $1.1 of asset impairment charges related to the adjustment to fair value less costs to sell two facilities classified as held-for-sale as of June 30, 2013 and $1.1 of severance costs incurred and paid within the quarter.
As discussed above, in May 2012, we completed the sale of the Information Management business and, accordingly, the operating results for this business are presented within discontinued operations. Accounting rules require certain costs previously allocated to the Information Management business to be included in continuing operations. These costs prior to the completion of the sale of the Information Management business were $2.8 in the second quarter of 2012. These amounts are included within selling, general and administrative expenses within continuing operations. We have taken actions to reduce these costs and remaining costs are substantially offset by revenue resulting from transition services provided to the buyer subsequent to the sale. In the second quarter of 2012, the Company recognized $88.6 non-cash impairment charges, consisting of $46.0 for the impairment of goodwill in the CIT reporting unit, and $42.6 for the impairment of certain facilities within Corporate classified as held for sale. Second quarter 2012 results also include corporate restructuring charges resulting from the sale of the Information Management business of $6.4, severance charges of $1.2 related to the continuing business, and pension and other post employment benefit plan curtailment benefit of $2.7 related to changes in the executive management team following the sale.
As a percentage of revenues, the cost of providing services and products sold was 64.9% in the second quarter of 2013 compared to 64.4% in the prior year period, largely due to the classification of costs associated with transition services provided to NEC Corporation. These transition services costs were classified within Selling, general and administrative in the prior year. Selling, general and administrative expenses of $119.9 in the second quarter of 2013 increased 5% from the prior year period. As a percentage of revenues, selling, general, and administrative cost was 23.8% compared to 23.2% in the prior year. The increase reflects the $7.5 pension settlement charge in the current period, partially offset by lower stock-based compensation costs. Research and development costs of $2.2 decreased $0.3 from the prior year due to reductions in headcount. Depreciation expense of $21.2 increased $0.7 from the prior year reflecting an increase in capital expenditures related to increased capacity. Amortization expense of $1.4 decreased $0.4 due to completion of the amortization of certain definite lived intangible assets. Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Consolidated total operating costs and expenses of $931.2 decreased 9% from the first half of 2012 costs of $1,020.1. Operating costs and expenses for the first six months of 2013 include the pension settlement, asset impairment and severance costs discussed above. Costs previously allocated to the Information Management segment that do not qualify for discontinued operations accounting treatment and reported as costs from continuing operations were $8.8 in the first half of 2012. As discussed above, in the first half of 2012, the Company recognized $88.6 non-cash impairment charges, consisting of $46.0 for the impairment of


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goodwill in the CIT reporting unit, and $42.6 for the impairment of certain facilities within Corporate classified as held-for-sale. First half of 2012 results also include corporate restructuring charges resulting from the sale of the Information Management business of $6.4 and pension and other post employment benefit plan curtailment benefit of $2.7 related to changes in the executive management team following the sale.
Costs of providing services and products sold during the first half of 2013 increased 2% to $645.5 from the first half of 2012. As a percentage of revenues, cost of providing services and products sold was 64.7% compared to 64.2% in the prior year period, largely due to the classification of costs associated with transition services provided to NEC Corporation. Selling, general and administrative expenses of $234.5 in the first half of 2013 decreased 2% as compared to $238.8 in the prior year period. As a percentage of revenues, selling, general, and administrative cost was 23.5% compared to 24.2% in the prior year, reflecting cost reductions previously taken, continued efforts to control costs, and the reclassification of Information Management costs discussed above, offset by the $7.5 pension settlement charge. Research and development costs of $4.3 decreased $2.1 from the prior year due to reductions in headcount. Depreciation expense of $42.1 increased $1.3 from the prior year, reflecting an increase in capital expenditures related to increased capacity. Amortization expense of $2.6 decreased $1.1 due to completion of the amortization of certain definite lived intangible assets.

Operating Income and Adjusted Operating Income (a non-GAAP measure) In order to assess the underlying operational performance of the continuing operations of the business and to have a basis to compare underlying results to prior and future periods, we provide the non-GAAP measures, Adjusted Operating Income and Adjusted Operating Margin, in the table below. For the three and six months ended June 30, 2013, Adjusted Operating Income and Adjusted Operating Margin exclude the following:

            The $7.5 non-cash pension settlement charge discussed above and in
             Note 5 of the Notes to Consolidated Financial Statements; and


            The $1.1 net impairment charge related to the adjustment of two
             facilities held for sale to their fair values less costs to sell
             discussed above and in Note 13 of the Notes to Consolidated
             Financial Statements.

For the three and six months ended June 30, 2012, Adjusted Operating Income and Adjusted Operating Margin exclude the following:

            Certain costs previously allocated to the Information Management
             business that are now included in continuing operations as discussed
             above and in more detail in Note 3 of the Notes to Consolidated
             Financial Statements (these costs were $2.8 and $8.8 for the three
             and six months ended June 30, 2012, respectively);


            Asset impairments charges of $88.6 including $46.0 for the
             impairment of goodwill of the CIT reporting unit and $42.6 for the
             impairment of facilities classified as held for sale as discussed in
             Note 13 of the Notes to Consolidated Financial Statement;


            Pension and other post employment benefit plan curtailment benefit
             of $2.7, including $4.1 of curtailment credits from pension and
             other post employment benefit plans as discussed in Note 5 of the
             Notes to Consolidated Financial Statements and $1.4 of
             post-retirement benefit costs related to changes in the executive
             management team; and


            Corporate restructuring charges resulting from the sale of the
             Information Management business of $6.4.

Adjustments for these charges are relevant in evaluating the overall performance of the business. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for this limitation by using both the non-GAAP measures and the GAAP measures in its evaluation of performance. There are no material purposes for which we use these non-GAAP measures beyond those described above. These non-GAAP measures should be considered supplemental in nature and should not be construed as being more important than comparable GAAP measures.


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                                    Three Months Ended                          Six Months Ended
                                         June 30,                                   June 30,
                               2013        2012       Change      %       2013        2012       Change      %
Operating Income (loss)      $ 30.1     $ (60.5 )    $  90.6       NM   $ 66.6     $ (31.5 )    $  98.1       NM
Operating Margin                6.0 %     (12.3 )%                         6.7 %      (3.2 )%

Net pension and other
post-employment benefit plan
charges                         7.5        (2.7 )                          7.5        (2.7 )
Asset impairments               1.1        88.6                            1.1        88.6
Restructuring                     -         6.4                              -         6.4
Information Management costs
not qualifying as
Discontinued Operations           -         2.8                              -         8.8
Adjusted Operating Income (a
non-GAAP measure)            $ 38.7     $  34.6      $   4.1       12   $ 75.2     $  69.6      $   5.6        8
Adjusted Operating Margin       7.7 %       7.0  %                         7.5 %       7.0  %

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012 Consolidated operating income was $30.1 for the second quarter of 2013 compared to an operating loss of $60.5 in the prior year. Excluding the pension and other post-employment benefit plan charges, asset impairment charges, restructuring and Information Management-related costs, consolidated operating income for the second quarter of 2013 was $38.7 compared to $34.6 in the same period in the prior year due to higher revenue and controlled costs.
Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Consolidated operating income was $66.6 for the first half of 2013 compared to an operating loss of $31.5 in the prior year period. Excluding the pension and other post-employment benefit plan charges, asset impairment charges, restructuring and Information Management-related costs, consolidated operating income for the first half of 2013 was $75.2 compared to $69.6 in the same period in the prior year.

Non-Operating Items
                          Three Months Ended                               Six Months Ended
                               June 30,                                        June 30,
                   2013          2012         Change        %        2013        2012       Change       %
Operating
Income (loss)   $    30.1     $   (60.5 )   $    90.6       NM     $  66.6     $ (31.5 )   $  98.1       NM
Other Income,
net                     -           0.7          (0.7 )     NM         2.3         2.1         0.2       10
Interest
Expense              (2.9 )        (4.4 )         1.5      (34 )      (5.8 )      (8.0 )       2.2      (28 )
Income (loss)
before Income
Taxes           $    27.2     $   (64.2 )   $    91.4       NM     $  63.1     $ (37.4 )   $ 100.5       NM

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012 Other income decreased from $0.7 due to foreign exchange losses in the second quarter of 2013. Interest expense of $2.9 improved from $4.4 in the prior year reflecting a lower level of debt outstanding throughout the second quarter of 2013 as well as elimination of incremental interest expense of $1.1 related to the purchase of the Orlando facility as a result of the termination of capital lease accounting treatment for this facility in the second quarter of 2012. Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Interest expense of $5.8 improved from $8.0 in the prior year reflecting a lower level of debt outstanding throughout the first half of 2013 as well as the incremental interest expense related to the Orlando facility in the first six months of 2012.


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Income Taxes
                              Three Months Ended                          Six Months Ended
                                   June 30,                                   June 30,
                        2013        2012        Change      %       2013        2012       Change      %
Income (loss) before
Income Taxes          $  27.2     $ (64.2 )   $   91.4       NM   $  63.1     $ (37.4 )   $ 100.5       NM
Income Tax Expense        5.2       (10.5 )       15.7       NM      10.9        (5.1 )      16.0       NM

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012 Our effective tax rate on net income from continuing operations was 19.1% for the three months ended June 30, 2013 compared to an effective tax rate of 16.4% in the same period last year. The higher tax rate for the three months ended June 30, 2013 is primarily due to a shift in the geographic mix of worldwide income and certain discrete items.
Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Our effective tax rate on net income from continuing operations was 17.3% for the six months ended June 30, 2013 compared to an effective tax rate of 13.6% in the same period last year. The higher tax rate for the six months ended June 30, 2013 is primarily due to the shift in the geographic mix of worldwide income and certain discrete items.

Net Income from Continuing Operations; Earnings per Diluted Share from Continuing Operations; Adjusted Net Income From Continuing Operations; and Adjusted Earnings per Diluted Share from Continuing Operations (non-GAAP measures)

We use income from continuing operations, net of tax and earnings per share data excluding the operating charges discussed above and the incremental interest charges related to the Orlando facility discussed above for the three and six months ended June 30, 2013 and 2012 to assess the underlying operational performance of the continuing operations of the business for the year and to have a basis to compare underlying results to prior and future periods. Adjustments for these items are relevant in evaluating the overall performance of the business. Limitations associated with the use of these non-GAAP measures include that these measures do not include all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for these limitations by using the non-GAAP measures, income from continuing operations, net of tax and diluted earnings per share excluding these items, and the GAAP measures, income from continuing operations, net of tax and diluted earnings per share, in its evaluation of performance. There are no material purposes for which we use these non-GAAP measures beyond those described above. These non-GAAP measures should be considered supplemental in nature and should not be construed as being more important than comparable GAAP measures.

                                  Three Months Ended                          Six Months Ended
                                       June 30,                                   June 30,
                              2013       2012       Change      %        2013       2012       Change      %
Income from Continuing
Operations, net of tax      $ 22.0     $ (53.7 )   $ 75.7       NM     $ 52.2     $ (32.3 )   $ 84.5      NM
Total operating charges
from above, net of tax         5.4        75.5      (70.1 )     NM        5.4        80.3      (74.9 )    NM
Orlando financing fees of
$1.1, net of tax                 -         0.7     $ (0.7 )     NM          -         0.7     $ (0.7 )    NM
Adjusted Income from
Continuing Operations, net
of tax (a non-GAAP measure) $ 27.4     $  22.5     $  4.9       22     $ 57.6     $  48.7     $  8.9      18

Diluted Earnings Per Common
Share:
Continuing Operations       $ 0.20     $ (0.47 )   $ 0.67       NM     $ 0.48     $ (0.28 )   $ 0.76      NM
Impact of net charges above
included in continuing
operations, net of tax        0.05        0.66      (0.61 )    (92 )     0.05        0.69      (0.64 )   (93 )
Adjusted diluted earnings
per common share from
continuing operations (a
non-GAAP measure)           $ 0.25     $  0.19     $ 0.06       32     $ 0.53     $  0.41     $ 0.12      29

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 2012


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Second quarter 2013 income from continuing operations was $22.0 compared to a loss from continuing operations of $53.7 in the second quarter of 2012. Diluted . . .

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