e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended July 3, 2011
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the Transition Period From to
Commission file number: 0-26786
APAC Customer Services, Inc.
(Exact name of registrant as specified in its charter)
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| Illinois
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36-2777140 |
| (State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
| incorporation or organization) |
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Bannockburn Lake Office, 2201 Waukegan Road, Suite 300, Bannockburn, Illinois 60015
(Address of Principal Executive Offices, Zip Code)
Registrant’s telephone number, including area code: (847) 374-4980
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company (see the definitions of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
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| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer* o
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Smaller reporting company o |
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(*Do not check if a smaller reporting company) |
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
There were 51,321,416 common shares, $0.01 par value per share, outstanding as of July 22, 2011.
Forward-Looking Statements and Factors That May Affect Future Results
In passing the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Congress
encouraged public companies to make “forward-looking statements” by creating a “safe harbor” to
protect companies from securities law liability in connection with forward-looking statements. We
intend to qualify our written and oral forward-looking statements for protection under the Reform
Act and any other similar safe harbor provisions. Unless the context indicates otherwise, the words
“Company,” “we,” “our,” and “us” when used in this Quarterly Report on Form 10-Q refer collectively
to APAC Customer Services, Inc. and its wholly-owned subsidiaries.
Generally, forward-looking statements include expressed expectations, estimates and projections of
future events and financial performance and the assumptions on which these expressed expectations,
estimates and projections are based. Statements that are not historical facts, including statements
about our beliefs and expectations and those of our management, are forward-looking statements.
Sometimes these statements will contain words such as “believes,” “expects,” “anticipates,”
“intends,” “estimates,” “goals,” “would,” “could,” “should,” “plans,” and other similar words. All
forward-looking statements are inherently uncertain as they are based on various expectations and
assumptions about future events, and they are subject to known and unknown risks and uncertainties
and other factors that can cause actual events and results to differ materially from historic
results and those projected. Such statements are based upon the current beliefs and expectations
of the Company’s management. The risks included below are not exhaustive.
Due to such uncertainties, the investment community is cautioned not to place undue reliance on our
written or oral forward-looking statements, which speak only as of the date on which they were
made. If no date is provided, such statements speak only as of the date of this Quarterly Report on
Form 10-Q. We expressly undertake no obligation to publicly update or revise any forward-looking
statements as a result of changed assumptions, new information, future events or otherwise.
Forward-looking statements are contained in this Quarterly Report on Form 10-Q, primarily in Items
2 and 3. Moreover, through our senior management, we may from time to time make forward-looking
statements about matters described herein or about other matters concerning us.
There are numerous factors that could prevent us from achieving our goals and cause future results
to differ materially from historic results or those expressed or implied by forward-looking
statements including, but not limited to, the following:
| • |
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A large portion of our revenue is generated from a limited number
of clients and the loss of one or more of them, or a reduction in
their demand for our services, could materially and adversely
affect our financial results. |
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| • |
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Our operating results and financial condition may be affected by
the performance of our clients and unfavorable general economic
conditions. |
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| • |
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The failure to effectively manage our production capacity and our
workforce could negatively impact our financial results. |
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| • |
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Our success is subject to the terms of our client contracts and if
we are unable to continue operating under existing client
contracts or renew existing client contracts with terms favorable
to us, our results of operations and financial condition may be
adversely affected by the loss of clients or by the less favorable
terms. |
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| • |
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Our business may be affected by our cash flows from operations and
our ability to comply with our debt covenants and funding
requirements under our credit facility. |
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| • |
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Our financial results may be affected by risks associated with
international operations and expansion, including, but not limited
to foreign currency fluctuations, tax obligations and changes to
laws in other countries. |
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| • |
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Our principal shareholder can exercise significant control over us
and, as a result of such control may be able to exert considerable
influence over our future direction and operations. |
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| • |
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Our success depends on our ability to recruit and retain a
sufficient number of qualified key personnel and the loss of the
services of key personnel without adequate replacement or the
inability to attract new qualified personnel could have a material
adverse effect on us. |
3
| • |
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We operate in a highly competitive industry and our financial
results may suffer if we are unable to adequately address
potential downward pricing pressures and other competitive
factors. |
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| • |
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Circumstances outside our control such as typhoons, hurricanes,
earthquakes, floods and other acts of God, political instability,
equipment malfunction, telephone or data service interruptions,
changes in the telecommunications market, war and terrorism could
seriously harm our domestic or international business operations. |
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| • |
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Unauthorized disclosure of sensitive or confidential client and
customer data could expose us to protracted and costly litigation,
penalties and may cause us to lose clients. |
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| • |
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Our business and our clients’ businesses are subject to federal
and state regulation and industry standards and the costs of
compliance with, or liability for violation of, existing or future
regulations or standards could significantly increase our costs of
doing business. |
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| • |
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The costs and management time and attention associated with
litigation could result in a negative impact to our financial
results. |
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| • |
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Our business is subject to rapid changes in technology and if our
technology is rendered obsolete or we are unable to compete
effectively, our operating results and financial condition could
be materially and adversely affected. |
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| • |
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Volatility in our stock price may result in loss of investment for
shareholders, potential litigation and substantial cost associated
with litigation, as well as diversion of management’s attention. |
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| • |
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Our inability to complete the Merger with an affiliate of One
Equity Partners (“One Equity”) or if the Merger Agreement is
otherwise terminated may result in adverse consequences to the
Company. |
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| • |
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The impact of the Merger on our business relationships, operating
results and business generally is unknown and may negatively
impact our business. |
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| • |
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The costs, delay and management time and attention associated with
litigation related to the Merger could negatively affect the
Merger or result in a negative impact to our financial results. |
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| • |
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There is the possibility that competing offers will be made which
could result in the termination of the Merger Agreement as well as
additional cost, delay and potential diversion of management’s
attention. |
See our filings with the Securities and Exchange Commission (SEC) for further discussion of the
risks and uncertainties associated with our business, in particular, the discussion in Item 1A of
Part I of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, and in Item 1A
of Part II of this Quarterly Report on Form 10-Q.
In various places throughout this Quarterly Report on Form 10-Q we use certain non-GAAP financial
measures when describing our performance. A “non-GAAP financial measure” is defined as a numerical
measure of a company’s financial performance that excludes or includes amounts so as to be
different than the most directly comparable measure calculated and presented in accordance with
GAAP in the statements of operations, balance sheets or statements of cash flows of a company. We
believe that non-GAAP financial measures provide meaningful supplemental information and are useful
in understanding our results of operations and analyzing of trends because they exclude certain
charges such as interest, taxes and depreciation and amortization expenses that are not part of our
ordinary business operations. We also believe that non-GAAP financial measures are useful to
investors and analysts in allowing for greater transparency with respect to the supplemental
information used by us in our financial and operational decision-making. In addition, we believe
investors, analysts and lenders benefit from referring to non-GAAP measures when assessing our
performance and expectations of our future performance. However, this information should not be
used as a substitute for our GAAP financial information; rather it should be used in conjunction
with financial statement information contained in our unaudited condensed consolidated financial
statements prepared in accordance with GAAP. We discuss non-GAAP financial measures in Item 2 of
this Quarterly Report on Form 10-Q under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Non-GAAP Financial Measures.” Pursuant to the
requirements of Regulation G, we have provided a reconciliation of all non-GAAP financial measures
to the most directly comparable GAAP financial measure in Item 2 of this Quarterly Report on Form
10-Q.
4
PART I. FINANCIAL INFORMATION
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| Item 1. |
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Condensed Consolidated Financial Statements |
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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July 3, |
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January 2, |
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2011 |
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2011 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
49,741 |
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$ |
41,399 |
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Accounts receivable, net |
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45,671 |
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52,483 |
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Deferred tax assets, current |
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7,094 |
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11,051 |
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Other current assets |
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10,661 |
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8,204 |
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Total current assets |
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113,167 |
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113,137 |
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Property and equipment, net |
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29,372 |
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28,030 |
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Goodwill and intangible assets, net |
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20,597 |
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13,763 |
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Deferred tax assets, non-current |
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5,387 |
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5,387 |
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Other assets |
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2,876 |
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2,848 |
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Total assets |
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$ |
171,399 |
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$ |
163,165 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Capital leases — current portion |
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$ |
548 |
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$ |
696 |
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Accounts payable |
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4,545 |
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4,964 |
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Income taxes payable |
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108 |
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93 |
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Accrued payroll and related items |
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22,096 |
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22,205 |
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Accrued liabilities |
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10,405 |
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9,200 |
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Total current liabilities |
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37,702 |
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37,158 |
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Other non-current liabilities |
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6,472 |
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4,536 |
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Commitments and contingencies |
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— |
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— |
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Shareholders’ equity: |
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Common shares, $0.01 per share; authorized 200,000,000 shares;
53,519,267 shares issued and 51,285,652 shares outstanding at
July 3, 2011, and 53,359,090 shares issued and 52,488,457 shares
outstanding at January 2, 2011 |
|
|
535 |
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|
533 |
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Additional paid-in capital |
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113,809 |
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112,668 |
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Accumulated earnings |
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23,635 |
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11,166 |
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Accumulated other comprehensive income |
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2,141 |
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1,980 |
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Treasury shares: 2,233,615 and 870,633 shares at cost at July 3, 2011
and January 2, 2011, respectively |
|
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(12,895 |
) |
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(4,876 |
) |
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Total shareholders’ equity |
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127,225 |
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121,471 |
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Total liabilities and shareholders’ equity |
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$ |
171,399 |
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$ |
163,165 |
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See Notes to Condensed Consolidated Financial Statements.
5
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
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Thirteen Weeks Ended |
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Twenty-Six Weeks Ended |
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July 3, |
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July 4, |
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July 3, |
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July 4, |
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2011 |
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2010 |
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2011 |
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2010 |
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Net revenue |
|
$ |
82,494 |
|
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$ |
77,386 |
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$ |
170,537 |
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$ |
162,640 |
|
Cost of services |
|
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65,958 |
|
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|
61,009 |
|
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|
134,502 |
|
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|
125,817 |
|
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Gross profit |
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16,536 |
|
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|
16,377 |
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36,035 |
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36,823 |
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Operating expenses: |
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Selling, general and administrative
expenses |
|
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8,086 |
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8,116 |
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16,387 |
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|
16,262 |
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Legal settlement |
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1 |
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7 |
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3 |
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2,407 |
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Severance and other charges (reversals) |
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71 |
|
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(13 |
) |
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496 |
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(12 |
) |
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Total operating expenses |
|
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8,158 |
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|
8,110 |
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16,886 |
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18,657 |
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Operating income |
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8,378 |
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|
8,267 |
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|
19,149 |
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18,166 |
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Other expense, net |
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34 |
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|
139 |
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|
54 |
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30 |
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Interest (income) expense, net |
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28 |
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(7 |
) |
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60 |
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(15 |
) |
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Income before income taxes |
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8,316 |
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|
8,135 |
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19,035 |
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|
18,151 |
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Income tax expense |
|
|
2,869 |
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|
2,806 |
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|
6,567 |
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6,262 |
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Net income |
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$ |
5,447 |
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$ |
5,329 |
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$ |
12,468 |
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$ |
11,889 |
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Net income per share: |
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Basic |
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$ |
0.11 |
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$ |
0.10 |
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$ |
0.24 |
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$ |
0.23 |
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Diluted |
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$ |
0.10 |
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$ |
0.10 |
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$ |
0.23 |
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$ |
0.22 |
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Weighted average number of shares
outstanding: |
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Basic |
|
|
51,052 |
|
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|
52,476 |
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|
51,425 |
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52,393 |
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Diluted |
|
|
52,735 |
|
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54,831 |
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|
53,131 |
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|
54,745 |
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See Notes to Condensed Consolidated Financial Statements.
6
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Twenty-Six Weeks Ended |
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July 3, |
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July 4, |
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2011 |
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2010 |
|
Operating activities: |
|
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Net income |
|
$ |
12,468 |
|
|
$ |
11,889 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
|
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|
|
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Depreciation and amortization |
|
|
5,900 |
|
|
|
6,071 |
|
Deferred income taxes |
|
|
3,957 |
|
|
|
5,548 |
|
Stock compensation expense |
|
|
837 |
|
|
|
1,195 |
|
Amortized gain on sale leaseback |
|
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(81 |
) |
|
|
(52 |
) |
Loss (gain) on sale of property and equipment |
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8 |
|
|
|
(1 |
) |
Income taxes payable (refundable) |
|
|
15 |
|
|
|
(365 |
) |
Change in operating assets and liabilities |
|
|
2,505 |
|
|
|
4,676 |
|
|
|
|
|
|
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Net cash provided by operating activities |
|
|
25,609 |
|
|
|
28,961 |
|
|
|
|
|
|
|
|
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Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net |
|
|
(6,785 |
) |
|
|
(3,968 |
) |
Net proceeds from sale of property and equipment |
|
|
— |
|
|
|
1 |
|
Acquisition of business |
|
|
(2,200 |
) |
|
|
— |
|
|
|
|
|
|
|
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Net cash used in investing activities |
|
|
(8,985 |
) |
|
|
(3,967 |
) |
|
|
|
|
|
|
|
|
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Financing activities: |
|
|
|
|
|
|
|
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Payment of capital lease obligations |
|
|
(527 |
) |
|
|
(332 |
) |
Stock option transactions, including related excess
income tax benefits |
|
|
307 |
|
|
|
533 |
|
Purchase of treasury stock |
|
|
(8,019 |
) |
|
|
— |
|
|
|
|
|
|
|
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Net cash (used in) provided by financing activities |
|
|
(8,239 |
) |
|
|
201 |
|
|
|
|
|
|
|
|
|
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Effect of exchange rate change on cash |
|
|
(43 |
) |
|
|
(336 |
) |
|
|
|
|
|
|
|
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Net increase in cash and cash equivalents |
|
|
8,342 |
|
|
|
24,859 |
|
|
|
|
|
|
|
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Cash and cash equivalents: |
|
|
|
|
|
|
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|
Beginning balance |
|
|
41,399 |
|
|
|
20,557 |
|
|
|
|
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Ending balance |
|
$ |
49,741 |
|
|
$ |
45,416 |
|
|
|
|
|
|
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|
See Notes to Condensed Consolidated Financial Statements.
7
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of APAC Customer Services,
Inc. and its subsidiaries (collectively, the Company) have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of a normal recurring nature) considered
necessary for a fair presentation have been included. Interim consolidated financial statements
are not necessarily indicative of the financial position or operating results for an entire year.
The Company’s international customer care centers use their local currency, the Philippine peso,
the Dominican peso and the Uruguayan Peso, as their functional currency. Assets and liabilities of
international customer care centers have been translated at period-end rates, and income and
expenses have been translated using average exchange rates for the respective periods. All
inter-company transactions and balances have been eliminated. The balance sheet at July 3, 2011
has been derived from the unaudited financial statements at that date and includes all of the
information and notes required by GAAP for interim financial statements. These interim financial
statements should be read in conjunction with the audited financial statements and notes thereto
included in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended
January 2, 2011. Copies of the Company’s filings are available on a web site maintained by the SEC
at http://www.sec.gov.
The Company operates on a thirteen week fiscal quarter that ends on the Sunday closest to June
30. The Company operates on a 52/53 week fiscal year that ends on the Sunday closest to
December 31.
2. New Accounting Pronouncements
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (FASB) issued guidance on Accounting
Standards Codification (ASC) Topic 605 “Revenue Recognition” related to revenue arrangements with
multiple deliverables, which revises the criteria for separating, measuring, and allocating
arrangement consideration to each deliverable in a multiple element arrangement. The guidance
requires companies to allocate revenue using the relative selling price of each deliverable, which
must be estimated if the company does not have a history of selling the deliverable on a
stand-alone basis or third-party evidence of selling price. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. The adoption of this guidance
effective January 3, 2011, the beginning of the Company’s current fiscal year, did not have any
material impact on the Company’s unaudited condensed consolidated financial statements.
Comprehensive Income
In June 2011, the FASB issued amendments to ASC Topic 220 “Comprehensive Income” related to how
entities present total comprehensive income. The amendments require that all non-owner changes in
stockholders’ equity be presented either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. In the two-statement approach, the first statement
should present total net income and its components followed consecutively by a second statement
that should present total other comprehensive income, the components of other comprehensive income,
and the total of comprehensive income. The amendments should be applied retrospectively and are
effective for fiscal years, and interim periods within those years, beginning after December 15,
2011, with early adoption permitted. The Company is currently evaluating these amendments and does
not expect them to have a material impact on its unaudited condensed consolidated financial
statements.
8
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
3. Acquisition of Fargo, North Dakota Call Center Operations
On April 29, 2011, the Company acquired certain assets and assumed certain liabilities of the
Fargo, North Dakota tele-sales services business unit (“Fargo”) of Shields Enterprises
International LLC (“SEI”). The acquisition includes the contracts and related services, including
sales and marketing and partner channel support, which SEI has historically delivered to one of the
world’s leading technology companies. The acquisition is accounted for as a business under ASC
Topic 805, Business Combinations.
The purchase price totaled $6.4 million, which represents the preliminary fair values of the assets
acquired and liabilities assumed as of the acquisition date, and consisted of the following: cash
of $2.2 million, and contingent consideration of $4.2 million.
A significant portion of the acquisition purchase price includes amounts determined on the
achievement of certain contingent financial performance measures. If the Fargo related revenue for
the month of August 2011 exceeds $0.3 million the Company will pay contingent consideration equal
to $2.2 million multiplied by the percentage difference between actual Fargo related revenue and
$0.3 million, however if the actual revenue for August 2011 exceeds $0.6 million the payment will
be $2.2 million. Additional contingent consideration is paid to SEI equal to 3.5% of the Fargo
related revenue for a period of sixty months after the closing date. In addition, consideration of
1% of certain new revenue generated from activities or services related to the Fargo operations is
paid for a period of 24 months for any additional services engaged within sixty months of the
closing date.
The acquisition results in the generation of intangible assets relating to customer relationships
and non-competition agreements totaling $4.8 million, which will be amortized over their estimated
useful lives ranging from five to fifteen years. In addition, goodwill totaling $1.8 million was
generated from the acquisition.
The preliminary valuation of the assets acquired and liabilities assumed was determined using the
income approach. The fair value measurement related to the contingent consideration liability,
customer relationship intangible asset and non-competition agreement is based upon significant
inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC
Topic 820, Fair Value Measurement.
The results of the Fargo operations have been included in the unaudited condensed consolidated
financial statements since the date of the acquisition resulting in revenue of $1.9 million.
Pro-forma disclosures have not been included as they are not material.
9
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
4. Accrued Liabilities
The components of other current accrued liabilities included in the unaudited condensed
consolidated balance sheets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
July 3, |
|
|
January 2, |
|
| |
|
2011 |
|
|
2011 |
|
Non-qualified retirement plan obligation |
|
$ |
2,335 |
|
|
$ |
2,375 |
|
Contingent consideration obligation — SEI |
|
|
2,184 |
|
|
|
— |
|
Accrued professional fees |
|
|
828 |
|
|
|
654 |
|
Deferred rent |
|
|
652 |
|
|
|
473 |
|
Accrued capital expenditures |
|
|
633 |
|
|
|
1,901 |
|
Accrued severance |
|
|
449 |
|
|
|
536 |
|
Accrued telecom |
|
|
405 |
|
|
|
424 |
|
Accrued workers’ compensation |
|
|
364 |
|
|
|
431 |
|
Other accrued liabilities |
|
|
2,555 |
|
|
|
2,406 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,405 |
|
|
$ |
9,200 |
|
|
|
|
|
|
|
|
5. Accounting for Stock-Based Compensation
The Company has a share-based incentive compensation plan for employees and non-employee directors,
which authorizes the granting of various equity-based incentive awards, including stock options and
non-vested common shares. The total number of common shares authorized for issuance under the plan
is 11.8 million, of which 1.0 million shares are available for future grants at July 3, 2011.
Total stock-based compensation expense was $0.5 million and $0.7 million for the thirteen weeks
ended July 3, 2011 and July 4, 2010, respectively. For the twenty-six weeks ended July 3, 2011 and
July 4, 2010, total stock-based compensation expense was $0.8 million and $1.2 million,
respectively. As of July 3, 2011, there was $5.5 million of unrecognized compensation cost related
to unvested awards that is expected to be recognized over a weighted-average period of
approximately 3.22 years.
A summary of the Company’s non-vested common share grant activity during the twenty-six weeks ended
July 3, 2011 is presented below:
| |
|
|
|
|
| |
|
Number of Shares |
|
Outstanding on January 2, 2011 |
|
|
250,000 |
|
Granted |
|
|
36,000 |
|
Issued |
|
|
— |
|
Cancelled |
|
|
— |
|
|
|
|
|
Outstanding on July 3, 2011 |
|
|
286,000 |
|
|
|
|
|
The Company awarded 36,000 non-vested common shares during the thirteen weeks ended July 3, 2011.
The Company did not award non-vested common shares during the thirteen weeks ended July 4, 2010.
10
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
A summary of the Company’s stock option grant activity during the twenty-six weeks ended July 3,
2011 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
Number of |
|
|
Grant Price Range Per |
|
|
Exercise Price Per |
|
|
Aggregate |
|
| |
|
Options |
|
|
Share |
|
|
Share |
|
|
Intrinsic Value |
|
Outstanding on January 2, 2011 |
|
|
5,644,478 |
|
|
$ |
0.79 |
|
|
|
— |
|
|
$ |
6.43 |
|
|
$ |
3.09 |
|
|
|
|
|
Granted |
|
|
287,755 |
|
|
|
5.33 |
|
|
|
— |
|
|
|
6.12 |
|
|
|
5.83 |
|
|
|
|
|
Exercised |
|
|
(124,177 |
) |
|
|
0.92 |
|
|
|
— |
|
|
|
5.31 |
|
|
|
2.47 |
|
|
|
|
|
Forfeited |
|
|
(212,500 |
) |
|
|
1.10 |
|
|
|
— |
|
|
|
5.86 |
|
|
|
4.77 |
|
|
|
|
|
Expired |
|
|
(11,875 |
) |
|
|
1.55 |
|
|
|
— |
|
|
|
5.31 |
|
|
|
3.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on July 3, 2011 |
|
|
5,583,681 |
|
|
$ |
0.79 |
|
|
|
— |
|
|
$ |
6.43 |
|
|
$ |
3.18 |
|
|
$ |
12,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on July 3, 2011 |
|
|
2,902,085 |
|
|
$ |
0.79 |
|
|
|
— |
|
|
$ |
6.43 |
|
|
$ |
2.32 |
|
|
$ |
8,819 |
|
Substantially all of the options become exercisable between one to five years after the grant
date and generally expire ten years from the grant date.
6. Goodwill and Other Intangible Assets
As of July 3, 2011, the Company had $15.1 million of goodwill, which included $1.8 million of
goodwill resulting from the April 2011 acquisition of the Fargo operations from SEI. For more
information regarding the April 2011 acquisition, see Note 3. As of January 2, 2011, the Company
had $13.3 million of goodwill.
The identifiable intangible assets of the Company include acquired customer relationships and
internally developed software. The acquired customer relationships have a gross carrying value of
$33.3 million and $28.5 million as of July 3, 2011 and January 2, 2011, respectively, and
accumulated amortization of $28.6 million and $28.5 million as of July 3, 2011 and January 2, 2011,
respectively. The internally developed software has a gross carrying value of $1.0 million and
$0.7 million as of July 3, 2011 and January 2, 2011, respectively, and accumulated amortization of
$0.3 million and $0.2 million as of July 3, 2011 and January 2, 2011, respectively. Total
amortization expense related to intangible assets was $0.1 million and $0.3 million for the
thirteen weeks ended July 3, 2011 and July 4, 2010, respectively, and $0.1 million and $0.9 million
for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively.
7. Comprehensive Income
Comprehensive income for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
|
July 3, |
|
|
July 4, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
5,447 |
|
|
$ |
5,329 |
|
|
$ |
12,468 |
|
|
$ |
11,889 |
|
Foreign currency translation adjustment |
|
|
102 |
|
|
|
(167 |
) |
|
|
364 |
|
|
|
23 |
|
Unrealized gain on derivative contracts |
|
|
(284 |
) |
|
|
(636 |
) |
|
|
(203 |
) |
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
5,265 |
|
|
$ |
4,526 |
|
|
$ |
12,629 |
|
|
$ |
11,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
8. Legal Proceedings
The Company is subject to other lawsuits, claims and governmental investigations arising out of the
normal conduct of its business. Management does not believe that the outcome of any pending
proceedings will have a material adverse effect on the Company’s business, results of operations,
liquidity, or financial condition. Although management does not believe that any such proceeding
will result in a material adverse effect, no assurance to that effect can be given.
On May 27, 2009, a purported collective/class action complaint captioned Tiffany Sharpe, et al. v.
APAC Customer Services, Inc. was filed in the United States District Court for the Western District
of Wisconsin. On behalf of the named plaintiff, a non-exempt call center employee, and other
similarly situated individuals, the complaint asserted violations under the Federal Fair Labor
Standards Act (FLSA) related to overtime compensation and wage records. The complaint also
asserted violations under Wisconsin Wage Payment and Overtime Compensation Laws based upon the same
alleged facts. The complaint purported to allege claims as a nationwide collective action under
federal law, as well as a class action under Wisconsin state law. The complaint sought various
forms of relief, including injunctive relief, unpaid overtime wages, liquidated damages, interest,
and attorneys’ fees and costs. On January 8, 2010, the court entered an order which conditionally
certified the case as a collective action under the FLSA.
In March 2010, the Company entered into an agreement to resolve the collective action. On June 16,
2010, the Court entered an order approving the resolution of all claims under the FLSA collective
action. Under the terms of the agreement, the Company agreed to pay a maximum amount of $4.0
million to resolve claims by eligible class members, including payments to class members and
payments for plaintiff attorneys’ fees. As a result, the Company recorded a liability of $2.4
million for the thirteen weeks ended April 4, 2010 which represented its estimate at the time of
the costs to be incurred for attorneys’ fees and claims, based on expected opt-in rates for
claimants in similar actions. Based on the court’s final order approving the agreement, (including
setting the amount of plaintiffs’ attorneys fees) and a revised estimated rate of participation
from eligible class members, the Company reduced the previously recorded liability by $0.5 million
during the thirteen weeks ended October 3, 2010 to an adjusted recorded liability of $1.8 million
which reflected its revised expectation of the final amount which would ultimately be paid.
On December 21, 2010, a final order of dismissal was entered by the Court triggering the Company’s
payment obligations under the agreement to resolve the collective action. The final amount paid to
class members who participated in the action and to plaintiff’s attorney was approximately $1.8
million.
The Company denied and continues to deny the allegations in the complaint and contends that its
policies and practices regarding compensation were proper and in compliance with the law at all
times. The Company denies all liability and wrongdoing in this case, but decided to settle this
lawsuit in order to avoid the distraction and additional legal expenses that would otherwise be
incurred.
9. Debt
The Company is party to a Revolving Credit and Security Agreement, as amended, (the “Credit
Agreement”) with PNC Bank National Association (“PNC”), as agent, and the financial institutions
from time to time parties thereto as lenders. The Credit Agreement provides the Company with a
$40.0 million revolving loan facility which was originally set to expire in May 2011. On April 27,
2011, the Company entered into the Second Amendment to Revolving Credit and Security Agreement (the
“Second Amendment”) which amended the Credit Agreement among the Company, Agent and Lenders dated
May 5, 2008. The Second Amendment extended the term of the Credit Agreement to September 30, 2011.
The Company is evaluating its options for a further extension of the Credit Agreement. See “Bank
Financing” under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources” in Item 2 of this Quarterly Report on
Form 10-Q.
12
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
The Company’s ability to borrow under the Credit Agreement depends on the amount of eligible
accounts receivable from its clients. The Credit Agreement contains certain financial covenants
including limits on the amount of capital expenditures and maintenance of a minimum fixed charge
coverage ratio. Other covenants in the Credit Agreement prohibit (with limited exceptions) the
Company from incurring additional indebtedness, repurchasing outstanding common shares, permitting
liens, acquiring, selling or disposing of certain assets, engaging in certain mergers and
acquisitions, paying dividends or making certain restricted payments. The Company obtained a
waiver from PNC permitting it to repurchase common shares under the program approved by the
Company’s Board of Directors.
Borrowings under the Credit Agreement incur a floating interest rate based on the LIBOR index rate
or an alternate base rate which approximates the prime rate defined in the Credit Agreement
subjecting the Company to interest rate risk and requires a $5.0 million interest rate hedge.
As of July 3, 2011, there were no outstanding borrowings under the Credit Agreement and the Company
had cash and cash equivalents of $49.7 million.
The Credit Agreement is secured principally by a grant of a first priority security interest in all
of the Company’s personal property, including its accounts receivable. In addition, the Company
pays a commitment fee on the unused portion of the Credit Agreement as well as fees on outstanding
letters of credit.
The Company was in compliance with its financial covenants as of July 3, 2011. At July 3, 2011,
the Company had approximately $37.8 million in undrawn borrowing capacity under its Credit
Agreement, based upon borrowing base calculations.
10. Severance and Other Charges
The Company recorded less than $0.1 million and $0.5 million in severance and other charges for the
thirteen and twenty-six weeks ended July 3, 2011, respectively, related to the elimination of
certain management and administrative positions. Cash payments of $0.4 million for these severance
and other charges have been made through July 3, 2011 and remaining cash payments of $0.1 million
are payable through August 2011.
Cash payments of $0.8 million for severance and other charges related to the September 2010
resignation of Michael Marrow, the Company’s former President and Chief Executive Officer and other
positions in 2010 have been made through July 3, 2011 and remaining cash payments of $0.6 million
are payable through December 2012.
11. Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. A valuation allowance is recorded
when management believes it is more likely than not that some portion or all of the deferred tax
assets will not be realized in the future. The Company records a reserve for tax contingencies
unless it believes it is more likely than not that the deductions giving rise to these
contingencies will be sustained if challenged by taxing authorities. Tax contingencies are not
material to the financial statements.
Income tax expense for the thirteen and twenty-six weeks ended July 3, 2011 was $2.9 million and
$6.6 million, respectively. This results in a 34.5% effective income tax rate for the thirteen and
twenty-six weeks ended July 3, 2011, which is lower than the statutory rate due to the generation
of tax credits. Income tax expense for the thirteen and twenty-six weeks ended July 4, 2010 was
$2.8 million and $6.3 million, respectively. This results in a 34.5% effective income tax rate for
the thirteen and twenty-six weeks ended July 4, 2010, which is lower than the statutory rate due to
the generation of tax credits.
13
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
12. Earnings Per Share
Basic earnings per share are computed by dividing the Company’s net income by the weighted average
number of common shares outstanding. Diluted earnings per share are computed by dividing the
Company’s net income by the weighted average number of shares plus the effect of dilutive potential
common shares outstanding and non-vested common shares using the treasury stock method. The
following table sets forth the computation of basic and diluted earnings per share for the thirteen
and twenty-six weeks ended July 3, 2011 and July 4, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
|
July 3, |
|
|
July 4, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
| |
|
(In thousands, except earnings per share) |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,447 |
|
|
$ |
5,329 |
|
|
$ |
12,468 |
|
|
$ |
11,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share calculation |
|
|
51,052 |
|
|
|
52,476 |
|
|
|
51,425 |
|
|
|
52,393 |
|
Effects of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,639 |
|
|
|
2,355 |
|
|
|
1,666 |
|
|
|
2,348 |
|
Non-vested stock |
|
|
44 |
|
|
|
— |
|
|
|
40 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per share calculation |
|
|
52,735 |
|
|
|
54,831 |
|
|
|
53,131 |
|
|
|
54,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.11 |
|
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen and twenty-six weeks ended July 3, 2011, options to purchase 1.9 million and 1.8
million shares of common stock, respectively, were outstanding, but not included in the computation
of diluted net income per share because the effect would have been anti-dilutive. For the thirteen
and twenty-six weeks ended July 4, 2010, options to purchase 1.2 million and 1.0 million shares of
common stock, respectively, were outstanding, but not included in the computation of diluted net
income per share because the effect would have been anti-dilutive.
13. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. The accounting standards
establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
| |
• |
|
Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| |
| |
• |
|
Level 2 — Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly. |
| |
| |
• |
|
Level 3 — Unobservable inputs based on the Company’s own assumptions. |
14
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
The following table presents the fair value hierarchy for those assets and liabilities measured at
fair value on a recurring basis as of July 3, 2011:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements as of |
|
| |
|
July 3, 2011 |
|
| |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1) |
|
$ |
43,203 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-qualified retirement plan(2) |
|
|
2,335 |
|
|
|
— |
|
|
|
— |
|
Foreign currency(3) |
|
|
— |
|
|
|
815 |
|
|
|
— |
|
Non-current investments(4) |
|
|
1,215 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration obligation — SEI
(5) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,237 |
|
Non-qualified retirement plan obligation(2) |
|
|
2,335 |
|
|
|
— |
|
|
|
— |
|
Foreign currency contracts(3) |
|
|
— |
|
|
|
38 |
|
|
|
— |
|
(1) Cash equivalents: The
carrying amount of these items approximates fair value at period end.
(2) Non-qualified retirement
plan: The Company maintains a non-qualified retirement plan (“Select
Plan”) for highly compensated employees who are limited in the amount of contributions that they
can make in the Company’s 401K plan. As of July 3, 2011, the fair value of investments in the
Select Plan totaled $2.3 million and is reflected on the Company’s balance sheet in other current
assets. The offsetting obligation to employees participating in the Select Plan, which will always
equal the fair value of the investments, are recorded on the Company’s balance sheet in other
current liabilities.
(3) Foreign currency
contracts: The carrying amount of these items is based on the market valuation
approach which is provided by the counter-party institutions and uses the closing or mid-market
rate and forward points obtained from external sources on the date of valuation. There are no
guaranteed selling prices for these forward currency contracts.
(4) Non-current investments:
The carrying amount of these items, which represent Philippine
treasury bills, approximates fair value as of July 3, 2011 and is recorded as a component of other
assets on the Company’s balance sheet.
(5) Contingent consideration
obligation — SEI: The carrying amount of this item represents
estimated future payments related to the Company’s acquisition of the Fargo operations from SEI.
The fair value was determined using the income approach. The contingent consideration for the
Fargo acquisition was preliminarily recorded at $4.2 million at the acquisition date and the
liability did not change by a material amount from the date of acquisition to July 3, 2011.
The carrying amounts of accounts receivable, accounts payable and short-term debt approximate fair
value.
There were no transfers of assets or liabilities between Level 1 and Level 2 during the thirteen
weeks ended July 3, 2011.
15
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
14. Derivative Instruments
The Company uses forward contracts to mitigate foreign currency risk. The derivatives are
designated as cash flow hedges to the extent that the instruments qualify for accounting as a
hedging instrument; therefore, the effective portion of gains and losses that result from changes
in fair value of the derivative instruments are recorded in accumulated other comprehensive income
(OCI) until the hedged transaction affects income, at which time gains and/or losses are realized.
The Company expects these amounts to be reclassified into earnings over the next eighteen months.
If the instrument does not qualify for accounting as a hedge, the change in the value of the
instrument during the reporting period is recorded immediately to earnings. The Company assesses
hedge effectiveness each reporting period.
The objective of the foreign currency hedge contract is to mitigate the variability in cash flows
and expenses over the period of the hedge contracts due to the foreign currency risk associated
with the repayment of the intercompany accounts payable from the U.S. operations to the Philippines
representing the Philippine’s share of revenue. The Company currently engages in forward contracts
with three major financial credit institutions. Forward contracts to purchase 1,503 million
Philippine pesos at a U.S. dollar notional of $33.7 million were outstanding as of July 3, 2011.
Each contract is designated to a hedged item which is settled periodically. The hedged item
represents the change in the U.S. dollar cash flow necessary to settle the accounts payable balance
at periodic intervals over the next 18 months. The settlement timing corresponds with the payroll
and rent cycles in the Philippines. No ineffectiveness is anticipated because the notional amount
of the contracts is no more than 95% of the anticipated payable balance and declines steadily over
the course of the next eighteen months. Also, the maturity date of the forward contract coincides
with the timing of the effective repayment of the intercompany payable. The Company had no gain or
loss recognized in income related to the ineffectiveness for the thirteen and twenty-six weeks
ended July 3, 2011 and July 4, 2010.
At July 3, 2011 and January 2, 2011, the fair value carrying amount of the Company’s derivative
instruments was recorded as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Asset Derivatives |
|
| |
|
|
|
Fair Value |
|
| |
|
Balance Sheet |
|
July 3, |
|
|
January 2, |
|
| |
|
Location |
|
2011 |
|
|
2011 |
|
Derivatives designated
as hedging instruments : |
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Other Current Assets |
|
$ |
815 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
815 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Liability Derivatives |
|
| |
|
|
|
Fair Value |
|
| |
|
Balance Sheet |
|
July 3, |
|
|
January 2, |
|
| |
|
Location |
|
2011 |
|
|
2011 |
|
Derivatives designated
as hedging instruments : |
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Accrued Liabilities |
|
$ |
38 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
38 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
16
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
The effect of derivative instruments on the unaudited condensed consolidated statement of
operations for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010 was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income on |
|
| |
|
(Loss) Recognized in |
|
|
Gain (Loss) Reclassified from |
|
|
Derivatives (Ineffective Portion and |
|
| Derivatives |
|
OCI on Derivatives |
|
|
Accumulated OCI into Income |
|
|
Amount Excluded from Effectiveness |
|
| Designated as |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
Testing) |
|
| Cash Flow |
|
Thirteen Weeks Ended |
|
| Hedging |
|
July 3, |
|
|
July 4, |
|
|
|
|
|
|
July 3, |
|
|
July 4, |
|
|
|
|
|
|
July 3, |
|
|
July 4, |
|
| Instruments |
|
2011 |
|
|
2010 |
|
|
Location |
|
|
2011 |
|
|
2010 |
|
|
Location |
|
|
2011 |
|
|
2010 |
|
Foreign currency
contracts |
|
$ |
(284 |
) |
|
$ |
(636 |
) |
|
Cost of Services |
|
$ |
415 |
|
|
$ |
392 |
|
|
na |
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income on |
|
| |
|
(Loss) Recognized in |
|
|
Gain (Loss) Reclassified from |
|
|
Derivatives (Ineffective Portion and |
|
| Derivatives |
|
OCI on Derivatives |
|
|
Accumulated OCI into Income |
|
|
Amount Excluded from Effectiveness |
|
| Designated as |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
Testing) |
|
| Cash Flow |
|
Twenty-Six Weeks Ended |
|
| Hedging |
|
July 3, |
|
|
July 4, |
|
|
|
|
|
|
July 3, |
|
|
July 4, |
|
|
|
|
|
|
July 3, |
|
|
July 4, |
|
| Instruments |
|
2011 |
|
|
2010 |
|
|
Location |
|
|
2011 |
|
|
2010 |
|
|
Location |
|
|
2011 |
|
|
2010 |
|
Foreign currency
contracts |
|
$ |
(203 |
) |
|
$ |
(366 |
) |
|
Cost of Services |
|
$ |
664 |
|
|
$ |
642 |
|
|
na |
|
$ |
— |
|
|
$ |
— |
|
As of July 3, 2011, $0.7 million of unrealized gains included in accumulated OCI relate to
contracts that may impact earnings during the next 12 months.
15. Subsequent Events
On July 6, 2011, the Company and One Equity Partners (“One Equity”) the private investment arm of
JPMorgan Chase & Co, entered into a definitive merger agreement under which Blackhawk Acquisition
Parent, LLC, (“Blackhawk”), an affiliate of One Equity will acquire 100% of the outstanding shares
of the Company, through an all-cash transaction with an aggregate equity value of approximately
$470 million. The agreement provides for the merger of the Company with Blackhawk Merger Sub, Inc.
(“Merger Sub”), a wholly owned subsidiary of Blackhawk. On July 29, 2011, the Company received
notice of early termination of the waiting period under the Hart-Scott-Rodino Act of 1976 (as
amended). The transaction is expected to close prior to the end of 2011, subject to the
satisfaction of customary closing conditions, including, without limitation, approval of the
Company’s shareholders.
On or about July 15, 2011, a purported class action complaint was filed against the Company. The
Complaint was filed in the Circuit Court of the Nineteenth Judicial Circuit, Lake County, Illinois
against the Company, all of its directors and One Equity, Blackhawk and Merger Sub. The complaint
alleges that the directors breached their fiduciary duties as it relates to the Merger. The
complaint also alleges that One Equity, Blackhawk and Merger Sub aided and abetted the directors in
breaching their fiduciary duties. The Company believes that the complaint is wholly without merit
and intends to vigorously defend this action.
17
|
|
|
| Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our management’s discussion and analysis of financial condition and results of operations should be
read in conjunction with our unaudited condensed consolidated financial statements and related
notes thereto appearing elsewhere in this report and our audited consolidated financial statements
which appear in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended
January 2, 2011. Our management’s discussion and analysis contains “forward-looking statements”.
All forward-looking statements are inherently uncertain as they are based on various expectations
and assumptions about future events and are subject to known and unknown risks and uncertainties,
and other factors that may cause our actual results, performance, or achievements to be materially
different from those expressed or implied by the forward-looking statements. See “Forward Looking
Statements and Factors That May Affect Future Results” on page 3 and page 4 of this Quarterly
Report on Form 10-Q and Item 1A in Part II of this Quarterly Report on Form 10-Q.
Overview
We are a leading provider of customer care services and solutions to market leaders in the
healthcare, communications, business services, media & publishing, travel & entertainment,
technology and financial services industries. Our services are provided through customer care
centers staffed with skilled customer service representatives in domestic, international, and
client-owned locations. As of July 3, 2011, we operated 17 customer care centers; eight domestic,
two domestic client-owned facilities, five international centers located in the Philippines, one
international center located in the Dominican Republic and one international center located in
Uruguay. Additionally, we provide services to one of our clients through a co-location
arrangement at one of the client’s domestic facilities. As of July 3, 2011, our domestic
operations consisted of approximately 6,500 workstations and our international operations consisted
of approximately 4,700 workstations.
During 2008, we restructured our operations resulting in the reduction of overhead costs and
headcount, refinanced our debt, and took steps to improve our operating efficiencies. We realized
an immediate impact from these and other cost savings initiatives resulting in us being profitable
on a full year basis for fiscal year 2008. In 2009, we expanded the sales organization and focused
on expanding our service offerings and client base. In 2010, we continued to expand our service
offerings in off-shore locations and increased our capital spending positioning us for future
growth.
In September 2010, Kevin Keleghan joined the Company as President and Chief Executive Officer after
serving on our Board of Directors during the previous year. Mr. Keleghan brings broad-based
experience and strong strategic capabilities to lead us into the future. He has more than 25 years
of experience in financial and business services, call center management, and outsourcing, along
with a strong track record of operational leadership and of strategically building businesses.
In April 2011, we acquired certain assets and assumed certain liabilities of the Fargo, North
Dakota tele-sales services business unit (“Fargo”) of Shields Enterprises International LLC
(“SEI”). The acquisition includes the contracts and related services which SEI has historically
delivered to one of the world’s leading technology companies. The acquisition date preliminary
fair value of the consideration transferred totaled $6.4 million, which consisted of the following:
cash of $2.2 million and contingent consideration of $4.2 million. For more information regarding
the acquisition, see Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1
of this Quarterly Report on Form 10-Q.
In the first six months of 2011, our revenue increased 4.9% to $170.5 million as compared to $162.6
million for the first six months of 2010. Our gross profit totaled $36.0 million, generating a
margin of 21.1%. Net income rose to $12.5 million, a 4.9% increase as compared to $11.9 million in
the comparable prior year period.
The results of the Fargo operations have been included in the unaudited condensed consolidated
financial statements since the date of the acquisition resulting in revenue of $1.9 million.
On July 6, 2011, the Company and One Equity Partners (“One Equity”) the private investment arm of
JPMorgan Chase & Co, entered into a definitive merger agreement under which Blackhawk Acquisition
Parent, LLC, (“Blackhawk”), an affiliate of One Equity will acquire 100% of the outstanding shares
of the Company, through an all-cash transaction with an aggregate equity value of approximately
$470 million. The agreement provides for the merger of the Company
with Blackhawk Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of Blackhawk. On July
29, 2011, the Company received notice of early termination of the waiting period under the
Hart-Scott-Rodino Act of 1976 (as amended). The transaction is expected to close prior to the end
of 2011, subject to the satisfaction of customary closing conditions, including, without
limitation, approval of the Company’s shareholders.
18
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
in the United States requires us to make estimates and judgments that affect the amounts reported
in the unaudited condensed consolidated financial statements and accompanying notes. Certain of our
accounting policies are considered critical, due to the level of subjectivity and judgment
necessary in applying these policies and because the impact of these estimates and assumptions on
our financial condition and operating performance may be material. On an ongoing basis, we
evaluate our estimates and judgments in these areas based on historic experience and other relevant
factors. The estimates as of the date of the financial statements reflect our best judgment giving
consideration to all currently available facts and circumstances. We believe our estimates and
judgments are reasonable, however, actual results and the timing of the recognition of such amounts
could differ from those estimates.
We have used methodologies that are consistent from year to year in all material respects. We have
identified the following accounting policies and estimates that we believe are most critical in the
preparation of our unaudited condensed consolidated financial statements: accounting for
derivatives, allowance for doubtful accounts, accounting for employee benefits, revenue
recognition, intangible assets, accounting for stock-based compensation and income taxes. For
details concerning these critical accounting policies and estimates see Item 7 of Part II of our
Annual Report on Form 10-K for the fiscal year ended January 2, 2011, under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” and Note 3 to our audited consolidated financial statements
which appears in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended
January 2, 2011. Any deviation from these policies or estimates could have a material impact on
our unaudited condensed consolidated financial statements.
19
Results of Operations
The following table sets forth selected information about our results of operations for the
thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively. Certain
additional components of cost of services have been included as we believe they would enhance an
understanding of our results of operations. All amounts in the table below are presented in
thousands.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
|
Fav (Unfav) |
|
|
July 3, |
|
|
July 4, |
|
|
Fav (Unfav) |
|
| |
|
2011 |
|
|
2010% |
|
|
Change |
|
|
2011 |
|
|
2010% |
|
|
Change |
|
| |
Net Revenue |
|
$ |
82,494 |
|
|
$ |
77,386 |
|
|
|
6.6 |
% |
|
$ |
170,537 |
|
|
$ |
162,640 |
|
|
|
4.9 |
% |
Cost of Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct labor |
|
|
43,558 |
|
|
|
41,170 |
|
|
|
(5.8 |
) |
|
|
89,729 |
|
|
|
86,372 |
|
|
|
(3.9 |
) |
Other facility expenses |
|
|
22,400 |
|
|
|
19,839 |
|
|
|
(12.9 |
) |
|
|
44,773 |
|
|
|
39,445 |
|
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
65,958 |
|
|
|
61,009 |
|
|
|
(8.1 |
) |
|
|
134,502 |
|
|
|
125,817 |
|
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
80.0 |
% |
|
|
78.8 |
% |
|
|
— |
|
|
|
78.9 |
% |
|
|
77.4 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
16,536 |
|
|
|
16,377 |
|
|
|
1.0 |
|
|
|
36,035 |
|
|
|
36,823 |
|
|
|
(2.1 |
) |
Gross profit margin |
|
|
20.0 |
% |
|
|
21.2 |
% |
|
|
— |
|
|
|
21.1 |
% |
|
|
22.6 |
% |
|
|
— |
|
| |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
administrative expenses |
|
|
8,086 |
|
|
|
8,116 |
|
|
|
0.4 |
|
|
|
16,387 |
|
|
|
16,262 |
|
|
|
(0.8 |
) |
Legal settlement |
|
|
1 |
|
|
|
7 |
|
|
|
85.7 |
|
|
|
3 |
|
|
|
2,407 |
|
|
|
* |
|
Severance and other
charges (reversals) |
|
|
71 |
|
|
|
(13 |
) |
|
|
* |
|
|
|
496 |
|
|
|
(12 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,158 |
|
|
|
8,110 |
|
|
|
(0.6 |
) |
|
|
16,886 |
|
|
|
18,657 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8,378 |
|
|
|
8,267 |
|
|
|
1.3 |
|
|
|
19,149 |
|
|
|
18,166 |
|
|
|
5.4 |
|
Other expense, net |
|
|
34 |
|
|
|
139 |
|
|
|
75.5 |
|
|
|
54 |
|
|
|
30 |
|
|
|
(80.0 |
) |
Interest (income) expense, net |
|
|
28 |
|
|
|
(7 |
) |
|
|
(500.0 |
) |
|
|
60 |
|
|
|
(15 |
) |
|
|
(500.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,316 |
|
|
|
8,135 |
|
|
|
2.2 |
|
|
|
19,035 |
|
|
|
18,151 |
|
|
|
4.9 |
|
Income tax expense |
|
|
2,869 |
|
|
|
2,806 |
|
|
|
(2.2 |
) |
|
|
6,567 |
|
|
|
6,262 |
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,447 |
|
|
$ |
5,329 |
|
|
|
2.2 |
% |
|
$ |
12,468 |
|
|
$ |
11,889 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| * |
|
Means that the percentage change is not meaningful |
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements presented in accordance
with GAAP, we present EBITDA and adjusted EBITDA, which are defined as non-GAAP financial measures.
The presentation of these non-GAAP financial measures is not intended to be considered in
isolation or as a substitute for the financial information presented in accordance with GAAP. The
items excluded from these non-GAAP financial measures are significant components of our financial
statements and must be considered in performing a comprehensive analysis of our overall financial
results.
We believe these non-GAAP financial measures provide meaningful supplemental information and are
useful in understanding our results of operations and analyzing trends because they excludes
certain charges that are not part of our ordinary business operations.
EBITDA and adjusted EBITDA are measures used by our lenders, investors and analysts to evaluate our
financial performance and our ability to pay interest and repay debt. These measures are also
indicative of our ability to fund the capital investments necessary for our continued growth. We
use these measures, together with our GAAP financial metrics, to assess our financial performance,
allocate resources, measure our performance against debt covenants and evaluate our overall
progress towards meeting our long-term financial objectives.
20
We believe that these non-GAAP financial measures are useful to investors and analysts in allowing
for greater transparency with respect to the supplemental information used by us in our financial
and operational decision making. In addition, we believe investors, analysts and lenders benefit
from referring to EBITDA and adjusted EBITDA when assessing our performance and expectations of our
future performance. However, this information should not be used as a substitute for our GAAP
financial information; rather it should be used in conjunction with financial statement information
contained in our unaudited condensed consolidated financial statements presented in accordance with
GAAP.
Our calculation of EBITDA and adjusted EBITDA may not be consistent with calculations of similar
measures used by other companies. The accompanying notes have more details on the GAAP financial
measure that is most directly comparable to our non-GAAP financial measure and the related
reconciliation between these financial measures.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended (1) |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
|
Fav (Unfav) |
|
|
July 3, |
|
|
July 4, |
|
|
Fav (Unfav) |
|
| |
|
2011 |
|
|
2010% |
|
|
Change |
|
|
2011 |
|
|
2010% |
|
|
Change |
|
| |
|
(Dollars in thousands except statistical data and notes) |
|
| |
EBITDA (2) |
|
$ |
11,323 |
|
|
$ |
11,087 |
|
|
|
2.1 |
% |
|
$ |
24,995 |
|
|
$ |
24,207 |
|
|
|
3.3 |
% |
Adjusted EBITDA (2) |
|
$ |
11,912 |
|
|
$ |
11,387 |
|
|
|
4.6 |
% |
|
$ |
26,011 |
|
|
$ |
26,908 |
|
|
|
(3.3 |
)% |
| |
Statistical information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of customer care centers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (3) |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
International |
|
|
7 |
|
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
17 |
|
|
|
15 |
|
|
|
|
|
|
|
17 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
workstations, end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
6,510 |
|
|
|
6,267 |
|
|
|
|
|
|
|
6,510 |
|
|
|
6,267 |
|
|
|
|
|
International |
|
|
4,710 |
|
|
|
4,222 |
|
|
|
|
|
|
|
4,710 |
|
|
|
4,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,220 |
|
|
|
10,489 |
|
|
|
|
|
|
|
11,220 |
|
|
|
10,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Non-GAAP Financial Measures
(1) We operate
on a thirteen-week fiscal quarter that ends on the Sunday closest to June 30.
(2) We define
EBITDA as net income plus income tax expense, depreciation and amortization, and
interest expense. We define adjusted EBITDA as EBITDA adjusted for legal settlement expense,
severance and other charges, transaction-related costs and accelerated stock compensation
expense.
EBITDA and adjusted EBITDA are measures used by our lenders, investors and analysts to evaluate our
financial performance and our ability to pay interest and repay debt. These measures are also
indicative of our ability to fund the capital investments necessary for our continued growth. We
use these measures, together with our GAAP financial metrics, to assess our financial performance,
allocate resources, measure our performance against debt covenants and evaluate our overall
progress towards meeting our long-term financial objectives.
EBITDA and adjusted EBITDA are not intended to be considered in isolation or used as a substitute
for net income or cash flow from operations data presented in accordance with GAAP or as a measure
of liquidity. The items excluded from EBITDA and adjusted EBITDA are significant components of our
statements of operations and must be considered in performing a comprehensive assessment of our
overall financial results.
21
EBITDA and adjusted EBITDA can be reconciled to net income, which we believe to be the most
directly comparable financial measure calculated and presented in accordance with GAAP, as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
|
July 3, |
|
|
July 4, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
| |
|
(Dollars in thousands) |
|
| |
Net income |
|
$ |
5,447 |
|
|
$ |
5,329 |
|
|
$ |
12,468 |
|
|
$ |
11,889 |
|
Interest (income) expense, net |
|
|
28 |
|
|
|
(7 |
) |
|
|
60 |
|
|
|
(15 |
) |
Income tax expense |
|
|
2,869 |
|
|
|
2,806 |
|
|
|
6,567 |
|
|
|
6,262 |
|
Depreciation and amortization |
|
|
2,979 |
|
|
|
2,959 |
|
|
|
5,900 |
|
|
|
6,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
11,323 |
|
|
$ |
11,087 |
|
|
$ |
24,995 |
|
|
$ |
24,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Settlement |
|
|
1 |
|
|
|
7 |
|
|
|
3 |
|
|
|
2,407 |
|
Severance and other charges (reversals) |
|
|
71 |
|
|
|
(13 |
) |
|
|
496 |
|
|
|
(12 |
) |
Transaction-related costs |
|
|
517 |
|
|
|
— |
|
|
|
517 |
|
|
|
— |
|
Accelerated stock compensation expense |
|
|
— |
|
|
|
306 |
|
|
|
— |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
11,912 |
|
|
$ |
11,387 |
|
|
$ |
26,011 |
|
|
$ |
26,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (3) |
|
We provide services to one of our clients through a co-location arrangement at one of the
client’s domestic facilities. |
22
Comparison of Results of Operations for the Thirteen Weeks Ended July 3, 2011 and July 4, 2010
Net revenue increased 6.6% to $82.5 million for the thirteen weeks ended July 3, 2011, as compared
to $77.4 million for the thirteen weeks ended July 4, 2010. The increase in revenue of $5.1
million is primarily driven by growth from new and existing clients of $5.7 million in the media &
publishing vertical, $3.1 million in the technology vertical, of which $1.9 million relates to the
Fargo operations, $1.6 million in the business services vertical and $1.4 million of other
services, partially offset by a $6.7 million decrease in the communications vertical.
Cost of services increased $5.0 million, or 8.1%, to $66.0 million for the thirteen weeks ended
July 3, 2011, from $61.0 million for the thirteen weeks ended July 4, 2010. Direct labor increased
$2.4 million, or 5.8%, primarily driven by increased volume in the off-shore media & publishing
vertical, increased volume in the domestic technology vertical, due in part to the addition of the
Fargo operations and increased volume in the domestic business services verticals, partially offset
by decreased volume in the domestic telecommunications vertical and decreased international
efficiencies. Total facility and other costs increased $2.6 million, or 12.9%, due to $2.1 million
of increased facility costs associated with increased growth at our customer care centers in the
Philippines and the Dominican Republic, the build-out of our customer care center in Uruguay, the
addition of the Fargo operations and increased domestic maintenance costs. Other facility expenses
increased $0.5 million due to $0.3 million of increased technology costs, $0.1 million of salaries
and wages associated with increased operations support and $0.1 million of other facility expenses.
Cost of services as a percentage of revenue increased to 80.0% for the thirteen weeks ended July
3, 2011, as compared to 78.8% for the thirteen weeks ended July 4, 2010, primarily due to decreased
volume in the domestic telecommunications vertical, an increase in domestic wage rates and
benefits, the build-out of the Uruguay customer care center, decreased international efficiencies
and increased domestic maintenance costs.
Gross profit increased $0.1 million, or 1%, to $16.5 million for the thirteen weeks ended July 3,
2011, as compared to $16.4 million for the thirteen weeks ended July 4, 2010, as a result of the
increased revenue being offset by increased direct labor and facility costs. Gross profit margin
decreased from 21.2% for the thirteen weeks ended July 4, 2010 to 20.0% for the thirteen weeks
ended July 3, 2011 driven by decreased volume in the domestic telecommunications vertical, an
increase in domestic wage rates and benefits, the build-out of the Uruguay customer care center,
decreased international efficiencies and increased domestic maintenance costs.
Selling, general and administrative expenses were flat at $8.1 million for the thirteen weeks ended
July 3, 2011, as compared to the thirteen weeks ended July 4, 2010, as increases in professional
fees of $0.5 million associated with the Fargo acquisition and pending merger with Blackhawk are
offset by a $0.2 million decrease in other professional fees and a $0.3 million decrease in costs
associated with the final amortization of intangible assets recorded in 2010.
Severance and other charges were $0.1 million for the thirteen weeks ended July 3, 2011, as
compared to a slight reversal of severance and other charges for the thirteen weeks ended July 4,
2010 and related to the elimination of certain management and administrative positions.
Operating income was $8.4 million for the thirteen weeks ended July 3, 2011, as compared to $8.3
million for the thirteen weeks ended July 4, 2010. The $0.1 million increase is the result of an
increase in gross profit, as noted above.
Net interest expense of less than $0.1 million for the thirteen weeks ended July 3, 2011 was
primarily related to $0.1 million of fees associated with the Revolving Loan Facility with PNC,
partially offset by $0.1 million from the amortization of points on forward contracts. Net
interest income of less than $0.1 million for the thirteen weeks ended July 4, 2010 was primarily
related to $0.1 million from the amortization of points on forward contracts, offset by $0.1
million of fees associated with the Revolving Loan Facility with PNC.
EBITDA was $11.3 million for the thirteen weeks ended July 3, 2011, a $0.2 million increase from
$11.1 million for the thirteen weeks ended July 4, 2010. Adjusting for legal settlement expense,
severance and other charges, transaction-related costs and accelerated stock compensation expense,
adjusted EBITDA was $11.9 million for the thirteen weeks ended July 3, 2011, as compared to $11.4
million for the thirteen weeks ended July 4, 2010. More information concerning these non-GAAP
financial measures, including the definition of EBITDA and adjusted EBITDA and a reconciliation of
these measures to the most directly comparable financial measures calculated and presented in
accordance with GAAP, can be found under the heading “Non-GAAP Financial Measures” and the
accompanying notes thereto appearing elsewhere in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
23
Income tax expense for the thirteen weeks ended July 3, 2011 was $2.9 million. This results in a
34.5% effective income tax rate for the thirteen weeks ended July 3, 2011, which is lower than the
statutory rate due to the generation of tax credits. Income tax expense for the thirteen weeks
ended July 4, 2010 was $2.8 million which represents an effective rate of 34.5%.
Net income for the thirteen weeks ended July 3, 2011 was $5.4 million, as compared to $5.3 million
for the thirteen weeks ended July 4, 2010. The $0.1 million increase is driven by the increase in
gross profit, as noted above.
Comparison of Results of Operations for the Twenty-six Weeks Ended July 3, 2011 and July 4, 2010
Net revenue increased 4.9% to $170.5 million for the twenty-six weeks ended July 3, 2011, as
compared to $162.6 million for the twenty-six weeks ended July 4, 2010. The increase in revenue of
$7.9 million is primarily driven by growth from new and existing clients of $12.9 million in the
media & publishing vertical, $5.1 million in the technology vertical, of which $1.9 million relates
to the Fargo operations, $3.3 million in the business services vertical and $2.4 million of other
services, partially offset by a $13.8 million decrease in the telecommunications vertical and a
$2.0 million decrease in the healthcare vertical associated with a customer who existed this
vertical in the fourth quarter of 2010.
Cost of services increased $8.7 million, or 6.9%, to $134.5 million for the twenty-six weeks ended
July 3, 2011, from $125.8 million for the twenty-six weeks ended July 4, 2010. Direct labor
increased $3.4 million, or 3.9%, primarily driven by increased international volume and expansion,
increased volume in the domestic business services vertical and increased volume in the domestic
technology vertical, due in part to the addition of the Fargo operations, partially offset by lower
domestic wages due to the decline in volume in the telecommunications vertical. Total facility and
other costs increased $5.3 million, or 13.5%, due to $3.4 million of increased facility costs
associated with increased growth at our customer care centers in the Philippines and the Dominican
Republic, the build-out of our customer care center in Uruguay, the addition of the Fargo
operations and increased domestic maintenance costs. Other facility expenses increased $1.9
million due to $0.7 million of increased technology costs, $0.4 million of salaries and wages
associated with increased operations support and $0.8 million of other facility costs. Cost of
services as a percentage of revenue increased to 78.9% for the twenty-six weeks ended July 3, 2011,
as compared to 77.4% for the twenty-six weeks ended July 4, 2010, as a result of decreased domestic
and international efficiencies, and the build-out of the Uruguay customer care center.
Gross profit was $36.0 million for the twenty-six weeks ended July 3, 2011, as compared to $36.8
million for the twenty-six weeks ended July 4, 2010. The $0.8 million decrease is primarily due to
decreased volumes in the domestic technology vertical and increased facility costs related to the
build-out of the Uruguay customer care center, partially offset by increased international volume
in the media & publishing vertical. Gross profit margin decreased from 22.6% for the twenty-six
weeks ended July 4, 2010 to 21.1% for the twenty-six weeks ended July 3, 2011 driven by decreased
domestic and international efficiencies, and the build-out of the Uruguay customer care center.
Selling, general and administrative expenses were $16.4 million for the twenty-six weeks ended July
3, 2011, as compared to $16.3 million for the twenty-six weeks ended July 4, 2010. The $0.1
million increase is primarily associated with a $0.5 million increase in professional fees
resulting from the acquisition of the Fargo operations and the pending merger with Blackhawk, a
$0.3 million increase in compensation and benefits and a $0.3 million increase in technology
expense, partially offset by a $0.8 million decrease in costs associated with the final
amortization on intangible assets recorded in 2010 and a $0.2 million decrease in other
professional fees.
Legal settlement expense was $2.4 million for the twenty-six weeks ended July 4, 2010 related to a
proposed litigation settlement of the Tiffany Sharpe, et al. v. APAC Customer Services, Inc. suit.
The $2.4 million recorded for the thirteen weeks ended April 4, 2010 represented our estimate at
that time of the costs to be incurred for attorneys’ fees and claims, based on expected opt-in
rates for claimants in similar actions. For more information regarding the 2010 legal settlement,
see Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly
Report on Form 10-Q.
24
Severance and other charges were $0.5 million for the twenty-six weeks ended July 3, 2011, as
compared to a slight reversal of severance and other charges for the twenty-six weeks ended July 4,
2010. The $0.5 million increase related to the elimination of certain management and
administrative positions.
Operating income was $19.2 million for the twenty-six weeks ended July 3, 2011, as compared to
$18.2 million for the twenty-six weeks ended July 4, 2010. The $1.0 million increase was the
result of a decrease in legal settlement expense of $2.4 million, partially offset by an $0.8
million decrease in gross profit, a $0.5 million increase in severance and other charges and a $0.1
million increase in selling, general and administrative expenses.
Net interest expense of $0.1 million for the twenty-six weeks ended July 3, 2011 was primarily
related to $0.3 million of fees associated with the Revolving Loan Facility with PNC, partially
offset by $0.2 million from the amortization of points on forward contracts. Net interest income
of less than $0.1 million for the twenty-six weeks ended July 4, 2010 was primarily related to $0.2
million from the amortization of points on forward contracts, partially offset by $0.2 million of
fees associated with the Revolving Loan Facility with PNC.
EBITDA was $25.0 million for the twenty-six weeks ended July 3, 2011, a $0.8 million increase from
$24.2 million for the twenty-six weeks ended July 4, 2010. Adjusting for legal settlement expense,
severance and other charges, transaction-related costs and accelerated stock compensation expense,
adjusted EBITDA was $26.0 million for the twenty-six weeks ended July 3, 2011, as compared to $26.9
million for the twenty-six weeks ended July 4, 2010. The $0.9 million decrease was primarily due
to the decrease in legal settlement expense and accelerated stock compensation expense, partially
offset by a decrease in gross profit and an increase in severance and other charges and
transaction-related costs, as noted above. More information concerning these non-GAAP financial
measures, including the definition of EBITDA and adjusted EBITDA and a reconciliation of these
measures to the most directly comparable financial measures calculated and presented in accordance
with GAAP, can be found under the heading “Non-GAAP Financial Measures” and the accompanying notes
thereto appearing elsewhere in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Income tax expense for the twenty-six weeks ended July 3, 2011 was $6.6 million. This results in a
34.5% effective income tax rate for the twenty-six weeks ended July 3, 2011, which is lower than
the statutory rate due to the generation of tax credits. Due to the utilization of net operating
loss carryforwards and tax credits, our estimated cash taxes paid for fiscal year 2011 will be
approximately 10-15% of income before taxes. Income tax expense for the twenty-six weeks ended
July 4, 2010 was $6.3 million which represents an effective rate of 34.5%.
Net income for the twenty-six weeks ended July 3, 2011 was $12.5 million, as compared to $11.9
million for the twenty-six weeks ended July 4, 2010.
Liquidity and Capital Resources
The following table sets forth our unaudited condensed consolidated statements of cash flow data
for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively.
| |
|
|
|
|
|
|
|
|
| |
|
Twenty-Six Weeks Ended |
|
| |
|
July 3, |
|
|
July 4, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
(Dollars in thousands) |
|
Net cash provided by operating activities |
|
$ |
25,609 |
|
|
$ |
28,961 |
|
Net cash used in investing activities |
|
|
(8,985 |
) |
|
|
(3,967 |
) |
Net cash (used in) provided by financing
activities |
|
|
(8,239 |
) |
|
|
201 |
|
Effect of exchange rate changes on cash |
|
|
(43 |
) |
|
|
(336 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
8,342 |
|
|
$ |
24,859 |
|
|
|
|
|
|
|
|
25
Operating Activities
Net cash provided by operating activities was $25.6 million for the twenty-six weeks ended July 3,
2011, as compared to $29.0 million for the twenty-six weeks ended July 4, 2010. The $3.4 million
decrease was primarily the result of a $2.0 million change in accounts receivable due to the timing
of cash receipts, a $1.6 million decrease in deferred income taxes driven by the utilization of net
operating loss carryforwards and net changes in prepaid expenses and other assets and liabilities
of $0.9 million, partially offset by a $1.2 million decrease in accrued payroll primarily related
to incentive compensation.
Investing Activities
Net cash used in investing activities of $9.0 million for the twenty-six weeks ended July 3, 2011
consisted primarily of $2.6 million in capital expenditures related to client implementations, $2.4
million for the build-out of new facilities, $2.2 million for the acquisition of the Fargo
operations and $1.8 million in continued investment in operational and information technology
equipment. Cash used in investing activities of $4.0 million for the twenty-six weeks ended
July 4, 2010 consisted primarily of $2.8 million in continued investment in operational and
information technology equipment and $1.2 million in capital expenditures related to client
implementations.
Financing Activities
Net cash used in financing activities of $8.2 million for the twenty-six weeks ended July 3, 2011
is primarily the result of an $8.0 million repurchase of our common stock and $0.5 million of
payments against capital lease obligations, partially offset by $0.3 million of cash received from
the exercise of stock options. Net cash provided by financing activities of $0.2 million for the
twenty-six weeks ended July 4, 2010 relates to $0.5 million in cash received from the exercise of
stock options, partially offset by $0.3 million in payments on capital leases.
Bank Financing
We are party to a Revolving Credit and Security Agreement, as amended, (the “Credit Agreement”)
with PNC Bank National Association (“PNC”), as agent, and the financial institutions from time to
time parties thereto as lenders. The Credit Agreement provides us with up to a $40.0 million
revolving loan facility which was originally set to expire in May 2011. On April 27, 2011, we
entered into the Second Amendment to Revolving Credit and Security Agreement (the “Second
Amendment”) which amended the Credit Agreement among the Company, Agent and Lenders dated May 5,
2008. The Second Amendment extended the term of the Credit Agreement to September 30, 2011. We
are uncertain as to whether the Merger will be completed before the expiration of the current
Credit Agreement and are currently evaluating our options with respect to a further extension of
the Credit Agreement. We expect that we will be able to obtain an extension of the Credit
Agreement under similar terms to the current extension of the Credit Agreement. In the event an
extension of the Credit Agreement cannot be obtained, we believe cash balances and cash flows from
operations will be sufficient to meet projected operating needs and fund any planned capital
expenditures for the next twelve months.
The Credit Agreement contains certain financial covenants including limits on the amount of capital
expenditures and maintenance of a minimum fixed charge coverage ratio. Other covenants in the
Credit Agreement prohibit us (with limited exceptions) from incurring additional indebtedness,
repurchasing outstanding common shares, permitting liens, acquiring, selling or disposing of
certain assets, engaging in certain mergers and acquisitions, paying dividends or making certain
restricted payments. We obtained a waiver from PNC permitting us to execute our stock repurchase
program as approved by our Board of Directors. Our ability to borrow under the Credit Agreement
depends on the amount of eligible accounts receivable from our clients.
As of July 3, 2011, there were no outstanding borrowings under the Credit Agreement and we had cash
and cash equivalents of $49.7 million. We had approximately $37.8 million of undrawn borrowing
capacity under the Credit Agreement as of July 3, 2011, based upon borrowing base calculations. We
were in compliance with our financial covenants as of July 3, 2011.
26
Future Liquidity
We expect that our cash balances of $49.7 million, cash flows from operations and available
borrowings of $37.8 million under our Credit Agreement will be sufficient to meet projected
operating needs, fund any planned capital expenditures and repay debt obligations for the next
twelve months.
We are not aware of any issues with our lenders which might cause funds not to be available for us
to draw upon under the terms of our Credit Agreement.
27
|
|
|
| Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to the impact of U.S. interest rate changes directly related to our normal operating
and funding activities and foreign currency exchange risk related to our operating costs in
international locations. Our Revolving Loan Agreement bears interest at floating rates, subjecting
us to interest rate risk. To date, the impact from interest rate fluctuations has not been
material.
The impact from foreign currency exchange rates has become significant due to the change in the
U.S. dollar relative to the Philippine peso and the increase in cost of services due to our
expanded operations in international locations. We maintain a currency rate hedging program with
the objective of mitigating the impact of significant fluctuations in the U.S. dollar / Philippine
peso exchange rate. The objective of the hedge transaction is to mitigate the variability in cash
flows and expenses over the period of the hedge contracts due to the foreign currency risk
associated with the repayment of the intercompany accounts payable from the U.S. operations to the
Philippines representing the Philippines’ share of revenue. Forward contracts to purchase 1,503
million Philippine pesos at a U.S. dollar notional of $33.7 million were outstanding as of July 3,
2011.
As we continue to expand operations in the Dominican Republic and Uruguay, the impact from foreign
currency exchange rates will become more significant. We will evaluate the use of derivatives to
mitigate this exposure as deemed necessary.
|
|
|
| Item 4. |
|
Controls and Procedures |
Disclosure Controls and Procedures
As of July 3, 2011, under the direction of our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934,
as amended, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the Securities Exchange
Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation, of our disclosure controls and procedures as of July 3,
2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the thirteen weeks ended
July 3, 2011 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
28
Part II. Other Information
For a detailed discussion of the risks and uncertainties associated with our business see Item 1A
of Part I of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011. Except as
set forth below, there have been no material changes to these risk factors since that report.
Our inability to complete the Merger with an affiliate of One Equity Partners (“One Equity”) or if
the Merger Agreement is otherwise terminated may result in adverse consequences to the Company.
We signed a merger agreement with an affiliate of One Equity on July 6, 2011. The Merger
Agreement includes a number of closing conditions which must be met to close the merger, some of
which are beyond our control. In addition, One Equity has rights to terminate the Merger Agreement
due to certain events, changes or other circumstances. If for any reason, we are unable to obtain
the necessary approvals (including, without limitation shareholder approval), meet the required
closing conditions or we do not complete the Merger, there could be negative consequences to the
Company, including, but not limited to a decline in our stock price.
The impact of the Merger on our business relationships, operating results and business generally is
unknown and may negatively impact our business.
Our client relationships are critical to the operating and financial results of the Company. It is
unclear what, if any, impact the Merger may have on our client relationships. The loss of one or
more significant clients or the inability to continue operating under existing client contracts
with terms favorable to us could materially and adversely affect our financial results and our
business.
The costs, delay and management time and attention associated with litigation related to the Merger
could negatively affect the Merger or result in a negative impact to our financial results.
Current legal proceedings have been brought against the Company or other actions may be
subsequently initiated relating to the pending Merger. Such litigation could result in significant
potential costs, diversion of management’s attention from ongoing business concerns and delay the
completion of the Merger. Additionally, as is the case with any such litigation, we cannot predict
the outcome of such proceedings.
There is the possibility that competing offers will be made which could result in the termination
of the Merger Agreement as well as additional cost, delay and potential diversion of management’s
attention.
If we receive competing offers, the Board of Directors of the Company, consistent with its duties
and the Merger Agreement, may need to consider such competing offers which could result in the
termination of the Merger Agreement as well as additional cost, delay and potential diversion of
management’s attention from the business during the pendency or consummation of a proposed
transaction. Any such delays and increased costs may harm our business and operations.
29
|
|
|
| Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information about our purchase of our common stock during the second
fiscal quarter of 2011:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer Purchases of Equity Securities |
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
| |
|
Total Number |
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that May |
|
| |
|
of Shares (or |
|
|
Average Price |
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
| |
|
Units) |
|
|
Paid per Share |
|
|
Announced Plans |
|
|
Under the Plans or |
|
| Period |
|
Purchased |
|
|
(or Unit) |
|
|
or Programs (1) |
|
|
Programs (1) |
|
Beg Balance 4/03/2011 |
|
|
1,791,325 |
|
|
$ |
5.75 |
|
|
|
1,791,325 |
|
|
|
3,208,675 |
|
4/04/2011 - 5/01/2011 |
|
|
306,940 |
|
|
|
5.94 |
|
|
|
306,940 |
|
|
|
2,901,735 |
|
5/02/2011 - 5/29/2011 |
|
|
135,350 |
|
|
|
5.65 |
|
|
|
135,350 |
|
|
|
2,766,385 |
|
5/30/2011 - 7/03/2011 |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
2,766,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,233,615 |
|
|
$ |
5.77 |
|
|
|
2,233,615 |
|
|
|
2,766,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
On August 18, 2010, we announced that our Board of Directors had authorized the
repurchase of up to an aggregate of five million shares of our common stock. Under the stock
repurchase program, purchases will be made from time to time on the open market at prevailing
market prices or in negotiated transactions off the market. We are not obligated to acquire any
particular amount of common stock as a result of the plan, which may be suspended at any time at
our discretion. In light of the pending acquisition of the Company by Blackhawk, as described
above, we do not currently intend to make any further repurchases of our common stock. |
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached
hereto.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
APAC Customer Services, Inc.
|
|
| Date: August 3, 2011 |
By: |
/s/ Kevin T. Keleghan
|
|
| |
|
Kevin T. Keleghan |
|
| |
|
President and
Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| Date: August 3, 2011 |
By: |
/s/ Andrew B. Szafran
|
|
| |
|
Andrew B. Szafran |
|
| |
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
| |
| |
|
|
| Date: August 3, 2011 |
By: |
/s/ Joseph R. Doolan
|
|
| |
|
Joseph R. Doolan |
|
| |
|
Vice President and Controller
(Principal Accounting Officer) |
|
| |
31
Exhibit Index
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
3.1 |
|
|
Amended and Restated Articles of Incorporation of APAC Customer
Services, Inc., incorporated by reference to APAC Customer
Services, Inc.’s Annual Report on Form 10-K for the fiscal year
ended January 1, 2006. |
| |
3.2 |
|
|
Second Amended and Restated Bylaws of APAC Customer Services,
Inc., dated August 20, 2007, incorporated by reference to APAC
Customer Services, Inc.’s Current Report on Form 8-K, dated August
22, 2007. |
| |
4.1 |
|
|
Specimen Common Stock Certificate, incorporated by reference to
APAC Customer Services, Inc.’s Annual Report on Form 10-K for the
fiscal year ended December 28, 2008. |
| |
10.1 |
|
|
Second Amendment to Revolving Credit and Security Agreement, dated
April 27, 2011, incorporated by reference to APAC Customer
Services, Inc.’s Current Report on Form 8-K, filed on May 3, 2011. |
| |
10.2 |
|
|
Employment Agreement with Gregory M. Carr, dated May 31, 2011,
incorporated by reference to APAC Customer Services, Inc.’s
Current Report on Form 8-K, dated June 6, 2011. |
| |
10.3 |
|
|
Agreement Protecting Company Interests with Gregory M. Carr, dated
May 31, 2011, incorporated by reference to APAC Customer Services,
Inc.’s Current Report on Form 8K, dated June 6, 2011. |
| |
31.1 |
|
|
Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 |
|
|
Certification of Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 |
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
32