Form 10-Q
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 4, 2010
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 Plaza 1, 2333 Waukegan Road, Suite 100, 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 o 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
There were 52,642,438 common shares, $0.01 par value per share, outstanding as of August 6, 2010.
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
that can cause actual events and results to differ materially from historic results and those
projected.
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 affect our
financial results. |
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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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The failure to effectively manage our production capacity and our
workforce could negatively impact our financial results. |
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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 the Company, 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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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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Our financial results may be affected by risks associated with
international operations and expansion, including, but not limited
to foreign currency fluctuations and changes to laws in other
countries. |
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Our principal shareholder can exercise significant control over
the Company and, as a result of such control may be able to exert
considerable influence over our future direction and operations. |
| • |
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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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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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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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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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The costs and management time and attention associated with
litigation could result in a negative impact to financial results. |
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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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Volatility in our stock price may result in loss of investment for
shareholders as well as litigation, substantial cost and 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 3, 2010, 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 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
Item 1. Condensed Consolidated Financial Statements
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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July 4, |
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January 3, |
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2010 |
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2010 |
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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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$ |
45,416 |
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$ |
20,557 |
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Accounts receivable, net |
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36,540 |
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45,358 |
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Deferred tax assets, current |
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9,045 |
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14,593 |
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Other current assets |
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8,508 |
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6,323 |
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Total current assets |
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99,509 |
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86,831 |
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Property and equipment, net |
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24,796 |
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25,653 |
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Goodwill |
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13,338 |
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13,338 |
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Other intangible assets, net |
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147 |
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1,028 |
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Deferred tax assets, non-current |
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10,170 |
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10,170 |
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Other assets |
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1,742 |
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1,585 |
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Total assets |
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$ |
149,702 |
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$ |
138,605 |
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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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$ |
505 |
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$ |
397 |
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Accounts payable |
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2,395 |
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2,770 |
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Income taxes payable |
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— |
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365 |
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Accrued payroll and related items |
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20,227 |
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21,964 |
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Accrued liabilities |
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10,384 |
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9,190 |
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Total current liabilities |
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33,511 |
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34,686 |
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Other non-current liabilities |
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3,170 |
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4,171 |
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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, $0.01 per share; authorized 200,000,000 shares;
52,642,438 shares issued and outstanding at July 4, 2010, and
52,318,726 shares issued and outstanding at January 3, 2010 |
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526 |
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523 |
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Additional paid-in capital |
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111,542 |
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109,818 |
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Accumulated earnings (deficit) |
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201 |
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(11,688 |
) |
Accumulated other comprehensive income |
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752 |
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1,095 |
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Total shareholders’ equity |
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113,021 |
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99,748 |
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Total liabilities and shareholders’ equity |
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$ |
149,702 |
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$ |
138,605 |
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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 4, |
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June 28, |
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July 4, |
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June 28, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenue |
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$ |
77,386 |
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$ |
66,042 |
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$ |
162,640 |
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$ |
139,288 |
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Cost of services |
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61,009 |
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50,638 |
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125,817 |
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105,334 |
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Gross profit |
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16,377 |
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15,404 |
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36,823 |
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33,954 |
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Operating expenses: |
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Selling, general and administrative
expenses |
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8,103 |
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7,603 |
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16,250 |
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15,297 |
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Legal settlement |
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7 |
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— |
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2,407 |
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4 |
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Total operating expenses |
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8,110 |
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7,603 |
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18,657 |
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15,301 |
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Operating income |
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8,267 |
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7,801 |
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18,166 |
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18,653 |
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Other (income) expense |
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139 |
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(23 |
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30 |
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(30 |
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Interest (income) expense |
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(7 |
) |
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(47 |
) |
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(15 |
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42 |
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Income before income taxes |
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8,135 |
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7,871 |
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18,151 |
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18,641 |
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Income tax expense |
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2,806 |
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135 |
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6,262 |
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286 |
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Net income |
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$ |
5,329 |
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$ |
7,736 |
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$ |
11,889 |
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$ |
18,355 |
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Net income per share: |
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Basic |
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$ |
0.10 |
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$ |
0.15 |
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$ |
0.23 |
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$ |
0.36 |
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Diluted |
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$ |
0.10 |
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$ |
0.14 |
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$ |
0.22 |
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$ |
0.34 |
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Weighted average number of shares
outstanding: |
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Basic |
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52,476 |
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51,404 |
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52,393 |
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51,111 |
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Diluted |
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54,831 |
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54,567 |
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54,745 |
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53,241 |
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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 4, |
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June 28, |
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2010 |
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2009 |
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Operating activities: |
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Net income |
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$ |
11,889 |
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$ |
18,355 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation and amortization |
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6,071 |
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5,782 |
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Deferred income taxes |
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5,548 |
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— |
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Stock compensation expense |
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1,195 |
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|
219 |
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Amortized gain on sale leaseback |
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(52 |
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(47 |
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Gain on sale of property and equipment |
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(1 |
) |
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(1 |
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Income taxes payable |
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(365 |
) |
|
|
283 |
|
Change in operating assets and liabilities |
|
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4,676 |
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(6,473 |
) |
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Net cash provided by operating activities |
|
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28,961 |
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18,118 |
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Investing activities: |
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Purchases of property and equipment, net |
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(3,968 |
) |
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(5,467 |
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Net proceeds from sale of property and equipment |
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|
1 |
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|
1 |
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Net cash used in investing activities |
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(3,967 |
) |
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(5,466 |
) |
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Financing activities: |
|
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Net payments under revolving credit facility |
|
|
— |
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(6,100 |
) |
Payment of capital lease obligations |
|
|
(332 |
) |
|
|
(16 |
) |
Stock option transactions, including related excess
income tax benefits |
|
|
533 |
|
|
|
1,771 |
|
|
|
|
|
|
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Net cash provided by (used in) financing activities |
|
|
201 |
|
|
|
(4,345 |
) |
|
|
|
|
|
|
|
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Effect of exchange rate change on cash |
|
|
(336 |
) |
|
|
680 |
|
|
|
|
|
|
|
|
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Net increase in cash and cash equivalents |
|
|
24,859 |
|
|
|
8,987 |
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Cash and cash equivalents: |
|
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|
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Beginning balance |
|
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20,557 |
|
|
|
618 |
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Ending balance |
|
$ |
45,416 |
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$ |
9,605 |
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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 and
the Dominican 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 4, 2010 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 3, 2010. 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
Fair Value
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance amending
Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures”. ASC
Sub-topic 820-10 and related guidance was amended to require disclosure of the transfers in and out
of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances
and settlements and requires more detailed disclosures regarding valuation techniques and inputs.
This update is effective for interim and annual reporting periods beginning after December 15, 2009
except for the disclosures about purchases, sales issuances and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption
of this guidance effective January 4, 2010, the beginning of the Company’s current fiscal year, did
not have a material impact on the Company’s condensed consolidated financial statements. See Note
11 for disclosures associated with the adoption of this guidance.
Revenue Recognition
In October 2009, the FASB issued guidance on 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 is not expected to have a material impact on the Company’s 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)
Subsequent Events
In February 2010, the FASB issued guidance amending Topic 855 “Subsequent Events”, to clarify that
while SEC filers are required to evaluate subsequent events through the date financial statements
are issued, they will not be required to disclose the date through which subsequent events have
been evaluated. This guidance is effective as of February 24, 2010. The Company adopted this
guidance during the fiscal quarter ended April 4, 2010. The adoption did not have a material
impact on the Company’s condensed consolidated financial statements. See Note 14 for disclosures
associated with the adoption of this guidance.
3. Accrued Liabilities
The components of other current accrued liabilities included in the condensed consolidated balance
sheets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
July 4, |
|
|
January 3, |
|
| |
|
2010 |
|
|
2010 |
|
Accrued legal settlement |
|
$ |
2,400 |
|
|
$ |
— |
|
Non-qualified retirement plan liability |
|
|
1,981 |
|
|
|
1,931 |
|
Deferred rent |
|
|
1,012 |
|
|
|
1,134 |
|
Accrued professional fees |
|
|
858 |
|
|
|
719 |
|
Accrued temporary labor |
|
|
674 |
|
|
|
839 |
|
Accrued workers’ compensation |
|
|
582 |
|
|
|
929 |
|
Accrued telecommunications expense |
|
|
537 |
|
|
|
961 |
|
Accrued capital expenditures |
|
|
253 |
|
|
|
890 |
|
Other accrued liabilities |
|
|
2,087 |
|
|
|
1,787 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,384 |
|
|
$ |
9,190 |
|
|
|
|
|
|
|
|
4. Goodwill and Other Intangible Assets
There were no significant changes in goodwill for the twenty-six weeks ended July 4, 2010. As of
July 4, 2010 and January 3, 2010, 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
$28.5 million and accumulated amortization of $28.5 million and $27.6 million as of July 4, 2010
and January 3, 2010, respectively. The acquired customer relationships have been fully amortized
as of July 4, 2010. The internally developed software has a gross carrying value of $0.4 million
and $0.3 million as of July 4, 2010 and January 3, 2010, respectively, and accumulated amortization
of $0.2 million as of July 4, 2010 and January 3, 2010. Total amortization expense related to
intangible assets was $0.3 million and $0.6 million for the thirteen weeks ended July 4, 2010 and
June 28, 2009, respectively, and $0.9 million and $1.2 million for the twenty-six weeks ended July
4, 2010 and June 28, 2009, respectively.
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 1.2 million shares are available for future grants at July 4, 2010.
9
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
Total stock-based compensation expense was $0.7 million and $0.2 million for the thirteen weeks
ended July 4, 2010 and June 28, 2009, respectively. For the twenty-six weeks ended July 4, 2010
and June 28, 2009, total stock-based compensation expense was $1.2 million and $0.2 million,
respectively. As of July 4, 2010, there was $3.7 million of unrecognized compensation cost related
to unvested awards that is expected to be recognized over a weighted-average period of
approximately 3.2 years.
A summary of the Company’s non-vested common share grant activity during the twenty-six weeks ended
July 4, 2010 is presented below:
| |
|
|
|
|
| |
|
Number of |
|
| |
|
Shares |
|
Outstanding on January 3, 2010 |
|
|
25,000 |
|
Granted |
|
|
— |
|
Issued |
|
|
(25,000 |
) |
Forfeited |
|
|
— |
|
Expired |
|
|
— |
|
|
|
|
|
Outstanding on July 4, 2010 |
|
|
— |
|
|
|
|
|
The Company did not award non-vested common shares during the twenty-six weeks ended July 4, 2010
and June 28, 2009.
A summary of the Company’s stock option grant activity during the twenty-six weeks ended July 4,
2010 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Grant Price Range |
|
|
Exercise Price |
|
|
Intrinsic |
|
| |
|
Options |
|
|
Per Share |
|
|
Per Share |
|
|
Value |
|
Outstanding on January 3, 2010 |
|
|
6,136,677 |
|
|
$ |
0.79 |
|
– |
$ |
11.63 |
|
|
$ |
2.24 |
|
|
|
|
|
Granted |
|
|
482,440 |
|
|
|
5.68 |
|
– |
|
5.96 |
|
|
|
5.80 |
|
|
|
|
|
Exercised |
|
|
(323,712 |
) |
|
|
1.06 |
|
– |
|
3.57 |
|
|
|
1.65 |
|
|
|
|
|
Forfeited |
|
|
(3,500 |
) |
|
|
5.31 |
|
– |
|
5.31 |
|
|
|
5.31 |
|
|
|
|
|
Expired |
|
|
(18,000 |
) |
|
|
2.81 |
|
– |
|
11.63 |
|
|
|
10.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on July 4, 2010 |
|
|
6,273,905 |
|
|
$ |
0.79 |
|
– |
$ |
7.36 |
|
|
$ |
2.52 |
|
|
$ |
19,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on July 4, 2010 |
|
|
3,161,719 |
|
|
$ |
0.79 |
|
– |
$ |
7.36 |
|
|
$ |
2.17 |
|
|
$ |
10,908 |
|
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.
10
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
6. Comprehensive Income
Comprehensive income for the thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 4, |
|
|
June 28, |
|
|
July 4, |
|
|
June 28, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
5,329 |
|
|
$ |
7,736 |
|
|
$ |
11,889 |
|
|
$ |
18,355 |
|
Foreign currency translation adjustment |
|
|
(167 |
) |
|
|
19 |
|
|
|
23 |
|
|
|
(104 |
) |
Unrealized gain on derivative contracts |
|
|
(636 |
) |
|
|
257 |
|
|
|
(366 |
) |
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
4,526 |
|
|
$ |
8,012 |
|
|
$ |
11,546 |
|
|
$ |
18,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Legal Proceedings
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 charge of $2.4 million
for the thirteen weeks ended April 4, 2010 which represents its estimate of the costs to be
incurred for attorneys’ fees and claims, based on expected opt-in rates for claimants in similar
actions. The final amount which will ultimately be paid by the Company under the agreement will be
determined based on the participation from eligible class members as well as the Court’s final
ruling with respect to plaintiff attorneys’ fees.
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 has chosen to settle this
lawsuit in order to avoid the distraction and additional legal expenses that would otherwise be
incurred.
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.
11
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
8. Debt
As of July 4, 2010, there were no outstanding borrowings under the Revolving Loan Agreement and the
Company had cash and cash equivalents of $45.4 million.
As of January 4, 2010, the Company was party to a Revolving Credit and Security Agreement, as
amended, (Revolving Loan Agreement) with PNC Bank National Association (PNC), as agent, and the
financial institutions from time to time parties thereto as lenders. The Revolving Loan Agreement
provides the Company with a $40.0 million revolving loan facility which expires in May 2011.
The Company’s ability to borrow under the Revolving Loan Agreement depends on the amount of
eligible accounts receivable from its clients. The Revolving Loan 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 Revolving Loan 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.
Borrowings under the Revolving Loan 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 Revolving
Loan Agreement subjecting the Company to interest rate risk and required a $5.0 million interest
rate hedge. In August 2008, the Company entered into a pay fixed / receive floating interest rate
swap for a $5.0 million notional amount. The objective of the swap was to mitigate the variability
in cash flows resulting from changes in the LIBOR rate. In June 2009, the swap was terminated due
to the elimination of all outstanding borrowings.
The Revolving Loan 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 Revolving Loan Agreement
as well as fees on outstanding letters of credit.
The Company was in compliance with its financial covenants related to the Revolving Loan Agreement
as of July 4, 2010.
9. 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 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. Income tax expense for the thirteen and twenty-six weeks ended June 28, 2009, was
$0.1 million and $0.3 million, respectively. This was driven by a gross income earned tax of 5% on
a portion of our Philippine financial results and certain state income taxes on our domestic
financial results. The federal tax provision for the thirteen and twenty-six weeks ended June 28,
2009 was fully offset by the utilization of net operating loss carryforwards and work opportunity
tax credits. This resulted in a 1.7% effective tax rate for the thirteen weeks ended June 28, 2009
and a 1.5% effective income tax rate for the twenty-six weeks ended June 28, 2009.
12
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
10. 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 and dilutive potential common shares
outstanding during the period. The following table sets forth the computation of basic and diluted
earnings per share for the thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
| |
|
July 4, |
|
|
June 28, |
|
|
July 4, |
|
|
June 28, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(In thousands, except earnings per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,329 |
|
|
$ |
7,736 |
|
|
$ |
11,889 |
|
|
$ |
18,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share calculation |
|
|
52,476 |
|
|
|
51,404 |
|
|
|
52,393 |
|
|
|
51,111 |
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
2,355 |
|
|
|
3,138 |
|
|
|
2,348 |
|
|
|
2,105 |
|
Non-vested stock |
|
|
— |
|
|
|
25 |
|
|
|
4 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per share calculation |
|
|
54,831 |
|
|
|
54,567 |
|
|
|
54,745 |
|
|
|
53,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.23 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.10 |
|
|
$ |
0.14 |
|
|
$ |
0.22 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. 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. |
The following table presents the fair value hierarchy for those assets and liabilities measured at
fair value on a recurring basis as of July 4, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements as of July 4, 2010 |
|
| |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1) |
|
$ |
35,773 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-qualified retirement plan(2) |
|
|
1,981 |
|
|
|
— |
|
|
|
— |
|
Foreign currency derivative contracts(3) |
|
|
— |
|
|
|
163 |
|
|
|
— |
|
Non-current investments(4) |
|
|
126 |
|
|
|
— |
|
|
|
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts(3) |
|
$ |
— |
|
|
$ |
160 |
|
|
$ |
— |
|
Non-qualified retirement plan obligation(2) |
|
|
1,981 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
| (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 401-K plan. As of July 4, 2010, the fair value of investments in the Select
Plan totaled $2.0 million and is reflected on the Company’s balance sheet in other current assets.
The related 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. |
13
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
| |
|
|
| (3) |
|
Foreign currency derivative contracts: The carrying amount of these items is based on
valuations provided by the counter-party institution, but 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 at as of July 4, 2010 and is recorded as a component of
other assets on the Company’s balance sheet. |
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
and twenty-six weeks ended July 4, 2010.
12. Derivative Instruments
The Company uses forward contracts to mitigate foreign currency risk and had used an interest rate
swap to mitigate interest rate risk. The Company’s 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 Philippines share of revenue. The Company currently engages in forward contracts
with two major financial credit institutions. Forward contracts to purchase approximately 1,017
million Philippine pesos at a U.S. dollar notional of $21.5 million were outstanding as of July 4,
2010.
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.
14
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
At July 4, 2010 and January 3, 2010, the fair value carrying amount of the Company’s derivative
instruments was recorded as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Asset Derivatives |
|
| |
|
|
|
|
|
Fair Value |
|
| |
|
Balance Sheet |
|
|
July 4, |
|
|
January 3, |
|
| |
|
Location |
|
|
2010 |
|
|
2010 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Other Current Assets |
|
|
$ |
163 |
|
|
$ |
657 |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
163 |
|
|
$ |
657 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Liability Derivatives |
|
| |
|
|
|
|
|
Fair Value |
|
| |
|
Balance Sheet |
|
|
July 4, |
|
|
January 3, |
|
| |
|
Location |
|
|
2010 |
|
|
2010 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Accrued Liabilities |
|
|
$ |
160 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
160 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not have any derivatives not designated as hedging instruments for the thirteen and
twenty-six weeks ended July 4, 2010 and June 28, 2009. The effect of derivative instruments on the
Condensed Consolidated Statement of Operations for the thirteen and twenty-six weeks ended July 4,
2010 and June 28, 2009 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income on |
|
| |
|
Recognized in OCI on |
|
|
Gain (Loss) Reclassified from |
|
|
Derivatives (Ineffective Portion and |
|
| Derivatives |
|
Derivatives (Effective |
|
|
|
Accumulated OCI into Income |
|
Amount Excluded from Effectiveness |
|
| Designated as |
|
Portion) |
|
|
(Effective Portion) |
|
|
Testing) |
|
| Cash Flow |
|
Thirteen Weeks Ended |
|
| Hedging |
|
July 4, |
|
|
June 28, |
|
|
|
|
|
|
July 4, |
|
|
June 28, |
|
|
|
|
|
|
July 4, |
|
|
June 28, |
|
| Instruments |
|
2010 |
|
|
2009 |
|
|
Location |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
Foreign currency contracts |
|
$ |
(636 |
) |
|
$ |
257 |
|
|
Cost of Services |
|
$ |
259 |
|
|
$ |
(398 |
) |
|
na |
|
$ |
— |
|
|
$ |
— |
|
| |
| |
|
Amount of Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income on |
|
| |
|
Recognized in OCI on |
|
|
Gain (Loss) Reclassified from |
|
|
Derivatives (Ineffective Portion and |
|
| Derivatives |
|
Derivatives (Effective |
|
|
Accumulated OCI into Income |
|
|
Amount Excluded from Effectiveness |
|
| Designated as |
|
Portion) |
|
|
(Effective Portion) |
|
|
Testing) |
|
| Cash Flow |
|
Twenty-Six Weeks Ended |
|
| Hedging |
|
July 4, |
|
|
June 28, |
|
|
|
|
|
|
July 4, |
|
|
June 28, |
|
|
|
|
|
|
July 4, |
|
|
June 28, |
|
| Instruments |
|
2010 |
|
|
2009 |
|
|
Location |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
Foreign currency contracts |
|
$ |
(366 |
) |
|
$ |
614 |
|
|
Cost of Services |
|
$ |
465 |
|
|
$ |
(942 |
) |
|
na |
|
$ |
— |
|
|
$ |
— |
|
15
APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
13. Reclassifications
Certain immaterial amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
14. Subsequent Events
The Company evaluated all events or transactions that occurred after the balance sheet date of July
4, 2010. The Company did not have any material recognizable subsequent events.
16
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 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 3, 2010.
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
communications, healthcare, business services, media & publishing, travel & entertainment,
financial services, and technology 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 4, 2010, we operated 15 customer care centers; eight domestic,
two domestic client-owned facilities, four off-shore centers located in the Philippines and one
near-shore facility located in the Dominican Republic. As of July 4, 2010, our domestic operations
consisted of approximately 6,300 workstations and our international operations consisted of
approximately 4,200 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. Our focus on
improving our financial performance resulted in increased gross profit margins, improved cash flow,
lower levels of debt and profitability on a full year basis in fiscal year 2008. This
transformation laid the foundation to return the Company to a sustainable, profitable operation.
During 2009, we continued to see a favorable impact from the initiatives launched in 2008. We
expanded the sales organization and focused on expanding our service offerings and client base. We
opened our fourth customer care center in the Philippines and a second customer care center in
Tucson, Arizona, expanded our atHOME™ program, and began call center operations in the Dominican
Republic. These actions resulted in an increase in revenue of 17.8% to $293.2 million for 2009 as
compared to $248.8 million for 2008, and resulted in improvements in operating margins to 11.8% for
2009, as compared to 2.8% in 2008. Operating cash flow improved significantly allowing us to fully
pay off all outstanding debt and establish a cash position of $20.6 million as of January 3, 2010.
Because of the significant improvement in our forecasted financial performance, we reversed
substantially all of the valuation allowance that had been provided against our deferred tax assets
in the fourth quarter of fiscal year 2009.
During the first half of 2010, we saw continued improvement in our financial performance. Our
revenue increased 16.8% to $162.6 million for the twenty-six weeks ended July 4, 2010, as compared
to $139.3 million for the twenty-six weeks ended June 28, 2009. Our gross profit increased $2.8
million to $36.8 million for the twenty-six weeks ended July 4, 2010, as compared to $34.0 million
for the twenty-six weeks ended June 28, 2009. Operating cash flow continued to be strong resulting
in a cash position of $45.4 million as of July 4, 2010.
During the first half of 2010, we benefited from the addition of several new clients, the result of
increasing our sales efforts. In addition, we have expanded our client services team to ensure we
are continually focused on enhancing the quality, dependability and overall value of the services
we provide for our clients.
17
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 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 condensed consolidated financial statements: accounting for derivatives,
allowance for doubtful accounts, accounting for employee benefits, revenue recognition, intangible
assets, restructuring charges, 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 3, 2010, 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 3, 2010. Any deviation from these policies or estimates could have a material impact on
our condensed consolidated financial statements.
18
Results of Operations
The following table sets forth selected information about our results of operations for the
thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009, 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 4, |
|
|
June 28, |
|
|
Fav (Unfav) |
|
|
July 4, |
|
|
June 28, |
|
|
Fav (Unfav) |
|
| |
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue |
|
$ |
77,386 |
|
|
$ |
66,042 |
|
|
|
17.2 |
% |
|
$ |
162,640 |
|
|
$ |
139,288 |
|
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct labor |
|
|
41,170 |
|
|
|
34,212 |
|
|
|
(20.3 |
) |
|
|
86,372 |
|
|
|
72,520 |
|
|
|
(19.1 |
) |
Other facility expenses |
|
|
19,839 |
|
|
|
16,426 |
|
|
|
(20.8 |
) |
|
|
39,445 |
|
|
|
32,814 |
|
|
|
(20.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
61,009 |
|
|
|
50,638 |
|
|
|
(20.5 |
) |
|
|
125,817 |
|
|
|
105,334 |
|
|
|
(19.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
78.8 |
% |
|
|
76.7 |
% |
|
|
— |
|
|
|
77.4 |
% |
|
|
75.6 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
16,377 |
|
|
|
15,404 |
|
|
|
6.3 |
|
|
|
36,823 |
|
|
|
33,954 |
|
|
|
8.4 |
|
Gross profit margin |
|
|
21.2 |
% |
|
|
23.3 |
% |
|
|
— |
|
|
|
22.6 |
% |
|
|
24.4 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
administrative expenses |
|
|
8,103 |
|
|
|
7,603 |
|
|
|
(6.6 |
) |
|
|
16,250 |
|
|
|
15,297 |
|
|
|
(6.2 |
) |
Legal settlement |
|
|
7 |
|
|
|
— |
|
|
|
* |
|
|
|
2,407 |
|
|
|
4 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,110 |
|
|
|
7,603 |
|
|
|
(6.7 |
) |
|
|
18,657 |
|
|
|
15,301 |
|
|
|
(21.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8,267 |
|
|
|
7,801 |
|
|
|
6.0 |
|
|
|
18,166 |
|
|
|
18,653 |
|
|
|
(2.6 |
) |
Other (income) expense |
|
|
139 |
|
|
|
(23 |
) |
|
|
(704.3 |
) |
|
|
30 |
|
|
|
(30 |
) |
|
|
(200.0 |
) |
Interest (income) expense |
|
|
(7 |
) |
|
|
(47 |
) |
|
|
(85.1 |
) |
|
|
(15 |
) |
|
|
42 |
|
|
|
135.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,135 |
|
|
|
7,871 |
|
|
|
3.4 |
|
|
|
18,151 |
|
|
|
18,641 |
|
|
|
(2.6 |
) |
Income tax expense |
|
|
2,806 |
|
|
|
135 |
|
|
|
* |
|
|
|
6,262 |
|
|
|
286 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,329 |
|
|
$ |
7,736 |
|
|
|
(31.1 |
)% |
|
$ |
11,889 |
|
|
$ |
18,355 |
|
|
|
(35.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| * |
|
Means that the percentage change is not meaningful |
Non-GAAP Financial Measures
To supplement our Condensed Consolidated Financial Statements presented in accordance with GAAP, we
present EBITDA, which is defined as a non-GAAP financial measure. The presentation of this
non-GAAP financial measure 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 this non-GAAP
financial measure are significant components of our financial statements and must be considered in
performing a comprehensive analysis of our overall financial results.
We believe this non-GAAP financial measure provides meaningful supplemental information and is
useful in understanding our results of operations and analyzing trends because it excludes certain
charges such as interest, taxes, depreciation and amortization expenses that are not part of our
ordinary business operations.
EBITDA is a measure used by our lenders, investors and analysts to evaluate our financial
performance and our ability to pay interest and repay debt. This measure is also indicative of our
ability to fund the capital investments necessary for our continued growth. We use this measure,
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.
19
We believe that this non-GAAP financial measure is 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 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
Condensed Consolidated Financial Statements presented in accordance with GAAP.
We use a consistent method for computation of EBITDA. Our calculation of 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 4, |
|
|
June 28, |
|
|
Fav (Unfav) |
|
|
July 4, |
|
|
June 28, |
|
|
Fav (Unfav) |
|
| |
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
| |
|
(Dollars in thousands except statistical data and notes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (2) |
|
$ |
11,087 |
|
|
$ |
10,777 |
|
|
|
2.9 |
% |
|
$ |
24,207 |
|
|
$ |
24,465 |
|
|
|
(1.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of customer care centers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
10 |
|
|
|
9 |
|
|
|
|
|
International |
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
15 |
|
|
|
13 |
|
|
|
|
|
|
|
15 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of workstations,
end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
6,267 |
|
|
|
5,396 |
|
|
|
|
|
|
|
6,267 |
|
|
|
5,396 |
|
|
|
|
|
International |
|
|
4,222 |
|
|
|
3,707 |
|
|
|
|
|
|
|
4,222 |
|
|
|
3,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,489 |
|
|
|
9,103 |
|
|
|
|
|
|
|
10,489 |
|
|
|
9,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (benefit), depreciation and
amortization, and interest expense. |
EBITDA is a measure used by our lenders, investors and analysts to evaluate our financial
performance and our ability to pay interest and repay debt. This measure is also indicative of our
ability to fund the capital investments necessary for our continued growth. We use this measure,
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 is 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 are significant components of our statements of operations and must be
considered in performing a comprehensive assessment of our overall financial results.
20
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 4, |
|
|
June 28, |
|
|
July 4, |
|
|
June 28, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,329 |
|
|
$ |
7,736 |
|
|
$ |
11,889 |
|
|
$ |
18,355 |
|
Interest (income) expense |
|
|
(7 |
) |
|
|
(47 |
) |
|
|
(15 |
) |
|
|
42 |
|
Income tax expense |
|
|
2,806 |
|
|
|
135 |
|
|
|
6,262 |
|
|
|
286 |
|
Depreciation and amortization |
|
|
2,959 |
|
|
|
2,953 |
|
|
|
6,071 |
|
|
|
5,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
11,087 |
|
|
$ |
10,777 |
|
|
$ |
24,207 |
|
|
$ |
24,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Comparison of Results of Operations for the Thirteen Weeks Ended July 4, 2010 and June 28, 2009
Net revenue increased 17.2% to $77.4 million for the thirteen weeks ended July 4, 2010, as compared
to $66.0 million for the thirteen weeks ended June 28, 2009. The increase in revenue of $11.4
million is primarily driven by growth with existing and new clients of $3.4 million in the media &
publishing vertical, $3.3 million in the communications vertical, $2.4 million in the business
services vertical, $1.3 million in the healthcare vertical, $0.6 million in the financial services
vertical, $0.5 million in the technology vertical and $0.4 of other services, partially offset by a
decline in revenue of $0.5 million in the travel & entertainment vertical.
Cost of services increased $10.4 million, or 20.5%, to $61.0 million for the thirteen weeks ended
July 4, 2010, from $50.6 million for the thirteen weeks ended June 28, 2009. Direct labor
increased $7.0 million, or 20.3%, primarily driven by increased volume in the domestic
communications, business services, media & publishing and healthcare verticals and by decreased
domestic efficiencies. Facility and other costs increased $3.4 million, or 20.8%, due to $1.6
million of increased facility costs primarily related to the addition of our second customer care
center in Tucson, Arizona, the opening of a customer care center in the Dominican Republic and
increased growth at our customer care centers in Green Bay, Wisconsin and Davenport, Iowa, as well
as at our fourth center in the Philippines. Other facility expenses increased $1.8 million due to
$0.8 million of salaries and wages associated with increased operational support, $0.4 million of
increased information technology costs, $0.3 million of increased telecommunication costs
associated with increased volumes domestically and off-shore and $0.3 million of other facility
expenses. Cost of services as a percentage of revenue increased to 78.8% for the thirteen weeks
ended July 4, 2010, as compared to 76.7% for the thirteen weeks ended June 28, 2009, primarily due
to increased facility and other costs and decreased domestic efficiencies.
Gross profit increased $1.0 million, or 6.3%, to $16.4 million for the thirteen weeks ended July 4,
2010, as compared to $15.4 million for the thirteen weeks ended June 28, 2009, primarily due to
increased volume in the domestic communications, business services, media & publishing and
healthcare verticals, partially offset by increased facility and other costs and decreased domestic
efficiencies. Gross profit margin decreased from 23.3% for the thirteen weeks ended June 28, 2009
to 21.2% for the thirteen weeks ended July 4, 2010 driven by increased facility and other costs and
decreased domestic efficiencies.
Selling, general and administrative expenses were $8.1 million for the thirteen weeks ended July 4,
2010, a $0.5 million increase from $7.6 million for the thirteen weeks ended June 28, 2009. The
increase is primarily due to a $0.5 million increase in stock compensation expense resulting from
the acceleration of expense related to the June 2010 retirement of two members of our Board of
Directors, a $0.3 million increase in compensation and benefits primarily associated with an
increase in our sales personnel and a $0.3 million increase in other expenses, partially offset by
a $0.3 million decrease in costs associated with the final amortization of intangible assets, a
$0.2 million decrease in professional fees and a $0.1 million decrease in bad debt expense.
Operating income was $8.3 million for the thirteen weeks ended July 4, 2010, as compared to $7.8
million for the thirteen weeks ended June 28, 2009. The $0.5 million increase is the result of an
increase in gross profit, partially offset by an increase in selling, general and administrative
expenses.
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. Net interest income of
less than $0.1 million for the thirteen weeks ended June 28, 2009 was primarily related to $0.2
million from the amortization of points on forward contracts, partially offset by $0.2 million of
fees and interest associated with borrowings under the Revolving Loan Facility with PNC.
EBITDA was $11.1 million for the thirteen weeks ended July 4, 2010, an increase of $0.3 million, as
compared to $10.8 million for the thirteen weeks ended June 28, 2009. The increase was primarily
due to an increase in gross profit, partially offset by an increase in selling, general and
administrative expenses, as noted above. More information concerning this non-GAAP financial
measure, including the definition of EBITDA and a reconciliation of this measure to the most
directly comparable financial measure 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.
22
Income tax expense was $2.8 million for the thirteen weeks ended July 4, 2010 which represents an
effective rate of 34.5%. This is lower than the statutory rate due to
the generation of tax
credits. Our estimated cash taxes for fiscal year 2010 will be approximately 5% of income before
taxes due to the utilization of net operating loss carryforwards and tax credits. Income tax
expense was $0.1 million for the thirteen weeks ended June 28, 2009. This was driven by a gross
income earned tax of 5% on a portion of our Philippine financial results and domestic state income
taxes. The Federal tax provision was fully offset by the utilization of net operating loss
carryforwards and work opportunity tax credits. This resulted in a 1.7% effective income tax rate
for the thirteen weeks ended June 28, 2009.
Net income for the thirteen weeks ended July 4, 2010 was $5.3 million, as compared to $7.7 million
for the thirteen weeks ended June 28, 2009. The $2.4 million decrease was primarily due to the
$2.7 million increase in income tax expense and the increase in selling, general and administrative
expenses, partially offset by the improvement in gross profit, all as noted above.
Comparison of Results of Operations for the Twenty-six Weeks Ended July 4, 2010 and June 28, 2009
Net revenue increased 16.8% to $162.6 million for the twenty-six weeks ended July 4, 2010, as
compared to $139.3 million for the twenty-six weeks ended June 28, 2009. The increase in revenue
of $23.3 million is primarily drive by growth with existing and new clients of $9.8 million in the
communications vertical, $5.9 million in the media & publishing vertical, $4.1 million in the
business services vertical, $2.7 million in the healthcare vertical, $1.4 million in the financial
services vertical, $0.5 million in the technology vertical and $0.4 million of other services,
partially offset by a decline in revenue of $1.5 million in the travel & entertainment vertical.
Cost of services increased $20.5 million, or 19.4%, to $125.8 million for the twenty-six weeks
ended July 4, 2010, from $105.3 million for the twenty-six weeks ended June 28, 2009. Direct labor
increased $13.9 million, or 19.1%, primarily driven by increased volume in the domestic
communications, business services and healthcare verticals, increased volume in the media &
publishing vertical, both domestically and off-shore and by decreased domestic efficiencies,
partially offset by lower healthcare volume off-shore and lower wage rates and employee benefits,
both domestically and off-shore. Facility and other costs increased $6.6 million, or 20.2%,
primarily due to $3.4 million of increased facility costs primarily related to the addition of our
second customer care center in Tucson, Arizona, the opening of our fourth customer care center in
the Philippines, the opening of a customer care center in the Dominican Republic and growth in our
customer care centers in Green Bay, Wisconsin and Davenport, Iowa. Other facility expenses
increased $3.2 million due to $1.6 million of salaries and wages associated with increased
operational support, $0.6 million of telecommunication costs associated with increased volumes
domestically and off-shore, $0.6 million of increased information technology costs and $0.4 million
of other facility expenses. Cost of services as a percentage of revenue increased to 77.4% for the
twenty-six weeks ended July 4, 2010, as compared to 75.6% for the twenty-six weeks ended June 28,
2009, as a result of increased facility and other costs and decreased domestic efficiencies.
Gross profit increased $2.8 million, or 8.4%, to $36.8 million for the twenty-six weeks ended July
4, 2010, as compared to $34.0 million for the twenty-six weeks ended June 28, 2009, primarily due
to increased volume in the domestic communications, business services and healthcare verticals and
increased volume in the media & publishing vertical, both domestically and off-shore, partially
offset by lower healthcare volume off-shore, increased facility and other costs, and decreased
domestic efficiencies. Gross profit margin decreased from 24.4% for the twenty-six weeks ended
June 28, 2009 to 22.6% for the twenty-six weeks ended July 4, 2010 driven by increased facility and
other costs and decreased domestic efficiencies.
Selling, general and administrative expenses were $16.3 million for the twenty-six weeks ended July
4, 2010, a 6.2% increase as compared to $15.3 million for the twenty-six weeks ended June 28, 2009.
The $1.0 million increase is primarily due to a $1.0 million increase in stock compensation
expense resulting from the acceleration of expense related to the June 2010 retirement of two
members of our Board of Directors and the impact of an expense reversal during the first quarter of
fiscal year 2009 related to options vesting at that time, but which were forfeited in earlier
periods, a $0.6 million increase in compensation and benefits primarily associated with an increase
in our sales and executive teams, a $0.3 million increase in travel and entertainment, and a $0.4
million net increase in other expenses, partially offset by a $0.6 million decrease in professional
fees, a $0.4 million decrease in bad debt expense and a $0.3 million decrease in costs associated
with the final amortization of intangible assets.
23
Legal settlement expense was $2.4 million for the twenty-six weeks ended July 4, 2010 and related
to the settlement of the Tiffany Sharpe, et al. v. APAC Customer Services, Inc. suit. Under the
terms of the agreement, which was approved by the Court on June 16, 2010, we have 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. The $2.4 million recorded for the
twenty-six weeks ended July 4, 2010 represents our estimate of the costs to be incurred for
attorneys’ fees and claims, based on expected opt-in rates for claimants in similar actions. The
final amount which will ultimately be paid by us under the agreement will be determined based on
the participation from eligible class members as well as the Court’s final ruling with respect to
plaintiff attorneys’ fees.
Operating income was $18.2 million for the twenty-six weeks ended July 4, 2010, as compared to
$18.7 million for the twenty-six weeks ended June 28, 2009. The $0.5 million decrease was the
result of the estimated legal settlement of $2.4 million and the $1.0 million increase in selling,
general and administrative expenses, partially offset by $2.9 million increase in gross profit, as
noted above.
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. Net interest
expense was less than $0.1 million for the twenty-six weeks ended June 28, 2009 and was primarily
related to $0.4 million of fees and interest associated with borrowings under the Revolving Loan
Facility, offset by $0.4 million related to the amortization of points on forward contracts.
EBITDA was $24.2 million for the twenty-six weeks ended July 4, 2010, a decrease of $0.3 million,
as compared to $24.5 million for the twenty-six weeks ended June 28, 2009. The decrease was
primarily due to the estimated legal settlement and the increase in selling, general and
administrative expenses, partially offset by higher gross profit, as noted above. More information
concerning this non-GAAP financial measure, including the definition of EBITDA and a reconciliation
of this measure to the most directly comparable financial measure 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 was $6.3 million for the twenty-six weeks ended July 4, 2010 which represents an
effective rate of 34.5%. This is lower than the statutory rate due to
the generation of tax
credits. Our estimated cash taxes for fiscal year 2010 will be approximately 5% of income before
taxes due to the utilization of net operating loss carryforwards and tax credits. Income tax
expense was $0.3 million for the twenty-six weeks ended June 28, 2009. This was driven by a gross
income earned tax of 5% on a portion of our Philippine financial results and domestic state income
taxes. The Federal tax provision was fully offset by the utilization of net operating loss
carryforwards and work opportunity tax credits. This resulted in a 1.5% effective income tax rate
for the twenty-six weeks ended June 28, 2009.
Net income for the twenty-six weeks ended July 4, 2010 was $11.9 million, as compared to $18.4
million for the twenty-six weeks ended June 28, 2009. The $6.5 million decrease was primarily due
to a $6.0 million increase in income tax expense, the estimated legal settlement expense of $2.4
million and the increase in selling, general and administrative expenses of $1.0 million, partially
offset by the $2.9 million increase in gross profit, all as noted above.
24
Liquidity and Capital Resources
The following table sets forth our condensed consolidated statements of cash flow data for the
twenty-six weeks ended July 4, 2010 and June 28, 2009, respectively.
| |
|
|
|
|
|
|
|
|
| |
|
Twenty-Six Weeks Ended |
|
| |
|
July 4, |
|
|
June 28, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in thousands) |
|
Net cash provided by operating activities |
|
$ |
28,961 |
|
|
$ |
18,118 |
|
Net cash used in investing activities |
|
|
(3,967 |
) |
|
|
(5,466 |
) |
Net cash provided by (used in) financing activities |
|
|
201 |
|
|
|
(4,345 |
) |
Effect of exchange rate changes on cash |
|
|
(336 |
) |
|
|
680 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
24,859 |
|
|
$ |
8,987 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities increased approximately $10.8 million to $29.0 million
for the twenty-six weeks ended July 4, 2010, as compared to $18.1 million for the twenty-six weeks
ended June 28, 2009. The net increase was primarily due to a reduction in accounts receivable of
$9.4 million, an increase of $2.4 million for estimated legal settlement expense and a decrease in
deferred tax assets of $5.5 million, partially offset by a $6.5 million decrease in net income.
Investing Activities
Net cash used in investing activities decreased $1.5 million to $4.0 million for the twenty-six
weeks ended July 4, 2010, as compared to $5.5 million for the twenty-six weeks ended June 28, 2009.
Cash used in investing activities 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. Cash used in investing
activities for the twenty-six weeks ended June 28, 2009 consisted primarily of $2.3 million in
capital expenditures related to the build-out of our fourth customer care center in the
Philippines, $2.2 million in capital expenditures related to client implementations and $1.0
million in continued investment in operational and information technology equipment.
Financing Activities
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. Net cash used in financing activities of $4.3
million for the twenty-six weeks ended June 28, 2009 is the result of net payments of $6.1 million
against the Revolving Loan Facility, offset by $1.8 million cash received from the exercise of
stock options.
25
Bank Financing
As of July 4, 2010, there were no outstanding borrowings under the Revolving Loan Agreement and we
had cash and cash equivalents of $45.4 million.
During the twenty-six weeks ended July 4, 2010, we were party to a Revolving Credit and Security
Agreement, as amended, (Revolving Loan Agreement) with PNC Bank National Association (PNC), as
agent, and the financial institutions from time to time parties thereto as lenders. The Revolving
Loan Agreement provides us with up to a $40.0 million revolving loan facility which expires in May
2011. The Revolving Loan 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 Revolving Loan 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. Our ability to borrow under the Revolving Loan Agreement depends on the
amount of eligible accounts receivable from our clients.
We had approximately $29.1 million of undrawn borrowing capacity under the Revolving Loan Agreement
as of July 4, 2010, based upon borrowing base calculations. We were in compliance with our
financial covenants as of July 4, 2010.
Future Liquidity
We expect that our cash balances of $45.4 million, cash flows from operations and available
borrowings of $29.1 million under our Revolving Loan Agreement will be sufficient to meet projected
operating needs, fund any planned capital expenditures and repay debt obligations for the next
twelve months.
A significant change in operating cash flow or a failure to maintain profitability could have a
material adverse effect on our liquidity and our ability to comply with the covenants in our
Revolving Loan Agreement. In addition, our failure to adhere to the financial and other covenants
could give rise to a default under the Revolving Loan Agreement which would have a material adverse
effect on our liquidity and financial condition. There can be no assurances that we will be able to
meet the financial and other covenants in our Revolving Loan Agreement.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Historically, we have been 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 the Philippines. 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. In 2008, we entered into a pay fixed / receive floating interest rate swap for a
$5.0 million notional amount. The objective of the contract was to mitigate the variability in
cash flows resulting from changes in the underlying interest rate index or changes in the LIBOR
rate. The contract was terminated in June 2009 due to the elimination of outstanding borrowings.
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 the Philippines. We manage this risk through 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 approximately 1,017 million Philippine pesos at a U.S. dollar notional of $21.5 million
were outstanding as of July 4, 2010.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of July 4, 2010, 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 4,
2010, 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 defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended
July 4, 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
27
Part II. Other Information
Item 1. Legal Proceedings
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, we 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, we 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, we recorded a charge of $2.4 million for the thirteen weeks ended
April 4, 2010 which represents our estimate of the costs to be incurred for attorneys’ fees and
claims, based on expected opt-in rates for claimants in similar actions. The final amount which
will ultimately be paid by us under the agreement will be determined based on the participation
from eligible class members as well as the Court’s final ruling with respect to plaintiff
attorneys’ fees.
We denied and continue to deny the allegations in the complaint and contend that our policies and
practices regarding compensation were proper and in compliance with the law at all times. We deny
all liability and wrongdoing in this case, but have chosen to settle this lawsuit in order to avoid
the distraction and additional legal expenses that would otherwise be incurred.
Item 1A. Risk Factors
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 3, 2010. There have
been no material changes to these risk factors since that report.
Item 6. Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached
hereto.
28
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 11, 2010
|
|
By:
|
|
/s/ Arthur D. DiBari |
|
|
|
|
|
|
Arthur D. DiBari
|
|
|
|
|
|
|
Interim Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Date: August 11, 2010
|
|
By:
|
|
/s/ Andrew B. Szafran |
|
|
|
|
|
|
Andrew B. Szafran
|
|
|
|
|
|
|
Senior Vice President and |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
Date: August 11, 2010
|
|
By:
|
|
/s/ Joseph R. Doolan |
|
|
|
|
|
|
Joseph R. Doolan
|
|
|
|
|
|
|
Vice President and Controller |
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
29
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. |
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3.2 |
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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. |
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4.1 |
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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. |
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10.1 |
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Employment agreement with Eric Tinch, dated April 1, 2010,
incorporated by reference to APAC Customer Services, Inc.’s
Current Report on Form 8-K, dated April 12, 2010. |
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31.1 |
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Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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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. |
30