UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013.
OR
o | 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: 001-33739
STREAM GLOBAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 26-0420454 |
(State or Other Jurisdiction of |
| (I.R.S. Employer |
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3285 Northwood Circle |
| 55121 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(651) 288-2979
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
We are a voluntary filer of reports required of companies with public securities under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and pursuant to the terms of our bond indenture, we have filed all reports which would have been required of us during the past 12 months had we been subject to such provisions.
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 x 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. (Check one):
Large Accelerated Filer o |
| Accelerated Filer o |
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Non-accelerated Filer x |
| Smaller reporting company o |
(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 x
There were 1,000 shares of the Registrant’s common stock, $0.001 par value per share, issued and outstanding as of August 2, 2013.
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| Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 | 1 |
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| 4 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
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Stream is a registered trademark of Stream Global Services, Inc.
ITEM 1. UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
STREAM GLOBAL SERVICES, INC.
(Unaudited)
(In thousands)
|
| June 30, |
| December 31, |
| ||
Assets |
|
|
|
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| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 14,122 |
| $ | 18,735 |
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Accounts receivable, net |
| 189,030 |
| 164,929 |
| ||
Income taxes receivable |
| 2,699 |
| 2,282 |
| ||
Deferred income taxes |
| 6,522 |
| 8,586 |
| ||
Prepaid expenses and other current assets |
| 14,697 |
| 18,140 |
| ||
Total current assets |
| 227,070 |
| 212,672 |
| ||
Equipment and fixtures, net |
| 100,735 |
| 96,851 |
| ||
Deferred income taxes |
| 3,113 |
| 3,483 |
| ||
Goodwill |
| 252,976 |
| 226,749 |
| ||
Intangible assets, net |
| 63,571 |
| 52,340 |
| ||
Other assets |
| 9,765 |
| 11,933 |
| ||
Total assets |
| $ | 657,230 |
| $ | 604,028 |
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Liabilities and Stockholders’ Equity |
|
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| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 19,494 |
| $ | 16,359 |
|
Accrued employee compensation and benefits |
| 70,983 |
| 58,035 |
| ||
Other accrued expenses |
| 26,049 |
| 20,473 |
| ||
Income taxes payable |
| 1,815 |
| 1,115 |
| ||
Current portion of long-term debt |
| 44,756 |
| 5,333 |
| ||
Current portion of capital lease obligations |
| 8,647 |
| 9,279 |
| ||
Other liabilities |
| 12,035 |
| 5,591 |
| ||
Total current liabilities |
| 183,779 |
| 116,185 |
| ||
Long-term debt, net of current portion |
| 236,819 |
| 240,354 |
| ||
Capital lease obligations, net of current portion |
| 5,877 |
| 5,967 |
| ||
Deferred income taxes |
| 16,068 |
| 15,673 |
| ||
Other long-term liabilities |
| 22,153 |
| 15,953 |
| ||
Total liabilities |
| 464,696 |
| 394,132 |
| ||
Contingencies (Note 14) |
|
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|
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| ||
Stockholders’ equity: |
|
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|
| ||
Voting common stock, par value $0.001 per share, 1 share authorized and outstanding |
| — |
| — |
| ||
Additional paid-in-capital |
| 337,287 |
| 336,572 |
| ||
Accumulated deficit |
| (126,309 | ) | (120,031 | ) | ||
Accumulated other comprehensive loss |
| (18,444 | ) | (6,645 | ) | ||
Total stockholders’ equity |
| 192,534 |
| 209,896 |
| ||
Total liabilities and stockholders’ equity |
| $ | 657,230 |
| $ | 604,028 |
|
See accompanying notes to consolidated condensed financial statements.
STREAM GLOBAL SERVICES, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
(In thousands)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Revenue |
| $ | 249,154 |
| $ | 197,743 |
| $ | 491,966 |
| $ | 413,283 |
|
Direct cost of revenue |
| 149,077 |
| 118,662 |
| 292,205 |
| 242,779 |
| ||||
Gross profit |
| 100,077 |
| 79,081 |
| 199,761 |
| 170,504 |
| ||||
Operating expenses: |
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Selling, general and administrative expenses |
| 76,927 |
| 64,569 |
| 149,017 |
| 130,862 |
| ||||
Severance, restructuring and other charges, net |
| 4,921 |
| 6,648 |
| 6,620 |
| 9,452 |
| ||||
Depreciation and amortization expense |
| 16,443 |
| 14,066 |
| 31,472 |
| 28,673 |
| ||||
Total operating expenses |
| 98,291 |
| 85,283 |
| 187,109 |
| 168,987 |
| ||||
Income (loss) from operations |
| 1,786 |
| (6,202 | ) | 12,652 |
| 1,517 |
| ||||
Other expenses, net: |
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Foreign currency loss (gain) |
| (1,575 | ) | 50 |
| (457 | ) | (205 | ) | ||||
Interest expense, net |
| 8,845 |
| 7,095 |
| 16,963 |
| 14,664 |
| ||||
Total other expenses, net |
| 7,270 |
| 7,145 |
| 16,506 |
| 14,459 |
| ||||
Loss before provision for income taxes |
| (5,484 | ) | (13,347 | ) | (3,854 | ) | (12,942 | ) | ||||
Provision for income taxes |
| 1,046 |
| 1,119 |
| 2,424 |
| 2,179 |
| ||||
Net loss |
| $ | (6,530 | ) | $ | (14,466 | ) | $ | (6,278 | ) | $ | (15,121 | ) |
See accompanying notes to consolidated condensed financial statements.
STREAM GLOBAL SERVICES, INC.
Consolidated Condensed Statements of Comprehensive Loss
(Unaudited)
(In thousands)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Net loss |
| $ | (6,530 | ) | $ | (14,466 | ) | $ | (6,278 | ) | $ | (15,121 | ) |
Other comprehensive income (loss): |
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Change in unrealized gain (loss) on forward exchange contracts, net of tax |
| (8,895 | ) | 549 |
| (10,191 | ) | 3,211 |
| ||||
Change in cumulative translation adjustment (1) |
| (665 | ) | (4,631 | ) | (1,608 | ) | (2,501 | ) | ||||
Comprehensive loss |
| $ | (16,090 | ) | $ | (18,548 | ) | $ | (18,077 | ) | $ | (14,411 | ) |
(1) During the three and six months ended June 30, 2012, we substantially liquidated our investment in Costa Rica. Accordingly, we reclassified $228 from cumulative translation adjustment to other foreign currency loss in our statement of operations. There were no sales or liquidations of investments in foreign entities during the three or six months ended June 30, 2013.
See accompanying notes to consolidated condensed financial statements.
STREAM GLOBAL SERVICES, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
|
| Six Months Ended |
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|
| 2013 |
| 2012 |
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Operating Activities: |
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Net loss |
| $ | (6,278 | ) | $ | (15,121 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
| 31,472 |
| 28,673 |
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Amortization of bond discount and debt issuance costs |
| 2,901 |
| 2,173 |
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Deferred taxes |
| (51 | ) | 516 |
| ||
Loss on impairment or disposal of assets |
| 9 |
| 433 |
| ||
Noncash stock compensation |
| 716 |
| 1,474 |
| ||
Other noncash adjustments |
| — |
| (228 | ) | ||
Changes in operating assets and liabilities: |
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Accounts receivable |
| (12,484 | ) | 21,146 |
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Income taxes receivable |
| (480 | ) | 394 |
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Prepaid expenses and other current assets |
| (6,100 | ) | (1,101 | ) | ||
Other assets |
| 39 |
| 672 |
| ||
Accounts payable |
| 1,127 |
| 1,487 |
| ||
Accrued expenses and other liabilities |
| 11,664 |
| (4,017 | ) | ||
Net cash provided by operating activities |
| 22,535 |
| 36,501 |
| ||
Investing Activities: |
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Acquisition of business |
| (41,167 | ) | — |
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Cash acquired from acquisition |
| 4,951 |
| — |
| ||
Additions to equipment and fixtures |
| (18,394 | ) | (15,848 | ) | ||
Net cash used in investing activities |
| (54,610 | ) | (15,848 | ) | ||
Financing Activities: |
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Net borrowings (payments) on line of credit (Note 10) |
| 2,954 |
| (26,615 | ) | ||
Proceeds from issuance of debt, net |
| 34,711 |
| 988 |
| ||
Payments on long-term debt |
| (1,926 | ) | (369 | ) | ||
Payments of capital lease obligations |
| (6,427 | ) | (6,270 | ) | ||
Proceeds from capital leases |
| — |
| 630 |
| ||
Tax payments for withholding on restricted stock |
| — |
| (11 | ) | ||
Net cash provided by (used in) financing activities |
| 29,312 |
| (31,647 | ) | ||
Effect of exchange rates on cash and cash equivalents |
| (1,850 | ) | (1,257 | ) | ||
Net decrease in cash and cash equivalents |
| (4,613 | ) | (12,251 | ) | ||
Cash and cash equivalents, beginning of period |
| 18,735 |
| 23,248 |
| ||
Cash and cash equivalents, end of period |
| $ | 14,122 |
| $ | 10,997 |
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Supplemental cash flow information: |
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Cash paid for interest |
| $ | 14,471 |
| $ | 13,197 |
|
Cash paid for income taxes |
| 2,825 |
| 3,834 |
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Noncash financing activities: |
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Capital lease financing |
| 3,695 |
| 2,244 |
|
See accompanying notes to consolidated condensed financial statements.
STREAM GLOBAL SERVICES, INC.
Notes to Consolidated Condensed Financial Statements
June 30, 2013
(Unaudited)
(In thousands)
Note 1—Our Business
Stream Global Services, Inc. (“we,” “us,” “Stream,” the “Company” or “SGS”) is a global business process outsourcing (“BPO”) service provider and wholly owned subsidiary of SGS Holdings, Inc. (“Parent”) specializing in customer relationship management (“CRM”), including sales, customer care and technical support primarily for Fortune 1000 companies. Our clients include multinational computing/hardware, telecommunications service providers, software/networking, entertainment/media, retail, travel and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across approximately 56 service centers in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.
Note 2—Basis of Presentation
Our consolidated condensed financial statements as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 include our accounts and those of our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to cash and accounts payable in the consolidated condensed statement of cash flows for the six months ended June 30, 2012. The effect of the reclassification increased net cash provided by operating activities by $1,181 for the six months ended June 30, 2012. We have also reclassified $204 from other accrued expenses to other current liabilities for the year ended December 31, 2012.
In compliance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”), the Company analyzes its contractual arrangements to determine whether they represent variable interests in a variable interest entity (“VIE”) and, if so, whether the Company is the primary beneficiary. ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary regardless of ownership of voting shares. The Company is the primary beneficiary of a VIE in China, which it consolidates. The assets, liabilities and obligations of the VIE are not material to these consolidated financial statements.
We have evaluated subsequent events through the date these financial statements were issued. There were no subsequent events which required recognition or disclosure in the consolidated condensed financial statements.
Note 3—Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying consolidated condensed financial statements as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows. The results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ended December 31, 2013, or for any other interim period or future year.
Use of Estimates
The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates including those related to revenue recognition, the allowance for bad debts, derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, contingencies, litigation and restructuring liabilities, and goodwill and other intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.
Foreign Currency Translation and Derivative Instruments
The assets and liabilities of our foreign subsidiaries, whose functional currency is their local currency, are translated at the exchange rate in effect on the reporting date, and income and expenses are translated at the average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income (loss), but is reflected in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity until the sale or until the liquidation of the net investment in the foreign subsidiary. Foreign currency transaction gains and losses are included in determining net income (loss), and are categorized as “Other expenses, net.”
We account for derivative financial instruments utilizing the authoritative guidance in ASC 815, Derivatives and Hedging. We generally utilize forward contracts expiring within one to eighteen months to reduce our foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies. Upon proper designation, certain of these contracts are accounted for as cash-flow hedges, as defined by the authoritative guidance. These contracts are entered into to protect against the risk that the value of the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates. In using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk. We do not believe that we are exposed to a concentration of credit risk with our derivative financial instruments as the counterparties are well established institutions and counterparty credit risk information is monitored on an ongoing basis.
Unrealized gains and losses on all derivatives, including foreign currency forward contracts, are recognized in “Other current assets”, “Other current liabilities”, “Other assets, long term”, or Other long-term liabilities” on the balance sheet at fair value. Fair values for our derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions. On the date the derivative contract is entered into, we determine whether the derivative contract should be designated as a cash flow hedge. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in “Accumulated other comprehensive loss,” until the forecasted underlying transactions occur. To date we have not experienced any hedge ineffectiveness of our cash flow hedges that we intended to be effective. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction within “Direct cost of revenue.” Cash flows from the derivative contracts are classified within “Cash flows from operating activities.” Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged.
We may also enter into derivative contracts that are intended to economically hedge certain risks, even though we do not qualify for or elect not to apply hedge accounting as defined by the authoritative guidance.
Changes in fair value of derivatives not designated as cash flow hedges are reported in “Other expenses, net.” Upon settlement of the derivatives not qualifying as cash flow hedges, a gain or loss is reported in “Other expenses, net.”
We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis (as required), whether the derivatives that are used in cash flow hedging transactions are highly effective in offsetting changes in cash flows of hedged items on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a cash flow hedge or that it has ceased to be a highly effective hedge or if a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting prospectively. At June 30, 2013, all hedges were determined to be highly effective, except for certain hedges where we elect not to apply hedge accounting as defined by the authoritative guidance.
Our hedging program has been effective in all periods presented and the amount of hedge ineffectiveness has not been material.
As of June 30, 2013, we had the following open foreign currency contracts:
Foreign Currency |
| Notional Amounts |
| Net Unrealized |
| ||
Canadian Dollar |
| $ | 49,568 |
| $ | (1,681 | ) |
Philippine Peso |
| 183,212 |
| (5,340 | ) | ||
Indian Rupee |
| 12,643 |
| (441 | ) | ||
Euro |
| 3,934 |
| (28 | ) | ||
British Pound |
| 13,860 |
| 214 |
| ||
|
| $ | 263,217 |
| $ | (7,276 | ) |
The table below summarizes the carrying values of derivative instruments as of June 30, 2013 and December 31, 2012:
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| Carrying Values of Derivative Instruments as of |
| |||||||
|
| Fair Value – |
| Fair Value – |
| Derivative Net |
| |||
Total derivatives designated as hedging instruments (1) |
| $ | 20 |
| $ | (6,935 | ) | $ | (6,915 | ) |
Total derivatives not designated as hedging instruments (1) |
|
| 239 |
|
| (600 | ) |
| (361 | ) |
Total derivatives |
| $ | 259 |
| $ | (7,535 | ) | $ | (7,276 | ) |
|
| Carrying Values of Derivative Instruments as of |
| |||||||
|
| Fair Value – |
| Fair Value – |
| Derivative Net |
| |||
Total derivatives designated as hedging instruments (1) |
| $ | 3,623 |
| $ | (65 | ) | $ | 3,558 |
|
Total derivatives not designated as hedging instruments (1) |
|
| 382 |
|
| (138 | ) |
| 244 |
|
Total derivatives |
| $ | 4,005 |
| $ | (203 | ) | $ | 3,802 |
|
(1) Assets are included in “Other current assets” or “Other assets, long term” and liabilities are included in “Other current liabilities” or “Other long-term liabilities” on the accompanying consolidated balance sheets.
As of June 30, 2013 and December 31, 2012, $5,795 of unrealized losses and $3,555 of unrealized gains, respectively, may be reclassified from other comprehensive income (loss) to earnings within the next 12 months based on current foreign exchange rates. As of June 30, 2013 and December 31, 2012, included in other current assets is $2 and $586, respectively, of fair market value of derivatives designated as cash flow hedges that were acquired from a commercial bank in which one of our financial sponsors owns a non-controlling interest.
The following table presents the impact of derivative instruments on the consolidated condensed statements of operations for the three and six months ended June 30, 2013 and 2012:
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| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Derivatives designated as hedging instruments |
| $ | 172 |
| $ | (365 | ) | $ | (1,006 | ) | $ | (338 | ) |
Derivatives not designated as hedging instruments |
| 1,528 |
| (1,112 | ) | 1,628 |
| 894 |
| ||||
Total |
| $ | 1,700 |
| $ | (1,477 | ) | $ | 622 |
| $ | 556 |
|
Fair Value of Financial Instruments
The following table presents information about our assets and liabilities and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability:
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| June 30, |
| Quoted Prices in |
| Significant Other |
| Significant |
| ||||
Description |
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|
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Forward exchange contracts |
| $ | (7,276 | ) | $ | — |
| $ | (7,276 | ) | $ | — |
|
Total |
| $ | (7,276 | ) | $ | — |
| $ | (7,276 | ) | $ | — |
|
|
| December 31, |
| Quoted Prices in |
| Significant Other |
| Significant |
| ||||
Description |
|
|
|
|
|
|
|
|
| ||||
Forward exchange contracts |
| $ | 3,802 |
| $ | — |
| $ | 3,802 |
| $ | — |
|
Total |
| $ | 3,802 |
| $ | — |
| $ | 3,802 |
| $ | — |
|
The fair values of our forward exchange contracts are determined through market, observable and corroborated sources.
The carrying amounts reflected in the consolidated balance sheets for other current assets, accounts payable, and other liabilities approximate fair value due to their short-term maturities. To the extent we have any outstanding borrowings under our revolving credit facility, the fair value would approximate its reported value because the interest rate is variable and reflects current market rates.
At June 30, 2013, the fair value of our long term debt was $234,600. The fair value of our long term debt is determined from financial market quotations.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance adding new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). We implemented these requirements in the first quarter of 2013. The guidance is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in financial statements. It does not amend any existing requirements for reporting net income or OCI in financial statements. The implementation of the guidance did not have a material impact on our consolidated financial statements.
Note 4—Acquisition
On February 25, 2013, we completed our acquisition of all of the outstanding share capital of LBM Holdings Limited and the interests in its two subsidiaries, LBM Holdings (UK) Limited and LBM Direct Marketing Limited (collectively, “LBM”), for a purchase price of approximately $41,167. LBM is a United Kingdom-based BPO provider servicing large, multinational companies primarily in the UK marketplace. LBM provides a range of revenue generation services and capabilities for utilities, telecommunications and financial services companies in Europe. LBM has approximately 2,500 employees across 6 locations in England and Northern Ireland. We have included the financial results of the business combination in our consolidated results of operations beginning on the acquisition date, however the impact of the acquisition was not material to our consolidated condensed financial statements.
The following summarizes the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
|
| Preliminary |
| Adjustments |
| Final Purchase |
| |||
Current assets |
| $ | 17,903 |
| $ | (91 | ) | $ | 17,812 |
|
Property and equipment |
| 6,465 |
| 401 |
| 6,866 |
| |||
Goodwill |
| 26,258 |
| (31 | ) | 26,227 |
| |||
Intangible assets |
| 18,614 |
| — |
| 18,614 |
| |||
Total assets acquired |
| 69,240 |
| 279 |
| 69,519 |
| |||
Current liabilities |
| 19,116 |
| 216 |
| 19,332 |
| |||
Other liabilities |
| 8,957 |
| 63 |
| 9,020 |
| |||
Total liabilities |
| 28,073 |
| 279 |
| 28,352 |
| |||
Allocated purchase price |
| $ | 41,167 |
| $ | — |
| $ | 41,167 |
|
Intangible assets acquired and the related amortization periods are as follows:
|
| Estimated |
| Gross |
| |
Customer relationships |
| 7 years |
| $ | 11,973 |
|
Non-compete agreements |
| 2 years |
| 2,817 |
| |
Trade names |
| 4 years |
| 704 |
| |
Other |
| 3 years |
| 3,120 |
| |
|
|
|
| $ | 18,614 |
|
Note 5—Goodwill and Intangibles
Goodwill and Indefinite Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances suggest that the carrying value of goodwill and indefinite-lived intangible assets may not be recoverable. We utilize internally developed models to estimate our expected future cash flow and utilize a discounted cash flow technique to estimate the fair value of the Company in connection with our evaluation of goodwill and indefinite-lived intangible assets. No impairment of goodwill and indefinite-lived intangible assets resulted from our most recent evaluation of goodwill and indefinite-lived intangible assets for
impairment, which occurred in the fourth quarter of 2012, nor do we believe any indicators of impairment have occurred. Our next annual impairment assessment will be conducted in the fourth quarter of 2013.
The following is a roll-forward of goodwill as of June 30, 2013:
Balance at December 31, 2012 |
| $ | 226,749 |
|
Acquisition of LBM |
| 26,227 |
| |
Balance at June 30, 2013 |
| $ | 252,976 |
|
Intangible Assets
We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows that the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in the statement of operations is the amount by which the carrying value of the assets exceeds their fair value, determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. There were no impairments recorded during the three months ended June 30, 2013.
Intangible assets at June 30, 2013 consisted of the following:
|
| Estimated |
| Weighted |
| Gross |
| Accumulated |
| Net |
| |||
Customer relationships |
| Up to 10 years |
| 2.3 |
| $ | 110,722 |
| $ | 69,313 |
| $ | 41,409 |
|
Technology-based intangible assets |
| 3 to 5 years |
| 1.8 |
| 5,271 |
| 2,152 |
| 3,119 |
| |||
Non-compete agreements |
| 2 years |
| 1.4 |
| 2,817 |
| 520 |
| 2,297 |
| |||
Trade names |
| 4 years |
| 2.4 |
| 801 |
| 155 |
| 646 |
| |||
Trade names - indefinite |
| Indefinite |
| Indefinite |
| 16,100 |
| — |
| 16,100 |
| |||
|
|
|
|
|
| $ | 135,711 |
| $ | 72,140 |
| $ | 63,571 |
|
Future amortization expense of our intangible assets for the next five years and thereafter is expected to be as follows:
|
| Remainder of |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| Thereafter |
| |||||||
Amortization |
| $ | 8,005 |
| $ | 12,241 |
| $ | 9,023 |
| $ | 6,763 |
| $ | 5,450 |
| $ | 4,610 |
| $ | 1,379 |
|
Note 6—Severance, Restructuring and Other Charges, Net
During the three and six months ended June 30, 2013, we recorded a net expense of $4,921 and $6,620, respectively, primarily related to salary continuation related to reductions in workforce, management’s decision to exit locations and eliminate unprofitable programs and expenses related to the integration of LBM.
During the three and six months ended June 30, 2012, we recorded a net expense of $6,648 and $9,452, respectively, primarily related to salary continuation related to reductions in workforce, legal expenses related to our privatization transaction and the closure of a call center.
Severance, restructuring and other charges, net, consist of the following:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Severance |
| $ | 1,716 |
| $ | 1,337 |
| $ | 2,395 |
| $ | 3,793 |
|
Lease exit charges, net |
| 1,409 |
| 2,723 |
| 1,455 |
| 3,071 |
| ||||
Transaction related expenses |
| 1,796 |
| 2,588 |
| 2,770 |
| 2,588 |
| ||||
Severance, restructuring and other charges, net |
| $ | 4,921 |
| $ | 6,648 |
| $ | 6,620 |
| $ | 9,452 |
|
The activity in the Company’s restructuring and other liabilities, which are included in liabilities, is as follows:
|
| Reduction in |
| Closure of call |
| Transaction related |
| Total |
| ||||
Balance at December 31, 2012 |
| $ | 1,042 |
| $ | 1,810 |
| $ | 470 |
| $ | 3,322 |
|
Expense |
| 2,395 |
| 1,455 |
| 2,770 |
| 6,620 |
| ||||
Cash Paid |
| (2,360 | ) | (1,393 | ) | (2,658 | ) | (6,411 | ) | ||||
Balance at June 30, 2013 |
| $ | 1,077 |
| $ | 1,872 |
| $ | 582 |
| $ | 3,531 |
|
Note 7—Equipment and Fixtures, Net
Equipment and fixtures, net, consist of the following:
|
| June 30, |
| December 31, |
| ||
Furniture and fixtures |
| $ | 21,263 |
| $ | 17,696 |
|
Building improvements |
| 70,614 |
| 66,369 |
| ||
Computer equipment |
| 74,075 |
| 70,238 |
| ||
Software |
| 49,265 |
| 40,460 |
| ||
Telecom and other equipment |
| 56,691 |
| 55,418 |
| ||
Equipment and fixtures not yet placed in service |
| 5,493 |
| 1,380 |
| ||
|
| $ | 277,401 |
| $ | 251,561 |
|
Less: accumulated depreciation |
| (176,666 | ) | (154,710 | ) | ||
|
| $ | 100,735 |
| $ | 96,851 |
|
Note 8—Accrued Employee Compensation and Benefits
Accrued employee compensation and benefits consist of the following:
|
| June 30, |
| December 31, |
| ||
Compensation related amounts |
| $ | 39,000 |
| $ | 28,386 |
|
Vacation liabilities |
| 17,171 |
| 14,176 |
| ||
Medical and dental liabilities |
| 2,094 |
| 2,078 |
| ||
Employer taxes |
| 2,769 |
| 2,098 |
| ||
Statutory retirement plans |
| 9,709 |
| 10,860 |
| ||
Other benefit related liabilities |
| 240 |
| 437 |
| ||
|
| $ | 70,983 |
| $ | 58,035 |
|
Note 9—Other Accrued Expenses and Other Liabilities
Other accrued expenses consist of the following:
|
| June 30, |
| December 31, |
| ||
Professional fees |
| $ | 3,736 |
| $ | 3,560 |
|
Accrued interest |
| 7,196 |
| 6,226 |
| ||
Occupancy expense |
| 2,331 |
| 2,108 |
| ||
Technology expense |
| 1,783 |
| 1,841 |
| ||
Value added and sales tax |
| 2,312 |
| 1,547 |
| ||
Other accrued expenses |
| 8,691 |
| 5,191 |
| ||
|
| $ | 26,049 |
| $ | 20,473 |
|
Other current liabilities consist of the following:
|
| June 30, |
| December 31, |
| ||
Lease exit liability |
| $ | 1,786 |
| $ | 1,704 |
|
Deferred revenue |
| 1,222 |
| 1,512 |
| ||
Market lease reserves |
| 529 |
| 946 |
| ||
Forward exchange contracts |
| 6,412 |
| 204 |
| ||
Other |
| 2,086 |
| 1,225 |
| ||
Total other current liabilities |
| $ | 12,035 |
| $ | 5,591 |
|
Other long-term liabilities consist of the following:
|
| June 30, |
| December 31, |
| ||
Deferred rent |
| $ | 4,362 |
| $ | 4,415 |
|
Accrued income taxes |
| 11,054 |
| 11,143 |
| ||
Market lease reserves |
| 125 |
| 61 |
| ||
Asset retirement obligation |
| 3,573 |
| — |
| ||
Forward exchange contracts |
| 1,124 |
| — |
| ||
Other |
| 1,915 |
| 334 |
| ||
Total other long-term liabilities |
| $ | 22,153 |
| $ | 15,953 |
|
Note 10—Long-Term Debt and Revolving Credit Facility
Pursuant to an indenture dated as of October 1, 2009 (the “Indenture”), among Stream, certain of our subsidiaries and Wells Fargo Bank, National Association, as trustee, we issued $200 million aggregate principal amount of 11.25% Senior Secured Notes due 2014 (the “Notes”) at an initial offering price of 95.454% of the principal amount, the proceeds of which were used to pay off the debt from our Fifth Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated as of January 8, 2009, as amended, with PNC Bank, National Association and other signatories thereto along with debt acquired from EGS. On March 8, 2013, we issued an additional $30 million aggregate principal amount of the Notes pursuant to the Indenture at an initial offering price of 102.00% of the principal amount (plus accrued interest), the proceeds of which were used to pay down our credit facility following the acquisition of LBM.
In addition, we and certain of our subsidiaries (collectively, the “Borrowers”) entered into a credit agreement, dated as of October 1, 2009, as amended by the First Amendment to Credit Agreement dated June 3, 2011, the Second Amendment to Credit Agreement dated November 1, 2011 and the Third Amendment to Credit Agreement dated December 27, 2012 (as amended, the “Credit Agreement”), with Wells Fargo Capital Finance, LLC, as agent and co-arranger, and Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders, providing for revolving credit financing (the “ABL Facility”) of up to $125 million, including a $20 million sub-limit for letters of credit. The ABL Facility has a term of five years effective from the date of the Third Amendment to Credit Agreement or 120 days prior to the maturity of our Notes (including any refinancing or extension of the Notes), whichever is less, at an interest rate of Wells Fargo’s base rate plus 150 basis points or LIBOR plus 250 basis points at our discretion. We capitalized fees of $8,966 and $5,642 associated with the Notes and the Credit Agreement, respectively, at the inception of these agreements and subsequent amendments that are being amortized over their respective lives. We amortized $1,073 and $1,997 of such capitalized fees into expense for the three and six months ended June 30, 2013.
The ABL facility has a fixed charge coverage ratio financial covenant that is operative when our availability under the facility is less than $25 million. As of June 30, 2013, we had $80,402 available under the ABL Facility. We made draws on the ABL Facility of $155,548 and $134,900 for the six months ended June 30, 2013 and 2012, respectively, and payments on the ABL Facility of $152,595 and $161,516 for the six months ended June 30, 2013 and 2012, respectively. We are in compliance with the financial covenant in the Credit Agreement as of June 30, 2013. Substantially all of the assets of Stream excluding intangible assets secure the Notes and the ABL Facility. See Note 16 for Guarantor Financial Information.
Long-term borrowings consist of the following:
|
| June 30, |
| December 31, |
| ||
Revolving line of credit |
| $ | 37,634 |
| $ | 34,680 |
|
11.25% Senior Secured Notes |
| 230,000 |
| 200,000 |
| ||
Other |
| 16,333 |
| 14,904 |
| ||
|
| 283,967 |
| 249,584 |
| ||
Less: current portion |
| (44,756 | ) | (5,333 | ) | ||
Less: discount on notes payable |
| (2,392 | ) | (3,897 | ) | ||
Long-term debt |
| $ | 236,819 |
| $ | 240,354 |
|
Minimum principal payments on long-term debt subsequent to June 30, 2013 are as follows:
|
| Total |
| |
2013 |
| $ | 3,030 |
|
2014 |
| 273,983 |
| |
2015 |
| 4,911 |
| |
2016 |
| 981 |
| |
2017 |
| 1,062 |
| |
Total |
| $ | 283,967 |
|
We had Letters of Credit in the aggregate outstanding amounts of zero and $3,245 at June 30, 2013 and December 31, 2012, respectively.
We had $308 and $380 of restricted cash as of June 30, 2013 and December 31, 2012, respectively.
Note 11—Accumulated Other Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss as of June 30, 2013:
|
| Unrealized gain |
| Cumulative |
| Accumulated |
| |||
Beginning balance December 31, 2012 |
| $ | 3,283 |
| $ | (9,928 | ) | $ | (6,645 | ) |
Current period other comprehensive loss |
| (10,191 | ) | (1,608 | ) | (11,799 | ) | |||
Ending balance June 30, 2013 |
| $ | (6,908 | ) | $ | (11,536 | ) | $ | (18,444 | ) |
The following table summarizes activity in other comprehensive income (loss) related to forward exchange contracts held by the Company during the three and six months ended June 30, 2013 and 2012:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Change in fair value of forward exchange contracts, net of tax |
| $ | (9,423 | ) | $ | 613 |
| $ | (11,077 | ) | $ | 1,897 |
|
Amount reclassified to direct cost of revenue |
| 528 |
| (64 | ) | 886 |
| 1,314 |
| ||||
Change in unrecognized gains/losses on forward exchange contracts |
| $ | (8,895 | ) | $ | 549 |
| $ | (10,191 | ) | $ | 3,211 |
|
Note 12—Income Taxes
The domestic and foreign source component of income (loss) before taxes is as follows:
|
| Six months ended |
| Six months ended |
| ||
Total US |
| $ | (16,958 | ) | $ | (19,834 | ) |
Total Foreign |
| 13,104 |
| 6,892 |
| ||
Total |
| $ | (3,854 | ) | $ | (12,942 | ) |
The provisions for income taxes for the six months ended June 30, 2013 and 2012 relate primarily to the foreign source component of income (loss) before tax. Our operations in countries outside the United States are generally taxed at lower statutory rates and also benefit from tax holidays.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign tax jurisdictions. We operate in a number of international tax jurisdictions and are subject to audits of income tax returns by tax authorities in those jurisdictions. We have open audit periods beginning after 2004 through the current period in various jurisdictions and are currently under audit in India, Canada, Italy, and Philippines.
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), limits the amount of US tax attributes (Net operating loss carry forwards and tax credits) that can be utilized annually to offset future taxable income based on certain 3-year cumulative increases in the ownership interests of stockholders who are 5% stockholders under the Code. The Company has determined that an ownership change occurred under these federal income tax provisions on April 27, 2012. However, the Company does not expect to generate U.S. taxable income in excess of the accumulated limitation in 2013.
The Italy Revenue Agency Enactment No. 140973 provides a refund claim in the event of non-deduction of employee and quasi-employee costs. This refund claim applied to tax years 2007 through 2011. We recorded a benefit of $1,020 related to this refund in the six months ended June 30, 2013.
As of June 30, 2013 and December 31, 2012, the liability for unrecognized tax benefits (including interest and penalties) was $11,261 and $11,222, respectively, and was recorded within other long term liabilities in our consolidated financial statements. Included in these amounts is $1,599 for both the six months ended June 30, 2013 and for the year ended December 31, 2012 of un-benefitted tax losses, which would be realized if the related uncertain tax positions were settled. As of January 1, 2013, we had reserved $2,633 for accrued interest and penalties, which increased to $2,736 as of June 30, 2013. We recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision. The total amount of net unrealized tax benefits that would affect income tax expense, if ever recognized in our consolidated financial statements, is $9,662. This amount includes interest and penalties of $2,736. We estimate that within the next 12 months, our unrecognized tax benefits, and interest and penalties, could decrease as a result of settlements with taxing authorities or the expiration of the statute of limitations by $4,807.
Note 13—Stock Options
The Company’s 2008 Stock Incentive Plan (the “2008 Plan”) was terminated on April 27, 2012. The 2008 Plan provided for the grant of incentive and nonqualified stock options. The 2008 Plan had authorized grants of up to 10,000 shares of common stock at an exercise price of not less than 100% of the fair value of the common stock at the date of grant. The 2008 Plan provided that the options shall have terms not to exceed ten years from the grant date. During the six months ended June 30, 2012, we granted options to purchase 185 shares of our common stock to our employees that were subsequently terminated.
The per share fair value of options granted was determined using the Black-Scholes-Merton model.
The following assumptions were used for the option grants in the six months ended June 30, 2012 under the 2008 Plan:
|
| Six months ended |
| |
Option term (years) |
| 6.380 |
| |
Volatility |
| 71.89 | % | |
Risk-free interest rate |
| 1.14 — 1.43 | % | |
Dividend yield |
| 0 | % | |
Weighted-average grant date fair value per option granted |
| $ | 1.73 |
|
During the six months ended June 30, 2012, 1,471 stock option grants under the 2008 Plan were vested, zero were exercised, and 5,623 were forfeited.
At June 30, 2013, no stock options were outstanding under the 2008 Plan. There are no shares outstanding, vested, or expected to vest (including forfeiture adjusted unvested shares) as the plan was cancelled.
On June 8, 2012, the Board of Directors and stockholders of Parent approved the 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive and nonqualified stock options. The 2012 Plan has authorized grants of up to 80 shares of common stock of Parent at an exercise price of not less than 100% of the fair value of the common stock at the date of grant. The 2012 Plan provides that the options shall have terms not to exceed seven years from the grant date.
The following assumptions were used for the option grants in the six months ended June 30, 2013 under the 2012 Plan:
|
| Six months ended |
| |
Option term (years) |
| 5.00 |
| |
Volatility |
| 44.35 | % | |
Risk-free interest rate |
| 0.88 | % | |
Dividend yield |
| 0 | % | |
Weighted-average grant date fair value per option granted |
| $ | 70.87 |
|
The option term was calculated under the simplified method for all option grants issued during the six months ended June 30, 2013. The volatility assumptions were based on a weighted average of the historical volatilities for the Company and its peer group. The risk-free interest rate assumptions were based upon the implied yields from the U.S. Treasury zero-coupon yield curve with a remaining term equal to the expected term in options.
During the six months ended June 30, 2013, 20 stock option grants under the 2012 Plan were vested, zero were exercised, and 3.4 were forfeited.
Stock options issued under the 2012 Plan during the six months ended June 30, 2013 were as follows:
|
| Number |
| Weighted |
| Weighted |
| Weighted |
| ||
Outstanding at December 31, 2012 |
| 74.3 |
| $ | 425.00 |
| — |
| 6.82 |
| |
Granted |
| 0.8 |
| 425.00 |
| $ | 70.87 |
|
|
| |
Exercised |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| 3.4 |
| 425.00 |
|
|
|
|
| ||
Outstanding at June 30, 2013 |
| 71.7 |
| $ | 425.00 |
|
|
| 6.26 |
| |
At June 30, 2013, we had stock options to purchase 20 shares that were exercisable. The weighted average exercise price of options currently exercisable is $425.00 at June 30, 2013. The weighted average remaining contractual term of options currently exercisable is 6.08 years at June 30, 2013. The total fair value of options vested during the six months ended June 30, 2013 was $120. There are 55 shares outstanding, vested, and expected to vest (including forfeiture adjusted unvested shares) with a weighted average exercise price of $425.00 and a weighted average remaining contractual term of 6.24 years.
For the three months ended June 30, 2013, we recognized stock compensation expense of $314 within selling, general and administrative expenses.
For the six months ended June 30, 2013, we recognized stock compensation expense of $716 within selling, general and administrative expenses.
As of June 30, 2013, the aggregate intrinsic value (i.e., the difference in the estimated fair value of our common stock and the exercise price to be paid by the option holder) of stock options outstanding, excluding the effects of expected forfeitures, was zero. The aggregate intrinsic value of the shares of exercisable stock at June 30, 2013 was zero.
As of June 30, 2013, there was $1,659 of unrecognized compensation cost related to the unvested portion of time-based arrangements granted under the 2012 Plan.
Note 14—Contingencies
We are subject to various lawsuits and claims in the normal course of business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of non-compliance with laws or regulations in jurisdictions in which we operate. Although the ultimate outcome of such lawsuits, claims and investigations cannot be ascertained, we believe, on the basis of present information, that the disposition or ultimate resolution of such claims, lawsuits and/or investigations will not have a material adverse effect on our business, results of operations or financial condition. We establish specific liabilities in connection with regulatory and legal actions that we deem to be probable and estimable, and we believe that our reserves for such liabilities are adequate.
Note 15—Geographic Operations and Concentrations
We operate in one operating segment and provide services primarily in two regions: “Americas,” which includes the United States, Canada, the Philippines, India, China, Nicaragua, the Dominican Republic, El Salvador, and Honduras; and “EMEA,” which includes Europe, the Middle East, and Africa.
The following table presents geographic information regarding our operations:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 54,323 |
| $ | 45,313 |
| $ | 110,883 |
| $ | 94,284 |
|
Philippines |
| 53,081 |
| 47,184 |
| 109,511 |
| 99,364 |
| ||||
Canada |
| 26,826 |
| 26,288 |
| 55,225 |
| 55,654 |
| ||||
Others |
| 31,671 |
| 27,951 |
| 63,493 |
| 56,132 |
| ||||
Total Americas |
| 165,901 |
| 146,736 |
| 339,112 |
| 305,434 |
| ||||
EMEA |
|
|
|
|
|
|
|
|
| ||||
Great Britain |
| 28,376 |
| — |
| 38,675 |
| — |
| ||||
Others |
| 54,877 |
| 51,007 |
| 114,179 |
| 107,849 |
| ||||
Total EMEA |
| 83,253 |
| 51,007 |
| 152,854 |
| 107,849 |
| ||||
|
| $ | 249,154 |
| $ | 197,743 |
| $ | 491,966 |
| $ | 413,283 |
|
|
| June 30, 2013 |
| December 31, 2012 |
| ||
Total assets: |
|
|
|
|
| ||
Americas |
| $ | 518,643 |
| $ | 536,149 |
|
EMEA |
| 138,587 |
| 67,879 |
| ||
|
| $ | 657,230 |
| $ | 604,028 |
|
We derive significant revenues from two clients. At June 30, 2013, two of our largest clients by revenue are global technology companies. The percentage of revenue for clients exceeding 10% of revenue in the three and six months ended June 30, 2013 and 2012 is as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
|
Microsoft | �� | 12 | % | 8 | % | 13 | % | 9 | % |
Dell |
| 7 | % | 10 | % | 7 | % | 10 | % |
Related accounts receivable from these two clients were 6% and 9%, respectively, of our total accounts receivable at June 30, 2013 and 5% and 13%, respectively, of our total accounts receivable at June 30, 2012.
Note 16—Guarantor Financial Information
The Notes are guaranteed by the Company, along with certain of our wholly owned subsidiaries. Such guaranties are full, unconditional and joint and several. Condensed consolidating financial information related to the Company, our guarantor subsidiaries and our non-guarantor subsidiaries as of and for the three and six months ended June 30, 2013 and 2012 are reflected below:
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net revenue |
| $ | — |
| $ | 107,839 |
| $ | 145,340 |
| $ | (4,025 | ) | $ | 249,154 |
|
Direct cost of revenue: |
|
|
|
|
|
|
|
|
|
|
| |||||
Customers |
| — |
| 60,646 |
| 88,431 |
| — |
| 149,077 |
| |||||
Intercompany |
| — |
| 3,390 |
| 635 |
| (4,025 | ) | — |
| |||||
|
| — |
| 64,036 |
| 89,066 |
| (4,025 | ) | 149,077 |
| |||||
Gross profit |
| — |
| 43,803 |
| 56,274 |
| — |
| 100,077 |
| |||||
Operating expenses |
| 353 |
| 46,914 |
| 51,024 |
| — |
| 98,291 |
| |||||
Non-operating expenses (income) |
| 8,802 |
| (2,532 | ) | 1,000 |
| — |
| 7,270 |
| |||||
Equity in earnings of subsidiaries |
| (2,625 | ) | — |
| — |
| 2,625 |
| — |
| |||||
Income (loss) before income taxes |
| (6,530 | ) | (579 | ) | 4,250 |
| (2,625 | ) | (5,484 | ) | |||||
Provision for income taxes |
| — |
| 471 |
| 575 |
| — |
| 1,046 |
| |||||
Net income (loss) |
| $ | (6,530 | ) | $ | (1,050 | ) | $ | 3,675 |
| $ | (2,625 | ) | $ | (6,530 | ) |
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net revenue |
| $ | — |
| $ | 225,315 |
| $ | 274,641 |
| $ | (7,990 | ) | $ | 491,966 |
|
Direct cost of revenue: |
|
|
|
|
|
|
|
|
|
|
| |||||
Customers |
| — |
| 123,464 |
| 168,741 |
| — |
| 292,205 |
| |||||
Intercompany |
| — |
| 6,738 |
| 1,252 |
| (7,990 | ) | — |
| |||||
|
| — |
| 130,202 |
| 169,993 |
| (7,990 | ) | 292,205 |
| |||||
Gross profit |
| — |
| 95,113 |
| 104,648 |
| — |
| 199,761 |
| |||||
Operating expenses |
| 789 |
| 94,265 |
| 92,055 |
| — |
| 187,109 |
| |||||
Non-operating expenses (income) |
| 17,138 |
| (4,161 | ) | 3,529 |
| — |
| 16,506 |
| |||||
Equity in earnings of subsidiaries |
| (11,655 | ) | — |
| — |
| 11,655 |
| — |
| |||||
Income (loss) before income taxes |
| (6,272 | ) | 5,009 |
| 9,064 |
| (11,655 | ) | (3,854 | ) | |||||
Provision for income taxes |
| 6 |
| 1,277 |
| 1,141 |
| — |
| 2,424 |
| |||||
Net income (loss) |
| $ | (6,278 | ) | $ | 3,732 |
| $ | 7,923 |
| $ | (11,655 | ) | $ | (6,278 | ) |
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net revenue |
| $ | — |
| $ | 167,474 |
| $ | 119,444 |
| $ | (89,175 | ) | $ | 197,743 |
|
Direct cost of revenue: |
|
|
|
|
|
|
|
|
|
|
| |||||
Customers |
| — |
| 52,693 |
| 65,969 |
| — |
| 118,662 |
| |||||
Intercompany |
| — |
| 81,840 |
| 7,335 |
| (89,175 | ) | — |
| |||||
|
| — |
| 134,533 |
| 73,304 |
| (89,175 | ) | 118,662 |
| |||||
Gross profit |
| — |
| 32,941 |
| 46,140 |
| — |
| 79,081 |
| |||||
Operating expenses |
| 945 |
| 44,506 |
| 39,832 |
| — |
| 85,283 |
| |||||
Non-operating expenses (income) |
| 7,823 |
| (2,500 | ) | 1,822 |
| — |
| 7,145 |
| |||||
Equity in earnings of subsidiaries |
| 5,698 |
| — |
| — |
| (5,698 | ) | — |
| |||||
Income (loss) before income taxes |
| (14,466 | ) | (9,065 | ) | 4,486 |
| 5,698 |
| (13,347 | ) | |||||
Provision (benefit) for income taxes |
| — |
| (170 | ) | 1,289 |
| — |
| 1,119 |
| |||||
Net income (loss) |
| $ | (14,466 | ) | $ | (8,895 | ) | $ | 3,197 |
| $ | 5,698 |
| $ | (14,466 | ) |
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net revenue |
| $ | — |
| $ | 375,056 |
| $ | 240,334 |
| $ | (202,107 | ) | $ | 413,283 |
|
Direct cost of revenue: |
|
|
|
|
|
|
|
|
|
|
| |||||
Customers |
| — |
| 108,483 |
| 134,296 |
| — |
| 242,779 |
| |||||
Intercompany |
| — |
| 184,317 |
| 17,790 |
| (202,107 | ) | — |
| |||||
|
| — |
| 292,800 |
| 152,086 |
| (202,107 | ) | 242,779 |
| |||||
Gross profit |
| — |
| 82,256 |
| 88,248 |
| — |
| 170,504 |
| |||||
Operating expenses |
| 1,618 |
| 87,610 |
| 79,759 |
| — |
| 168,987 |
| |||||
Non-operating expenses (income) |
| 15,361 |
| (4,276 | ) | 3,374 |
| — |
| 14,459 |
| |||||
Equity in earnings of subsidiaries |
| (1,858 | ) | — |
| — |
| 1,858 |
| — |
| |||||
Income (loss) before income taxes |
| (15,121 | ) | (1,078 | ) | 5,115 |
| (1,858 | ) | (12,942 | ) | |||||
Provision (benefit) for income taxes |
| — |
| (1,777 | ) | 3,956 |
| — |
| 2,179 |
| |||||
Net income (loss) |
| $ | (15,121 | ) | $ | 699 |
| $ | 1,159 |
| $ | (1,858 | ) | $ | (15,121 | ) |
Condensed Consolidating Statement of Comprehensive Income
For the three months ended June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net income (loss) |
| $ | (6,530 | ) | $ | (1,050 | ) | $ | 3,675 |
| $ | (2,625 | ) | $ | (6,530 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Change in unrealized gain on forward exchange contracts, net of tax |
| (8,895 | ) | (1,721 | ) | (7,174 | ) | 8,895 |
| (8,895 | ) | |||||
Change in cumulative translation adjustment |
| (665 | ) | 194 |
| (859 | ) | 665 |
| (665 | ) | |||||
Comprehensive income (loss) |
| $ | (16,090 | ) | $ | (2,577 | ) | $ | (4,358 | ) | $ | 6,935 |
| $ | (16,090 | ) |
Condensed Consolidating Statement of Comprehensive Income
For the six months ended June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net income (loss) |
| $ | (6,278 | ) | $ | 3,732 |
| $ | 7,923 |
| $ | (11,655 | ) | $ | (6,278 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Change in unrealized gain on forward exchange contracts, net of tax |
| (10,191 | ) | (2,572 | ) | (7,619 | ) | 10,191 |
| (10,191 | ) | |||||
Change in cumulative translation adjustment |
| (1,608 | ) | (517 | ) | (1,091 | ) | 1,608 |
| (1,608 | ) | |||||
Comprehensive income (loss) |
| $ | (18,077 | ) | $ | 643 |
| $ | (787 | ) | $ | 144 |
| $ | (18,077 | ) |
Condensed Consolidating Statement of Comprehensive Income
For the three months ended June 30, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net income (loss) |
| $ | (14,466 | ) | $ | (8,895 | ) | $ | 3,197 |
| $ | 5,698 |
| $ | (14,466 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Change in unrealized gain on forward exchange contracts, net of tax |
| 549 |
| (836 | ) | 1,385 |
| (549 | ) | 549 |
| |||||
Change in cumulative translation adjustment |
| (4,631 | ) | (2,559 | ) | (2,072 | ) | 4,631 |
| (4,631 | ) | |||||
Comprehensive income (loss) |
| $ | (18,548 | ) | $ | (12,290 | ) | $ | 2,510 |
| $ | 9,780 |
| $ | (18,548 | ) |
Condensed Consolidating Statement of Comprehensive Income
For the six months ended June 30, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net income (loss) |
| $ | (15,121 | ) | $ | 699 |
| $ | 1,159 |
| $ | (1,858 | ) | $ | (15,121 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Change in unrealized gain on forward exchange contracts, net of tax |
| 3,211 |
| 593 |
| 2,618 |
| (3,211 | ) | 3,211 |
| |||||
Change in cumulative translation adjustment |
| (2,501 | ) | (1,565 | ) | (936 | ) | 2,501 |
| (2,501 | ) | |||||
Comprehensive income (loss) |
| $ | (14,411 | ) | $ | (273 | ) | $ | 2,841 |
| $ | (2,568 | ) | $ | (14,411 | ) |
Condensed Consolidating Balance Sheet
As of June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 6 |
| $ | 5,067 |
| $ | 9,049 |
| $ | — |
| $ | 14,122 |
|
Accounts receivable, net |
| — |
| 151,821 |
| 37,209 |
| — |
| 189,030 |
| |||||
Intercompany receivable |
| 32,239 |
| — |
| 102,952 |
| (135,191 | ) | — |
| |||||
Other current assets |
| 4,350 |
| 11,199 |
| 8,369 |
| — |
| 23,918 |
| |||||
Total current assets |
| 36,595 |
| 168,087 |
| 157,579 |
| (135,191 | ) | 227,070 |
| |||||
Equipment and fixtures, net and other assets |
| 722 |
| 50,659 |
| 62,232 |
| — |
| 113,613 |
| |||||
Investment in subsidiaries |
| 450,029 |
| 134,288 |
| 17 |
| (584,334 | ) | — |
| |||||
Intercompany receivable |
| — |
| 133,622 |
| — |
| (133,622 | ) | — |
| |||||
Goodwill and intangible assets, net |
| — |
| 164,949 |
| 151,598 |
| — |
| 316,547 |
| |||||
Total assets |
| $ | 487,346 |
| $ | 651,605 |
| $ | 371,426 |
| $ | (853,147 | ) | $ | 657,230 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | — |
| $ | 9,809 |
| $ | 9,685 |
| $ | — |
| $ | 19,494 |
|
Accrued employee compensation and benefits |
| — |
| 22,665 |
| 48,318 |
| — |
| 70,983 |
| |||||
Other accrued expenses |
| 6,704 |
| 5,904 |
| 13,441 |
| — |
| 26,049 |
| |||||
Other current liabilities |
| 37,558 |
| 12,610 |
| 17,085 |
| — |
| 67,253 |
| |||||
Intercompany payable |
| — |
| 124,657 |
| 10,534 |
| (135,191 | ) | — |
| |||||
Total current liabilities |
| 44,262 |
| 175,645 |
| 99,063 |
| (135,191 | ) | 183,779 |
| |||||
Intercompany notes payable |
| 22,942 |
| — |
| 110,680 |
| (133,622 | ) | — |
| |||||
Long-term liabilities |
| 227,608 |
| 31,455 |
| 21,854 |
| — |
| 280,917 |
| |||||
Total shareholders’ equity (deficit) |
| 192,534 |
| 444,505 |
| 139,829 |
| (584,334 | ) | 192,534 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 487,346 |
| $ | 651,605 |
| $ | 371,426 |
| $ | (853,147 | ) | $ | 657,230 |
|
Condensed Consolidating Balance Sheet
As of December 31, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 6 |
| $ | 9,975 |
| $ | 8,754 |
| $ | — |
| $ | 18,735 |
|
Accounts receivable, net |
| — |
| 146,078 |
| 18,851 |
| — |
| 164,929 |
| |||||
Intercompany receivable |
| 32,239 |
| — |
| 88,776 |
| (121,015 | ) | — |
| |||||
Other current assets |
| 3,587 |
| 14,878 |
| 10,543 |
| — |
| 29,008 |
| |||||
Total current assets |
| 35,832 |
| 170,931 |
| 126,924 |
| (121,015 | ) | 212,672 |
| |||||
Equipment and fixtures, net and other assets |
| 2,254 |
| 48,019 |
| 61,994 |
| — |
| 112,267 |
| |||||
Investment in subsidiaries |
| 450,175 |
| 74,783 |
| 17 |
| (524,975 | ) | — |
| |||||
Intercompany receivable |
| — |
| 114,480 |
| — |
| (114,480 | ) | — |
| |||||
Goodwill and intangible assets, net |
| — |
| 169,792 |
| 109,297 |
| — |
| 279,089 |
| |||||
Total assets |
| $ | 488,261 |
| $ | 578,005 |
| $ | 298,232 |
| $ | (760,470 | ) | $ | 604,028 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | — |
| $ | 7,485 |
| $ | 8,874 |
| $ | — |
| $ | 16,359 |
|
Accrued employee compensation and benefits |
| — |
| 18,467 |
| 39,568 |
| — |
| 58,035 |
| |||||
Other accrued expenses |
| 5,947 |
| 5,876 |
| 8,650 |
| — |
| 20,473 |
| |||||
Other current liabilities |
| — |
| 11,683 |
| 9,635 |
| — |
| 21,318 |
| |||||
Intercompany payable |
| — |
| 118,041 |
| 2,974 |
| (121,015 | ) | — |
| |||||
Total current liabilities |
| 5,947 |
| 161,552 |
| 69,701 |
| (121,015 | ) | 116,185 |
| |||||
Intercompany notes payable |
| 41,634 |
| — |
| 72,846 |
| (114,480 | ) | — |
| |||||
Long-term liabilities |
| 230,784 |
| 31,915 |
| 15,248 |
| — |
| 277,947 |
| |||||
Total shareholders’ equity (deficit) |
| 209,896 |
| 384,538 |
| 140,437 |
| (524,975 | ) | 209,896 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 488,261 |
| $ | 578,005 |
| $ | 298,232 |
| $ | (760,470 | ) | $ | 604,028 |
|
Condensed Statements of Cash Flows
For the six months ended June 30, 2013
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net cash provided by (used in) operating activities |
| $ | (14,862 | ) | $ | 22,433 |
| $ | 14,964 |
| $ | — |
| $ | 22,535 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net intercompany receivables |
| — |
| (19,142 | ) | (14,175 | ) | 33,317 |
| — |
| |||||
Acquisition of business |
| — |
| — |
| (41,167 | ) | — |
| (41,167 | ) | |||||
Cash acquired from acquisition |
| — |
| — |
| 4,951 |
| — |
| 4,951 |
| |||||
Additions to equipment and fixtures |
| — |
| (12,987 | ) | (5,407 | ) | — |
| (18,394 | ) | |||||
Net cash used in investing activities |
| — |
| (32,129 | ) | (55,798 | ) | 33,317 |
| (54,610 | ) | |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net borrowings on line of credit |
| 2,954 |
| — |
| — |
| — |
| 2,954 |
| |||||
Net borrowings (repayments) on long term debt |
| 30,600 |
| 2,831 |
| (646 | ) | — |
| 32,785 |
| |||||
Net repayments on capital leases |
| — |
| (4,573 | ) | (1,854 | ) | — |
| (6,427 | ) | |||||
Net intercompany payables |
| (18,692 | ) | 6,615 |
| 45,394 |
| (33,317 | ) | — |
| |||||
Net cash provided by (used in) financing activities |
| 14,862 |
| 4,873 |
| 42,894 |
| (33,317 | ) | 29,312 |
| |||||
Effect of exchange rates on cash and cash equivalents |
| — |
| (86 | ) | (1,764 | ) | — |
| (1,850 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
| — |
| (4,909 | ) | 296 |
| — |
| (4,613 | ) | |||||
Cash and cash equivalents, beginning of period |
| 6 |
| 9,976 |
| 8,753 |
| — |
| 18,735 |
| |||||
Cash and cash equivalents, end of period |
| $ | 6 |
| $ | 5,067 |
| $ | 9,049 |
| $ | — |
| $ | 14,122 |
|
Condensed Statements of Cash Flows
For the six months ended June 30, 2012
(Unaudited)
|
| Parent |
| Guarantor |
| Non- |
| Elimination |
| Total |
| |||||
Net cash provided by (used in) operating activities |
| $ | (13,378 | ) | $ | 28,164 |
| $ | 21,715 |
| $ | — |
| $ | 36,501 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net intercompany receivables |
| (75 | ) | (47,011 | ) | (22,443 | ) | 69,529 |
| — |
| |||||
Investment in subsidiaries |
| — |
| (100 | ) | — |
| 100 |
| — |
| |||||
Additions to equipment and fixtures |
| — |
| (8,082 | ) | (7,766 | ) | — |
| (15,848 | ) | |||||
Net cash used in investing activities |
| (75 | ) | (55,193 | ) | (30,209 | ) | 69,629 |
| (15,848 | ) | |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net repayments on line of credit |
| (26,615 | ) | — |
| — |
| — |
| (26,615 | ) | |||||
Net borrowings (repayments) on long term debt |
| — |
| 765 |
| (146 | ) | — |
| 619 |
| |||||
Net repayments on capital leases |
| — |
| (4,358 | ) | (1,282 | ) | — |
| (5,640 | ) | |||||
Investment from parent |
| — |
| — |
| 100 |
| (100 | ) | — |
| |||||
Net intercompany payables |
| 40,079 |
| 22,121 |
| 7,329 |
| (69,529 | ) | — |
| |||||
Tax payments for withholding on restricted stock |
| (11 | ) | — |
| — |
| — |
| (11 | ) | |||||
Net cash provided by (used in) financing activities |
| 13,453 |
| 18,528 |
| 6,001 |
| (69,629 | ) | (31,647 | ) | |||||
Effect of exchange rates on cash and cash equivalents |
| — |
| 122 |
| (1,379 | ) | — |
| (1,257 | ) | |||||
Net decrease in cash and cash equivalents |
| — |
| (8,379 | ) | (3,872 | ) | — |
| (12,251 | ) | |||||
Cash and cash equivalents, beginning of period |
| 6 |
| 11,143 |
| 12,099 |
| — |
| 23,248 |
| |||||
Cash and cash equivalents, end of period |
| $ | 6 |
| $ | 2,764 |
| $ | 8,227 |
| $ | — |
| $ | 10,997 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “intend,” “plan,” target,” “goal,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 26, 2013.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we explicitly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.
Overview
Our Business
Stream Global Services, Inc. (“we”, “us”, “Stream”, the “Company” or “SGS”) is a global business process outsourcing (“BPO”) service provider specializing in customer relationship management (“CRM”), including sales, customer care and technical support primarily for Fortune 1000 companies. Our clients include multinational computing/hardware, telecommunications service providers, software/networking, entertainment/media, retail, travel and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across approximately 56 service centers in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.
On February 25, 2013, we completed our acquisition of all of the outstanding share capital of LBM Holdings Limited and the interests in its two subsidiaries, LBM Holdings (UK) Limited and LBM Direct Marketing Limited (collectively, “LBM”), for a purchase price of approximately $41.2 million. LBM is a United Kingdom-based BPO provider servicing large, multinational companies primarily in the UK marketplace. LBM provides a range of revenue generation services and capabilities for utilities, telecommunications and financial services companies in Europe. LBM has approximately 2,500 employees across 6 locations in England and Northern Ireland.
We generate revenue based primarily on the amount of time our agents devote to a client’s program. Revenue is recognized as services are provided. The majority of our revenue is from multi-year contracts and we expect that trend to continue. However, we do provide certain client programs on a short-term basis.
Our industry is highly competitive. We compete primarily with the in-house business processing operations of our current and potential clients. We also compete with certain third-party BPO providers. Our industry is labor-intensive and the majority of our operating costs relate to wages, employee benefits and employment taxes.
We periodically review our capacity utilization and projected demand for future capacity. In conjunction with these reviews, we may decide to consolidate or close under-performing service centers, including those impacted by the loss of client programs, in order to maintain or improve targeted utilization and margins.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. We define our “critical accounting policies” as those that require us to make subjective estimates about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations or that concern the specific manner in which we apply GAAP. On an on-going basis, we evaluate our estimates including those related to revenue recognition, the allowance for bad debts, derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, contingencies, litigation and restructuring liabilities, and goodwill and other intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time the accounting estimate is made and applied and require us to assess a range of potential outcomes.
We believe the following critical accounting policies are those that are most important to the portrayal of our results of operations and financial condition and that require the most subjective judgment.
Revenue Recognition
We generate revenue based primarily on the amount of time our agents devote to a client’s program. Revenue is recognized as services are provided. The majority of our revenue is from multi-year contracts and we expect that trend to continue. However, we do provide certain client programs on a short-term basis.
Our policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:
Persuasive evidence of an arrangement —We use a legally binding contract signed by the client as evidence of an arrangement. We consider the signed contract to be the most persuasive evidence of the arrangement.
Delivery has occurred or services rendered —Delivery has occurred based on the billable time or transactions processed by each service professional, as defined in the client contract. The rate per billable time or transaction is based on a pre-determined contractual rate. Contractually pre-determined quality and performance metrics may adjust the amount of revenue recognized.
Fee is fixed or determinable —We assess whether the fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. Our standard payment terms are normally within 90 days. Our experience has been that we are generally able to determine whether a fee is fixed or determinable.
Collection is probable —We assess the probability of collection from each client at the outset of the arrangement based on a number of factors, including the payment history and its current creditworthiness. If in our judgment collection of a fee is not probable, we do not record revenue until the uncertainty is removed, which generally means revenue is recognized upon our receipt of the cash payment. Our experience has been that we are generally able to estimate whether collection is probable.
Allowances for Accounts Receivable
We maintain allowances for estimated losses resulting from the inability of our clients to make required payments. We perform credit reviews of each client, monitor collections and payments from our clients, and determine the allowance based upon historical experience and specific collection issues. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
Accounting for Income Taxes
In connection with preparing our financial statements, we are required to compute income tax expense in each jurisdiction in which we operate. This process requires us to project our current tax liability and estimate our deferred tax assets and liabilities, including net operating loss and tax credit carryforwards. We also continually assess the need for a valuation allowance against deferred tax assets under the “more-likely-than-not” criteria. As part of this assessment, we have considered our recent operating results, future taxable income projections, and all prudent and feasible tax planning strategies.
As of June 30, 2013 and 2012, we maintained a full valuation allowance against our deferred tax assets in certain countries including the United States. We currently do not have sustained profitability sufficient to support a conclusion that a valuation allowance is not required in these jurisdictions.
We account for our uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740-10, Income Taxes. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, and settlement of issues under audit.
Interest and penalties relating to income taxes and uncertain tax positions are accrued net of tax in “Provision for income taxes.”
In the future, our effective tax rate could be adversely affected by several factors, many of which are outside our control. Our effective tax rate is affected by the proportion of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. Further, we are subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate, as well as the requirements, pronouncements and rulings of certain tax and regulatory organizations. We estimate our annual effective tax rate each quarter based on a combination of actual and forecasted results of subsequent quarters. Consequently, significant changes in our actual quarterly or forecasted results may impact the effective tax rate for the current or future periods.
Earnings of our foreign subsidiaries are designated as indefinitely reinvested outside the U.S. If required for our operations in the U.S., most of the cash held abroad could be repatriated to the U.S. but, under current law, would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits). Currently, we do not anticipate a need to repatriate these funds to our U.S. operations.
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), limits the amount of U.S. tax attributes (Net operating loss carry forwards and tax credits) that can be utilized annually to offset future taxable income based on certain 3-year cumulative increases in the ownership interests of stockholders who are 5% stockholders under the Code. The Company has determined that an ownership change occurred under these federal income tax provisions on April 27, 2012. However, the Company does not expect to generate U.S. taxable income in excess of the accumulated limitation in 2013.
Contingencies
We consider the likelihood of various loss contingencies, including non-income tax and legal contingencies arising in the ordinary course of business, and our ability to reasonably estimate the range of loss in determining loss contingencies. An estimated loss contingency is accrued in accordance with the authoritative guidance when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such accruals should be adjusted.
Derivatives and Hedging
We enter into foreign exchange forward contracts to reduce our exposure to foreign currency exchange rate fluctuations that are associated with forecasted expenses in non-functional currencies. Upon proper qualification, these contracts are accounted for as cash flow hedges.
All derivative financial instruments are reported in the accompanying Consolidated Balance Sheets at fair value. Changes in fair value of derivative instruments designated as cash flow hedges are recorded in “Accumulated other comprehensive income (loss),” to the extent they are deemed effective. Based on the criteria established by current accounting standards, all of our cash flow hedge contracts are deemed to be highly effective. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction within “Direct cost of revenue.”
We also enter into fair value derivative contracts to reduce our exposure to foreign currency exchange rate fluctuations associated with changes in asset and liability balances. Changes in the fair value of derivative instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized in “Other expenses, net” in the accompanying Consolidated Statements of Operations.
While we expect that our derivative instruments designated as cash flow hedges will continue to be highly effective and in compliance with applicable accounting standards, if our cash flow hedges did not qualify as highly effective or if we determine that forecasted transactions will not occur, the changes in the fair value of the derivatives used as cash flow hedges would be reflected currently in “Other expenses, net” in the accompanying Consolidated Statement of Operations.
Goodwill and Other Intangible Assets
In accordance with the authoritative guidance, goodwill is reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value. We operate in one reporting unit, which is the basis for impairment testing of all goodwill. We utilize internally developed models to estimate our expected future cash flows in connection with our estimate of fair value of the reporting unit in the evaluation of goodwill. The key assumptions in our model consist of numerous factors including the discount rate, terminal value, growth rate and the achievability of our longer term financial results. Intangible assets with a finite life are recorded at cost and amortized using their projected cash flows over their estimated useful life. Client lists and relationships are amortized over periods up to ten years, market adjustments related to facility leases are amortized over the term of the respective lease and developed software is amortized over five years. Brands and trademarks are not amortized as their life is indefinite. In accordance with the authoritative guidance, indefinite-lived intangible assets are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired.
The carrying value of finite-lived intangibles is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the authoritative guidance. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets.
Key Operating Metrics and Other Items
Direct Cost of Revenue
We record the costs specifically associated with client billable programs identified in a client statement of work as direct cost of revenue. These costs include direct labor wages and benefits of service professionals in our call centers as well as reimbursable expenses such as telecommunication charges. The most significant portion of our direct cost of revenue is attributable to employee compensation, benefits and payroll taxes. These costs are expensed as they are incurred. Direct costs are affected by prevailing wage rates in the countries in which they are incurred and are subject to the effects of foreign currency fluctuations, net of the impact of any cash flow hedges.
Selling, general and administrative expenses
Our selling, general and administrative expenses consist of all expenses of operations other than direct costs of revenue, such as information technology, telecommunications, sales and marketing costs, finance, human resource management and other functions and service center operational expenses such as facilities, operations and training.
Severance, restructuring and other charges
Our severance, restructuring and other charges include expenses related to acquisitions, non-agent severance charges and expenses related to exiting leased facilities.
Other Income and Expenses
Other income and expenses consists of foreign currency transaction gains or losses, other income, interest income and interest expense. Interest expense includes interest expense and amortization of debt issuance costs associated with our indebtedness under our credit lines, senior secured notes and capitalized lease obligations.
We generate revenue and incur expenses in several different currencies. We do not operate in any countries subject to hyper-inflationary accounting treatment. Our most common transaction currencies are the U.S. Dollar, the Euro, the British Pound, the Canadian Dollar, Philippine Peso and the Indian Rupee. Our clients are most commonly billed in the U.S. Dollar or the Euro. We translate our results from functional currencies to U.S. Dollars using the average exchange rates in effect during the accounting period.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance adding new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). We implemented these requirements in the first quarter of 2013. The guidance is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in financial statements. It does not amend any existing requirements for reporting net income or OCI in financial statements. The implementation of the guidance did not have a material impact on our consolidated financial statements.
Results of Operations
Three months ended June 30, 2013 compared with three months ended June 30, 2012
Revenue. Revenues increased $51.5 million, or 26.0%, to $249.2 million for the three months ended June 30, 2013, compared to $197.7 million for the three months ended June 30, 2012. The increase is primarily attributable to the acquisition of LBM and increased volume with existing customers.
Revenues for services performed in our offshore service centers in the Philippines, India, El Salvador, the Dominican Republic, China, Nicaragua, Tunisia and Egypt increased $10.6 million, or 11.8%, for the three months ended June 30, 2013, compared to the three months ended June 30, 2012 due to higher client volumes. Revenues in our offshore service centers represented 40.5% of consolidated revenues for the three months ended June 30, 2013, compared to 45.6% in the same period in 2012. Revenues for services performed in our United States and Canadian service centers increased $9.5 million, or 13.3%, for the three months ended June 30, 2013, compared to the three months ended June 30, 2012 due to higher client volume. Revenues for services performed in European service centers increased $31.2 million, or 86.9%, for the three months ended June 30, 2013, compared to the three months ended June 30, 2012. This increase is primarily attributable to the acquisition of LBM and increased client volumes.
Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $30.4 million, or 25.6%, to $149.1 million for the three months ended June 30, 2013, compared to $118.7 million for the three months ended June 30, 2012. The increase is primarily attributable to the acquisition of LBM and increased client volume.
Gross Profit. Gross profit increased $21.0 million, or 26.5%, to $100.1 million for the three months ended June 30, 2013 from $79.1 million for the three months ended June 30, 2012. Gross profit as a percentage of revenue was 40.2% and 40.0% for the three months ended June 30, 2013 and 2012, respectively.
Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance, restructuring and other charges, net and depreciation and amortization expense. Operating expenses increased $13.0 million, or 15.3%, to $98.3 million for the three months ended June 30, 2013, compared to $85.3 million for the three months ended June 30, 2012. Operating expenses as a percentage of revenues was 39.4% for the three months ended June 30, 2013 compared to 43.1% for the three months ended June 30, 2012.
Selling, general and administrative expense increased 19.1%, from $64.6 million for the three months ended June 30, 2012 to $76.9 million for the three months ended June 30, 2013. Selling, general and administrative expense as a percentage of revenue was 30.9% and 32.7% for the three months ended June 30, 2013 and 2012, respectively. The increase in selling, general and administrative expenses in 2013 compared to 2012 is primarily due to the addition of the LBM business, a larger number of operations support personnel, and the opening of new service centers.
Severance, restructuring and other charges were $4.9 million and $6.6 million for the three months ended June 30, 2013 and 2012, respectively. The charge in 2013 primarily relates to salary continuation expense of approximately $1.7 million related to non-agent severance, $1.4 million related to management’s decision to exit locations and eliminate unprofitable programs, and approximately $1.8 million primarily related to the integration of LBM. The charge in 2012 primarily relates to salary continuation expense of approximately $1.3 million related to non-agent severance and $2.7 million related to management’s decision to exit locations and eliminate unprofitable programs, and approximately $2.6 million of expenses related to our going private transaction in April 2012.
Depreciation and amortization expense was $16.4 million and $14.1 million for the three months ended June 30, 2013 and 2012, respectively. The increase in depreciation and amortization is primarily related to assets acquired from LBM during the first quarter of 2013.
Other Expenses, Net. Other expenses, net include interest expense and foreign currency gains and losses. Other expenses, net increased $0.2 million, or 1.7%, to $7.3 million for the three months ended June 30, 2013, compared to $7.1 million for the three months ended June 30, 2012.
Interest expense was $8.8 million and $7.1 million for the three months ended June 30, 2013 and 2012, respectively. This increase is primarily due to borrowings to fund our acquisition of LBM.
Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the three months ended June 30, 2013, we recorded a foreign currency gain of $1.6 million versus a loss of $0.1 million for the comparable period in the prior year.
Provision for Income Taxes. Income taxes were $1.0 million and $1.1 million for the three months ended June 30, 2013 and 2012, respectively. Foreign tax expense, where we generally have taxable income, was $1.0 million for both the three months ended June 30, 2013 and 2012. We operate in a number of countries outside the United States where we are generally taxed at lower statutory rates than the United States and also benefit from tax holidays in some foreign locations.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
Revenue. Revenues increased $78.7 million, or 19.0%, to $492.0 million for the six months ended June 30, 2013, compared to $413.3 million for the six months ended June 30, 2012. The increase is primarily attributable to the acquisition of LBM and increased volume with existing customers.
Revenues for services performed in our offshore service centers in the Philippines, India, El Salvador, the Dominican Republic, China, Nicaragua, Tunisia and Egypt increased $20.5 million, or 11.0%, for the six months ended June 30, 2013, compared to the six months ended June 30, 2012 due to higher client volumes. Revenues in our offshore service centers represented 42.0% of consolidated revenues for the six months ended June 30, 2013, compared to 45.1% in the same period in 2012. Revenues for services performed in our United States and Canadian service centers increased $16.2 million, or 10.8%, for the six months ended June 30, 2013, compared to the six months ended June 30, 2012 due to higher client volumes. Revenues for services performed in European service centers increased $42.0 million, or 54.5%, for the six months ended June 30, 2013, compared to the six months ended June 30, 2012. This increase is primarily attributable to the acquisition of LBM and increased client volumes.
Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $49.4 million, or 20.4%, to $292.2 million for the six months ended June 30, 2013, compared to $242.8 million for the six months ended June 30, 2012. The increase is primarily attributable to the acquisition of LBM and increased client volume.
Gross Profit. Gross profit increased $29.3 million, or 17.2%, to $199.8 million for the six months ended June 30, 2013 from $170.5 million for the six months ended June 30, 2012. Gross profit as a percentage of revenue was 40.6% and 41.3% for the six months ended June 30, 2013 and 2012, respectively.
Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance, restructuring and other charges, net and depreciation and amortization expense. Operating expenses increased $18.1 million, or 10.7%, to $187.1 million for the six months ended June 30, 2013, compared to $169.0 million for the six months ended June 30, 2012. Operating expenses as a percentage of revenues was 38.0% for the six months ended June 30, 2013 compared to 40.9% for the six months ended June 30, 2012.
Selling, general and administrative expense increased 13.9%, from $130.9 million for the six months ended June 30, 2012 to $149.0 million for the six months ended June 30, 2013. Selling, general and administrative expense as a percentage of revenue was 30.3% and 31.7% for the six months ended June 30, 2013 and 2012, respectively. The increase in selling, general and administrative expenses in 2013 compared to 2012 is primarily due to the addition of the LBM business, a larger number of operations support personnel, and the opening of new service centers.
Severance, restructuring and other charges were $6.6 million and $9.5 million for the six months ended June 30, 2013 and 2012, respectively. The charge in 2013 primarily relates to salary continuation expense of approximately $2.4 million related to non-agent severance, $1.5 million related to management’s decision to exit locations and eliminate unprofitable programs, and approximately $2.8 million primarily related to the acquisition and integration of LBM. The charge in 2012 primarily relates to salary continuation expense of approximately $3.8 million related to non-agent severance and $3.1 million related to management’s decision to exit locations and eliminate unprofitable programs, and approximately $2.6 million of expenses related to our going private transaction in April 2012.
Depreciation and amortization expense was $31.5 million and $28.7 million for the six months ended June 30, 2013 and 2012, respectively. The increase in depreciation and amortization is primarily related to assets acquired from LBM during the six months ended June 30, 2013.
Other Expenses, Net. Other expenses, net include interest expense and foreign currency gains and losses. Other expenses, net increased $2.0 million, or 14.2%, to $16.5 million for the six months ended June 30, 2013, compared to $14.5 million for the six months ended June 30, 2012.
Interest expense was $17.0 million and $14.7 million for the six months ended June 30, 2013 and 2012, respectively. The increase is primarily due to borrowings to fund our acquisition of LBM.
Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the six months ended June 30, 2013, we recorded a foreign currency gain of $0.5 million versus $0.2 million for the comparable period in the prior year.
Provision for Income Taxes. Income taxes were $2.4 million and $2.2 million for the six months ended June 30, 2013 and 2012, respectively. Foreign tax expense, where we generally have taxable income, was $2.0 million for both the six months ended June 30, 2013 and 2012. In the United States, we recorded a tax expense of $0.4 million and $0.3 million primarily due to tax on other comprehensive loss and state non-income based tax for the six months ended June 30, 2013 and 2012, respectively. We operate in a number of countries outside the United States where we are generally taxed at lower statutory rates than the United States and also benefit from tax holidays in some foreign locations. The Italy Revenue Agency Enactment No. 140973 provides a refund claim in the event of non-deduction of employee and quasi-employee costs. This refund claim applied to tax years 2007 through 2011. We recorded a benefit of $1.0 million related to this refund in the six months ended June 30, 2013.
Liquidity and Capital Resources
Our primary liquidity needs are for financing working capital associated with the expenses we incur in performing services under our client contracts and capital expenditures for the opening of new service centers, including the purchase of computers and related equipment. We have in place a credit facility that consists of a revolving line of credit that allows us to manage our cash flows. Our ability to make payments on the credit facility, to replace our indebtedness if desired, and to fund working capital and planned capital expenditures will depend on our ability to generate cash in the future. We have secured our credit facility primarily through our accounts receivable and therefore, our ability to continue servicing debt is dependent upon the timely collection of those receivables.
We made capital expenditures (including amounts financed under capital leases) of $22.0 million in the six months ended June 30, 2013 as compared to $18.1 million for the six months ended June 30, 2012. We expect to continue to make capital expenditures to build new service centers, upgrade existing service centers, meet new contract requirements and maintain and upgrade our infrastructure.
We have outstanding $230 million aggregate principal amount of 11.25% Senior Secured Notes due 2014 (the “Notes”), which mature on October 1, 2014. The Notes were issued pursuant to an Indenture among us, certain of our subsidiaries (the “Note Guarantors”), and Wells Fargo Bank, N.A., as trustee (the “Indenture”). We issued $200 million aggregate principal amount of the Notes on October 1, 2009 and an additional $30 million aggregate principal amount of the Notes on March 8, 2013. The Indenture contains restrictions on our ability to incur additional secured indebtedness under certain circumstances. Interest on the Notes is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2010.
The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, by the Note Guarantors and will be so guaranteed by any future domestic subsidiaries of ours, subject to certain exceptions.
The Notes and the Note Guarantors’ guarantees of the Notes are secured by senior liens on our and the Note Guarantors’ Primary Notes Collateral and by junior liens on our and the Note Guarantors’ Primary ABL Collateral (each as defined in the Indenture).
In October 2009, Stream, Stream Holdings Corporation, Stream International, Inc., Stream New York, Inc., Stream Global Services-US, Inc., Stream Global Services-AZ, Inc. and Stream International Europe B.V. (collectively, the “U.S. Borrowers”), and SGS Netherland Investment Corporation B.V. and Stream International Canada Inc., (collectively, the “Foreign Borrowers” and together with the U.S. Borrowers, the “Borrowers”), entered into a Credit Agreement, as amended by the First Amendment to Credit Agreement dated June 3, 2011, the Second Amendment to Credit Agreement dated November 1, 2011 and the Third Amendment to Credit Agreement dated December 27, 2012, with Wells Fargo Capital Finance, LLC, as agent and co-arranger, Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders (the “Credit Agreement”), providing for the revolving credit financing (the “ABL Facility”) of up to $125.0 million, including a $20.0 million sub-limit for letters of credit, in each case, with certain further sub-limits for certain Foreign Borrowers. The ABL Facility has
a term of five years effective from the date of the Third Amendment to Credit Agreement or 120 days prior to the maturity of our Notes (including any refinancing or extension of the Notes), whichever is less, at an interest rate of Wells Fargo’s base rate plus 150 basis points or LIBOR plus 250 basis points at our discretion. The ABL Facility has a fixed charge coverage ratio financial covenant that is operative when our availability under the facility is less than $25.0 million. At June 30, 2013, we had $80.4 million available under the ABL Facility, which includes increases in availability resulting from the Third Amendment to Credit Agreement. We were in compliance with the financial covenant as of June 30, 2013.
Letters of Credit. We had certain standby letters of credit for the benefit of landlords of certain sites in the United States and Canada. As of June 30, 2013, we had no letters of credit in place under our ABL Facility.
Unrestricted cash and cash equivalents totaled $13.8 million for the six months ended June 30, 2013 which is a $2.9 million increase compared to $10.9 million for the six months ended June 30, 2012. The amount of cash and cash equivalents on hand at any given time is primarily affected by timing differences between the collection of our accounts receivables and payment of our expenses. The timing of collections are a function of contractually agreed payment terms with our clients while certain routine disbursements (e.g. payrolls) are based on prevailing convention or statutory requirements in each jurisdiction where we do business. Our ABL Facility is utilized to provide a bridge between these timing differences allowing us to more effectively utilize our cash and cash equivalents on hand. A substantial portion of our cash and cash equivalents is located in foreign countries and may be subject to foreign withholding taxes if repatriated to the United States.
Working capital decreased $26.4 million to $43.3 million for the six months ended June 30, 2013, compared to $69.7 million for the six months ended June 30, 2012. The decrease in working capital is primarily due to the classification of the revolving line of credit from long term liabilities to short term liabilities partially offset by an increase in accounts receivable.
Net cash provided by operating activities totaled $22.5 million for the six months ended June 30, 2013, a $14.0 million decrease from the $36.5 million provided by operations for the six months ended June 30, 2012 due to changes in working capital partially offset by improvement in net income.
Net cash used in investing activities totaled $54.6 million for the six months ended June 30, 2013 which is a $38.8 million increase from the $15.8 million used in the period ended June 30, 2012. The increase is primarily due to the acquisition of LBM.
Net cash provided by financing activities totaled $29.3 million for the six months ended June 30, 2013, a $60.9 million increase from the $31.6 million used in financing activities for the period ended June 30, 2012. The increase in cash provided by financing activities reflects the $33.7 million proceeds from issuance of debt and $29.6 million net borrowings in 2013.
Our foreign exchange forward contracts require the exchange of foreign currencies for U.S. Dollars or vice versa, and generally mature in one to eighteen months. We had outstanding foreign exchange forward contracts with aggregate notional amounts of $263.2 million as of June 30, 2013 and $203.1 million as of June 30, 2012.
We expect to replace, refinance or extend our ABL Credit Agreement prior to its maturity in June 2014. We also expect to refinance the Notes prior to their maturity in October 2014. However, there can be no assurance that we will be able to obtain such financing arrangements on terms favorable to us, or at all. We believe that the renegotiated financing combined with our cash generated from operations, and existing cash and cash equivalents, will be sufficient to meet expected liquidity needs for the next 12 months.
Off-Balance Sheet Arrangements
With the exception of operating leases, we do not have any off-balance sheet arrangements.
Seasonality
We are exposed to seasonality in our revenues because of the nature of certain consumer-based clients. We may experience increased volume associated with the peak processing needs in the fourth quarter coinciding with the holiday period and a somewhat seasonal overflow into the first quarter of the following calendar year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes the use of derivative instruments to reduce the effects on our operating results and cash flows from fluctuations caused by volatility in currency exchange and interest rates. By using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk.
Interest Rate Risk
We are exposed to interest rate risk primarily through our debt facilities since some of those instruments bear interest at variable rates. At June 30, 2013, we had outstanding borrowings under variable rate debt agreements that totaled approximately $38.0 million. A hypothetical 1% increase in the interest rate would have increased interest expense by approximately $0.4 million and would have decreased annual cash flow by a comparable amount. The carrying amount of our variable rate borrowings reflects fair value due to their short-term and variable interest rate features.
We had no outstanding interest rate derivatives covering interest rate exposure at June 30, 2013.
Foreign Currency Exchange Rate Risk
We serve many of our U.S.-based clients using our service centers in several non-U.S. locations. Although the contracts with these clients are typically priced in U.S. Dollars, a substantial portion of the costs incurred to render services under these contracts are denominated in the local currency of the country in which the contracts are serviced which creates foreign exchange exposure. The exposure is in Canada, India, the Dominican Republic, Honduras, Egypt, Germany, Spain, Italy, Netherlands, the Philippines and Nicaragua. We serve most of our EMEA-based clients using our service centers in the Netherlands, the United Kingdom, Italy, Ireland, Spain, Sweden, France, Germany, Poland, Denmark, Bulgaria, Egypt, and Tunisia. We typically bill our EMEA-based clients in Euros. While a substantial portion of the costs incurred to render services under these contracts are denominated in Euros, we also incur costs in non-Euro currencies of the local countries in which the contracts are serviced which creates foreign exchange exposure.
The expenses from these foreign operations create exposure to changes in exchange rates between the local currencies and the contractual currencies—primarily the U.S. Dollar and the Euro. As a result, we may experience foreign currency gains and losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. The majority of this exposure is related to work performed from call centers in Canada, India and the Philippines.
In order to manage the risk of these foreign currencies from strengthening against the currency used for billing, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, although not 100%, of these foreign currency exposures. While our hedging strategy may protect us from adverse changes in foreign currency rates in the short term, an overall strengthening of the foreign currencies would adversely impact margins over the long term.
The following summarizes the relative (weakening)/strengthening of the U.S. Dollar against the local currency during the years presented:
|
| Six Months Ended |
| ||
|
| 2013 |
| 2012 |
|
U.S. Dollar vs. Canadian Dollar |
| 6.0 | % | 0.5 | % |
U.S. Dollar vs. Euro |
| 0.6 | % | 2.9 | % |
U.S. Dollar vs. Indian Rupee |
| 7.8 | % | 3.3 | % |
U.S. Dollar vs. Philippine Peso |
| 6.7 | % | (3.4 | )% |
U.S. Dollar vs. British Pound |
| 4.8 | % | (3.5 | )% |
Cash Flow Hedging Program
Substantially all of our subsidiaries use the respective local currency as their functional currency because they pay labor and operating costs in those local currencies. Certain of our subsidiaries in the Philippines use the U.S. Dollar as their functional currency while paying their labor and operating cost in local currency. Conversely, revenue for most of our foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. Dollars, Euros and other non-local currencies. Where appropriate, to mitigate the risk of principally a weaker U.S. Dollar, we purchase forward contracts to acquire the local currency of certain of the foreign subsidiaries at a fixed exchange rate at specific dates in the future. We have designated and account for certain of these derivative instruments as cash flow hedges where applicable, as defined by the authoritative guidance.
Given the significance of our foreign operations and the potential volatility of certain of these currencies versus the U.S. Dollar, we use forward purchases of Philippine Pesos, Canadian Dollars, Euros and Indian Rupees to minimize the impact of currency fluctuations. As of June 30, 2013, we had entered into forward contracts with financial institutions to acquire or sell the following currencies:
Currency |
| Notional Value |
| USD Equivalent |
| Highest Rate |
| Lowest Rate |
|
Philippine Peso |
| 7,722,500 |
| 183,212 |
| 43.45 |
| 40.80 |
|
Canadian Dollar |
| 50,525 |
| 49,568 |
| 1.06 |
| 0.99 |
|
Indian Rupee |
| 745,500 |
| 12,643 |
| 64.47 |
| 54.47 |
|
Euro |
| 3,000 |
| 3,934 |
| 1.31 |
| 1.31 |
|
British Pound |
| 9,113 |
| 13,860 |
| 1.55 |
| 1.52 |
|
While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this risk is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could affect our consolidated operating results.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Our Chief Executive Officer, Kathryn V. Marinello, and our Chief Financial Officer, Michael Henricks (our principal executive officer and principal financial officer, respectively), have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective as of June 30, 2013 to ensure that information required to be disclosed by us in the reports filed or submitted by us 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, and include controls and procedures designed to ensure that information required to be disclosed by Stream in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. On an on-going basis, we review and document our disclosure controls and procedures and our internal control over financial reporting and we may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and Rule 15d-15(f) of the Exchange Act) occurred during the fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 26, 2013, which could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause operating results to vary significantly from period to period. As of June 30, 2013, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2012, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
We are filing as part of this Report the Exhibits listed in the Exhibit Index following the signature page to this Report.
Pursuant to the requirements of Section 13 or 15(d) 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.
| STREAM GLOBAL SERVICES, INC. | |
|
| |
August 5, 2013 | By: | /s/ Kathryn V. Marinello |
|
| Kathryn V. Marinello |
|
| Chairman, Chief Executive Officer and President |
|
| (Principal Executive Officer) |
|
| |
August 5, 2013 | By: | /s/ Michael Henricks |
|
| Michael Henricks |
|
| Chief Financial Officer |
|
| (Principal Financial Officer) |
Exhibit Index
Exhibit |
| Description |
|
|
|
31.1* |
| Principal Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
| Principal Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1** |
| Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2** |
| Principal Financial and Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS*** |
| XBRL Instance Document |
|
|
|
101.SCH*** |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL*** |
| XBRL Calculation Linkbase Document |
|
|
|
101.DEF*** |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB*** |
| XBRL Label Linkbase Document |
|
|
|
101.PRE*** |
| XBRL Taxonomy Presentation Linkbase Document |
* |
| Filed herewith. |
** |
| Furnished herewith. |
*** |
| XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |