StarTek(SRT) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements for Q3 and YTD September 2022 show decreases in revenue, assets, liabilities, and operating cash flow Consolidated Statement of Income (Loss) Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $163,135 | $172,787 | $498,093 | $524,888 | | Gross Profit | $23,117 | $21,523 | $60,901 | $70,764 | | Operating Income | $5,596 | $8,339 | $11,604 | $29,232 | | Net Income | $2,264 | $3,122 | $5,178 | $1,387 | | Net Income Attributable to Startek Shareholders | $243 | $76 | $867 | $(5,194) | | Diluted EPS | $0.01 | $0.00 | $0.02 | $(0.13) | Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $223,699 | $225,018 | | Total Assets | $612,334 | $642,475 | | Total Current Liabilities | $152,988 | $147,629 | | Total Liabilities | $361,544 | $389,155 | | Total Stockholders' Equity | $250,790 | $253,320 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,324 | $31,032 | | Net cash used in investing activities | $(10,994) | $(41,256) | | Net cash (used in) / provided by financing activities | $(1,962) | $24,091 | | Cash and cash equivalents at end of period | $51,703 | $56,840 | Note 1: Overview and Basis of Preparation Startek provides global technology-enabled business process management solutions, serving over 170 clients across 13 countries - Startek provides technology-enabled business process management solutions, including omni-channel customer experience and digital transformation services[29] - The company operates with over 44,000 employees in 36 delivery campuses across 13 countries, serving over 170 clients[29][30] Note 3: Goodwill and Intangible Assets Goodwill remained unchanged at $183.4 million, with net intangible assets decreasing to $82.3 million due to amortization and no impairment Goodwill and Intangible Assets (in thousands) | Asset | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Goodwill | $183,397 | $183,397 | | Net Intangible Assets | $82,347 | $90,092 | - A qualitative assessment as of September 30, 2022, concluded that there was no impairment of goodwill or intangible assets[65][66] Note 4: Revenue Revenue from customer care services saw Telecom as the largest contributor, while Healthcare & Education and Media & Cable verticals experienced significant declines Revenue by Industry Vertical (Nine Months Ended Sep 30, in thousands) | Vertical | 2022 | 2021 | | :--- | :--- | :--- | | Telecom | $174,565 | $161,961 | | E-commerce & Consumer | $59,966 | $74,757 | | Financial & Business Services | $52,312 | $48,374 | | Media & Cable | $45,139 | $72,435 | | Travel & Hospitality | $41,238 | $33,066 | | Healthcare & Education | $26,348 | $73,020 | | Total Gross Revenue | $498,093 | $525,879 | Note 6: Impairment Losses and Restructuring/Exit Cost The company recorded $3.15 million in restructuring costs for facility closures in Argentina and the Philippines, with $0.54 million remaining to be paid - For the nine months ended September 30, 2022, the company accrued $3.15 million in restructuring costs, primarily from closing facilities in Argentina and the Philippines[83][84] - The remaining accrued restructuring cost as of September 30, 2022, was $543 thousand, which is expected to be paid by the end of Q4 2022[83][85] Note 9: Debt Total debt was $169.6 million as of September 30, 2022, with the company in compliance with all financial covenants following a $185 million debt refinancing Debt Summary (in thousands) | Debt Category | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Short term debt & Current portion of long term debt | $27,074 | $9,852 | | Long term debt | $142,515 | $160,175 | | Total Debt | $169,589 | $170,027 | - In February 2021, the company secured a $185 million senior debt facility, comprising a $165 million term loan and a $20 million revolving credit facility[97] - The company utilizes non-recourse factoring agreements to sell certain accounts receivable, with $15.8 million factored as of September 30, 2022[103] Note 12: Segment Reporting The Middle East segment was the largest revenue contributor and grew significantly, while the Americas segment declined, with a single client accounting for 18% of consolidated net revenue Revenue by Segment (Nine Months Ended Sep 30, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Americas | $126,811 | $203,348 | | India & Sri Lanka | $82,112 | $75,032 | | Malaysia | $34,068 | $41,502 | | Middle East | $181,680 | $143,783 | | Argentina & Peru | $26,895 | $27,060 | | Rest of World | $46,527 | $34,163 | | Total | $498,093 | $524,888 | - A single client accounted for 18% of consolidated total net revenue during the nine months ended September 30, 2022 and 2021[114] Note 14: Investment in Equity-Accounted Investees The company's equity-method investment in CSS Corp LP increased to $35.8 million as of September 30, 2022, reflecting its share of income - The company holds a 61.35% ownership interest in CSS Corp LP, which is accounted for as an equity-method investment[122][123] Investment in CSS Corp LP (in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Carrying Amount | $35,810 | $31,688 | - The company's share of income from equity-accounted investees was $4.1 million for the nine months ended September 30, 2022[122] Note 15: Common Stock The company repurchased 370,133 shares of common stock for approximately $1.6 million during the nine months ended September 30, 2022 - During the nine months ended September 30, 2022, the company repurchased 370,133 shares of common stock[133] - The average price paid per share was $4.4, for a total repurchase value of approximately $1.64 million[133] Note 16: Private Offer Transaction Cost The company incurred $2.6 million in expenses for financial and legal advisors related to a rejected and withdrawn non-binding acquisition proposal - A special committee was formed to evaluate a non-binding acquisition proposal from CSP Management Limited[134] - The company incurred total expenses of $2,603 thousand during the nine months ended September 30, 2022, related to the private offer[134] - The special committee rejected the proposal, which was subsequently withdrawn by CSP, and the committee was dissolved[135] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and YTD September 2022 financial results, highlighting revenue declines, gross margin impacts, and costs from a withdrawn take-private offer Results of Operations — Three Months Ended September 30, 2022 and 2021 Q3 2022 net revenue decreased by 5.6% due to Americas client insourcing, with gross margin improving to 14.2%, but operating income declined due to higher SG&A Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $163,135 | $172,787 | (5.6%) | | Gross Profit | $23,117 | $21,523 | 7.4% | | Gross Margin | 14.2% | 12.5% | +1.7 p.p. | | Operating Income | $5,596 | $8,339 | (32.9%) | - The revenue decline in the Americas was primarily due to a client in the media vertical insourcing its operations[144] - Gross margin improved due to a change in geography mix with higher revenues from higher-margin offshore and nearshore delivery, and rationalization of facility rent costs[153][154][157] - SG&A expenses increased to 10.1% of revenue from 7.6% in the prior year, including $1.4 million in costs related to the take-private transaction[159] Results of Operations — Nine Months Ended September 30, 2022 and 2021 YTD 2022 net revenue decreased by 5.1% due to Americas impacts, gross margin contracted to 12.2% from wage inflation, and operating income significantly dropped due to higher SG&A YTD 2022 vs YTD 2021 Performance (in thousands) | Metric | YTD 2022 | YTD 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $498,093 | $524,888 | (5.1%) | | Gross Profit | $60,901 | $70,764 | (13.9%) | | Gross Margin | 12.2% | 13.5% | -1.3 p.p. | | Operating Income | $11,604 | $29,232 | (60.3%) | - The revenue decline in the Americas was due to the high base impact from a short-term government COVID vaccination program in the prior year and client insourcing[166] - Gross margin decreased primarily due to inflation-led wage increases and an increase in outsourcing costs[176][179] - SG&A expenses for the period included $2.6 million in costs related to the take-private transaction[181] Liquidity and Capital Resources Liquidity is supported by cash from operations and debt facilities, with cash and equivalents increasing to $61.3 million, despite a decrease in operating cash flow - Primary sources of liquidity are cash from operations, working capital facilities, and term debt[186] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Flow | 2022 | 2021 | | :--- | :--- | :--- | | Operating Activities | $21,324 | $31,032 | | Investing Activities | $(10,994) | $(41,256) | | Financing Activities | $(1,962) | $24,091 | - Cash used in investing activities decreased significantly as the prior year included a $25 million investment in CSS Corp and a $3 million payment for a call option premium[189] Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Startek is not required to provide this disclosure - As a Smaller Reporting Company, Startek is not required to provide this disclosure[197] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2022[198] - No material changes were made to the company's internal control over financial reporting during the third quarter of 2022[199] PART II - OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report[201] Risk Factors No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[202] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 370,133 shares of common stock for approximately $1.6 million under its authorized stock repurchase plan - The company has a stock repurchase plan, originally announced in 2004, authorizing up to $25 million in repurchases[203] Stock Repurchase Activity (Nine Months Ended Sep 30, 2022) | Period | Total Shares Purchased | Average Price Paid ($) | | :--- | :--- | :--- | | Jan 2022 | 130,803 | 5.08 | | Feb 2022 | 75,865 | 4.90 | | Mar 2022 | 52,739 | 4.36 | | May 2022 | 20,000 | 3.15 | | Sep 2022 | 90,726 | 3.31 | | Total | 370,133 | 4.4 (approx.) | Other Information The company reported no other information for this item - There is no other information to report[209]