StarTek, Inc. Reports Second Quarter Results

StarTek, Inc. (NYSE:SRT) today announced results for the second quarter of 2007. Revenue for the second quarter was $58.8 million, an increase of 2.1% from the first quarter of 2007, with a net loss of $3.4 million, or $0.23 per diluted share. The results were negatively affected by a decline in foreign currency exchange rates. In addition, the Company booked one-time non-cash charges for the impairment of assets and a tax valuation allowance. Cash and investments increased $8.3 million for the quarter to $43.7 million, due mainly to working capital improvements. Financial Results Revenue for the second quarter of 2007 increased $1.2 million or 2.1% over the first quarter of 2007 to $58.8 million. Most of the growth was attributable to increased business from current clients and improved pricing terms with two significant clients. Compared to the second quarter of 2006, revenue was down $0.7 million or 1.2%. This was driven by the temporary closing of the Petersburg facility and lower FTE due to continued staffing pressures, partially offset by new business, improved pricing, and productivity. Gross margin for the second quarter of 2007 was 14.5% compared to 15.5% in the first quarter of 2007. After adjusting for the $0.8 million effect of foreign currency exchange, gross margin improved to 15.9%. This adjusted margin improvement was primarily due to improved pricing terms from two existing clients and productivity gains. Compared to the second quarter of 2006, gross margin improved from 13.8%. Operating loss for the second quarter was $0.5 million, basically unchanged from the first quarter of 2007. Selling, general and administrative expense for the quarter decreased from $9.4 million to $9.0 million. After adjusting the first quarter for a one-time $0.8 million severance charge, selling, general and administrative expense actually increased in the second quarter by $0.4 million due to increases in corporate staffing and human resources spending. Normalizing for the impact of foreign currency exchange and severance charges, adjusted operating income for the second quarter was $0.33 million, a slight improvement from the first quarter adjusted operating income of $0.30 million. While second quarter operating income was comparable to the first quarter, the net loss and loss per diluted share for the second quarter were $3.4 million and $0.23 respectively. This compares to the prior quarter net loss of $0.2 million and loss per diluted share of $0.01. The second quarter results included three non-cash charges: a $1.7 million impairment related to software projects; a $1.3 million impairment of leasehold improvements relating to the closing of the Hawkesbury, Ontario facility; and a $1.8 million tax valuation allowance affecting tax rates which was established against capital loss carryforwards that management does not believe will be offset by future capital gains prior to their expiration. Q2 Accomplishments In keeping with the Company’s plan to return to profitability and restore growth, the Company has executed on the following: Signed one new account and added new programs with several existing clients Improved pricing terms with two significant clients Announced plans to open a new center in Victoria, Texas Re-opened the Petersburg, Virginia facility that commenced operations in July Announced the closing of the Hawkesbury, Ontario center "We remain focused on growth and profitability. We are very pleased with our progress toward these goals and expect to see continued progress and improvements in the second half of the year,” said Larry Jones, StarTek’s president and chief executive officer. "We continue to execute on our plan and expect to see quarter over quarter improvements in revenue and margins throughout 2007.” CONFERENCE CALL The call will begin at 4:00 p.m. Mountain Time (6:00 p.m. Eastern Time) and can be accessed as follows: USA: 800-510-0146 International: 617-614-3449 Passcode: 21850947 Conference Host: Larry Jones A dial-in replay will be available from August 2, 2007, at 6:00 p.m. Mountain Time through August 9, 2007, and can be accessed as follows: USA: 888-286-8010 International: 617-801-6888 Passcode: 83453814 A web-based replay will be available by August 3, 2007, and accessible from the Company's website at www.startek.com. ABOUT STARTEK, INC. StarTek, Inc. (NYSE: SRT) is a leading provider of high value business process outsourcing services to the communications industry. Since 1987 StarTek has partnered with their clients to solve strategic business challenges so that fast-moving businesses can improve customer retention, increase revenue and reduce costs through an improved customer experience. These robust solutions leverage industry knowledge, best business practices, highly skilled agents, proven operational excellence and flexible technology. The StarTek comprehensive service suite includes customer care, sales support, complex order processing, accounts receivable management, technical support and other industry-specific processes. Headquartered in Denver, Colorado, StarTek provides these services from 19 operational facilities in the US and Canada. For more information visit the Company’s website at www.StarTek.com or contact us at 800-541-1130. FORWARD-LOOKING STATEMENTS The matters regarding the future discussed in this news release include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to a number of risks and uncertainties. The following are important risks and uncertainties relating to StarTek's business that could cause StarTek's actual results to differ materially from those expressed or implied by any such forward-looking statements. These factors include, but are not limited to, risks relating to our revenue from our principal clients, concentration of our client base in the communications industry, consolidation in the communications industry, trend of communications companies to out-source non-core services, management turnover, dependence on and requirement to recruit qualified employees, labor costs, need to add key management personnel and specialized sales personnel, considerable pricing pressure, capacity utilization of our facilities, collection of note receivable from sale of Supply Chain Management Services platform, defense and outcome of pending class action lawsuit, lack of success of our clients’ products or services, risks related to our contracts, decreases in numbers of vendors used by clients or potential clients, inability to effectively manage growth, risks associated with advanced technologies, highly competitive markets, foreign exchange risks and other risks relating to conducting business in Canada, lack of a significant international presence, potentially significant influence on corporate actions by our largest stockholder, volatility of our stock price, geopolitical military conditions, interruption to our business, increasing costs of or interruptions in telephone and data services, compliance with SEC rules, inability to renew or replace sources of capital funding, fluctuations in the value of our investment securities portfolio, and variability of quarterly operating results. Readers are encouraged to review Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors and all other disclosures appearing in the Company's Form 10-K for the year ended December 31, 2006, and subsequent filings with the Securities and Exchange Commission. STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)   Three Months Ended June 30, Six Months Ended June 30, 2007   2006   2007   2006     Revenue $ 58,832 $ 59,525 $ 116,479 $ 116,630 Cost of services 50,295   51,321   99,032   98,654   Gross profit 8,537 8,204 17,447 17,976 Selling, general and administrative expenses 9,040   7,389   18,432   14,962   Operating (loss) profit (503 ) 815 (985 ) 3,014 Impairment losses (3,018 ) - (3,018 ) - Net interest and other income (expense) 143   533   331   1,066     (Loss) income before taxes (3,378 ) 1,348 (3,672 ) 4,080 Income tax (expense) benefit (65 ) (523 ) 40   (1,119 ) Net (loss) income $ (3,443 ) $ 825   $ (3,632 ) $ 2,961     Net (loss) income per share from:         Basic $ (0.23 ) $ 0.06   $ (0.25 ) $ 0.20   Diluted $ (0.23 ) $ 0.06   $ (0.25 ) $ 0.20             Dividends declared per common share $ -   $ 0.25   $ -   $ 0.50     Weighted Average shares Outstanding Basic 14,696 14,691 14,696 14,663 Diluted 14,696 14,748 14,696 14,744 STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)   As of June 30,2007   December 31, 2006   ASSETS   Current assets: Cash and cash equivalents $ 27,133 $ 33,437 Investments 16,573 5,933 Trade accounts receivable, less allowance for doubtful accounts of $5 and $16, respectively 40,879 46,364 Income tax receivable 3,651 1,281 Prepaid expenses and other current assets 3,417 3,009   Total current assets 91,653 90,024   Property, plant and equipment, net 56,528 60,101 Long-term deferred tax assets 3,340 4,444 Other assets 1,198 1,166   Total assets $ 152,719 $ 155,735     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 3,962 $ 6,061 Accrued liabilities: Accrued payroll 6,860 6,798 Accrued compensated absences 5,380 4,146 Accrued health insurance 245 77 Other accrued liabilities 864 338 Current portion of long-term debt 5,169 5,654 Short-term deferred income tax liabilities 1,575 754 Grant advances 954 173 Other current liabilities 365 329   Total current liabilities 25,374 24,330   Long-term debt, less current portion 8,788 10,314 Grant advances - 781 Other liabilities 1,915 1,928   Total liabilities 36,077 37,353     Stockholders' equity: Common stock, 32,000,000 non-convertible shares, $0.01 par value, authorized; 14,725,791 and 14,695,791 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively 147 147 Additional paid-in capital 62,202 61,669 Cumulative translation adjustment 2,130 1,222 Unrealized gain on investments available for sale 10 1 Unrealized gain (loss) on derivative instruments 207 (235 ) Retained earnings 51,946 55,578   Total stockholders' equity 116,642 118,382   Total liabilities and stockholders' equity $ 152,719 $ 155,735   STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)   Six Months Ended June 30, 2007   2006   Operating Activities Net (loss) income $ (3,632 ) $ 2,961 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 8,429 8,153 Non-cash compensation cost 533 153 Impairment losses 3,018 - Deferred income taxes 1,272 (1,243 ) Realized gain on investments - (35 ) Loss (gain) on sale of assets 3 (101 ) Changes in operating assets and liabilities: Trade accounts receivable, net 5,771 (3,419 ) Prepaid expenses and other assets (41 ) (940 ) Accounts payable (1,723 ) (1,604 ) Income taxes receivable, net (2,408 ) 2,313 Accrued and other liabilities 1,635   1,045   Net cash provided by operating activities 12,857   7,283     Investing Activities Purchases of investments available for sale (17,497 ) (114,490 ) Proceeds from disposition of investments available for sale 6,869 127,273 Purchases of property, plant and equipment (6,141 ) (13,339 ) Proceeds from disposition of property, plant and equipment -   343   Net cash used in investing activities (16,769 ) (213 )   Financing Activities Proceeds from stock option exercises - 1,112 Principal payments on borrowings (2,716 ) (1,253 ) Dividend payments -   (8,942 ) Net cash used in financing activities (2,716 ) (9,083 ) Effect of exchange rate changes on cash 324   (413 ) Net decrease in cash and cash equivalents (6,304 ) (2,426 ) Cash and cash equivalents at beginning of period 33,437   17,425   Cash and cash equivalents at end of period $ 27,133   $ 14,999     Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 397 $ 92 Income taxes paid $ 1,143 $ 1,535 Change in unrealized gain on investments available for sale, net of tax $ 9 $ 26 Non-GAAP Financial Measures The information presented in this press release reports (i) gross margin excluding the effects of foreign currency exchange and (ii) operating profit excluding the effects of foreign currency exchange and severance charges, which are non-GAAP measures. The following table provides a reconciliation of (i) adjusted gross profit, from which adjusted margin is calculated, to gross margin calculated in accordance with GAAP and (ii) adjusted operating profit to operating loss calculated in accordance with GAAP. This non-GAAP information should not be construed as an alternative to the reported results determined in accordance with generally accepted accounting principles in the United States (GAAP). It is provided solely to assist in an investor's understanding of the impact of the variance in foreign currency exchange rates, and the affect of one-time severance charges, on the comparability of the Company's operations. A reconciliation of the GAAP amounts to the non-GAAP amounts is shown below. STARTEK, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP DATA (In thousands) (Unaudited)                       Variance from Q1 2007 Q2 2007 Q2 2007 Q1 2007 Q1 2007 to Q2 2007 GAAP Adjustments Non-GAAP GAAP Adjustments Non-GAAP (Non-GAAP)   Revenue $ 58,832 $ (217 ) (a) $ 58,615 $ 57,647 $ 57,647 968 Cost of services 50,295   (993 ) (b) 49,302   48,737   48,737   565 Gross profit 8,537 776 9,313 8,910 8,910 403 Gross margin 14.5 % 15.9 % 15.5 % 15.5 % 0.4 %   Selling, general and administrative 9,040   (58 ) (c) 8,982   9,392   (779 ) (d) 8,613   369   Operating (loss) profit (503 ) 834 331 (482 ) 779 297 34                         Foreign currency exchange rate adjustments convert Q2 2007 results to the Q1 2007 foreign currency exchange rate, net of our hedge gains (a) Adjustment to subtract gain in revenue due to foreign currency exchange. (b) Adjustment to subtract expenses in cost of services due to foreign currency exchange. (c) Adjustment to subtract expenses in selling, general and administrative due to foreign currency exchange. (d) Adjustment to subtract expenses related to one-time severance charges from total selling, general and administrative expenses during Q1 2007.