Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to, those items described herein or set forth in Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 20142015 and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015.March 31, 2016. Unless otherwise noted in this report, any description of “us," “we,” or "our," refers to StarTek, Inc. ("STARTEK") and its subsidiaries.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. These financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. Operating results for the three and nine months ended September 30, 2015,March 31, 2016, are not necessarily indicative of operating results that may be expected during any other interim period of 20152016 or the year ending December 31, 2015.

Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. and its subsidiaries. Financial information in this report is presented in U.S. dollars.

 

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they are determined to be necessary.

Total goodwill of $8,995$9,077 is assigned to our Domestic segment. Pursuant to Federal income tax regulations,We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. In 2015, we concluded that goodwill from the ACCENT acquisition will be deductible for tax purposes.was not impaired. No indicators of impairment exist as of March 31, 2016.

The following table presents our intangible assets as of September 30, 2015:March 31, 2016:

Expected future amortization of intangible assets as of September 30, 2015March 31, 2016 is as follows:

 

During 2015, we pursued opening additional capacity in our nearshore segment. When it became evident that this additional capacity was not necessary, we decided to abandon the plan and establish a restructuring reserve of $96$112 for employee-relatedthe remaining facility costs. We expect the remaining costs to close the facility and record additional facility-related restructuring expensesbe paid during the fourth quarter.

 

The following table represents revenue concentration of our principal clients:

We enter into contracts and perform services with our major clients that fall under the scope of master service agreements (MSAs) with statements of work (SOWs) specific to each line of business. These MSAs and SOWs may automatically renew or be extended by mutual agreement and are generally terminable by the customer or us with prior written notice.

On January 25, 2013, we entered into a new MSA with AT&T Services, Inc., whichthat expires December 31, 2015 and may be extended upon mutual agreement,June 30, 2016, but may be terminated by AT&T with written notice. WeCurrently there are currently negotiating an extensiona number of the contract.SOWs for several different lines of AT&T business. These SOWs expire prior to 2018.

 

We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency exchangeforward contracts to hedge our anticipated operating commitments that are denominated in foreign currencies, including forward contracts.currencies.  The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are principally unsecured foreign exchange contracts.months.  The market risk exposure is essentially limited to risk related to currency rate movements. The functional currenciesWe operate in Canada, Jamaica, and the Philippines, where the functional currencies are the Canadian dollar, the Jamaican dollar, and the Philippine peso, respectively, which are used to pay labor and other operating costs in those countries. We provide funds for these operating costs as our client contracts generate revenues, which are paid in U.S. dollars.

Unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) and will be re-classified to operations as the forecasted expenses are incurred, typically within one year. During the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, our cash flow hedges were highly effective and hedge ineffectiveness was not material.

The following table shows the notional amount of our foreign exchange cash flow hedging instruments as of September 30, 2015:March 31, 2016:

 

The values of our derivative instruments are derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves.  The inputs to the valuation pricing models are observable in the market, and as such the derivatives are classified as Level 2 in the fair value hierarchy.

 

On April 29, 2015, we entered into a secured revolving credit facility ("Credit Agreement") with BMO Harris Bank N.A. ("Administrative Agent" or "Lender") and terminated our $20,000 secured revolving credit facility with Wells Fargo, which was effective through February 28, 2016.  All amounts owed under the Wells Fargo credit facility were repaid with borrowings under the Credit Agreement in the amount of approximately $9,300, which included an early termination fee in the amount of $100.

Initially,Our borrowings under the Credit Agreement bore interest at one, two, three or six-month LIBOR, as selected by us, plus 1.75% to 2.50%, depending on current availability under the Credit Agreement and until January 1, 2016, the interest rate would be the selected LIBOR plus 1.75%. On June 1, 2015, we amended certain definitions in the Credit Agreement adjusting the borrowings to bear interest at one-month LIBOR plus 1.75% to 2.50%, depending on current availability under the Credit Agreement.availability. We will pay letter of credit fees equal to the applicable margin (1.75% to 2.50%) times the daily maximum amount available to be drawn under all letters of credit outstanding and a monthly unused fee at a rate per annum of 0.25% on the aggregate unused commitment under the Credit Agreement.commitment.

We enteredFrom time to time and when management believes it to be advantageous, we may enter into a financing agreement forother arrangements to finance the purchase or construction of certain software licenses and related hardware for approximately $1,000, which were delivered and placed into service in April 2014. Monthly payments commenced July 2014. As of September 30, 2015, the current and long-term portion was $394 and $208, respectively, and at December 31, 2014, the current and long-term portion was $373 and $506, respectively. The amountscapital assets. These obligations are included in other current liabilities and other liabilities on theour consolidated balance sheets.sheets in Other current debt and Other debt, as applicable.

 

Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 were as follows:

We primarily evaluate segment operating performance in each reporting segment based on revenue and gross profit. Certain operating expenses are not allocated to each reporting segment; therefore, we do not present income statement information by reporting segment below the gross profit level.

Information about our reportable segments for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is as follows:

 

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report, as well as the financial and other information included in our 20142015 Annual Report on Form 10-K.

 

STARTEK is a trustedcustomer engagement business process outsourcing ("BPO") service(BPO) services provider, with comprehensivedelivering customer care solutions in a different and more meaningful way. We use “engagement” design principles vs. traditional contact center methods, resulting in added value services that create deeper customer relationships through better customer insights and interactions for our clients. Our unique approach to Omni Channel Design and Service, Training Innovation and Analytics, allows STARTEK to deliver full life-cycle care solutions through our engagement centers around the world. Our employees, whom we call Brand Warriors, are at the forefront of our customer careengagement services and represent our greatest asset. For over 25 years, theseSTARTEK Brand Warriors have been committed to enhancing the customer experience, providing higher value and making a positive impact for our clients’ business results, enhancing the customer experience while reducing costs for our clients.results.

Our vision is to be the most trusted global service provider by passionately engagingto customer-centric companies who are looking for more effective ways to engage their customers, on their terms and preferred channels with all of our stakeholders in a different and more meaningful way. We accomplish this by aligning with our clients’ business objectives. solutions that are not always available via traditional “contact center” companies.

The STARTEK Advantage System, is the sum total of our customer engagement culture, customized solutions and processes, that enhanceallows us to always remain focused on enhancing our clients’ customer experience. The STARTEK Advantage System is focused on improvingexperience, increasing customer experiencelifetime value (CLV) and reducing total cost of ownership for our clients.ownership. STARTEK has proven results for the multiple services we provide, including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs.  We manageservice client programs using a variety of multi-channel customer interaction capabilities, including voice, chat, email, social media, IVR and back-office support. STARTEK has delivery centers in the United States, Philippines, Canada, Honduras and Jamaica and through our STARTEK@Home workforce.

We seek to become a trusted partner to our clients and provide meaningful impact BPO services. Our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused, flexible and responsive to their business needs. In addition, we offer creative industry-based solutions to meet our clients’ ever changing business needs. The end result is the delivery of a quality customer experience to our clients’ customers. To achieve sustainable, predictable, profitable growth, our strategy is to:

 

The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:

Revenue increased by $11.4$14.4 million, from $61.4$63.7 million to $72.8$78.0 million in the thirdfirst quarter of 2015. This includes ACCENT revenue of $17.3 million.2016. The Domestic segment increase of $13.8$13.5 million was due to $14.2 million from the acquisition of ACCENT and $9.4$7.9 million of new business and growth from existing clients, partially offset by $7.6$7.0 million of volume reductions and $2.2$1.6 million of lost programs. Offshore revenues declined by $5.3$2.8 million due to $5.4$3.0 million of volume reductions $1.5and $1.8 million of lost programs, and $0.7 million of price reductions, partially offset by $2.3$2.1 million of growth from existing and new clients. The increase in the Nearshore segment of $2.8$3.6 million was due to $1.4 million of growth from existing and new clients in our Honduras facilities and $3.1$2.3 million of revenue from our Jamaica facility, partially offset by $1.7$0.1 million of volume reductions.

The grossGross profit as a percentage of revenue decrease of 10.4% wasincreased by 1.1% primarily due to the dilutive effectsbenefit of both the ACCENT acquisitionongoing contract optimization efforts and lower site overhead costs, partially offset by costs related to new capacity added in late 2014, coupled with lower than expected call volumes.business ramps. Domestic gross profit as a percentage of revenue decreasedincreased to 0.7%9.8% in 2016 from 6.8% in 2015 from 9.9%primarily due to the aforementioned optimization efforts and lower site overhead costs. The Offshore increase of 0.6% was primarily due to an increase in 2014 primarilycapacity utilization. The Nearshore decrease of 4.1% was due to the dilutive effects of the ACCENT acquisition and the aforementioned lower call volumes. The Offshore decline of 15.4% was primarily due to under-utilized capacity added during 2014. Nearshore gross profit increased by $0.7 million, or 3.3% as a percentage of revenue, due to the closure of Costa Rica, continuing increased capacity utilization in Honduras and the benefit of our new Jamaica facility.

As a percentage of revenue, selling,Selling, general and administrative ("SG&A") expenses increased to 12.8% from 12.2%decreased by $0.3 million during the thirdfirst quarter of 2014. On a year-to-date basis, such2016 compared to the prior year. Such expenses as a percentage of revenue increaseddecreased from 12.7% in 2015 to 13.0% from 12.4%10.0% in 2014. For the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014, SG&A expenses increased $1.8 million and $2.9 million, respectively, primarily due to the acquisition2016 as a result of ACCENT. The increases include ACCENT SG&A of $1.3 million and $2.1 million for the three and nine months ended September 30, 2015, respectively. SG&A also includes $0.7 million and $1.0 million of acquisition-related costs, comprised of transaction and integration costs, for the three and nine months ended September 30, 2015, respectively.continued cost control measures.

Restructuring charges totaled $0.9 million and $3.2 million for$12 thousand during the three and nine months ended September 30, 2015, respectively. Forfirst quarter of 2016. During the nine months ended September 30,first quarter of 2015, restructuring charges totaled $0.8 million, which primarily consisted of the following:

Interest and other income (expense), net for the ninethree months ended September 30,March 31, 2016 and 2015 of approximately $0.7$0.4 million of expenseand $0.2 million, respectively, primarily consists of approximately $0.5 million of interest expense and amortization of loan fees associated with our linesline of credit, which includes $0.2 million associated with prepayment penalties and the write-off of unamortized deferred loan costs related to our previous credit facility, and $0.7 million of interest expense related to capital leases. Interest expense was partially offset by a $0.5 million gain on disposal of assets.

Income tax expense was $0.6 million and $0.5 million forduring the first nine monthsquarter of 2015 and 2014, respectively.2016 was $0.1 million compared to $0.2 million in the first quarter of 2015. Income tax expense is primarily related to our Canadian operations. We are currently operating underhave tax holidays in Honduras and Jamaica, and for certain facilities in the Philippines.

Our primary sources of liquidity are cash flows generated by operating activities and available borrowings under our revolving credit facility.  We have historically utilized these resources to finance our operations and make capital expenditures associated with capacity expansion, upgrades of information technologies and service offerings, and business acquisitions.  Due to the timing of our collections of receivables due from our major customers, we have historically needed to draw on the line of credit periodically for ongoing working capital needs.  Recently, we negotiated modifications toWe believe our credit facility to provide

As of September 30, 2015, we had aMarch 31, 2016, working capital deficit of $3.1totaled $5.2 million and our current ratio was 1.10:1, compared to working capital of $22.8$1.6 million and a current ratio of 1.03:1 as of December 31, 2014.2015. The increase in working capital in 2016 was primarily driven by an increase in net cash provided by operations.

Net cash flows used inprovided by operating activities for the ninethree months ended September 30, 2015March 31, 2016 was $3.4$4.9 million compared to net cash flows provided by operating activities of $3.0$0.5 million for the ninethree months ended September 30, 2014,March 31, 2015, primarily due to lowerincreased earnings of $12.1$3.2 million partially offset byand a $4.1$0.9 million increase in cash provided from working capital and an increase in non-cash reconciling items of $1.6 million.capital. Cash flows from operating activities can vary significantly from quarter to quarter depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable.

Net cash used in investing activities for the ninethree months ended September 30, 2015 of $24.4 million primarily consisted of the cash paid to acquire ACCENT of $18.3 million, cash paid for prior period acquisitionsMarch 31, 2016 of $0.6 million and $6.5consisted of $0.4 million for capital expenditures partially offset by proceeds of $1.0and $0.2 million from the sale of assets.paid for prior acquisitions. This compares to net cash used in investing activities for the ninethree months ended September 30, 2014March 31, 2015 of $8.6$3.7 million, which primarily consisted of capital expenditures of $9.6$3.5 million related to new facility build-outexpansions and expansions, partially offset by proceeds$0.2 million related to prior acquisitions.

Net cash used in financing activities for the three months ended March 31, 2016 of $1.1$6.0 million from the salewas primarily used to pay down of our Laramie, Wyoming property andline of credit during the sale of other miscellaneous assets at various facilities.

We have no material off-balance sheet transactions, unconditional purchase obligations or similar instruments and we are not a guarantor of any other entities’ debt or other financial obligations.

 

We have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control, including: (i) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients; (ii) changes in the volume of services provided to principal clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal nature of certain clients’ businesses; and (vi) variability in demand for our services by our clients depending on demand for their products or services and/or depending on our performance.

 

In preparing our consolidated financial statements in conformity with GAAP, management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions upon which accounting estimates are based. Management applies its best judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results may vary significantly from the estimates we have applied.

Our critical accounting policies and estimates are consistent with those disclosed in our 20142015 Annual Report on Form 10-K. Please refer to Item 7, “Management's Discussion and AnalysisNote 1 of the Notes to the Consolidated Financial Condition and Results of Operations,”Statements in our 2014 Annual Report on Form 10-K for the year ended December 31, 2015 for a complete description of our Critical Accounting Policiescritical accounting policies and Estimates.estimates.

 

Market risk relating to our international operations results primarily from changes in foreign exchange rates. To address this risk, we enter into foreign currency exchange contracts. The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are principally unsecured. The cumulative translation effects for subsidiaries using functional currencies other than the U.S. dollar ("USD") are included in accumulated other comprehensive loss in stockholders’ equity. Movements in non-USD currency exchange rates may negatively or positively affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors.

We serve many of our U.S.-based clients in non-U.S. locations, such as Canada and the Philippines. Our client contracts are primarily priced and invoiced in USDs;USD; however, the functional currencies of our Canadian and Philippine operations are the Canadian dollar ("CAD") and the Philippine peso ("PHP"), respectively, which representscreates foreign currency exchange exposure.

At September 30, 2015,March 31, 2016, we had a $50.0 million secured credit facility with BMO Harris Bank. The interest rate on our credit facility is variable based upon the LIBOR index, and, therefore, is affected by changes in market interest rates. If the LIBOR increased 100 basis points, there would not be a material impact to our unaudited consolidated financial statements.

During the three months ended September 30, 2015,March 31, 2016, there were no material changes in our market risk exposure.

Evaluation of disclosure controls and procedures. As of September 30, 2015,March 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015,March 31, 2016, our disclosure controls and procedures were effective and were designed to ensure that all information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2015,March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.