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Startek, Inc. - Quarter Report: 2017 September (Form 10-Q)



 
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 September 30, 2017
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 1-12793 
 
 
StarTek, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
84-1370538
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
Identification No.)
 
 
 
8200 E. Maplewood Ave., Suite 100
 
 
Greenwood Village, Colorado
 
80111
(Address of principal executive offices)
 
(Zip code)
 
(303) 262-4500
(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  x  No o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x 

As of October 31, 2017, there were 16,142,641 shares of Common Stock outstanding.
 
 




STARTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
ITEM 1.
 
FINANCIAL STATEMENTS
 
Page
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
 
Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
ITEM 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
ITEM 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
ITEM 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
ITEM 1A.
 
Risk Factors
 
ITEM 6.
 
Exhibits
 
SIGNATURES
 
 
 
 
 
 
 
 





NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain 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, including the following:

certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
any statements regarding the prospects for our business or any of our services;
any statements preceded by, followed by or that include the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,” “projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions; and
other statements regarding matters that are not historical facts.
 
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, 2016 and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. ("STARTEK") and its subsidiaries.





PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
 
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
69,372

 
$
78,305

 
$
221,004

 
$
230,073

Cost of services
62,053

 
67,958

 
194,683

 
204,327

Gross profit
7,319

 
10,347

 
26,321

 
25,746

Selling, general and administrative expenses
8,062

 
8,767

 
24,115

 
24,668

Impairment losses and restructuring charges, net
14

 
187

 
427

 
356

Operating income (loss)
(757
)
 
1,393

 
1,779

 
722

Interest and other expense, net
(385
)
 
(374
)
 
(668
)
 
(1,185
)
Income (loss) before income taxes
(1,142
)
 
1,019

 
1,111

 
(463
)
Income tax expense (benefit)
30

 
163

 
(64
)
 
334

Net income (loss)
$
(1,172
)
 
$
856

 
$
1,175

 
$
(797
)
Other comprehensive income (loss), net of tax:
 
 
1

 
156

 
 
Foreign currency translation adjustments
135

 
45

 
122

 
152

Change in fair value of derivative instruments
148

 
(46
)
 
626

 
240

Comprehensive income (loss)
$
(889
)
 
$
855

 
$
1,923

 
$
(405
)
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic
$
(0.07
)
 
$
0.05

 
$
0.07

 
$
(0.05
)
Weighted average common shares outstanding - basic
15,977

 
15,735

 
15,903

 
15,718

 
 
 
 
 
 
 
 
Net income (loss) per common share - diluted
$
(0.07
)
 
$
0.05

 
$
0.07

 
$
(0.05
)
Weighted average common shares outstanding - diluted
15,977

 
16,250

 
17,250

 
15,718


 
See Notes to Consolidated Financial Statements.


2





STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
September 30,
 
December 31,
 
2017
 
2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,336

 
$
1,039

Trade accounts receivable, net
54,717

 
60,179

Derivative asset
560

 

Prepaid expenses
2,606

 
2,140

Other current assets
575

 
1,670

Total current assets
$
59,794

 
$
65,028

Property, plant and equipment, net
18,302

 
23,276

Deferred income tax assets
366

 
333

Intangible assets, net
5,842

 
6,697

Goodwill
9,077

 
9,077

Other long-term assets
2,764

 
2,397

Total assets
$
96,145

 
$
106,808

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
6,220

 
$
7,612

Accrued liabilities:
 

 
 

Accrued employee compensation and benefits
12,408

 
13,767

Other accrued liabilities
1,988

 
2,083

Line of credit

 
26,025

Derivative liability
396

 
980

Other current debt
2,806

 
2,740

Other current liabilities
974

 
1,157

Total current liabilities
$
24,792

 
$
54,364

Line of credit
17,392

 

Deferred rent
652

 
1,151

Deferred income tax liabilities
679

 
499

Other debt
3,705

 
5,500

Other liabilities
661

 
550

Total liabilities
$
47,881

 
$
62,064

Commitments and contingencies

 

Stockholders’ equity:
 

 
 

Common stock, 32,000,000 non-convertible shares, $0.01 par value, authorized; 16,142,641 and 15,811,516 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
$
161

 
$
158

Additional paid-in capital
82,153

 
80,560

Accumulated other comprehensive income (loss)
699

 
(49
)
Accumulated deficit
(34,749
)
 
(35,925
)
Total stockholders’ equity
$
48,264

 
$
44,744

Total liabilities and stockholders’ equity
$
96,145

 
$
106,808


See Notes to Consolidated Financial Statements.

3




STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities
 

 
 

Net income (loss)
$
1,175

 
$
(797
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
8,383

 
9,382

Impairment losses
53

 
174

Provision for doubtful accounts
(54
)
 
555

Share-based compensation expense
745

 
1,279

Deferred income taxes
178

 
103

Income tax benefit related to other comprehensive income
(460
)
 
(233
)
Changes in operating assets and liabilities:
 

 
 

Trade accounts receivable
5,550

 
2,482

Prepaid expenses and other assets
807

 
2,105

Accounts payable
(449
)
 
(1,663
)
Accrued and other liabilities
(2,002
)
 
(1,891
)
Net cash provided by operating activities
13,926

 
11,496

 
 
 
 
Investing Activities
 

 
 

Proceeds from sale of assets
342

 
24

Purchases of property, plant and equipment
(4,039
)
 
(938
)
Cash paid for acquisition of businesses

 
(617
)
Net cash used in investing activities
(3,697
)
 
(1,531
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from the issuance of common stock
848

 
159

Proceeds from line of credit
233,208

 
224,650

Principal payments on line of credit
(241,841
)
 
(234,680
)
Principal payments on other debt
(2,133
)
 
(2,150
)
Net cash used in financing activities
(9,918
)
 
(12,021
)
Effect of exchange rate changes on cash
(14
)
 
221

Net increase (decrease) in cash and cash equivalents
297

 
(1,835
)
Cash and cash equivalents at beginning of period
$
1,039

 
$
2,626

Cash and cash equivalents at end of period
$
1,336

 
$
791

 
 
 
 

See Notes to Consolidated Financial Statements.

4



STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(In thousands, except per share data)
(Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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 nine months ended September 30, 2017 are not necessarily indicative of operating results that may be expected during any other interim period of 2017 or the year ending December 31, 2017.
The consolidated balance sheet as of December 31, 2016, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
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.

Use of Estimates
 
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.

Recent Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815) ("ASU 2017-12"), Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. We do not expect the adoption of ASU 2017-12 will have a material impact on our consolidated financial statements.

In May 2017, FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU 2017-09"), Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1. The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. We do not expect the adoption of ASU 2017-09 will have a material impact on our consolidated financial statements.



5



In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU 2017-04"), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.

In October 2016, FASB issued ASU 2016-16, Income Taxes (Topic 740) ("ASU 2016-16"), Intra-Entity Transfers of Assets Other Than Inventory. The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. We do not expect the adoption of ASU 2016-16 will have a material impact on our consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.

In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) ("ASU 2016-09"), Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 address multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liability, and classification on the statements of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted in any interim or annual period. An entity that elects early adoption must adopt all the amendments in the same period, and any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We adopted this ASU for the first quarter of 2017 and it did not have a material impact on our consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases”. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements, and we anticipate that adoption of ASU 2016-02 will have an impact to the financial statement presentation of right of use asset, lease liability, amortization expense, and lease expense.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption, but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of

6



adoption. We have assessed the impact of ASU 2014-09 and have determined that our current revenue recognition process is substantially in compliance with the ASU. Therefore, we do not anticipate a material impact to our consolidated financial statements. We are currently evaluating the additional disclosures that will be required upon adoption.

2. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Total goodwill of $9,077 is assigned to our Domestic segment. We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. We performed a quantitative assessment to determine whether it was more likely than not that the fair value of the Domestic reporting unit exceeded its carrying value. In making this assessment, we evaluated overall business and economic conditions as well as expectations of projected revenues and cash flows, assumptions impacting the weighted average cost of capital and overall global industry and market conditions.

In 2016, we concluded that goodwill was not impaired. No indicators of impairment exist as of September 30, 2017.

Intangible Assets

The following table presents our intangible assets as of September 30, 2017:
 
 
Gross Intangibles
 
Accumulated Amortization
 
Net Intangibles
 
Weighted Average Amortization Period (years)
Developed technology
 
$
390

 
$
219

 
$
171

 
4.00
Customer relationships
 
7,550

 
2,490

 
5,060

 
4.92
Trade names
 
1,050

 
439

 
611

 
3.11
 
 
$
8,990

 
$
3,148

 
$
5,842

 
4.70

Expected future amortization of intangible assets as of September 30, 2017 is as follows:
 
 
 
Year Ending December 31,
 
Amount
Remainder of 2017
 
$
285

2018
 
1,140

2019
 
1,131

2020
 
1,128

2021
 
1,004

Thereafter
 
1,154


3. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is computed based on our weighted average number of common shares outstanding. Diluted earnings per share is computed based on our weighted average number of common shares outstanding plus the effect of dilutive stock options, non-vested restricted stock, and deferred stock units, using the treasury stock method. 

When a net loss is reported, potentially issuable common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted shares for the periods indicated (in thousands):

7



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Shares used in basic earnings per share calculation:
15,977

 
15,735

 
15,903

 
15,718

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options

 
414

 
1,291

 

Restricted stock/Deferred stock units

 
101

 
56

 

Total effects of dilutive securities

 
515

 
1,347

 

Shares used in dilutive earnings per share calculation:
15,977

 
16,250

 
17,250

 
15,718


The following shares were not included in the computation of diluted earnings per share because the exercise price exceeded the value of the shares, or we reported a net loss, and the effect would have been anti-dilutive (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Anti-dilutive securities:
 
 
 
 
 
 
 
Stock options
2,326

 
84

 
34

 
2,537

Restricted stock/Deferred stock units
46

 

 
1

 
149

Total anti-dilutive securities
2,372

 
84

 
35

 
2,686





8



4. IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES

Impairment Losses

During the second quarter of 2017, we closed our facility in Tell City, Indiana. The closure resulted in the recognition of an impairment loss of $53 related to the disposal of certain assets.  No additional impairment charges occurred in third quarter 2017.

Restructuring Charges 

Related to the Tell City closure, we established restructuring reserves for employee related costs of $262 when the decision was made and facility related costs of $97 at the time the facilities were vacated. We expect to pay the remaining costs by the end of 2017.

The table below summarizes the balance of accrued restructuring costs, which is included in other accrued liabilities in our consolidated balance sheets, and the changes during the nine months ended September 30, 2017: 
Facility-Related and Employee-Related Costs
 
 
Total
Balance as of January 1, 2017
 
$

Expenses
 
$
342

Payments
 
$
(296
)
Balance as of September 30, 2017
 
$
46

.

5. PRINCIPAL CLIENTS

The following table represents revenue concentration of our principal clients:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
Revenue
 
Percentage
 
Revenue
 
Percentage
 
Revenue
 
Percentage
 
Revenue
 
Percentage
T-Mobile
 
$
21,937

 
31.6
%
 
$
20,298

 
25.9
%
 
$
67,990

 
30.8
%
 
$
53,359

 
23.2
%
Sprint
 
$
6,773

 
9.8
%
 
$
11,656

 
14.9
%
 
$
26,544

 
12.0
%
 
$
33,785

 
14.7
%
AT&T
 
$
7,095

 
10.2
%
 
$
9,194

 
11.7
%
 
$
23,362

 
10.6
%
 
$
29,416

 
12.8
%
        
We enter into master service agreements (MSAs) that cover all of our work for each client.  These MSAs are typically multi-year contracts that include auto-renewal provisions. They typically do not include contractual minimum volumes and are generally terminable by the customer or us with prior written notice. 

To limit credit risk, management performs periodic credit analyses and maintains allowances for uncollectible accounts as deemed necessary. Under certain circumstances, management may require clients to pre-pay for services. As of September 30, 2017, management believes reserves are appropriate and does not believe that any significant credit risk exists.

We have entered into factoring agreements with financial institutions to sell certain of our accounts receivable under non-recourse agreements.  These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers.  We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as part of our financing for working capital.  The aggregate gross amount factored under these agreements was $17,165 and $66,013 for the three and nine months ended September 30, 2017, and $14,584 and $35,102 for the three and nine months ended September 30, 2016, respectively.

9




6.  DERIVATIVE INSTRUMENTS
 
We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency forward and option contracts to hedge our anticipated operating commitments that are denominated in foreign currencies, including forward contracts and range forward contracts (a transaction where both a call option is purchased and a put option is sold). The contracts cover periods commensurate with expected exposure, generally three to twelve months.  The market risk exposure is essentially limited to risk related to currency rate movements. We 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. In Honduras, our functional currency is the U.S. dollar and the majority of our costs are denominated in U.S. dollars. We have elected to designate our derivatives as cash flow hedges in order to associate the results of the hedges with forecasted expenses.

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 nine months ended September 30, 2017
and 2016, 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, 2017:
 
Local Currency Notional Amount
 
U.S. Dollar Notional Amount
Canadian Dollar
11,600

 
$
8,808

Philippine Peso
1,518,100

 
29,419

 

 
$
38,227


Derivative assets and liabilities associated with our hedging activities are measured at gross fair value as described in Note 7, "Fair Value Measurements," and are reflected as separate line items in our consolidated balance sheets, as applicable.

7.  FAIR VALUE MEASUREMENTS 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are described below:
Level 1 - Quoted prices for identical instruments traded in active markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Unobservable inputs that cannot be supported by market activity and that are significant to the fair value of the asset or liability, such as the use of certain pricing models, discounted cash flow models and similar techniques that use significant assumptions. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability.

Derivative Instruments
 
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.
 

10



The following tables set forth our assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. 
 
As of September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
560

 
$

 
$
560

Total fair value of assets measured on a recurring basis
$

 
$
560

 
$

 
$
560

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
396

 
$

 
$
396

Total fair value of liabilities measured on a recurring basis
$

 
$
396

 
$

 
$
396

 
As of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
980

 
$

 
$
980

Total fair value of liabilities measured on a recurring basis
$

 
$
980

 
$

 
$
980


8. DEBT
 
Secured Revolving Credit Facility

On April 29, 2015, we entered into a secured revolving credit facility with BMO Harris Bank N.A. ("Administrative Agent" or "Lender"); subsequently we entered into amendments one through four (collectively, the "Credit Agreement"). The Credit Agreement is effective through March 2022 and we may borrow the lesser of the borrowing base calculation and $50,000. As long as no default has occurred and with the Administrative Agent’s consent, we may increase the maximum availability to $70,000 in $5,000 increments. We may request letters of credit under the Credit Agreement in an aggregate amount equal to the lesser of the borrowing base calculation (minus outstanding advances) and $5,000. The borrowing base is generally defined as 85% of our eligible accounts receivable less certain reserves as defined in the Credit Agreement.

Our borrowings bear interest at one-month LIBOR plus 1.50% to 1.75%, depending on current availability. We will pay letter of credit fees equal to the applicable margin 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. As of September 30, 2017, outstanding letters of credit totaled $893.

The Credit Agreement contains standard affirmative and negative covenants that may limit or restrict our ability to sell assets, incur additional indebtedness and engage in mergers and acquisitions. We are required to maintain a minimum consolidated fixed charge coverage ratio of 1.00:1.00, if a reporting trigger period commences. We were in compliance with all covenants as of September 30, 2017.

The fourth amendment to the Credit Agreement was executed on March 28, 2017. Among other things, it removed the requirement that funds collected be automatically applied to our credit facility balance, unless a trigger event occurs. As a result, the balance sheet classification has been changed from short-term liabilities to long-term liabilities beginning in the first quarter of 2017.

As of September 30, 2017, we had $17,392 of outstanding borrowings and our remaining borrowing capacity was $32,112.

Other Debt

From time to time and when management believes it to be advantageous, we may enter into other arrangements to finance the purchase or construction of capital assets. These obligations are included on our consolidated balance sheets in other current debt and other debt, as applicable.


11



9. SHARE-BASED COMPENSATION
 
Our share-based compensation arrangements include grants of stock options, restricted stock units and deferred stock units under the StarTek, Inc. 2008 Equity Incentive Plan and our Employee Stock Purchase Plan. The compensation expense that has been charged against income for such awards for the three and nine months ended September 30, 2017 was $215 and $745, and for the three and nine months ended September 30, 2016 was $454 and $1,279, and is included in selling, general and administrative expenses.  As of September 30, 2017, there was $800 of total unrecognized compensation expense related to nonvested awards, which is expected to be recognized over a weighted-average period of 1.82 years.

10.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (AOCI)
 
Accumulated other comprehensive income consisted of the following items:
 
 Foreign Currency Translation Adjustment
 
 Derivatives Accounted for as Cash Flow Hedges
 
Defined Benefit Plan
 
 Total
 Balance at December 31, 2016
$
1,830

 
$
(2,132
)
 
$
253

 
$
(49
)
 Foreign currency translation
175

 
 
 

 
175

 Reclassification to operations
22

 
134

 

 
156

 Unrealized gains
 
 
876

 

 
876

 Tax benefit
(75
)
 
(384
)
 

 
(459
)
 Balance at September 30, 2017
$
1,952

 
$
(1,506
)
 
$
253

 
$
699


Reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2017 and 2016 were as follows:
Details about AOCI components
 
Amount reclassified from AOCI
 
Affected line item in the Consolidated Statements of Comprehensive Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
Losses on cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
(93
)
 
$
1

 
$
151

 
$416
 
Cost of services
Foreign exchange contracts
 
(1
)
 
(1
)
 
5

 
15

 
Selling, general and administrative expenses
Total reclassifications for the period
 
$
(94
)
 
$

 
$
156

 
$
431

 
 

11.  SEGMENT INFORMATION
 
We operate our business within three reportable segments based on the geographic regions in which our services are rendered. As of September 30, 2017, our Domestic segment included the operations of twelve facilities in the U.S. and one facility in Canada. Our Offshore segment included the operations of four facilities in the Philippines and our Nearshore segment included two facilities in Honduras and one facility in Jamaica.

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.


12



Information about our reportable segments for the three and nine months ended September 30, 2017 and 2016 is as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 

 
 

 
 
 
 
Domestic
$
41,090

 
$
46,050

 
$
128,012

 
$
141,537

Offshore
17,819

 
20,830

 
58,306

 
55,475

Nearshore
10,463

 
11,425

 
34,686

 
33,061

Total
$
69,372

 
$
78,305

 
$
221,004

 
$
230,073

 
 
 
 
 
 
 
 
Gross profit:
 

 
 

 
 
 
 
Domestic
$
1,648

 
$
2,790

 
$
5,710

 
$
10,858

Offshore
4,125

 
5,101

 
14,597

 
9,935

Nearshore
1,546

 
2,456

 
6,014

 
4,953

Total
$
7,319

 
$
10,347

 
$
26,321

 
$
25,746


12.  INCOME TAX

In April 2017, we received a notice of reassessment related to our ongoing Canadian income tax audit. We do not believe it is more likely than not that we owe the taxes that have been reassessed. Therefore, we filed an appeal in June 2017 and have not accrued a liability related to this matter.

Because the Canada Revenue Agency considers us a large corporation, we were required to pay half of the reassessment, or $400, which is recorded in other long-term assets on our balance sheet.

We do not anticipate receiving a decision on our appeal in the near future.




13



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 2016 Annual Report on Form 10-K.

BUSINESS DESCRIPTION AND OVERVIEW
 
STARTEK is a customer engagement business process outsourcing (BPO) services provider, delivering 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 engagement services and represent our greatest asset. For over 30 years, STARTEK Brand Warriors have been committed to enhancing the customer experience, providing higher value and making a positive impact for our clients’ business results.

Our vision is to be the most trusted global service provider to customer-centric companies who are looking for more effective ways to engage their customers on their terms and preferred channels with solutions that are not always available via traditional “contact center” companies.

The STARTEK Advantage System, the sum total of our customer engagement culture, customized solutions and processes, allows us to always remain focused on enhancing our clients’ customer experience, increasing customer lifetime value and reducing total cost of 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 service client programs using a variety of multi-channel customer interaction capabilities, including voice, chat, email, social media, interactive voice response and back-office support. 

We operate our business within three reportable segments based on the geographic regions in which our services are rendered. As of September 30, 2017, our Domestic segment included the operations of twelve facilities in the U.S. and one facility in Canada. Our Offshore segment included the operations of four facilities in the Philippines, and our Nearshore segment included two facilities in Honduras and one facility in Jamaica.

We seek to become the trusted partner to our clients and provide meaningful, impactful customer engagement BPO services. Our approach is to develop relationships with our clients that are truly collaborative in nature where we are focused, flexible and proactive to their business needs.  The end result is the delivery of the highest quality customer experience to our clients’ customers. To achieve sustainable, predictable, profitable growth, our strategy is to:

grow our existing client base by deepening and broadening our relationships;
diversify our client base by adding new clients and verticals;
improve our market position by becoming the leader in customer engagement services;
improve profitability through operational improvements, increased utilization and higher margin accounts;
expand our global delivery platform to meet our clients' needs;
broaden our service offerings through more innovative, technology-enabled and added-value solutions; and
develop talent and plan for succession.



RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

During the current quarter, the Company's margin improvement initiative has resulted in lower overall revenue and margins compared to the prior year. The process of simultaneously winding down and ramping up business is complex and during the quarter we experienced a temporary decline in production billings during client transitions, while continuing to incur site fixed costs and variable costs related to new client ramps. The new business is expected to be fully ramped by early 2018, at which time we expect to fully realize the margin increases.


14



The following table summarizes our revenues and gross profit for the periods indicated by reporting segment:
 
For the Three Months Ended September 30,
 
2017
 
2016
 
(in 000s)
 
(% of Total)
 
(in 000s)
 
(% of Total)
Domestic:
 

 
 

 
 

 
 

Revenue
$
41,090

 
59.2
%
 
$
46,050

 
58.8
%
Gross profit
$
1,648

 
22.5
%
 
$
2,790

 
27.0
%
Gross profit %
4.0
%
 
 

 
6.1
%
 
 

Offshore:
 

 
 

 
 

 
 

Revenue
$
17,819

 
25.7
%
 
$
20,830

 
26.6
%
Gross profit
$
4,125

 
56.4
%
 
$
5,101

 
49.3
%
Gross profit %
23.1
%
 
 

 
24.5
%
 
 

Nearshore:
 

 
 

 
 

 
 

Revenue
$
10,463

 
15.1
%
 
$
11,425

 
14.6
%
Gross profit
$
1,546

 
21.1
%
 
$
2,456

 
23.7
%
Gross profit %
14.8
%
 
 

 
21.5
%
 
 

Company Total:
 

 
 

 
 

 
 

Revenue
$
69,372

 
100.0
%
 
$
78,305

 
100.0
%
Gross profit
$
7,319

 
100.0
%
 
$
10,347

 
100.0
%
Gross profit %
10.6
%
 
 

 
13.2
%
 
 


Revenue

Revenue decreased by $8.9 million, from $78.3 million to $69.4 million in the third quarter of 2017. The decrease was due to $9.8 million in reductions related to the Company's margin improvement initiative and the related temporary decline in production billings, and $1.2 million in lost programs, offset by $2.1 million of net growth from new and existing clients. Domestic segment decrease of $5.0 million was due to $8.9 million in reductions related to the Company's margin improvement initiative and the related temporary decline in production billings, and $0.7 million decline from lost programs, partially offset by $4.6 million of net growth from new and existing clients. Offshore revenues decreased by $3.0 million due to $2.1 million net decline from existing clients and lost programs and $0.9 million in reductions related to the Company's margin improvement initiative and the related temporary decline in production billings. The decrease in the Nearshore segment was due to $1.0 million net decline from existing clients and lost programs.

Gross profit

Gross profit as a percentage of revenue decreased by 2.6% primarily due to the Company's margin improvement initiative and the related temporary decline in production billings, and lower net revenue from existing clients.  Domestic gross profit as a percentage of revenue decreased to 4.0% in 2017 from 6.1% in 2016 primarily due to the temporary decline in production billings related to the Company's margin improvement initiative and the ramping of new customers.  The Offshore decrease of 1.4% was primarily due to lower than expected call volumes resulting in decreased utilization and the impact from ramping new clients.  The Nearshore decrease of 6.7% was due to lower than expected call volumes. 



15



RESULTS OF OPERATIONS — NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

The following table summarizes our revenues and gross profit for the periods indicated by reporting segment:
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
(in 000s)
 
(% of Total)
 
(in 000s)
 
(% of Total)
Domestic:
 

 
 

 
 

 
 

Revenue
$
128,012

 
57.9
%
 
$
141,537

 
61.5
%
Gross profit
$
5,710

 
21.7
%
 
$
10,858

 
42.2
%
Gross profit %
4.5
%
 
 

 
7.7
%
 
 

Offshore:
 

 
 

 
 

 
 

Revenue
58,306

 
26.4
%
 
$
55,475

 
24.1
%
Gross profit
14,597

 
55.5
%
 
$
9,935

 
38.6
%
Gross profit %
25.0
%
 
 

 
17.9
%
 
 

Nearshore:
 

 
 

 
 

 
 

Revenue
$
34,686

 
15.7
%
 
$
33,061

 
14.4
%
Gross profit
$
6,014

 
22.8
%
 
$
4,953

 
19.2
%
Gross profit %
17.3
%
 
 

 
15.0
%
 
 

Company Total:
 

 
 

 
 

 
 

Revenue
$
221,004

 
100.0
%
 
$
230,073

 
100.0
%
Gross profit
$
26,321

 
100.0
%
 
$
25,746

 
100.1
%
Gross profit %
11.9
%
 
 

 
11.2
%
 
 


Revenue

Revenue decreased by $9.1 million, from $230.1 million to $221.0 million in the first three quarters of 2017. The decrease was due to $22.1 million related to the Company's margin improvement initiative and $4.7 million in lost programs offset by $17.7 million of net growth from new and existing clients. The Domestic segment decrease of $13.5 million was due to $15.6 million of reductions from the Company's margin improvement initiative and $3.1 million in lost programs, partially offset by $5.2 million of net growth from new and existing clients. Offshore revenues increased by $2.8 million due to $8.1 million of net growth from existing clients, partially offset by $0.5 million of lost programs and $4.8 million in reductions related to the Company's margin improvement initiative. The increase in the Nearshore segment of $1.6 million was due to $4.4 million of net growth from new and existing clients, partially offset by $1.0 million of lost programs and $1.8 million in reductions related to the Company's margin improvement initiative.

Gross profit

Gross profit as a percentage of revenue increased by 0.7% primarily due to the Company's margin improvement initiative and information technology cost savings. Domestic gross profit as a percentage of revenue decreased to 4.5% in 2017 from 7.7% in 2016 primarily due to the Company's margin improvement initiative and the related temporary decline in production billings, partially offset by information technology cost savings.  The Offshore increase of 7.1% was primarily due to increased volumes and the resulting increase in capacity utilization and the Company's margin improvement initiative resulting in a greater concentration of higher margin clients.  The Nearshore increase of 2.3% was due to the Company's margin improvement initiative resulting in a greater concentration of higher margin clients. 

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $0.7 million during the third quarter of 2017 compared to the prior year. Such expenses as a percentage of revenue increased to 11.6% from 11.2% year over year. On a year-to-date basis, such expenses decreased by $0.6 million, and as a percentage of revenue increased slightly to 10.9%, compared to 10.7% in 2016. The decrease in expenses is primarily a result of a decline in compensation costs. The increase in expenses as a percentage of revenue is due to decreased revenue year over year.

16




Impairment Losses and Restructuring Charges

In second quarter 2017, we made the decision to close our Tell City, Indiana facility, resulting in the recognition of an impairment loss of $53 thousand related to the disposal of certain assets. No additional impairment charges occurred in third quarter 2017. During 2015, we pursued opening additional capacity in our Nearshore segment. In the fourth quarter of 2015 we determined that this additional capacity was not necessary. In September 2016, we impaired the remaining value of the assets in this location when we determined that we would not be able to sell them, resulting in a loss of $174 thousand.

Restructuring charges totaled $15 thousand and $374 thousand, respectively, for the three and nine months ended September 30, 2017, related to the closure of the Tell City, Indiana facility. During the three and nine months ended September 30, 2016, restructuring charges totaled $16 thousand and $183 thousand, primarily due to abandonment of the plan to increase capacity in the Nearshore segment.

Interest and other income (expense), net

Interest and other income (expense), net for the three and nine months ended September 30, 2017 of approximately ($0.4) million and ($0.7) million, respectively, primarily consists of interest expense of ($0.4) million per quarter associated with our line of credit, capital leases, and notes payable, offset by a recovery of $0.5 million during the second quarter.

Interest and other income (expense), net for the three and nine months ended September 30, 2016 of approximately ($0.4)
million and ($1.2) million, respectively, primarily consists of interest expense associated with our line of credit, capital leases,
and notes payable.

Income tax expense (benefit)

Income tax benefit during the first nine months of 2017 was ($0.1) million. Income tax expense is primarily related to our Canadian operations, offset by benefits related to our US operations. Income tax expense was $0.3 million in the first nine months of 2016. We have tax holidays in Honduras and Jamaica, and for certain facilities in the Philippines.


17



LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flows generated by operating activities, available borrowings under our revolving credit facility, and factoring agreements for certain accounts receivable.  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.  We believe our cash and cash equivalents, cash from operations and available credit will be sufficient to operate our business for the next twelve months.

As of September 30, 2017, working capital totaled $35.0 million and the current ratio was 2.41:1, compared to working capital of $10.7 million and a current ratio of 1.20:1 as of December 31, 2016. The increase in 2017 was primarily driven by the reclassification of the revolving credit facility balance from short-term to long-term liabilities. See Note 7, "Debt," to our unaudited consolidated financial statements included in Item 1, "Financial Statements" for additional details.

Net cash flows provided by operating activities for the nine months ended September 30, 2017 was $13.9 million, compared to $11.5 million for the nine months ended September 30, 2016, primarily due to increased net income. 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 nine months ended September 30, 2017 of $3.7 million consisted of $4.0 million for capital expenditures offset by $0.3 million of proceeds from the sale of assets. This compares to net cash used in investing activities for the nine months ended September 30, 2016 of $1.5 million, which primarily consisted of capital expenditures of $0.9 million and $0.6 million related to prior acquisitions.

Net cash used in financing activities for the nine months ended September 30, 2017 of $9.9 million primarily consisted of $8.6 million used to pay down our line of credit and $2.1 million of principal payments on debt. Net cash used in financing activities for the nine months ended September 30, 2016 of $12.0 million consisted of $10.0 million used to pay down our line of credit and $2.2 million of principal payments on debt.

Secured Revolving Credit Facility

For more information, refer to Note 7, "Debt," to our unaudited consolidated financial statements included in Item 1, "Financial Statements."

CONTRACTUAL OBLIGATIONS
There were no material changes in our contractual obligations during the third quarter 2017.

OFF-BALANCE SHEET ARRANGEMENTS

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.

VARIABILITY OF OPERATING RESULTS
 
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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
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

18



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 2016 Annual Report on Form 10-K. Please refer to Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for a complete description of our critical accounting policies and estimates.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Foreign Currency Exchange Risks
 
Market risk relating to our international operations results primarily from changes in foreign exchange rates. To address this risk, we enter into foreign currency forward and options contracts. The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are secured through a reserve on our availability calculation with our Lender. The cumulative translation effects for subsidiaries using functional currencies other than the 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 USD; however, the functional currencies of our Canadian and Philippine operations are the Canadian dollar ("CAD") and the Philippine peso ("PHP"), respectively, which creates foreign currency exchange exposure.

In order to hedge our exposure to foreign currency transactions in the CAD and PHP, we had outstanding foreign currency forward and option contracts as of September 30, 2017 with notional amounts totaling $38.2 million. If the USD were to weaken against the CAD and PHP by 10% from current period-end levels, we would incur a loss of approximately $5.5 million on the underlying exposures of the derivative instruments. As of September 30, 2017, we have not entered into any arrangements to hedge our exposure to fluctuations in the Honduran lempira or the Jamaican dollar relative to the USD.

If we increase our operations in international markets, our exposure to potentially volatile movements in foreign currency exchange rates would also increase. The economic impact of foreign currency exchange rate movements is linked to variability in real growth, inflation, governmental actions and other factors. These changes, if significant, could cause us to adjust our foreign currency risk strategies.

Interest Rate Risk

At September 30, 2017, 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 nine months ended September 30, 2017, there were no material changes in our market risk exposure.


19



ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of September 30, 2017, 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, 2017, 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, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.



20



ITEM 6.  EXHIBITS 

INDEX OF EXHIBITS
Exhibit
 
 
 
Incorporated Herein by Reference
No.
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101*
 
The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), (ii) Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016, (iii) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited) and (iv) Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
*
 
Filed with this Form 10-Q.
 
 
 

21



SIGNATURES
 
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.
 
STARTEK, INC.
 
 
 
 
 
 
 
By:
/s/ CHAD A. CARLSON
Date: November 8, 2017
 
Chad A. Carlson
 
 
President and Chief Executive Officer
 
 
(principal executive officer)
 
 
 
 
 
 
 
By:
/s/ DON NORSWORTHY
Date: November 8, 2017
 
Don Norsworthy
 
 
Senior Vice President, Chief Financial Officer and Treasurer
 
 
(principal financial and accounting officer)
 
   




22