ICT GROUP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004 or

¨	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: 0-20807

ICT GROUP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2458937

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


100 Brandywine Boulevard, Newtown PA		18940
(Address of principal executive offices)		(Zip Code)

267-685-5000

(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 ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES x NO ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Shares, $0.01 par value, 12,562,100 shares outstanding as of July 23, 2004.

ICT GROUP, INC.

INDEX


		PAGE

PART I	FINANCIAL INFORMATION

Item 1	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Consolidated Balance Sheets - June 30, 2004 and December 31, 2003	3

	Consolidated Statements of Operations - Three and six months ended June 30, 2004 and 2003	4

	Consolidated Statements of Cash Flows - Six months ended June 30, 2004 and 2003	5

	Notes to Consolidated Financial Statements	6

Item 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13

Item 3	QUANTITATIVE AND QUALITITATIVE DISCLOSURES ABOUT MARKET RISK	20

Item 4	CONTROLS AND PROCEDURES	21

PART II	OTHER INFORMATION

Item 1	LEGAL PROCEEDINGS	22

Item 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22

Item 6	EXHIBITS AND REPORTS ON FORM 8-K	22

SIGNATURES		23

ICT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	June 30, 2004			December 31, 2003
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	12,449		$	17,591
Accounts receivable, net		52,501			48,409
Prepaid expenses and other		13,496			11,875
Deferred income taxes		4,521			4,531

Total current assets		82,967			82,406

PROPERTY AND EQUIPMENT:
Communications and computer equipment		97,929			92,928
Furniture and fixtures		25,396			21,448
Leasehold improvements		18,063			16,694

		141,388			131,070
Less: Accumulated depreciation and amortization		(90,952	)		(83,458	)

		50,436			47,612

DEFERRED INCOME TAXES		2,196			2,196
OTHER ASSETS		6,151			3,498

	$	141,750		$	135,712

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	16,751		$	13,265
Accrued expenses		10,947			13,895
Income taxes payable		1,229			846
Accrued litigation		4,400			4,400

Total current liabilities		33,327			32,406

LINE OF CREDIT		36,000			30,000
OTHER LIABILITIES		2,593			2,755

SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value 5,000 shares authorized, none issued		—			—
Common stock, $0.01 par value, 40,000 shares authorized, 12,562 and 12,483 shares issued and outstanding		126			125
Additional paid-in capital		51,742			51,485
Retained earnings		18,658			18,084
Accumulated other comprehensive income (loss)		(696	)		857

Total shareholders’ equity		69,830			70,551

	$	141,750		$	135,712

The accompanying notes are an integral part of these consolidated financial statements.

ICT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
REVENUE	$	75,511	$	70,543		$	152,609	$	147,122

OPERATING EXPENSES:
Cost of services		45,197		43,974			91,608		88,690
Selling, general and administrative		29,021		28,764			58,519		57,002
Litigation costs		445		(4,674	)		1,005		7,026
Restructuring charge		—		(377	)		—		(377	)

		74,663		67,687			151,132		152,341

Operating income (loss)		848		2,856			1,477		(5,219	)

INTEREST EXPENSE, net of interest income of $26 and $37 for the three months and $61 and $63 for the six months		325		257			619		457

Income (loss) before income taxes		523		2,599			858		(5,676	)
INCOME TAX PROVISION (BENEFIT)		173		1,012			284		(2,069	)

NET INCOME (LOSS)	$	350	$	1,587		$	574	$	(3,607	)

EARNINGS (LOSS) PER SHARE:

Basic earnings (loss) per share	$	0.03	$	0.13		$	0.05	$	(0.29	)

Diluted earnings (loss) per share	$	0.03	$	0.12		$	0.04	$	(0.29	)

Shares used in computing basic earnings (loss) per share		12,546		12,394			12,531		12,394

Shares used in computing diluted earnings (loss) per share		12,918		12,753			12,930		12,394

The accompanying notes are an integral part of these consolidated financial statements.

ICT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	574		$	(3,607	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		8,315			8,718
Tax benefit of stock option exercises		63			—
Asset impairment		—			280
Amortization of deferred financing costs		105			142
(Increase) decrease in:
Accounts receivable		(4,435	)		9,371
Prepaid expenses and other		(1,820	)		(6,099	)
Other assets		(108	)		(4	)
Increase (decrease) in:
Accounts payable		3,610			1,558
Accrued expenses and other liabilities		(1,945	)		(4,541	)
Income taxes payable		383			(1,686	)
Accrued litigation		—			6,500

Net cash provided by operating activities		4,742			10,632

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(11,561	)		(12,113	)
Business acquisition		(3,011	)		—

Net cash used in investing activities		(14,572	)		(12,113	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit		20,000			7,500
Payments on line of credit		(14,000	)		(3,000	)
Proceeds from exercise of stock options		196			23

Net cash provided by financing activities		6,196			4,523

EFFECT OF FOREIGN EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		(1,508	)		(275	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(5,142	)		2,767
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		17,591			16,279

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	12,449		$	19,046

The accompanying notes are an integral part of these consolidated financial statements.

ICT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the complete fiscal year. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2003.

Note 2: CORPORATE RESTRUCTURING

In December 2002, the Company announced a corporate restructuring and recorded a $8,894,000 pre-tax restructuring charge in connection with a plan to reduce its cost structure by closing all or part of ten operations centers prior to the end of their existing lease terms. The restructuring costs included severance of $1,078,000, site closure costs totaling $7,243,000, which were the estimated costs for closing the operations centers, including $6,151,000 in obligations under signed real estate and equipment lease agreements and $1,092,000 in costs related to early lease terminations, and the write-off of $573,000 of leasehold improvements, security deposits and certain fixed assets. The planned facilities closings were completed by the end of the second quarter of 2003.

The change in the restructuring accrual during the six months ended June 30, 2004 is summarized as follows (amounts in thousands):


	Accrual at December 31, 2003		Cash Payments			Accrual at June 30, 2004
Severance	$	6	$	(6	)	$	—
Lease obligations		2,717		(449	)		2,268
Facility exit costs		119		—			119

	$	2,842	$	(455	)	$	2,387

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