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 1-14379
CONVERGYS CORPORATION
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1598292
Telephone - Area Code (513) 723-7000
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 ¨.
At July 31, 2004, 174,777,587 Common Shares were outstanding, of which 32,233,157 were held in Treasury (142,544,430 Common Shares in the open market).
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934). Yes x No ¨
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts in Millions, Except Per Share Amounts)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 601.7 | $ | 563.2 | $ | 1,175.6 | $ | 1,123.6 | ||||||||
| Costs and Expenses |
||||||||||||||||
| Cost of providing services and products sold |
377.3 | 322.6 | 728.7 | 646.2 | ||||||||||||
| Selling, general and administrative |
125.2 | 115.0 | 242.2 | 228.4 | ||||||||||||
| Research and development costs |
19.1 | 23.5 | 37.6 | 46.7 | ||||||||||||
| Depreciation |
28.5 | 27.2 | 56.0 | 55.2 | ||||||||||||
| Amortization |
5.4 | 3.9 | 10.0 | 7.6 | ||||||||||||
| Total costs and expenses |
555.5 | 492.2 | 1,074.5 | 984.1 | ||||||||||||
| Operating Income |
46.2 | 71.0 | 101.1 | 139.5 | ||||||||||||
| Equity in Earnings (Losses) of Cellular Partnerships |
1.7 | (1.3 | ) | 1.6 | (11.2 | ) | ||||||||||
| Other Income (Expense), net |
(0.5 | ) | (0.3 | ) | (2.2 | ) | (2.0 | ) | ||||||||
| Interest Expense |
(2.0 | ) | (1.7 | ) | (3.7 | ) | (3.2 | ) | ||||||||
| Income Before Income Taxes |
45.4 | 67.7 | 96.8 | 123.1 | ||||||||||||
| Income Taxes |
16.7 | 24.9 | 35.6 | 45.4 | ||||||||||||
| Net Income |
$ | 28.7 | $ | 42.8 | $ | 61.2 | $ | 77.7 | ||||||||
| Other Comprehensive Income (Loss), net of tax: |
||||||||||||||||
| Foreign currency translation adjustments |
$ | (1.6 | ) | $ | 7.4 | $ | (2.4 | ) | $ | 13.8 | ||||||
| Unrealized gains (losses) on cash flow hedging |
(10.1 | ) | 14.1 | (13.7 | ) | 19.2 | ||||||||||
| Total other comprehensive income (loss) |
(11.7 | ) | 21.5 | (16.1 | ) | 33.0 | ||||||||||
| Comprehensive Income |
$ | 17.0 | $ | 64.3 | $ | 45.1 | $ | 110.7 | ||||||||
| Earnings Per Common Share |
||||||||||||||||
| Basic |
$ | 0.20 | $ | 0.29 | $ | 0.43 | $ | 0.52 | ||||||||
| Diluted |
$ | 0.20 | $ | 0.29 | $ | 0.42 | $ | 0.51 | ||||||||
| Average Common Shares Outstanding |
||||||||||||||||
| Basic |
142.1 | 145.3 | 142.1 | 149.6 | ||||||||||||
| Diluted |
146.3 | 148.5 | 145.8 | 152.4 | ||||||||||||
See Notes to Financial Statements.
2
| Form 10-Q Part I |
Convergys Corporation |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions)
| June 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 56.2 | $ | 37.2 | ||||
| Receivables, less allowances of $25.2 and $20.4 |
333.6 | 298.1 | ||||||
| Deferred income tax benefits |
5.3 | 23.0 | ||||||
| Prepaid expenses and other current assets |
51.5 | 61.2 | ||||||
| Total current assets |
446.6 | 419.5 | ||||||
| Property and equipment - net |
393.1 | 363.8 | ||||||
| Goodwill - net |
835.8 | 726.3 | ||||||
| Other intangibles - net |
66.3 | 45.0 | ||||||
| Investment in Cellular Partnerships |
43.7 | 47.2 | ||||||
| Deferred charges |
151.9 | 153.5 | ||||||
| Other assets |
72.2 | 54.9 | ||||||
| Total Assets |
$ | 2,009.6 | $ | 1,810.2 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Current Liabilities |
||||||||
| Debt maturing within one year |
$ | 256.1 | $ | 76.0 | ||||
| Payables and other current liabilities |
470.6 | 466.7 | ||||||
| Total current liabilities |
726.7 | 542.7 | ||||||
| Long-term debt |
56.1 | 58.8 | ||||||
| Other long-term liabilities |
36.2 | 65.2 | ||||||
| Total liabilities |
819.0 | 666.7 | ||||||
| Shareholders’ Equity |
||||||||
| Preferred shares – without par value, 5.0 authorized |
— | — | ||||||
| Common shares – without par value, 500.0 authorized; 174.8 and 174.6 issued and outstanding |
847.7 | 839.4 | ||||||
| Treasury shares – 31.8 shares in 2004 and 31.4 in 2003 |
(553.3 | ) | (547.0 | ) | ||||
| Retained earnings |
896.6 | 835.4 | ||||||
| Accumulated other comprehensive income (loss) |
(0.4 | ) | 15.7 | |||||
| Total shareholders’ equity |
1,190.6 | 1,143.5 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 2,009.6 | $ | 1,810.2 | ||||
See Notes to Financial Statements.
3
| Form 10-Q Part I |
Convergys Corporation |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 61.2 | $ | 77.7 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
66.0 | 62.8 | ||||||
| Deferred income tax expense |
16.7 | 1.0 | ||||||
| Cellular Partnerships losses (earnings) in excess of distributions |
(1.4 | ) | 11.6 | |||||
| Income tax benefit from stock option exercises |
0.2 | 0.7 | ||||||
| Stock compensation expense |
6.8 | 6.0 | ||||||
| Proceeds from receivables securitization, net |
15.0 | — | ||||||
| Changes in assets and liabilities, net of effects from acquisitions: |
||||||||
| Increase in receivables |
(37.4 | ) | (2.9 | ) | ||||
| Increase in other current assets |
(7.6 | ) | (2.8 | ) | ||||
| Decrease (increase) in deferred charges |
1.6 | (36.8 | ) | |||||
| Decrease (increase ) in other assets |
(2.7 | ) | 3.1 | |||||
| Increase (decrease) in payables and other current liabilities |
(14.8 | ) | 38.3 | |||||
| Other, net |
(2.6 | ) | (2.8 | ) | ||||
| Net cash provided by operating activities |
101.0 | 155.9 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
| Capital expenditures |
(71.8 | ) | (47.0 | ) | ||||
| Investment in Cellular Partnerships |
— | (14.7 | ) | |||||
| Return of capital from Cellular Partnerships |
4.9 | — | ||||||
| Acquisitions, net of cash acquired |
(188.6 | ) | (3.5 | ) | ||||
| Net cash used in investing activities |
(255.5 | ) | (65.2 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
| Borrowings of debt, net |
176.7 | 115.9 | ||||||
| Purchase of treasury shares |
(4.5 | ) | (187.1 | ) | ||||
| Issuance of common shares |
1.3 | 2.4 | ||||||
| Net cash provided by (used in) financing activities |
173.5 | (68.8 | ) | |||||
| Net increase in cash and cash equivalents |
19.0 | 21.9 | ||||||
| Cash and cash equivalents at beginning of period |
37.2 | 12.2 | ||||||
| Cash and cash equivalents at end of period |
$ | 56.2 | $ | 34.1 | ||||
See Notes to Financial Statements.
4
| Form 10-Q Part I |
Convergys Corporation |
NOTES TO FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
| (1) | BACKGROUND AND BASIS OF PRESENTATION |
Convergys Corporation (the Company or Convergys) is a global leader in the provision of outsourced customer management, employee care and integrated billing software services. The Company was spun off from its former parent company, Cincinnati Bell Inc. (CBI), in 1998. Convergys focuses on developing long-term strategic relationships with clients in employee- and customer-intensive industries including communications, technology and financial services as well as governmental agencies. The Company has two reporting segments: (i) the Customer Management Group (CMG), which provides outsourced marketing, customer support services, accounts receivable management and employee care services; and (ii) the Information Management Group (IMG), which provides outsourced billing and information services and software. The Company has developed a base of recurring revenues by providing value-added billing and customer management and employee care solutions for its clients, generally under long-term contracts.
These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown. All adjustments are of a normal and recurring nature. The December 31, 2003 condensed balance sheet has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. It is suggested that these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the period ended December 31, 2003. Certain prior period amounts have been reclassified to conform to current period presentation.
The Company files annual, quarterly, special reports and proxy statements with the SEC. These filings are available to the public over the Internet on the SEC’s Web site at http://www.sec.gov and on the Company’s Web site at http://www.convergys.com. You may also read and copy any document the Company files with the SEC at its public reference facilities in Washington, D.C. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also inspect reports, proxy statements and other information about Convergys at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
| (2) | RECENT ACCOUNTING PRONOUNCEMENTS |
In May 2003, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 03-04, “Determining the Classification and Benefit Attribution Method for a ‘Cash Balance’ Pension Plan,” to address specifically the accounting for certain cash balance pension plans. EITF 03-04 requires certain cash balance pension plans to be accounted for as defined benefit plans. For cash balance plans described in the consensus, the consensus also requires the use of the traditional unit credit method for purposes of measuring the benefit obligation and annual cost of benefits earned as opposed to the projected unit credit method. The Company historically has accounted for its cash balance plan as a defined benefit plan; however, the Company adopted the measurement provisions of EITF 03-04 as of December 31, 2003. The adoption of EITF 03-04 will reduce pension expense in 2004 by $4.5.
5
| Form 10-Q Part I |
Convergys Corporation |
NOTES TO FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
| (3) | ACQUISITIONS |
In May 2004, the Company acquired 100% of the outstanding shares of Encore Receivable Management, Inc. (Encore), a Kansas-based provider of accounts receivable management and collection services. This transaction provides CMG entry into the accounts receivable management market and the ability to expand its business process outsourcing capabilities. The purchase price was $53, subject to final purchase price adjustments. Up to $14 in additional earn-out payments is possible based on future operating performance.
During May 2004, the Company also acquired 100% of the outstanding shares of DigitalThink, Inc. (NASDAQ: DTHK), a custom e-learning company. DigitalThink’s solutions include consulting services, simulations, customer online course development and a scalable platform for on-demand course delivery. With this acquisition, Convergys will be able to provide its clients customized, on-demand courses; expand its capabilities in the HR Business Process Outsourcing market to meet the needs of large global organizations for full service learning solutions including consulting and course design, development, delivery, and administration; and support its employee care and customer management clients more efficiently by accelerating the effectiveness of customer support teams through on-the-job training for client programs. Convergys paid approximately $131 for the purchase, including transaction costs.
Additionally, in May 2004, the Company acquired 100% of the outstanding shares of WhisperWire, Inc., a provider of industry-specific sales effectiveness software. WhisperWire’s PowerSeller software complements Convergys’ Infinys® business support system (BSS) for ordering, billing and customer care for converged voice, data and video services. The acquisition enables Convergys to offer communication providers a complete solution to more effectively drive their sales process f