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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/08/17 TTEC Holdings, Inc. 10-Q 9/30/17 85:16M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.35M
2: EX-10.85 Material Contract HTML 237K
3: EX-10.97 Material Contract HTML 458K
4: EX-10.98 Material Contract HTML 191K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 35K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 34K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
15: R1 Document and Entity Information HTML 44K
16: R2 Consolidated Balance Sheets HTML 140K
17: R3 Consolidated Balance Sheets (Parenthetical) HTML 39K
18: R4 Consolidated Statements of Comprehensive Income HTML 118K
(Loss)
19: R5 Consolidated Statement of Stockholders' Equity HTML 81K
20: R6 Consolidated Statement of Stockholders' Equity HTML 25K
(Parenthetical)
21: R7 Consolidated Statements of Cash Flows HTML 148K
22: R8 Consolidated Statements of Cash Flows HTML 25K
(Parenthetical)
23: R9 Overview and Basis of Presentation HTML 45K
24: R10 Acquisitions and Divestitures HTML 159K
25: R11 Segment Information HTML 389K
26: R12 Significant Clients and Other Concentrations HTML 30K
27: R13 Goodwill HTML 91K
28: R14 Derivatives HTML 473K
29: R15 Fair Value HTML 285K
30: R16 Income Taxes HTML 34K
31: R17 Restructuring Charges, Integration Charges and HTML 166K
Impairment Losses
32: R18 Commitments and Contingencies HTML 35K
33: R19 Noncontrolling Interest HTML 54K
34: R20 Mandatorily Redeemable Noncontrolling Interest HTML 52K
35: R21 Accumulated Other Comprehensive Income (Loss) HTML 236K
36: R22 Net Income Per Share HTML 63K
37: R23 Employee Compensation Plans HTML 30K
38: R24 Related Party Transactions HTML 29K
39: R25 Overview and Summary of Significant Accounting HTML 52K
Policies (Policies)
40: R26 Acquisitions and Divestitures (Tables) HTML 141K
41: R27 Segment Information (Tables) HTML 388K
42: R28 Goodwill (Tables) HTML 83K
43: R29 Derivatives (Tables) HTML 477K
44: R30 Fair Value (Tables) HTML 277K
45: R31 Restructuring Charges, Integration Charges and HTML 165K
Impairment (Tables)
46: R32 Noncontrolling Interest (Tables) HTML 52K
47: R33 Mandatorily Redeemable Noncontrolling Interest HTML 50K
(Tables)
48: R34 Accumulated Other Comprehensive Income (Loss) HTML 238K
(Tables)
49: R35 Net Income Per Share (Tables) HTML 61K
50: R36 Overview and Basis of Presentation (Overview) HTML 31K
(Details)
51: R37 Overview and Basis of Presentation (Narrative) HTML 29K
(Details)
52: R38 Acquisitions (Assets Acquired Table) (Details) HTML 85K
53: R39 Acquisitions and Divestitures (Details) HTML 84K
54: R40 Acquisitions and Divestitures (Narrative) HTML 144K
(Details)
55: R41 Segment Information (Segment Financials) (Details) HTML 74K
56: R42 Segment Information (Revenue Geography) (Details) HTML 43K
57: R43 Significant Clients(Narrative) (Details) HTML 41K
58: R44 Goodwill (Goodwill Rollforward) (Details) HTML 41K
59: R45 Goodwill (Narrative) (Details) HTML 49K
60: R46 Derivatives (Oci Rollforward) (Details) HTML 34K
61: R47 Derivatives (Notional Table) (Details) HTML 36K
62: R48 Derivatives (Interest Rate Swaps) (Details) HTML 34K
63: R49 Derivatives (Balance Sheet Classification) HTML 56K
(Details)
64: R50 Derivatives (Income Statement Classification) HTML 51K
(Details)
65: R51 Derivatives (Narrative) (Details) HTML 25K
66: R52 Fair Value (Derivatives Table) (Details) HTML 45K
67: R53 Fair Value (Fair Value Assets and Liabilities) HTML 53K
(Details)
68: R54 Fair Value (Contingent Consideration Table) HTML 35K
(Details)
69: R55 Fair Value (Narrative) (Details) HTML 41K
70: R56 Income Taxes (Narrative) (Details) HTML 58K
71: R57 Restructuring and Integration Charges and HTML 45K
Impairment Losses (Liability Classification Table)
(Details)
72: R58 Restructuring Charges and Impairment Losses HTML 42K
(Liablity Rollforward Table) (Details)
73: R59 Restructuring and Integration Charges and HTML 33K
Impairment Losses (Narrative) (Details)
74: R60 Commitments and Contingencies (Narrative) HTML 51K
(Details)
75: R61 Noncontrolling Interes (Noncontrolling Interest HTML 38K
Rollforward Table) (Details)
76: R62 Mandatorily Redeemable Noncontrolling Interest HTML 43K
(Rollforward Table) (Details)
77: R63 Accumulated Other Comprehensive Income (Loss) HTML 49K
(Rollforward Table) (Details)
78: R64 Accumulated Other Comprehensive Income (Loss) HTML 61K
(Income Statement Classification Table) (Details)
79: R65 Net Income Per Share (Diluted Shares Table) HTML 42K
(Details)
80: R66 Net Income Per Share (Narrative) (Details) HTML 31K
81: R67 Equity-Based Compensation Plans (Narrative) HTML 41K
(Details)
82: R68 Related Party Transactions (Narrative) (Details) HTML 35K
84: XML IDEA XML File -- Filing Summary XML 144K
83: EXCEL IDEA Workbook of Financial Reports XLSX 95K
9: EX-101.INS XBRL Instance -- ttec-20170930 XML 4.70M
11: EX-101.CAL XBRL Calculations -- ttec-20170930_cal XML 197K
12: EX-101.DEF XBRL Definitions -- ttec-20170930_def XML 582K
13: EX-101.LAB XBRL Labels -- ttec-20170930_lab XML 1.04M
14: EX-101.PRE XBRL Presentations -- ttec-20170930_pre XML 955K
10: EX-101.SCH XBRL Schema -- ttec-20170930 XSD 151K
85: ZIP XBRL Zipped Folder -- 0001558370-17-008571-xbrl Zip 221K
| ttec_Current folio_10Q |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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☑ |
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
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☐ |
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 001-11919
TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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84-1291044 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
9197 South Peoria Street
(Address of principal executive offices)
Registrant’s telephone number, including area code: (303) 397-8100
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☑ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
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(Do not check if a |
Emerging growth company ☐ |
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
As of October 31, 2017, there were 45,849,114 shares of the registrant’s common stock outstanding.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2017 FORM 10-Q
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
(Amounts in thousands, except share amounts)
(unaudited)
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September 30, |
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2016 |
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ASSETS |
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Current assets |
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|
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Cash and cash equivalents |
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$ |
78,842 |
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$ |
55,264 |
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Accounts receivable, net |
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304,493 |
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|
300,808 |
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Prepaids and other current assets |
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|
67,516 |
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59,905 |
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Income tax receivable |
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|
8,078 |
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|
7,035 |
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Assets held for sale |
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9,279 |
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10,715 |
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Total current assets |
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468,208 |
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433,727 |
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Long-term assets |
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Property, plant and equipment, net |
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162,361 |
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151,037 |
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Goodwill |
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166,584 |
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129,648 |
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Deferred tax assets, net |
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|
30,953 |
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|
53,585 |
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Other intangible assets, net |
|
|
61,784 |
|
|
30,787 |
|
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Other long-term assets |
|
|
59,628 |
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|
47,520 |
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Total long-term assets |
|
|
481,310 |
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|
412,577 |
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Total assets |
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$ |
949,518 |
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$ |
846,304 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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Current liabilities |
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|
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|
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Accounts payable |
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$ |
45,155 |
|
$ |
38,197 |
|
|
Accrued employee compensation and benefits |
|
|
85,820 |
|
|
66,133 |
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|
Other accrued expenses |
|
|
29,405 |
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|
14,830 |
|
|
Income tax payable |
|
|
10,194 |
|
|
7,040 |
|
|
Deferred revenue |
|
|
23,416 |
|
|
23,318 |
|
|
Other current liabilities |
|
|
23,497 |
|
|
29,154 |
|
|
Liabilities held for sale |
|
|
2,491 |
|
|
1,357 |
|
|
Total current liabilities |
|
|
219,978 |
|
|
180,029 |
|
|
|
|
|
|
|
|
|
|
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Long-term liabilities |
|
|
|
|
|
|
|
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Line of credit |
|
|
255,000 |
|
|
217,300 |
|
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Deferred tax liabilities, net |
|
|
155 |
|
|
160 |
|
|
Deferred rent |
|
|
16,023 |
|
|
15,256 |
|
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Other long-term liabilities |
|
|
58,568 |
|
|
71,664 |
|
|
Total long-term liabilities |
|
|
329,746 |
|
|
304,380 |
|
|
Total liabilities |
|
|
549,724 |
|
|
484,409 |
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|
|
|
|
|
|
|
|
|
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Commitments and contingencies (Note 10) |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Mandatorily redeemable noncontrolling interest |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
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Preferred stock; $0.01 par value; 10,000,000 shares authorized; zero shares outstanding as of September 30, 2017 and December 31, 2016 |
|
|
— |
|
|
— |
|
|
Common stock; $0.01 par value; 150,000,000 shares authorized; 45,847,389 and 46,113,693 shares outstanding as of September 30, 2017 and December 31, 2016, respectively |
|
|
458 |
|
|
462 |
|
|
Additional paid-in capital |
|
|
348,932 |
|
|
348,739 |
|
|
Treasury stock at cost: 36,204,864 and 35,938,560 shares as of September 30, 2017 and December 31, 2016, respectively |
|
|
(615,917) |
|
|
(603,262) |
|
|
Accumulated other comprehensive income (loss) |
|
|
(103,893) |
|
|
(126,964) |
|
|
Retained earnings |
|
|
763,116 |
|
|
735,939 |
|
|
Noncontrolling interest |
|
|
7,098 |
|
|
6,981 |
|
|
Total stockholders’ equity |
|
|
399,794 |
|
|
361,895 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
949,518 |
|
$ |
846,304 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands, except per share amounts)
(Unaudited)
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Three months ended September 30, |
|
Nine months ended September 30, |
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||||||||
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2016 |
|
2017 |
|
2016 |
|
|||||
|
Revenue |
|
$ |
359,036 |
|
$ |
312,796 |
|
$ |
1,050,742 |
|
$ |
930,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization presented separately below) |
|
|
275,548 |
|
|
233,541 |
|
|
797,450 |
|
|
691,649 |
|
|
Selling, general and administrative |
|
|
45,167 |
|
|
40,628 |
|
|
132,372 |
|
|
130,902 |
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|
Depreciation and amortization |
|
|
16,515 |
|
|
16,811 |
|
|
47,273 |
|
|
51,761 |
|
|
Restructuring and integration charges, net |
|
|
6,006 |
|
|
3,688 |
|
|
9,768 |
|
|
3,890 |
|
|
Impairment losses |
|
|
— |
|
|
5,602 |
|
|
— |
|
|
5,602 |
|
|
Total operating expenses |
|
|
343,236 |
|
|
300,270 |
|
|
986,863 |
|
|
883,804 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
15,800 |
|
|
12,526 |
|
|
63,879 |
|
|
46,507 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
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|
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Interest income |
|
|
899 |
|
|
397 |
|
|
2,020 |
|
|
826 |
|
|
Interest expense |
|
|
(3,469) |
|
|
(2,041) |
|
|
(8,699) |
|
|
(5,758) |
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Other income (expense), net |
|
|
4,416 |
|
|
6,254 |
|
|
6,573 |
|
|
7,488 |
|
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Loss on assets held for sale |
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|
— |
|
|
(5,300) |
|
|
(3,178) |
|
|
(5,300) |
|
|
Total other income (expense) |
|
|
1,846 |
|
|
(690) |
|
|
(3,284) |
|
|
(2,744) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
17,646 |
|
|
11,836 |
|
|
60,595 |
|
|
43,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision for) benefit from income taxes |
|
|
(2,071) |
|
|
813 |
|
|
(9,059) |
|
|
(6,667) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
15,575 |
|
|
12,649 |
|
|
51,536 |
|
|
37,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
(806) |
|
|
(1,198) |
|
|
(2,828) |
|
|
(2,804) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TeleTech stockholders |
|
$ |
14,769 |
|
$ |
11,451 |
|
$ |
48,708 |
|
$ |
34,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,575 |
|
$ |
12,649 |
|
$ |
51,536 |
|
$ |
37,096 |
|
|
Foreign currency translation adjustments |
|
|
(1,153) |
|
|
(8,541) |
|
|
8,414 |
|
|
(8,069) |
|
|
Derivative valuation, gross |
|
|
3,221 |
|
|
(6,009) |
|
|
24,713 |
|
|
(2,395) |
|
|
Derivative valuation, tax effect |
|
|
(1,288) |
|
|
2,462 |
|
|
(10,117) |
|
|
725 |
|
|
Other, net of tax |
|
|
127 |
|
|
802 |
|
|
386 |
|
|
1,202 |
|
|
Total other comprehensive income (loss) |
|
|
907 |
|
|
(11,286) |
|
|
23,396 |
|
|
(8,537) |
|
|
Total comprehensive income (loss) |
|
|
16,482 |
|
|
1,363 |
|
|
74,932 |
|
|
28,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to noncontrolling interest |
|
|
(899) |
|
|
(1,202) |
|
|
(3,153) |
|
|
(2,734) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to TeleTech stockholders |
|
$ |
15,583 |
|
$ |
161 |
|
$ |
71,779 |
|
$ |
25,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
45,838 |
|
|
47,081 |
|
|
45,816 |
|
|
47,771 |
|
|
Diluted |
|
|
46,367 |
|
|
47,315 |
|
|
46,348 |
|
|
48,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to TeleTech stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.32 |
|
$ |
0.24 |
|
$ |
1.06 |
|
$ |
0.72 |
|
|
Diluted |
|
$ |
0.32 |
|
$ |
0.24 |
|
$ |
1.05 |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share outstanding |
|
$ |
0.25 |
|
$ |
0.20 |
|
$ |
0.47 |
|
$ |
0.385 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
(Amounts in thousands)
(Unaudited)
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity of the Company |
|
|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
Common Stock |
|
Treasury |
|
Additional |
|
Comprehensive |
|
Retained |
|
Noncontrolling |
|
|
|
|
|||||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Stock |
|
Paid-in Capital |
|
Income (Loss) |
|
Earnings |
|
interest |
|
Total Equity |
|
||||||||
|
Balance as of December 31, 2016 |
|
— |
|
$ |
— |
|
46,114 |
|
$ |
462 |
|
$ |
(603,262) |
|
$ |
348,739 |
|
$ |
(126,964) |
|
$ |
735,939 |
|
$ |
6,981 |
|
$ |
361,895 |
|
|
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
48,708 |
|
|
2,828 |
|
|
51,536 |
|
|
Dividends to shareholders ($0.47 per common share) |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(21,531) |
|
|
— |
|
|
(21,531) |
|
|
Dividends distributed to noncontrolling interest |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,745) |
|
|
(2,745) |
|
|
Foreign currency translation adjustments |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8,089 |
|
|
— |
|
|
325 |
|
|
8,414 |
|
|
Derivatives valuation, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
14,596 |
|
|
— |
|
|
— |
|
|
14,596 |
|
|
Vesting of restricted stock units |
|
— |
|
|
— |
|
283 |
|
|
2 |
|
|
4,673 |
|
|
(9,612) |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,937) |
|
|
Exercise of stock options |
|
— |
|
|
— |
|
60 |
|
|
— |
|
|
994 |
|
|
1,156 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,150 |
|
|
Equity-based compensation expense |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
8,649 |
|
|
— |
|
|
— |
|
|
(291) |
|
|
8,358 |
|
|
Purchases of common stock |
|
— |
|
|
— |
|
(610) |
|
|
(6) |
|
|
(18,322) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(18,328) |
|
|
Other, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
386 |
|
|
— |
|
|
— |
|
|
386 |
|
|
Balance as of September 30, 2017 |
|
— |
|
$ |
— |
|
45,847 |
|
$ |
458 |
|
$ |
(615,917) |
|
$ |
348,932 |
|
$ |
(103,893) |
|
$ |
763,116 |
|
$ |
7,098 |
|
$ |
399,794 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
|
2016 |
|
|||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,536 |
|
$ |
37,096 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
47,273 |
|
|
51,761 |
|
|
Amortization of contract acquisition costs |
|
|
1,273 |
|
|
499 |
|
|
Amortization of debt issuance costs |
|
|
521 |
|
|
582 |
|
|
Imputed interest expense and fair value adjustments to contingent consideration |
|
|
39 |
|
|
(4,320) |
|
|
Provision for doubtful accounts |
|
|
380 |
|
|
542 |
|
|
(Gain) loss on disposal of assets |
|
|
85 |
|
|
(65) |
|
|
Gain on sale of business and dissolution of entity |
|
|
(3,323) |
|
|
— |
|
|
Impairment losses |
|
|
— |
|
|
5,602 |
|
|
Loss on held for sale assets |
|
|
3,178 |
|
|
5,300 |
|
|
Deferred income taxes |
|
|
8,155 |
|
|
5,368 |
|
|
Excess tax benefit from equity-based awards |
|
|
(1,970) |
|
|
(539) |
|
|
Equity-based compensation expense |
|
|
8,358 |
|
|
7,278 |
|
|
Loss on foreign currency derivatives |
|
|
829 |
|
|
4,649 |
|
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
13,460 |
|
|
23,780 |
|
|
Prepaids and other assets |
|
|
(26,814) |
|
|
(12,652) |
|
|
Accounts payable and accrued expenses |
|
|
32,597 |
|
|
(9,347) |
|
|
Deferred revenue and other liabilities |
|
|
14,066 |
|
|
(4,696) |
|
|
Net cash provided by operating activities |
|
|
149,643 |
|
|
110,838 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Proceeds from sale of long-lived assets |
|
|
31 |
|
|
93 |
|
|
Purchases of property, plant and equipment, net of acquisitions |
|
|
(43,932) |
|
|
(38,863) |
|
|
Proceeds from sale of business |
|
|
391 |
|
|
— |
|
|
Investments in non-marketable equity investments |
|
|
(1,384) |
|
|
— |
|
|
Acquisitions, net of cash acquired of zero and zero, respectively |
|
|
(81,360) |
|
|
(400) |
|
|
Net cash used in investing activities |
|
|
(126,254) |
|
|
(39,170) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
1,571,837 |
|
|
1,584,800 |
|
|
Payments on line of credit |
|
|
(1,534,137) |
|
|
(1,555,800) |
|
|
Payments on other debt |
|
|
(4,501) |
|
|
(2,306) |
|
|
Payments of contingent consideration and hold back payments to acquisitions |
|
|
(674) |
|
|
(9,467) |
|
|
Dividends paid to shareholders |
|
|
(10,069) |
|
|
(8,922) |
|
|
Payments to noncontrolling interest |
|
|
(2,745) |
|
|
(3,237) |
|
|
Purchase of mandatorily redeemable noncontrolling interest |
|
|
— |
|
|
(4,105) |
|
|
Proceeds from exercise of stock options |
|
|
2,150 |
|
|
371 |
|
|
Tax payments related to issuance of restricted stock units |
|
|
(4,937) |
|
|
(3,692) |
|
|
Excess tax benefit from equity-based awards |
|
|
— |
|
|
539 |
|
|
Payments of debt issuance costs |
|
|
(38) |
|
|
(1,888) |
|
|
Purchase of treasury stock |
|
|
(18,328) |
|
|
(57,279) |
|
|
Net cash used in financing activities |
|
|
(1,442) |
|
|
(60,986) |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,631 |
|
|
(9,678) |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
23,578 |
|
|
1,004 |
|
|
Cash and cash equivalents, beginning of period |
|
|
55,264 |
|
|
60,304 |
|
|
Cash and cash equivalents, end of period |
|
$ |
78,842 |
|
$ |
61,308 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
8,138 |
|
$ |
4,976 |
|
|
Cash paid for income taxes |
|
$ |
11,357 |
|
$ |
16,755 |
|
|
Non-cash operating, investing and financing activities |
|
|
|
|
|
|
|
|
Acquisition of long-lived assets through capital leases |
|
$ |
931 |
|
$ |
2,417 |
|
|
Acquisition of equipment through increase in accounts payable, net |
|
$ |
405 |
|
$ |
(542) |
|
|
Contract acquisition costs credited to accounts receivable |
|
$ |
— |
|
$ |
200 |
|
|
Dividend declared but not paid |
|
$ |
11,462 |
|
$ |
9,342 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
(1)OVERVIEW AND BASIS OF PRESENTATION
Summary of Business
TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) is a leading global provider of technology enabled customer experience services. The Company helps leading brands improve customer experiences and operational effectiveness through a unique combination of technological innovation and operational expertise. The Company’s portfolio of solutions includes consulting, technology, operations and analytics to enable a seamless customer experience across every interaction channel and phase of the customer lifecycle. TeleTech’s 49,500 employees serve clients in the automotive, communication, financial services, government, healthcare, logistics, media and entertainment, retail, technology, transportation and travel industries across all the segments and via operations in the U.S., Australia, Belgium, Brazil, Bulgaria, Canada, China, Costa Rica, Germany, Hong Kong, Ireland, Lebanon, Macedonia, Mexico, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.
Basis of Presentation
The Consolidated Financial Statements are comprised of the accounts of TeleTech, its wholly owned subsidiaries, and its 55% equity owned subsidiary Percepta, LLC. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited Consolidated Financial Statements do not include all of the disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company and the consolidated results of operations and comprehensive income (loss) and the consolidated cash flows of the Company. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
During the three months ended March 31, 2016, the Company recorded an additional tax expense of $1.1 million that should have been recorded in prior periods related to operations by an entity outside its country of incorporation. The total amount of $1.1 million should have been recorded as additional expense in the amount of $180 thousand in 2011, $123 thousand in 2012, $137 thousand in 2013, $358 thousand in 2014 and $301 thousand in 2015.
The Company has evaluated the impact of this adjustment and concluded that the adjustment was not material to the previously issued consolidated financial statements.
These unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, self-insurance reserves, litigation reserves, restructuring reserves, allowance for doubtful accounts, contingent consideration, and valuation of goodwill, long-lived and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.
5
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 specifies new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue and cash flows from contracts with customers. While ASU-2014-09 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016, in August 2015, the FASB issued ASU 2015-14, “Deferral of Effective Date”, deferring the effective date by one year, to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. In June 2017, FASB issued ASU 2017-10, “Service Concession Arrangements”, which will be adopted along with the ASU 2014-09 guidance. The Company has assigned a project manager and team, has selected an external consulting company to assist through the project, has completed the initial project assessment phase, and is finalizing its implementation approach. The Company has determined that it will adopt this new standard using the modified retrospective approach in which a cumulative adjustment to retained earnings will be recorded as of January 1, 2018. The Company is in the process of completing its assessment of the financial statement impact and as such, has not reached any conclusions regarding the potential impact to the financials.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which amends the existing accounting standards for lease accounting, including requiring lessees, to recognize most leases on their balance sheets related to the rights and obligations created by those leases and making targeted changes to lessor accounting. The ASU also requires new disclosures regarding the amounts, timing, and uncertainty of cash flows arising from leases. The ASU is effective for interim and annual periods beginning on or after December 15, 2018 and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently assessing the impact on the consolidated financial statements and related disclosures, evaluating software solutions and other tracking methods, and determining the implementation timeline.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting”, which amends the existing accounting standards related to stock-based compensation. The ASU simplifies several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for interim and annual periods beginning on or after December 15, 2016. Beginning with the first quarter of 2017, the Company has adopted the new guidance as applicable and this adoption did not have a material impact on its financial position, results of operation or related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”. ASU 2016-15 is intended to reduce diversity in practice regarding how certain cash transactions are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The ASU is effective for interim and annual periods beginning on or after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on the consolidated statements and related disclosures.
6
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other: Simplifying the Accounting for Goodwill Impairment”. ASU 2017-04 removes the need to complete Step 2 of any goodwill impairment test that has failed Step 1. The goodwill impairment will now be calculated as the amount by which a reporting unit’s carrying value exceeds its fair value. The ASU is effective for interim and annual periods beginning on or after December 15, 2019 and early adoption is permitted. The Company early adopted this standard as of January 1, 2017.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. ASU 2017-12 amends and simplifies existing guidance for derivatives and hedges including aligning accounting with companies’ risk management strategies and increasing disclosure transparency regarding both the scope and results of hedging programs. The changes include designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact on the consolidated statements and related disclosures.
(2)ACQUISITIONS AND DIVESTITURES
Connextions
On April 3, 2017, the Company acquired all of the outstanding shares of Connextions, Inc., a health care customer service provider company, from OptumHealth Holdings, LLC. Connextions is being integrated into the health care vertical of the Customer Management Services (“CMS”) segment of the Company. Connextions employed approximately 2,000 at several centers in the U.S.
The total cash paid at acquisition was $80 million. The purchase price is subject to customary representations and warranties, indemnities, and net working capital adjustment. In connection with the acquisition, the Company and OptumHealth (directly and through affiliates) also entered into long-term technology and customer services agreements, and into transition services agreements to facilitate the transfer of the business. The Company was required to pay an additional $1.8 million for the working capital adjustment, which was paid during the third quarter of 2017. Additionally, fair value adjustments related to the transition services agreements are expected to reduce the purchase price by $4.1 million resulting in a net estimated purchase price of $77.7 million.
7
The following summarizes the preliminary estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
Preliminary |
|
|
|
|
|
Estimate of |
|
|
|
|
|
Acquisition Date |
|
|
|
|
|
Fair Value |
|
|
|
Cash |
|
$ |
— |
|
|
Accounts receivable, net |
|
|
15,959 |
|
|
Prepaid expenses |
|
|
241 |
|
|
Other current assets |
|
|
51 |
|
|
Property, plant and equipment |
|
|
7,594 |
|
|
Customer relationships |
|
|
35,000 |
|
|
Goodwill |
|
|
35,272 |
|
|
|
|
$ |
94,117 |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1 |
|
|
Accrued employee compensation and benefits |
|
|
346 |
|
|
Accrued expenses |
|
|
386 |
|
|
Deferred tax liabilities |
|
|
15,273 |
|
|
Deferred revenue |
|
|
399 |
|
|
|
|
$ |
16,405 |
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
77,712 |
|
The estimates of fair value of identifiable assets acquired and liabilities assumed are preliminary, pending finalization of a valuation, thus are subject to revisions that may result in adjustments to the values presented above.
The Connextions customer relationships have been estimated based on the initial valuation and are amortized over an estimated useful life of 12 years. The goodwill recognized from the Connextions acquisition is estimated to be attributable, but not limited to, the acquired work force and expected synergies with CMS. None of the tax basis of the acquired intangibles and goodwill will be deductible for income tax purposes. The acquired goodwill and the operating results of Connextions are reported within the CMS segment from the date of acquisition.
Atelka
On November 9, 2016, the Company acquired all of the outstanding shares of Atelka Enterprise Inc. (“Atelka”), a Canadian customer contact center management and business process outsourcing services company that serves Canadian telecommunications, logistics, and entertainment clients. This acquisition was an addition to the CMS segment. Atelka employed approximately 2,800 in Quebec, Ontario, New Brunswick and Prince Edward Island.
The total purchase price was $48.4 million ($65.0 CAD), including certain working capital adjustments, and consisted of $47.5 million in cash at closing and a $1.4 million hold-back for contingencies as defined in the sale and purchase agreement, which will be released to the seller in month 12 and month 24, post acquisition, if not used.
8
The following summarizes the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
Acquisition Date |
|
|
|
|
|
Fair Value |
|
|
|
Cash |
|
$ |
2,655 |
|
|
Accounts receivable, net |
|
|
18,449 |
|
|
Prepaid expenses |
|
|
615 |
|
|
Property, plant and equipment |
|
|
3,161 |
|
|
Deferred tax assets, net |
|
|
638 |
|
|
Customer relationships |
|
|
10,500 |
|
|
Goodwill |
|
|
20,275 |
|
|
|
|
$ |
56,293 |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,199 |
|
|
Accrued employee compensation and benefits |
|
|
2,418 |
|
|
Accrued expenses |
|
|
2,597 |
|
|
Other |
|
|
1,678 |
|
|
|
|
$ |
7,892 |
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
48,401 |
|
In the third quarter of 2017, the Company finalized its valuation of Atelka for the acquisition date assets and liabilities assumed and determined that no material adjustments to any of the balances were required.
The Atelka customer relationships will be amortized over a useful life of 12 years. The goodwill recognized from the Atelka acquisition is attributable, but not limited to, the acquired work force and expected synergies with CMS. None of the tax basis of the acquired intangibles and goodwill will be deductible for income tax purposes. The acquired goodwill and the operating results of Atelka are reported within the CMS segment from the date of acquisition.
rogenSi
In the third quarter of 2014, as an addition to the Customer Strategy Services (“CSS”) segment, the Company acquired substantially all operating assets of rogenSi Worldwide PTY, Ltd., a global leadership, change management, sales, performance training and consulting company.
The total potential purchase price was $34.4 million, subject to certain working capital adjustments, and consisted of $18.1 million in cash at closing and an estimated $14.5 million in three earn-out payments, contingent on the acquired companies and TeleTech’s CSS segment achieving certain agreed earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets, as defined in the sale and purchase agreement. Additionally, the estimated purchase price included a $1.8 million hold-back for contingencies as defined in the sale and purchase agreement which was released to the sellers in the first quarter of 2016. The total contingent consideration possible per the sale and purchase agreement ranged from zero to $17.6 million and the earn-out payments were payable in early 2015, 2016 and 2017, based on July 1, 2014 through December 31, 2014, and full year 2015 and 2016 performance, respectively. As of December 31, 2016, the contingent consideration has been finalized and a total of $12.0 million was earned and paid.
9
The fair value of the contingent consideration was measured by applying a probability weighted discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.6% and expected future value of payments of $15.3 million. The $15.3 million of expected future payments was calculated using a probability weighted EBITDA assessment with the highest probability associated with rogenSi achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent consideration was approximately $14.5 million. During the fourth quarter of 2014, the third quarter of 2015, the fourth quarter of 2015, and the third quarter of 2016, the Company recorded fair value adjustments of the contingent consideration of $0.5 million, $0.8 million, $(0.3) million, and $(4.3) million, respectively, based on revised estimates noting higher or lower probability of exceeding the EBITDA targets (see Note 7). As of September 30, 2016, the fair value of the remaining contingent consideration was reduced from $4.3 million to zero given the remote possibility of achieving targeted EBITDA for 2016. As of December 31, 2016, the payment was finalized at a value of zero and thus no additional expense was required.
Financial Impact of Acquired Businesses
The acquired businesses purchased in 2016 and 2017 noted above contributed revenues of $43.6 million and $101.9 million, and a net loss of $(4.1) million and $(6.3) million, inclusive of $0.9 million and $2.1 million of acquired intangible amortization, to the Company for the three and nine months ended September 30, 2017, respectively.
The unaudited proforma financial results for the third quarter and first nine months of 2017 and 2016 combines the consolidated results of the Company, Connextions and Atelka assuming the Connextions acquisition had been completed on January 1, 2016 and the Atelka acquisition on January 1, 2015. The reported revenue and net income of $312.8 million and $11.5 million would have been $362.3 million and $9.4 million for the three months ended September 30, 2016, respectively, on an unaudited proforma basis. The reported revenue and net income of $930.3 million and $34.3 million would have been $1,071.7 million and $27.8 million for the nine months ended September 30, 2016, respectively, on an unaudited proforma basis.
For 2017, the reported revenue and net income of $359.0 million and $14.8 million would have been $359.0 million and $14.8 million for the three months ended September 30, 2017, respectively. The reported revenue and net income of $1,050.7 million and $48.7 million would have been $1,090.0 million and $46.9 million for the nine months ended September 30, 2017, respectively, on an unaudited proforma basis.
The unaudited pro forma consolidated results are not to be considered indicative of the results if these acquisitions occurred in the periods mentioned above, or indicative of future operations or results. Additionally, the pro forma consolidated results do not reflect any anticipated synergies expected as a result of the acquisition.
Assets and Liabilities Held for Sale
During the third quarter of 2016, the Company determined that one business unit from the Customer Growth Services (“CGS”) segment and one business unit from the Customer Strategy Services (“CSS”) segment would be divested from the Company’s operations. These business units continue to meet the criteria to be classified as held for sale. The Company had engaged a broker for both business units and is working with potential buyers for both business units. The Company anticipates the transactions will be finalized during the next three to six months. The Company has taken into consideration the discounted cash flow models, management input based on early discussions with brokers and potential buyers, and third-party evidence from similar transactions to complete the fair value analysis as there has not been a selling price determined at this point for either unit. For the two business units in CGS and CSS losses of $2.6 million and $2.7 million, respectively, were recorded as of September 30, 2016 in Loss on assets held for sale in the Consolidated Statements of Comprehensive Income (Loss). As of September 30, 2017, for the business unit in CSS, this loss continues to be the best estimate and no additional charge has been recorded. For the business unit in CGS, based on further discussion and initial offers, management determined that the estimated selling price assumed should be
10
revised. Based on this and further analysis, an additional $3.2 million loss was recorded as of June 30, 2017 and included in Loss on assets held for sale in the Consolidated Statements of Comprehensive Income (Loss). As of September 30, 2017, for the business unit in CGS, the aggregate loss continues to be the best estimate and no additional charge has been recorded.
The following table presents information related to the major components of assets and liabilities that were classified as held for sale in the Consolidated Balance Sheet as of September 30, 2017.
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
||
|
Cash |
|
$ |
— |
|
|
Accounts receivable, net |
|
|
8,240 |
|
|
Allowance for doubtful accounts |
|
|
(51) |
|
|
Other assets |
|
|
589 |
|
|
Property, plant and equipment |
|
|
1,229 |
|
|
Customer relationships |
|
|
3,946 |
|
|
Goodwill |
|
|
3,033 |
|
|
Other intangible assets |
|
|
771 |
|
|
Allowance for reduction of assets held for sale |
|
|
(8,478) |
|
|
Total assets |
|
$ |
9,279 |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,046 |
|
|
Accrued employee compensation and benefits |
|
|
817 |
|
|
Accrued expenses |
|
|
316 |
|
|
Other |
|
|
312 |
|
|
Total liabilities |
|
$ |
2,491 |
|
Investments
CaféX
In the first quarter of 2015, the Company invested $9.0 million in CafeX Communications, Inc. (“CaféX”) through the purchase of a portion of the Series B Preferred Stock of CaféX. CaféX is a provider of omni-channel web-based real time communication (WebRTC) solutions that enhance mobile applications and websites with in-app video communication and screen share technology to increase customer satisfaction and enterprise efficiency. TeleTech has deployed the CaféX technology as part of the TeleTech customer experience offerings within the CMS business segment and as part of its Humanify platform. At December 31, 2015, the Company owned 17.2% of the total equity of CaféX. During the fourth quarter of 2016, the Company invested an additional $4.3 million to purchase a portion of the Series C Preferred Stock; $3.2 million was paid in the fourth quarter of 2016 and $1.1 million was paid in the first quarter of 2017. At September 30, 2017, the Company owns 17.2% of the total equity of CaféX. The investment is accounted for under the cost method of accounting. The Company evaluates its investments for possible other-than-temporary impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company tested the investment in CaféX for impairment and concluded that the investment was not impaired at September 30, 2017 or December 31, 2016.
11
Divestitures
Technology Solutions Group (“TSG”)
Effective June 30, 2017, the Company sold the Technology Solutions Group to SKC Communication Products, LLC (“SKC”) for an upfront payment of $250 thousand and future contingent royalty payments over the next 3 years. TSG had been included in the CTS segment. During the second quarter of 2017, a $30 thousand gain, which included the write-off of $0.7 million of goodwill, was recorded and included in the Consolidated Statements of Comprehensive Income (Loss). During the third quarter of 2017, a $141 thousand gain was recorded as a result of TSG delivering to SKC working capital in excess of the target set forth in the stock purchase agreement, and the gain was included in the Consolidated Statements of Comprehensive Income (Loss).
TeleTech Spain Holdings SL
In the third quarter of 2017, the Company dissolved TeleTech Spain Holdings SL, a fully owned foreign subsidiary domiciled in Spain. Upon complete liquidation, $3.2 million attributable to the accumulated translation adjustment component of equity has been removed from Accumulated other comprehensive income (loss) and recognized as part of the gain on liquidation. The $3.2 million gain is included in Other income (expense), net in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017.
Subsequent Event
On November 8, 2017, the Company agreed to acquire all of the outstanding shares in Motif, Inc., a California corporation (“Motif”). Motif is a digital trust and safety services company serving eCommerce marketplaces, online retailers, travel agencies and financial services companies. Motif provides omni-channel community moderation services via voice, email and chat from delivery centers in India and the Philippines via approximately 2,800 employees. The acquisition will be implemented through two separate transactions. In November 2017, the Company will complete the acquisition of 70% of all outstanding shares in Motif from private equity and certain individual investors for $46.9 million, subject to customary representations and warranties, and working capital adjustments. The Company also agreed to purchase the remaining 30% interest in Motif from Motif’s founders (“founders’ shares”) by no later than May 2020 (“30% buyout period”). The Company agreed to pay for the founders’ shares at a purchase price contingent on Motif’s fiscal year 2020’s adjusted normalized EBITDA, and 30% of the excess cash present in the business at the time of the buyout; or if the buyout occurs prior to May 2020, the trailing twelve months EBITDA, calculated from the most recently completed full monthly period ending prior to the date of the buyout triggering event and 30% of the excess cash in the business at that point. As a condition to the acquisition, the Motif founders agreed to continue to stay as executives in the acquired business, at least through the 30% buyout period, as part of the Company’s CMS segment, and not to compete with the Company with respect to the acquired business.
(3)SEGMENT INFORMATION
The Company reports the following four segments:
|
· |
the CMS segment includes the customer experience delivery solutions which integrate innovative technology with highly-trained customer experience professionals to optimize the customer experience across all channels and all stages of the customer lifecycle from an onshore, offshore or work-from-home environment; |
|
· |
the CGS segment provides technology-enabled sales and marketing solutions that support revenue generation across the customer lifecycle, including sales advisory, search engine optimization, digital demand generation, lead qualification, and acquisition sales, growth and retention services; |
12
|
· |
the CTS segment includes system design consulting, customer experience technology product, implementation and integration consulting services, and management of clients’ cloud and on-premise solutions; and |
|
· |
the CSS segment provides professional services in customer experience strategy and operations, insights, system and operational process optimization, and culture development and knowledge management. |
The Company allocates to each segment its portion of corporate operating expenses. All intercompany transactions between the reported segments for the periods presented have been eliminated.
The following tables present certain financial data by segment (in thousands):
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
Income |
|
||
|
|
|
Gross |
|
Intersegment |
|
Net |
|
& |
|
(Loss) from |
|
|||||
|
|
|
Revenue |
|
Sales |
|
Revenue |
|
Amortization |
|
Operations |
|
|||||
|
Customer Management Services |
|
$ |
277,373 |
|
$ |
— |
|
$ |
277,373 |
|
$ |
13,455 |
|
$ |
9,133 |
|
|
Customer Growth Services |
|
|
30,829 |
|
|
— |
|
|
30,829 |
|
|
717 |
|
|
1,564 |
|
|
Customer Technology Services |
|
|
34,658 |
|
|
(95) |
|
|
34,563 |
|
|
1,772 |
|
|
4,158 |
|
|
Customer Strategy Services |
|
|
16,271 |
|
|
— |
|
|
16,271 |
|
|
571 |
|
|
945 |
|
|
Total |
|
$ |
359,131 |
|
$ |
(95) |
|
$ |
359,036 |
|
$ |
16,515 |
|
$ |
15,800 |
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
Income |
|
||
|
|
|
Gross |
|
Intersegment |
|
Net |
|
& |
|
(Loss) from |
|
|||||
|
|
|
Revenue |
|
Sales |
|
Revenue |
|
Amortization |
|
Operations |
|
|||||
|
Customer Management Services |
|
$ |
223,742 |
|
$ |
(78) |
|
$ |
223,664 |
|
$ |
11,891 |
|
$ |
12,255 |
|
|
Customer Growth Services |
|
|
35,301 |
|
|
— |
|
|
35,301 |
|
|
1,561 |
|
|
161 |
|
|
Customer Technology Services |
|
|
36,871 |
|
|
(291) |
|
|
36,580 |
|
|
2,457 |
|
|
3,776 |
|
|
Customer Strategy Services |
|
|
17,251 |
|
|
— |
|
|
17,251 |
|
|
902 |
|
|
(3,666) |
|
|
Total |
|
$ |
313,165 |
|
$ |
(369) |
|
$ |
312,796 |
|
$ |
16,811 |
|
$ |
12,526 |
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
Income |
|
||
|
|
|
Gross |
|
Intersegment |
|
Net |
|
& |
|
(Loss) from |
|
|||||
|
|
|
Revenue |
|
Sales |
|
Revenue |
|
Amortization |
|
Operations |
|
|||||
|
Customer Management Services |
|
$ |
798,527 |
|
$ |
(19) |
|
$ |
798,508 |
|
$ |
37,843 |
|
$ |
43,804 |
|
|
Customer Growth Services |
|
|
96,890 |
|
|
— |
|
|
96,890 |
|
|
2,249 |
|
|
6,295 |
|
|
Customer Technology Services |
|
|
105,337 |
|
|
(283) |
|
|
105,054 |
|
|
5,377 |
|
|
11,034 |
|
|
Customer Strategy Services |
|
|
50,290 |
|
|
— |
|
|
50,290 |
|
|
1,804 |
|
|
2,746 |
|
|
Total |
|
$ |
1,051,044 |
|
$ |
(302) |
|
$ |
1,050,742 |
|
$ |
47,273 |
|
$ |
63,879 |
|
13
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
Income |
|
||
|
|
|
Gross |
|
Intersegment |
|
Net |
|
& |
|
(Loss) from |
|
|||||
|
|
|
Revenue |
|
Sales |
|
Revenue |
|
Amortization |
|
Operations |
|
|||||
|
Customer Management Services |
|
$ |
664,647 |
|
$ |
(255) |
|
$ |
664,392 |
|
$ |
36,024 |
|
$ |
36,189 |
|
|
Customer Growth Services |
|
|
105,713 |
|
|
— |
|
|
105,713 |
|
|
4,943 |
|
|
4,138 |
|
|
Customer Technology Services |
|
|
109,720 |
|
|
(522) |
|
|
109,198 |
|
|
8,187 |
|
|
9,932 |
|
|
Customer Strategy Services |
|
|
51,008 |
|
|
— |
|
|
51,008 |
|
|
2,607 |
|
|
(3,752) |
|
|
Total |
|
$ |
931,088 |
|
$ |
(777) |
|
$ |
930,311 |
|
$ |
51,761 |
|
$ |
46,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
|
|||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
$ |
12,732 |
|
$ |
8,515 |
|
$ |
36,701 |
|
$ |
29,751 |
|
|
Customer Growth Services |
|
|
346 |
|
|
375 |
|
|
708 |
|
|
3,546 |
|
|
Customer Technology Services |
|
|
1,180 |
|
|
1,864 |
|
|
6,025 |
|
|
4,877 |
|
|
Customer Strategy Services |
|
|
85 |
|
|
366 |
|
|
498 |
|
|
689 |
|
|
Total |
|
$ |
14,343 |
|
$ |
11,120 |
|
$ |
43,932 |
|
$ |
38,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total Assets |
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
|
$ |
713,377 |
|
$ |
585,679 |
|
|
Customer Growth Services |
|
|
|
60,086 |
|
|
71,540 |
|
|
Customer Technology Services |
|
|
|
106,372 |
|
|
115,537 |
|
|
Customer Strategy Services |
|
|
|
69,683 |
|
|
73,548 |
|
|
Total |
|
|
$ |
949,518 |
|
$ |
846,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Goodwill |
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
|
$ |
79,391 |
|
$ |
42,589 |
|
|
Customer Growth Services |
|
|
|
24,439 |
|
|
24,439 |
|
|
Customer Technology Services |
|
|
|
40,839 |
|
|
41,500 |
|
|
Customer Strategy Services |
|
|
|
21,915 |
|
|
21,120 |
|
|
Total |
|
|
$ |
166,584 |
|
$ |
129,648 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents revenue based upon the geographic location where the services are provided (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
197,664 |
|
$ |
166,993 |
|
$ |
570,305 |
|
$ |
507,819 |
|
|
Philippines |
|
|
86,938 |
|
|
90,692 |
|
|
258,360 |
|
|
259,898 |
|
|
Latin America |
|
|
31,361 |
|
|
30,832 |
|
|
96,301 |
|
|
90,154 |
|
|
Canada |
|
|
18,937 |
|
|
891 |
|
|
56,035 |
|
|
3,020 |
|
|
Europe / Middle East / Africa |
|
|
14,892 |
|
|
15,604 |
|
|
45,555 |
|
|
49,100 |
|
|
Asia Pacific |
|
|
9,244 |
|
|
7,784 |
|
|
24,186 |
|
|
20,320 |
|
|
Total |
|
$ |
359,036 |
|
$ |
312,796 |
|
$ |
1,050,742 |
|
$ |
930,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
(4)SIGNIFICANT CLIENTS AND OTHER CONCENTRATIONS
The Company had no clients that contributed in excess of 10% of total revenue for the nine months ended September 30, 2017. The Company had one client that contributed in excess of 10% of total revenue for the nine months ended September 30, 2016. This client operates in the communications industry and is included in the CMS segment. This client contributed 9.5% and 10.4% of total revenue for the nine months ended September 30, 2017 and 2016, respectively. The Company does have several other clients with revenue exceeding $100 million annually and the loss of one or more of these clients could have a material adverse effect on the Company’s business, operating results, or financial condition.
To limit the Company’s credit risk with its clients, management performs periodic credit evaluations, maintains allowances for uncollectible accounts and may require pre-payment for services from certain clients. Based on currently available information, management does not believe significant credit risk existed as of September 30, 2017.
(5)GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
|
|
December 31, |
|
Acquisitions / |
|
|
|
|
Foreign |
|
|
|||||
|
|
|
|
Adjustments |
|
Impairments |
|
Currency |
|
2017 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
$ |
42,589 |
|
$ |
34,662 |
|
$ |
— |
|
$ |
2,140 |
|
$ |
79,391 |
|
|
Customer Growth Services |
|
|
24,439 |
|
|
— |
|
|
— |
|
|
— |
|
|
24,439 |
|
|
Customer Technology Services |
|
|
41,500 |
|
|
(661) |
|
|
— |
|
|
— |
|
|
40,839 |
|
|
Customer Strategy Services |
|
|
21,120 |
|
|
— |
|
|
— |
|
|
795 |
|
|
21,915 |
|
|
Total |
|
$ |
129,648 |
|
$ |
34,001 |
|
$ |
— |
|
$ |
2,935 |
|
$ |
166,584 |
|
The Company performs a goodwill impairment assessment on at least an annual basis. The Company conducts its annual goodwill impairment assessment during the fourth quarter, or more frequently, if indicators of impairment exist. During the quarter ended September 30, 2017, the Company assessed whether any such indicators of impairment existed and concluded there were none.
During the quarter ended September 30, 2016, the Company identified negative indicators such as lower financial performance and the reversal of contingent consideration for the CSS reporting unit and thus the Company updated its quantitative assessment for the CSS reporting unit fair value using an income based approach. The determination of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rates for the businesses, the useful lives over which the cash flows will occur and determination of appropriate discount rates (based in part on the Company’s weighted average cost of capital). Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. At September 30, 2016, the fair value for the CSS reporting unit exceeded the carrying value, and thus no impairment was required.
The Company has also determined that effective September 30, 2016 the assets of one of the business units within the CSS reporting unit will be held for sale (see discussion in Note 2). Therefore the CSS reporting unit was separated into the component that will be held for sale and the components that will be held for use and two separate fair value analyses were completed. At September 30, 2016 the fair value for the CSS held for use component exceeded the carrying value and thus no impairment was required. The fair value for the CSS held for sale component also exceeded the carrying value, and thus no impairment was required.
15
CSS – component held-for-sale
The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 3.75%, a discount rate specific to the trade name of 19.2% and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $2.0 million, the Company recorded impairment expense of $3.3 million in the three months ended September 30, 2016 which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).
Other Intangible Assets
In connection with reduced profitability for the Avaya component of the CTS segment an interim impairment analysis was completed during the third quarter of 2016. The Company will modify the sales focus of the Avaya component away from premise product and services towards cloud solutions. The indefinite-lived intangible asset evaluated for impairment consisted of the TSG trade name. The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 0.5%, a discount rate specific to the trade name of 19.0%, which is equal to the reporting unit’s equity risk premium adjusted for its size and company specific risk factors, and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $0.4 million, the Company recorded impairment expense of $0.7 million in the three months ended September 30, 2016 which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).
In connection with reduced profitability of the rogenSi component of the CSS segment, an interim impairment analysis was completed during the third quarter of 2016. The indefinite-lived intangible asset evaluated for impairment consisted of the trade name. The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 2.0%, a discount rate specific to the trade name of 18.2%, which is equal to the reporting unit’s equity risk premium adjusted for its size and company specific risk factors. and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $3.1 million, the Company recorded impairment expense of $1.2 million in the three months ended September 30, 2016 which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).
(6)DERIVATIVES
Cash Flow Hedges
The Company enters into foreign exchange and interest rate related derivatives. Foreign exchange derivatives entered into consist of forward and option contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. Interest rate derivatives consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. It is the Company’s policy to only enter into derivative contracts with investment grade counterparty financial institutions, and correspondingly, the fair value of derivative assets consider, among other factors, the creditworthiness of these counterparties. Conversely, the fair value of derivative liabilities reflects the Company’s creditworthiness. As of September 30, 2017, the Company has not experienced, nor does it anticipate, any issues related to derivative counterparty defaults. The following table summarizes the aggregate unrealized net gain or loss in Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 (in thousands and net of tax):
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
|
|||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate unrealized net gain/(loss) at beginning of period |
|
$ |
(19,730) |
|
$ |
(25,007) |
|
$ |
(32,393) |
|
$ |
(26,885) |
|
|
Add: Net gain/(loss) from change in fair value of cash flow hedges |
|
|
5,420 |
|
|
631 |
|
|
25,290 |
|
|
9,519 |
|
|
Less: Net (gain)/loss reclassified to earnings from effective hedges |
|
|
(3,487) |
|
|
(4,179) |
|
|
(10,694) |
|
|
(11,189) |
|
|
Aggregate unrealized net gain/(loss) at end of period |
|
$ |
(17,797) |
|
$ |
(28,555) |
|
$ |
(17,797) |
|
$ |
(28,555) |
|
The Company’s foreign exchange cash flow hedging instruments as of September 30, 2017 and December 31, 2016 are summarized as follows (amounts in thousands). All hedging instruments are forward contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
U.S. Dollar |
|
|
% Maturing |
|
|
|
||
|
|
|
Notional |
|
Notional |
|
|
in the next |
|
|
Maturing |
|
|
|
As of September 30, 2017 |
|
Amount |
|
Amount |
|
|
12 months |
|
|
Through |
|
|
|
Philippine Peso |
|
10,490,000 |
|
|
218,413 |
(1) |
|
53.2 |
% |
|
August 2021 |
|
|
Mexican Peso |
|
1,774,000 |
|
|
104,652 |
|
|
37.2 |
% |
|
May 2021 |
|
|
|
|
|
|
$ |
323,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
U.S. Dollar |
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
Notional |
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
Philippine Peso |
|
14,315,000 |
|
|
301,134 |
(1) |
|
|
|
|
|
|
|
Mexican Peso |
|
2,089,000 |
|
|
129,375 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
430,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on September 30, 2017 and December 31, 2016. |
The Company’s interest rate swap arrangement expired as of May 31, 2017 and no additional swaps have been entered into. As of December 31, 2016, the outstanding interest rate swap was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Notional |
|
Variable Rate |
|
Fixed Rate |
|
Commencement |
|
Maturity |
|
|
|
|
Amount |
|
Received |
|
Paid |
|
Date |
|
Date |
|
||
|
Swap |
|
$ |
15 million |
|
1 - month LIBOR |
|
3.14 |
% |
May 2012 |
|
May 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
The Company enters into foreign exchange forward contracts to economically hedge against foreign currency exchange gains and losses on certain receivables and payables of the Company’s foreign operations. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings in Other income (expense), net. As of September 30, 2017 and December 31, 2016 the total notional amounts of the Company’s forward contracts used as fair value hedges were $167.1 million and $227.8 million, respectively.
17
Derivative Valuation and Settlements
The Company’s derivatives as of September 30, 2017 and December 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Designated |
|
Not Designated |
|
|||||
|
|
|
as Hedging |
|
as Hedging |
|
|||||
|
Designation: |
|
Instruments |
|
Instruments |
|
|||||
|
|
|
Foreign |
|
Interest |
|
Foreign |
|
|||
|
Derivative contract type: |
|
Exchange |
|
Rate |
|
Exchange |
|
|||
|
Derivative classification: |
|
Cash Flow |
|
Cash Flow |
|
Fair Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value and location of derivative in the Consolidated Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other current assets |
|
$ |
55 |
|
$ |
— |
|
$ |
355 |
|
|
Other long-term assets |
|
|
594 |
|
|
— |
|
|
— |
|
|
Other current liabilities |
|
|
(17,071) |
|
|
— |
|
|
(447) |
|
|
Other long-term liabilities |
|
|
(13,051) |
|
|
— |
|
|
— |
|
|
Total fair value of derivatives, net |
|
$ |
(29,473) |
|
$ |
— |
|
$ |
(92) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Designated |
|
Not Designated |
|
|||||
|
|
|
as Hedging |
|
as Hedging |
|
|||||
|
Designation: |
|
Instruments |
|
Instruments |
|
|||||
|
|
|
Foreign |
|
Interest |
|
Foreign |
|
|||
|
Derivative contract type: |
|
Exchange |
|
Rate |
|
Exchange |
|
|||
|
Derivative classification: |
|
Cash Flow |
|
Cash Flow |
|
Fair Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value and location of derivative in the Consolidated Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other current assets |
|
$ |
1,178 |
|
$ |
— |
|
$ |
1,606 |
|
|
Other long-term assets |
|
|
— |
|
|
— |
|
|
— |
|
|
Other current liabilities |
|
|
(23,503) |
|
|
(147) |
|
|
(866) |
|
|
Other long-term liabilities |
|
|
(31,714) |
|
|
— |
|
|
— |
|
|
Total fair value of derivatives, net |
|
$ |
(54,039) |
|
$ |
(147) |
|
$ |
740 |
|
18
The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
||||||||||
|
|
|
|
2016 |
|
|||||||||
|
|
|
Designated as Hedging |
|
Designated as Hedging |
|
||||||||
|
Designation: |
|
Instruments |
|
Instruments |
|
||||||||
|
|
|
Foreign |
|
Interest |
|
Foreign |
|
Interest |
|
||||
|
Derivative contract type: |
|
Exchange |
|
Rate |
|
Exchange |
|
Rate |
|
||||
|
Derivative classification: |
|
Cash Flow |
|
Cash Flow |
|
Cash Flow |
|
Cash Flow |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in Other comprehensive income (loss) - effective portion, net of tax |
|
$ |
(3,487) |
|
$ |
— |
|
$ |
(4,119) |
|
$ |
(60) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
(5,812) |
|
$ |
— |
|
$ |
(7,103) |
|
$ |
— |
|
|
Interest expense |
|
|
— |
|
|
— |
|
|
— |
|
|
(104) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
||||||||||
|
|
|
|
2016 |
|
|||||||||
|
Designation: |
|
Not Designated as |
|
Not Designated as |
|
||||||||
|
Derivative contract type: |
|
Foreign Exchange |
|
Foreign Exchange |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative classification: |
|
Forward Contracts |
|
Fair Value |
|
Forward Contracts |
|
Fair Value |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Other income (expense), net |
|
$ |
— |
|
$ |
(1,186) |
|
$ |
— |
|
$ |
(3,674) |
|
19
The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
2016 |
|
|||||||||
|
|
|
Designated as Hedging |
|
Designated as Hedging |
|
||||||||
|
Designation: |
|
Instruments |
|
Instruments |
|
||||||||
|
|
|
Foreign |
|
Interest |
|
Foreign |
|
Interest |
|
||||
|
Derivative contract type: |
|
Exchange |
|
Rate |
|
Exchange |
|
Rate |
|
||||
|
Derivative classification: |
|
Cash Flow |
|
Cash Flow |
|
Cash Flow |
|
Cash Flow |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in Other comprehensive income (loss) - effective portion, net of tax |
|
$ |
(10,625) |
|
$ |
(69) |
|
$ |
(10,939) |
|
$ |
(252) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
(17,709) |
|
$ |
— |
|
$ |
(18,860) |
|
$ |
— |
|
|
Interest expense |
|
|
— |
|
|
(115) |
|
|
— |
|
|
(435) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Nine Months Ended September 30, |
|
||||||||||||
|
|
|
|
2016 |
|
|||||||||||
|
Designation: |
|
Not Designated as |
|
Not Designated as |
|
||||||||||
|
Derivative contract type: |
|
Foreign Exchange |
|
Foreign Exchange |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Derivative classification: |
|
Forward Contracts |
|
Fair Value |
|
Forward Contracts |
|
Fair Value |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Costs of services |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
||
|
Other income (expense), net |
|
$ |
— |
|
$ |
(1,545) |
|
$ |
— |
|
$ |
(3,616) |
|
||
(7)FAIR VALUE
The authoritative guidance for fair value measurements establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
20
The following presents information as of September 30, 2017 and December 31, 2016 for the Company’s assets and liabilities required to be measured at fair value on a recurring basis, as well as the fair value hierarchy used to determine their fair value.
Accounts Receivable and Payable - The amounts recorded in the accompanying balance sheets approximate fair value because of their short-term nature.
Investments – The Company measures investments, including cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include market observable inputs, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. As of September 30, 2017, the investment in CaféX Communication, Inc., which consists of the Company’s first quarter 2015 $9.0 million investment, the fourth quarter 2016 $3.2 million investment and the first quarter 2017 $1.1 million investment, is recorded at $13.3 million which approximates fair value.
Debt - The Company’s debt consists primarily of the Company’s Credit Agreement, which permits floating-rate borrowings based upon the current Prime Rate or LIBOR plus a credit spread as determined by the Company’s leverage ratio calculation (as defined in the Credit Agreement). As of September 30, 2017 and December 31, 2016, the Company had $255.0 million and $217.3 million, respectively, of borrowings outstanding under the Credit Agreement. During the third quarter of 2017 outstanding borrowings accrued interest at an average rate of 2.3% per annum, excluding unused commitment fees. The amounts recorded in the accompanying Balance Sheets approximate fair value due to the variable nature of the debt based on Level 2 inputs.
Derivatives - Net derivative assets (liabilities) are measured at fair value on a recurring basis. The portfolio is valued using models based on market observable inputs, including both forward and spot foreign exchange rates, interest rates, implied volatility, and counterparty credit risk, including the ability of each party to execute its obligations under the contract. As of September 30, 2017, credit risk did not materially change the fair value of the Company’s derivative contracts.
The following is a summary of the Company’s fair value measurements for its net derivative assets (liabilities) as of September 30, 2017 and December 31, 2016 (in thousands):
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|||||||
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
||
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|||
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|||
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|||
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
At Fair Value |
|
||||
|
Cash flow hedges |
|
$ |
— |
|
$ |
(29,473) |
|
$ |
— |
|
$ |
(29,473) |
|
|
Interest rate swaps |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Fair value hedges |
|
|
— |
|
|
(92) |
|
|
— |
|
|
(92) |
|
|
Total net derivative asset (liability) |
|
$ |
— |
|
$ |
(29,565) |
|
$ |
— |
|
$ |
(29,565) |
|
21
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|||||||
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
||
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|||
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|||
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|||
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
At Fair Value |
|
||||
|
Cash flow hedges |
|
$ |
— |
|
$ |
(54,039) |
|
$ |
— |
|
$ |
(54,039) |
|
|
Interest rate swaps |
|
|
— |
|
|
(147) |
|
|
— |
|
|
(147) |
|
|
Fair value hedges |
|
|
— |
|
|
740 |
|
|
— |
|
|
740 |
|
|
Total net derivative asset (liability) |
|
$ |
— |
|
$ |
(53,446) |
|
$ |
— |
|
$ |
(53,446) |
|
The following is a summary of the Company’s fair value measurements as of September 30, 2017 and December 31, 2016 (in thousands):
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
|
Quoted Prices in |
|
|
|
|
Significant |
|
||
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|||
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
|||
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, net |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Total assets |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability |
|
$ |
— |
|
$ |
(12,624) |
|
$ |
— |
|
|
Derivative instruments, net |
|
|
— |
|
|
(29,565) |
|
|
— |
|
|
Contingent consideration |
|
|
— |
|
|
— |
|
|
(1,178) |
|
|
Total liabilities |
|
$ |
— |
|
$ |
(42,189) |
|
$ |
(1,178) |
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
|
Quoted Prices in |
|
|
|
|
Significant |
|
||
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|||
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
|||
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, net |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Total assets |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability |
|
$ |
— |
|
$ |
(10,841) |
|
$ |
— |
|
|
Derivative instruments, net |
|
|
— |
|
|
(53,446) |
|
|
— |
|
|
Contingent consideration |
|
|
— |
|
|
— |
|
|
(1,808) |
|
|
Total liabilities |
|
$ |
— |
|
$ |
(64,287) |
|
$ |
(1,808) |
|
Deferred Compensation Plan — The Company maintains a non-qualified deferred compensation plan structured as a Rabbi trust for certain eligible employees. Participants in the deferred compensation plan select from a menu of phantom investment options for their deferral dollars offered by the Company each year, which are based upon changes in value of complementary, defined market investments. The deferred compensation liability represents the combined values of market investments against which participant accounts are tracked.
22
Contingent Consideration — The Company recorded contingent consideration related to the acquisitions of rogenSi and Atelka. These contingent payables were recognized at fair value using a discounted cash flow approach and a discount rate of 4.6% and 0%, respectively. The discount rates vary dependent on the specific risks of each acquisition including the country of operation, the nature of services and complexity of the acquired business, and other similar factors. These measurements were based on significant inputs not observable in the market. The Company recorded interest expense each period using the effective interest method until the future value of these contingent payables reached their expected future value. Interest expense related to all recorded contingent payables is included in Interest expense in the Consolidated Statements of Comprehensive Income (Loss).
The Company recorded contingent consideration related to a revenue servicing agreement with Welltok in the fourth quarter of 2016, in which a maximum of $1.25 million will be paid over eight quarters based on the dollar value of revenue earned by the Company. The contingent payable was recognized at fair value of $1.25 million as of December 31, 2016. As required, the first payment of $435 thousand was completed during the second quarter of 2017. As required, the second payment of $239 thousand was completed during the third quarter of 2017.
A rollforward of the activity in the Company’s fair value of the contingent consideration payable is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed |
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
Interest / |
|
|
||||
|
|
|
|
Acquisitions |
|
Payments |
|
Adjustments |
|
2017 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welltok |
|
$ |
1,250 |
|
$ |
— |
|
$ |
(674) |
|
$ |
— |
|
$ |
576 |
|
|
Atelka |
|
|
558 |
|
|
— |
|
|
— |
|
|
44 |
|
|
602 |
|
|
Total |
|
$ |
1,808 |
|
$ |
— |
|
$ |
(674) |
|
$ |
44 |
|
$ |
1,178 |
|
(8)INCOME TAXES
The Company accounts for income taxes in accordance with the accounting literature for income taxes, which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. Quarterly, the Company assesses the likelihood that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized.
In accordance with ASC 740, the Company recorded a liability during the first quarter of 2016 of $1.1 million, inclusive of penalties and interest, for uncertain tax positions. See Note 1 for further information on this item.
During the second quarter of 2016, $0.3 million of liability was released due to the closing of a statute of limitations.
During the third quarter of 2016, $0.8 million of liability was released due to the favorable outcome of communications with a revenue authority related to site compliance for locations with tax advantaged status.
During the third quarter of 2016, $0.5 million of liability was released due to the closing of a statute of limitations.
As of September 30, 2017, the Company had $31.0 million of gross deferred tax assets (after a $10.5 million valuation allowance) and net deferred tax assets (after deferred tax liabilities) of $30.8 million related to the U.S. and international tax jurisdictions whose recoverability is dependent upon future profitability.
23
The effective tax rate for the three and nine months ended September 30, 2017 was 11.7% and 15.0%, respectively. The effective tax rate for the three and nine months ended September 30, 2016 was (6.9)% and 15.2%, respectively.
The Company’s U.S. income tax returns filed for the tax years ending December 31, 2014 to present remain open tax years. The Company has been notified of the intent to audit, or is currently under audit of, income taxes for Canada for tax years 2009 and 2010, the state of Michigan in the United States for tax years 2012 through 2015, for the Philippines branch for tax year 2015, for Belgium for tax years 2014 and 2015, and for eLoyalty in Ireland for tax year 2016. Although the outcome of examinations by taxing authorities are always uncertain, it is the opinion of management that the resolution of these audits will not have a material effect on the Company’s Consolidated Financial Statements. During the third quarter of 2017, the Company closed the audit in Hong Kong for 2014 with no changes. Additionally, during the second quarter of 2016, the Company successfully closed the audit in the U.S. for the acquired entity Technology Solutions Group for the tax year 2012 (prior to acquisition) with no changes. The Company also closed in the fourth quarter of 2016 the audit in New Zealand for tax years 2013 and 2014 with no changes.
The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the government of the Philippines. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted multiple agreements with an initial period of four years and additional periods for varying years, expiring at various times between 2011 and 2020. The aggregate effect on income tax expense for the three months ended September 30, 2017 and 2016 was approximately $2.8 million and $2.0 million, respectively, which had a favorable impact on diluted net income per share of $0.06 and $0.04, respectively. The aggregate effect on income tax expense for the nine months ended September 30, 2017 and 2016 was approximately $8.9 million and $4.5 million, respectively, which had a favorable impact on diluted net income per share of $0.19 and $0.10, respectively.
(9)RESTRUCTURING CHARGES, INTEGRATION CHARGES AND IMPAIRMENT LOSSES
Restructuring Charges
During the three and nine months ended September 30, 2017 and 2016, the Company continued restructuring activities primarily associated with reductions in the Company’s capacity, workforce and related management in several of the segments to better align the capacity and workforce with current business needs.
During the three and nine months ended September 30, 2017, several restructuring activities were completed regarding the purchase of Connextions (see Note 2). Several of the delivery centers that were included in the purchase will be closed over the next few quarters. During the second quarter of 2017, a $1.7 million severance accrual was recorded in relation to these closures and included in the Consolidated Statements of Comprehensive Income (Loss) for the quarter ended June 30, 2017. In conjunction with closing one delivery center, a $0.6 million termination fee was recorded in the third quarter of 2017. During the third quarter of 2017, the severance accrual was reviewed and a reversal of $0.7 million was recorded as of September 30, 2017. These charges and reversals were included in the Consolidated Statements of Comprehensive Income (Loss) during the quarter ended September 30, 2017.
24
A summary of the expenses recorded in Restructuring and integration charges, net in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016, respectively, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
|
|||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in force |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
$ |
(213) |
|
$ |
2,485 |
|
$ |
1,548 |
|
$ |
2,482 |
|
|
Customer Growth Services |
|
|
— |
|
|
108 |
|
|
— |
|
|
108 |
|
|
Customer Technology Services |
|
|
— |
|
|
314 |
|
|
93 |
|
|
324 |
|
|
Customer Strategy Services |
|
|
13 |
|
|
82 |
|
|
13 |
|
|
92 |
|
|
Total |
|
$ |
(200) |
|
$ |
2,989 |
|
$ |
1,654 |
|
$ |
3,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
|
|||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility exit and other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Management Services |
|
$ |
600 |
|
$ |
699 |
|
$ |
642 |
|
$ |
852 |
|
|
Customer Growth Services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Customer Technology Services |
|
|
— |
|
|
— |
|
|
84 |
|
|
33 |
|
|
Customer Strategy Services |
|
|
21 |
|
|
— |
|
|
21 |
|
|
— |
|
|
Total |
|
$ |
621 |
|
$ |
699 |
|
$ |
747 |
|
$ |
885 |
|
A rollforward of the activity in the Company’s restructuring accruals is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction |
|
Facility Exit and |
|
|
|
|||
|
|
|
in Force |
|
Other Charges |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016 |
|
$ |
1,468 |
|
$ |
98 |
|
$ |
1,566 |
|
|
Expense |
|
|
2,384 |
|
|
747 |
|
|
3,131 |
|
|
Payments |
|
|
(987) |
|
|
(841) |
|
|
(1,828) |
|
|
Change due to foreign currency |
|
|
(23) |
|
|
— |
|
|
(23) |
|
|
Change in estimates |
|
|
(730) |
|
|
— |
|
|
(730) |
|
|
Balance as of September 30, 2017 |
|
$ |
2,112 |
|
$ |
4 |
|
$ |
2,116 |
|
The remaining restructuring and other accruals are expected to be paid or extinguished during the next twelve months and are all classified as current liabilities within Other accrued expenses in the Consolidated Balance Sheets.
Integration Charges
During the three months ended September 30, 2017, as a result of the Connextions acquisition, certain integration activities were completed and $5.6 million of additional expenses were incurred and paid. These integration activities included the hiring, training and licensing of a group of employees at new delivery centers as one of the acquired centers was closed during the third quarter of 2017 and one of the acquired centers will be closed during the fourth quarter of 2017. The Company has also incurred significant expenses related to the integration of the IT systems and has paid duplicative software costs and facilities expenses for several areas during the transition period.
25
(10)COMMITMENTS AND CONTINGENCIES
Credit Facility
On February 11, 2016, the Company entered into a First Amendment to its June 3, 2013 Amended and Restated Credit Agreement and Amended and Restated Security Agreement (collectively the “Credit Agreement”) for a senior secured revolving credit facility (the “Credit Facility”) with a syndicate of lenders led by Wells Fargo Bank, National Association. The Credit Agreement provides for a secured revolving credit facility that matures on February 11, 2021 with an initial maximum aggregate commitment of $900.0 million, and an accordion feature of up to $1.2 billion in the aggregate, if certain conditions are satisfied.
On October 30, 2017, the Company entered into a Third Amendment to the Credit Agreement and exercised the Credit Facility’s accordion feature to increase the total commitment under the Credit Facility to $1.2 billion. All other material terms of the Credit Agreement remained unchanged.
Base rate loans bear interest at a rate equal to the greatest of (i) Wells Fargo’s prime rate, (ii) one half of 1% in excess of the federal funds effective rate, and (iii) 1.25% in excess of the one month London Interbank Offered Rate (“LIBOR”); plus in each case a margin of 0% to 0.75% based on the Company’s net leverage ratio. Eurodollar loans bear interest at LIBOR plus a margin of 1.0% to 1.75% based on the Company’s net leverage ratio. Alternate currency loans bear interest at rates applicable to their respective currencies.
Letter of credit fees are one eighth of 1% of the stated amount of the letter of credit on the date of issuance, renewal or amendment, plus an annual fee equal to the borrowing margin for Eurodollar loans.
The Credit Facility commitment fees are payable to the lenders in an amount equal to the unused portion of the Credit Facility at a rate of 0.125% to 0.250% based on the Company’s net leverage ratio.
The Company is obligated to maintain a maximum net leverage ratio of 3.25 to 1.00, and a minimum interest coverage ratio of 2.50 to 1.00.
The Company primarily utilizes its Credit Agreement to fund working capital, general operations, stock repurchases, dividends and other strategic activities, such as the acquisitions described in Note 2. As of September 30, 2017 and December 31, 2016, the Company had borrowings of $255.0 million and $217.3 million, respectively, under its Credit Agreement, and its average daily utilization was $474.3 million and $359.5 million for the nine months ended September 30, 2017 and 2016, respectively. Based on the current level of availability based on the covenant calculations, the Company’s remaining borrowing capacity was approximately $390.0 million as of September 30, 2017. As of September 30, 2017, the Company was in compliance with all covenants and conditions under its Credit Agreement.
Letters of Credit
As of September 30, 2017, outstanding letters of credit under the Credit Agreement totaled $3.9 million and primarily guaranteed workers’ compensation and other insurance related obligations. As of September 30, 2017, letters of credit and contract performance guarantees issued outside of the Credit Agreement totaled $7.6 million.
Legal Proceedings
From time to time, the Company has been involved in legal actions, both as plaintiff and defendant, which arise in the ordinary course of business. The Company accrues for exposures associated with such legal actions to the extent that losses are deemed both probable and reasonably estimable. To the extent specific reserves have not been made for certain legal proceedings, their ultimate outcome, and consequently, an estimate of possible loss, if any, cannot reasonably be determined at this time.
26
Based on currently available information and advice received from counsel, the Company believes that the disposition or ultimate resolution of any current legal proceedings, except as otherwise specifically reserved for in its financial statements, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.
(11)NONCONTROLLING INTEREST
The following table reconciles equity attributable to noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
|
2016 |
|
|||
|
Noncontrolling interest, January 1 |
|
$ |
6,981 |
|
$ |
7,201 |
|
|
Net income attributable to noncontrolling interest |
|
|
2,828 |
|
|
2,804 |
|
|
Dividends distributed to noncontrolling interest |
|
|
(2,745) |
|
|
(2,745) |
|
|
Foreign currency translation adjustments |
|
|
325 |
|
|
(70) |
|
|
Equity-based compensation expense |
|
|
(291) |
|
|
96 |
|
|
Other |
|
|
— |
|
|
10 |
|
|
Noncontrolling interest, September 30 |
|
$ |
7,098 |
|
$ |
7,296 |
|
(12)MANDATORILY REDEEMABLE NONCONTROLLING INTEREST
The Company held an 80% interest in iKnowtion until January 1, 2016 when the additional 20% was purchased. In the event iKnowtion met certain EBITDA targets for calendar year 2015, the purchase and sale agreement required TeleTech to purchase the remaining 20% interest in iKnowtion in 2016 for an amount equal to a multiple of iKnowtion’s 2015 EBITDA as defined in the purchase and sale agreement. These terms represented a contingent redemption feature which the Company determined was probable of being achieved.
Based on final EBITDA for 2015, the payment for the remaining 20% was completed in April 2016 for the value shown in the table below in accordance with the purchase and sale agreement.
The Company recorded the mandatorily redeemable noncontrolling interest at the redemption value based on the corresponding EBITDA multiples as prescribed in the purchase and sale agreement at the end of each reporting period. At the end of each reporting period the changes in the redemption value were recorded in retained earnings. Since the EBITDA multiples as defined in the purchase and sale agreement were below the current market multiple, the Company determined that there was no preferential treatment to the noncontrolling interest shareholders resulting in no impact to earnings per share.
A rollforward of the mandatorily redeemable noncontrolling interest is included in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
|
2016 |
|
|||
|
Mandatorily redeemable noncontrolling interest, January 1 |
|
$ |
— |
|
$ |
4,131 |
|
|
Net income attributable to mandatorily redeemable noncontrolling interest |
|
|
— |
|
|
— |
|
|
Working capital distributed to mandatorily redeemable noncontrolling interest |
|
|
— |
|
|
(492) |
|
|
Change in redemption value |
|
|
— |
|
|
466 |
|
|
Purchase of mandatorily redeemable noncontrolling interest |
|
|
— |
|
|
(4,105) |
|
|
Mandatorily redeemable noncontrolling interest, September 30 |
|
$ |
— |
|
$ |
— |
|
27
(13)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in the accumulated balance for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
Derivative |
|
|
|
|
|
|
|
||
|
|
|
Translation |
|
Valuation, Net |
|
Other, Net |
|
|
|
|
|||
|
|
|
Adjustment |
|
of Tax |
|
of Tax |
|
Totals |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at December 31, 2015 |
|
$ |
(71,196) |
|
$ |
(26,885) |
|
$ |
(3,284) |
|
$ |
(101,365) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
(7,999) |
|
|
9,519 |
|
|
2,330 |
|
|
3,850 |
|
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
(11,189) |
|
|
(1,128) |
|
|
(12,317) |
|
|
Net current period other comprehensive income (loss) |
|
|
(7,999) |
|
|
(1,670) |
|
|
1,202 |
|
|
(8,467) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2016 |
|
$ |
(79,195) |
|
$ |
(28,555) |
|
$ |
(2,082) |
|
$ |
(109,832) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at December 31, 2016 |
|
$ |
(92,008) |
|
$ |
(32,393) |
|
$ |
(2,563) |
|
$ |
(126,964) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
8,089 |
|
|
25,290 |
|
|
738 |
|
|
34,117 |
|
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
(10,694) |
|
|
(352) |
|
|
(11,046) |
|
|
Net current period other comprehensive income (loss) |
|
|
8,089 |
|
|
14,596 |
|
|
386 |
|
|
23,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2017 |
|
$ |
(83,919) |
|
$ |
(17,797) |
|
$ |
(2,177) |
|
$ |
(103,893) |
|
The following table presents the classification and amount of the reclassifications from Accumulated other comprehensive income (loss) to the statement of comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
For the Three Months Ended September 30, |
|
Comprehensive Income |
|
||||
|
|
|
2017 |
|
2016 |
|
(Loss) Classification |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Derivative valuation |
|
|
|
|
|
|
|
|
|
|
Loss on foreign currency forwards |
|
$ |
(5,812) |
|
$ |
(7,103) |
|
Revenue |
|
|
Loss on interest rate swaps |
|
|
— |
|
|
(104) |
|
Interest expense |
|
|
Tax effect |
|
|
2,325 |
|
|
3,028 |
|
Provision for income taxes |
|
|
|
|
$ |
(3,487) |
|
$ |
(4,179) |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Actuarial loss on defined benefit plan |
|
$ |
(130) |
|
$ |
(804) |
|
Cost of services |
|
|
Tax effect |
|
|
13 |
|
|
80 |
|
Provision for income taxes |
|
|
|
|
$ |
(117) |
|
$ |
(724) |
|
Net income (loss) |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
For the Nine Months Ended September 30, |
|
Comprehensive Income |
|
||||
|
|
|
2017 |
|
2016 |
|
(Loss) Classification |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Derivative valuation |
|
|
|
|
|
|
|
|
|
|
Loss on foreign currency forwards |
|
$ |
(17,709) |
|
$ |
(18,860) |
|
Revenue |
|
|
Loss on interest rate swaps |
|
|
(115) |
|
|
(435) |
|
Interest expense |
|
|
Tax effect |
|
|
7,130 |
|
|
8,106 |
|
Provision for income taxes |
|
|
|
|
$ |
(10,694) |
|
$ |
(11,189) |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Actuarial loss on defined benefit plan |
|
$ |
(391) |
|
$ |
(1,252) |
|
Cost of services |
|
|
Tax effect |
|
|
39 |
|
|
124 |
|
Provision for income taxes |
|
|
|
|
$ |
(352) |
|
$ |
(1,128) |
|
Net income (loss) |
|
(14)NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted shares for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic earnings per share calculation |
|
45,838 |
|
47,081 |
|
45,816 |
|
47,771 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
Stock options |
|
10 |
|
6 |
|
9 |
|
11 |
|
Restricted stock units |
|
517 |
|
214 |
|
513 |
|
292 |
|
Performance-based restricted stock units |
|
2 |
|
14 |
|
10 |
|
15 |
|
Total effects of dilutive securities |
|
529 |
|
234 |
|
532 |
|
318 |
|
Shares used in dilutive earnings per share calculation |
|
46,367 |
|
47,315 |
|
46,348 |
|
48,089 |
For the three months ended September 30, 2017 and 2016, options to purchase 0.0 million and 0.1 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted net income per share because the exercise price exceeded the value of the shares and the effect would have been anti-dilutive. For the nine months ended September 30, 2017 and 2016, options to purchase 0.0 million and 0.1 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted net income per share because the exercise price exceeded the value of the shares and the effect would have been anti-dilutive. For the three months ended September 30, 2017 and 2016, restricted stock units (“RSUs”) of 0.0 million and 0.1 million, respectively, were outstanding, but not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the nine months ended September 30, 2017 and 2016, RSUs of 0.0 million and 0.1 million, respectively, were outstanding, but not included in the computation of diluted net income per share because the effect would have been anti-dilutive.
29
(15)EQUITY-BASED COMPENSATION PLANS
All equity-based awards to employees are recognized in the Consolidated Statements of Comprehensive Income (Loss) at the fair value of the award on the grant date. During the three and nine months ended September 30, 2017 and 2016, the Company recognized total compensation expense of $3.5 million and $8.4 million and $2.7 million and $7.3 million, respectively. Of the total compensation expense, $1.4 million and $2.9 million was recognized in Cost of services and $2.1 million and $5.5 million was recognized in Selling, general and administrative during the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recognized compensation expense of $1.0 million and $2.3 million in Cost of services and $1.7 million and $5.0 million in Selling, general and administrative, respectively.
Restricted Stock Unit Grants
During the nine months ended September 30, 2017 and 2016, the Company granted 724,951 and 443,875 RSUs, respectively, to new and existing employees, which vest in equal installments over four or five years. The Company recognized compensation expense related to RSUs of $3.5 million and $8.7 million for the three and nine months ended September 30, 2017, respectively. The Company recognized compensation expense related to RSUs of $2.6 million and $7.2 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, there was approximately $25.0 million of total unrecognized compensation cost (including the impact of expected forfeitures) related to RSUs granted under the Company’s equity plans.
Stock Options
The Company recognized compensation expense related to subsidiary performance options of zero and $(0.3) million for the three and nine months ended September 30, 2017, respectively. The option benefit for 2017 resulted from the Company concluding that the performance targets of the subsidiary will not be achieved.
(16)RELATED PARTY
The Company entered into an agreement under which Avion, LLC (“Avion”) and Airmax LLC (“Airmax”) provide certain aviation flight services as requested by the Company. Such services include the use of an aircraft and flight crew. Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company, has a direct 100% beneficial ownership interest in Avion and Airmax. During the nine months ended September 30, 2017 and 2016, the Company expensed $0.6 million and $0.7 million, respectively, to Avion and Airmax for services provided to the Company. There was $114 thousand in payments due and outstanding to Avion and Airmax as of September 30, 2017.
During 2014, the Company entered into a vendor contract with Convercent Inc. to provide learning management and web and telephony based global helpline solutions. This contract was renewed, after an arms-length market pricing review, in the fourth quarter of 2016. The majority owner of Convercent is a company which is owned and controlled by Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company. During the nine months ended September 30, 2017 and 2016, the Company paid $55 thousand and $75 thousand, respectively.
During 2015, the Company entered into a contract to purchase software from CaféX, which is a company that TeleTech holds a 17.2% equity investment in. During the three and nine months ended September 30, 2017, the Company purchased $0.0 million and $0.1 million, respectively, of software from CaféX. See Note 2 for further information regarding this investment.
30
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Litigation Reform Act”), relating to our future operations, expected financial condition and prospects, results of operation, continuation of client relationships, and other business matters that are based on our current expectations, assumptions, business strategy, and projections with respect to the future, and are not a guarantee of performance. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. When we discuss our strategy, plans, goals, initiatives, or objectives, we are making forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Litigation Reform Act.
We caution you not to rely unduly on any forward-looking statements. Actual results may differ materially from what is expressed in the forward-looking statements, and you should review and consider carefully the risks, uncertainties and other factors that affect our business and may cause such differences, as outlined but not limited to factors discussed in the “Risk Factors” section of our 2016 Annual Report on Form 10-K. The risk factors we wish for you to be aware of in particular include but are not limited to the risk inherent in the volatile and uncertain economic conditions, the fact that a large portion of our revenue is generated from a limited number of clients and the loss of one or more of these clients or a large portion of one client’s business could adversely affect our results of operations, the risk of client consolidation, the possibility that the current trend among clients to outsource their customer care may not continue, the competitiveness of our markets, the risk of information systems breach and the related impact on our clients and their data, our geographic concentration, the risk inherent in the terms of our contracts that we do not always have the opportunity to negotiate, the risk related to our international footprint, how our foreign currency exchange risk can adversely impact our results of operations, the risk of changes in law that impact our business and our ability to comply with all the laws that relate to our operations, the risk related to the reliability of the information infrastructure that we use and our ability to deliver uninterrupted service to our clients, the risk of not being able to forecast demand for services accurately and the related impact on capacity utilization, our inability to attract and retain qualified and skilled personnel, impact of changing technologies on our services and solutions, the restrictive covenants contained in our credit facility that may impact our ability to execute our strategy and operate our business, the supply chain disruption related risk, the risk to innovation due to unforeseen intellectual property infringement, the risk related to our M&A activity and our ability to identify, acquire and properly integrate acquired businesses in accordance with our strategy, the controlling shareholder risk, and the volatility of our stock price that may result in loss of investment.
The forward-looking statements are based on information available as of the date that this Form 10-Q is filed with the United States Securities and Exchange Commission (“SEC”) and we undertake no obligation to update them, except as may be required by applicable laws. They are based on numerous assumptions and developments that are not within our control. Although we believe these forward-looking statements are reasonable, we cannot assure you they will turn out to be correct.
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Executive Summary
TeleTech Holdings, Inc. (“TeleTech”, “the Company”, “we”, “our” or “us”) is a leading global provider of technology enabled customer experience services. We help leading brands improve customer experiences and operational effectiveness through a unique combination of technological innovation and operational expertise. Our portfolio of solutions includes consulting, technology, operations and analytics to enable a seamless customer experience across every interaction channel and phase of the customer lifecycle. Our solutions are supported by 49,500 employees delivering services in 23 countries from 92 customer engagement centers on six continents. Our revenue for the quarter ended September 30, 2017 was $359.0 million.
Since our establishment in 1982, we have helped clients strengthen their customer relationships, brand recognition and loyalty by simplifying and personalizing interactions with their customers. We deliver thought leadership, technology and innovation that create customer strategies designed to differentiate our clients from their competition; data analytics that personalize interactions and increase customer value; and integration services that connect clients’ customer relationship management (“CRM”) system to a cloud-based collaboration platform, leading to customer interactions that are seamless and relevant.
Our services are value-oriented, outcome-based, and delivered on a global scale across all of our business segments: Customer Management Services (“CMS”), Customer Growth Services (“CGS”), Customer Technology Services (“CTS”) and Customer Strategy Services (“CSS”). Our integrated customer experience managed services platform differentiates the Company by combining strategic consulting, data analytics, process optimization, system design and integration, operational excellence, and technology solutions and services.
We have developed tailored expertise in the automotive, communications, financial services, government, healthcare, logistics, media and entertainment, retail, technology, travel and transportation industries. We target customer-focused industry leaders in the Global 1000 and serve approximately 300 global clients.
To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and growth businesses, diversifying our heritage business process outsourcing services of our CMS segment into higher-value consulting, data analytics, digital marketing and technology-enabled services. Of the $359.0 million in revenue we reported in the current period, approximately 23% or $81.7 million came from the CGS, CTS and CSS segments, focused on customer-centric strategy, growth and technology-based services, with the remainder of our revenue coming from the heritage business process outsourcing focused CMS segment.
Our strong balance sheet, cash flows from operations and access to debt and capital markets have historically provided us the financial flexibility to effectively fund our organic growth, capital expenditures, strategic acquisitions and incremental investments. Additionally, we continue to return capital to our shareholders via an ongoing stock repurchase program and regular semi-annual dividends. As of September 30, 2017, our cumulative authorized repurchase allowance was $762.3 million, of which we repurchased 46.1 million shares for $735.8 million. For the period from September 30, 2017 through October 31, 2017, we did not repurchase any additional shares. The stock repurchase program does not have an expiration date.
32
On February 24, 2015, our Board of Directors adopted a dividend policy, with the intent to distribute a periodic cash dividend to stockholders of our common stock, after consideration of, among other things, TeleTech’s performance, cash flows, capital needs and liquidity factors. Given our cash flow generation and balance sheet strength, we believe cash dividends and early returns to shareholders through share repurchases, in balance with our investments in innovation and strategic acquisitions, align shareholder interests with the needs of the Company. The initial dividend of $0.18 per common share was paid on March 16, 2015 to shareholders of record as of March 6, 2015. Thereafter, the Company has been paying a semi-annual dividend in October and April of each year in amount ranging between $0.18 and $0.22 per common share. On September 21, 2017, the Board of Directors authorized a dividend of $0.25 per common share, which was paid on October 17, 2017 to shareholders of record as of October 5, 2017.
Our Integrated Service Offerings and Business Segments
We have four operating and reportable segments, which provide an integrated set of services including:
Customer Strategy Services
We typically begin by engaging our clients at a strategic level. Through our strategy and operations, analytics, learning and performance, change management and consulting expertise, we help our clients design, build and execute their customer engagement strategies. We help our clients to better understand and predict their customers’ behaviors and preferences along with their current and future economic value. Using proprietary analytic models, we provide the insight clients need to build the business case for customer centricity, to better optimize their marketing spend and then work alongside them to help implement our recommendations. A key component of this segment involves instilling a high performance culture through management and leadership alignment and process optimization.
Customer Technology Services
Once the design of the customer engagement is completed, our ability to architect, deploy and host or manage the client’s customer management environment becomes a key enabler to achieving and sustaining the client’s customer engagement vision. Given the proliferation of mobile communication technologies and devices, we enable our clients’ operations to interact with their customers across the growing array of channels including email, social networks, mobile, web, SMS text, voice and chat. We design, implement and manage cloud, on-premise or hybrid customer management environments to deliver a consistent and superior experience across all touch points on a global scale that we believe result in higher quality, lower costs and reduced risk for our clients. Through our Humanify™ platform, we also provide data-driven context aware software-as-a-service (“SaaS”) based solutions that link customers seamlessly and directly to appropriate resources, any time and across any channel.
Customer Management Services
We design and manage clients’ front-to-back office processes to deliver just-in-time, personalized, multi-channel interactions. Our front-office solutions seamlessly integrate voice, chat, email, e-commerce and social media to optimize the customer experience for our clients. In addition, we manage certain client back-office processes to enhance their customer-centric view of relationships and maximize operating efficiencies. Our delivery of integrated business processes via our onshore, offshore or work-from-home associates reduces operating costs and allows customer needs to be met more quickly and efficiently, resulting in higher satisfaction, brand loyalty and a stronger competitive position for our clients.
Customer Growth Services
We offer integrated sales and marketing solutions to help our clients boost revenue in new, fragmented or underpenetrated business-to-consumer or business-to-business markets. We deliver approximately $3 billion in client revenue annually via the discovery, acquisition, growth and retention of customers through a combination of our highly trained, client-dedicated sales professionals and our proprietary Revana Analytic Multichannel PlatformTM. This platform continuously aggregates individual customer information across all channels into one holistic view so as to ensure more relevant and personalized communications.
Based on our clients’ requirements, we provide our services on an integrated cross-business segment and on a discrete basis.
33
Financial Highlights
In the third quarter of 2017, our revenue increased 14.8% to $359.0 million over the same period in 2016 including an increase of 0.5% or $1.7 million due to foreign currency fluctuations. This increase in revenue is comprised of an increase from the Atelka and Connextions acquisitions and organic growth in the CMS and CTS segments. Revenue, adjusted for the $1.7 million increase related to foreign exchange, increased by $44.5 million, or 14.2%, over the prior year.
Our third quarter 2017 income from operations increased 26.1% to $15.8 million or 4.4% of revenue, from $12.5 million or 4.0% of revenue in the third quarter of 2016. This increase is primarily due to increases in CMS organic and inorganic volumes, a $3.8 million increase due to foreign currency fluctuations and a deprioritization of certain non-essential businesses and activities, offset by investments to build out, hire and train for the increased fourth quarter 2017 seasonal volumes, which increased third quarter 2017 CMS costs. In addition, income from operations in the third quarter of 2017 and 2016 included $6.0 million ($5.6 million of which related to the planned integration of the Connextions acquisition) and $9.3 million of restructuring and integration charges and asset impairments, respectively.
Our offshore customer engagement centers serve clients based in the U.S. and in other countries and spans five countries with 23,000 workstations, representing 56% of our global delivery capability. Revenue for our CMS and CGS segments that is provided in these offshore locations was $111 million and represented 36% of our revenue for the third quarter of 2017, as compared to $111 million and 43% of our revenue for 2016.
Our cash flow from operations and available credit allowed us to finance a significant portion of our capital needs through internally generated cash flows. As of September 30, 2017, we had $78.8 million of cash and cash equivalents, total debt of $270.8 million, and a total debt to total capitalization ratio of 40.4%.
We internally target capacity utilization in our customer engagement centers at 80% to 90% of our available workstations. As of September 30, 2017, the overall capacity utilization in our centers was 78%, up from 71%, in the prior period. The table below presents workstation data for all of our centers as of September 30, 2017 and 2016. Our utilization percentage is defined as the total number of utilized production workstations compared to the total number of available production workstations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
Total |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Production |
|
|
|
% In |
|
Production |
|
|
|
% In |
|
|
|
|
Workstations |
|
In Use |
|
Use |
|
Workstations |
|
In Use |
|
Use |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sites open >1 year |
|
39,856 |
|
30,916 |
|
78 |
% |
34,538 |
|
24,284 |
|
70 |
% |
|
Sites open <1 year |
|
969 |
|
949 |
|
98 |
% |
1,104 |
|
967 |
|
88 |
% |
|
Total workstations |
|
40,825 |
|
31,865 |
|
78 |
% |
35,642 |
|
25,251 |
|
71 |
% |
While we continue to see demand from all geographic regions to utilize our offshore delivery capabilities and expect this trend to continue with our clients, some of our clients have regulatory pressures to bring the services onshore to the United States. In light of these trends we plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity in the United States. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.
Recently Issued Accounting Pronouncements
Refer to Part I, Item I, Financial Statements, Note 1 to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
34
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. For further information, please refer to the discussion of all critical accounting policies in 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.
Results of Operations
Three months ended September 30, 2017 compared to three months ended September 30, 2016
The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended September 30, 2017 and 2016 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated.
Customer Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
277,373 |
|
$ |
223,664 |
|
$ |
53,709 |
|
24.0 |
% |
|
Operating Income |
|
|
9,133 |
|
|
12,255 |
|
|
(3,122) |
|
(25.5) |
% |
|
Operating Margin |
|
|
3.3 |
% |
|
5.5 |
% |
|
|
|
|
|
The increase in revenue for the Customer Management Services segment was attributable to a $55.3 million net increase in organic and inorganic client programs including the Atelka and Connextions acquisitions and a $1.4 million increase due to foreign currency fluctuations, offset by program completions of $3.0 million.
The operating income as a percentage of revenue decreased to 3.3% in the third quarter of 2017 as compared to 5.5% in the prior period. The operating margin decreased due to $5.6 million of planned restructuring and integration charges for the Connextions acquisition related to severance, center closure costs, the hiring, training and licensing of employees in new delivery centers and the integration of the IT systems, as well as investments to buildout, hire, and train for the increased fourth quarter 2017 seasonal volumes, which necessitated increased third quarter 2017 costs. These were partially offset by higher revenue, a $3.7 million benefit due to improved foreign exchange trends, increased capacity utilization, and efficiencies realized from the expense rationalization activities completed during the second half of 2016. Included in the operating income was amortization expense related to acquired intangibles of $1.2 million and $0.2 million for the quarters ended September 30, 2017 and 2016, respectively.
Customer Growth Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
30,829 |
|
$ |
35,301 |
|
$ |
(4,472) |
|
(12.7) |
% |
|
Operating Income |
|
|
1,564 |
|
|
161 |
|
|
1,403 |
|
871.4 |
% |
|
Operating Margin |
|
|
5.1 |
% |
|
0.5 |
% |
|
|
|
|
|
The decrease in revenue for the Customer Growth Services segment was due to a $1.6 million increase in client programs and a decrease for program completions of $6.1 million.
35
The operating income as a percentage of revenue increased to 5.1% in the third quarter of 2017 as compared to 0.5% in the prior period. This increase in margin is related to pricing improvements and other profit optimization actions, along with a reduction in the operating losses for the Digital Marketing unit which we are holding for sale. Included in the operating income was amortization expense related to acquired intangibles of zero and $0.5 million for the quarters ended September 30, 2017 and 2016, respectively.
Customer Technology Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
34,563 |
|
$ |
36,580 |
|
$ |
(2,017) |
|
(5.5) |
% |
|
Operating Income |
|
|
4,158 |
|
|
3,776 |
|
|
382 |
|
10.1 |
% |
|
Operating Margin |
|
|
12.0 |
% |
|
10.3 |
% |
|
|
|
|
|
The decrease in revenue for the Customer Technology Services segment was driven by a decrease in the Avaya offerings as we wound down and then sold the business unit in the second quarter of 2017, offset by revenue increases in the CISCO offerings.
The operating income as a percentage of revenue increased to 12.0% in the third quarter of 2017 as compared to 10.3% in the prior period. This increase is primarily due to a decrease in amortization. Included in the operating income was amortization expense related to acquired intangibles of $0.3 million and $1.2 million for the quarters ended September 30, 2017 and 2016, respectively.
Customer Strategy Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
16,271 |
|
$ |
17,251 |
|
$ |
(980) |
|
(5.7) |
% |
|
Operating Income |
|
|
945 |
|
|
(3,666) |
|
|
4,611 |
|
125.8 |
% |
|
Operating Margin |
|
|
5.8 |
% |
|
(21.3) |
% |
|
|
|
|
|
The decrease in revenue for the Customer Strategy Services segment was related to growth in the Content and Collaboration practice offset by decreases in the Mindset and Sales Transformation and Customer Insights practices across multiple delivery regions.
The operating income as a percentage of revenue increased to 5.8% in the third quarter of 2017 as compared to an operating loss of (21.3)% in the prior period. The increase is primarily related to the $4.5 million charge for the impairment of two trade name intangibles recorded during the third quarter of 2016. Included in the operating income was amortization expense of $0.5 million and $0.8 million for the quarters ended September 30, 2017 and 2016, respectively.
Interest Income (Expense)
For the three months ended September 30, 2017 interest income increased to $0.9 million from $0.4 million in the same period in 2016. Interest expense increased to $3.5 million during 2017 from $2.0 million during 2016 due to larger outstanding balances on the line of credit primarily due to acquisitions, and higher interest rates.
Other Income (Expense)
Included in the three months ended September 30, 2017 was a $3.2 million gain related to dissolution of a foreign entity and a release of its cumulative translation adjustment.
Included in the three months ended September 30, 2016 was a $4.3 million benefit related to a fair value adjustment of contingent consideration for one of our acquisitions (see Part I. Item 1. Financial Statements, Note 7 to the Consolidated Financial Statements).
36
Income Taxes
The effective tax rate for the three months ended September 30, 2017 was 11.7%. This compares to an effective tax rate of (6.9)% for the comparable period of 2016. The effective tax rate for the three months ended September 30, 2017 was influenced by earnings in international jurisdictions currently under an income tax holiday and the distribution of income between the U.S. and international tax jurisdictions. Without a $1.0 million benefit related to excess taxes on equity compensation, $0.2 million of expense related to return to provision adjustments, $2.4 million of benefit from restructuring expenses, and $0.1 million of other, the Company’s effective tax rate for the third quarter of 2017 would have been 22.1%.
Results of Operations
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the nine months ended September 30, 2017 and 2016 (in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated.
Customer Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
798,508 |
|
$ |
664,392 |
|
$ |
134,116 |
|
20.2 |
% |
|
Operating Income |
|
|
43,804 |
|
|
36,189 |
|
|
7,615 |
|
21.0 |
% |
|
Operating Margin |
|
|
5.5 |
% |
|
5.4 |
% |
|
|
|
|
|
The increase in revenue for the Customer Management Services segment was attributable to a $145.9 million net increase in organic and inorganic client programs including Atelka and Connextions offset by program completions of $12.1 million. Revenue was further impacted by a $0.3 million increase due to foreign currency fluctuations.
The operating income as a percentage of revenue increased to 5.5% for the nine months ended September 30, 2017 as compared to 5.4% in the prior period. The operating margin increased due to higher revenue, a $10.6 million benefit due to improved foreign exchange trends, increased capacity utilization, and efficiencies realized from the expense rationalization activities completed during the second half of 2016. These increases were partially offset by $9.0 million of restructuring and integration charges for the Connextions acquisition related to severance, center closure costs, the hiring, training and licensing of employees in new delivery centers and the integration of the IT systems, as well as investments to buildout, hire and train for the increased fourth quarter 2017 seasonal volumes. Included in the operating income was amortization expense related to acquired intangibles of $3.0 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Customer Growth Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
96,890 |
|
$ |
105,713 |
|
$ |
(8,823) |
|
(8.3) |
% |
|
Operating Income |
|
|
6,295 |
|
|
4,138 |
|
|
2,157 |
|
52.1 |
% |
|
Operating Margin |
|
|
6.5 |
% |
|
3.9 |
% |
|
|
|
|
|
The decrease in revenue for the Customer Growth Services segment was due to a $10.2 million increase in client programs and a decrease for program completions of $19.0 million.
37
The operating income as a percentage of revenue increased to 6.5% for the nine months ended September 30, 2017 as compared to 3.9% in the prior period. This was attributable to pricing improvements and other profit optimization actions, along with reductions in amortization expenses and a reduction in the operating loss for the Digital Marketing unit which we are holding for sale. Included in the operating income was amortization expense related to acquired intangibles of zero and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively.
Customer Technology Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
105,054 |
|
$ |
109,198 |
|
$ |
(4,144) |
|
(3.8) |
% |
|
Operating Income |
|
|
11,034 |
|
|
9,932 |
|
|
1,102 |
|
11.1 |
% |
|
Operating Margin |
|
|
10.5 |
% |
|
9.1 |
% |
|
|
|
|
|
The decrease in revenue for the Customer Technology Services segment was driven by an increase for the CISCO offerings offset by a decrease in the Avaya offerings as we wound down and then sold the business unit in the second quarter of 2017.
The operating income as a percentage of revenue increased to 10.5% for the nine months ended September 30, 2017 as compared to 9.1% in the prior period. The increase is due to increased profitability in the CISCO offerings and a reduction in amortization. Included in the operating income was amortization expense related to acquired intangibles of $0.8 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively.
Customer Strategy Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
|
2016 |
|
$ Change |
|
% Change |
|
||||
|
Revenue |
|
$ |
50,290 |
|
$ |
51,008 |
|
$ |
(718) |
|
(1.4) |
% |
|
Operating Income (Loss) |
|
|
2,746 |
|
|
(3,752) |
|
|
6,498 |
|
173.2 |
% |
|
Operating Margin |
|
|
5.5 |
% |
|
(7.4) |
% |
|
|
|
|
|
The decrease in revenue for the Customer Strategy Services segment was related to growth in the Content and Collaboration and Service Optimization practices offset by decreases in the Mindset and Sales Transformation and Customer Insights practices across multiple delivery regions.
The operating income as a percentage of revenue was 5.5% for the nine months ended September 30, 2017 as compared to a loss of (7.4)% in the prior period. The operating income increased primarily due to the $4.5 million charge for the impairment of two trade name intangibles recorded during the third quarter of 2016, as well as expense rationalization, decreased amortization and reduced losses for the PRG Middle East unit which we are holding for sale. Included in the operating income was amortization expense of $1.5 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively.
Interest Income (Expense)
For the nine months ended September 30, 2017 interest income increased to $2.0 million from $0.8 million in the same period in 2016. Interest expense increased to $8.7 million during 2017 from $5.8 million during 2016 due to larger outstanding balances on the line of credit primarily due to the acquisitions, and higher average interest rates.
Other Income (Expense), Net
Included in the nine months ended September 30, 2017 was a $3.2 million gain related to dissolution of a foreign entity and a release of its cumulative translation adjustment.
Included in the nine months ended September 30, 2017 was $3.2 million of estimated losses related to a business unit which has been classified as assets held for sale (see Part I. Item 1. Financial Statements, Note 2 to the Consolidated Financial Statements).
38
Included in the nine months ended September 30, 2016 was a $4.3 million benefit related to a fair value adjustment of contingent consideration for one of our acquisitions (see Part I. Item 1. Financial Statements, Note 7 to the Consolidated Financial Statements for further details).
Income Taxes
The effective tax rate for the nine months ended September 30, 2017 was 15.0%. This compares to an effective tax rate of 15.2% for the comparable period of 2016. The effective tax rate for the nine months ended September 30, 2017 was influenced by earnings in international jurisdictions currently under an income tax holiday and the distribution of income between the U.S. and international tax jurisdictions. Without a $2.0 million benefit related to excess taxes on equity compensation, $0.2 million benefit related to return to provision, $3.9 million benefit related to restructuring expenses and $1.3 million benefit related to businesses held for sale, the Company’s effective tax rate for the nine months ended September 30, 2017 would have been 22.3%.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Facility. During the nine months ended September 30, 2017, we generated positive operating cash flows of $149.6 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months.
We manage a centralized global treasury function in the United States with a focus on concentrating and safeguarding our global cash and cash equivalents. While the majority of our cash is held outside the U.S., we prefer to hold U.S. Dollars in addition to the local currencies of our foreign subsidiaries. We expect to use our offshore cash to support working capital and growth of our foreign operations. While there are no assurances, we believe our global cash is protected given our cash management practices, banking partners and utilization of diversified, high quality investments.
We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts and interest rate swaps through our cash flow hedging program. Please refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.
The following discussion highlights our cash flow activities during the nine months ended September 30, 2017 and 2016.
Cash and Cash Equivalents
We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $78.8 million and $55.3 million as of September 30, 2017 and December 31, 2016, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.
We reinvest our cash flows to grow our client base, expand our infrastructure, for investment in research and development, for strategic acquisitions, for the purchase of our outstanding stock and to pay dividends.
Cash Flows from Operating Activities
For the nine months ended September 30, 2017 and 2016, net cash flows provided by operating activities was $149.6 million and $110.8 million, respectively. The increase was primarily due to a $41.9 million decrease in payments made for operating expenses, an $18.8 million increase in collections for deferred revenue, offset by a $10.3 million decrease in cash collected from accounts receivable.
Cash Flows from Investing Activities
For the nine months ended September 30, 2017 and 2016, we reported net cash flows used in investing activities of $126.3 million and $39.2 million, respectively. The increase was due to a $5.1 million increase in capital expenditures and an additional $81.7 million related to funding for an acquisition.
39
Cash Flows from Financing Activities
For the nine months ended September 30, 2017 and 2016, we reported net cash flows used in financing activities of $1.4 million and $61.0 million, respectively. The change in net cash flows from 2016 to 2017 was primarily due to a $8.7 million increase in the Credit Facility, a $39.0 million decrease in purchases of our outstanding common stock, a $12.9 million decrease in contingent consideration and purchase of non-controlling interest payments and a decrease of $1.9 million related to the 2016 payment of debt issuance costs.
Free Cash Flow
Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to an increase in cash flow from working capital. Free cash flow was $105.7 million and $72.0 million for the nine months ended September 30, 2017 and 2016, respectively.
Presentation of Non-GAAP Measurements
Free Cash Flow
Free cash flow is a non-GAAP liquidity measurement. We believe that free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property, plant and equipment. Free cash flow is not a measure determined by GAAP and should not be considered a substitute for “income from operations,” “net income,” “net cash provided by operating activities,” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful, in addition to the most directly comparable GAAP measure of “net cash provided by operating activities,” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also includes cash that may be necessary for acquisitions, investments and other needs that may arise.
The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|||||||||
|
|
|
|
2016 |
|
2017 |
|
2016 |
|
|||||
|
Net cash provided by operating activities |
|
$ |
24,188 |
|
$ |
55,793 |
|
$ |
149,643 |
|
$ |
110,838 |
|
|
Less: Purchases of property, plant and equipment |
|
|
14,343 |
|
|
11,120 |
|
|
43,932 |
|
|
38,863 |
|
|
Free cash flow |
|
$ |
9,845 |
|
$ |
44,673 |
|
$ |
105,711 |
|
$ |
71,975 |
|
Obligations and Future Capital Requirements
Future maturities of our outstanding debt and contractual obligations as of September 30, 2017 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
1 to 3 |
|
3 to 5 |
|
Over 5 |
|
|
|
|
||||
|
|
|
1 Year |
|
Years |
|
Years |
|
Years |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility(1) |
|
$ |
6,702 |
|
|
13,405 |
|
|
257,793 |
|
|
— |
|
$ |
277,900 |
|
|
Equipment financing arrangements |
|
|
3,216 |
|
|
4,675 |
|
|
1,378 |
|
|
— |
|
|
9,269 |
|
|
Contingent consideration |
|
|
1,178 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,178 |
|
|
Purchase obligations |
|
|
10,761 |
|
|
8,589 |
|
|
1,007 |
|
|
— |
|
|
20,357 |
|
|
Operating lease commitments |
|
|
44,438 |
|
|
59,522 |
|
|
36,894 |
|
|
25,661 |
|
|
166,515 |
|
|
Other debt |
|
|
2,763 |
|
|
3,388 |
|
|
387 |
|
|
— |
|
|
6,538 |
|
|
Total |
|
$ |
69,058 |
|
$ |
89,579 |
|
$ |
297,459 |
|
$ |
25,661 |
|
$ |
481,757 |
|
|
(1) |
Includes estimated interest payments based on the weighted-average interest rate, unused commitment fees, current interest rate swap arrangements, and outstanding debt as of September 30, 2017. |
40
|
· |
Contractual obligations to be paid in a foreign currency are translated at the period end exchange rate. |
|
· |
Purchase obligations primarily consist of outstanding purchase orders for goods or services not yet received, which are not recognized as liabilities in our Consolidated Balance Sheets until such goods and/or services are received. |
|
· |
The contractual obligation table excludes our liabilities of $4.0 million related to uncertain tax positions because we cannot reliably estimate the timing of cash payments. |
Our outstanding debt is primarily associated with the use of funds under our Credit Agreement to fund working capital, repurchase our common stock, pay dividends, and for other cash flow needs across our global operations.
Future Capital Requirements
We expect total capital expenditures in 2017 to be approximately 4.4% of revenue. Approximately 70% of these expected capital expenditures are to support growth in our business and 30% relate to the maintenance for existing assets. The anticipated level of 2017 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional delivery center capacity as well as enhancements to our technological infrastructure.
The amount of capital required over the next 12 months will depend on our levels of investment in infrastructure necessary to maintain, upgrade or replace existing assets. Our working capital and capital expenditure requirements could also increase materially in the event of acquisitions or joint ventures, among other factors. These factors could require that we raise additional capital through future debt or equity financing. We can provide no assurance that we will be able to raise additional capital upon commercially reasonable terms acceptable to us.
Client Concentration
During the nine months ended September 30, 2017, one of our clients represented 9.5% of our total revenue. Our five largest clients, collectively, accounted for 35.2% and 36.4% of our consolidated revenue for the three months ended September 30, 2017 and 2016, respectively. Our five largest clients, collectively, accounted for 34.3% and 35.8% of our consolidated revenue for the nine months ended September 30, 2017 and 2016, respectively. We have experienced long-term relationships with our top five clients, ranging from 10 to 21 years, with the majority of these clients having completed multiple contract renewals with us. The relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis and varies greatly based upon specific contract terms. In addition, clients may adjust business volumes served by us based on their business requirements. We believe the risk of this concentration is mitigated, in part, by the long-term contracts we have with our largest clients. Although certain client contracts may be terminated for convenience by either party, we believe this risk is mitigated, in part, by the service level disruptions and transition/migration costs that would arise for our clients.
The contracts with our five largest clients expire between 2018 and 2020. Additionally, a particular client may have multiple contracts with different expiration dates. We have historically renewed most of our contracts with our largest clients. However, there is no assurance that future contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated financial position, consolidated results of operations, or consolidated cash flows due to adverse changes in financial and commodity market prices and rates. Market risk also includes credit and non-performance risk by counterparties to our various financial instruments. We are exposed to market risk due to changes in interest rates and foreign currency exchange rates (as measured against the U.S. dollar); as well as credit risk associated with potential non-performance of our counterparty banks. These exposures are directly related to our normal operating and funding activities. We enter into derivative instruments to manage and reduce the impact of currency exchange rate changes, primarily between the U.S. dollar/Philippine peso, the U.S. dollar/Mexican peso, and the Australian dollar/Philippine peso. We enter into interest rate derivative instruments to reduce our exposure to interest rate
41
fluctuations associated with our variable rate debt. To mitigate against credit and non-performance risk, it is our policy to only enter into derivative contracts and other financial instruments with investment grade counterparty financial institutions and, correspondingly, our derivative valuations reflect the creditworthiness of our counterparties. As of the date of this report, we have not experienced, nor do we anticipate, any issues related to derivative counterparty defaults.
Interest Rate Risk
We previously entered into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. The interest rate on our Credit Agreement is variable based upon the Prime Rate, the Federal Funds rate, or LIBOR and, therefore, is affected by changes in market interest rates. As of September 30, 2017, we had $255.0 million of outstanding borrowings under the Credit Agreement. Based upon average outstanding borrowings during the three and nine months ended September 30, 2017, interest accrued at a rate of approximately 2.3% and 2.1% per annum, respectively. If the Prime Rate or LIBOR increased by 100 basis points during the quarter, there would be a $1.0 million of additional interest expense per $100.0 million of outstanding borrowing under the Credit Agreement.
The Company’s interest rate swap arrangement has expired as of May 31, 2017 and no additional swaps have been entered into. As of December 31, 2016 the outstanding interest rate swap was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Notional |
|
Variable Rate |
|
Fixed Rate |
|
Commencement |
|
Maturity |
|
|
|
|
Amount |
|
Received |
|
Paid |
|
Date |
|
Date |
|
||
|
Swap |
|
$ |
15 million |
|
1 - month LIBOR |
|
3.14 |
% |
May 2012 |
|
May 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Risk
Our subsidiaries in Bulgaria, Costa Rica, Mexico, Poland, and the Philippines use the local currency as their functional currency for paying labor and other operating costs. Conversely, revenue for these foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. dollars or other foreign currencies. As a result, we may experience foreign currency gains or losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. For the nine months ended September 30, 2017 and 2016, revenue associated with this foreign exchange risk was 27% and 33% of our consolidated revenue, respectively.
In order to mitigate the risk of these non-functional foreign currencies weakening against the functional currencies of the servicing subsidiaries, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, though not 100%, of the projected foreign currency exposure related to client programs served from these foreign countries through our cash flow hedging program. While our hedging strategy can protect us from adverse changes in foreign currency rates in the short term, an overall weakening of the non-functional foreign currencies would adversely impact margins in the segments of the servicing subsidiary over the long term.
Cash Flow Hedging Program
To reduce our exposure to foreign currency exchange rate fluctuations associated with forecasted revenue in non-functional currencies, we purchase forward and/or option contracts to acquire the functional currency of the foreign subsidiary at a fixed exchange rate at specific dates in the future. We have designated and account for these derivative instruments as cash flow hedges for forecasted revenue in non-functional currencies.
While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could adversely affect our consolidated operating results.
42
Our cash flow hedging instruments as of September 30, 2017 and December 31, 2016 are summarized as follows (in thousands). All hedging instruments are forward contracts, except as noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
U.S. Dollar |
|
|
% Maturing |
|
|
|
||
|
|
|
Notional |
|
Notional |
|
|
in the next |
|
|
Maturing |
|
|
|
As of September 30, 2017 |
|
Amount |
|
Amount |
|
|
12 months |
|
|
Through |
|
|
|
Philippine Peso |
|
10,490,000 |
|
|
218,413 |
(1) |
|
53.2 |
% |
|
August 2021 |
|
|
Mexican Peso |
|
1,774,000 |
|
|
104,652 |
|
|
37.2 |
% |
|
May 2021 |
|
|
|
|
|
|
$ |
323,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
U.S. Dollar |
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
Notional |
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
Philippine Peso |
|
14,315,000 |
|
|
301,134 |
(1) |
|
|
|
|
|
|
|
Mexican Peso |
|
2,089,000 |
|
|
129,375 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
430,509 |
|
|
|
|
|
|
|
|
(1) |
Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on September 30, 2017 and December 31, 2016. |
The fair value of our cash flow hedges at September 30, 2017 was assets/(liabilities) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in the |
|
|
|
|
|
|
Next 12 Months |
|
|||
|
Philippine Peso |
|
|
(15,688) |
|
|
(9,399) |
|
|
Mexican Peso |
|
|
(13,785) |
|
|
(7,617) |
|
|
|
|
$ |
(29,473) |
|
$ |
(17,016) |
|
Our cash flow hedges are valued using models based on market observable inputs, including both forward and spot foreign exchange rates, implied volatility, and counterparty credit risk. The increase in fair value from December 31, 2016 largely reflects a broad weakening in the U.S. dollar.
We recorded net losses of approximately $17.7 million and $18.9 million for settled cash flow hedge contracts and the related premiums for the nine months ended September 30, 2017 and 2016, respectively. These losses were reflected in Revenue in the accompanying Consolidated Statements of Comprehensive Income (Loss). If the exchange rates between our various currency pairs were to increase or decrease by 10% from current period-end levels, we would incur a material gain or loss on the contracts. However, any gain or loss would be mitigated by corresponding increases or decreases in our underlying exposures.
Other than the transactions hedged as discussed above and in Part I, Item 1. Financial Statements, Note 6 to the Consolidated Financial Statements, the majority of the transactions of our U.S. and foreign operations are denominated in their respective local currency. However, transactions are denominated in other currencies from time-to-time. We do not currently engage in hedging activities related to these types of foreign currency risks because we believe them to be insignificant as we endeavor to settle these accounts on a timely basis. For the nine months ended September 30, 2017 and 2016, approximately 25% and 22%, respectively, of revenue was derived from contracts denominated in currencies other than the U.S. Dollar. Our results from operations and revenue could be adversely affected if the U.S. Dollar strengthens significantly against foreign currencies.
Fair Value of Debt and Equity Securities
We did not have any investments in marketable debt or equity securities as of September 30, 2017 or December 31, 2016.
43
ITEM 4. CONTROLS AND PROCEDURES
This report includes the certifications of our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”) required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended) are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our CEO and CFO, to allow timely decisions regarding required disclosures.
Management of the Company, with the participation of its CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017. Based on that evaluation, as of the end of the period covered by this Form 10-Q, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective to provide reasonable assurance because of the material weaknesses in our internal control over financial reporting.
At the year ended December 31, 2016, material weaknesses existed in the Company’s internal control over financial reporting. Certain material weaknesses that existed at the year ended December 31, 2016 continued to exist as of September 30, 2017. These material weaknesses are fully described in our Annual Report on Form 10-K for the year ended December 31, 2016.
While these material weaknesses did not result in errors that were material to our annual or interim financial statements, they could result in misstatements of our consolidated financial statements and disclosures which would result in material misstatement of our consolidated financial statements and disclosures which would not be prevented or detected.
Notwithstanding such material weaknesses in internal control over financial reporting, our CEO and CFO have concluded that our consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Inherent Limitations of Internal Controls
Our management, including the CEO and CFO, believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal controls must consider the benefits of controls relative to their costs. Inherent limitations within internal controls include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of controls. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. While the objective of the design of any system of controls is to provide reasonable assurance of the effectiveness of controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such assumptions, while reasonable, may not take into account all potential future conditions. Thus, even effective internal control over financial reporting can only provide reasonable assurance of achieving their objectives. Therefore, because of the inherent limitations in cost effective internal controls, misstatements due to error or fraud may occur and may not be prevented or detected.
44
Remediation of Prior Material Weakness
The following captures the progress made by management related to the revenue material weakness that has been remediated.
Revenue: Management previously identified a material weakness in the design and operating effectiveness of controls over the revenue process. During 2016, management took the necessary steps to redesign the control framework, including the implementation of (i) a revenue quality assurance organization, (ii) standardized contract and invoice review and approval templates, and (iii) a document storage system for improved organization and evidence of review. Additionally, management established a quarterly control owner certification process and invested in employee training. Management completed the design and implementation of this control framework in the quarter ended December 31, 2016. Based on the results of our testing, management has concluded that the controls are adequately designed and have operated effectively for a sufficient period of time during 2017. Accordingly, the revenue material weakness is remediated.
Remediation Efforts and Status of Remaining Material Weaknesses
Impairments: During 2016, management has taken the necessary steps to redesign the control framework, including implementation of specific preparation and review procedures to (i) ensure the accuracy of the valuation models used to calculate fair market values, (ii) validate the source of the financial forecasts, and (iii) evidence the assessment of the models for reasonableness. In addition, TeleTech has engaged a third-party valuation expert to assist management with the underlying valuation models supporting the goodwill and intangible impairment assessments. Management has completed the design and implementation of the control framework and has tested the impairment controls in the quarter ending December 31, 2016. Management will continue to test the controls for impairment in 2017 to ensure they have operated for a sufficient period of time before concluding on remediation.
Control Environment: During 2016 TeleTech invested significantly in the quality of our accounting talent including management, technical, process improvement and financial system roles. Additionally, we implemented a number of programs to: improve our talent acquisition and retention platforms; enhance technical, transactional and control knowledge of our accounting teams; create a culture of accountability and control. These programs have significantly improved the stability of our global accounting organization. In order to consider this material weakness to be fully remediated, we believe additional time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part I, Item 1. Financial Statements, Note 10 to the Consolidated Financial Statements of this Form 10-Q is hereby incorporated by reference.
There were no material changes to the risk factors described in Item 1A. Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2016.
45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Following is the detail of the issuer purchases made during the quarter ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares |
|
Value of Shares that |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
May Yet Be |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Purchased Under |
|
|
|
|
|
Total Number |
|
|
|
|
Announced |
|
the Plans or |
|
|
|
|
|
of Shares |
|
Average Price |
|
Plans or |
|
Programs (In |
|
||
|
Period |
|
Purchased |
|
Paid per Share |
|
Programs |
|
thousands)(1) |
|
||
|
|
|
|
|
|
|
|
|
$ |
26,580 |
|
|
|
|
— |
|
$ |
— |
|
— |
|
$ |
26,580 |
|
|
|
|
— |
|
$ |
— |
|
— |
|
$ |
26,580 |
|
|
|
|
— |
|
$ |
— |
|
— |
|
$ |
26,580 |
|
|
|
Total |
|
— |
|
|
|
|
— |
|
|
|
|
|
(1) |
In November 2001, our Board of Directors (“Board”) authorized a stock repurchase program with the objective of increasing stockholder returns. The Board periodically authorizes additional increases to the program. The most recent Board authorization to purchase additional common stock occurred in February 2017, whereby the Board increased the program allowance by $25.0 million. Since inception of the program through September 30, 2017, the Board has authorized the repurchase of shares up to a total value of $762.3 million, of which we have purchased 46.1 million shares on the open market for $735.8 million. As of September 30, 2017 the remaining amount authorized for repurchases under the program was approximately $26.6 million. The stock repurchase program does not have an expiration date. |
None
46
|
|
|
|
|
Exhibit No. |
|
Exhibit Description |
|
|
|
|
|
10.85* |
|
Employment Agreement between Anthony Y. Tsai and TeleTech Services Corporation effective as of September 5, 2017. |
|
|
|
|
| 10.92 |
|
|
|
|
|
|
|
10.97* |
|
|
|
|
|
|
|
10.98* |
|
|
|
|
|
|
|
31.1* |
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
32.1* |
|
|
|
|
|
|
|
32.2* |
|
|
|
|
|
|
|
101.INS** |
|
XBRL Instance Document |
|
|
|
|
|
101.SCH** |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL** |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.LAB** |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
101.PRE** |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
101.DEF** |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Filed or furnished herewith. |
|
|
|
|
|
** |
|
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Notes to the Consolidated Financial Statements, (ii) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016 (unaudited), (iv) Consolidated Statements of Stockholders’ Equity as of and for the nine months ended September 30, 2017 (unaudited), and (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited). |
|
|
|
|
47
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
TELETECH HOLDINGS, INC. |
|
|
|
(Registrant) |
|
|
|
|
|
Date: November 8, 2017 |
By: |
|
|
|
|
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: November 8, 2017 |
By: |
|
|
|
|
|
|
|
|
Chief Financial Officer |
48
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 2/11/21 | ||||
| 12/15/19 | ||||
| 12/15/18 | ||||
| 1/1/18 | ||||
| 12/31/17 | 10-K, 5 | |||
| 12/15/17 | ||||
| Filed on: | 11/8/17 | 8-K, 8-K/A | ||
| 10/31/17 | ||||
| 10/30/17 | 8-K | |||
| 10/17/17 | ||||
| 10/5/17 | ||||
| For Period end: | 9/30/17 | |||
| 9/21/17 | 4, 8-K | |||
| 9/5/17 | 3, 8-K | |||
| 9/1/17 | ||||
| 8/31/17 | ||||
| 8/1/17 | ||||
| 7/31/17 | ||||
| 7/1/17 | 4 | |||
| 6/30/17 | 10-Q | |||
| 5/31/17 | 4 | |||
| 4/3/17 | 4, 8-K | |||
| 1/1/17 | ||||
| 12/31/16 | 10-K | |||
| 12/15/16 | 4 | |||
| 11/9/16 | 8-K | |||
| 9/30/16 | 10-Q, NT 10-Q | |||
| 3/31/16 | 10-Q | |||
| 2/11/16 | ||||
| 1/1/16 | ||||
| 12/31/15 | 10-K, 5 | |||
| 3/16/15 | ||||
| 3/6/15 | 4 | |||
| 2/24/15 | 4 | |||
| 1/1/15 | ||||
| 12/31/14 | 10-K, 5, ARS | |||
| 7/1/14 | 4 | |||
| 6/3/13 | 3, 8-K | |||
| List all Filings | ||||