UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20142015
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-11919
TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 84-1291044 | ||
(State or other jurisdiction of
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9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(303) 397-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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).
Yesx☒ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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Non-accelerated filer |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of June 30, 2014,2015, the last business day of the registrant’s most recently completed second fiscal quarter, there were 48,732,50248,232,405 shares of the registrant’s common stock outstanding. The aggregate market value of the registrant’s voting and non-voting common stock that was held by non-affiliates on such date was $495,904,505$435,686,329 based on the closing sale price of the registrant’s common stock on such date as reported on the NASDAQ Global Select Market.
As of February 28, 2015,March 7, 2016, there were 48,307,89348,343,409 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the proxy statement for the registrant’s 20152016 annual meeting of stockholders.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
DECEMBER 31, 20142015 FORM 10-K
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC. |
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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTSSTATEMENT
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This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, relating to our operations, expected financial position, results of operation, and other business matters that are based on our current expectations, assumptions, and projections with respect to the future, and are not a guarantee of performance. In this report, when we use words such as “may,” “believe,” “plan,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “would,” “could,” “target,” or similar expressions, or when we discuss our strategy, plans, goals, initiatives, or objectives, we are making forward-looking statements.
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 are not limited to factors discussed in the section of this report entitled “Risk Factors”. Our forward looking statements speak only as of the date that this report 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.
AVAILABILITY OF INFORMATIONINFORMATION
TeleTech Holdings, Inc.’s principal executive offices are located at 9197 South Peoria Street, Englewood, Colorado 80112. Electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and any amendments to these reports are available free of charge by (i) visiting our website at http://www.teletech.com/investors/sec-filings/ or (ii) sending a written request to Investor Relations at our corporate headquarters or to investor.relations@teletech.com.investor.relations@teletech.com. TeleTech’s SEC filings are posted on our corporate website as soon as reasonably practical after we electronically file such materials with, or furnish them to, the SEC. Information on our website is not incorporated by reference into this report.
You may also access any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549 (telephone number 1-800-SEC-0330); or via the SEC’s public website at www.sec.gov.www.sec.gov.
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TeleTech Holdings, Inc. (“TeleTech”, “the Company”, “we”, “our” or “us”) is a customer engagement management service provider that delivers integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of productproducts and service capabilitiesservices allows us to design and deliver enhanced, value-drivenengaging, outcome-based customer experiences across numerous communicationinteraction channels. Our solutions are supported by 46,00044,000 employees delivering services in 24 countries from 5967 delivery centers on six continents. Our revenue for fiscal 20142015 was $1,242$1,287 million.
Since our establishment as a Delaware corporation in 1982, we have helped clients strengthen their customer relationships, brand recognition and loyalty through customer engagement solutions. 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 more than 250approximately 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 traditionalheritage business process outsourcing services of our CMS segment into higher-value consulting, data analytics, digital marketing and technology-enabled services. Of the $1,242$1,287 million in revenue we reported in 2014,2015, approximately 26%29% or $318$373 million came from the CGS, CTS and CSS segments (our “Emerging Segments”), focused on customer-centric strategy, growth or technology-based services, with the remainder of our revenue coming from the traditionalheritage business process outsourcing focused CMS segment.
Consistent with our growth and diversification strategy, we continue to invest in technology differentiation, analytics, cloud computing and digital marketing. We also invest in businesses that accelerate our strategy: in 2014, we acquired Sofica Group, a Bulgarian customer management services company which provides our clients with the capabilities of 18 additional languages while contributing to the geographic and time zone diversity of our footprint; and rogenSi, a global leadership, change management and sales consulting company that further diversifies our consulting offerings.
Our business is structured and reported in the following four segments:
Operating Segments and Industry Verticals
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Healthcare | Media and Entertainment | Healthcare |
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Our strong balance sheet, cash flows from operations and access to debt and capital markets providehave 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.program and regular semi-annual dividends. As of December 31, 2014,2015, our cumulative authorized repurchase allowance was $637.3$662.3 million, of which we repurchased 42.142.8 million shares for $625.5$642.8 million. For the period from January 1, 20152016 through February 28, 2015,March 7, 2016, we purchased 212,100217,346 additional shares at a cost of $4.7$5.6 million. The stock repurchase program does not have an expiration date. Effective February 24, 2015,18, 2016, the Board of Directors authorized an additionalincrease in the share repurchase allowance of $25 million for stock repurchases.
million.
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 will bewas paid on March 16, 2015 to shareholders of record as of March 6, 2015. An additional dividend of $0.18 per common share was paid on October 14, 2015 to shareholders of record as of September 30, 2015. Effective February 18, 2016, the Board of Directors authorized an increase in the semi-annual dividend to $0.185 per common share, payable on April 15, 2016 to shareholders of record as of March 31, 2016.
Our Market Opportunity
We believe that exceptional customer engagement creates sustainable economic value for our clients and our market opportunities are defined by the following trends:
· | Increasing focus on customer engagement to sustain competitive advantage. — Our ability to sustain a competitive advantage based on price or product differentiation has significantly narrowed given the speed of technological innovation. As customers become more connected and widely broadcast their experiences across a variety of social networking channels, the quality of the experience has a profound impact on brand loyalty and business performance. We believe customers are increasingly shaping their attitudes, behaviors and willingness to recommend or stay with a brand on the totality of their experience, including not only the superiority of the product or service but more importantly on the quality of their ongoing service interactions. Given the strong correlation between high customer satisfaction and improved profitability, we believe more companies are increasingly focused on selecting third-party partners, such as TeleTech, who can deliver an analytic-driven, integrated solution that increases the lifetime value of each customer relationship versus merely reducing costs. |
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· | Increasing percentage of companies consolidating their customer engagement requirements with the few select partners who can deliver measurable business outcomes by offering an integrated, technology-rich solution. — The proliferation of mobile communication technologies and devices along with customers’ increased access to information and heightened expectations are driving the need for companies to implement enabling technologies that ensure customers have the best experience across all devices and channels. These two-way interactions need to be received or delivered seamlessly via the customer channel of choice and include voice, email, chat, SMS text, intelligent self serve, virtual agents and the social network. We believe companies will continue to consolidate to third-party partners, like TeleTech, who have demonstrated expertise in increasing brand value by delivering a holistic, integrated customer-centric solution that spans strategy to execution versus the time, expense and often failed returns resulting from linking together a series of point solutions from different providers. |
· | Focus on speed-to-market by companies launching new products or entering new geographic locations. — As companies broaden their product offerings and enter new markets, they are looking for partners that can provide speed-to-market while reducing their capital and operating risk. To achieve these benefits, companies select us because of our extensive operating track record, established global footprint, financial strength, commitment to innovation, and our ability to quickly scale infrastructure and complex business processes around the globe in a short period of time while assuring a high-quality experience for their customers. |
Our Strategy
We aim to grow our revenue and profitability by focusing on higher margin, data and technology-enabled services that drive a superior customer experience and engagement. To that end we plan to continue:
· | Building deeper, more strategic relationships with existing global clients to drive enduring, transformational change within their organizations; |
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| Pursuing new clients who lead their respective industries and who are committed to the customer engagement as a differentiator; |
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| Investment in our Global Markets and Industries sales leadership team; |
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| Executing strategic acquisitions that further complement and expand our integrated solution; and |
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| Investing in innovative technology-enabled platforms and innovating through proprietary technology advancements, broader and globally protected intellectual property, and process optimization. |
Our Integrated Service Offerings and Business Segments
We operate our business utilizinghave four operating and reportable segments, which provide an integrated set of services offering through design, technology enablement, management and growth:including:
Customer Strategy Services
We typically begin by engaging our clients at a strategic level. Through our strategy, change management and analytics-driven 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 environments 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 proprietary Humanify™ technology, we also provide data-driven context aware 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 $1$2 billion in client revenue annually via the 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. As a result of our acquisition of the digital agency Web Metro,WebMetro, we have developed an integrated marketing-to-sales platform that links online searches to live sales through a closed loop, multichannel interface. This platform uses proprietary tools and methodology to capture and use more than 400 marketing and sales data points to engage with customers in relevant conversations.
Based on our clients’ requirements, we provide our services on an integrated cross-business segment and on a discrete basis.
Additional information with respect to our segments and geographic footprint is containedincluded in Part II, Item 8. Financial Statements and Supplementary Data, Note 3 to the Consolidated Financial Statements.
Our Competitive Strengths
We believe our integrated suite of services and holistic approach to customer engagement is an industry differentiator. Our end-to-end capabilities, from customer strategy and technology services to customer management and growth services, improve customer outcomes, increase satisfaction and loyalty, strengthen operating effectiveness and efficiencies, and drive long-term growth and profitability for our clients. We also believe that our technological solutions, innovative human capital strategies and globally scaled and deployed best practices are key elements to our continued industry leadership.
As the complexity and pace of technological change required to deliver a multi-channel customer engagement increases, the successful execution of our principal corporate strategies is based on our competitive strengths, which are briefly described below:
· | Our industry reputation and leadership position with over three decades of expertise delivering integrated customer engagement solutions provides our clients with the ability to enable, manage and grow the value of every customer relationship; |
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· | Multi-channel, multi-modal solutions that meet the rapidly changing profile of the customer and their heightened expectations; |
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| Scalable technology and human capital infrastructure using globally deployed best practices to ensure a consistent, high-quality service; |
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| Tailored and optimized customer care delivery through the use of proprietary workforce hiring, training and performance optimization methodology and tools; and |
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| Commitment to continued product and services innovation that enhances the strategic capabilities of our clients. |
Technological Excellence
Our technology platform is based on a secure, private, 100% internet protocol based infrastructure. This architecture enables us to centralize and standardize our worldwide delivery capabilities resulting in improved scalability and quality of delivery for our clients, as well as lower capital, and lower information technology (“IT”) operating costs.
The foundation of this platform is our four IP hosting centers known as TeleTech GigaPOPs®, which are located on three continents. Our GigaPOPs® provide a fully integrated suite of voice and data routing, workforce management, quality monitoring, business analytic and storage capabilities, enabling seamless operations from any location around the globe. This hub and spoke model enables us to provide our services at the lowest cost while increasing scalability, reliability, asset utilization and the diversity of our service offerings. It also provides an effective redundancy to address ordinary course system interruptions and outages due to natural disasters and other force majeure conditions.
To ensure high end-to-end security and reliability of this critical infrastructure, we monitor and manage the TeleTech GigaPOPs® 24 x 7, 365 days per year from several strategically located global command centers as well as providing redundant, fail-over capabilities for each GigaPOP® to address ordinary course system interruptions and outages due to natural disasters and other force majeure conditions.
Importantly, this platform has become the foundation for new, innovative offerings including TeleTech’s cloud-based offerings, TeleTech@Home and our suite of human capital solutions.
Innovative Human Capital Strategies
Our globally located, highly trained employees are a crucial component of the success of our business. We have made significant investments in proprietary technologies, management tools, methodologies and training processes in the areas of talent acquisition, learning services, knowledge management, workforce collaboration and performance optimization. These capabilities are the culmination of more than three decades of experience in managing large, global workforces combined with the latest technology, innovation and strategy in the field of human capital management. This capability has enabled us to deliver a consistent, scalable and flexible workforce that is highly engaged in achieving or exceeding our clients’ business objectives.
Globally Deployed Best Operating Practices
Globally deployed best operating practices assure that we deliver a consistent, scalable, high-quality experience to our clients’ customers from any of our 5967 delivery centers and work from home associates around the world. Standardized processes include our approach to attracting, screening, hiring, training, scheduling, evaluating, coaching and maximizing associate performance to meet our clients’ needs. We provide real-time reporting on performance across the globe to ensure consistency of delivery. In addition, this information provides valuable insight into what is driving customer inquiries, enabling us to proactively recommend process changes to our clients to optimize their customers’ experience.
Our global operating model includes delivery centers in 1417 countries on six continents that operate 24 hours a day, 365 days a year. New delivery centers are established and existing centers are expanded or scaled down to accommodate anticipated business demands or specific client needs. We continue to expand our capacity in the Philippines and Latin America to leverage demand and favorable cost efficiencies, and are exploring opportunities in Central Europe and Africa to augment our multi-lingual service offerings and continue to diversify our footprint.
Of the 1417 countries from which we provide customer management solutions, nine11 provide services for onshore clients including the U.S., Australia, Brazil, China, Germany, Ireland, Macedonia, New Zealand, South Africa, Thailand, and the United Kingdom. The total number of workstations in these countries is 11,300,12,900, or 36% of our total delivery capacity. The other fivesix countries provide services, partially or entirely, for offshore clients including Bulgaria, Canada, Costa Rica, Mexico, Poland, and the Philippines. The total number of workstations in these countries is 19,900,22,500 or 64% of our total delivery capacity.
See Item 1A. Risk Factors for a description of the risks associated with our foreign operations.
Clients
We develop long-term relationships with Global 1000 companies in customer intensive industries, whose business complexities and customer focus requires a partner that can quickly and globally scale integrated technology and data-enabled services.
In 2014,2015, our top five and ten clients represented 38%35% and 50%48% of total revenue, respectively; and one of our clients, Telstra Corporation Limited, represented 11%10% of our total annual revenue. In several of our operating segments, we enter into long-term relationships which provide us with a more predictable revenue stream. Although most of our contracts can be terminated for convenience by either party, our relationships with our top five clients have ranged from two to 1819 years including multiple contract renewals for several of these clients. In 2014,2015, we had a 97%96% client retention rate for the combined Customer Management Services and Customer Growth Services segments.
Certain of our communications clients provide us with telecommunication services through arm’s length negotiated transactions. These clients currently represent approximately 17% of our total annual revenue. Expenditures under these supplier contracts represent less than one percent of our total operating costs.
Competition
We are a diverse, global customer engagement management company. Our competitors vary by geography and business segment, and range from large multinational corporations to smaller, narrowly-focused enterprises. Across our lines of business, the principal competitive factors include: client relationships, technology and process innovation; integrated solutions, operational performance and efficiencies, pricing, brand recognition and financial strength.
Our strategy in maintaining market leadership is to prudently invest, innovate and provide integrated value-driven services, all centered around customer engagement management. Today, we are executing on a more expansive, holistic strategy by transforming our business into higher-value offerings through organic investments and strategic acquisitions. As we execute, we are differentiating ourselves in the marketplace and entering new markets that introduce us to an expanded competitive landscape.
In our core customer care and management competency, we primarily compete with the in-house customer management operations of our current and potential clients, as well as other companies that provide customer care and business process outsourcing (“BPO”) services, including: Convergys, Sykes, and Teleperformance, among others. As we expand our offerings into customer engagement consulting, technology, and growth, we are competing with smaller specialized companies and divisions of multinational companies, including Bain & Company, McKinsey & Company, Accenture, IBM, AT&T, Interactive Intelligence, LiveOps, inContact, Five9, WPP, Publicis Groupe, Dentsu, Sitel, and others.
Employees
Our people are our most valuable asset. As of December 31, 2014,2015, we had 46,00044,000 employees in 24 countries on six continents. Although a small percentage of these employees are hired seasonally to address the fourth quarter and first quarter higher business volumes in retail, healthcare and other seasonal industries, most remain employed throughout the year and work at 5967 locations and through our @home environment. Approximately 67% of our employees are located outside of the U.S. Approximately 17%15% of our employees are covered by collective bargaining agreements, most of which are mandated under national labor laws outside of the United States. These agreements are subject to periodic renegotiations and we anticipate that they will be renewed in the ordinary course of business without material impact to our business or in a manner materially different from other companies covered by such industry-wide agreements.
Research, Innovation, Intellectual Property and Proprietary Technology
We recognize the value of innovation in our business and are committed to developing leading-edge technologies and proprietary solutions. Research and innovation has been a major factor in our success and we believe that it will continue to contribute to our growth in the future. We use our investment in research and development to create, commercialize and deploy innovative business strategies and high-value technology solutions.
We deliver value to our clients through, and our success in part depends on, certain proprietary technologies and methodologies. We leverage U.S. and foreign patent, trade secret, copyright and trademark laws as well as confidentiality, proprietary information non-disclosure agreements, and key staff non-competition agreements to protect our proprietary technology.
As of December 31, 20142015 we had 9492 patent applications pending in eight10 jurisdictions; and own 103120 U.S. and non-U.S. patents that we leverage in our operations and as market place differentiation for our service offerings. Our trade name, logos and names of our proprietary solution offerings are protected by their historic use and by trademarks and service marks registered in 59 countries.
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In addition to the other information presented in this Annual Report on Form 10-K, you should carefully consider the risks and uncertainties discussed in this section when evaluating our business. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations (including revenue and profitability) could be materially adversely affected and the market price of our stock may decline.
Our markets are highly competitive and we might not be able to compete effectively
The markets where we offer our services are highly competitive. Our future performance is largely dependent on our ability to compete successfully in markets we currently serve, while expanding into new, profitable markets. We compete with large multinational service providers (including the service arms of global technology providers); offshore service providers from lower-cost jurisdictions that offer similar services, often at highly competitive prices and more aggressive contract terms; niche solution or service providers that compete with us in a specific geographic markets, industry segments or service areas, including companies that rely on new technologies or delivery models; and in-house functions of large companies that use their own resources, rather than outsourcing customer care services we provide. Some of our competitors have greater financial or marketing resources than we do and, therefore, may be better able to compete.
Further, the recentcontinuing trend of consolidation in the technology sector and among business process outsourcing competitors in various geographies where we have operations may result in new competitors with greater scale, a broader footprint, better technologies and price efficiencies attractive to our clients. If we are unable to compete successfully and provide our clients with superior service and solutions at competitive prices, we could lose market share and clients to competitors, which would materially adversely affect our business, financial condition, and results of operations.
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If the TeleTech leadership team is unsuccessful in implementing our business strategy or if our new investments are not successful, the company’sour financial condition could be adversely affected
Our growth strategy included a diversification of our business beyond contact center customer care outsourcing to an integrated customer experience platform that unites innovative technologies, strategic consulting, data analytics, digital marketing, client growth solutions, and customer care focused system design and integration. The strategy also includes an accelerated investment in the development of proprietary technologies, and the deployment of a multi business line sales function. These investments in technologies, integrated solution development and sales, however, may not lead to increased revenue and profitability as we may not be successful in deploying our new products and services. If the company iswe are not successful in creating value from these investments, the investments and lack of new integrated sales could have a negative impact on the company’sour operating results and financial condition.
Our profitability could suffer if our cost-management strategies are unsuccessful
Our ability to improve or maintain our profitability is dependent on our ability to successfully manage our costs. Our cost management strategies include optimizing the alignment between the demand for our services and our resource capacity, the costs of service delivery, the cost of sales, and general and administrative costs, as a percentage of revenues. If we are not effective in managing our operating and administrative costs in response to changes in demand and pricing for our services; if we are unable to absorb or pass on to our clients the increases in our costs of operations, our results of operations could be materially adversely affected.
Cyber attacks on our systems and disclosure of personal information could result in harm to our reputation, legal liability, and service outages, any of which could adversely affect our business and results of operations
Our business is dependent upon our information technology systems. Information security breaches, computer viruses, interruption or loss of business data, DDoS (denial of service) attacks, and other cyber attacks on any of these systems could disrupt the normal operations of our contact centers, our cloud platform offerings, and our enterprise services, impeding our ability to provide critical services to our clients and preventing key personnel from being able to perform their duties or communicate within our organization. Our business involves the use, storage and transmission of information about our clients, customers of our clients, and our employees. While we take reasonable measures to protect the security of and unauthorized access to our systems and the privacy of personal and proprietary information that we access and store, our security controls over our systems may not prevent the improper access to or disclosure of this information. Such unauthorized access or disclosure could harm our reputation and subject us to liability under our contracts and laws, and could harm our reputation resulting in loss of revenue, and loss of business opportunities.
In recent years there have been an increasing number of high profile security breaches at otherprivate and public companies and government agencies, and security experts have warned about the growing risks of hackers, cyber criminals and othera broad range of potential attacks targeting information technology systems. While we have taken measures to protect our systems from intrusion, we cannot be certain that advances in cyber criminal capabilities, discovery of new system vulnerabilities, and attempts to exploit such vulnerabilities will not compromise or breach the technology protecting our systems and the information that we manage and control. New cyberCyber attacks may force us to expend significant additional resources in response to asystem disruptions or security breach,breaches, including additional investments in repairing system damage, increasingreconfiguring and rerouting systems to reduce vulnerabilities; cyber security protection costs, and litigatinglitigation and resolvingresolution of related legal claims. A significant security breach could materially harm our business, financial condition and operating results.
Continuing expansion of our service offerings into technology and consulting solutions subjects our business to different operational risk than our tradition business process outsourcing business
We continue to expand our services and solutions into new business areas such as technology and analytics, focused customer care consulting, and technology development and integration services. Expanding into new areas and providing services to new types of clients with different revenue models may expose us to additional operational and regulatory risks specific to these new areas. While our business process outsourcing contracts are usually long term arrangements, most consulting service contracts are short lived and require aggressive sales and contract renewal process; the services are usually paid based on milestone attainment that may be subject to subjective determination of achievement. Unless we effectively manage special risks involved in providing technology and strategic consulting services, our business may be materially adversely affected impacting our results of operations and financial position.
Our results of operations and ability to grow could be materially adversely affected if we cannot adapt our services offerings to changes in technology
Our success depends on our ability to develop and implement technology, consulting and outsourcing services and solutions that anticipate and respond to rapid and continuing changes in technology. Areas of significant change include mobility, cloud-based computing, and processing and analyzing large and unstructured data. Our growth and profitability will depend on our ability to develop and adopt new technologies that expand our existing solutions and service offerings to leverage new technological trends and developments, and achieve cost efficiencies in our operations. We may not be successful in anticipating or responding to new technology developments and our integration of new technologies may not achieve their intended cost reductions. Services and technologies offered by our competitors may make our service offerings obsolete. Our failure to innovate, maintain technological advantage, or respond effectively and timely to transformational changes in technology could have a material adverse effect on our business, financial condition, and results of operations.
Our cloud solutions present execution and competitive risks
We are devoting significant resources to extend our current cloud solutions which are and will continue to be materially dependent upon certain third party infrastructure and licensed software. There can be no assurance that such third parties will continue to support and maintain their products and services. In addition to certain software development costs, we are incurring costs to build and maintain infrastructure to support cloud computing services.
Certain new competitors offer alternative cloud-based services for consumers and business customers. While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provide us with a solid foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful.
If we are unable to attract and retain industry leaders for key positions in our business, our business and our strategy execution can be adversely impacted
Our business success depends on contributions of senior management and key personnel. Our ability to attract, motivate and retain key senior management staff is conditioned on our willingness to pay adequate compensation and incentives. We compete for top senior staffmanagement candidates with other, often larger, companies that at times have access to greater resources. Our ability to attract senior managersmanagement is also impacted by our requirement that members of senior staffmanagement sign non-compete agreements as a condition to joining TeleTech. If we are not able to attract and retain industry leaders, we would be unable to compete effectively and our growth may be limited, which could have a material adverse effect on our business, results of operations, and prospects.
A large portion of our revenue is generated from a limited number of clients and the loss of one or more of our clients could cause adversely effect on our business
We rely on strategic, long-term relationships with large, global companies in targeted industries. As a result, we derive a substantial portion of our revenue from relatively few clients. Our five and ten largest clients collectively represented 38%35% and 50%48% of our revenue in 2014;2015 while the largest client represented 11%10% of our revenue in 2014.
2015.
Although we have multiple engagements with each of our largest clients and all contracts are unlikely to terminate at the same time, the contracts with our five largest clients expire between 20152016 and 20172020 and there can be no assurance that these contracts will continue to be renewed at all or be renewed on favorable terms. The loss of all or part of a major client’s business could have a material adverse effect on our business, financial condition and results of operations, if the loss of revenue was not replaced with profitable business from other clients.
We serve clients in industries that have historically experienced a significant level of consolidation. If one of our clients is acquired by another company (including another one of our clients) our business volume and revenue may materially decrease due to the termination or phase out of an existing client contract, volume discounts or other contract concessions which could have an adverse effect on our business, financial condition, and results of operations.
9
Our delivery model involves geographic concentration exposing us to significant operational risks
Our business model is dependent on our service delivery centers and enterprise support functions being located in low cost jurisdictions around the globe. We have presence in 24 countries, but our customer care management delivery capacity and our back office functions are concentrated in the Philippines and Latin America, and our technology solutions delivery centers are concentrated in a few locations in the United States. Natural disasters (floods, winds and earthquakes), terrorist attacks, pandemics, insufficient infrastructure (large-scale utilities outages, telecommunication and transportation disruptions), labor or political unrest, and restriction on repatriation of funds at some of these locations may interrupt or limit our ability to operate or may increase our costs. Our business continuity and disaster recovery plans, while extensive, may not be effective, particularly if catastrophic events occur.
Our dependence on our delivery centers and enterprise services support functions in the Philippines, which is subject to frequent severe weather, natural disasters, and occasional security threats, represents a particular risk. This geographic concentration cancould result in a material adverse effect on our business, financial condition and results of operations. Although we procure business interruption insurance to cover some of these exposures, adequate insurance may not be available on an ongoing basis for a reasonable price.
Our growth of operations could strain our resources and cause our business to suffer
We plan to continue growing our business organically through aggressive expansion and sales efforts and through strategic acquisitions, while maintaining tight controls on our expenses and overhead. Lean overhead functions combined with focused growth may place a strain on our management systems, infrastructure and resources, resulting in internal control failures, missed opportunities, and staff attrition which could impact our business and results of operations.
Our results of operation and share price could be adversely affected if we are unable to maintain effective internal controls over financial reporting and we are not able to prevent or timely detect all errors or acts of fraud
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As disclosed in Item 9A.Controls and Procedures, our management has identified material weaknesses in our internal control over financial reporting related to the effectiveness of our control environment and controls over account reconciliations, journal entries, revenue, and impairments.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses discussed above, our management concluded that our internal control over financial reporting was not effective as of December 31, 2015. Although we are taking remedial actions in response to the identified material weaknesses in our internal control over financial reporting, there can be no assurances that we will be able to prevent future control deficiencies, including material weaknesses, from occurring, nor that our remediation actions will be successful. If additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements. These misstatements could result in restatements of our consolidated financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could lead to a decline in our stock price.
Any internal and disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Inherent limitations within a control system include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individuals acting alone or in collusion with others to override controls. Accordingly, because of the inherent limitations in the design of a cost effective control system, misstatements due to error or fraud may occur and may not always be prevented or timely detected, even if we are successful in remediating the material weaknesses previously identified by management.
10
Our financial results depend on our capacity utilization and our ability to forecast demand and make timely decisions about staffing levels, investments and operating expenses
Our ability to meet our strategic growth and profitability objectives depends on how effectively we manage our contact center capacity against the fluctuating and seasonal client demands. Predicting customer demand and making timely staffing level decisions, investments and other operating expenditure commitments in each of our delivery center locations is key to our successful project execution and profitability maximization. We can provide no assurance that we will continue to be able to achieve or maintain desired delivery center capacity utilization, because quarterly variations in client volumes, many of which are outside our control, can have a material adverse effect on our utilization rates. If our utilization rates are below expectations, because of our very high fixed costs of operation, our financial conditions and results of operations could be adversely affected.
If we cannot recruit, hire, train, and retain qualified employees in balance with the demand of our clients, our business will be adversely affected
Our business is labor intensive and our ability to locate and train employees with the right skills at the right price point is critical to achieving our growth objective. Demand for qualified personnel with multiple language capabilities and fluency in English may exceed supply. Employees with new backgrounds and skills may also be required to keep pace with evolving technologies and client demands. While we invest and make progress in employee retention, we continue to experience high employee turnover and are continuously recruiting and training replacement staff. Some of our facilities are located in geographies with low unemployment, which makes it costly to hire personnel, and in several jurisdictions, jurisdiction-specific wage regulations are changing quickly which make it difficult to recruit.recruit new employees. Our inability to attract and retain qualified personnel at costs acceptable under our contracts, our costs associated with attracting, training, and retaining employees, and the challenge of managing the continuously changing and seasonal client demands could have a material adverse affecteffect on our business, financial condition, and results of operations.
Our commercial success is subject to the terms of our client contracts, many of which can increase the volatility of our revenue and could impact our margins
Many of our contracts have termination for convenience clauses, which could have a material adverse effect on our results of operation. Although many of our contracts can be terminated for convenience, our relationships with our top five clients have ranged from two to 1819 years with the majority of these clients having completed multiple contract renewals with us. Yet, our contracts, do not guarantee a minimum revenue level or profitability, and clients may terminate them or materially reduce customer interaction volumes, which would reduce our earning potential. This could have a material adverse effect on our results of operations and makes it harder to make projections.
Many of our contracts utilize performance pricing that link some of our fees to the attainment of performance criteria, which could increase the variability of our revenue and operating margin. A majority of our contracts include performance clauses that condition our fees on the achievement of agreed-upon performance criteria. These performance criteria can be complex, and at times they are not entirely within our control. If we fail to satisfy our contract performance metrics, our revenue under the contracts and our operating margin are reduced.
We may not always offset increased costs with increased fees under long-term contracts. The pricing and other terms of our client contracts, particularly our long-term contact center agreements, are based on estimates and assumptions we make at the time we enter into these contracts. These estimates reflect our best judgments regarding the nature of the engagement and our expected costs to provide the contracted services and could differ from actual results. Not all our larger long-term contracts allow for escalation of fees as our cost of operations increase. While many of our contracts allow periodic fee adjustments based on increases in certain price indices, in the past several years, our payroll costs, including healthcare costs, have increased at rates much greater than increases in these indices. If we cannot negotiate long-term contract terms that provide for fee adjustments to reflect increases in our cost of service delivery, our business, financial conditions and results of operation would be materially impacted.
11
Our contracts seldom address the impacts of currency fluctuation on our costs of delivery. As we continue to leverage our global delivery model, more of our expenses aremay be incurred in currencies other than those in which we bill for services. An increase in the value of certain currencies, such as Australian dollar against the US dollar and Philippine peso, could increase costs for our delivery at offshore sites by increasing our labor and other costs that are denominated in local currencies. Our contractual provisions, cost management efforts, and currency hedging activities may not be able to offset the currency fluctuation impact, resulting in the decrease of the profitability of our contracts.
Our pricing depends on effectiveness of our forecasting of the level of effort. Pricing for our services in our technology and strategic consulting businesses is highly contingent on our ability to accurately forecast the level of effort and cost necessary to deliver our services, which is data dependent and could turn out to be materially inaccurate. The inaccurate level of effort in project estimates could yield lower profit margins or become unprofitable, resulting in adverse impacts on our results of operations.
We face special risks associated with our business outside of the United States
An important component of our growth strategy is service delivery outside of the United States and our continuing international expansion. In 20142015 we derived approximately 51%47% of our revenue from operations outside of the United States. Conducting business abroad is subject to a variety of risks, including:
· | currency exchange rate fluctuations, restrictions on currency movement, and impact of international tax laws could adversely affect our results of operations, if we are forced to maintain assets in currencies other than the US dollars, while our financial results are reported in US dollars; |
· | |
| longer payment cycles and/or difficulties in accounts receivable collections could impact our cash flows and results of operations; |
· | |
| political and economic instability and unexpected changes in regulatory regimes could adversely affect our ability to deliver services overseas and our ability to repatriate cash; |
· | |
| inconsistent regulations, licensing and legal requirements may increase our cost of operations as we endeavor to comply with multiple, complex laws that differ from one country to another; |
· | |
| terrorist attacks and civil unrests in some of the countries where we do business (e.g. tension in the Middle East and Latin America, and terror attacks in Europe), and the resulting need for enhanced security measures may impact our ability to deliver services, threaten the safety of our employees, and increase our costs of operations; and |
· | |
| special challenges in managing risks inherent in international operations, such as unique and prescriptive labor rules and corrupt business environments may cause an inadvertent violation of laws that we may not be able to immediately detect or correct. |
While we are monitoringmonitor and endeavoringendeavor to mitigate timely mitigate the relevant regulatory, geopolitical, and other risk factorsrisks related to our operations outside of the United States, we cannot assess with certainty what impact such risks are likely to have over time on our business, and we can provide no assurance that we will always be able to mitigate these risks successfully and avoid material impact to our business and results of operations.
Uncertainty of tax regulations and treatment of permanent establishments in certain countries where we do business may affect our taxation levels and affect our ability to collect for services rendered
Currently, we operate in multiple countries, in entity forms and under laws that are advantageous to us, from operational and tax perspectives. Any changes in the regulatory frameworks in the countries where we currently operate could lead to higher taxation levels, change in our legal operating status, or lead to higher costs associated with maintaining certain entities, which may materially affect our business, operating costs, and results of operations.
12
Our strategy of growing through selective acquisitions and mergers involves risks of failing to successfully identify, acquire and integrate businesses and realize returns on our investments
We evaluate opportunities to expand the scope of our services through acquisitions and mergers. Yet, we may be unable to identify companies that complement our strategies and which are available to be acquired at valuation levels accretive to our business.
Our acquisition strategy involves other potential risks, including the inability to integrate acquired companies effectively and realize the full amounts of anticipated synergies and benefits from the acquisitions; the diversion of management’s attention to the integration of the acquired businesses at the expense of delivering results for the legacy business; the risk that we will not be able to retain key employees of the acquired business or that they will not be effective as part of TeleTech operations; the impact of liabilities of the acquired business undiscovered or underestimated as part of the acquisition due diligence; and the unforeseen difficulties experienced by the acquired operations due to the acquisition or the integration which could result in short or longer term effects on our operating results.
TableCorporate social engineering attacks and other phishing scams aimed at the company may result in the inadvertent loss of Contentscash and cash equivalent resources
The increased activity and sophistication of corporate social engineering attacks and other phishing scams in recent months have increased the risk of inadvertent transfer of large amounts of cash and cash equivalents from the various bank accounts we have around the world. We actively train and inform our employees and key personnel about these risks and, while we have implemented a series of measures to curb these risks, the very nature of these attacks may deceive one or more employees, thereby resulting in a material loss.
Intellectual property infringement by us and by others may adversely impact our ability to innovate and compete
Our services or solutions could infringe intellectual property of others impacting our ability to deploy them with clients. There can be no assurance that services and solutions we utilize in our business or offer to clients do not infringe the intellectionintellectual property rights of others. From time to time, we and members of our supply chain receive assertions that our service offerings or technologies infringe on the patents or other intellectual property rights of third parties. These claims could require us to cease activities, incur expensive licensing costs, or engage in costly litigation, which could adversely affect our business and results of operation.
Our intellectual property may not always receive favorable treatment from the United States Patent and Trademark Office, the European Patent Office or similar foreign intellectual property adjudication and registration agencies; and our “patent pending” intellectual property may not receive a patent or may be subject to prior art limitations. The lack of legal system sophistication in certain countries where we do business or lack of commitment to protection of intellectual property rights, may prevent us from being able to defend our intellectual property and related technology against infringement by others, leading to a material adverse effect on our business, results of operations and financial condition.
Our results of operation and share price could be adversely affected if we are unable to maintain effective internal controls and we are not able to prevent or timely detect all errors or acts of fraud
Any internal and disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individuals acting alone or in collusion with others to override controls. Accordingly, because of the inherent limitations in the design of a cost effective control system, misstatements due to error or fraud may occur and may not always be prevented or timely detected.
Our management is required to furnish a report regarding the effectiveness of TeleTech’s internal controls over financial reporting, including a statement as to whether or not our internal controls are effective. If we are unable to conclude that our internal controls over financial reporting are effective now or in the future, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
Increases in the cost of communication and data services or significant interruptions in such services could adversely affect our business
Our business is significantly dependent on telephone, internet and data service provided by various domestic and foreign communication companies. Any disruption of these services could adversely affect our business. We have taken steps to mitigate our exposure to service disruptions by investing in complex and multi-layered redundancies, and we can transition services among different of our contact centers around the world. Despite these efforts, there can be no assurance, however, that the redundancies we have in place would be sufficient to maintain operations without disruption.
Our inability to obtain communication and data services at favorable rates could negatively affect our business results. Where possible, we have entered into long-term contracts with various providers to mitigate short term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of communication services that is not recoverable through an increase in the price of our services could adversely affect our business.
Our financial results may be adversely impacted by foreign currency exchange rate risk
Many contracts that we service from delivery centers outside of the United States (for example in Bulgaria, Canada, Costa Rica, Mexico, and the Philippines) are typically priced, invoiced, and paid in U.S. and Australian dollars, and Euro, while the costs incurred to operate these delivery centers are denominated in the functional currency of the applicable operating subsidiary. The fluctuations between the currencies of the contract and operating currencies present foreign currency exchange risks. Furthermore, because our financial statements are denominated in US dollars, but approximately 24%23% of our revenue is derived from contracts denominated in other currencies, our results of operations could be adversely affected if the US dollar strengthens significantly against foreign currencies.
While we hedge against the effect of exchange rate fluctuations, we can provide no assurance that we will be able to continue to successfully manage this foreign currency exchange risk and avoid adverse impacts on our business, financial condition, and results of operations.
Compliance with laws, including unexpected changes to such laws could adversely affect our results of operations
Our business is subject to extensive regulation by U.S. and foreign national, state and provincial authorities relating to confidential client and customer data, customer communications, telemarketing practices, and licensed healthcare and financial services activities, among other areas. Costs and complexity of compliance with existing and future regulations could adversely affect our profitability. If we fail to comply with regulations relevant to our business, we could be subject to civil or criminal liability, monitory damages and fines. Private lawsuits and enforcement actions by regulatory agencies may materially increase our costs of operations and impact our ability to serve our clients.
As we provide services to clients’ customers residing in over 80 countries, we are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as import/export controls, communication content requirements, trade restrictions and sanctions, tariffs, taxation, data privacy, labor relations, wages and severance, health care requirements, internal and disclosure control obligations, and immigration. Violations of these regulations could impact our reputation and result in financial liability, criminal prosecution, unfavorable publicity, restrictions on our ability to process information and breach of our contractual commitments.
Adverse changes in laws or regulations that impact our business may negatively affect the sale of our services, slow the growth of our operations, or mandate changes to how we deliver our services, including our ability to use offshore resources. These changes could threaten our ability to continue to serve certain markets.
Volatile and uncertain economic conditions and effect of these conditions on our clients could have an adverse effect on the profitability of our business
Ever changing and increasingly unstable global economic conditions affect our clients’ businesses and may, therefore, affect our business and our profitability. We generate revenue based, in large part, on the amount of time our employees devote to our clients’ customers, and our clients’ willingness to invest in their customer relationships. Consequently, our revenue depends on consumers’ interest in and use of our clients’ products and services, which may be adversely affected by general economic conditions. Uncertain economic conditions and slow economic recovery may impact our clients’ willingness to procure our technology and strategic consulting services and may impact products and services that require their customers to use our customer care services. Our business, financial condition, results of operations and cash flows would be adversely affected if any of our major clients were unable to pay for our services due to volatile economic conditions.
The current trend to outsource customer care may not continue and the prices that clients are willing to pay for the services may diminish, adversely affecting our business
Our growth depends, in large part, on the willingness of our clients and potential clients to outsource customer care and management services to companies like TeleTech. There can be no assurance that the customer care outsourcing trend will continue; and our clients and potential clients may elect to perform in-house customer care and management services that they currently outsource. Reduction in demand for our services and increased competition from other providers and in-house service alternatives would create pricing pressures and excess capacity that could have an adverse effect on our business, financial condition, and results of operations.
Unfavorable regulation and negative public perception about digital marketing could adversely affect our business and results of operations
With the growth of online marketplace and e-commerce, there is increasing awareness and concern among the general public, privacy advocates, mainstream media, and government bodies regarding the reach of digital marketing and its potential impact on individual privacy interests. For example, in recent years, consumer advocates and certain government agencies have publicly criticized companies that collect, store and use personal data for commercial purposes. This public scrutiny may lead to unfavorable regulation, public distrust of digital marketing industry, consumer reluctance to share and permit use of personal data, and increased consumer opt-out rates, any of which could negatively influence, change or reduce our ability to provide our digital marketing and related analytics services and current and prospective clients’ demand for our offerings, adversely affecting our business and results of operations. Any unfavorable publicity or negative public perception about us or the digital marketing industry in general may affect not only our digital marketing business but our reputation, in general, and our businesses unrelated to digital marketing.
Health epidemics could disrupt our business and adversely affect our financial results
Our contact centers typically seat hundreds of employees in one location. Accordingly, an outbreak of a contagious infection in one or more of the markets in which we do business may result in significant worker absenteeism, lower capacity utilization rates, voluntary or mandatory closure of our delivery centers, travel restrictions on our employees, and other disruptions to our business. Any prolonged or widespread health epidemic could severely disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations.
Our credit facility contains covenant restrictions that may limit our ability to operate our business or execute on our strategy
Our credit facility contains common operating and financial covenants that impose operating and financial restrictions on how we operate our business and require us to meet certain financial metrics quarterly. Complying with these covenant restrictions may limit our ability to engage in certain activities, including incurring additional indebtedness, making certain investments and capital expenditures, acquisitions, selling certain assets, stock repurchases, payment of existing obligations, or replenishment of cash reserves.
As a result of these covenant restrictions, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. We can provide no assurance that we will be able to meet the financial covenants under our credit facility, or that in the event of noncompliance, will be able to obtain waivers or amendments from the lenders. If we fail to comply with the covenants the lenders could elect to declare all amounts outstanding under the credit facilities, together with accrued interest, to be immediately due and payable, and there can be no assurance that we would have adequate resources to comply with the accelerated repayment schedule or that the assets securing such indebtedness would be sufficient to repay it in full that indebtedness, which could have a material and adverse effect on our financial condition.
15
The volatility of our stock price may result in loss of investment
Our share price has been and may continue to be subject to substantial fluctuation. We believe that market prices of outsourced customer care management services stock in general have experienced volatility and such volatility will affect our stock price. As we continue to diversify our service offerings to include growth, technology and strategic consulting, our stock price volatility may stabilize or it may be further impacted by stock price fluctuations in these new relevant industries. In addition to fluctuations specific to our industry and service offerings, we believe that various other factors such as general economic conditions, changes or volatility in the financial markets, and changing market condition for our clients could impact the valuation of our stock. The quarterly variations in our financial results, acquisition and divestiture announcements by us or our competitors, strategic partnerships and new service offering, our failure to meet our growth objectives or exceeding our targets, and securities analysts’ perception about our performance could cause the market price of our shares to fluctuate substantially in the future.
Our Chairman and Chief Executive Officer controls majority of our stock and has control over all matters requiring action by our stockholders
Kenneth D. Tuchman, our Chairman and Chief Executive Officer, directly and beneficially owns approximately 65.0%64.9% of TeleTech’s common stock. As a result, Mr. Tuchman could exercise control over all matters requiring action by our stockholders, including the election of our entire Board of Directors. Therefore, a change in control of our company could not be effected without his approval, even when such a change of control could benefit our other stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTSCOMMENTS
We have not received written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 20142015 fiscal year that remain unresolved.
Our corporate headquarters are located in Englewood, Colorado, which consists of approximately 264,000 square feet of owned office space. In addition to our headquarters and the delivery centers used by our Customer Management Services and Customer Growth Services segments discussed below, we also maintain sales and consulting offices in several countries around the world which serve our Customer Technology Services and Customer Strategy Services segments.
As of December 31, 20142015 we operated 5967 delivery centers that are classified as follows:
· | Multi-Client Center — We lease space for these centers and serve multiple clients in each facility; |
· | Dedicated Center — We lease space for these centers and dedicate the entire facility to one client; and |
· | Managed Center — These facilities are leased or owned by our clients and we staff and manage these sites on behalf of our clients in accordance with facility management contracts. |
16
·Multi-Client Center — We lease space for these centers and serve multiple clients in each facility;
·Dedicated Center — We lease space for these centers and dedicate the entire facility to one client; and
·Managed Center — These facilities are leased or owned by our clients and we staff and manage these sites on behalfTable of our clients in accordance with facility management contracts.Contents
As of December 31, 2014,2015, our delivery centers were located in the following countries:
|
| Multi-Client Centers |
| Dedicated |
| Managed |
| Total |
|
Australia |
| 1 |
| 1 |
| — |
| 2 |
|
Brazil |
| 2 |
| — |
| — |
| 2 |
|
Bulgaria |
| 2 |
| — |
| — |
| 2 |
|
Canada |
| 1 |
| — |
| 1 |
| 2 |
|
Costa Rica |
| — |
| 1 |
| — |
| 1 |
|
Germany |
| — |
| — |
| 1 |
| 1 |
|
Ireland |
| 1 |
| — |
| — |
| 1 |
|
Macedonia |
| 1 |
| — |
| — |
| 1 |
|
Mexico |
| 3 |
| — |
| — |
| 3 |
|
New Zealand |
| 1 |
| — |
| — |
| 1 |
|
Philippines |
| 14 |
| 3 |
| — |
| 17 |
|
South Africa |
| — |
| — |
| 1 |
| 1 |
|
United Kingdom |
| — |
| 1 |
| 2 |
| 3 |
|
United States of America |
| 13 |
| 5 |
| 4 |
| 22 |
|
Total |
| 39 |
| 11 |
| 9 |
| 59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| Number of |
|
|
| Multi-Client |
| Dedicated |
| Managed |
| Delivery |
|
|
| Centers |
| Centers |
| Centers |
| Centers |
|
Australia |
| 1 |
| 1 |
| — |
| 2 |
|
Brazil |
| 2 |
| — |
| — |
| 2 |
|
Bulgaria |
| 2 |
| — |
| — |
| 2 |
|
Canada |
| 1 |
| — |
| 1 |
| 2 |
|
China |
| — |
| — |
| 1 |
| 1 |
|
Costa Rica |
| — |
| 1 |
| — |
| 1 |
|
Germany |
| — |
| — |
| 1 |
| 1 |
|
Ireland |
| 1 |
| — |
| — |
| 1 |
|
Macedonia |
| 1 |
| — |
| — |
| 1 |
|
Mexico |
| 3 |
| — |
| — |
| 3 |
|
New Zealand |
| 1 |
| — |
| — |
| 1 |
|
Philippines |
| 17 |
| 2 |
| 1 |
| 20 |
|
Poland |
| — |
| — |
| 1 |
| 1 |
|
South Africa |
| — |
| — |
| 1 |
| 1 |
|
Thailand |
| — |
| — |
| 1 |
| 1 |
|
United Kingdom |
| — |
| 1 |
| 2 |
| 3 |
|
United States of America |
| 15 |
| 4 |
| 5 |
| 24 |
|
Total |
| 44 |
| 9 |
| 14 |
| 67 |
|
The leases for our delivery centers have remaining terms ranging from one to seven10 years and generally contain renewal options, with the exception of one center which we have subleased for the remainder of the lease term through 2021. We believe that our existing delivery centers are suitable and adequate for our current operations, and we have plans to build additional centers to accommodate future business.
ITEM 3. LEGAL PROCEEDINGSPROCEEDING
S
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.
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.
ITEM 4. MINE SAFETY DISCLOSURESDISCLOSURES
Not applicable.
17
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESSECURITIES
Our common stock is traded on the NASDAQ Global Select Market under the symbol “TTEC.” The following table sets forth the range of the high and low sales prices per share of the common stock for the quarters indicated as reported on the NASDAQ Global Select Market:
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| High |
| Low |
| |||||||||
Fourth Quarter 2015 |
| $ | 30.61 |
| $ | 26.76 |
| |||||||
Third Quarter 2015 |
| $ | 28.97 |
| $ | 25.37 |
| |||||||
Second Quarter 2015 |
| $ | 28.01 |
| $ | 25.14 |
| |||||||
First Quarter 2015 |
| $ | 25.54 |
| $ | 21.86 |
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|
| High |
| Low |
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|
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|
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| ||
Fourth Quarter 2014 |
| $ | 25.87 |
| $ | 21.81 |
|
| $ | 25.87 |
| $ | 21.81 |
|
Third Quarter 2014 |
| $ | 29.54 |
| $ | 24.58 |
|
| $ | 29.54 |
| $ | 24.58 |
|
Second Quarter 2014 |
| $ | 29.24 |
| $ | 23.58 |
|
| $ | 29.24 |
| $ | 23.58 |
|
First Quarter 2014 |
| $ | 24.98 |
| $ | 21.29 |
|
| $ | 24.98 |
| $ | 21.29 |
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Fourth Quarter 2013 |
| $ | 27.07 |
| $ | 23.31 |
| |||||||
Third Quarter 2013 |
| $ | 25.79 |
| $ | 23.03 |
| |||||||
Second Quarter 2013 |
| $ | 24.84 |
| $ | 20.37 |
| |||||||
First Quarter 2013 |
| $ | 21.36 |
| $ | 17.53 |
|
As of December 31, 2014,2015, we had approximately 291236 holders of record of our common stock and in previous yearsduring 2015 we have not declared orand paid anytwo $0.18 per share dividends on our common stock.
stock as discussed below.
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 will bewas paid on March 16, 2015 to shareholders of record as of March 6, 2015. An additional dividend of $0.18 per common share was paid on October 14, 2015 to shareholders of record as of September 30, 2015. On February 18, 2016, the Board of Directors authorized an increase in the semi-annual dividend to $0.185 per common share, payable on April 15, 2016, to shareholders of record as of March 31, 2016. While it is our intention to continue to pay semi-annual dividends in 2016 and beyond, any decision to pay future cash dividends will be made by our Board of Directors. In addition, our credit facility restricts our ability to pay dividends in the event we are in default or do not satisfy certain covenants.
Stock Repurchase Program
We continue to return capital to our shareholders via an ongoing stock repurchase program (originally authorized by the Board of Directors in 2001). As of December 31, 2014,2015, the cumulative authorized repurchase allowance was $637.3$662.3 million, of which we have purchased 42.142.8 million shares for $625.5$642.8 million.
18
Issuer Purchases of Equity Securities During the Fourth Quarter of 2014
2015
The following table provides information about our repurchases of equity securities during the quarter ended December 31, 2014:2015:
Period |
| Total Number |
| Average Price |
| Total Number of |
| Approximate Dollar |
| ||
September 30, 2014 |
|
|
|
|
|
|
| $ | 21,614 |
| |
October 1, 2014 - October 31, 2014 |
| 80,200 |
| $ | 24.65 |
| 80,200 |
| $ | 19,637 |
|
November 1, 2014 - November 30, 2014 |
| 23,000 |
| $ | 24.52 |
| 23,000 |
| $ | 19,073 |
|
December 1, 2014 - December 31, 2014 |
| 311,045 |
| $ | 23.31 |
| 311,045 |
| $ | 11,822 |
|
Total |
| 414,245 |
|
|
| 414,245 |
|
|
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|
|
|
|
| Total Number of |
| Approximate Dollar |
| |
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|
|
|
|
|
| Shares |
| Value of Shares that |
| |
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|
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|
| Purchased as |
| May Yet Be |
| |
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|
|
|
| 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) |
| ||
September 30, 2015 |
|
|
|
|
|
|
|
| $ | 20,220 |
|
October 1, 2015 - October 31, 2015 |
| 23,400 |
| $ | 26.86 |
| 23,400 |
| $ | 19,591 |
|
November 1, 2015 - November 30, 2015 |
| — |
| $ | — |
| — |
| $ | 19,591 |
|
December 1, 2015 - December 31, 2015 |
| — |
| $ | — |
| — |
| $ | 19,591 |
|
Total |
| 23,400 |
|
|
|
| 23,400 |
|
|
|
|
In 2015,2016, through February 28, 2015,March 7, 2016, we purchased 212,100217,346 additional shares at a cost of $4.7$5.6 million. The stock repurchase program does not have an expiration date and the Board authorizes additional stock repurchases under the program from time to time. EffectiveOn February 24, 2015,18, 2016, the Board of Directors authorized an additionalincrease in the share repurchase allowance of $25 million for stock repurchases.million.
Equity Compensation Plan Information
The following table sets forth, as of December 31, 2014,2015, the number of shares of our common stock to be issued upon exercise of outstanding options, RSUs, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities available for future issuance under equity-based compensation plans.
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| ||||||||
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| Number of |
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| ||||||||
|
| Securities to be |
| Weighted- |
| Number of Securities |
| |||||||||
|
| Issued Upon |
| Average Exercise |
| Remaining Available for |
| |||||||||
|
| Exercise of |
| Price of |
| Future Issuance Under |
| |||||||||
|
| Outstanding |
| Outstanding |
| Equity Compensation |
| |||||||||
|
| Options, RSUs, |
| Options, |
| Plans (Excluding |
| |||||||||
|
| Warrants and |
| Warrants and |
| Securities Reflected in |
| |||||||||
Plan Category |
| Number of |
| Weighted- |
| Number of Securities |
|
| Rights (a) |
| Rights (b) |
| Column (a)) |
| ||
|
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|
|
|
|
| |
Equity compensation plans approved by security holders |
| 2,975,077 | (1) | $ | 13.67 | (2) | 1,237,579 |
|
| 1,796,630 | (1) | $ | 21.11 | (2 ) | 990,069 |
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|
| |
Equity compensation plans not approved by security holders |
| — |
| $ | — |
| — |
|
| — |
| $ | — |
| — |
|
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|
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|
|
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|
|
|
|
|
| |
Total |
| 2,975,077 |
|
|
| 1,237,579 |
|
| 1,796,630 |
|
|
|
| 990,069 |
|
| (1) | Includes options to purchase 241,164 shares and 1,555,466 RSUs issued under our equity incentive plans. |
(2) | Weighted average exercise price of outstanding stock options excludes RSUs, which have no exercise price. |
Stock Performance Graph
The graph depicted below compares the performance of TeleTech common stock with the performance of the NASDAQ Composite Index; the Russell 2000 Index; and customized peer group over the period beginning on December 31, 20092010 and ending on December 31, 2014.2015. We have chosen a “New Peer“Peer Group” composed of Convergys Corporation (NYSE: CVG), Sykes Enterprises, Incorporated (NASDAQ: SYKE) and Teleperformance (NYSE Euronext: RCF). We believe that the companies in the New Peer Group are relevant to our current business model, market capitalization and position in the overall BPO industry.
19
The graph assumes that $100 was invested on December 31, 20092010 in our common stock and in each comparison index, and that all dividends were reinvested. We have not declared anytwo $0.18 per share dividends on our common stock.stock during 2015. Stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among TeleTech Holdings, Inc., The NASDAQ Composite Index,
The Russell 2000 Index, And A Peer Group
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| December 31, |
|
| December 31, |
| ||||||||||||||||||||||||||||||||
|
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
|
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| ||||||||||||
TeleTech Holdings, Inc. |
| $ | 100 |
| $ | 103 |
| $ | 81 |
| $ | 89 |
| $ | 120 |
| $ | 118 |
|
| $ | 100 |
| $ | 79 |
| $ | 86 |
| $ | 116 |
| $ | 115 |
| $ | 137 |
|
NASDAQ Composite |
| $ | 100 |
| $ | 118 |
| $ | 119 |
| $ | 139 |
| $ | 197 |
| $ | 224 |
|
| $ | 100 |
| $ | 101 |
| $ | 117 |
| $ | 166 |
| $ | 189 |
| $ | 200 |
|
Russell 2000 |
| $ | 100 |
| $ | 127 |
| $ | 122 |
| $ | 141 |
| $ | 196 |
| $ | 206 |
|
| $ | 100 |
| $ | 96 |
| $ | 111 |
| $ | 155 |
| $ | 162 |
| $ | 155 |
|
Old Peer Group |
| $ | 100 |
| $ | 103 |
| $ | 91 |
| $ | 116 |
| $ | 158 |
| $ | 168 |
| |||||||||||||||||||
New Peer Group |
| $ | 100 |
| $ | 104 |
| $ | 83 |
| $ | 114 |
| $ | 172 |
| $ | 185 |
| |||||||||||||||||||
Peer Group |
| $ | 100 |
| $ | 80 |
| $ | 109 |
| $ | 165 |
| $ | 177 |
| $ | 223 |
|
20
ITEM 6. SELECTED FINANCIAL DATADATA
The following selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the related notes appearing elsewhere in this Form 10-K (amounts in thousands except per share amounts).
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|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||||||||||
|
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
|
| 2015 |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| ||||||||||
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Statement of Operations Data |
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| |||||
Revenue |
| $ | 1,241,781 | (1) | $ | 1,193,157 | (6) | $ | 1,162,981 | (11) | $ | 1,179,388 | (15) | $ | 1,094,906 |
|
| $ | 1,286,755 |
| $ | 1,241,781 | (3) | $ | 1,193,157 | (8) | $ | 1,162,981 | (13) | $ | 1,179,388 | (17) |
Cost of services |
| (886,492 | ) | (846,631 | ) | (834,803 | ) | (848,362 | ) | (789,697 | ) |
|
| (928,247) |
|
| (886,492) |
|
| (846,631) |
|
| (834,803) |
|
| (848,362) |
| |||||
Selling, general and administrative |
| (198,553 | ) | (193,423 | ) | (182,634 | ) | (188,802 | ) | (165,812 | ) |
|
| (194,606) |
|
| (198,553) |
|
| (193,423) |
|
| (182,634) |
|
| (188,802) |
| |||||
Depreciation and amortization |
| (56,538 | ) | (46,064 | ) | (41,166 | ) | (44,889 | ) | (50,218 | ) |
|
| (63,808) |
|
| (56,538) |
|
| (46,064) |
|
| (41,166) |
|
| (44,889) |
| |||||
Other operating expenses |
| (3,723 | )(2) | (5,640 | )(7) | (25,833 | )(12) | (3,881 | )(16) | (15,434 | )(19) |
|
| (9,914) | (1) |
| (3,723) | (4) |
| (5,640) | (9) |
| (25,833) | (14) |
| (3,881) | (18) | |||||
Income from operations |
| 96,475 |
| 101,399 |
| 78,545 |
| 93,454 |
| 73,745 |
|
|
| 90,180 |
|
| 96,475 |
|
| 101,399 |
|
| 78,545 |
|
| 93,454 |
| |||||
Other income (expense) |
| 3,984 | (3) | (9,330 | )(8) | (4,683 | ) | (1,900 | ) | 8,224 | (20) |
|
| (4,291) |
|
| 3,984 | (5) |
| (9,330) | (10) |
| (4,683) |
|
| (1,900) |
| |||||
(Provision for) benefit from income taxes |
| (23,042 | )(4) | (20,598 | )(9) | 61 | (13) | (13,279 | )(17) | (28,431 | )(21) |
|
| (20,004) | (2) |
| (23,042) | (6) |
| (20,598) | (11) |
| 61 | (15) |
| (13,279) | (19) | |||||
Noncontrolling interest |
| (5,124 | ) | (4,083 | ) | (3,908 | ) | (4,101 | ) | (3,664 | ) |
|
| (4,219) |
|
| (5,124) |
|
| (4,083) |
|
| (3,908) |
|
| (4,101) |
| |||||
Net income attributable to TeleTech stockholders |
| $ | 72,293 |
| $ | 67,388 |
| $ | 70,015 |
| $ | 74,174 |
| $ | 49,874 |
|
| $ | 61,666 |
| $ | 72,293 |
| $ | 67,388 |
| $ | 70,015 |
| $ | 74,174 |
|
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| |||||
Weighted average shares outstanding |
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| |||||
Basic |
| 49,297 |
| 51,338 |
| 54,738 |
| 56,669 |
| 60,361 |
|
|
| 48,370 |
|
| 49,297 |
|
| 51,338 |
|
| 54,738 |
|
| 56,669 |
| |||||
Diluted |
| 50,102 |
| 52,244 |
| 55,540 |
| 57,963 |
| 61,792 |
|
|
| 49,011 |
|
| 50,102 |
|
| 52,244 |
|
| 55,540 |
|
| 57,963 |
| |||||
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| |||||
Net income per share attributable to TeleTech stockholders |
|
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| |||||
Basic |
| $ | 1.47 |
| $ | 1.31 |
| $ | 1.28 |
| $ | 1.31 |
| $ | 0.83 |
|
| $ | 1.27 |
| $ | 1.47 |
| $ | 1.31 |
| $ | 1.28 |
| $ | 1.31 |
|
Diluted |
| $ | 1.44 |
| $ | 1.29 |
| $ | 1.26 |
| $ | 1.28 |
| $ | 0.81 |
|
| $ | 1.26 |
| $ | 1.44 |
| $ | 1.29 |
| $ | 1.26 |
| $ | 1.28 |
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| |||||
Dividends issued per common share |
| $ | 0.36 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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Balance Sheet Data |
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| |||||
Total assets |
| $ | 852,475 | (5) | $ | 842,342 | (10) | $ | 847,173 | (14) | $ | 746,978 | (18) | $ | 660,623 |
|
| $ | 843,327 |
| $ | 852,475 | (7) | $ | 842,342 | (12) | $ | 847,173 | (16) | $ | 746,978 | (20) |
Total long-term liabilities |
| $ | 187,780 | (5) | $ | 175,564 | (10) | $ | 175,431 | (14) | $ | 106,720 | (18) | $ | 33,554 |
|
| $ | 191,473 |
| $ | 187,780 | (7) | $ | 175,564 | (12) | $ | 175,431 | (16) | $ | 106,720 | (20) |
(1) | Includes $1.8 million expense related to reductions in force, a $0.4 million expense related to the impairment of property and equipment, and a $7.7 million expense related to the impairment of goodwill. |
(2) | Includes a $0.7 million benefit related to restructuring charges, $1.2 million net of expense related to changes in valuation allowance and a related release of a deferred tax liability, $1.5 million of expense related to provisions for uncertain tax positions, $2.6 million of benefit related to impairments, $1.3 million of expense related to state net operating losses and credits, and $0.4 million of benefit related to other discrete items. |
(3) | Includes $30.0 million in revenue generated by Sofica and rogenSi which were acquired in 2014. |
| (4) | Includes $3.3 million expense related to reductions in force and $0.4 million expense related to the impairment of property and equipment. |
| (5) | Includes a net $6.7 million benefit related to fair value adjustments to the contingent consideration based on revised estimates of performance against targets for four of our acquisitions. |
| (6) | Includes a $1.3 million benefit related to restructuring charges, a $0.4 million benefit related to a valuation allowance for equity compensation, a $1.2 million benefit related to the closing of statute of limitations in Canada, $3.8 million of expense related to future contingent payments, $1.3 million of expense related to the resolution of an audit in the Netherlands, and $0.2 million of expense related to other discrete items. |
21
| (7) | The Company spent $23.8 million net of cash acquired of $3.5 million in 2014 for the acquisitions of Sofica and rogenSi. Upon acquisitions of Sofica and rogenSi, the Company acquired $59.5 million in assets and assumed $11.1 million in liabilities ($5.4 million in long-term liabilities). The Company also assumed a purchase price payable of $22.4 million related to this acquisition. Of the $22.4 million purchase price payable, $13.2 million was included in long-term liabilities. |
| (8) | Includes $51.4 million in revenue generated by WebMetro which was acquired in 2013 and TSG which was acquired on December 31, 2012. |
| (9) | Includes $4.1 million expense related to reductions in force, $0.3 million related to facilities exit charges, $0.1 million expense related to the impairment of property and equipment and $1.1 million expense related to the impact of intangible assets. |
| (10) | Includes a $3.7 million charge related to the deconsolidation of a subsidiary and a $1.9 million charge related to a fair value adjustment to the contingent consideration based on revised estimates of performance against targets for three of our acquisitions. |
| (11) | Includes a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments, and $1.8 million of expense related to valuation allowance increases. |
| (12) | The Company spent $8.9 million net of cash acquired of $6.4 million in 2013 for the acquisition of WebMetro. Upon acquisition of WebMetro, the Company acquired $27.5 million in assets and assumed $9.7 million in liabilities ($0.8 million in long-term liabilities). The Company also assumed a purchase price payable of $2.5 million related to this acquisition. Of the $2.5 million purchase price payable, $1.8 million was included in long-term liabilities. |
| (13) | Includes $8.9 million in revenue generated by OnState, iKnowtion and Guidon which were acquired in 2012. |
| (14) | Includes $22.5 million expense related to reductions in force, $0.4 million expense related to facilities exit charges, and $2.9 million expense related to the impairment of property and equipment. |
| (15) | Includes a $7.6 million benefit related to Australia and New Zealand Transfer Pricing Arrangements, a $1.4 million benefit from the release of uncertain tax positions, a $9.2 million benefit related to restructuring charges, a $1.9 million benefit related to return to provision adjustments and $0.1 million of expense related to other discrete items. |
| (16) | The Company spent $35.8 million, net of cash acquired of $3.7 million, in 2012 for the acquisitions of OnState, iKnowtion, Guidon, and TSG through an increase in borrowings on its line of credit. Upon acquisition of these companies, the Company acquired $65.6 million in assets and assumed $12.4 million in liabilities ($3.1 million in long-term liabilities). The Company also assumed a purchase price payable of $12.7 million related to these acquisitions. Of the $12.7 million purchase price payable, $10.8 million was included in long-term liabilities. |
| (17) | Includes $80.0 million in revenue generated by PRG and eLoyalty which were acquired in late 2010 and mid-2011, respectively. |
| (18) | Includes $3.6 million expense related to reductions in force, $0.1 million expense related to facilities exit charges, and $0.2 million expense related to the impairment of property and equipment. |
| (19) | Includes an $8.6 million expense related to the adverse decision by the Canada Revenue Agency regarding the Company’s request for relief from double taxation, an $11.7 million benefit related to the Company’s mediated settlement with the IRS related to U.S. tax refund claims, a $1.4 million benefit related to the 2010 foreign earnings repatriation, and $0.2 million benefit for other discrete items. |
| (20) | The Company spent $38.0 million for the acquisition of eLoyalty through an increase in borrowings on its line of credit. Upon acquisition of eLoyalty, the Company acquired $64.1 million in assets and assumed $26.1 million in liabilities ($22.7 million in long-term liabilities). | |
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22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS
Executive Summary
TeleTech Holdings, Inc. (“TeleTech”, “the Company”, “we”, “our” or “us”) is a customer engagement management service provider that delivers integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of productproducts and service capabilitiesservices allows us to design and deliver enhanced, value-drivenengaging, outcome-based customer experiences across numerous communicationinteraction channels. Our solutions are supported by 46,00044,000 employees delivering services in 24 countries from 5967 delivery centers on six continents. Our revenue for fiscal 20142015 was $1,242$1,287 million.
Since our establishment in 1982, we have helped clients strengthen their customer relationships, brand recognition and loyalty through customer engagement solutions. 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 more than 250approximately 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 traditionalheritage business process outsourcing services of our CMS segment into higher-value consulting, data analytics, digital marketing and technology-enabled services. Of the $1,242$1,287 million in revenue we reported in 2014,2015, approximately 26%29% or $318$373 million came from the CGS, CTS and CSS segments (our “Emerging Segments”), focused on customer-centric strategy, growth or technology-based services, with the remainder of our revenue coming from the traditionalheritage business process outsourcing focused CMS segment.
We operate our business utilizinghave four operating and reportable segments, which provide an integrated set of services offering through design, technology enablement, management and growth:including:
Customer Strategy Services
We typically begin by engaging our clients at a strategic level. Through our strategy, change management and analytics-driven 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.
23
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 environments 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 proprietary Humanify™ technology, we also provide data-driven context aware 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 $1$2 billion in client revenue annually via the 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. As a result of our acquisition of the digital agency Web Metro,WebMetro, we have developed an integrated marketing-to-sales platform that links online searches to live sales through a closed loop, multichannel interface. This platform uses proprietary tools and methodology to capture and use more than 400 marketing and sales data points to engage with customers in relevant conversations.
Based on our clients’ requirements, we provide our services on an integrated cross-business segment and on a discrete basis.
SeeAdditional information with respect to our segments and geographic footprint is included in Part II, Item 8. Financial Statements and Supplementary Data, Note 3 to the Notes to the Consolidated Financial Statements for additional discussion regarding our segment information.Statements.
Our 20142015 Financial Results
In 2014,2015, our revenue increased 4.1%3.6% to $1,242$1,287 million over the same period in 2013,2014, despite a decrease of 2.4%5.1% or $28.0$63.7 million due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real. Revenue adjusted for the $28.0 million decrease related to foreign exchange and $1.2 million of lost revenue due to a typhoon in 2013, increased 6.3% over the prior year. The increase in revenue is comprised of growth in the CMS, CGS, CTS and CSS segments which collectively grew 6.0%17.3%, offset by a declinedecrease in the CTS segment. The decline inCMS segment due to the CTS segment is primarilyforeign currency fluctuations. Revenue adjusted for the $63.7 million decrease related to a decline in revenue from our Avaya based offerings.
foreign exchange increased 8.8% over the prior year.
Our 20142015 income from operations decreased $4.9$6.3 million to $90.2 million or 7.0% of revenue, from $96.5 million or 7.8% of revenue from $101.4 or 8.5% of revenue for 2013.2014. The decrease is primarily due to the $14.9 million adverse impact of foreign currency fluctuations, a $15.4goodwill impairment of $7.7 million reductionfor our WebMetro and Latin America reporting units in CTS income from operations with $5.6 million relatedthe third and fourth quarters of 2015 (see Part II, Item 8. Financial Statements and Supplementary Data, Note 6 to the decreaseConsolidated Financial Statements), $6.5 million of additional investment in revenue from Avaya based offerings, $3.3 million in additional selling, general and administrative expenses related to investments in sales, marketing and research and development, associated withand lower capacity utilization due to the build out of a super site for one of our largest clients. These were partially offset by organic revenue growth and income from the CISCO Cloud Solution, $1.4 million of one-time technology and managed services expenses, and $1.0 million associated with severance and other costs related to the integration of TSG into the Customer Technology Services segment.recent acquisitions. Income from operations in 2015 and 2014 and 2013 included $3.7$9.9 million and $5.6$3.7 million of restructuring charges and asset impairments, respectively.
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Our offshore delivery centers serve clients based in North Americathe U.S. and in other countries spans fiveand span six countries with 19,90022,500 workstations and representing 64% of our global delivery capabilities. Revenue from servicesfor our CMS and CGS segments that is provided in these offshore locations was $457$450 million and represented 43% of our revenue for 2014,2015, as compared to $490$457 million and 49%43% of our revenue for 2013, with both years excluding revenue from acquisitions completed outside the CMS and CGS segments.2014.
Our cash flow from operations and available credit allowed us to finance a significant portion of our capital needs and stock repurchases through internally generated cash flows. At December 31, 2014,2015, we had $77.3$60.3 million of cash and cash equivalents, total debt of $105.9$107.3 million, and a total debt to total capitalization ratio of 18.6%19.6%.
We internally target capacity utilization in our delivery centers at 80% to 90% of our available workstations. As of December 31, 2014,2015, the overall capacity utilization in our multi-client centers was 85%71%. The table below presents workstation data for our multi-client centers as of December 31, 20142015 and 2013.2014. Dedicated and Managed Centers (5,261(7,109 and 4,5505,261 workstations, at December 31, 20142015 and 2013,2014, respectively) are excluded from the workstation data as unused workstations in these facilities are not available for sale. Our utilization percentage is defined as the total number of utilized multi-client production workstations compared to the total number of available multi-client production workstations. We may change the designation of shared or dedicated centers based on the normal changes in our business environment and client needs.
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| December 31, 2015 |
| December 31, 2014 |
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| Total |
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| Total |
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| December 31, 2014 |
| December 31, 2013 |
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| Production |
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| % In |
| Production |
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| % In |
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| Total |
| In Use |
| % In |
| Total |
| In Use |
| % In |
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| Workstations |
| In Use |
| Use |
| Workstations |
| In Use |
| Use |
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Multi-client centers |
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Sites open >1 year |
| 24,948 |
| 21,093 |
| 85% |
| 22,358 |
| 18,731 |
| 84% |
|
| 26,790 |
| 18,971 |
| 71 | % | 24,948 |
| 21,093 |
| 85 | % |
Sites open <1 year |
| 982 |
| 982 |
| 100% |
| 2,028 |
| 1,417 |
| 70% |
|
| 1,477 |
| 1,197 |
| 81 | % | 982 |
| 982 |
| 100 | % |
Total multi-client centers |
| 25,930 |
| 22,075 |
| 85% |
| 24,386 |
| 20,148 |
| 83% |
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| 28,267 |
| 20,168 |
| 71 | % | 25,930 |
| 22,075 |
| 85 | % |
TableThe reduction in utilization in 2015 compared to 2014 is due to the build out of Contentsa new supersite for one of our largest clients which was completed in 2015.
WeWhile we continue to see demand from all geographic regions to utilize our offshore delivery capabilities and expect this trend to continue with our clients.clients, some of our clients have regulatory pressures to bring the services onshore to the United States. In light of this trend, we plan to continue to selectively retain and grow capacity and expand into new offshore markets.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.
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 accounting principles generally accepted in the U.S. (“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. Below is a discussion of the policies that we believe may involve a high degree of judgment and complexity.
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Revenue Recognition
We recognize revenue when evidence of an arrangement exists, the delivery of service has occurred, the fee is fixed or determinable and collection is reasonably assured. The BPO inbound and outbound service fees are based on either a per minute, per hour, per transaction or per call basis. Certain client programs provide for adjustments to monthly billings based upon whether we achieve, exceed or fail certain performance criteria. Adjustments to monthly billings consist of contractual bonuses/penalties, holdbacks and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of future services or meeting other specified performance conditions.
Revenue also consists of services for agent training, program launch, professional consulting, fully-hosted or managed technology and learning innovation. These service offerings may contain multiple element arrangements whereby we determine if those service offerings represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenue is recognized as services are provided. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into one unit of accounting and recognized over the life of the arrangement or at the time all services and deliverables have been delivered and satisfied. We allocate revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on our best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once we allocate revenue to each deliverable, we recognize revenue when all revenue recognition criteria are met.
Periodically, we will make certain expenditures related to acquiring contracts or provide up-front discounts for future services. These expenditures are capitalized as contract acquisition costs and amortized in proportion to the expected future revenue from the contract, which in most cases results in straight-line amortization over the life of the contract. Amortization of these contract acquisition costs is recorded as a reduction to revenue.
During 2014, new guidance was issued 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. The new guidance is effective for years beginning after December 15, 20162017 and can be adopted retrospectively or as a cumulative effect adjustment. We are currently determining our implementation approach and assessing the impact on the consolidated financial statements.
Income Taxes
Accounting for income taxes 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 or tax returns. 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. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from future projected taxable income.
We continually review the likelihood that deferred tax assets will be realized in future tax periods under the “more-likely-than-not” criteria. In making this judgment, we consider all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is required.
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We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, and settlement of issues under audit.
Interest and penalties relating to income taxes and uncertain tax positions are accrued net of tax in Provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income.
Income (Loss).
In the future, our effective tax rate could be adversely affected by several factors, many of which are outside our control. Our effective tax rate is affected by the proportion of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. Further, we are subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate, as well as the requirements, pronouncements and rulings of certain tax, regulatory and accounting organizations. We estimate our annual effective tax rate each quarter based on a combination of actual and forecasted results of subsequent quarters. Consequently, significant changes in our actual quarterly or forecasted results may impact the effective tax rate for the current or future periods.
Impairment of Long-Lived Assets
We evaluate the carrying value of property, plant and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
We use a three step process to assess the realizability of goodwill. The first step, Step 0, is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, we analyze changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit. A qualitative assessment also includes analyzing the excess fair value of a reporting unit over its carrying value from impairment assessments performed in previous years. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.
If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, we will proceed to Step 1 testing where we calculate the fair value of a reporting unit based on discounted future probability-weighted cash flows. If Step 1 indicates that the carrying value of a reporting unit is in excess of its fair value, we will proceed to Step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as it would in a business combination. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in Step 2.
We estimate fair value using discounted cash flows of the reporting units. The most significant assumptions used in these analyses are those made in estimating future cash flows. In estimating future cash flows, we use financial assumptions in our internal forecasting model such as projected capacity utilization, projected changes in the prices we charge for our services, projected labor costs, as well as contract negotiation status. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate. We use a discount rate we consider appropriate for the country where the business unit is providing services.
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Similar to goodwill, the Company may first use a qualitative analysis to assess the realizability of its indefinite-lived intangible assets. The qualitative analysis will include a review of changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of an indefinite-lived intangible asset. If a quantitative analysis is completed, an indefinite-lived intangible asset (such as a trade name) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value. Fair value was estimated as the discounted value of future revenues arising from a trade name using a royalty rate that a market participant would pay for use of that trade name. An impairment charge is recorded if the trade name’s carrying value exceeds its estimated fair value.
Restructuring Liability
We routinely assess the profitability and utilization of our delivery centers and existing markets. In some cases, we have chosen to close under-performing delivery centers and complete reductions in workforce to enhance future profitability. Severance payments that occur from reductions in workforce are in accordance with postemployment plans and/or statutory requirements that are communicated to all employees upon hire date; therefore, we recognize severance liabilities when they are determined to be probable and reasonably estimable. Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, rather than upon commitment to a plan.
Derivatives
We enter into foreign exchange forward and option contracts to reduce our exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. We enter into interest rate swaps to reduce our exposure to interest rate fluctuations associated with our variable rate debt. Upon proper qualification, these contracts are accounted for as cash flow hedges under current accounting standards. From time-to-time, we also enter into foreign exchange forward contracts to hedge our net investment in a foreign operation.
All derivative financial instruments are reported in the accompanying Consolidated Balance Sheets at fair value. Changes in fair value of derivative instruments designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss), a component of Stockholders’ Equity, to the extent they are deemed effective. Based on the criteria established by current accounting standards, all of our cash flow hedge contracts are deemed to be highly effective. Changes in fair value of any net investment hedge are recorded in cumulative translation adjustment in Accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets offsetting the change in cumulative translation adjustment attributable to the hedged portion of our net investment in the foreign operation. Any realized gains or losses resulting from the foreign currency cash flow hedges are recognized together with the hedged transactions within Revenue. Any realized gains or losses resulting from the interest rate swaps are recognized in interest income (expense). Gains and losses from the settlements of our net investment hedges remain in Accumulated other comprehensive income (loss) until partial or complete liquidation of the applicable net investment.
We also enter into fair value derivative contracts to reduce our exposure to foreign currency exchange rate fluctuations associated with changes in asset and liability balances. Changes in the fair value of derivative instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income.
Income (Loss).
While we expect that our derivative instruments will continue to be highly effective and in compliance with applicable accounting standards, if our hedges did not qualify as highly effective or if we determine that forecasted transactions will not occur, the changes in the fair value of the derivatives used as hedges would be reflected currently in earnings.
Contingencies
We record a liability for pending litigation and claims where losses are both probable and reasonably estimable. Each quarter, management reviews all litigation and claims on a case-by-case basis and assigns probability of loss and range of loss.
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Explanation of Key Metrics and Other Items
Cost of Services
Cost of services principally include costs incurred in connection with our customer management services, including direct labor, telecommunications, technology costs, printing, sales and use tax and certain fixed costs associated with the delivery centers. In addition, cost of services includes income related to grants we may receive from local or state governments as an incentive to locate delivery centers in their jurisdictions which reduce the cost of services for those facilities.
Selling, General and Administrative
Selling, general and administrative expenses primarily include costs associated with administrative services such as sales, marketing, product development, legal settlements, legal, information systems (including core technology and telephony infrastructure) and accounting and finance. It also includes outside professional fees (i.e., legal and accounting services), building expense for non-delivery center facilities and other items associated with general business administration.
Restructuring Charges, Net
Restructuring charges, net primarily include costs incurred in conjunction with reductions in force or decisions to exit facilities, including termination benefits and lease liabilities, net of expected sublease rentals.
Interest Expense
Interest expense includes interest expense, amortization of debt issuance costs associated with our Credit Facility, and the accretion of deferred payments associated with our acquisitions.
Other Income
The main components of other income are miscellaneous income not directly related to our operating activities, such as foreign exchange gains.gains and reductions in our contingent consideration liabilities.
Other Expenses
The main components of other expenses are expenditures not directly related to our operating activities, such as foreign exchange losses.losses and increases in our contingent consideration liabilities.
RESULTS OF OPERATIONS
Year Ended December 31, 2015 Compared to December 31, 2014
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 years ended December 31, 2015 and 2014 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated.
Customer Management Services
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| Year Ended December 31, |
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| 2015 |
| 2014 |
| $ Change |
| % Change |
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Revenue |
| $ | 913,272 |
| $ | 923,497 |
| $ | (10,225) |
| (1.1) | % |
Operating Income |
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| 58,018 |
|
| 76,792 |
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| (18,774) |
| (24.4) | % |
Operating Margin |
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| 6.4 | % |
| 8.3 | % |
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The change in revenue for the Customer Management Services segment was attributable to a $69.3 million net increase in client programs and acquisitions offset by program completions of $25.6 million. Revenue was further impacted by a $53.9 million reduction due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real.
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The operating income as a percentage of revenue decreased to 6.4% in 2015 as compared to 8.3% in 2014. The operating margin, as with revenue, was negatively impacted by $13.0 million of foreign currency fluctuations and a $4.5 million increase in spending on a number of growth related investments in CMS including sales, marketing and research and development. The decrease is also attributable to a $1.8 million goodwill impairment for the Latin America reporting unit (see part II, Item 8. Financial Statements and Supplementary Data, Note 6 to the Consolidated Financial Statements), and the build out of a super site for one of our largest clients. Included in the operating income was amortization related to acquired intangibles of $0.8 million and $0.8 million for the years ended December 31, 2015 and 2014, respectively.
Customer Growth Services
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| Year Ended December 31, |
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| 2015 |
| 2014 |
| $ Change |
| % Change |
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Revenue |
| $ | 129,021 |
| $ | 115,434 |
| $ | 13,587 |
| 11.8 | % |
Operating Income |
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| 3,077 |
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| 7,255 |
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| (4,178) |
| (57.6) | % |
Operating Margin |
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| 2.4 | % |
| 6.3 | % |
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The increase in revenue for the Customer Growth Services segment was due to $29.4 million increase in client programs offset by program completions of $10.4 million and a $5.4 million reduction due to foreign currency fluctuations.
The operating income as a percentage of revenue decreased to 2.4% in 2015 as compared to 6.3% in 2014. This decrease was primarily driven by a $5.9 million goodwill impairment for the WebMetro reporting unit (see Part II, Item 8. Financial Statements and Supplementary Data, Note 6 to the Consolidated Financial Statements), a $1.8 million decrease due to foreign currency fluctuations and the completion of established programs. These were partially offset by increased profits from additional business booked during 2015 which began operating in 2015. Included in the operating income was amortization related to acquired intangibles of $2.7 million and $2.7 million for the year ended December 31, 2015 and 2014, respectively.
Customer Technology Services
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| Year Ended December 31, |
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| 2015 |
| 2014 |
| $ Change |
| % Change |
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Revenue |
| $ | 157,606 |
| $ | 139,182 |
| $ | 18,424 |
| 13.2 | % |
Operating Income |
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| 13,339 |
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| 4,519 |
|
| 8,820 |
| 195.2 | % |
Operating Margin |
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| 8.5 | % |
| 3.2 | % |
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The increase in revenue for the Customer Technology Services segment was related to increases in both the Cisco and Avaya offerings including recurring revenue for the cloud and managed services solutions.
The operating income as a percentage of revenue increased to 8.5% in 2015 as compared to 3.2% in 2014. The improvement in operating income margin is attributable to increased revenue in combination with lower selling, general and administrative expenses. Also as the revenue grows for the cloud and managed services solutions, the margins increase due to higher utilization of fixed expenses. Included in the operating income was amortization related to acquired intangibles of $4.2 million and $4.4 million for the year ended December 31, 2015 and 2014, respectively.
Customer Strategy Services
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| Year Ended December 31, |
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| 2015 |
| 2014 |
| $ Change |
| % Change |
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Revenue |
| $ | 86,856 |
| $ | 63,668 |
| $ | 23,188 |
| 36.4 | % |
Operating Income |
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| 15,746 |
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| 7,909 |
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| 7,837 |
| 99.1 | % |
Operating Margin |
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| 18.1 | % |
| 12.4 | % |
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30
The increase in revenue for the Customer Strategy Services segment was primarily related to the acquisition of rogenSi in August 2014, as well as organic growth across several of our geographies and practices including our Customer Insights and Service Optimization practices offset by a $3.9 million reduction due to foreign currency fluctuations.
The operating income as a percentage of revenue increased to 18.1% in 2015 as compared to 12.4% in 2014. The operating margin increase was related to the acquisition of rogenSi and stronger year over year margins in the Customer Insights, Service Optimization and CX Consulting practices. Included in the operating income was amortization expense related to acquired intangibles of $2.9 million and $2.1 million for the year ended December 31, 2015 and 2014, respectively.
Interest Income (Expense)
Interest income decreased to $1.1 million in 2015 from $1.8 million in 2014. Interest expense increased to $7.5 million during 2015 from $6.9 million for the comparable period in 2014, primarily due to high outstanding debt.
Other Income (Expense), Net
Included in the year ended December 31, 2015, was a net $26 thousand expense related to fair value adjustments of the contingent consideration based on revised estimates of performance against targets for two of our acquisitions (see Part II, Item 8. Financial Statements and Supplementary Data, Note 9 to the Consolidated Financial Statements).
Included in the year ended December 31, 2014, was a combined net $6.7 million benefit related to fair value adjustments of the contingent consideration based on revised estimates of performance against targets for four of our acquisitions (see Part II, Item 8. Financial Statements and Supplementary Data, Note 9 to the Consolidated Financial Statements).
Income Taxes
The reported effective tax rate for 2015 was 23.3% as compared to 22.9% for 2014. The effective tax rate for 2015 was impacted by earnings in international jurisdictions currently under an income tax holiday, $2.6 million of benefit related to impairments, $0.7 million benefit related to restructuring charges, $1.2 million net of expense related to changes in valuation allowance and a related release of a deferred tax liability, $1.3 million of expense related to state net operating losses and credits, $1.5 million of expense related to provisions for uncertain tax positions, and $0.4 million benefit related to other discrete items. Without these items our effective tax rate for the year ended December 31, 2015 would have been 20.4%. In the year ended December 31, 2014, our effective tax rate was 22.9%. Without a $1.3 million benefit related to restructuring charges, a $1.2 million benefit related to the closing of statute of limitations in Canada, a $0.4 million benefit related to a valuation allowance for equity compensation, $3.8 million of expense related to future contingent payments, $1.3 million of expense related to the resolution of an audit in the Netherlands, and $0.2 million of expense related to other discrete items, our effective tax rate for the year ended December 31, 2014 would have been 19.8%.
Year Ended December 31, 2014 Compared to December 31, 2013
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 years ended December 31, 2014 and 2013 (amounts in thousands). All inter—companyinter-company transactions between the reported segments for the periods presented have been eliminated.
31
Customer Management Services
|
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|
| Year Ended December 31, |
|
|
|
|
|
| ||||
|
| 2014 |
| 2013 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 923,497 |
| $ | 890,883 |
| $ | 32,614 |
| 3.7 | % |
Operating Income |
|
| 76,792 |
|
| 75,689 |
|
| 1,103 |
| 1.5 | % |
Operating Margin |
|
| 8.3 | % |
| 8.5 | % |
|
|
|
|
|
The changeincrease in revenue for the Customer Management Services segment was attributable to a $79.5 million net increase in client programs and acquisitions offset by program completions of $20.8 million. Revenue was further impacted by a $26.1 million reduction due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real.
The operating income as a percentage of revenue decreased slightly to 8.3% in 2014 as compared to 8.5% in 2013. Adjusted for the negative $5.5 million of foreign currency impact, the operating margin increased on operational efficiencies, increased revenue and the related increase in capacity utilization. Included in the operating income was amortization related to acquired intangibles of $0.8 million and zero for the years ended December 31, 2014 and 2013, respectively.
Customer Growth Services
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| Year Ended December 31, |
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| ||||
|
| 2014 |
| 2013 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 115,434 |
| $ | 100,996 |
| $ | 14,438 |
| 14.3 | % |
Operating Income |
|
| 7,255 |
|
| 3,024 |
|
| 4,231 |
| 139.9 | % |
Operating Margin |
|
| 6.3 | % |
| 3.0 | % |
|
|
|
|
|
The changeincrease in revenue for the Customer Growth Services segment was due to the combination of net increases in client programs and the acquisition of WebMetro in August 2013 of $20.7 million collectively, offset by program completions of $5.1 million and a $1.2 million reduction due to foreign currency fluctuations.
The operating income as a percentage of revenue increased to 6.3% in 2014 as compared to 3.0% in 2013. This increase was primarily driven by operational improvements and a shift in program mix to higher margin outcome based programs. Included in the operating income was amortization related to acquired intangibles of $2.7 million and $1.5 million for the year ended December 31, 2014 and 2013, respectively.
Customer Technology Services
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| ||||||||||||
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| Year Ended December 31, |
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| Year Ended December 31, |
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| |||||||||
|
| 2014 |
| 2013 |
| $ Change |
| % Change |
|
| 2014 |
| 2013 |
| $ Change |
| % Change |
| ||||||
Revenue |
| $ | 139,182 |
| $ | 152,485 |
| $ | (13,303 | ) | (8.7 | )% |
| $ | 139,182 |
| $ | 152,485 |
| $ | (13,303) |
| (8.7) | % |
Operating Income |
| 4,519 |
| 19,965 |
| (15,446 | ) | (77.4 | )% |
|
| 4,519 |
|
| 19,965 |
|
| (15,446) |
| (77.4) | % | |||
Operating Margin |
| 3.2 | % | 13.1 | % |
|
|
|
|
|
| 3.2 | % |
| 13.1 | % |
|
|
|
|
|
Revenue for the Customer Technology Services segment decreased by $13.3 million compared to the prior year. The decrease in revenue was primarily attributable to a $13.1 million decrease in revenue from the Avaya based offerings offset, in part, by approximately $2.4 million of additional CISCO Cloud revenue.
The operating income as a percentage of revenue decreased to 3.2% in 2014 as compared to 13.1% in 2013. The decrease in operating income was primarily the result of a $5.6 million decline tied to the lower Avaya platform revenue, $3.3 million of additional selling, general and administrative expenses related to investments in sales, marketing and research and development expenses related to the build out of the CISCO cloud solution, $1.4 million related to one-time charges for technology and managed service expenses, a $1.3 million increase in depreciation expense tied to the increased number of cloud solutions in service, and $1.0 million in severance and other cost associated with the integration of TSG into the Customer Technology Services segment. Included in the operating income was amortization related to acquired intangibles of $4.4 million and $4.1 million for the year ended December 31, 2014 and 2013, respectively.
32
Customer Strategy Services
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| Year Ended December 31, |
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|
|
|
|
| ||||
|
| 2014 |
| 2013 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 63,668 |
| $ | 48,793 |
| $ | 14,875 |
| 30.5 | % |
Operating Income |
|
| 7,909 |
|
| 2,721 |
|
| 5,188 |
| 190.7 | % |
Operating Margin |
|
| 12.4 | % |
| 5.6 | % |
|
|
|
|
|
The increase in revenue for the Customer Strategy Services segment was related to organic growth across our geographies and our consulting practices including our strategy, operations and technology, analytics and learning innovations practices and the acquisition of rogenSi in August 2014.
The operating income as a percentage of revenue increased to 12.4% in 2014 as compared to 5.6% in 2013. The improvement in the CSS operating income was primarily the result of the 30.5% increase in revenue in combination with the restructure and full integration of this segment’s multiple acquisitions initiated in the third quarter of 2013. Additionally the increase in operating income was partially related to the impairment charges of $1.1 million recorded as a result of decreased revenues resulting from the deconsolidation of a subsidiary in the prior period (see Part II, Item 8. Financial Statements and Supplementary Data, Note 1211 to the Consolidated Financial Statements for further details)Statements). Included in the operating income was amortization expense related to acquired intangibles of $2.1 million and $1.6 million for the year ended December 31, 2014 and 2013, respectively.
Interest Income (Expense)
Interest income decreased to $1.8 million in 2014 from $2.6 million in 2013. Interest expense decreased to $6.9 million during 2014 from $7.5 million for the comparable period in 2013, primarily due to decreased accretion of deferred acquisition costs.
Other Income (Expense), Net
Included in the year ended December 31, 2014, was a combined net $6.7 million benefit related to fair value adjustments of the contingent consideration based on revised estimates of performance against targets for four of our acquisitions (see Part II, Item 8. Financial Statements and Supplementary Data, Note 10 of the Notes9 to the Consolidated Financial Statements for further details)Statements).
Included in the year ended December 31, 2013, was a $3.7 million charge related to the deconsolidation of a subsidiary (see Part II, Item 8. Financial Statements and Supplementary Data, Note 24 of the Notes23 to the Consolidated Financial Statements for further details)Statements).
Income Taxes
The reported effective tax rate for 2014 was 22.9% as compared to 22.4% for 2013. The effective tax rate for 2014 was impacted by earnings in international jurisdictions currently under an income tax holiday, a $1.3 million benefit related to restructuring charges, a $0.4 million benefit related to a valuation allowance for equity compensation, a $1.2 million benefit related to the closing of statute of limitations in Canada, $3.8 million of expense related to future contingent payments, $1.3 million of expense related to the resolution of an audit in the Netherlands, and $0.2 million of expense related to other discrete items. Without these items our effective tax rate for the year ended December 31, 2014 would have been 19.8%. In the year ended December 31, 2013, our effective tax rate was 22.4%. Without a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments and $1.8 million of expense related to changes in valuation allowance, our effective tax rate for the year ended December 31, 2013 would have been 21.5%.
Year Ended December 31, 2013 Compared to 2012
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 years ended December 31, 2013 and 2012 (amounts in thousands). All inter—company transactions between the reported segments for the periods presented have been eliminated.
Customer Management Services
|
| Year Ended December 31, |
|
|
|
|
| |||||
|
| 2013 |
| 2012 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 890,883 |
| $ | 923,774 |
| $ | (32,891 | ) | (3.6 | )% |
Operating Income |
| 75,689 |
| 60,271 |
| 15,418 |
| 25.6 | % | |||
Operating Margin |
| 8.5 | % | 6.5 | % |
|
|
|
| |||
The change in revenue for the Customer Management Services segment was attributable to a $68.5 million net increase in client programs offset by program completions of $52.2 million. Revenue was further impacted by a $10.4 million reduction due to foreign currency fluctuations, primarily the Australian dollar, a $37.6 million reduction related to the exit of our business in Spain, and $1.2 million in lost revenue due to a typhoon in the third quarter of 2013.
The operating income as a percentage of revenue increased to 8.5% in 2013 as compared to 6.5% in 2012. This increase in margin was primarily due to the improvement in utilization of our capacity, exit of our business in Spain as described above and the reduction of restructuring expenses noted below. These increases were offset by a $6.6 million adverse impact from foreign currency fluctuations and a $0.8 million negative impact due to lost revenue from a typhoon. During 2013 and 2012, we recorded $4.2 million and $8.2 million, respectively, in restructuring and impairment charges in various locations to better align our capacity and workforce with current business needs. In addition, during 2012, we recorded $15.1 million in restructuring charges and $0.4 million in impairment charges as a result of our decision to exit Spain. These items were offset during 2012 in part by a $4.6 million accrual release for salaries expense due to an authoritative ruling in Spain related to the legally required cost of living adjustments for our employees’ salaries.
Customer Growth Services
|
| Year Ended December 31, |
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|
|
|
| |||||
|
| 2013 |
| 2012 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 100,996 |
| $ | 100,772 |
| $ | 224 |
| 0.2 | % |
Operating Income |
| 3,024 |
| 2,258 |
| 766 |
| 33.9 | % | |||
Operating Margin |
| 3.0 | % | 2.2 | % |
|
|
|
| |||
The change in revenue for the Customer Growth Services segment was due to the combination of net increase in client programs and the acquisition of WebMetro in August 2013 of $20.0 million in an aggregate amount, offset by program completions of $19.8 million.
The operating income as a percentage of revenue increased to 3.0% in 2013 as compared to 2.2% in 2012. Increases in income were primarily driven by a $1.8 million charge related to the impairment of the trade-name intangible asset due to the rebranding of our Direct Alliance subsidiary to Revana during the first quarter of 2012. There were also operational improvements and a shift in program mix to additional outcome-based higher margin programs. These increases were offset by net declines in client volumes, changes in pricing, the cost of ramping multiple clients and increases in amortization expense related to WebMetro. Included in the operating income was amortization related to acquired intangibles of $1.5 million and $0.7 million for the year ended December 31, 2013 and 2012, respectively.
Customer Technology Services
|
| Year Ended December 31, |
|
|
|
|
| |||||
|
| 2013 |
| 2012 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 152,485 |
| $ | 96,848 |
| $ | 55,637 |
| 57.4 | % |
Operating Income |
| 19,965 |
| 15,714 |
| 4,251 |
| 27.1 | % | |||
Operating Margin |
| 13.1 | % | 16.2 | % |
|
|
|
| |||
The increase in revenue for the Customer Technology Services segment was related to organic growth for eLoyalty in consulting and managed services and the acquisition of TSG on December 31, 2012.
The operating income as a percentage of revenue decreased to 13.1% in 2013 as compared to 16.2% in 2012. This decrease was related to investments to integrate TSG, increases in sales and marketing expenses, and a $2.6 million increase in amortization expense related to TSG. Included in the operating income was amortization related to acquired intangibles of $4.1 million and $1.8 million for the year ended December 31, 2013 and 2012, respectively.
Customer Strategy Services
|
| Year Ended December 31, |
|
|
|
|
| |||||
|
| 2013 |
| 2012 |
| $ Change |
| % Change |
| |||
Revenue |
| $ | 48,793 |
| $ | 41,587 |
| $ | 7,206 |
| 17.3 | % |
Operating Income |
| 2,721 |
| 302 |
| 2,419 |
| 801.0 | % | |||
Operating Margin |
| 5.6 | % | 0.7 | % |
|
|
|
| |||
The increase in revenue for the Customer Strategy Services segment was related to a combination of growth in operational consulting, analytics and learning innovations revenue, and the acquisitions of iKnowtion, LLC (“iKnowtion”) and Guidon Performance Solutions (“Guidon”) during 2012.
The operating income as a percentage of revenue increased to 5.6% in the 2013 as compared to 0.7% in 2012. This increase was related to the full integration of the businesses comprising the Customer Strategy Services segment, including their leadership, consultants, the services portfolio and infrastructure, and a consolidation of their geographies and personnel realignment. This integration allowed for additional revenue to be generated as well as cost savings based on the realignment. The increase also included the impairment charges of $1.1 million recorded as a result of decreased revenues resulting from the deconsolidation of a subsidiary in the second quarter of 2013 (see Notes 12 and 24 of the Notes to the Consolidated Financial Statements for further details). Included in the operating income was amortization expense related to acquired intangibles of $1.6 million and $1.2 million for the year ended December 31, 2013 and 2012, respectively.
Interest Income (Expense)
Interest income decreased to $2.6 million in 2013 from $3.0 million in 2012. Interest expense increased to $7.5 million during 2013 from $6.7 million for the comparable period in 2012, due to higher average borrowings on our credit facility and additional accretion of deferred acquisition costs.
Other Income (Expense), Net
Included in the year ended December 31, 2013, was a $3.7 million charge related to the deconsolidation of a subsidiary (see Note 24 of the Notes to the Consolidated Financial Statements for further details). Also included was a $1.9 million charge related to a fair value adjustment of the contingent consideration based on revised estimates of performance against targets for three of our acquisitions (see Note 10 of the Notes to the Consolidated Financial Statements for further details).
Income Taxes
The reported effective tax rate for 2013 was 22.4% as compared to (0.1)% for 2012. The effective tax rate for 2013 was impacted by earnings in international jurisdictions currently under an income tax holiday, a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments, and $1.8 million of expenses related to changes in valuation allowance. Without these items our effective tax rate for the year ended December 31, 2013 would have been 21.5%. In the year ended December 31, 2012, our effective tax rate would have been 19.9% without a $7.6 million tax benefit related to Australia and New Zealand transfer pricing, a $1.4 million benefit from the release of uncertain tax positions, a $9.2 million benefit related to restructuring charges, a $1.9 million benefit related to return to provision adjustments and $0.1 million of expense related to other discrete items.
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 Agreement,credit facility, dated June 3, 2013 which was amended and restated effective February 11, 2016 (the “Credit Agreement”Facility”). During the year ended December 31, 2014,2015, we generated positive operating cash flows of $94.1$133.8 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.
33
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 7A. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.
We primarily utilize our Credit AgreementFacility to fund working capital, general operations, stock repurchases, dividends, and other strategic activities, such as the acquisitions described in Note 2 of the Notes to Consolidated Financial Statements. As of December 31, 20142015 and 2013,2014, we had borrowings of $100.0 million and $100.0 million, respectively, under our Credit Agreement,Facility, and our average daily utilization was $285.9$319.6 million and $238.1$285.9 million for the years ended December 31, 20142015 and 2013,2014, respectively. After consideration for issued letters of credit under the Credit Agreement,Facility, totaling $3.2$3.4 million, and the current level of availability based on the covenant calculations, our remaining borrowing capacity was $596.8approximately $415 million as of December 31, 2014.2015. As of December 31, 2014,2015, we were in compliance with all covenants and conditions under our Credit Agreement.
Facility.
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 with commercially reasonable terms acceptable to us.
The following discussion highlights our cash flow activities during the years ended December 31, 2015, 2014, 2013, and 2012.2013.
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 $77.3$60.3 million and $158.0$77.3 million as of December 31, 20142015 and 2013,2014, 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, and expand our infrastructure, and for investment in research and development, strategic acquisitions and the purchase of our outstanding stock.
Cash Flows from Operating Activities
For the years 2015, 2014 2013 and 20122013 we reported net cash flows provided by operating activities of $133.8 million, $94.1 million and $138.0 million, and $106.9respectively. The increase of $39.7 million respectively. Despite increasesfrom 2014 to 2015 was primarily due to a $21.1 million increase in cash collected from accounts receivable, a $20.1 million decrease in payments made for operating expenses offset by decreases in deferred revenue of $13.1 million. The net income and depreciation and amortizationdecrease of $16.4$43.9 million the decreasefrom 2013 to 2014 was primarily due to a $48.3 million decrease in cash collected from accounts receivable and an increase of $5.6 million in payments made for operating expenses. The net increase of $31.1 million from 2012 to 2013 was primarily due to a $20.3 million decrease in cash spent on prepaid and other assets, a $13.8 million decrease in payments made for operating expenses, a $9.2 million increase in cash from net income and a $6.9 million increase in cash collected from accounts receivable. This increase was partially offset by a $19.1 million decrease in cash prepayments from customers.
Cash Flows from Investing Activities
For the years 2015, 2014 2013 and 2012,2013, we reported net cash flows used in investing activities of $77.2 million, $91.9 million and $59.5 million, respectively. The net decrease in cash used in investing activities from 2014 to 2015 was primarily due to decreased spending on acquisitions and $80.9 million, respectively.investments of $13.6 million. The net increase in cash used in investing activities from 2013 to 2014 was primarily due to increased spending on acquisitions of $15.3 million along with a $17.3 million increase in capital expenditures. The net decrease in cash used in investing activities from 2012 to 2013 was primarily due to the $31.7 million decrease in acquisition related spending offset partially by a $10.3 million increase in net spend on capital expenditures.
34
Cash Flows from Financing Activities
For the years 2015, 2014 2013 and 2012,2013, we reported net cash flows used in financing activities of $52.9 million, $74.2 million and $70.7 million, respectively. The change in net cash flows from 2014 to 2015 was primarily due to a $39.8 million decrease in purchases of our outstanding common stock offset by $17.4 million of dividends paid during 2015 and $35.0a $3.3 million respectively.increase for payments of contingent consideration related to acquisitions. The change in net cash flows from 2013 to 2014 was primarily due to $8.5 million of payments for contingent consideration related to acquisitions and an increase of $1.5 million in dividends paid to noncontrolling interests, partially offset by a $8.0 million increase in net borrowings from our line of credit. The change from 2012 to 2013 was due to a decrease in net borrowings on our line of credit of $52.0 million, a decrease in proceeds received from other debt of $4.3 million and an increase in dividends paid to noncontrolling interests of $2.3 million. This increase in cash used in financing activities was partially offset against a decrease in cash used to repurchase common stock of $24.7 million.
Free Cash Flow
Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) was $26.5$67.2 million, $87.6$26.4 million and $66.4$87.6 million for the years 2015, 2014 and 2013, respectively. The increase from 2014 to 2015 was primarily due to the increase in cash flows provided by operating activities and 2012, respectively.a decrease in spend for capital expenditures and acquisitions. The decrease from 2013 to 2014 resulted primarily from a decrease in cash flow from operating activities and a $17.3 million increase in capital expenditures. The increase from 2012 to 2013 resulted primarily from the $31.1 million increase in cash flow from operating activities offset by a $9.8 million increase in capital expenditures, net of grant funds received.
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 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| |||||||||||||||
|
| 2014 |
| 2013 |
| 2012 |
|
| 2015 |
| 2014 |
| 2013 |
| |||||||
Net cash provided by operating activities |
| $ | 94,090 |
| $ | 137,979 |
| $ | 106,920 |
|
|
| $ | 133,750 |
| $ | 94,090 |
| $ | 137,979 |
|
Less: Purchases of property, plant and equipment |
| 67,641 |
| 50,364 |
| 40,543 | (1) |
|
|
| 66,595 |
|
| 67,641 |
|
| 50,364 |
| |||
Free cash flow |
| $ | 26,449 |
| $ | 87,615 |
| $ | 66,377 |
|
|
| $ | 67,155 |
| $ | 26,449 |
| $ | 87,615 |
|
(1)Purchases of property, plant and equipment for the year ended 2012 is net of proceeds from a government grant of $0.1 million.
35
Obligations and Future Capital Requirements
Future maturities of our outstanding debt and contractual obligations as of December 31, 20142015 are summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Less than |
| 1 to 3 |
| 3 to 5 |
| Over 5 |
|
|
|
| ||||||||||||||||||||
|
| Less than |
| 1 to 3 |
| 3 to 5 |
| Over 5 |
| Total |
|
| 1 Year |
| Years |
| Years |
| Years |
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Credit Facility(1) |
| $ | 2,582 |
| $ | 4,446 |
| $ | 100,828 |
| $ | — |
| $ | 107,856 |
|
| $ | 2,479 |
| $ | 103,118 |
| $ | — |
| $ | — |
| $ | 105,597 |
|
Equipment financing arrangements |
| 171 |
| 447 |
| 78 |
| — |
| 696 |
|
|
| 1,194 |
|
| 1,635 |
|
| 78 |
|
| — |
|
| 2,907 |
| |||||
Contingent consideration |
| 11,991 |
| 13,703 |
| — |
| — |
| 25,694 |
|
|
| 9,421 |
|
| 4,337 |
|
| — |
|
| — |
|
| 13,758 |
| |||||
Purchase obligations |
| 31,363 |
| 22,164 |
| — |
| — |
| 53,527 |
|
|
| 4,355 |
|
| 7,976 |
|
| 2,289 |
|
| — |
|
| 14,620 |
| |||||
Operating lease commitments |
| 43,411 |
| 60,753 |
| 28,247 |
| 3,826 |
| 136,237 |
|
|
| 36,571 |
|
| 52,381 |
|
| 23,591 |
|
| 29,976 |
|
| 142,519 |
| |||||
Other debt |
| 3,052 |
| 1,795 |
| 390 |
| — |
| 5,237 |
|
|
| 1,242 |
|
| 1,781 |
|
| 1,046 |
|
| — |
|
| 4,069 |
| |||||
Total |
| $ | 92,570 |
| $ | 103,308 |
| $ | 129,543 |
| $ | 3,826 |
| $ | 329,247 |
|
| $ | 55,262 |
| $ | 171,228 |
| $ | 27,004 |
| $ | 29,976 |
| $ | 283,470 |
|
| (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 December 31, 2015. On February 11, 2016, we entered into an agreement to extend the maturity of our credit facility to February 11, 2021. See “Debt Instruments and Related Covenants” below. |
| · | 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 $3.7 million related to uncertain tax positions because we cannot reliably estimate the timing of future cash payments. See Part II, Item 8. Financial Statements and Supplementary Data, Note 10 to the Consolidated Financial Statements for further discussion. |
Our outstanding debt is primarily associated with the use of funds under our Credit Agreement to fund working capital, repurchase our common stock, dividends and other cash flow needs across our global operations.
Purchase Obligations
Occasionally we contract with certain of our communications clients to provide us with telecommunication services. These clients currently represent approximately 17% of our total annual revenue. We believe these contracts are negotiated on an arm’s-length basis and may be negotiated at different times and with different legal entities.
Future Capital Requirements
We expect total capital expenditures in 20152016 to be within the range of $70$60 to $80$70 million. Approximately 70%65% of these expected capital expenditures are to support growth in our business and 30%35% relate to the maintenance of existing assets. The anticipated level of 20152016 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.
We may consider restructurings, dispositions, mergers, acquisitions and other similar transactions. Such transactions could include the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures or the incurrence, assumption, or refinancing of indebtedness and could be material to the consolidated financial condition and consolidated results of our operations. Our capital expenditures requirements could also increase materially in the event of acquisition or joint ventures. In addition, as of December 31, 2014,2015, we were authorized to purchase an additional $11.8$19.6 million of common stock under our stock repurchase program (see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Form 10-K)Securities). Our stock repurchase program does not have an expiration date.
36
The launch of large client contracts may result in short-term negative working capital because of the time period between incurring the costs for training and launching the program and the beginning of the accounts receivable collection process. As a result, periodically we may generate negative cash flows from operating activities.
Debt Instruments and Related Covenants
On June 3, 2013,February 11, 2016, we entered into a $700.0 million, five-year, multi-currencyFirst Amendment to our 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 Agreement”Facility”) with a syndicate of lenders which includes an accordion feature that permits us to request an increase in total commitments up to $1.0 billion, under certain conditions, including additional commitments from members of the syndicate.led by Wells Fargo Securities, LLC, KeyBankBank, National Association, Bank of America Merrill Lynch, BBVA Compassas agent, swing line and HSBC Bank USA, National Association served as Joint Lead Arrangers. The Credit Agreement amends and restates in its entirety our prior credit facility entered into during 2010 and as amended in 2012.
fronting lender.
The Credit Agreement provides for a secured revolving credit facility that matures on June 3, 2018February 11, 2021 with an initial maximum aggregate commitment of $700.0 million.$900.0 million, and an accordion feature of up to $1.2 billion in the aggregate, if certain conditions are satisfied. At our discretion, direct borrowing options under the Credit Agreement include (i) Eurodollar loans with one, two, three, and six month terms, and/or (ii) overnight base rate loans, and (iii) alternate currency loans. The Credit Agreement also provides for a foreign subsidiary borrowing capacity sub-limit for loans or letters of credit of up to 50% of the total commitment amount, in both U.S. dollars and certain foreign currencies, with direct foreign subsidiary borrowing capabilities up to 50% of the total commitment amount. We may increase the maximum aggregate commitment under the Credit Agreement to $1.0 billion if certain conditions are satisfied.
currencies.
We primarily utilize our credit facilitiesCredit Facility to fund working capital, general operations, stock repurchases, dividends, acquisitions, and other strategic activities.
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, or (iii) 1.25% in excess of the one month London Interbank Offered Rate (“LIBOR”); and Eurodollar loans bear interest at LIBOR, in each case adding a margin based upon our net leverage ratio. Alternate currency loans bear interest at rates applicable to their respective currencies.
The applicable margins from February 11, 2016 until a compliance certificate is provided by us in connection with the delivery to the lenders of our quarterly financial statements for the quarter ended March 31, 2016, are 0.000% per annum for base rate loans and 1.000% per annum for Eurodollar loans or alternate currency loans. Thereafter the borrowing margins are determined by reference to our net leverage ratio, as set forth in the table below:
|
|
|
Net Leverage Ratio | Applicable Margin for LIBOR Fixed Rate Loans | Applicable Margin for Base Rate Loans |
Greater than or equal to 3.00 to 1.00 | 1.750% | 0.750% |
Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00 | 1.500% | 0.500% |
Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 | 1.375% | 0.375% |
Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00 | 1.125% | 0.125% |
Less than 1.00 to 1.00 | 1.000% | 0.000% |
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.
37
The Credit Facility commitment fees are payable to the lenders in an amount equal to the unused portion of the Credit Facility multiplied by 0.125% per annum from February 11, 2016 until a compliance certificate is provided by us in connection with the delivery to the lenders of our quarterly financial statements for the quarter ended March 31, 2016, and thereafter are determined by reference to our net leverage ratio, as set forth in the table below:
Net Leverage Ratio | Applicable Commitment Fee Rate |
Greater than or equal to 3.00 to 1.00 | 0.250% |
Greater than or equal to 2.50 to 1.00 but less than 3.00 to 1.00 | 0.200% |
Greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00 | 0.175% |
Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00 | 0.150% |
Less than 1.00 to 1.00 | 0.125% |
Indebtedness under the Credit Agreement is guaranteed by certain of our domestic subsidiaries and is secured by security interests (subject to permitted liens) in the U.S. accounts receivable and cash of our Company and certain of its domestic subsidiaries. The indebtedness may also be secured by tangible assets of our Company and its domestic subsidiaries, if borrowings by foreign subsidiaries exceed $100.0 million and the total net leverage ratio is greater than 3.00 to 1.00. We also pledged 65% of the voting stock and all of the non-voting stock, if any, of certain of our material foreign subsidiaries.
The Credit Agreement contains customary affirmative, negative, and financial covenants. These covenants include, but are not limited to, the following, in each case subject to exceptions set forth in the Credit Agreement: incurring additional indebtedness or, guaranteeing of indebtedness; creating, incurring, assuming or permitting to exist liens on property and assets; making loans and investments and entering into certain types of mergers, consolidations and acquisitions; making capital distributions or paying, redeeming or repurchasing subordinated debt; entering into certain affiliate transactions; and entering into agreements that would restrict the ability of the Company’s subsidiaries to pay dividends and make distributions.
In addition, 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 Credit Facility also contains certain customary information and reporting requirements, and events of default, including without limitation events of default based on payment obligations, material inaccuracies of representations and warranties, covenant defaults, cross defaults to certain other debt, certain ERISA events, changes in control, monetary judgments, and insolvency proceedings. Upon the occurrence of an event of default, the lenders may accelerate the maturity of all amounts outstanding under the Credit Facility.
As of December 31, 20142015 and 2013,2014, we had borrowings of $100.0 million and $100.0 million, respectively, under the Credit Agreement.Facility. During 2015, 2014 2013 and 2012,2013, borrowings accrued interest at an average rate of approximately 1.2%, 1.4%1.2%, and 1.6%1.4% per annum, respectively, excluding unused commitment fees. Our daily average borrowings during 2015, 2014 and 2013 and 2012 were $319.6 million, $285.9 million and $238.1 million, and $154.5 million, respectively. Availability was $596.8 million asAs of December 31, 2015, and 2014, reduced from $700.0 million bybased on the outstanding borrowingcurrent level of availability based on the covenant calculations and by $3.2 million inthe issued letters of credit;credit, our remaining borrowing capacity was approximately $415 million and was $596.5$390 million, as of December 31, 2013, reduced from $700.0 million by the outstanding borrowing and by $3.5 million in issued letters of credit.
respectively.
From time-to-time, we may have unsecured, uncommitted bank lines of credit to support working capital for a few foreign subsidiaries. As of December 31, 20142015 and 2013,2014, we had no foreign loans outstanding.
38
Client Concentration
During 2014,2015, one of our clients represented 11%10% of our total annual revenue. Our five largest clients accounted for 38%35%, 40%38% and 39%40% of our annual revenue for the years ended December 31, 2015, 2014 2013 and 2012,2013, respectively. We have long-term relationships with our top five clients, ranging from two to 1819 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 20152016 and 2017.2020. Additionally, a particular client may have multiple contracts with different expiration dates. We have historically renewed most of our contracts with our largest clients, but there can be no assurance that future contracts will be renewed or, if renewed, will be on terms as favorable as the existing contracts.
Recently Issued Accounting Pronouncements
We discuss the potential impact of recent accounting pronouncements in Part II, Item 8. Financial Statements and Supplementary Data, Note 1 to the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKRIS
K
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 risks 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/Canadian dollar, 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 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 issue related to derivative counterparty defaults.
Interest Rate Risk
We 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 and LIBOR and, therefore, is affected by changes in market interest rates. As of December 31, 2014,2015, we had $100.0 million of outstanding borrowings under the Credit Agreement. Based upon average daily outstanding borrowings during the years ended December 31, 20142015 and 2013,2014, interest accrued at a rate of approximately 1.2% and 1.4%1.2% per annum, respectively. If the Prime Rate or LIBOR increased by 100 basis points, during the quarter, there would not have been a material impact to our consolidated financial position or resultsbe $1.0 million of operations.additional interest expense per $100.0 million of outstanding borrowing under the Credit Agreement.
39
The Company’s interest rate swap arrangements as of December 31, 20142015 and 20132014 were as follows:
|
|
|
|
| ||||||||
| Contract | Contract | ||||||||||
Notional | Variable Rate | Fixed Rate | Commencement | Maturity | ||||||||
Amount | Received | Paid | Date | Date | ||||||||
Swap 1 |
| $ | 25 million |
| 1 - month LIBOR |
| 2.55 | % | April 2012 |
| April 2016 |
|
|
| 15 million |
| 1 - month LIBOR |
| 3.14 | % | May 2012 |
| May 2017 |
| |
|
| $ | 40 million |
|
|
|
|
|
|
|
|
|
Foreign Currency Risk
Our subsidiaries in Bulgaria, Canada, 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 years ended December 31, 2015, 2014 2013 and 2012,2013, revenue associated with this foreign exchange risk was 31%30%, 32%31% and 37%32% of our consolidated revenue, respectively.
The following summarizes relative (weakening) strengthening of local currencies that are relevant to our business:
|
|
|
|
|
|
|
| |||||||
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||
|
| 2014 |
| 2013 |
| 2012 |
|
| 2015 |
| 2014 |
| 2013 |
|
Canadian Dollar vs. U.S. Dollar |
| (8.7 | )% | (7.3 | )% | 2.3 | % |
| (19.3) | % | (8.7) | % | (7.3) | % |
Philippine Peso vs. U.S. Dollar |
| (0.9 | )% | (7.6 | )% | 6.4 | % |
| (4.7) | % | (0.9) | % | (7.6) | % |
Mexican Peso vs. U.S. Dollar |
| (13.0 | )% | (0.3 | )% | 7.0 | % |
| (17.5) | % | (13.0) | % | (0.3) | % |
Australian Dollar vs. U.S. Dollar |
| (8.8 | )% | (16.9 | )% | 1.9 | % |
| (11.8) | % | (8.8) | % | (16.9) | % |
Euro vs. U.S. Dollar |
| (13.3 | )% | 4.0 | % | 2.0 | % |
| (11.5) | % | (13.3) | % | 4.0 | % |
Philippine Peso vs. Australian Dollar |
| 7.2 | % | 7.9 | % | 6.4 | % |
| 6.3 | % | 7.2 | % | 7.9 | % |
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 revenue 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.
40
Our cash flow hedging instruments as of December 31, 20142015 and 20132014 are summarized as follows (in thousands). All hedging instruments are forward contracts, except as noted.
As of December 31, 2014 |
| Local |
| U.S. Dollar |
| % Maturing |
| Contracts |
| |
Canadian Dollar |
| 1,500 |
| $ | 1,441 |
| 100.0 | % | June 2015 |
|
Philippine Peso |
| 17,428,000 |
| 398,046 | (1) | 40.0 | % | August 2019 |
| |
Mexican Peso |
| 2,532,000 |
| 179,089 |
| 29.7 | % | September 2019 |
| |
New Zealand Dollar |
| 490 |
| 381 |
| 100.0 | % | July 2015 |
| |
|
|
|
| $ | 578,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Local |
|
|
|
|
|
|
|
|
|
|
|
| Currency |
| U.S. Dollar |
|
| % Maturing |
|
| Contracts |
| |
|
| Notional |
| Notional |
|
| in the next |
|
| Maturing |
| |
As of December 31, 2015 |
| Amount |
| Amount |
|
| 12 months |
|
| Through |
| |
Philippine Peso |
| 16,362,000 |
|
| 361,571 | (1) |
| 45.4 | % |
| October 2020 |
|
Mexican Peso |
| 2,637,000 |
|
| 173,124 |
|
| 28.7 | % |
| October 2020 |
|
|
|
|
| $ | 534,695 |
|
|
|
|
|
|
|
As of December 31, 2013 |
| Local |
| U.S. Dollar |
|
|
|
|
| |
Canadian Dollar |
| 7,500 |
| $ | 7,336 |
|
|
|
|
|
Philippine Peso |
| 17,355,000 |
| 404,638 | (1) |
|
|
|
| |
Mexican Peso |
| 2,305,500 |
| 166,132 |
|
|
|
|
| |
British Pound Sterling |
| 1,200 |
| 1,853 | (2) |
|
|
|
| |
New Zealand Dollars |
| 150 |
| 117 |
|
|
|
|
| |
|
|
|
| $ | 580,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Local |
|
|
|
|
|
|
|
|
|
|
|
| Currency |
| U.S. Dollar |
|
|
|
|
|
|
| |
|
| Notional |
| Notional |
|
|
|
|
|
|
| |
As of December 31, 2014 |
| Amount |
| Amount |
|
|
|
|
|
|
| |
Canadian Dollar |
| 1,500 |
| $ | 1,441 |
|
|
|
|
|
|
|
Philippine Peso |
| 17,428,000 |
|
| 398,046 | (1) |
|
|
|
|
|
|
Mexican Peso |
| 2,532,000 |
|
| 179,089 |
|
|
|
|
|
|
|
New Zealand Dollar |
| 490 |
|
| 381 |
|
|
|
|
|
|
|
|
|
|
| $ | 578,957 |
|
|
|
|
|
|
|
| (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 December 31, 2015 and December 31, 2014. |
The fair value of our cash flow hedges at December 31, 20142015 was assets/(liabilities)a liability (in thousands):
|
| December 31, |
| Maturing in |
|
|
|
|
|
|
|
| ||
|
| 2014 |
| 2015 |
|
|
|
|
| Maturing in the |
| |||
Canadian Dollar |
| $ | (152 | ) | $ | (152 | ) | |||||||
|
| December 31, 2015 |
| Next 12 Months |
| |||||||||
Philippine Peso |
| (14,816 | ) | (7,210 | ) |
|
| (20,102) |
|
| (10,183) |
| ||
Mexican Peso |
| (14,196 | ) | (5,121 | ) |
|
| (25,620) |
|
| (9,866) |
| ||
New Zealand Dollar |
| (3 | ) | (3 | ) | |||||||||
|
| $ | (29,167 | ) | $ | (12,486 | ) |
| $ | (45,722) |
| $ | (20,049) |
|
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 fair value of our cash flow hedges decreased by $17.7$14.2 million from December 31, 20132014 to December 31, 2014.2015. The decrease in fair value from December 31, 20132014 largely reflects a broaderbroad strengthening in the U.S. dollar during 2014.2015.
We recorded net (losses)/gains of $(12.4) million, $(2.4) million, $8.0 million, and $4.6$8.0 million for settled cash flow hedge contracts for the years ended December 31, 2015, 2014, 2013, and 2012,2013, respectively. These (losses)/gains 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 Note 98 in the accompanying 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 years ended 2015 and 2014, approximately 23% and 2013, approximately 24% 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.
41
Fair Value of Debt and Equity Securities
We did not have any investments in marketable debt or equity securities as of December 31, 20142015 or 2013.2014.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATADATA
The financial statements required by this item are located beginning on page F-1 of this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREDISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURESPROCEDURES
This Form 10-K includes the certifications of our Chief Executive Officer (“CEO”(the “CEO”) and Chief Financial Officer (“CFO”(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 9A includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of TeleTech’s disclosureDisclosure controls and procedures (as required by Rule 13a-15(b)defined in Rules 13a-15(e) and 15d-15(b)15d-15(e) under the “Exchange Act”)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.
Based on their evaluation, as of December 31, 2014. Based on that evaluation, the principal executive officer and the principal financial officer of TeleTech have concluded that, as of2015, the end of the period covered by this report, ourForm 10-K, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective to providebecause of the material weaknesses in our internal control over financial reporting described in “Management’s Report on Internal Control over Financial Reporting” below.
Notwithstanding such reasonable assurance.material weaknesses in internal control over financial reporting, our CEO and CFO have concluded that our consolidated financial statements included in this Form 10-K 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 and Article 10 of Regulation S-X of under the Exchange Act.
42
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 theinternal control system are met. Further, the design of a control systeminternal controls must consider the benefits of controls relative to their costs. Inherent limitations within a control systeminternal controls include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errorerrors or mistake.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 the control.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 disclosure 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. Accordingly,Thus, even effective internal control over financial reporting can only provide reasonable assurance of achieving their objectives. Therefore, because of the inherent limitations in a cost effective control system,internal controls, misstatements due to error or fraud may occur and may not be prevented or detected.
Our management has conducted an assessment of its internal control over financial reporting as of December 31, 2014 as required by Section 404 of the Sarbanes-Oxley Act. Management’s report on our internal control over financial reporting is included below. The Independent Registered Public Accounting Firm’s report with respect to the effectiveness of our internal control over financial reporting is included on page F-2. Management has concluded that internal control over financial reporting is effective as of December 31, 2014.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management, under the supervision of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f)Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act.Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP,generally accepted accounting principles, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of Directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
During 2014, the Company acquired Sofica and rogenSi and have excluded these businesses, from its assessment of internal control over financial reporting as of December 31, 2014. Sofica’s total assets and total revenues represent 2% and 1%, respectively, and rogenSi’s total assets and total revenues represent 5% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.
In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20142015 based on the framework established in Internal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of that evaluation, our management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2015, the end of the period covered by this Form 10-K, because of the material weaknesses in our internal control over financial reporting was effective atdescribed below under “Material Weaknesses in Internal Control over Financial Reporting”.
Material Weaknesses in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable assurance levelpossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We identified the following material weaknesses that existed as of December 31, 2015:
Control Environment: We did not maintain an effective control environment as we did not have a sufficient complement of qualified personnel commensurate with our financial reporting requirements. The material weakness resulted from employee turnover and organizational changes experienced subsequent to the filing of our Form 10-K for the year ended December 31, 2014. This material weakness contributed to the following control deficiencies, each of which is considered to be a material weakness.
Account Reconciliations: We did not maintain effective controls over account reconciliations, including the failure to reconcile certain accounts and to review underlying financial information in the correct reporting period. As a result of this material weakness, we failed to identify errors in the accuracy and completeness
43
of the preparation and review of account reconciliations associated with unbilled revenue, accrued expenses and telecommunications expense. This material weakness resulted in errors that were not material to our annual or interim consolidated financial statements during 2015.
Journal Entries: As previously disclosed, we did not design and maintain effective controls over the appropriate review and approval of journal entries at certain of our acquired entities, including maintaining appropriate supporting documentation. During the quarter ending December 31, 2015 management identified additional deficiencies, related to the appropriate review and approval of journal entries. Specifically, we did not design and maintain effective controls over the appropriate review and approval of journal entries, including proper segregation of duties related to the ability to create and post journal entries. This material weakness did not result in the identification of any adjustments to the annual or interim consolidated financial statements.
Revenue:We did not maintain processes, procedures and internal controls that were adequately designed, documented, and executed over our revenue process which could lead to misstatements in accurate and timely recording or reporting of revenue. This material weakness did not result in the identification of any adjustments to the annual or interim consolidated financial statements.
Impairments: We did not design and maintain effective internal controls over the review of the cash flow forecasts used in the accounting for long-lived asset recoverability and goodwill impairment and determination of the an impairment charge in accordance with generally accepted accounting principles. Specifically, the Company did not design and maintain effective internal controls related to determining the fair value of reporting units for the purpose of performing goodwill impairment testing and management’s review of the data, model and assumptions used in its cash flow forecasts for long-lived asset recoverability and goodwill impairment. This control deficiency resulted in an immaterial misstatement to goodwill during the year-ended December 31, 2014 and immaterial out-of-period adjustments to goodwill during each of the quarters ended September 30, 2015 and December 31, 2015.
While these control deficiencies did not result in errors that were material to our annual or interim financial statements, they could result in material misstatements of our consolidated financial statements and disclosures which would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 31, 20142015 has also been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Remediation Plan for Material Weakness
In response to the identified material weaknesses, our management, with the oversight of the Audit Committee of our board of directors, has dedicated significant resources and efforts to improve our control environment and has taken immediate action to remediate the material weaknesses identified. While certain remedial actions have been completed, we continue to actively plan for and implement additional control procedures. The remediation efforts, outlined below, are intended both to address the identified material weaknesses and to enhance our overall financial control environment.
Remediation Actions for Control Environment:
· | We hired additional personnel and established appropriate roles and responsibilities within our global finance and accounting organization to improve our knowledge and expertise over financial reporting. Since mid-year 2015, we have been actively upgrading key accounting leadership personnel in the United States, Philippines, and Mexico. Our focus is on upgrading personnel that have responsibilities for the knowledge of and technical expertise in US GAAP. In the last six months we appointed a new Global Controller, VP accounting operations, two assistant controllers with responsibility for our reporting segments, and additional technical accounting staff. We are also in the process of augmenting our financial reporting function by hiring a senior executive, reporting to the Global Controller, with significant public company experience who will have accountability for all SEC reporting, US GAAP technical accounting issues, and Sarbanes-Oxley compliance. |
44
· | In addition, we engaged an independent third party expert to assist us in our review of our control structure, including a comprehensive risk assessment with respect to our internal controls, and to provide constructive recommendations for optimization of our controls and control environment, including our implementation of a periodic monitoring process for the design and operating effectiveness of our control activities. We expect to implement the expert recommendations and upgrade our control structure in 2016, but we can provide no assurance as to the timing of when the material weaknesses will be remediated as a result of these changes |
· | We have implemented a comprehensive training for our accounting managers designed to ensure that we have sufficient complement of qualified personnel with knowledge, experience, and training in the application of generally accepted accounting principles, and will include a program of continuous education for new staff and refresher courses for existing staff on a going forward basis. |
Remediation Actions for Account Reconciliations
· | Beginning in the quarter ended September 30, 2015, we implemented enhanced control procedures over our reconciliation process. |
· | Beginning in the quarter ended December 31, 2015, we implemented additional balance sheet and income statement analytic controls designed to further enhance our controls and detect any material misstatements. |
Remediation Actions for Journal Entries
· | We will review our accounting system configuration and implement the necessary system controls to eliminate the ability for a user to create and post a journal entry. |
· | We have integrated our acquired companies onto our accounting system which will allow for system controls to prevent a user from posting and approving their journal entries. |
Remediation Actions for Revenue Processes
· | We are optimizing our revenue accounting organization structure to improve our control environment including the establishment of a revenue quality assurance organization. |
· | We will implement enhanced control procedures and additional controls over our revenue process including, but not limited to, system controls and specific transaction controls. |
Remediation for Impairment
· | We engaged a third party expert to assist in our review of the completeness and accuracy of our valuation methodology and will continue to apply the enhancements in our valuation models on a going forward basis. |
· | We will assess, develop and implement specific guidance and procedures for the expected level of reviews to be performed in connection with valuation models that we use for impairment testing, including consideration of the data and assumptions used in these models. |
These material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
We believe the measures described above will remediate the control deficiencies we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
45
Changes in Internal Control
The changes made in our internal controls related to account reconciliations, as described under Remediation Plan for Material Weaknesses, were the only changes in internal controls over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEGOVERNANCE
The information in our 20152016 Definitive Proxy Statement on Schedule 14A, which will be filed no later than 120 days after December 31, 20142015 (the “2015“2016 Proxy Statement”) regarding our executive officers under the heading “Information Regarding Executive Officers” is incorporated herein by reference. We have both a Code of Ethical Conduct for Executive and Financial Managers and a Code of Conduct. The Code of Ethical Conduct for Executive and Financial Officers applies to our Chief Executive Officer, Chief Financial Officer, presidents of our business segments, Controller, Treasurer, the General Counsel, Chief Audit executive, senior financial officers of each operating segment and other persons performing similar functions. The Code of Conduct applies to all directors, officers, employees and members of our supply chain (as applicable). Both the Code of Ethical Conduct for Executive and Financial Officers and the Code of Conduct are posted on our website at www.teletech.com on the Corporate Governance page. We will post on our website any amendments to or waivers of the Code of Ethical Conduct for Executive and Financial Officers and our Code of Conduct, in accordance with applicable laws and regulations.
There have been no material changes to the procedures by which stockholders may recommend nominees to the board of directors. The remaining information called for by this Item 10 is incorporated by reference herein from our 20152016 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATIONCOMPENSATION
The information in our 20152016 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSMATTERS
The information regarding these matters is included in Part II, Item 5. “MarketMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.Securities. Also the information in our 20152016 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEINDEPENDENCE
The information in our 20152016 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICESSERVICES
The information in our 20152016 Proxy Statement is incorporated herein by reference.
47
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSCHEDULES
(a)The following documents are filed as part of this report:
1.Consolidated Financial Statements.
The Index to Consolidated Financial Statements is set forth on page F-1 of this report.
2.Financial Statement Schedules.
All schedules for TeleTech have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information is included in the respective Consolidated Financial Statements or notes thereto.
3.Exhibits.
EXHIBIT INDEX
EXHIBIT INDEX
| ||
Exhibit No. | Description | |
3.01** |
| Restated Certificate of Incorporation of TeleTech Holdings, Inc. filed with the State of Delaware on August 1, 1996 (incorporated by reference to Exhibit 3.1 to TeleTech’s Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996) |
|
|
|
3.02** |
| Second Amended and Restated Bylaws of TeleTech (incorporated by reference to Exhibit 3.02 to TeleTech’s Current Report on Form 8-K filed on May 28, 2009) |
|
|
|
10.04** |
| TeleTech Holdings, Inc. Amended and Restated 1999 Stock Option and Incentive Plan (incorporated by reference as Exhibit 10.04 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2012) |
|
|
|
10.06** |
| TeleTech Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference as Appendix A to TeleTech’s Definitive Proxy Statement, filed April 12, 2010) |
|
|
|
|
| |
|
| |
|
| |
|
| |
10.24** |
| Form of Restricted Stock Unit Agreement (Section 16 Officers) (incorporated by reference as Exhibit 4.3 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010) |
|
|
|
10.25** |
| Form of Restricted Stock Unit Agreement (Non-Section 16 Employees) (incorporated by reference as Exhibit 4.4 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010) |
|
|
|
|
| |
10.27** |
| Form of Global Restricted Stock Unit Agreement (Operating Committee Member) (incorporated by reference to Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013) |
|
| |
10.28** |
| Form of Global Restricted Stock Unit Agreement (Non-Operating Committee Member) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013) |
|
|
|
10.29** |
| Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (other employees) effective July 1, 2014 (incorporated by reference as Exhibit 10.29 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2014) |
|
|
|
48
Exhibit No. | Description | |
10.30** |
| Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (Directors and Executive Committee Members) effective July 1, 2014 (incorporated by reference as Exhibit 10.30 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2014) |
|
|
|
10.31** |
| Form of Non-Qualified Stock Option Agreement (Non-Employee Director) (incorporated by reference as Exhibit 10.08 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007) |
|
|
|
10.32* |
| Independent Director Compensation Arrangements (effective January 1, |
|
|
|
10.33** |
| Form of Indemnification Agreement with Directors (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010) |
|
|
|
10.40** |
| Employment Agreement between Kenneth D. Tuchman and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.68 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001) |
|
|
|
10.41** |
| Amendment to Employment Agreement between Kenneth D. Tuchman and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.17 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008) |
|
|
|
|
| |
10.50** |
| Employment Agreement between James E. Barlett and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.66 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001) |
|
|
|
10.52** |
| Amendment to Employment Agreement between James E. Barlett and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.13 |
|
| |
|
|
|
10.54** |
| Second Amendment, dated as of April 19, 2011, to TeleTech Holdings, Inc. Restricted Stock Unit Agreement by and between TeleTech Holdings, Inc. and James E. Barlett dated June 22, 2007 (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed April 22, 2011) |
|
|
|
10.60** |
| Employment Agreement between Regina Paolillo and TeleTech Holdings, Inc. effective as of November 3, 2011 (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed October 27, 2011) |
|
|
|
10.62** |
| Restricted Stock Unit Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (RSU Performance Agreement) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011) |
|
|
|
10.63** |
| Non-Qualified Stock Option Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (Option Agreement)(incorporated by reference as Exhibit 10.3 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011) |
|
|
|
|
|
|
| |
10.80** |
| Employment Agreement between Keith Gallacher and TeleTech Services Corporation effective as of June 3, 2013 (incorporated by reference as Exhibit 10.2 to TeleTech’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013) |
|
|
|
10.81** | Employment Agreement between Robert N. Jimenez and TeleTech Services Corporation effective as of April 20, 2015 (incorporated by reference as Exhibit 10.81 to TeleTech’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015) | |
49
Exhibit No. | Description | |
10.90** |
| First Amendment to Amended and Restated Credit Agreement and First Amendment to Amended and Restated Security Agreement (collectively, “New Credit Agreement”) for the senior secured revolving credit facility (the “New Credit Facility”) with a syndicate of lenders (collectively, “Lenders”) led by Wells Fargo Bank, National Association, as agent, swing line and fronting lender. The New Credit Agreement amends the Company’s prior Amended and Restated Credit Agreement and Amended and Restated Security Agreement dated as of June 3, 2013 |
|
|
|
21.1* |
| List of subsidiaries |
|
|
|
23.1* |
| Consent of Independent Registered Public Accounting Firm |
|
|
|
24.1* |
| Power of Attorney |
|
|
|
31.1* |
| Rule 13a-14(a) Certification of CEO of TeleTech |
|
|
|
31.2* |
| Rule 13a-14(a) Certification of CFO of TeleTech |
|
|
|
32.1* |
| Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
32.2* |
| Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
101.INS*** |
| XBRL Instance Document |
|
|
|
101.SCH*** |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL*** |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
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|
|
101.LAB*** |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE*** |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF*** |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
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|
|
|
|
*Filed or furnished herewith.
**Identifies exhibit that consists of or includes a management contract or compensatory plan or arrangement.
***Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2015 and 2014, (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013, (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.
50
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 on March 9, 2015.14, 2016.
| TELETECH HOLDINGS, INC. | |
|
| |
|
| |
| By: | /s/ KENNETH D. TUCHMAN |
|
| Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 9, 2015,14, 2016, by the following persons on behalf of the registrant and in the capacities indicated:
| ||
Signature | Title | |
|
|
|
/s/ KENNETH D. TUCHMAN |
| PRINCIPAL EXECUTIVE OFFICER |
Kenneth D. Tuchman |
| Chief Executive Officer and Chairman of the Board |
|
|
|
|
|
|
/s/ REGINA M. PAOLILLO |
| PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER |
Regina M. Paolillo |
| Chief Financial Officer |
|
|
|
* |
| DIRECTOR |
James E. Barlett |
|
|
|
|
|
* |
| DIRECTOR |
Tracy L. Bahl |
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|
|
* |
| DIRECTOR |
Gregory A. Conley |
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|
|
* |
| DIRECTOR |
Robert Frerichs |
|
|
|
|
|
* |
| DIRECTOR |
Marc L. Holtzman |
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|
|
* |
| DIRECTOR |
Shrikant Mehta |
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|
* By /s/ Regina M. Paolillo under Power of Attorney as attached hereto as Exhibit 24.1
51
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC.INC.
| |
Page No. | |
| |
Consolidated Balance Sheets as of December 31, |
|
| |
| |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 |
|
|
F-1
Report of Independent Registered Public Accounting FirmFirm
To the Stockholders and the Board of Directors of TeleTech Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income (loss), of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of TeleTech Holdings, Inc. and its subsidiaries (the “Company”) at December 31, 20142015 and 2013,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, ,2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). because material weaknesses in internal control over financial reporting existed as of that date related to (i) an ineffective control environment, as the Company did not have a sufficient complement of qualified personnel commensurate with the Company’s reporting requirements. This material weakness contributed to material weaknesses related to (ii) ineffective controls over account reconciliations, including review of underlying financial information, (iii) ineffective design of controls over review and approval of journal entries, including lack of appropriate supporting documentation and proper segregation of duties over creation and posting of journal entries, (iv) ineffective controls over the accurate and timely recognition of revenue, and (v) ineffective design and execution of controls over the review of cash flow forecasts used in the accounting for long-lived asset recoverability and goodwill impairment analyses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred income taxes in 2015.
F-2
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded rogenSi and Sofica from its assessment of internal control over financial reporting as of December 31, 2014, because they were acquired by the Company during 2014. We have also excluded rogenSi and Sofica Group, both 100% owned subsidiaries, from our audit of internal control over financial reporting. rogenSi’s total assets and total revenues represent 5% and 1%, respectively, and Sofica’s total assets and total revenues represent 2% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.
/s/ PricewaterhouseCoopers LLP
Denver, COColorado
March 9, 201514, 2016
F-3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance SheetsSheets
(Amounts in thousands, except share amounts)
|
| December 31, |
| ||||
|
| 2014 |
| 2013 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 77,316 |
| $ | 158,017 |
|
Accounts receivable, net |
| 276,432 |
| 236,099 |
| ||
Prepaids and other current assets |
| 64,702 |
| 52,332 |
| ||
Deferred tax assets, net |
| 22,501 |
| 11,905 |
| ||
Income tax receivable |
| 4,532 |
| 11,198 |
| ||
Total current assets |
| 445,483 |
| 469,551 |
| ||
|
|
|
|
|
| ||
Long-term assets |
|
|
|
|
| ||
Property, plant and equipment, net |
| 150,212 |
| 126,719 |
| ||
Goodwill |
| 128,705 |
| 102,743 |
| ||
Deferred tax assets, net |
| 31,512 |
| 42,791 |
| ||
Other intangible assets, net |
| 59,905 |
| 54,812 |
| ||
Other long-term assets |
| 36,658 |
| 45,726 |
| ||
Total long-term assets |
| 406,992 |
| 372,791 |
| ||
Total assets |
| $ | 852,475 |
| $ | 842,342 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 37,019 |
| $ | 32,031 |
|
Accrued employee compensation and benefits |
| 70,069 |
| 80,130 |
| ||
Other accrued expenses |
| 34,430 |
| 31,659 |
| ||
Income tax payable |
| 10,141 |
| 6,066 |
| ||
Deferred tax liabilities, net |
| — |
| 590 |
| ||
Deferred revenue |
| 29,887 |
| 28,799 |
| ||
Other current liabilities |
| 17,085 |
| 11,512 |
| ||
Total current liabilities |
| 198,631 |
| 190,787 |
| ||
|
|
|
|
|
| ||
Long-term liabilities |
|
|
|
|
| ||
Line of credit |
| 100,000 |
| 100,000 |
| ||
Deferred tax liabilities, net |
| 4,675 |
| 2,281 |
| ||
Deferred rent |
| 8,956 |
| 9,635 |
| ||
Other long-term liabilities |
| 74,149 |
| 63,648 |
| ||
Total long-term liabilities |
| 187,780 |
| 175,564 |
| ||
Total liabilities |
| 386,411 |
| 366,351 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 15) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Mandatorily redeemable noncontrolling interest |
| 2,814 |
| 2,509 |
| ||
|
|
|
|
|
| ||
Stockholders’ equity |
|
|
|
|
| ||
Preferred stock; $0.01 par value; 10,000,000 shares authorized; zero shares outstanding as of December 31, 2014 and 2013 |
| — |
| — |
| ||
Common stock; $.01 par value; 150,000,000 shares authorized; 48,452,852 and 50,352,881 shares outstanding as of December 31, 2014 and 2013, respectively |
| 485 |
| 503 |
| ||
Additional paid-in capital |
| 356,792 |
| 356,381 |
| ||
Treasury stock at cost: 33,599,401 and 31,699,372 shares as of December 31, 2014 and 2013, respectively |
| (527,595 | ) | (477,399 | ) | ||
Accumulated other comprehensive income (loss) |
| (52,274 | ) | (20,586 | ) | ||
Retained earnings |
| 677,859 |
| 606,502 |
| ||
Noncontrolling interest |
| 7,983 |
| 8,081 |
| ||
Total stockholders’ equity |
| 463,250 |
| 473,482 |
| ||
Total liabilities and stockholders’ equity |
| $ | 852,475 |
| $ | 842,342 |
|
|
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
| ||
|
| 2015 |
| 2014 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 60,304 |
| $ | 77,316 |
|
Accounts receivable, net |
|
| 283,474 |
|
| 276,432 |
|
Prepaids and other current assets |
|
| 64,180 |
|
| 64,702 |
|
Deferred tax assets, net |
|
| — |
|
| 22,501 |
|
Income tax receivable |
|
| 7,114 |
|
| 4,532 |
|
Total current assets |
|
| 415,072 |
|
| 445,483 |
|
|
|
|
|
|
|
|
|
Long-term assets |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 168,289 |
|
| 150,212 |
|
Goodwill |
|
| 114,183 |
|
| 128,705 |
|
Deferred tax assets, net |
|
| 52,082 |
|
| 31,512 |
|
Other intangible assets, net |
|
| 51,215 |
|
| 59,905 |
|
Other long-term assets |
|
| 42,486 |
|
| 36,658 |
|
Total long-term assets |
|
| 428,255 |
|
| 406,992 |
|
Total assets |
| $ | 843,327 |
| $ | 852,475 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
| $ | 43,323 |
| $ | 37,019 |
|
Accrued employee compensation and benefits |
|
| 71,634 |
|
| 70,069 |
|
Other accrued expenses |
|
| 33,160 |
|
| 34,430 |
|
Income tax payable |
|
| 9,125 |
|
| 10,141 |
|
Deferred revenue |
|
| 26,184 |
|
| 29,887 |
|
Other current liabilities |
|
| 23,480 |
|
| 17,085 |
|
Total current liabilities |
|
| 206,906 |
|
| 198,631 |
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
|
Line of credit |
|
| 100,000 |
|
| 100,000 |
|
Deferred tax liabilities, net |
|
| 3,333 |
|
| 4,675 |
|
Deferred rent |
|
| 11,791 |
|
| 8,956 |
|
Other long-term liabilities |
|
| 76,349 |
|
| 74,149 |
|
Total long-term liabilities |
|
| 191,473 |
|
| 187,780 |
|
Total liabilities |
|
| 398,379 |
|
| 386,411 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable noncontrolling interest |
|
| 4,131 |
|
| 2,814 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
Preferred stock; $0.01 par value; 10,000,000 shares authorized; zero shares outstanding as of December 31, 2015 and December 31, 2014 |
|
| — |
|
| — |
|
Common stock; $0.01 par value; 150,000,000 shares authorized; 48,481,323 and 48,452,852 shares outstanding as of December 31, 2015 and December 31, 2014, respectively |
|
| 485 |
|
| 485 |
|
Additional paid-in capital |
|
| 347,251 |
|
| 356,792 |
|
Treasury stock at cost: 33,570,930 and 33,599,401 shares as of December 31, 2015 and December 31, 2014, respectively |
|
| (533,744) |
|
| (527,595) |
|
Accumulated other comprehensive income (loss) |
|
| (101,365) |
|
| (52,274) |
|
Retained earnings |
|
| 720,989 |
|
| 677,859 |
|
Noncontrolling interest |
|
| 7,201 |
|
| 7,983 |
|
Total stockholders’ equity |
|
| 440,817 |
|
| 463,250 |
|
Total liabilities and stockholders’ equity |
| $ | 843,327 |
| $ | 852,475 |
|
The accompanying notes are an integral part of these consolidated financial statements.statements.
F-4
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)(Loss)
(Amounts in thousands, except per share amounts)
|
| Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2014 |
| 2013 |
| 2012 |
|
|
| Year Ended December 31, |
| ||||||||||
|
|
|
|
|
|
|
|
|
| 2015 |
| 2014 |
| 2013 |
| ||||||
Revenue |
| $ | 1,241,781 |
| $ | 1,193,157 |
| $ | 1,162,981 |
|
|
| $ | 1,286,755 |
| $ | 1,241,781 |
| $ | 1,193,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of services |
| 886,492 |
| 846,631 |
| 834,803 |
| ||||||||||||||
Cost of services (exclusive of depreciation and amortization presented separately below) |
|
|
| 928,247 |
|
| 886,492 |
|
| 846,631 |
| ||||||||||
Selling, general and administrative |
| 198,553 |
| 193,423 |
| 182,634 |
|
|
|
| 194,606 |
|
| 198,553 |
|
| 193,423 |
| |||
Depreciation and amortization |
| 56,538 |
| 46,064 |
| 41,166 |
|
|
|
| 63,808 |
|
| 56,538 |
|
| 46,064 |
| |||
Restructuring charges, net |
| 3,350 |
| 4,435 |
| 22,875 |
|
|
|
| 1,814 |
|
| 3,350 |
|
| 4,435 |
| |||
Impairment losses |
| 373 |
| 1,205 |
| 2,958 |
|
|
|
| 8,100 |
|
| 373 |
|
| 1,205 |
| |||
Total operating expenses |
| 1,145,306 |
| 1,091,758 |
| 1,084,436 |
|
|
|
| 1,196,575 |
|
| 1,145,306 |
|
| 1,091,758 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income from operations |
| 96,475 |
| 101,399 |
| 78,545 |
|
|
|
| 90,180 |
|
| 96,475 |
|
| 101,399 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest income |
| 1,769 |
| 2,560 |
| 2,978 |
|
|
|
| 1,090 |
|
| 1,769 |
|
| 2,560 |
| |||
Interest expense |
| (6,946 | ) | (7,513 | ) | (6,696 | ) |
|
|
| (7,538) |
|
| (6,946) |
|
| (7,513) |
| |||
Loss on deconsolidation of subsidiary |
| — |
| (3,655 | ) | — |
|
|
|
| — |
|
| — |
|
| (3,655) |
| |||
Other income (expense), net |
| 9,161 |
| (722 | ) | (965 | ) |
|
|
| 2,157 |
|
| 9,161 |
|
| (722) |
| |||
Total other income (expense) |
| 3,984 |
| (9,330 | ) | (4,683 | ) |
|
|
| (4,291) |
|
| 3,984 |
|
| (9,330) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income before income taxes |
| 100,459 |
| 92,069 |
| 73,862 |
|
|
|
| 85,889 |
|
| 100,459 |
|
| 92,069 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
(Provision for) benefit from income taxes |
| (23,042 | ) | (20,598 | ) | 61 |
| ||||||||||||||
Provision for income taxes |
|
|
| (20,004) |
|
| (23,042) |
|
| (20,598) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| 77,417 |
| 71,471 |
| 73,923 |
|
|
|
| 65,885 |
|
| 77,417 |
|
| 71,471 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income attributable to noncontrolling interest |
| (5,124 | ) | (4,083 | ) | (3,908 | ) |
|
|
| (4,219) |
|
| (5,124) |
|
| (4,083) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income attributable to TeleTech stockholders |
| $ | 72,293 |
| $ | 67,388 |
| $ | 70,015 |
|
|
| $ | 61,666 |
| $ | 72,293 |
| $ | 67,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 77,417 |
| $ | 71,471 |
| $ | 73,923 |
|
|
| $ | 65,885 |
| $ | 77,417 |
| $ | 71,471 |
|
Foreign currency translation adjustments |
| (23,120 | ) | (26,342 | ) | 12,648 |
|
|
|
| (38,200) |
|
| (23,120) |
|
| (26,342) |
| |||
Derivative valuation, gross |
| (16,970 | ) | (29,465 | ) | 25,266 |
|
|
|
| (15,768) |
|
| (16,970) |
|
| (29,465) |
| |||
Derivative valuation, tax effect |
| 6,978 |
| 11,554 |
| (9,855 | ) |
|
|
| 7,228 |
|
| 6,978 |
|
| 11,554 |
| |||
Other, net of tax |
| 1,076 |
| 598 |
| 527 |
|
|
|
| (2,707) |
|
| 1,076 |
|
| 598 |
| |||
Total other comprehensive income (loss) |
| (32,036 | ) | (43,655 | ) | 28,586 |
|
|
|
| (49,447) |
|
| (32,036) |
|
| (43,655) |
| |||
Total comprehensive income (loss) |
| 45,381 |
| 27,816 |
| 102,509 |
|
|
|
| 16,438 |
|
| 45,381 |
|
| 27,816 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Less: Comprehensive income attributable to noncontrolling interest |
| (4,163 | ) | (3,995 | ) | (4,039 | ) |
|
|
| (3,026) |
|
| (4,163) |
|
| (3,995) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Comprehensive income (loss) attributable to TeleTech stockholders |
| $ | 41,218 |
| $ | 23,821 |
| $ | 98,470 |
|
|
| $ | 13,412 |
| $ | 41,218 |
| $ | 23,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Basic |
| 49,297 |
| 51,338 |
| 54,738 |
|
|
|
| 48,370 |
|
| 49,297 |
|
| 51,338 |
| |||
Diluted |
| 50,102 |
| 52,244 |
| 55,540 |
|
|
|
| 49,011 |
|
| 50,102 |
|
| 52,244 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income per share attributable to TeleTech stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | 1.47 |
| $ | 1.31 |
| $ | 1.28 |
|
|
| $ | 1.27 |
| $ | 1.47 |
| $ | 1.31 |
|
Diluted |
| $ | 1.44 |
| $ | 1.29 |
| $ | 1.26 |
|
|
| $ | 1.26 |
| $ | 1.44 |
| $ | 1.29 |
|
The accompanying notes are an integral part of these consolidated financial statements.statements.
F-5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ EquityEquity
(Amounts in thousands)
|
| Stockholders’ Equity of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
| Stockholders’ Equity of the Company |
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Preferred Stock |
| Common Stock |
| Treasury |
| Additional |
| Comprehensive |
| Retained |
| Noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Stock |
| Paid-in Capital |
| Income (Loss) |
| Earnings |
| interest |
| Total Equity |
|
| Preferred Stock |
| Common Stock |
| Treasury |
| Additional |
| Comprehensive |
| Retained |
| Noncontrolling |
|
|
|
| |||||||||||||||||||
Balance as of December 31, 2011 |
| — |
| $ | — |
| 56,635 |
| $ | 566 |
| $ | (357,267 | ) | $ | 350,386 |
| $ | (5,474 | ) | $ | 470,776 |
| $ | 11,260 |
| $ | 470,247 |
| |||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 70,015 |
| 3,908 |
| 73,923 |
| |||||||||||||||||||||||||||||||||||||
Acquisition of noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 941 |
| 941 |
| |||||||||||||||||||||||||||||||||||||
Dividends distributed to noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,205 | ) | (2,205 | ) | |||||||||||||||||||||||||||||||||||||
Transfer of noncontrolling interest to mandatorily redeemable noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,067 | ) | (1,067 | ) | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| 12,517 |
| — |
| 131 |
| 12,648 |
| |||||||||||||||||||||||||||||||||||||
Derivatives valuation, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| 15,411 |
| — |
| — |
| 15,411 |
| |||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units |
| — |
| — |
| 575 |
| 5 |
| 8,041 |
| (12,626 | ) | — |
| — |
| — |
| (4,580 | ) | |||||||||||||||||||||||||||||||||||||
Exercise of stock options |
| — |
| — |
| 121 |
| 1 |
| 1,703 |
| (330 | ) | — |
| — |
| — |
| 1,374 |
| |||||||||||||||||||||||||||||||||||||
Excess tax benefit from equity-based awards |
| — |
| — |
| — |
| — |
| — |
| (1 | ) | — |
| — |
| — |
| (1 | ) | |||||||||||||||||||||||||||||||||||||
Equity-based compensation expense |
| — |
| — |
| — |
| — |
| — |
| 13,285 |
| — |
| — |
| 10 |
| 13,295 |
| |||||||||||||||||||||||||||||||||||||
Purchases of common stock |
|
|
|
|
| (5,043 | ) | (50 | ) | (81,193 | ) | — |
| — |
| — |
| — |
| (81,243 | ) | |||||||||||||||||||||||||||||||||||||
Other, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| 527 |
| — |
| — |
| 527 |
| |||||||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Stock |
| Paid-in Capital |
| Income (Loss) |
| Earnings |
| interest |
| Total Equity |
| |||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2012 |
| — |
| $ | — |
| 52,288 |
| $ | 522 |
| $ | (428,716 | ) | $ | 350,714 |
| $ | 22,981 |
| $ | 540,791 |
| $ | 12,978 |
| $ | 499,270 |
|
| — |
| $ | — |
| 52,288 |
| $ | 522 |
| $ | (428,716) |
| $ | 350,714 |
| $ | 22,981 |
| $ | 540,791 |
| $ | 12,978 |
| $ | 499,270 |
|
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 67,388 |
| 3,601 |
| 70,989 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 67,388 |
|
| 3,601 |
|
| 70,989 |
| ||||||||
Dividends distributed to noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,183 | ) | (4,183 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,183) |
|
| (4,183) |
| ||||||||
Purchases of outstanding noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| 3,715 |
| — |
| — |
| (4,140 | ) | (425 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 3,715 |
|
| — |
|
| — |
|
| (4,140) |
|
| (425) |
| ||||||||
Adjustments to redemption value of mandatorily redeemable noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,677 | ) | — |
| (1,677 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,677) |
|
| — |
|
| (1,677) |
| ||||||||
Deconsolidation of a subsidiary |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (121 | ) | (121 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (121) |
|
| (121) |
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| (26,254 | ) | — |
| (88 | ) | (26,342 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (26,254) |
|
| — |
|
| (88) |
|
| (26,342) |
| ||||||||
Derivatives valuation, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| (17,911 | ) | — |
| — |
| (17,911 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (17,911) |
|
| — |
|
| — |
|
| (17,911) |
| ||||||||
Vesting of restricted stock units |
| — |
| — |
| 455 |
| 5 |
| 6,530 |
| (11,509 | ) | — |
| — |
| — |
| (4,974 | ) |
| — |
|
| — |
| 455 |
|
| 5 |
|
| 6,530 |
|
| (11,509) |
|
| — |
|
| — |
|
| — |
|
| (4,974) |
| ||||||||
Exercise of stock options |
| — |
| — |
| 91 |
| 1 |
| 1,294 |
| (433 | ) | — |
| — |
| — |
| 862 |
|
| — |
|
| — |
| 91 |
|
| 1 |
|
| 1,294 |
|
| (433) |
|
| — |
|
| — |
|
| — |
|
| 862 |
| ||||||||
Excess tax benefit from equity-based awards |
| — |
| — |
| — |
| — |
| — |
| 787 |
| — |
| — |
| — |
| 787 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 787 |
|
| — |
|
| — |
|
| — |
|
| 787 |
| ||||||||
Equity-based compensation expense |
| — |
| — |
| — |
| — |
| — |
| 13,107 |
| — |
| — |
| 34 |
| 13,141 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 13,107 |
|
| — |
|
| — |
|
| 34 |
|
| 13,141 |
| ||||||||
Purchases of common stock |
| — |
| — |
| (2,481 | ) | (25 | ) | (56,507 | ) | — |
| — |
| — |
| — |
| (56,532 | ) |
| — |
|
| — |
| (2,481) |
|
| (25) |
|
| (56,507) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (56,532) |
| ||||||||
Other, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| 598 |
| — |
| — |
| 598 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 598 |
|
| — |
|
| — |
|
| 598 |
| ||||||||
Balance as of December 31, 2013 |
| — |
| $ | — |
| 50,353 |
| $ | 503 |
| $ | (477,399 | ) | $ | 356,381 |
| $ | (20,586 | ) | $ | 606,502 |
| $ | 8,081 |
| $ | 473,482 |
|
| — |
| $ | — |
| 50,353 |
| $ | 503 |
| $ | (477,399) |
| $ | 356,381 |
| $ | (20,586) |
| $ | 606,502 |
| $ | 8,081 |
| $ | 473,482 |
|
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 72,293 |
| 4,512 |
| 76,805 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 72,293 |
|
| 4,512 |
|
| 76,805 |
| ||||||||
Dividends distributed to noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,275 | ) | (4,275 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,275) |
|
| (4,275) |
| ||||||||
Adjustments to redemption value of mandatorily redeemable noncontrolling interest |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (936 | ) | — |
| (936 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (936) |
|
| — |
|
| (936) |
| ||||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| — |
| (22,771 | ) | — |
| (349 | ) | (23,120 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (22,771) |
|
| — |
|
| (349) |
|
| (23,120) |
| ||||||||
Derivatives valuation, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| (9,993 | ) | — |
| — |
| (9,993 | ) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (9,993) |
|
| — |
|
| — |
|
| (9,993) |
| ||||||||
Vesting of restricted stock units |
| — |
| — |
| 396 |
| 4 |
| 5,979 |
| (11,362 | ) | — |
| — |
| — |
| (5,379 | ) |
| — |
|
| — |
| 396 |
|
| 4 |
|
| 5,979 |
|
| (11,362) |
|
| — |
|
| — |
|
| — |
|
| (5,379) |
| ||||||||
Exercise of stock options |
| — |
| — |
| 58 |
| 1 |
| 876 |
| (434 | ) | — |
| — |
| — |
| 443 |
|
| — |
|
| — |
| 58 |
|
| 1 |
|
| 876 |
|
| (434) |
|
| — |
|
| — |
|
| — |
|
| 443 |
| ||||||||
Excess tax benefit from equity-based awards |
| — |
| — |
| — |
| — |
| — |
| 1,015 |
| — |
| — |
| — |
| 1,015 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,015 |
|
| — |
|
| — |
|
| — |
|
| 1,015 |
| ||||||||
Equity-based compensation expense |
| — |
| — |
| — |
| — |
| — |
| 11,192 |
| — |
| — |
| 14 |
| 11,206 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 11,192 |
|
| — |
|
| — |
|
| 14 |
|
| 11,206 |
| ||||||||
Purchases of common stock |
| — |
| — |
| (2,354 | ) | (23 | ) | (57,051 | ) | — |
| — |
| — |
| — |
| (57,074 | ) |
| — |
|
| — |
| (2,354) |
|
| (23) |
|
| (57,051) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (57,074) |
| ||||||||
Other, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,076 |
| — |
| — |
| 1,076 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,076 |
|
| — |
|
| — |
|
| 1,076 |
| ||||||||
Balance as of December 31, 2014 |
| — |
| $ | — |
| 48,453 |
| $ | 485 |
| $ | (527,595 | ) | $ | 356,792 |
| $ | (52,274 | ) | $ | 677,859 |
| $ | 7,983 |
| $ | 463,250 |
|
| — |
| $ | — |
| 48,453 |
| $ | 485 |
| $ | (527,595) |
| $ | 356,792 |
| $ | (52,274) |
| $ | 677,859 |
| $ | 7,983 |
| $ | 463,250 |
|
Net income |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 61,666 |
|
| 3,382 |
|
| 65,048 |
| |||||||||||||||||||||||||||||
Dividends to shareholders ($0.18 per common share) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (17,423) |
|
| — |
|
| (17,423) |
| |||||||||||||||||||||||||||||
Dividends distributed to noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,960) |
|
| (3,960) |
| |||||||||||||||||||||||||||||
Adjustments to redemption value of mandatorily redeemable noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,113) |
|
| — |
|
| (1,113) |
| |||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (37,844) |
|
| — |
|
| (356) |
|
| (38,200) |
| |||||||||||||||||||||||||||||
Derivatives valuation, net of tax |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (8,540) |
|
| — |
|
| — |
|
| (8,540) |
| |||||||||||||||||||||||||||||
Vesting of restricted stock units |
| — |
|
| — |
| 372 |
|
| 4 |
|
| 5,768 |
|
| (10,016) |
|
| — |
|
| — |
|
| — |
|
| (4,244) |
| |||||||||||||||||||||||||||||
Exercise of stock options |
| — |
|
| — |
| 342 |
|
| 3 |
|
| 5,307 |
|
| (9,737) |
|
| — |
|
| — |
|
| — |
|
| (4,427) |
| |||||||||||||||||||||||||||||
Excess tax benefit from equity-based awards |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (823) |
|
| — |
|
| — |
|
| — |
|
| (823) |
| |||||||||||||||||||||||||||||
Equity-based compensation expense |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 11,035 |
|
| — |
|
| — |
|
| 152 |
|
| 11,187 |
| |||||||||||||||||||||||||||||
Purchases of common stock |
| — |
|
| — |
| (686) |
|
| (7) |
|
| (17,224) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (17,231) |
| |||||||||||||||||||||||||||||
Other, net of tax |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (2,707) |
|
| — |
|
| — |
|
| (2,707) |
| |||||||||||||||||||||||||||||
Balance as of December 31, 2015 |
| — |
| $ | — |
| 48,481 |
| $ | 485 |
| $ | (533,744) |
| $ | 347,251 |
| $ | (101,365) |
| $ | 720,989 |
| $ | 7,201 |
| $ | 440,817 |
|
The accompanying notes are an integral part of these consolidated financial statements.statements.
F-6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsFlows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||
|
| 2014 |
| 2013 |
| 2012 |
|
| 2015 |
| 2014 |
| 2013 |
| ||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 77,417 |
| $ | 71,471 |
| $ | 73,923 |
|
| $ | 65,885 |
| $ | 77,417 |
| $ | 71,471 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 56,538 |
| 46,063 |
| 41,166 |
|
|
| 63,808 |
|
| 56,538 |
|
| 46,063 |
| |||
Amortization of contract acquisition costs |
| 856 |
| 1,160 |
| 1,017 |
|
|
| 900 |
|
| 856 |
|
| 1,160 |
| |||
Amortization of debt issuance costs |
| 705 |
| 659 |
| 808 |
|
|
| 712 |
|
| 705 |
|
| 659 |
| |||
Imputed interest expense and fair value adjustments to contingent consideration |
| (6,233 | ) | 3,301 |
| 904 |
|
|
| 716 |
|
| (6,233) |
|
| 3,301 |
| |||
Provision for doubtful accounts |
| 633 |
| 695 |
| 368 |
|
|
| 1,465 |
|
| 633 |
|
| 695 |
| |||
Loss (gain) on disposal of assets |
| 141 |
| — |
| 305 |
| |||||||||||||
(Gain) loss on disposal of assets |
|
| (166) |
|
| 141 |
|
| — |
| ||||||||||
Impairment losses |
| 373 |
| 1,205 |
| 2,958 |
|
|
| 8,100 |
|
| 373 |
|
| 1,205 |
| |||
Deferred income taxes |
| 9,514 |
| 6,892 |
| 2,354 |
|
|
| 9,317 |
|
| 9,514 |
|
| 6,892 |
| |||
Excess tax benefit from equity-based awards |
| (1,399 | ) | (1,343 | ) | (462 | ) |
|
| (662) |
|
| (1,399) |
|
| (1,343) |
| |||
Equity-based compensation expense |
| 11,307 |
| 13,234 |
| 13,376 |
|
|
| 11,304 |
|
| 11,307 |
|
| 13,234 |
| |||
Loss on foreign currency derivatives |
| (1,548 | ) | 234 |
| 414 |
| |||||||||||||
Loss on deconsolidation of subsidiary, net of cash of zero, $897, and zero, respectively |
| — |
| 2,758 |
| — |
| |||||||||||||
(Gain) loss on foreign currency derivatives |
|
| (1,469) |
|
| (1,548) |
|
| 234 |
| ||||||||||
Loss on deconsolidation of subsidiary, net of cash of zero, zero, and $897, respectively |
|
| — |
|
| — |
|
| 2,758 |
| ||||||||||
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
| (41,005 | ) | 7,291 |
| 400 |
|
|
| (19,867) |
|
| (41,005) |
|
| 7,291 |
| |||
Prepaids and other assets |
| (5,300 | ) | (5,374 | ) | (25,664 | ) |
|
| (5,379) |
|
| (5,300) |
|
| (5,374) |
| |||
Accounts payable and accrued expenses |
| (8,115 | ) | (2,549 | ) | (16,301 | ) |
|
| 11,941 |
|
| (8,115) |
|
| (2,549) |
| |||
Deferred revenue and other liabilities |
| 206 |
| (7,718 | ) | 11,354 |
|
|
| (12,855) |
|
| 206 |
|
| (7,718) |
| |||
Net cash provided by operating activities |
| 94,090 |
| 137,979 |
| 106,920 |
|
|
| 133,750 |
|
| 94,090 |
|
| 137,979 |
| |||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Proceeds from grant for property, plant and equipment |
| — |
| — |
| 110 |
| |||||||||||||
Proceeds from sale of long-lived assets |
| 135 |
| — |
| 450 |
|
|
| 202 |
|
| 135 |
|
| — |
| |||
Purchases of property, plant and equipment, net of acquisitions |
| (67,641 | ) | (50,364 | ) | (40,653 | ) |
|
| (66,595) |
|
| (67,641) |
|
| (50,364) |
| |||
Acquisitions, net of cash acquired of $3,525, $6,423 and $3,744, respectively |
| (24,416 | ) | (9,166 | ) | (40,839 | ) | |||||||||||||
Investments in non-marketable equity investments |
|
| (9,000) |
|
| — |
|
| — |
| ||||||||||
Acquisitions, net of cash acquired of zero, $3,525, and $6,423, respectively |
|
| (1,776) |
|
| (24,416) |
|
| (9,166) |
| ||||||||||
Net cash used in investing activities |
| (91,922 | ) | (59,530 | ) | (80,932 | ) |
|
| (77,169) |
|
| (91,922) |
|
| (59,530) |
| |||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Proceeds from line of credit |
| 2,077,400 |
| 1,533,550 |
| 1,179,850 |
|
|
| 2,262,350 |
|
| 2,077,400 |
|
| 1,533,550 |
| |||
Payments on line of credit |
| (2,077,400 | ) | (1,541,550 | ) | (1,135,850 | ) |
|
| (2,262,350) |
|
| (2,077,400) |
|
| (1,541,550) |
| |||
Proceeds from other debt |
| — |
| 3,709 |
| 8,014 |
|
|
| — |
|
| — |
|
| 3,709 |
| |||
Payments on other debt |
| (4,504 | ) | (5,789 | ) | (4,900 | ) |
|
| (3,222) |
|
| (4,504) |
|
| (5,789) |
| |||
Payments of contingent consideration related to acquisitions |
| (8,547 | ) | — |
| — |
|
|
| (11,883) |
|
| (8,547) |
|
| — |
| |||
Dividends paid to noncontrolling interest |
| (5,962 | ) | (4,455 | ) | (2,205 | ) | |||||||||||||
Dividends paid to shareholders |
|
| (17,423) |
|
| — |
|
| — |
| ||||||||||
Payments to noncontrolling interest |
|
| (4,593) |
|
| (5,962) |
|
| (4,455) |
| ||||||||||
Proceeds from exercise of stock options |
| 443 |
| 862 |
| 1,374 |
|
|
| 825 |
|
| 443 |
|
| 862 |
| |||
Excess tax benefit from equity-based awards |
| 1,399 |
| 1,343 |
| 462 |
|
|
| 662 |
|
| 1,399 |
|
| 1,343 |
| |||
Payments of debt issuance costs |
|
| (35) |
|
| — |
|
| (1,800) |
| ||||||||||
Purchase of treasury stock |
| (57,074 | ) | (56,532 | ) | (81,243 | ) |
|
| (17,231) |
|
| (57,074) |
|
| (56,532) |
| |||
Payments of debt issuance costs |
| — |
| (1,800 | ) | (467 | ) | |||||||||||||
Net cash used in financing activities |
| (74,245 | ) | (70,662 | ) | (34,965 | ) |
|
| (52,900) |
|
| (74,245) |
|
| (70,662) |
| |||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| (8,624 | ) | (14,255 | ) | 17,091 |
|
|
| (20,693) |
|
| (8,624) |
|
| (14,255) |
| |||
(Decrease) increase in cash and cash equivalents |
| (80,701 | ) | (6,468 | ) | 8,114 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Decrease in cash and cash equivalents |
|
| (17,012) |
|
| (80,701) |
|
| (6,468) |
| ||||||||||
Cash and cash equivalents, beginning of period |
| 158,017 |
| 164,485 |
| 156,371 |
|
|
| 77,316 |
|
| 158,017 |
|
| 164,485 |
| |||
Cash and cash equivalents, end of period |
| $ | 77,316 |
| $ | 158,017 |
| $ | 164,485 |
|
| $ | 60,304 |
| $ | 77,316 |
| $ | 158,017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Supplemental disclosures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 5,404 |
| $ | 4,220 |
| $ | 4,412 |
|
| $ | 6,052 |
| $ | 5,404 |
| $ | 4,220 |
|
Cash paid for income taxes |
| $ | 14,545 |
| $ | 16,757 |
| $ | 16,388 |
|
| $ | 15,178 |
| $ | 14,545 |
| $ | 16,757 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Purchases of equipment through financing agreements |
| $ | 696 |
| $ | — |
| $ | 6,100 |
| ||||||||||
Acquisition of equipment through increase in accounts payable |
| $ | 4,170 |
| $ | 2,762 |
| $ | — |
| ||||||||||
Acquisition of long-lived assets through capital leases |
| $ | 10,492 |
| $ | 696 |
|
| — |
| ||||||||||
Acquisition of equipment through increase in accounts payable, net |
| $ | 386 |
| $ | 4,170 |
| $ | 2,762 |
| ||||||||||
Landlord incentives credited to deferred rent |
| $ | — |
| $ | 1,016 |
| $ | 1,723 |
|
| $ | — |
| $ | — |
| $ | 1,016 |
|
Contract acquisition costs credited to accounts receivable |
| $ | 471 |
| $ | 1,000 |
| $ | — |
|
| $ | 1,055 |
| $ | 471 |
|
| 1,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.statements.
F-7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
(1)OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) is a customer engagement management services provider, delivering integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of productproducts and service capabilitiesservices allows us to design and deliver enhanced, value-drivenengaging, outcome-based customer experiences across numerous communicationinteraction channels. TeleTech’s 46,00044,000 employees serve clients in the automotive, communication, financial services, government, healthcare, logistics, media and entertainment, retail, technology, transportation and travel industries via operations in the U.S., Australia, Belgium, Brazil, Bulgaria, Canada, China, Costa Rica, Germany, Ghana,Hong Kong, Ireland, Israel, Lebanon, Macedonia, Mexico, New Zealand, the Philippines, Poland, Singapore, South Africa, Spain, 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, its 55% equity owned subsidiary Percepta, LLC, its 80% interest in iKnowtion, LLC, and its 80% interest in Peppers & Rogers Group through the third quarter of 2013 when the final 20% interest was repurchased (see Note 2). All intercompany balances and transactions have been eliminated in consolidation.
Certain amounts for 2013During the three months ended June 30, 2015, the Company recorded an additional expense of $1.75 million as an additional estimated tax liability that should have been reclassifiedrecorded in prior periods related to ongoing discussions with relevant government authorities related to site compliance with tax advantaged status. The total amount of $1.75 million should have been recorded as additional tax expense in the amount of $466 thousand in 2012, $406 thousand in 2013, $645 thousand in 2014 and $234 thousand in the first quarter of 2015.
During the three months ended June 30, 2015, the Company recorded an additional $3.2 million loss related to foreign currency translation within Other comprehensive income (loss) that should have been recorded in 2014 and the three months ended March 31, 2015 to correct for an error in translating the financial results of Sofica Group AD, which the Company acquired on February 28, 2014. Of the $3.2 million recorded, approximately $1.7 million and $1.5 million should have been recorded in the year ended December 31, 2014, and the three months ended March 31, 2015, respectively. The Company also recorded an additional $2.7 million loss to “Other, net of tax” within Other comprehensive income (loss) in the three months ended March 31, 2015 and the nine months ended September 30, 2015 related to the annual actuarial analysis for the Company’s Philippines pension liability that should have been recorded in the fourth quarter of 2014.
During the three months ended December 31, 2015, the Company recorded an additional $2.9 million impairment to correct for an error in the goodwill impairment annual assessment and quarterly assessment for the WebMetro reporting unit. The Company should have recorded a $2.3 million impairment in the three months ended December 31, 2014 and an additional $0.6 million impairment in the three months ended September 30, 2015.
The Company has evaluated the aggregate impact of these adjustments and concluded that these adjustments were not material to the previously issued or current period Consolidated Financial Statements to conform to the 2014 presentation.Statements.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. (“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
F-8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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. In the year ended December 31, 2012, the Company recorded a change in estimate which resulted in a decrease of $4.6 million to employee related expenses in connection with an authoritative ruling in Spain related to the legally required cost of living adjustment for employees’ salaries for the year 2010, 2011 and 2012.
Concentration of Credit Risk
The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and derivative instruments. Historically, the losses related to credit risk have been immaterial. The Company regularly monitors its credit risk to mitigate the possibility of current and future exposures resulting in a loss. The Company evaluates the creditworthiness of its clients prior to entering into an agreement to provide services and as necessary through the life of the client relationship. The Company does not believe it is exposed to more than a nominal amount of credit risk in its derivative hedging activities, as the Company diversifies its activities across six well-capitalized, investment-grade financial institutions.
Fair Value of Financial Instruments
Fair values of cash equivalents and accounts receivable and payable approximate the carrying amounts because of their short-term nature.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all cash and highly liquid short-term investments with an original maturity of 90 days or less to be cash equivalents. The Company manages a centralized global treasury function in the United States with a focus on concentrating and safeguarding its global cash and cash equivalents. While the majority of the Company’s cash is held outside the U.S., the Company prefers to hold U.S. Dollars in addition to the local currencies of the foreign subsidiaries. The Company believes that it has effectively mitigated and managed its risk relating to its global cash through its cash management practices, banking partners, and utilization of diversified, high quality investments. However, the Company can provide no assurances that it will not sustain losses.
Accounts Receivable
An allowance for doubtful accounts is determined based on the aging of the Company’s accounts receivable, historical experience, client financial condition, and management judgment. The Company writes off accounts receivable against the allowance when the Company determines a balance is uncollectible.
Derivatives
The Company enters into foreign exchange forward and option contracts to reduce its exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. The Company also enters into interest rate derivatives which 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. The Company formally documents at the inception of the hedge all relationships between hedging instruments and hedged items as well as its risk management objective and strategy for undertaking various hedging activities.
All derivative financial instruments are reported at fair value and recorded in Prepaids and other current assets, Other assets, Other current liabilities, and Other liabilities in the accompanying Consolidated Balance Sheets at fair value.as applicable for each period end. Changes in fair value of derivative instruments designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss), a component of Stockholders’ Equity, to the extent they are deemed effective. Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged. Based on the criteria established by current accounting standards, the Company’s cash flow hedge contracts are deemed to be highly effective. Any realized gains or losses resulting from the foreign currency cash flow hedges are recognized together with the hedged transaction within Revenue. Any realized gains or losses from the interest rate swaps are recognized in interest income (expense). Gains and losses from the settlements of the Company’s net investment hedges remain in Accumulated other comprehensive income (loss) until partial or complete liquidation of the applicable net investment.
F-9
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The Company also enters into fair value derivative contracts that hedge against foreign currency exchange gains and losses primarily associated with short-term payables and receivables. Changes in the fair value of derivative instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income (Loss).
In addition to hedging activities, the Company has embedded derivatives in certain foreign lease contracts. The Company bifurcates and calculates the fair values of the embedded derivative feature from the host contract with any changes in fair value of the embedded derivatives recognized in Cost of services.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization. Maintenance, repairs and minor renewals are expensed as incurred.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Depreciation and amortization are computed on the straight-line method based on the following estimated useful lives:
The Company evaluates the carrying value of property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of forecasted future cash flows. Software Development Costs The Company capitalizes costs incurred to acquire or develop software for internal use. Capitalized software development costs are amortized using the straight-line method over the estimated useful life equal to the lesser of the license term or 4 years. The amortization expense is recorded in Depreciation and amortization in the accompanying Consolidated Statements of Comprehensive Income (Loss). Goodwill The Company evaluates goodwill for possible impairment at least annually on December 1, and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses a three step process to assess the realizability of goodwill. The first step, Step 0, is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, the Company analyzes changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit. A qualitative assessment also includes analyzing the excess fair value of a reporting unit over its carrying value from impairment assessments performed in previous years. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, the Company will proceed to Step 1 testing where the Company calculates the fair value of a reporting unit. If Step 1 indicates that the carrying value of a reporting unit is in excess of its fair value, the Company will proceed to Step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as they would in a business combination. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in Step 2.
Other Intangible Assets The Company has other intangible assets that include customer relationships (definite-lived) and trade names (indefinite-lived and definite-lived) and non-compete agreements (definite-lived). Definite-lived intangible assets F-10 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements are amortized on a straight-line basis over their estimated useful lives, which range from four to 11 years. The Company evaluates the carrying value of its definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company evaluates indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Similar to goodwill, the Company may first use a qualitative analysis to assess the realizability of its indefinite-lived intangible assets. The qualitative analysis will include a review of changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of an indefinite-lived intangible asset. If a quantitative analysis is completed, an indefinite-lived intangible asset (a trade name) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value. Fair value is estimated as the discounted value of future revenues arising from a trade name using a royalty rate that a market participant would pay for use of that trade name. An impairment charge is recorded if the trade name’s carrying value exceeds its estimated fair value. Self Insurance Liabilities The Company self-insures for certain levels of workers’ compensation, employee health, property, errors and omissions, cyber risks, and general liability insurance. The Company records estimated liabilities for these insurance lines based upon analyses of historical claims experience. The most significant assumption the Company makes in estimating these liabilities is that future claims experience will emerge in a similar pattern with historical claims experience. The liabilities related to workers’ compensation and employee health insurance are included in Accrued employee compensation and benefits in the accompanying Consolidated Balance Sheets. The liability for other general liability insurance is included in Other accrued expenses in the accompanying Consolidated Balance Sheets. Restructuring Liabilities The Company routinely assesses the profitability and utilization of its delivery centers and existing markets. In some cases, the Company has chosen to close under-performing delivery centers and complete reductions in workforce to enhance future profitability. Severance payments that occur from reductions in workforce are in accordance with the Company’s postemployment plans and/or statutory requirements that are communicated to all employees upon hire date; therefore, severance liabilities are recognized when they are determined to be probable and reasonably estimable. Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, rather than upon commitment to a plan.
Income Taxes Accounting for income taxes 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 or tax returns. 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 enacted tax rates in effect for the year in which the differences are expected to reverse. Gross deferred tax assets may then be reduced by a valuation allowance for amounts that do not satisfy the realization criteria established by current accounting standards. The Company accounts for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, and settlement of issues under audit. The Company recognizes interest and penalties related to uncertain tax positions as a part of the Provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income (Loss). F-11 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The Company provides for U.S. income tax expense on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. Equity-Based Compensation Expense Equity-based compensation expense for all share-based payment awards granted is determined based on the grant-date fair value net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, which is typically the vesting term of the share-based payment award. The Company estimates the forfeiture rate annually based on its historical experience of forfeited awards. Foreign Currency Translation The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is not the U.S. Dollar, are translated at the exchange rates in effect on the last day of the period and income and expenses are translated using the monthly average exchange rates in effect for the period in which the items occur. Foreign currency translation gains and losses are recorded in Accumulated other comprehensive income (loss) within Stockholders’ Equity. Foreign currency transaction gains and losses are included in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income (Loss). Revenue Recognition The Company recognizes revenue when evidence of an arrangement exists, the delivery of service has occurred, the fee is fixed or determinable and collection is reasonably assured. The BPO inbound and outbound service fees are based on either a per minute, per hour, per transaction or per call basis. Certain client programs provide for adjustments to monthly billings based upon whether the Company achieves, exceeds or fails certain performance criteria. Adjustments to monthly billings consist of contractual bonuses/penalties, holdbacks and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of future services or meeting other specified performance conditions.
Revenue also consists of services for agent training, program launch, professional consulting, fully-hosted or managed technology and learning innovation services. These service offerings may contain multiple element arrangements whereby the Company determines if those service offerings represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenue is recognized as services are provided. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into one unit of accounting and recognized over the life of the arrangement or at the time all services and deliverables have been delivered and satisfied. The Company allocates revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on the Company’s best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once the Company allocates revenue to each deliverable, the Company recognizes revenue when all revenue recognition criteria are met. Deferred Revenue and Costs The Company records amounts billed and received, but not earned, as deferred revenue. These amounts are recorded in Deferred revenue or as a component of Other long-term liabilities in the accompanying Consolidated Balance Sheets based on the period over which the Company expects to render services. We defer revenue for initial training that occurs upon commencement of a new contract if that training is billed separately because the training is not considered to provide standalone value from other services. Accordingly, the corresponding training costs, consisting primarily of labor and related expenses, are also deferred. In these circumstances, both the training revenue and costs are amortized straight-line over the life of the contract as a component of Revenue and Cost of services, respectively. In situations where these initial training costs are not billed separately, but rather included in the hourly service rates paid by the client over the life of the contract, F-12 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements no deferral is necessary as the revenue is being recognized over the life of the contract and the associated training costs are expensed as incurred. Rent Expense The Company has negotiated certain rent holidays, landlord/tenant incentives and escalations in the base price of rent payments over the initial term of its operating leases. The initial term includes the “build-out” period of leases, where no rent payments are typically due. The Company recognizes rent holidays and rent escalations on a straight-line basis to rent expense over the lease term. The landlord/tenant incentives are recorded as an increase to deferred rent liabilities and amortized on a straight line basis to rent expense over the initial lease term. Asset Retirement Obligations Asset retirement obligations relate to legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. The Company records all asset retirement obligations at estimated fair value. The Company’s asset retirement obligations primarily relate to clauses in its delivery center operating leases which require the Company to return the leased premises to its original condition. The associated asset retirement obligations are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability, reported within Other long-term liabilities, is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, In In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 requires all costs incurred in connection with the issuance of debt to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. This ASU is effective for interim and annual periods beginning on or after December 15, 2015 and early adoption is permitted. Beginning in 2016, the Company will apply the new guidance as applicable and In F-13 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset to the net non-current deferred tax asset in its Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted. See additional discussion in Note 10 Income Taxes. 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 to 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 determining its implementation approach and assessing the impact on the consolidated financial statements and related disclosures.
(2)ACQUISITIONS 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 purchase price was $34.3 million, subject to certain working capital adjustments, and consists of $18.0 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 payment for contingencies as defined in the sale and purchase agreement which will be paid in the first quarter of 2016, if required. The total contingent consideration possible per the sale and purchase agreement ranges from zero to $17.6 million and the earn-out payments are payable in early 2015, 2016 and 2017, based on July 1, 2014 through December 31, 2014, and full year 2015 and 2016 performance, respectively.
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, and the fourth quarter of 2015, the Company recorded F-14
TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The following summarizes the
balances for tradename/ trademarks, customer relationships and non-compete agreements by $3.4 million and a resulting decrease to goodwill of $3.4 million. In connection with this valuation finalization, a reduction to amortization expense of $0.3 million was recorded during the quarter ended September 30, 2015. The rogenSi customer relationships Sofica In the first quarter of 2014, as an addition to the Customer Management Services (“CMS”) segment, the Company acquired a 100% interest in Sofica Group, a Bulgarian joint stock company (“Sofica”). Sofica provides customer lifecycle management and other business process services across multiple channels in multiple sites in over 18 languages.
The purchase price of $14.2 million included $9.4 million in cash consideration (including working capital adjustments) and an estimated $3.8 million in earn-out payments, payable in 2015 and 2016, contingent on Sofica achieving specified EBITDA targets, as defined by the stock purchase agreement. The total contingent consideration possible per the stock purchase agreement ranges from zero to $7.5 million. Additionally, the purchase price includes a $1.0 million hold-back payment for contingencies as defined in the stock purchase agreement which will be paid in the second quarter of 2016, if required. F-15 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The fair value of the contingent consideration was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 5.0% and expected future value of payments of $4.0 million. The $4.0 million of expected future payments was calculated using a probability weighted EBITDA assessment with the highest probability associated with Sofica achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent consideration was approximately $3.8 million. During the third and fourth quarters of 2014, the Company recorded fair value adjustments of the contingent consideration of $1.8 million and $0.6 million, respectively based on revised estimates noting higher probability of exceeding the EBITDA targets (see Note
Other Acquisitions
WebMetro In the third quarter of 2013, as an addition to the Customer Growth Services (“CGS”) segment, the Company acquired 100% of WebMetro, a California corporation (“WebMetro”), a digital marketing agency. The total purchase price was $17.8
million. The Company was In the third quarter of 2014, the Company finalized its valuation of WebMetro for the acquisition date assets acquired and liabilities assumed. There were no material measurement period adjustments in 2014.
Financial Impact of Acquired Businesses The acquired businesses purchased in 2014 F-16 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements 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 anticipates deploying 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 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 December 31, 2015.
(3)SEGMENT INFORMATION The Company reports the following four segments:
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): Year Ended December 31,
TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Year Ended December 31, 2014
F-18 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The following tables present certain financial data based upon the geographic location where the services are provided (in thousands):
(4)ACCOUNTS RECEIVABLE AND SIGNIFICANT CLIENTS Accounts receivable, net in the accompanying Consolidated Balance Sheets consists of the following (in thousands):
Activity in the Company’s Allowance for doubtful accounts consists of the following (in thousands):
F-19 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Significant Clients The Company had one client that contributed in excess of 10% of total revenue in the years ended December 31, 2015, 2014
Accounts receivable from this client was as follows (in thousands):
The loss of one or more of its significant clients could have a material adverse effect on the Company’s business, operating results, or financial condition. The Company does not require collateral from its clients. To limit the Company’s credit risk, management performs periodic credit evaluations of its clients and maintains allowances for uncollectible accounts and may require pre-payment for services. Although the Company is impacted by economic conditions in various industry segments, management does not believe significant credit risk exists as of December 31,
(5)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Depreciation and amortization expense for property, plant and equipment was $54.0 million, $46.9 million Included in the computer equipment and
F-20 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (6)GOODWILL Goodwill consisted of the following (in thousands):
The adjustment recorded during 2015 relates to the finalization of the purchase price valuation for the rogenSi acquisition which resulted in a decrease in the goodwill balance. See Note 2 for further information. Impairment The Company has eleven reporting units with goodwill and performs a goodwill impairment test on at least an annual basis. The Company conducts its annual goodwill impairment test during the fourth quarter, or more frequently, if indicators of impairment exist. The Company concluded that goodwill for all reporting units was not impaired at December 1, 2014. While no impairment indicators were identified, due to the small margin of fair value in excess of carrying value for two reporting units, Revana (approximately 6%) and WebMetro (approximately 11%) both of which are a part of the CGS segment, these reporting units remain at considerable risk for future impairment if projected operating results are not met or other inputs into the fair value measurement change. At September 30, 2015, the Company At September 30, 2015, the updated fair value for WebMetro was below the carrying value which necessitated an interim impairment analysis. The Company tested all of the assets of this reporting unit for impairment. Definite-lived long-lived assets consisted of fixed assets, internally developed software, and an intangible asset related to the WebMetro customer relationships. The Company determined that the undiscounted future cash flows would be sufficient to cover the net book value of all definite-lived long-lived assets. F-21 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the goodwill impairment Since the fair value of the reporting unit was not in excess of its carrying value, was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss). For the annual goodwill impairment analysis, the Company elected to perform a Step 1 evaluation for all of its reporting units, which includes comparing a reporting unit’s estimated fair value to its carrying value. 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. As of December 1, The process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. We used an income approach to determine our best estimates of fair value which incorporated the following significant assumptions:
As of December 1, 2015, during the F-22
TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements
As of December 1, 2015, the updated fair value for the Latin America reporting unit was below the carrying value which necessitated an impairment analysis. The Company tested all of the assets of this reporting unit for impairment. Definite-lived long-lived assets consisted of fixed assets and an intangible asset related to customer relationships. The Company determined that the undiscounted future cash flows would be sufficient to cover the net book value of all definite-lived long-lived assets For the goodwill impairment analysis, the Company calculated the fair value of the
Since the fair value of the
Other intangible assets which are included in Other long-term assets in the accompanying Consolidated Balance Sheets consisted of the following (in thousands):
F-23
TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements
The adjustments recorded during 2015 relate to the finalization of the purchase price valuation for the rogenSi acquisition which resulted in an increase to the trade name and decrease in the customer relationships intangible assets. See Note 2 for further information. Customer relationships are being amortized over the remaining weighted average useful life of
Expected future amortization of other intangible assets as of December 31,
In connection with the reorganization of the CSS segment an interim impairment analysis was completed during the second quarter of 2013. The indefinite-lived intangible asset evaluated for impairment consisted of the PRG 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 6.0%, a discount rate specific to the trade name of 38.0% and a perpetuity growth rate of 7.0%. Based on the calculated fair value of $5.3 million, the Company recorded impairment expense of $1.1 million in the three months ended June 30, 2013. The Company reevaluated the PRG trade name for impairment as of December 31, 2013. The Company used the same method to fair value the PRG trade name and similar inputs described above. The forecasted revenues used to fair value the PRG trade name changed resulting in a fair value of $5.7 million. This fair value was approximately 7% higher than the book value of $5.3 million. As a result, the Company continues to evaluate the PRG trade name for impairment. Definite-lived long-lived assets consisted of fixed assets and an intangible asset related to the PRG customer relationships. The Company determined that the undiscounted future cash flows would be sufficient to cover the net book value of all definite-lived long-lived assets upon reorganization of the Customer Strategy Services segment and as of December 31, 2013.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (8)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 December 31,
The Company’s foreign exchange cash flow hedging instruments as of December 31,
F-25 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The Company’s interest rate swap arrangements as of December 31,
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 December 31,
Derivative Valuation and Settlements The Company’s derivatives as of December 31,
F-26 TELETECH HOLDINGS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The effect of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the
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:
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