Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to          


Commission File Number 001-11919


TeleTechTTEC Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

84-1291044

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

9197 South Peoria Street

Englewood, Colorado80112

(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

Trading Symbol

Name of each exchange on which registered

Common stock of TTEC Holdings, Inc.,
$0.01 par value per share

TTEC

NASDAQ

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 þ   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 

Accelerated Filer 

Non-accelerated Filer 

Smaller Reporting Company 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

(Do not check if a
smaller reporting company
)

Emerging growth company Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No

As of OctoberJuly 31, 2017,2020, there were 45,849,11446,733,591 shares of the registrant’s common stock outstanding.


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

SEPTEMBERJUNE 30, 20172020 FORM 10-Q

TABLE OF CONTENTS

Page No.

Page No.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets as of SeptemberJune 30, 20172020 and December 31, 20162019 (unaudited)

1

Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)

2

Consolidated StatementStatements of Stockholders’ Equity and Mezzanine Equity as of and for the ninethree and six months ended
September
June 30, 20172020 and 2019 (unaudited)

3

Consolidated Statements of Cash Flows for the ninesix months ended
September
June 30, 20172020 and 20162019 (unaudited)

4

Notes to the Unaudited Consolidated Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

42

Item 4.

Controls and Procedures

44

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

47

Item 5.

Other Information

46

47

Item 6.

Exhibits

47

SIGNATURES

48

49


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

(unaudited)(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,842

 

$

55,264

 

Accounts receivable, net

 

 

304,493

 

 

300,808

 

Prepaids and other current assets

 

 

67,516

 

 

59,905

 

Income tax receivable

 

 

8,078

 

 

7,035

 

Assets held for sale

 

 

9,279

 

 

10,715

 

Total current assets

 

 

468,208

 

 

433,727

 

 

 

 

 

 

 

 

 

Long-term assets

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

162,361

 

 

151,037

 

Goodwill

 

 

166,584

 

 

129,648

 

Deferred tax assets, net

 

 

30,953

 

 

53,585

 

Other intangible assets, net

 

 

61,784

 

 

30,787

 

Other long-term assets

 

 

59,628

 

 

47,520

 

Total long-term assets

 

 

481,310

 

 

412,577

 

Total assets

 

$

949,518

 

$

846,304

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

45,155

 

$

38,197

 

Accrued employee compensation and benefits

 

 

85,820

 

 

66,133

 

Other accrued expenses

 

 

29,405

 

 

14,830

 

Income tax payable

 

 

10,194

 

 

7,040

 

Deferred revenue

 

 

23,416

 

 

23,318

 

Other current liabilities

 

 

23,497

 

 

29,154

 

Liabilities held for sale

 

 

2,491

 

 

1,357

 

Total current liabilities

 

 

219,978

 

 

180,029

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Line of credit

 

 

255,000

 

 

217,300

 

Deferred tax liabilities, net

 

 

155

 

 

160

 

Deferred rent

 

 

16,023

 

 

15,256

 

Other long-term liabilities

 

 

58,568

 

 

71,664

 

Total long-term liabilities

 

 

329,746

 

 

304,380

 

Total liabilities

 

 

549,724

 

 

484,409

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable noncontrolling interest

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock; $0.01 par value; 10,000,000 shares authorized; zero shares outstanding as of             September 30, 2017 and December 31, 2016

 

 

 —

 

 

 

Common stock; $0.01 par value; 150,000,000 shares authorized; 45,847,389 and 46,113,693 shares outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

458

 

 

462

 

Additional paid-in capital

 

 

348,932

 

 

348,739

 

Treasury stock at cost: 36,204,864 and 35,938,560 shares as of September 30, 2017 and December 31, 2016, respectively

 

 

(615,917)

 

 

(603,262)

 

Accumulated other comprehensive income (loss)

 

 

(103,893)

 

 

(126,964)

 

Retained earnings

 

 

763,116

 

 

735,939

 

Noncontrolling interest

 

 

7,098

 

 

6,981

 

Total stockholders’ equity

 

 

399,794

 

 

361,895

 

Total liabilities and stockholders’ equity

 

$

949,518

 

$

846,304

 

June 30,

December 31,

 

    

2020

    

2019

 

ASSETS

Current assets

Cash and cash equivalents

$

482,255

$

82,407

Accounts receivable, net of allowance of $5,795 and $5,452

 

353,289

 

331,096

Prepaids and other current assets

 

87,950

 

96,287

Income and other tax receivables

 

35,358

 

40,035

Total current assets

 

958,852

 

549,825

Long-term assets

Property, plant and equipment, net

 

177,099

 

176,633

Operating lease assets

142,701

150,808

Goodwill

 

307,139

 

301,694

Deferred tax assets, net

 

10,508

 

13,263

Other intangible assets, net

 

108,205

 

115,596

Other long-term assets

 

62,485

 

68,969

Total long-term assets

 

808,137

 

826,963

Total assets

$

1,766,989

$

1,376,788

LIABILITIES, STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

Current liabilities

Accounts payable

$

73,640

$

64,440

Accrued employee compensation and benefits

 

119,476

 

114,165

Other accrued expenses

 

37,892

 

79,171

Income tax payable

 

24,627

 

11,307

Deferred revenue

 

33,820

 

39,447

Current operating lease liabilities

45,121

45,218

Other current liabilities

 

10,214

 

9,541

Total current liabilities

 

344,790

 

363,289

Long-term liabilities

Line of credit

 

700,000

 

290,000

Deferred tax liabilities, net

 

10,008

 

10,602

Non-current income tax payable

25,208

25,208

Non-current operating lease liabilities

116,558

127,395

Other long-term liabilities

 

68,472

 

79,641

Total long-term liabilities

 

920,246

 

532,846

Total liabilities

 

1,265,036

 

896,135

Commitments and contingencies (Note 10)

Redeemable noncontrolling interest

 

54,026

 

48,923

Stockholders’ equity

Preferred stock; $0.01 par value; 10,000,000 shares authorized; 0 shares outstanding as of June 30, 2020 and December 31, 2019

 

 

Common stock; $0.01 par value; 150,000,000 shares authorized; 46,682,482 and 46,488,938 shares outstanding as of June 30, 2020 and December 31, 2019, respectively

 

467

 

465

Additional paid-in capital

 

355,968

 

356,409

Treasury stock at cost; 35,369,771 and 35,563,315 shares as of June 30, 2020 and December 31, 2019, respectively

 

(602,117)

 

(605,314)

Accumulated other comprehensive income (loss)

 

(128,528)

 

(106,234)

Retained earnings

 

810,234

 

773,218

Noncontrolling interest

 

11,903

 

13,186

Total stockholders’ equity

 

447,927

 

431,730

Total liabilities and stockholders’ equity and mezzanine equity

$

1,766,989

$

1,376,788

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

1


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue

 

$

359,036

 

$

312,796

 

$

1,050,742

 

$

930,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization presented separately below)

 

 

275,548

 

 

233,541

 

 

797,450

 

 

691,649

 

Selling, general and administrative

 

 

45,167

 

 

40,628

 

 

132,372

 

 

130,902

 

Depreciation and amortization

 

 

16,515

 

 

16,811

 

 

47,273

 

 

51,761

 

Restructuring and integration charges, net

 

 

6,006

 

 

3,688

 

 

9,768

 

 

3,890

 

Impairment losses

 

 

 —

 

 

5,602

 

 

 —

 

 

5,602

 

Total operating expenses

 

 

343,236

 

 

300,270

 

 

986,863

 

 

883,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

15,800

 

 

12,526

 

 

63,879

 

 

46,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

899

 

 

397

 

 

2,020

 

 

826

��

Interest expense

 

 

(3,469)

 

 

(2,041)

 

 

(8,699)

 

 

(5,758)

 

Other income (expense), net

 

 

4,416

 

 

6,254

 

 

6,573

 

 

7,488

 

Loss on assets held for sale

 

 

 —

 

 

(5,300)

 

 

(3,178)

 

 

(5,300)

 

Total other income (expense)

 

 

1,846

 

 

(690)

 

 

(3,284)

 

 

(2,744)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

17,646

 

 

11,836

 

 

60,595

 

 

43,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

 

(2,071)

 

 

813

 

 

(9,059)

 

 

(6,667)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

15,575

 

 

12,649

 

 

51,536

 

 

37,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

(806)

 

 

(1,198)

 

 

(2,828)

 

 

(2,804)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to TeleTech stockholders

 

$

14,769

 

$

11,451

 

$

48,708

 

$

34,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,575

 

$

12,649

 

$

51,536

 

$

37,096

 

Foreign currency translation adjustments

 

 

(1,153)

 

 

(8,541)

 

 

8,414

 

 

(8,069)

 

Derivative valuation, gross

 

 

3,221

 

 

(6,009)

 

 

24,713

 

 

(2,395)

 

Derivative valuation, tax effect

 

 

(1,288)

 

 

2,462

 

 

(10,117)

 

 

725

 

Other, net of tax

 

 

127

 

 

802

 

 

386

 

 

1,202

 

Total other comprehensive income (loss)

 

 

907

 

 

(11,286)

 

 

23,396

 

 

(8,537)

 

Total comprehensive income (loss)

 

 

16,482

 

 

1,363

 

 

74,932

 

 

28,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

(899)

 

 

(1,202)

 

 

(3,153)

 

 

(2,734)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to TeleTech stockholders

 

$

15,583

 

$

161

 

$

71,779

 

$

25,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,838

 

 

47,081

 

 

45,816

 

 

47,771

 

Diluted

 

 

46,367

 

 

47,315

 

 

46,348

 

 

48,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

$

0.24

 

$

1.06

 

$

0.72

 

Diluted

 

$

0.32

 

$

0.24

 

$

1.05

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share outstanding

 

$

0.25

 

$

0.20

 

$

0.47

 

$

0.385

 

Three months ended June 30,

Six months ended June 30,

 

    

2020

    

2019

    

2020

    

2019

 

Revenue

$

453,081

$

392,515

$

885,294

$

786,871

Operating expenses

Cost of services (exclusive of depreciation and amortization presented separately below)

 

337,306

 

299,237

 

658,863

 

592,571

Selling, general and administrative

 

47,360

 

50,864

 

97,194

 

100,584

Depreciation and amortization

 

18,660

 

17,050

 

37,532

 

33,793

Restructuring charges, net

793

428

1,331

1,389

Impairment losses

 

 

2,063

 

696

 

3,569

Total operating expenses

 

404,119

 

369,642

 

795,616

 

731,906

Income from operations

 

48,962

 

22,873

 

89,678

 

54,965

Other income (expense)

Interest income

 

491

 

429

 

855

 

769

Interest expense

 

(3,104)

 

(4,208)

 

(12,696)

 

(9,496)

Other income (expense), net

(1,761)

1,865

 

1,635

 

2,663

Total other income (expense)

 

(4,374)

 

(1,914)

 

(10,206)

 

(6,064)

Income before income taxes

 

44,588

 

20,959

 

79,472

 

48,901

Provision for income taxes

 

(11,039)

 

(7,345)

 

(21,238)

 

(14,811)

Net income

 

33,549

 

13,614

 

58,234

 

34,090

Net income attributable to noncontrolling interest

 

(2,224)

 

(1,816)

 

(5,375)

 

(3,290)

Net income attributable to TTEC stockholders

$

31,325

$

11,798

$

52,859

$

30,800

Other comprehensive income (loss)

Net income

$

33,549

$

13,614

$

58,234

$

34,090

Foreign currency translation adjustments

 

10,980

 

4,749

 

(18,834)

 

6,380

Derivative valuation, gross

 

5,101

 

6,082

 

(5,448)

 

10,262

Derivative valuation, tax effect

 

(1,317)

 

(1,630)

 

1,429

 

(2,749)

Other, net of tax

 

119

 

(38)

 

246

 

17

Total other comprehensive income (loss)

 

14,883

 

9,163

 

(22,607)

 

13,910

Total comprehensive income (loss)

 

48,432

 

22,777

 

35,627

 

48,000

Less: Comprehensive income attributable to noncontrolling interest

 

(1,867)

 

(1,787)

 

(3,567)

 

(3,290)

Comprehensive income attributable to TTEC stockholders

$

46,565

$

20,990

$

32,060

$

44,710

Weighted average shares outstanding

Basic

 

46,619

 

46,318

 

46,559

 

46,261

Diluted

46,861

 

46,684

 

46,838

 

46,636

Net income per share attributable to TTEC stockholders

Basic

$

0.67

$

0.25

$

1.14

$

0.67

Diluted

$

0.67

$

0.25

$

1.13

$

0.66

Dividends declared per share outstanding

$

$

$

0.34

$

0.30

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

2


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity and Mezzanine Equity

(Amounts in thousands)

(Unaudited)

Three months ended June 30, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity of the Company

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

    

    

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Treasury

 

Additional

 

Comprehensive

 

Retained

 

Noncontrolling

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Stock

 

Paid-in Capital

 

Income (Loss)

 

Earnings

 

interest

 

Total Equity

 

Balance as of December 31, 2016

 

 

$

 

46,114

 

$

462

 

$

(603,262)

 

$

348,739

 

$

(126,964)

 

$

735,939

 

$

6,981

 

$

361,895

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

48,708

 

 

2,828

 

 

51,536

 

Dividends to shareholders ($0.47 per common share)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(21,531)

 

 

 —

 

 

(21,531)

 

Dividends distributed to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,745)

 

 

(2,745)

 

Foreign currency translation adjustments

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,089

 

 

 —

 

 

325

 

 

8,414

 

Derivatives valuation, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,596

 

 

 —

 

 

 —

 

 

14,596

 

Vesting of restricted stock units

 

 —

 

 

 —

 

283

 

 

 2

 

 

4,673

 

 

(9,612)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,937)

 

Exercise of stock options

 

 —

 

 

 —

 

60

 

 

 —

 

 

994

 

 

1,156

 

 

 —

 

 

 —

 

 

 —

 

 

2,150

 

Equity-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

8,649

 

 

 —

 

 

 —

 

 

(291)

 

 

8,358

 

Purchases of common stock

 

 —

 

 

 —

 

(610)

 

 

(6)

 

 

(18,322)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(18,328)

 

Other, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

386

 

 

 —

 

 

 —

 

 

386

 

Balance as of September 30, 2017

 

 —

 

$

 —

 

45,847

 

$

458

 

$

(615,917)

 

$

348,932

 

$

(103,893)

 

$

763,116

 

$

7,098

 

$

399,794

 

Stockholders’ Equity of the Company

 

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

 

Other

 

Preferred Stock

Common Stock

Treasury

Additional

Comprehensive

Retained

Noncontrolling

Mezzanine

 

Shares

Amount

Shares

Amount

Stock

Paid-in Capital

Income (Loss)

Earnings

interest

Total Equity

Equity

 

Balance as of March 31, 2020

 

$

 

46,597

$

466

$

(603,531)

$

355,734

$

(143,208)

$

778,909

$

13,036

$

401,406

$

53,367

Net income

 

 

 

 

 

 

 

 

31,325

 

1,664

 

32,989

560

Dividends to shareholders ($0.00 per common share)

 

 

 

 

 

 

Acquisition of noncontrolling interest

99

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(3,000)

 

(3,000)

Foreign currency translation adjustments

 

 

 

 

 

 

 

10,777

 

 

203

 

10,980

Derivatives valuation, net of tax

 

 

 

 

 

 

 

3,784

 

 

 

3,784

Vesting of restricted stock units

 

 

 

85

 

1

 

1,414

 

(2,823)

 

 

 

 

(1,408)

Equity-based compensation expense

 

 

 

 

 

 

3,057

 

 

 

 

3,057

Other, net of tax

 

 

 

 

 

 

 

119

 

 

 

119

Balance as of June 30, 2020

 

$

 

46,682

$

467

$

(602,117)

$

355,968

$

(128,528)

$

810,234

$

11,903

$

447,927

$

54,026

Stockholders’ Equity of the Company

 

    

    

    

    

    

    

    

    

    

    

    

  �� 

    

Accumulated

    

    

    

    

    

    

 

Other

 

Preferred Stock

Common Stock

Treasury

Additional

Comprehensive

Retained

Noncontrolling

Mezzanine

 

Shares

Amount

Shares

Amount

Stock

Paid-in Capital

Income (Loss)

Earnings

interest

Total Equity

Equity

 

Balance as of March 31, 2019

 

$

 

46,297

$

463

$

(608,490)

$

353,639

$

(119,878)

$

729,930

$

9,610

$

365,274

$

Cumulative effect of adopting accounting standard updates

Net income

 

 

 

 

 

 

 

11,798

 

1,816

 

13,614

Dividends to shareholders ($0.00 per common share)

 

 

 

 

 

 

Capital contribution from noncontrolling interest

2,032

2,032

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(1,350)

 

(1,350)

Foreign currency translation adjustments

 

 

 

 

 

 

 

4,778

 

 

(29)

 

4,749

Derivatives valuation, net of tax

 

 

 

 

 

 

 

4,452

 

 

 

4,452

Vesting of restricted stock units

 

 

 

90

 

1

 

1,486

 

(2,937)

 

 

 

 

(1,450)

Equity-based compensation expense

 

 

 

 

 

 

3,366

 

 

 

 

3,366

Other, net of tax

 

 

 

 

 

 

 

(38)

 

 

 

(38)

Balance as of June 30, 2019

 

$

 

46,387

$

464

$

(607,004)

$

354,068

$

(110,686)

$

741,728

$

12,079

$

390,649

$

Six months ended June 30, 2020 and 2019

Stockholders’ Equity of the Company

 

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

 

Other

 

Preferred Stock

Common Stock

Treasury

Additional

Comprehensive

Retained

Noncontrolling

Mezzanine

 

Shares

Amount

Shares

Amount

Stock

Paid-in Capital

Income (Loss)

Earnings

interest

Total Equity

Equity

 

Balance as of December 31, 2019

 

$

 

46,489

$

465

$

(605,314)

$

356,409

$

(106,234)

$

773,218

$

13,186

$

431,730

$

48,923

Net income

 

 

 

 

 

 

 

 

52,859

 

3,880

 

56,739

1,495

Dividends to shareholders ($0.34 per common share)

 

 

 

 

 

 

(15,843)

(15,843)

Acquisition of noncontrolling interest

3,849

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(4,850)

 

(4,850)

(241)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(18,521)

 

 

(313)

 

(18,834)

Derivatives valuation, net of tax

 

 

 

 

 

 

 

(4,019)

 

 

 

(4,019)

Vesting of restricted stock units

 

 

 

193

 

2

 

3,197

 

(6,417)

 

 

 

 

(3,218)

Equity-based compensation expense

 

 

 

 

 

 

5,976

 

 

 

 

5,976

Other, net of tax

 

 

 

 

 

 

 

246

 

 

 

246

Balance as of June 30, 2020

 

$

 

46,682

$

467

$

(602,117)

$

355,968

$

(128,528)

$

810,234

$

11,903

$

447,927

$

54,026

Stockholders’ Equity of the Company

 

    

    

    

    

    

    

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

 

Other

 

Preferred Stock

Common Stock

Treasury

Additional

Comprehensive

Retained

Noncontrolling

Mezzanine

 

Shares

Amount

Shares

Amount

Stock

Paid-in Capital

Income (Loss)

Earnings

interest

Total Equity

Equity

 

Balance as of December 31, 2018

 

$

 

46,195

$

462

$

(610,177)

$

353,932

$

(124,596)

$

725,551

$

7,677

$

352,849

$

Cumulative effect of adopting accounting standard updates

(759)

(759)

Net income

 

 

 

 

 

 

 

30,800

 

3,290

 

34,090

Dividends to shareholders ($0.30 per common share)

 

 

 

 

 

 

(13,864)

(13,864)

Capital contribution from noncontrolling interest

3,362

3,362

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(2,250)

 

(2,250)

Foreign currency translation adjustments

 

 

 

 

 

 

 

6,380

 

 

 

6,380

Derivatives valuation, net of tax

 

 

 

 

 

 

 

7,513

 

 

 

7,513

Vesting of restricted stock units

 

 

 

192

 

2

 

3,173

 

(6,398)

 

 

 

 

(3,223)

Equity-based compensation expense

 

 

 

 

 

 

6,534

 

 

 

 

6,534

Other, net of tax

 

 

 

 

 

 

 

17

 

 

 

17

Balance as of June 30, 2019

 

$

 

46,387

$

464

$

(607,004)

$

354,068

$

(110,686)

$

741,728

$

12,079

$

390,649

$

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

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Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2017

    

2016

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

51,536

 

$

37,096

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

47,273

 

 

51,761

 

Amortization of contract acquisition costs

 

 

1,273

 

 

499

 

Amortization of debt issuance costs

 

 

521

 

 

582

 

Imputed interest expense and fair value adjustments to contingent consideration

 

 

39

 

 

(4,320)

 

Provision for doubtful accounts

 

 

380

 

 

542

 

(Gain) loss on disposal of assets

 

 

85

 

 

(65)

 

Gain on sale of business and dissolution of entity

 

 

(3,323)

 

 

 —

 

Impairment losses

 

 

 —

 

 

5,602

 

Loss on held for sale assets

 

 

3,178

 

 

5,300

 

Deferred income taxes

 

 

8,155

 

 

5,368

 

Excess tax benefit from equity-based awards

 

 

(1,970)

 

 

(539)

 

Equity-based compensation expense

 

 

8,358

 

 

7,278

 

Loss on foreign currency derivatives

 

 

829

 

 

4,649

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

13,460

 

 

23,780

 

Prepaids and other assets

 

 

(26,814)

 

 

(12,652)

 

Accounts payable and accrued expenses

 

 

32,597

 

 

(9,347)

 

Deferred revenue and other liabilities

 

 

14,066

 

 

(4,696)

 

Net cash provided by operating activities

 

 

149,643

 

 

110,838

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sale of long-lived assets

 

 

31

 

 

93

 

Purchases of property, plant and equipment, net of acquisitions

 

 

(43,932)

 

 

(38,863)

 

Proceeds from sale of business

 

 

391

 

 

 —

 

Investments in non-marketable equity investments

 

 

(1,384)

 

 

 —

 

Acquisitions, net of cash acquired of zero and zero, respectively

 

 

(81,360)

 

 

(400)

 

Net cash used in investing activities

 

 

(126,254)

 

 

(39,170)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

1,571,837

 

 

1,584,800

 

Payments on line of credit

 

 

(1,534,137)

 

 

(1,555,800)

 

Payments on other debt

 

 

(4,501)

 

 

(2,306)

 

Payments of contingent consideration and hold back payments to acquisitions

 

 

(674)

 

 

(9,467)

 

Dividends paid to shareholders

 

 

(10,069)

 

 

(8,922)

 

Payments to noncontrolling interest

 

 

(2,745)

 

 

(3,237)

 

Purchase of mandatorily redeemable noncontrolling interest

 

 

 —

 

 

(4,105)

 

Proceeds from exercise of stock options

 

 

2,150

 

 

371

 

Tax payments related to issuance of restricted stock units

 

 

(4,937)

 

 

(3,692)

 

Excess tax benefit from equity-based awards

 

 

 —

 

 

539

 

Payments of debt issuance costs

 

 

(38)

 

 

(1,888)

 

Purchase of treasury stock

 

 

(18,328)

 

 

(57,279)

 

Net cash used in financing activities

 

 

(1,442)

 

 

(60,986)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,631

 

 

(9,678)

 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

23,578

 

 

1,004

 

Cash and cash equivalents, beginning of period

 

 

55,264

 

 

60,304

 

Cash and cash equivalents, end of period

 

$

78,842

 

$

61,308

 

 

 

 

 

 

 

 

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,138

 

$

4,976

 

Cash paid for income taxes

 

$

11,357

 

$

16,755

 

Non-cash operating, investing and financing activities

 

 

 

 

 

 

 

Acquisition of long-lived assets through capital leases

 

$

931

 

$

2,417

 

Acquisition of equipment through increase in accounts payable, net

 

$

405

 

$

(542)

 

Contract acquisition costs credited to accounts receivable

 

$

 —

 

$

200

 

Dividend declared but not paid

 

$

11,462

 

$

9,342

 

Six Months Ended June 30,

    

2020

    

2019

    

Cash flows from operating activities

Net income

$

58,234

$

34,090

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

37,532

 

33,793

Amortization of contract acquisition costs

 

205

 

488

Amortization of debt issuance costs

 

366

 

735

Imputed interest expense and fair value adjustments to contingent consideration

 

1,941

 

(555)

Provision for credit losses

 

607

 

(Gain) loss on disposal of assets

17

34

Loss on dissolution of subsidiary

2,467

Impairment losses

 

696

 

3,569

Deferred income taxes

 

3,289

 

(2,724)

Excess tax benefit from equity-based awards

 

(403)

 

(557)

Equity-based compensation expense

 

5,976

 

6,534

(Gain) loss on foreign currency derivatives

 

114

 

(232)

Changes in assets and liabilities, net of acquisitions:

Accounts receivable

 

(26,007)

 

27,688

Prepaids and other assets

 

30,287

 

13,103

Accounts payable and accrued expenses

 

35,572

 

62,770

Deferred revenue and other liabilities

 

(45,615)

 

(57,470)

Net cash provided by operating activities

 

105,278

 

121,266

Cash flows from investing activities

Proceeds from sale of long-lived assets

 

16

 

327

Purchases of property, plant and equipment, net of acquisitions

 

(31,915)

 

(28,428)

Acquisitions, net of cash acquired of $3,123 and 0, respectively

 

(4,421)

 

Net cash used in investing activities

 

(36,320)

 

(28,101)

Cash flows from financing activities

Proceeds from line of credit

 

905,700

 

540,200

Payments on line of credit

 

(495,700)

 

(594,200)

Payments on other debt

 

(4,356)

 

(7,016)

Payments of contingent consideration and hold back payments to acquisitions

 

(48,686)

 

(5,902)

Dividends paid to shareholders

(15,843)

(13,864)

Payments to noncontrolling interest

 

(5,091)

 

(2,250)

Capital contribution from noncontrolling interest

3,362

Tax payments related to issuance of restricted stock units

(3,218)

(3,223)

Payments of debt issuance costs

 

(35)

 

(1,819)

Net cash provided by (used in) financing activities

 

332,771

 

(84,712)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(4,645)

 

239

Increase in cash, cash equivalents and restricted cash

 

397,084

 

8,692

Cash, cash equivalents and restricted cash, beginning of period

 

105,591

 

78,237

Cash, cash equivalents and restricted cash, end of period

$

502,675

$

86,929

Supplemental disclosures

Cash paid for interest

$

5,924

$

6,844

Cash paid for income taxes

$

10,605

$

19,445

Non-cash investing and financing activities

Acquisition of long-lived assets through finance leases

$

1,599

$

1,318

Acquisition of equipment through increase in accounts payable, net

$

(2,169)

$

221

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

4


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

(1)OVERVIEW AND BASIS OF PRESENTATION

Summary of Business

TeleTechTTEC Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”TTEC”, “the Company”)is a leading global provider of technology enabled customer experience services. Thetechnology and services company focused on the design, implementation and delivery of transformative customer experience outcomes for many of the world’s most iconic and disruptive brands. Since its inception in 1982, the Company helps leading brands improvehas been helping clients deliver frictionless customer experiences, strengthen their customer relationships, brand recognition and operational effectivenessloyalty through a unique combination of technological innovationpersonalized interactions, significantly improve their Net Promoter Score (“NPS”), and operational expertise. The Company’s portfolio of solutions includes consulting, technology, operationslower their total cost to serve by enabling and analytics to enable adelivering simplified, consistent and seamless customer experience across every interaction channelchannels and phasephases of the customer lifecycle. TeleTech’s 49,500 TTEC’s 51,700 employees serve clients in the automotive, communication, financial services, government, healthcare, logistics, media and entertainment, retail, technology, transportation and travel industries across all the segments and via operations in the U.S.,United States, Australia, Belgium, Brazil, Bulgaria, Canada, China, Costa Rica, Germany, Greece, Hong Kong, India, Ireland, Lebanon, Macedonia, Mexico, the Netherlands, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.

The Company reports its financial information based on the following two segments:  TTEC Digital and TTEC Engage.

TTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience solutions through our professional services and suite of technology offerings. These solutions are critical to enabling and accelerating digital transformation for our clients.
TTEC Engage provides the essential technologies, human resources, infrastructure and processes to operate customer care, acquisition, and fraud detection and prevention services.

TTEC Digital and TTEC Engage come together under our unified offering, HumanifyTM Customer Experience as a Service (“CXaas”), which drives measurable customer results for clients through the delivery of personalized, omnichannel experiences. Our HumanifyTM cloud platform provides a fully integrated ecosystem of Customer Experience (“CX”) offerings, including omnichannel, messaging, AI, ML, RPA, analytics, cybersecurity, customer relationship management (“CRM”), knowledge management and journey orchestration.

Basis of Presentation

The Consolidated Financial Statements are comprised of the accounts of TeleTech,TTEC, its wholly owned subsidiaries, and its 55% equity owned subsidiary Percepta, LLC.LLC, its 70% equity owned subsidiary First Call Resolution, LLC and its 70% equity owned subsidiary Serendebyte, Inc. (see Note 2). All intercompany balances and transactions have been eliminated in consolidation.

The unaudited Consolidated Financial Statements do not include all of the disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company and the consolidated results of operations and comprehensive income (loss) and the consolidated cash flows of the Company. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

During the three months ended March 31, 2016, the Company recorded an additional tax expense of $1.1 million that should have been recorded in prior periods related to operations by an entity outside its country of incorporation. The total amount of $1.1 million should have been recorded as additional expense in the amount of $180 thousand in 2011, $123 thousand in 2012, $137 thousand in 2013, $358 thousand in 2014 and $301 thousand in 2015.

The Company has evaluated the impact of this adjustment and concluded that the adjustment was not material to the previously issued consolidated financial statements.2020.

These unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.

5

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TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. On an on-goingongoing 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,credit losses, contingent consideration, redeemable noncontrolling interest, and valuation of goodwill, long-lived and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash and highly liquid short-term investments, primarily held in interest-bearing investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheets that sum to the amounts reported in the Condensed Consolidated Statement of Cash Flows (in thousands):

June 30, 2020

    

December 31, 2019

Cash and cash equivalents

$

482,255

 

$

82,407

Restricted cash included in "Prepaid and other current assets"

 

20,416

 

23,172

Restricted cash included in "Other noncurrent assets"

 

4

 

12

Total

$

502,675

 

$

105,591

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 nine investment-grade financial institutions.

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TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Recently IssuedAdopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 specifies new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue and cash flows from contracts with customers. While ASU-2014-09 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016, in August 2015, the FASB issued ASU 2015-14, “Deferral of Effective Date”, deferring the effective date by one year, to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. In June 2017, FASB issued ASU 2017-10, “Service Concession Arrangements”, which will be adopted along with the ASU 2014-09 guidance. The Company has assigned a project manager and team, has selected an external consulting company to assist through the project, has completed the initial project assessment phase, and is finalizing its implementation approach. The Company has determined that it will adopt this new standard using the modified retrospective approach in which a cumulative adjustment to retained earnings will be recorded as of January 1, 2018. The Company is in the process of completing its assessment of the financial statement impact and as such, has not reached any conclusions regarding the potential impact to the financials.

In February 2016, the FASB issued ASU 2016-02, “Leases2016-13, “Financial Instruments – Credit Losses” (ASC 326), which amends the existing accounting standards for lease accounting, including requiring lessees, to recognize most leasesmethodology of how and when companies measure credit losses on their balance sheets related tofinancial instruments. The objective of the rights and obligations created by those leases and making targeted changes to lessor accounting. The ASU also requires new disclosures regarding the amounts, timing, and uncertainty of cash flows arising from leases. The ASU is effective for interim and annual periods beginningto provide financial statement users more useful information regarding expected credit losses on or after December 15, 2018 and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently assessing the impact on the consolidated financial statements and related disclosures, evaluating software solutionsinstruments and other tracking methods, and determining the implementation timeline.

commitments. In March 2016,November 2018, the FASB issued ASU 2016-09, “Compensation – Stock Compensation:2018-19, “Codification Improvements to Employee Share-Based Payment Accounting”,Topic 326, Financial Instruments - Credit Losses” which amendsclarifies the existing accounting standards related to stock-based compensation. Thescope of guidance in ASU simplifies several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for interim and annual periods beginning on or after December 15, 2016. Beginning with the first quarter of 2017, the Company has adopted the new guidance as applicable and this adoption did not have a material impact on its financial position, results of operation or related disclosures.

2016-13. In August 2016,May 2019, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”. ASU 2016-15 is intended to reduce diversity in practice regarding how certain cash transactions are presented and classified in2019-05, “Financial Instruments—Credit Losses (Topic 326), Targeted Transition Relief” which amended the Consolidated Statement of Cash Flows by providingtransition guidance on eight specific cash flow issues. The ASU is effective for interim and annual periods beginning on or after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on the consolidated statements and related disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other:  Simplifying the Accounting for Goodwill Impairment”. ASU 2017-04 removes the need to complete Step 2 of any goodwill impairment test that has failed Step 1. The goodwill impairment will now be calculated as the amount by which a reporting unit’s carrying value exceeds its fair value.new credit losses standard. The ASU is effective for interim and annual periods beginning on or after December 15, 2019 andwith early adoption is permitted.permitted, using a modified retrospective approach. The Company early adopted this standard as ofthe new guidance effective January 1, 2017.2020 and the adoption did not have a material effect on the financial statements. See Note 4 for additional disclosures.

In August 2017,2018, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to2018-15 “Customer’s Accounting for Hedging Activities”. ASU 2017-12 amends and simplifies existing guidanceImplementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“CCA”), which aligns the accounting for derivatives and hedges including aligning accountingthe costs of implementing CCA’s with companies’ risk management strategies and increasing disclosure transparency regarding both the scope and resultsrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Once these costs have been capitalized, they should be amortized over the term of hedging programs. The changes include designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.hosting arrangement. The ASU is effective for interim and annual periods beginning on or after December 15, 20182019, using a prospective or retrospective transition approach. The Company adopted the new guidance effective January 1, 2020 using the prospective approach and the adoption did not have a material effect on the financial statements.

Other Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (ASU 740), which is intended to simplify various aspects related to income tax accounting. The ASU is effective for interim and annual periods beginning on or after December 15, 2020, with early adoption is permitted. The Company is currently assessingevaluating the impactpotential effects of adoption on theits consolidated financial statements and related disclosures.

(2)ACQUISITIONS AND DIVESTITURES

ConnextionsSerendebyte

On April 3, 2017,February 7, 2020, the Company acquired, allthrough its subsidiary TTEC Digital, LLC (“TTEC Digital”), 70% of the outstanding shares of Connextions,capital stock of Serendebyte Inc., a health careDelaware corporation (“the Transaction”). Serendebyte is an autonomous customer serviceexperience and intelligent automation solutions provider company, from OptumHealth Holdings, LLC. Connextions is beingwith 125 employees based in India, the United States, and Canada. The business has been integrated into the health care verticalTTEC Digital segment and is being fully consolidated into the financial statements of the Customer Management Services (“CMS”) segment of the Company. Connextions employed approximately 2,000 at several centers in the U.S.TTEC.

The totalTotal cash paid at acquisition, for 70% of the outstanding shares of capital stock, was $80$9.0 million. The purchase priceTransaction is subject to customary representations and warranties, indemnities,holdbacks, and a net working capital adjustment. In connection with the acquisition, the Company and OptumHealth (directly and through affiliates) also entered into long-term technology and customer services agreements, and into transition services agreements to facilitate the transfer of the business. The Company was required to pay an additional $1.8 million forfinalized the net working capital adjustment for $0.8 million during the second quarter of 2020 which was paid duringfrom Serendebyte to TTEC Digital in the thirdsecond quarter of 2017. Additionally, fair value adjustments related to the transition services agreements are expected to reduce the purchase price by $4.1 million resulting in a net estimated purchase price of $77.7 million.

2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

As of the closing of the Transaction, Serendebyte’s founder and certain members of its management will continue to hold the remaining 30% interest in Serendebyte, Inc. (“Remaining Interest”). Between January 31, 2023 and December 31, 2023, Serendebyte’s founder and the management team shall have an option to sell to TTEC Digital and TTEC Digital shall have an option to purchase the Remaining Interest at a purchase price equal to a multiple of Serendebyte’s adjusted trailing twelve month EBITDA for this particular acquisition. The noncontrolling interest was recorded at fair value on the date of acquisition. The fair value was based on significant inputs not observable in the market (Level 3 inputs) including forecasted earnings, discount rate of 35%, working capital requirements and applicable tax rates. The noncontrolling interest was valued at $3.8 million and is shown as Redeemable noncontrolling interest in the accompanying Consolidated Balance Sheets.

As a condition to closing, Serendebyte’s founder and certain members of the management team agreed to continue their affiliation with Serendebyte at least through 2023, and the founder agreed not to compete with TTEC for a period of four years after the disposition of the Remaining Interest.

The following summarizes the preliminary estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

 

 

    

Preliminary

 

 

Estimate of

 

 

Acquisition Date

 

 

Fair Value

 

    

Preliminary

 

Estimate of

 

Acquisition Date

 

Fair Value

 

Cash

 

$

 —

 

$

3,123

Accounts receivable, net

 

 

15,959

 

 

1,243

Prepaid expenses

 

 

241

 

Other current assets

 

 

51

 

Prepaid and other assets

 

1,327

Property, plant and equipment

 

 

7,594

 

14

Deferred tax assets

20

Tradename

400

Customer relationships

 

 

35,000

 

1,920

Goodwill

 

 

35,272

 

9,033

 

$

94,117

 

 

 

 

 

$

17,080

Accounts payable

 

$

 1

 

$

120

Accrued employee compensation and benefits

 

 

346

 

 

1,025

Accrued income taxes

 

170

Accrued expenses

 

 

386

 

2,208

Deferred tax liabilities

 

 

15,273

 

Deferred revenue

 

 

399

 

 

$

16,405

 

 

 

 

 

Deferred tax liabilities - long-term

 

629

$

4,152

Total purchase price

 

$

77,712

 

$

12,928

The estimates of fair value of identifiable assets acquired and liabilities assumed are preliminary, pending finalization of a valuation and tax returns, thus are subject to revisions that may result in adjustments to the values presented above.

At the date of the purchase, an additional $2.2 million of cash was retained in the entity that was withdrawn by the holders of the Remaining Interest during the second quarter of 2020.

The ConnextionsSerendebyte customer relationships and tradename have been estimated based on the initial valuation and arewill be amortized over an estimated useful lifelives of 12 years.5 and 3 years, respectively. The goodwill recognized from the ConnextionsSerendebyte acquisition is estimated to be attributable, but not limited to, the acquired work forceworkforce and expected synergies with CMS. None of theTTEC Digital segment. The tax basis of the acquired intangibles and goodwill will not be deductible for income tax purposes. The acquired goodwill and theintangibles and operating results of ConnextionsSerendebyte are reported within the CMSTTEC Digital segment from the date of acquisition.

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Notes to Consolidated Financial Statements

(Unaudited)

First Call Resolution

On November 9, 2016,October 26, 2019, the Company acquired, allthrough its subsidiary TTEC Services Corporation (“TSC”), 70% of the outstanding shares of Atelka Enterprise Inc.membership interest in First Call Resolution, LLC (“Atelka”FCR”), an Oregon limited liability company (“the Transaction”). FCR is a Canadian customer contact center managementcare, social networking and business process outsourcing services company that serves Canadian telecommunications, logistics,solutions service provider with approximately 2,000 employees based in the U.S. The business has been integrated into the TTEC Engage segment and entertainment clients. Thisis being fully consolidated into the financial statements of TTEC.

Total cash paid at acquisition was $107.0 million, inclusive of $4.5 million related to cash balances, for the 70% membership interest in FCR. The Transaction was subject to customary representations and warranties, holdbacks, and a net working capital adjustment. The Transaction included a potential contingent payment with a maximum value of $10.9 million based on FCR’s 2020 EBITDA performance. The Company finalized the working capital adjustment for $0.7 million during the first quarter of 2020 which was paid from FCR to TSC in March 2020.

As of the closing of the Transaction, Ortana Holdings, LLC, an additionOregon limited liability company (“Ortana”), owned by the FCR founders, will continue to hold the CMS segment. Atelka employed approximately 2,800remaining 30% membership interest in Quebec, Ontario, New BrunswickFCR (“Remaining Interest”). Between January 31, 2023 and Prince Edward Island.December 31, 2023, Ortana shall have an option to sell to TSC and TSC shall have an option to purchase from Ortana the Remaining Interest at a purchase price equal to a multiple of FCR’s adjusted trailing twelve month EBITDA for this particular acquisition, and not to compete with the Company for a period of four years after the disposition of the Remaining Interest. The noncontrolling interest was recorded at fair value on the date of acquisition. The fair value was based on significant inputs not observable in the market (Level 3 inputs) including forecasted earnings, discount rate of 19.6%, working capital requirements and applicable tax rates. The noncontrolling interest was valued at $48.3 million on the acquisition date and is shown as Redeemable noncontrolling interest in the accompanying Consolidated Balance Sheets.

The total purchase price was $48.4 million ($65.0 CAD)fair value of the contingent consideration has been measured based on significant inputs not observable in the market (Level 3 inputs). Significant assumptions include a discount rate of 16.7%, including certain working capital adjustments, and consistedexpected forecast volatility of $47.5 million in cash at closing20%, an equivalent metric risk premium of 15.1%, risk-free rate of 1.6% and a $1.4credit spread of 1.8%. Based on these, a $6.5 million hold-backexpected future payment was calculated. As of the acquisition date, the present value of the contingent consideration was $6.1 million. During the first and second quarters of 2020, $3.3 million and $1.1 million of net benefits, respectively, were recorded related to fair value adjustments of the estimated contingent consideration based on revised actuals and estimates of EBITDA performance for contingencies as defined2020. The benefits were included in Other income (expense) in the saleConsolidated Statements of Comprehensive Income (Loss). As of June 30, 2020, the value of the contingent consideration was $1.8 million and purchase agreement, which will be released towas included in Other current liabilities in the seller in month 12 and month 24, post acquisition, if not used.

accompanying Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

The following summarizes the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

 

 

 

Acquisition Date

 

 

Fair Value

 

Acquisition Date

 

Fair Value

 

Cash

 

$

2,655

 

$

5,225

Accounts receivable, net

 

 

18,449

 

 

10,659

Prepaid expenses

 

 

615

 

 

357

Property, plant and equipment

 

 

3,161

 

Deferred tax assets, net

 

 

638

 

Property and equipment

6,006

Other assets

224

Operating lease assets

5,127

Tradename

8,600

Customer relationships

 

 

10,500

 

38,540

Goodwill

 

 

20,275

 

96,739

 

$

56,293

 

 

 

 

 

$

171,477

Accounts payable

 

$

1,199

 

$

388

Operating lease liability - short-term

 

1,160

Accrued employee compensation and benefits

 

 

2,418

 

 

4,049

Accrued expenses

 

 

2,597

 

72

Other

 

 

1,678

 

 

$

7,892

 

 

 

 

 

Operating lease liability - long-term

 

3,967

$

9,636

Total purchase price

 

$

48,401

 

$

161,841

In the thirdfirst quarter of 2017,2020, the Company finalized its valuation of AtelkaFCR for the acquisition date assets acquired and liabilities assumed and determined that no material adjustments to any of the balances were required.

As part of the purchase, an additional net $0.7 million of cash was retained in the entity to pay for certain Ortana liabilities that had been recorded prior to the acquisition.

The AtelkaFCR customer relationships will beand tradename are being amortized over a useful lifelives of 12 years.10 and 4 years, respectively. The goodwill recognized from the AtelkaFCR acquisition is attributable, but not limited to, the acquired work forceworkforce and expected synergies with CMS. None of theEngage. The tax basis of the acquired intangibles and goodwill will be deductible for income tax purposes. The acquired goodwill and theintangibles and operating results of AtelkaFCR are reported within the CMSTTEC Engage segment from the date of acquisition.

rogenSiDissolutions

TeleTech Customer Management (Ghana) Limited

In the thirdsecond quarter of 2014, as an addition2020, the Company dissolved TeleTech Customer Management (Ghana) Limited, a wholly owned subsidiary domiciled in Ghana. Upon the completed dissolution, a $2.5 million loss was included in Other income (expense), net in the Consolidated Statements of Comprehensive Income (Loss) during the quarter ended June 30, 2020. The majority of the loss related to the Customer Strategy Services (“CSS”) segment, the Company acquired substantially all operating assets of rogenSi Worldwide PTY, Ltd., a global leadership, change management, sales, performance training and consulting company.

The total potential purchase price was $34.4 million, subject to certain working capital adjustments, and consisted of $18.1 million in cash at closing and an estimated $14.5 million in three earn-out payments, contingent on the acquired companies and TeleTech’s CSS segment achieving certain agreed earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets, as defined in the sale and purchase agreement. Additionally, the estimated purchase price included a $1.8 million hold-back for contingencies as defined in the sale and purchase agreement which was released to the sellers in the first quarter of 2016. The total contingent consideration possible per the sale and purchase agreement ranged from zero to $17.6 million and the earn-out payments were payable in early 2015, 2016 and 2017, based on July 1, 2014 through December 31, 2014, and full year 2015 and 2016 performance, respectively. As of December 31, 2016, the contingent consideration has been finalized and a total of $12.0 million was earned and paid.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The fair valueremoval of the contingent consideration was measured by applying a probability weighted discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.6% and expected future value of payments of $15.3 million. The $15.3 million of expected future payments was calculated using a probability weighted EBITDA assessment with the highest probability associated with rogenSi achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent consideration was approximately $14.5 million. During the fourth quarter of 2014, the third quarter of 2015, the fourth quarter of 2015, and the third quarter of 2016, the Company recorded fair value adjustments of the contingent consideration of $0.5 million, $0.8 million, $(0.3) million, and $(4.3) million, respectively, based on revised estimates noting higher or lower probability of exceeding the EBITDA targets (see Note 7). As of September 30, 2016, the fair value of the remaining contingent consideration was reduced from $4.3 million to zero given the remote possibility of achieving targeted EBITDA for 2016. As of December 31, 2016, the payment was finalized at a value of zero and thus no additional expense was required.Accumulated other comprehensive income (loss) balance.

Financial Impact of Acquired Businesses

The acquired businesses purchased in 20162020 and 20172019 noted above contributed revenues of $43.6$52.2 million and $101.9 million, and a net lossincome of $(4.1) million and $(6.3)$3.7 million, inclusive of $0.9 million and $2.1$3.2 million of acquired intangible amortization, to the Company for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2020.

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Notes to Consolidated Financial Statements

(Unaudited)

The unaudited proforma financial results for the third quartersix months ended June 30, 2020 and first nine months of 2017 and 20162019 combines the consolidated results of the Company, ConnextionsFCR and AtelkaSerendebyte, assuming the Connextions acquisitionacquisitions had been completed on January 1, 2016 and the Atelka acquisition on January 1, 2015.2019. The reported revenue and net income of $312.8$885.3 million and $11.5$52.9 million would have been $362.3$886.3 million and $9.4$53.1 million for the threesix months ended SeptemberJune 30, 2016, respectively, on an unaudited proforma basis. The reported revenue and net income of $930.3 million and $34.3 million would have been $1,071.7 million and $27.8 million for the nine months ended September 30, 2016,2020, respectively, on an unaudited proforma basis.

For 2017,2019, the reported revenue and net income of $359.0$786.9 million and $14.8$30.8 million would have been $359.0$830.7 million and $14.8$39.4 million for the threesix months ended SeptemberJune 30, 2017, respectively. The reported revenue and net income of $1,050.7 million and $48.7 million would have been $1,090.0 million and $46.9 million for the nine months ended September 30, 2017,2019, respectively, on an unaudited proforma basis.

The unaudited pro formaproforma consolidated results are not to be considered indicative of the results if these acquisitions occurred in the periods mentioned above, or indicative of future operations or results. Additionally, the pro formaproforma consolidated results do not reflect any anticipated synergies expected as a result of the acquisition.

Assets and Liabilities Held for SaleSubsequent Event

During the third quarter of 2016, the Company determined that one business unit from the Customer Growth Services (“CGS”) segment and one business unit from the Customer Strategy Services (“CSS”) segment would be divested from the Company’s operations. These business units continue to meet the criteria to be classified as held for sale. The Company had engaged a broker for both business units and is working with potential buyers for both business units. The Company anticipates the transactions will be finalized during the next three to six months. The Company has taken into consideration the discounted cash flow models, management input based on early discussions with brokers and potential buyers, and third-party evidence from similar transactions to complete the fair value analysis as there has not been a selling price determined at this point for either unit. For the two business units in CGS and CSS losses of $2.6 million and $2.7 million, respectively, were recorded as of September 30, 2016 in Loss on assets held for sale in the Consolidated Statements of Comprehensive Income (Loss). As of September 30, 2017,  for the business unit in CSS, this loss continues to be the best estimate and no additional charge has been recorded. For the business unit in CGS, based on further discussion and initial offers, management determined that the estimated selling price assumed should be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

revised. Based on this and further analysis, an additional $3.2 million loss was recorded as of June 30, 2017 and included in Loss on assets held for sale in the Consolidated Statements of Comprehensive Income (Loss). As of September 30, 2017, for the business unit in CGS, the aggregate loss continues to be the best estimate and no additional charge has been recorded.

The following table presents information related to the major components of assets and liabilities that were classified as held for sale in the Consolidated Balance Sheet as of September 30, 2017.

 

 

 

 

 

 

 

As of

 

 

 

September 30, 2017

 

Cash

 

$

 —

 

Accounts receivable, net

 

 

8,240

 

Allowance for doubtful accounts

 

 

(51)

 

Other assets

 

 

589

 

Property, plant and equipment

 

 

1,229

 

Customer relationships

 

 

3,946

 

Goodwill

 

 

3,033

 

Other intangible assets

 

 

771

 

Allowance for reduction of assets held for sale

 

 

(8,478)

 

Total assets

 

$

9,279

 

 

 

 

 

 

Accounts payable

 

$

1,046

 

Accrued employee compensation and benefits

 

 

817

 

Accrued expenses

 

 

316

 

Other

 

 

312

 

Total liabilities

 

$

2,491

 

Investments

CaféX

In the first quarter of 2015, the Company invested $9.0 million in CafeX Communications, Inc. (“CaféX”) through the purchase of a portion of the Series B Preferred Stock of CaféX. CaféX is a provider of omni-channel web-based real time communication (WebRTC) solutions that enhance mobile applications and websites with in-app video communication and screen share technology to increase customer satisfaction and enterprise efficiency. TeleTech has deployed the CaféX technology as part of the TeleTech customer experience offerings within the CMS business segment and as part of its Humanify platform. At December 31, 2015, the Company owned 17.2% of the total equity of CaféX. During the fourth quarter of 2016, the Company invested an additional $4.3 million to purchase a portion of the Series C Preferred Stock; $3.2 million was paid in the fourth quarter of 2016 and $1.1 million was paid in the first quarter of 2017. At September 30, 2017, the Company owns 17.2% of the total equity of CaféX. The investment is accounted for under the cost method of accounting. The Company evaluates its investments for possible other-than-temporary impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company tested the investment in CaféX for impairment and concluded that the investment was not impaired at September 30, 2017 or December 31, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Divestitures

Technology Solutions Group (“TSG”)

Effective June 30, 2017, the Company sold the Technology Solutions Group to SKC Communication Products,On August 5, 2020, TTEC Digital, LLC (“SKC”TTEC Digital”) for an upfront payment of $250 thousand and future contingent royalty payments over the next 3 years. TSG had been included in the CTS segment. During the second quarter of 2017,, a $30 thousand gain, which included the write-offsubsidiary of $0.7 million of goodwill, was recorded and included in the Consolidated Statements of Comprehensive Income (Loss). During the third quarter of 2017, a $141 thousand gain was recorded as a result of TSG delivering to SKC working capital in excess of the target set forth in the stock purchase agreement, and the gain was included in the Consolidated Statements of Comprehensive Income (Loss).

TeleTech Spain Holdings SL

In the third quarter of 2017, the Company dissolved TeleTech Spain Holdings SL, a fully owned foreign subsidiary domiciled in Spain. Upon complete liquidation, $3.2 million attributable to the accumulated translation adjustment component of equity has been removed from Accumulated other comprehensive income (loss) and recognized as part of the gain on liquidation. The $3.2 million gain is included in Other income (expense), net in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017.

Subsequent Event

On November 8, 2017, the Company, agreed to acquire all100% of the outstanding sharesVoiceFoundry, a preferred Amazon Connect cloud contact center services partner (the “VF Transaction”). The VF Transaction will close in Motif, Inc., a California corporation (“Motif”). Motif is a digital trust and safety services company serving eCommerce marketplaces, online retailers, travel agencies and financial services companies. Motif provides omni-channel community moderation services via voice, email and chat from delivery centers in India and the Philippines via approximately 2,800 employees. The acquisition will be implemented through two separate transactions.  In November 2017, the Company will completephases, with the acquisition of 70%VoiceFoundry’s U.S. and European operations closing contemporaneously with the signing of all outstanding sharesthe purchase agreement and the acquisition of the Australian and ASEAN operations closing as soon as practicable following clearance by the Australian Foreign Investment Review Board.

TTEC Digital agreed to pay up to $67.2 million, in Motif from private equityaggregate, for the VF Transaction, including aggregate cash consideration at closing of $48.0 million and certain individual investors for $46.9potential earn-out payments over the next two years with a maximum value of up to $19.2 million, based on VoiceFoundry’s post-closing performance against agreed 2020 and 2021 EBITDA targets. The VF Transaction is subject to customary representations and warranties, holdbacks, and working capital adjustments. The Company also agreed to purchase the remaining 30% interest in Motif from Motif’s founders (“founders’ shares”) by no later than May 2020 (“30% buyout period”). The Company agreed to pay for the founders’ shares at a purchase price contingent on Motif’s fiscal year 2020’s adjusted normalized EBITDA, and 30% of the excess cash present in the business at the time of the buyout; or if the buyout occurs prior to May 2020, the trailing twelve months EBITDA, calculated from the most recently completed full monthly period ending prior to the date of the buyout triggering event and 30% of the excess cash in the business at that point. As a condition to the acquisition, the Motif founders agreed to continue to stay as executives in the acquired business, at least through the 30% buyout period, as part of the Company’s CMS segment, and not to compete with the Company with respect to the acquired business.

(3)SEGMENT INFORMATION

The Company reports the following fourtwo segments:

·

the CMS segment includes theTTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience delivery solutions whichthrough our professional services and suite of technology offerings. These solutions are critical to enabling and accelerating digital transformation for our clients.

oTechnology Services:  Our technology services design, integrate innovativeand operate highly scalable, digital omnichannel technology with highly-trainedsolutions in the cloud, on premise, or hybrid, including journey orchestration, automation and AI, knowledge management, and workforce productivity.
oProfessional Services:  Our management consulting practices deliver customer experience professionalsstrategy, analytics, process optimization, and learning and performance services.
TTEC Engage provides the essential technologies, human resources, infrastructure and processes to operate customer care, acquisition, and fraud detection and prevention services.
oCustomer Acquisition Services:  Our customer growth and acquisition services optimize the buying journeys for acquiring new customers by leveraging technology and analytics to deliver personal experiences that increase the quantity and quality of leads and customers.
oCustomer Care Services:  Our customer experiencecare services provide turnkey contract center solutions, including digital omnichannel technologies, associate recruiting and training, facilities, and operational expertise to create exceptional customer experiences across all channels and all stages of the customer lifecycle from an onshore, offshore or work-from-home environment;

touchpoints.

·

the CGS segment provides technology-enabled sales and marketing solutions that support revenue generation across the customer lifecycle, including sales advisory, search engine optimization, digital demand generation, lead qualification, and acquisition sales, growth and retention services;

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TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

·

o

the CTS segment includes system design consulting, customer experience technology product, implementationFraud Prevention Services:  Our digital fraud detection and integration consultingprevention services proactively identify and management of clients’ cloudprevent fraud and on-premise solutions;provide community content moderation and

compliance.

·

the CSS segment provides professional services in customer experience strategy and operations, insights, system and operational process optimization, and culture development and knowledge management.

The Company allocates to each segment its portion of corporate operating expenses. All intercompany transactions between the reported segments for the periods presented have been eliminated.

The following tables present certain financial data by segment (in thousands):

Three Months Ended SeptemberJune 30, 20172020

    

    

    

    

Depreciation

    

Income

 

Gross

Intersegment

Net

&

from

 

Revenue

Sales

Revenue

Amortization

Operations

 

TTEC Digital

$

77,168

$

(25)

$

77,143

$

3,278

$

14,376

TTEC Engage

 

375,938

 

 

375,938

 

15,382

 

34,586

Total

$

453,106

$

(25)

$

453,081

$

18,660

$

48,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Depreciation

    

Income 

 

 

 

Gross

 

Intersegment

 

Net

 

&

 

(Loss) from

 

 

 

Revenue

 

Sales

 

Revenue

 

Amortization

 

Operations

 

Customer Management Services

 

$

277,373

 

$

 —

 

$

277,373

 

$

13,455

 

$

9,133

 

Customer Growth Services

 

 

30,829

 

 

 

 

30,829

 

 

717

 

 

1,564

 

Customer Technology Services

 

 

34,658

 

 

(95)

 

 

34,563

 

 

1,772

 

 

4,158

 

Customer Strategy Services

 

 

16,271

 

 

 

 

16,271

 

 

571

 

 

945

 

Total

 

$

359,131

 

$

(95)

 

$

359,036

 

$

16,515

 

$

15,800

 

Three Months Ended SeptemberJune 30, 20162019

    

    

    

    

Depreciation

    

Income

 

Gross

Intersegment

Net

&

from

 

Revenue

Sales

Revenue

Amortization

Operations

 

TTEC Digital

$

78,580

$

(61)

$

78,519

$

3,235

$

7,709

TTEC Engage

 

313,996

 

 

313,996

 

13,815

 

15,164

Total

$

392,576

$

(61)

$

392,515

$

17,050

$

22,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Depreciation

    

Income 

 

 

 

Gross

 

Intersegment

 

Net

 

&

 

(Loss) from

 

 

 

Revenue

 

Sales

 

Revenue

 

Amortization

 

Operations

 

Customer Management Services

 

$

223,742

 

$

(78)

 

$

223,664

 

$

11,891

 

$

12,255

 

Customer Growth Services

 

 

35,301

 

 

 —

 

 

35,301

 

 

1,561

 

 

161

 

Customer Technology Services

 

 

36,871

 

 

(291)

 

 

36,580

 

 

2,457

 

 

3,776

 

Customer Strategy Services

 

 

17,251

 

 

 —

 

 

17,251

 

 

902

 

 

(3,666)

 

Total

 

$

313,165

 

$

(369)

 

$

312,796

 

$

16,811

 

$

12,526

 

NineSix Months Ended SeptemberJune 30, 20172020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Depreciation

    

Income 

 

 

 

Gross

 

Intersegment

 

Net

 

&

 

(Loss) from

 

 

 

Revenue

 

Sales

 

Revenue

 

Amortization

 

Operations

 

Customer Management Services

 

$

798,527

 

$

(19)

 

$

798,508

 

$

37,843

 

$

43,804

 

Customer Growth Services

 

 

96,890

 

 

 —

 

 

96,890

 

 

2,249

 

 

6,295

 

Customer Technology Services

 

 

105,337

 

 

(283)

 

 

105,054

 

 

5,377

 

 

11,034

 

Customer Strategy Services

 

 

50,290

 

 

 —

 

 

50,290

 

 

1,804

 

 

2,746

 

Total

 

$

1,051,044

 

$

(302)

 

$

1,050,742

 

$

47,273

 

$

63,879

 

    

    

    

    

Depreciation

    

Income

 

Gross

Intersegment

Net

&

from

 

Revenue

Sales

Revenue

Amortization

Operations

 

TTEC Digital

$

154,949

$

(250)

$

154,699

$

6,566

$

24,634

TTEC Engage

 

730,595

 

 

730,595

 

30,966

 

65,044

Total

$

885,544

$

(250)

$

885,294

$

37,532

$

89,678

Six Months Ended June 30, 2019

    

    

    

    

Depreciation

    

Income

 

Gross

Intersegment

Net

&

from

Revenue

Sales

Revenue

Amortization

Operations

TTEC Digital

$

144,621

$

(249)

$

144,372

$

5,543

$

15,468

TTEC Engage

 

642,499

 

642,499

 

28,250

 

39,497

Total

$

787,120

$

(249)

$

786,871

$

33,793

$

54,965

Three Months Ended 

Six Months Ended 

June 30,

June 30,

2020

    

2019

    

2020

    

2019

 

Capital Expenditures

TTEC Digital

$

2,888

 

$

5,655

 

$

5,326

 

$

9,396

TTEC Engage

 

12,214

 

9,573

 

26,589

 

19,032

Total

$

15,102

 

$

15,228

 

$

31,915

 

$

28,428

1312


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

June 30, 2020

    

December 31, 2019

Total Assets

TTEC Digital

$

287,237

 

$

238,081

TTEC Engage

 

1,479,752

 

1,138,707

Total

$

1,766,989

 

$

1,376,788

June 30, 2020

    

December 31, 2019

Goodwill

TTEC Digital

$

74,817

 

$

66,275

TTEC Engage

 

232,322

 

235,419

Total

$

307,139

 

$

301,694

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Depreciation

    

Income 

 

 

 

Gross

 

Intersegment

 

Net

 

&

 

(Loss) from

 

 

 

Revenue

 

Sales

 

Revenue

 

Amortization

 

Operations

 

Customer Management Services

 

$

664,647

 

$

(255)

 

$

664,392

 

$

36,024

 

$

36,189

 

Customer Growth Services

 

 

105,713

 

 

 ���

 

 

105,713

 

 

4,943

 

 

4,138

 

Customer Technology Services

 

 

109,720

 

 

(522)

 

 

109,198

 

 

8,187

 

 

9,932

 

Customer Strategy Services

 

 

51,008

 

 

 —

 

 

51,008

 

 

2,607

 

 

(3,752)

 

Total

 

$

931,088

 

$

(777)

 

$

930,311

 

$

51,761

 

$

46,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

Capital Expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

12,732

 

$

8,515

 

$

36,701

 

$

29,751

 

Customer Growth Services

 

 

346

 

 

375

 

 

708

 

 

3,546

 

Customer Technology Services

 

 

1,180

 

 

1,864

 

 

6,025

 

 

4,877

 

Customer Strategy Services

 

 

85

 

 

366

 

 

498

 

 

689

 

Total

 

$

14,343

 

$

11,120

 

$

43,932

 

$

38,863

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

    

December 31, 2016

 

Total Assets

 

 

 

 

 

 

 

 

Customer Management Services

 

 

$

713,377

 

$

585,679

 

Customer Growth Services

 

 

 

60,086

 

 

71,540

 

Customer Technology Services

 

 

 

106,372

 

 

115,537

 

Customer Strategy Services

 

 

 

69,683

 

 

73,548

 

Total

 

 

$

949,518

 

$

846,304

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

    

December 31, 2016

 

Goodwill

 

 

 

 

 

 

 

 

Customer Management Services

 

 

$

79,391

 

$

42,589

 

Customer Growth Services

 

 

 

24,439

 

 

24,439

 

Customer Technology Services

 

 

 

40,839

 

 

41,500

 

Customer Strategy Services

 

 

 

21,915

 

 

21,120

 

Total

 

 

$

166,584

 

$

129,648

 

 

 

 

 

 

 

 

 

 

The following table presents revenue based upon the geographic location where the services are provided (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2017

    

2016

    

2017

    

2016

 

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

197,664

 

$

166,993

 

$

570,305

 

$

507,819

 

$

312,310

$

235,733

 

$

589,988

$

472,700

Philippines

 

 

86,938

 

 

90,692

 

 

258,360

 

 

259,898

 

 

79,269

 

91,401

 

170,373

 

184,580

Latin America

 

 

31,361

 

 

30,832

 

 

96,301

 

 

90,154

 

 

23,352

 

25,054

 

48,450

 

49,190

Europe / Middle East / Africa

17,361

 

15,610

 

34,304

 

31,651

Asia Pacific / India

 

13,725

 

14,155

 

28,893

 

26,980

Canada

 

 

18,937

 

 

891

 

 

56,035

 

 

3,020

 

 

7,064

 

10,562

 

13,286

 

21,770

Europe / Middle East / Africa

 

 

14,892

 

 

15,604

 

 

45,555

 

 

49,100

 

Asia Pacific

 

 

9,244

 

 

7,784

 

 

24,186

 

 

20,320

 

Total

 

$

359,036

 

$

312,796

 

$

1,050,742

 

$

930,311

 

$

453,081

 

$

392,515

$

885,294

$

786,871

 

 

 

 

 

 

 

 

 

 

 

 

14


Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(4)SIGNIFICANT CLIENTS AND OTHER CONCENTRATIONS

The Company had no0 clients that contributed in excess of 10% of total revenue for the ninesix months ended SeptemberJune 30, 2017.  The Company had one client that contributed in excess of 10% of total revenue for the nine months ended September 30, 2016. This client operates in the communications industry and is included in the CMS segment. This client contributed 9.5% and 10.4% of total revenue for the nine months ended September 30, 2017 and 2016, respectively.2020 or 2019. The Company does have several other clients with aggregate revenue exceeding $100 million annually and the loss of one or more of these clients could have a material adverse effect on the Company’s business, operating results, or financial condition. To mitigate this risk, the Company has multiple contracts with these larger clients, where each individual contract is for an amount below the $100 million aggregate.

To limit the Company’s credit risk with its clients, management performs periodic credit evaluations, maintains allowances for uncollectible accountscredit losses and may require pre-payment for services from certain clients. Based on currently available information, management does not believe significant credit risk existed as of SeptemberJune 30, 2017.2020.

In connection with the implementation of ASC 326 as of January 1, 2020, the Company analyzed the prior history of credit losses on revenue for TTEC as a whole and separately for each of the two segments. Based on this evaluation, no modification to the allowance for credit losses balance was necessary as of the implementation date. At the end of each quarter beginning on March 31, 2020, an allowance for credit losses will be calculated based on the current quarterly revenue multiplied by the historical loss percentage of the prior three year period and recorded in the income statement. In addition to the evaluation of historical losses, the Company considers current and future economic conditions and events such as changes in customer credit quality and liquidity. The Company will write-off accounts receivable against this allowance when the Company determines a balance is uncollectible. 

13

Table of Contents

TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Activity in the Company’s Allowance for credit losses consists of the following (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

 

    

2020

    

2019

    

2020

    

2019

 

Balance, beginning of period

$

5,402

$

5,579

$

5,452

$

5,592

Provision for credit losses

 

445

 

 

607

 

Uncollectible receivables written-off

 

(107)

 

(82)

 

(285)

 

(97)

Effect of foreign currency

 

55

 

(2)

 

21

 

Balance, end of period

$

5,795

$

5,495

$

5,795

$

5,495

On October 15, 2018, Sears Holding Corporation (“Sears”) announced that it had filed a petition for bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. As of June 30, 2020 and December 31, 2019, TTEC had approximately $2.7 million in pre-petition accounts receivables exposure related to Sears; during the fourth quarter of 2018 a $2.7 million allowance for uncollectible accounts was recorded and included in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss). TTEC continues to provide post-petition services to Sears and has assessed these receivables for collection risk and has determined that these will be collectible.

Accounts Receivable Sales Agreement

On March 5, 2019, the Company entered into an Uncommitted Receivables Purchase Agreement (“Agreement”) with Bank of the West (“Bank”), whereby from time-to-time the Company may elect to sell, on a revolving basis, U.S. accounts receivables of certain clients at a discount to the Bank for cash on a limited recourse basis. The maximum amount of receivables that the Company may sell to the Bank at any given time shall not exceed $75 million. The sales of accounts receivable in accordance with the Agreement are reflected as a reduction of Accounts Receivable, net on the Consolidated Balance sheets. The Company has retained no interest in the sold receivables but retains all collection responsibilities on behalf of the Bank. The discount on the accounts receivable sold will be recorded within Other expense, net in the Consolidated Statements of Comprehensive Income (Loss). The cash proceeds from this agreement are included in the change in accounts receivable within the operating activities section of the Consolidated Statements of Cash Flows.

As of June 30, 2020, the Company had factored $40.0 million of accounts receivable; under the Agreement discounts on these receivables were not material during the quarter. As of June 30, 2020, the Company had collected $20.4 million of cash from customers which had not been remitted to the Bank. The unremitted cash is Restricted Cash and is included within Prepaid and Other Current Assets with the corresponding liability included in Accrued Expenses on the Consolidated Balance Sheet. The Company has not recorded any servicing assets or liabilities as of June 30, 2020 as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.

(5)GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill consisted of the following (in thousands):

    

    

    

    

Effect of

    

 

December 31,

Acquisitions /

Foreign

June 30,

 

2019

Adjustments

Impairments

Currency

2020

 

TTEC Digital

$

66,275

$

9,033

(491)

$

74,817

TTEC Engage

 

235,419

 

(254)

(2,843)

 

232,322

Total

$

301,694

$

8,779

$

$

(3,334)

$

307,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Effect of

    

 

 

 

 

 

December 31,

 

Acquisitions /

 

 

 

 

Foreign

 

September 30,

 

 

 

2016

 

Adjustments

 

Impairments

 

Currency

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

42,589

 

$

34,662

 

$

 —

 

$

2,140

 

$

79,391

 

Customer Growth Services

 

 

24,439

 

 

 —

 

 

 —

 

 

 

 

24,439

 

Customer Technology Services

 

 

41,500

 

 

(661)

 

 

 

 

 

 

40,839

 

Customer Strategy Services

 

 

21,120

 

 

 —

 

 

 —

 

 

795

 

 

21,915

 

Total

 

$

129,648

 

$

34,001

 

$

 —

��

$

2,935

 

$

166,584

 

14

Table of Contents

TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company performs a goodwill impairment assessment on at least an annual basis. The Company conducts its annual goodwill impairment assessment during the fourth quarter, or more frequently, if indicators of impairment exist. During the quarter ended SeptemberJune 30, 2017,2020, the Company assessed whether any such indicators of impairment existed and concluded there were none.

During the Company’s annual impairment testing as of December 1, 2019, the Company identified triggering events that could lead to impairment of goodwill for the Digital Consulting reporting unit, including lower revenues and profits than had been anticipated over the past two years. The carrying value of Digital Consulting was $39.7 million at December 1, 2019, including approximately $24.3 million of goodwill. Based on the Company’s assessment, the estimated fair value of the Digital Consulting reporting unit exceeded its carrying value by approximately 26%, but based on additional sensitivity analysis, the amount of cushion could fall to 0% or below if the performance of the business does not improve as expected. The estimate of fair value was based on generally accepted valuation techniques and information available at the date of the assessment, which incorporated management’s assumptions about expected revenues and future cash flows and available market information for comparable companies. During the first six months of 2020, the reporting unit has delivered actual results slightly better than the estimate included in the analysis above.

Other Intangible Assets

During the second quarter ended September 30, 2016,of 2019, the Company identified negative indicators such as lower financial performance and the reversal of contingent consideration for the CSS reporting unit and thus the Company updated its quantitative assessment for the CSS reporting unit fair value using an income based approach. The determination of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimationrogenSi component of the long-term growth ratesTTEC Digital segment, thus an interim impairment analysis was completed. The long-lived assets reviewed for impairment consisted of the businesses, the useful lives over which the cash flows will occurcustomer relationship intangible, intellectual property, and determinationright of appropriate discount rates (based in partuse assets. The Company completed an asset group recoverability evaluation based on the Company’s weighted average cost of capital). Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. At September 30, 2016, the fair value for the CSS reporting unit exceeded the carrying value, and thus no impairment was required.

The Company has also determined that effective September 30, 2016 the assets of one of the business units within the CSS reporting unit will be held for sale (see discussion in Note 2). Therefore the CSS reporting unit was separated into the component that will be held for sale and the components that will be held for use and two separate fair value analyses were completed. At September 30, 2016 the fair value for the CSS held for use component exceeded the carrying value and thus no impairment was required. The fair value for the CSS held for sale component also exceeded the carrying value, and thus no impairment was required.

15


Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

CSS – component held-for-sale

The Company calculated the fair value of the trade name using a relief from royalty methodcurrent estimated cash flow based on forecasted revenues sold under the trade nameand operating income using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 3.75%, a discount rate specific to the trade name of 19.2% and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $2.0 million,this calculation, the Company recorded an impairment expense of $3.3$2.0 million in the three months ended SeptemberJune 30, 20162019, which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).

Other Intangible Assets

In connection with reduced profitability for the Avaya component As part of the CTS segment an interim$2.0 million impairment analysis$0.4 million was completed duringassigned to the third quarter of 2016. The Company will modify the sales focus of the Avaya component away from premise product and services towards cloud solutions. The indefinite-livedcustomer relationship intangible asset evaluated for impairment consisted of the TSG trade name. The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 0.5%, a discount rate specificand $0.2 million to the trade name of 19.0%, which is equal to the reporting unit’s equity risk premium adjusted for its sizeIP intangible asset. At December 31, 2019 and company specific risk factors, and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $0.4 million,June 30, 2020, the Company recordedreviewed the evaluation completed as of June 30, 2019, and noted no material changes, thus no additional impairment expense of $0.7 million in the three months ended September 30, 2016 which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).required.

In connection with reduced profitability of the rogenSi component of the CSS segment, an interim impairment analysis was completed during the third quarter of 2016. The indefinite-lived intangible asset evaluated for impairment consisted of the trade name. The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 2.0%, a discount rate specific to the trade name of 18.2%, which is equal to the reporting unit’s equity risk premium adjusted for its size and company specific risk factors. and a perpetuity growth rate of 3.0%. Based on the calculated fair value of $3.1 million, the Company recorded impairment expense of $1.2 million in the three months ended September 30, 2016 which was included in Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).

(6)DERIVATIVES

(6)DERIVATIVES

Cash Flow Hedges

The Company enters into foreign exchange and interest rate related derivatives. Foreign exchange derivatives entered into consist of forward and option contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. Interest rate derivatives consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. It is the Company’s policy to only enter into derivative contracts with investment grade counterparty financial institutions, and correspondingly, the fair value of derivative assets consider,considers, among other factors, the creditworthiness of these counterparties. Conversely, the fair value of derivative liabilities reflects the Company’s creditworthiness. As of SeptemberJune 30, 2017,2020, the Company has not experienced, nor does it anticipate, any issues related to derivative counterparty defaults. The following table summarizes the aggregate unrealized net gain or loss in Accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands and net of tax):

1615


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Three Months Ended 

Six Months Ended 

June 30,

June 30,

2020

    

2019

    

2020

    

2019

Aggregate unrealized net gain/(loss) at beginning of period

$

(3,621)

$

(5,217)

$

4,182

$

(8,278)

Add: Net gain/(loss) from change in fair value of cash flow hedges

3,726

5,190

(4,187)

10,096

Less: Net (gain)/loss reclassified to earnings from effective hedges

58

(738)

168

(2,583)

Aggregate unrealized net gain/(loss) at end of period

$

163

$

(765)

$

163

$

(765)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate unrealized net gain/(loss) at beginning of period

 

$

(19,730)

 

$

(25,007)

 

$

(32,393)

 

$

(26,885)

 

Add: Net gain/(loss) from change in fair value of cash flow hedges

 

 

5,420

 

 

631

 

 

25,290

 

 

9,519

 

Less: Net (gain)/loss reclassified to earnings from effective hedges

 

 

(3,487)

 

 

(4,179)

 

 

(10,694)

 

 

(11,189)

 

Aggregate unrealized net gain/(loss) at end of period

 

$

(17,797)

 

$

(28,555)

 

$

(17,797)

 

$

(28,555)

 

The Company’s foreign exchange cash flow hedging instruments as of SeptemberJune 30, 20172020 and December 31, 20162019 are summarized as follows (amounts in thousands). All hedging instruments are forward contracts.

    

Local

    

    

    

 

Currency

U.S. Dollar

% Maturing

Contracts

 

Notional

Notional

in the next

Maturing

 

As of June 30, 2020

Amount

Amount

12 months

Through

 

Philippine Peso

 

6,955,000

 

132,470

(1)  

59.9

%  

April 2023

Mexican Peso

 

1,221,000

 

56,033

52.7

%  

December 2022

$

188,503

    

Local

    

    

    

Currency

U.S. Dollar

     

Notional

Notional

 

      

 

As of December 31, 2019

Amount

Amount

 

Philippine Peso

 

7,715,000

 

147,654

(1)  

Mexican Peso

 

1,299,500

 

61,529

$

209,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Local

    

 

 

    

 

 

    

 

 

 

 

 

Currency

 

U.S. Dollar

 

 

% Maturing

 

 

Contracts

 

 

 

Notional

 

Notional

 

 

in the next

 

 

Maturing

 

As of September 30, 2017

 

Amount

 

Amount

 

 

12 months

 

 

Through

 

Philippine Peso

 

10,490,000

 

 

218,413

(1)  

 

53.2

%  

 

August 2021

 

Mexican Peso

 

1,774,000

 

 

104,652

 

 

37.2

%  

 

May 2021

 

 

 

 

 

$

323,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Local

    

 

 

    

 

 

    

 

 

 

 

 

Currency

 

U.S. Dollar

 

 

 

 

 

     

 

 

 

Notional

 

Notional

 

 

      

 

 

 

 

As of December 31, 2016

 

Amount

 

Amount

 

 

 

 

 

 

 

Philippine Peso

 

14,315,000

 

 

301,134

(1)  

 

 

 

 

 

 

Mexican Peso

 

2,089,000

 

 

129,375

 

 

 

 

 

 

 

 

 

 

 

$

430,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

(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 SeptemberJune 30, 20172020 and December 31, 2016.

2019.

The Company’s interest rate swap arrangement expired as of May 31, 2017 and no additional swaps have been entered into. As of December 31, 2016, the outstanding interest rate swap was as follows:

Contract

Contract

Notional

Variable Rate

Fixed Rate

Commencement

Maturity

December 31, 2016

Amount

Received

Paid

Date

Date

Swap

$

15 million

1 - month LIBOR

3.14

%  

May 2012

May 2017

Fair Value Hedges

The Company enters into foreign exchange forward contracts to economically hedge against foreign currency exchange gains and losses on certain receivables and payables of the Company’s foreign operations. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings in Other income (expense), net. As of SeptemberJune 30, 20172020 and December 31, 20162019 the total notional amounts of the Company’s forward contracts used as fair value hedges were $167.1$7.4 million and $227.8$64.5 million, respectively.

1716


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Derivative Valuation and Settlements

The Company’s derivatives as of SeptemberJune 30, 20172020 and December 31, 20162019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

Designated

 

Not Designated

 

 

as Hedging

 

as Hedging

 

June 30, 2020

 

Designated

Not Designated

 

as Hedging

as Hedging

Designation:

 

Instruments

 

Instruments

 

Instruments

Instruments

 

    

Foreign

    

Interest

    

Foreign

 

    

Foreign

    

Foreign

 

Derivative contract type:

 

Exchange

 

Rate

 

Exchange

 

Exchange

Exchange

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Fair Value

 

Cash Flow

Fair Value

 

 

 

��

 

 

 

 

 

 

Fair value and location of derivative in the Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

$

55

 

$

 —

 

$

355

 

$

2,962

$

Other long-term assets

 

 

594

 

 

 —

 

 

 —

 

 

2,296

 

Other current liabilities

 

 

(17,071)

 

 

 —

 

 

(447)

 

 

(2,845)

 

(21)

Other long-term liabilities

 

 

(13,051)

 

 

 —

 

 

 —

 

 

(2,188)

 

Total fair value of derivatives, net

 

$

(29,473)

 

$

 —

 

$

(92)

 

$

225

$

(21)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Designated

 

Not Designated

 

 

as Hedging

 

as Hedging

 

December 31, 2019

 

Designated

Not Designated

 

as Hedging

as Hedging

Designation:

 

Instruments

 

Instruments

 

Instruments

Instruments

 

    

Foreign

    

Interest

    

Foreign

 

    

Foreign

    

Foreign

 

Derivative contract type:

 

Exchange

 

Rate

 

Exchange

 

Exchange

Exchange

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Fair Value

 

Cash Flow

Fair Value

 

 

 

 

 

 

 

 

 

 

Fair value and location of derivative in the Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

$

1,178

 

$

 —

 

$

1,606

 

$

3,467

$

205

Other long-term assets

 

 

 —

 

 

 —

 

 

 —

 

 

3,525

 

Other current liabilities

 

 

(23,503)

 

 

(147)

 

 

(866)

 

 

(1,223)

 

(107)

Other long-term liabilities

 

 

(31,714)

 

 

 —

 

 

 —

 

 

(95)

 

Total fair value of derivatives, net

 

$

(54,039)

 

$

(147)

 

$

740

 

$

5,674

$

98

18


Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the three months ended SeptemberJune 30, 20172020 and 20162019 were as follows (in thousands):

Three Months Ended June 30,

 

2020

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

2017

 

2016

 

 

Designated as Hedging

 

Designated as Hedging

 

Designated as Hedging

 

Designation:

 

Instruments

 

Instruments

 

Instruments

 

    

Foreign

    

Interest

    

Foreign

    

Interest

 

Derivative contract type:

 

Exchange

 

Rate

 

Exchange

 

Rate

 

Foreign Exchange

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Cash Flow

 

Cash Flow

 

 

Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) recognized in Other comprehensive income (loss) - effective portion, net of tax

 

$

(3,487)

 

$

 —

 

$

(4,119)

 

$

(60)

 

$

58

$

(738)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

(5,812)

 

$

 —

 

$

(7,103)

 

$

 —

 

$

79

$

(1,011)

Interest expense

 

 

 —

 

 

 —

 

 

 —

 

 

(104)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2017

 

2016

 

Designation:

    

Not Designated as 
Hedging Instruments

    

Not Designated as 
Hedging Instruments

 

Derivative contract type:

 

Foreign Exchange

 

Foreign Exchange

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative classification:

 

Forward Contracts

 

Fair Value

 

Forward Contracts

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of services

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Other income (expense), net

 

$

 —

 

$

(1,186)

 

$

 —

 

$

(3,674)

 

1917


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Three Months Ended June 30,

 

2020

2019

 

Designation:

    

Not Designated as Hedging Instruments

Derivative contract type:

 

Foreign Exchange

Derivative classification:

 

Fair Value

Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss):

Other income (expense), net

 

$

(14)

 

$

(1,465)

The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

 

 

Designated as Hedging

 

Designated as Hedging

 

Designation:

 

Instruments

 

Instruments

 

 

    

Foreign

    

Interest

    

Foreign

    

Interest

 

Derivative contract type:

 

Exchange

 

Rate

 

Exchange

 

Rate

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Cash Flow

 

Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) recognized in Other comprehensive income (loss) - effective portion, net of tax

 

$

(10,625)

 

$

(69)

 

$

(10,939)

 

$

(252)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

(17,709)

 

$

 —

 

$

(18,860)

 

$

 

Interest expense

 

 

 —

 

 

(115)

 

 

 —

 

 

(435)

 

Six Months Ended June 30,

2020

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2017

 

2016

 

Designated as Hedging

Designation:

 

Not Designated as
Hedging Instruments

 

Not Designated as
Hedging Instruments

 

Instruments

Derivative contract type:

 

Foreign Exchange

 

Foreign Exchange

 

Foreign Exchange

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative classification:

 

Forward Contracts

 

Fair Value

 

Forward Contracts

 

Fair Value

 

 

Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of services

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Other income (expense), net

 

$

 —

 

$

(1,545)

 

$

 —

 

$

(3,616)

 

Amount of gain or (loss) recognized in Other comprehensive income (loss) - effective portion, net of tax

$

168

$

(2,583)

Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion:

Revenue

$

230

$

(3,538)

Six Months Ended June 30,

2020

2019

Designation:

 

Not Designated as Hedging Instruments

Derivative contract type:

 

Foreign Exchange

Derivative classification:

 

Fair Value

Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income (Loss):

Other income (expense), net

 

$

(343)

 

$

(1,217)

(7)FAIR VALUE

The authoritative guidance for fair value measurements establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

2018


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

The following presents information as of SeptemberJune 30, 20172020 and December 31, 20162019 for the Company’s assets and liabilities required to be measured at fair value on a recurring basis, as well as the fair value hierarchy used to determine their fair value.

Accounts Receivable and Payable - The amounts recorded in the accompanying balance sheets approximate fair value because of their short-term nature.

Investments – The Company measures investments, including cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include market observable inputs, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. As of SeptemberJune 30, 2017,2020, the investment in CaféX Communication, Inc., which consistsconsisted of the Company’s first quarter 2015 $9.0 million investment, the fourth quarter 2016 $3.2 million investment and the first quarter 2017 $1.1total $15.6 million investment, is recorded at $13.3 million which approximates fair value.fully impaired to 0.

Debt - The Company’s debt consists primarily of the Company’s Credit Agreement, which permits floating-rate borrowings based upon the current Prime Rate or LIBORthe London Interbank Offered Rate (“LIBOR”) plus a credit spread as determined by the Company’s leverage ratio calculation (as defined in the Credit Agreement). As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had $255.0$700.0 million and $217.3$290.0 million, respectively, of borrowings outstanding under the Credit Agreement. During the thirdsecond quarter of 20172020 outstanding borrowings accrued interest at an average rate of 2.3%1.6% per annum, excluding unused commitment fees. The amounts recorded in the accompanying Balance Sheets approximate fair value due to the variable nature of the debt based on Level 2 inputs.

Derivatives - Net derivative assets (liabilities) are measured at fair value on a recurring basis. The portfolio is valued using models based on market observable inputs, including both forward and spot foreign exchange rates, interest rates, implied volatility, and counterparty credit risk, including the ability of each party to execute its obligations under the contract. As of SeptemberJune 30, 2017,2020, credit risk did not materially change the fair value of the Company’s derivative contracts.

The following is a summary of the Company’s fair value measurements for its net derivative assets (liabilities) as of SeptemberJune 30, 20172020 and December 31, 20162019 (in thousands):

As of SeptemberJune 30, 20172020

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

    

Quoted Prices in

    

Significant

    

 

 

    

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

At Fair Value

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

Significant

    

    

 

Active Markets

Other

Significant

 

for Identical

Observable

Unobservable

 

Assets

Inputs

Inputs

 

(Level 1)

(Level 2)

(Level 3)

At Fair Value

 

Cash flow hedges

 

$

 

$

(29,473)

 

$

 

$

(29,473)

 

$

$

225

$

$

225

Interest rate swaps

 

 

 

 

 —

 

 

 

 

 —

 

Fair value hedges

 

 

 

 

(92)

 

 

 

 

(92)

 

 

 

(21)

 

 

(21)

Total net derivative asset (liability)

 

$

 

$

(29,565)

 

$

 

$

(29,565)

 

$

$

204

$

$

204

2119


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

As of December 31, 20162019

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

    

Quoted Prices in

    

Significant

    

 

 

    

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

At Fair Value

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

Significant

    

    

 

Active Markets

Other

Significant

 

for Identical

Observable

Unobservable

 

Assets

Inputs

Inputs

 

(Level 1)

(Level 2)

(Level 3)

At Fair Value

 

Cash flow hedges

 

$

 

$

(54,039)

 

$

 

$

(54,039)

 

$

$

5,674

$

$

5,674

Interest rate swaps

 

 

 

 

(147)

 

 

 

 

(147)

 

Fair value hedges

 

 

 

 

740

 

 

 

 

740

 

 

 

98

 

 

98

Total net derivative asset (liability)

 

$

 

$

(53,446)

 

$

 

$

(53,446)

 

$

$

5,772

$

$

5,772

The following is a summary of the Company’s fair value measurements as of SeptemberJune 30, 20172020 and December 31, 20162019 (in thousands):

As of SeptemberJune 30, 20172020

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

 

 

    

Significant

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

    

Significant

 

Active Markets for

Significant Other

Unobservable

 

Identical Assets

Observable Inputs

Inputs

 

(Level 1)

(Level 2)

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

Derivative instruments, net

 

$

 

$

 

$

 

$

$

204

$

Total assets

 

$

 

$

 

$

 

$

$

204

$

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability

 

$

 

$

(12,624)

 

$

 

$

$

(20,801)

$

Derivative instruments, net

 

 

 

 

(29,565)

 

 

 

Contingent consideration

 

 

 

 

 —

 

 

(1,178)

 

 

 

 

(1,785)

Total liabilities

 

$

 —

 

$

(42,189)

 

$

(1,178)

 

$

$

(20,801)

$

(1,785)

As of December 31, 20162019

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

 

 

    

Significant

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

    

Significant

 

Active Markets for

Significant Other

Unobservable

 

Identical Assets

Observable Inputs

Inputs

 

(Level 1)

(Level 2)

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

Derivative instruments, net

 

$

 

$

 

$

 

$

$

5,772

$

Total assets

 

$

 

$

 

$

 

$

$

5,772

$

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability

 

$

 

$

(10,841)

 

$

 

$

$

(20,370)

$

Derivative instruments, net

 

 

 

 

(53,446)

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

(1,808)

 

 

 

 

(6,134)

Total liabilities

 

$

 —

 

$

(64,287)

 

$

(1,808)

 

$

$

(20,370)

$

(6,134)

Deferred Compensation Plan — The Company maintains a non-qualified deferred compensation plan structured as a Rabbi trust for certain eligible employees. Participants in the deferred compensation plan select from a menu of phantom investment options for their deferral dollars offered by the Company each year, which are based upon changes in value of complementary, defined market investments. The deferred compensation liability represents the combined values of market investments against which participant accounts are tracked.

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TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Contingent Consideration - The Company recorded contingent consideration related to the acquisitionsacquisition of rogenSi and Atelka. TheseFCR. This contingent payables werepayable was recognized at fair value using a discounted cash flow approach and a discount rate of 4.6% and 0%, respectively.16.7%. The discount rates vary dependent on the specific risks of each acquisition including the country of operation, the nature of services and complexity of the acquired business, and other similar factors. These measurements were based on significant inputs not observable in the market. The Company recordedwill record interest expense each periodquarter using the effective interest method until the future value of thesethis contingent payables reached theirpayment reaches the expected total future value. Interest expense related

During the first and second quarters of 2020, the Company recorded fair value adjustments to allthe contingent consideration associated with the FCR acquisition based on decreased estimates of EBITDA which caused the estimated payable to decrease. Accordingly, a $3.3 million decrease and a $1.1 million decrease to the payable were recorded contingent payables isas of March 31, 2020 and June 30, 2020, respectively, and were included in Interest expenseOther income (expense), net in the Consolidated Statements of Comprehensive Income (Loss).

The Company recorded As of June 30, 2020, the expected future contingent consideration related to a revenue servicing agreement with Welltok in the fourth quarter of 2016, in which a maximum of $1.25 million will be paid over eight quarters based on the dollar value of revenue earned by the Company. The contingent payable was recognized at fair value of $1.25 million as of December 31, 2016. As required, the first payment of $435 thousand was completed during the second quarter of 2017. As required, the second payment of $239 thousand was completed during the third quarter of 2017.is $1.8 million.

A rollforward of the activity in the Company’s fair value of the contingent consideration payable is as follows (in thousands):

    

    

    

    

Imputed

    

 

December 31,

Interest /

June 30,

 

2019

Acquisitions

Payments

Adjustments

2020

 

FCR

$

6,134

$

$

$

(4,349)

$

1,785

Total

$

6,134

$

$

$

(4,349)

$

1,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Imputed

    

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

Interest /

 

September 30,

 

 

 

2016

 

Acquisitions

 

Payments

 

Adjustments

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Welltok

 

$

1,250

 

$

 —

 

$

(674)

 

$

 —

 

$

576

 

Atelka

 

 

558

 

 

 —

 

 

 —

 

 

44

 

 

602

 

Total

 

$

1,808

 

$

 —

 

$

(674)

 

$

44

 

$

1,178

 

(8)INCOME TAXES

The Company accounts for income taxes in accordance with the accounting literature for income taxes, which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. Quarterly, the Company assesses the likelihood that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized. The Company’s selection of an accounting policy with respect to both the global intangible low taxed foreign income (“GILTI”) and base erosion and anti-abuse tax (“BEAT”) rules is to compute the related taxes in the period the entity becomes subject to either GILTI or BEAT.

In accordance with ASC 740,On March 27, 2020, the Company recorded a liability duringCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act includes various provisions designed to support corporations and reduce the first quarterimpact of 2016COVID-19 pandemic on their liquidity including provisions relating to payroll tax credits, deferment of $1.1 million, inclusiveemployer side social security payments, modifications to the net interest deduction limitations, allowing companies to carryback certain Net Operating Losses (“NOLs”) and increasing the amount of penalties and interest, for uncertain tax positions. See Note 1 for further information on this item.

During theNOLs that corporations can use to offset income. The CARES Act did not materially affect our second quarter income tax provision, deferred tax assets and liabilities, or related taxes payable. We are continuing to assess the future implications of 2016, $0.3 million of liability was released duethese provisions within the CARES Act but do not expect there to the closing ofbe a statute of limitations.

During the third quarter of 2016, $0.8 million of liability was released due to the favorable outcome of communications with a revenue authority related to site compliance for locations with tax advantaged status.

During the third quarter of 2016, $0.5 million of liability was released due to the closing of a statute of limitations.material impact on our financial statements at this time.

As of SeptemberJune 30, 2017,2020, the Company had $31.0$10.5 million of gross deferred tax assets (after a $10.5$17.0 million valuation allowance) and a net deferred tax assetsasset of $0.5 million (after deferred tax liabilities)liabilities of $30.8 million$10.0 million) related to the U.S.United States and international tax jurisdictions whose recoverability is dependent upon future profitability.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172020 was 11.7%24.8% and 15.0%26.7%, respectively. The effective tax rate for the three and ninesix months ended SeptemberJune 30, 20162019 was (6.9)%35.0% and 15.2%30.3%, respectively.

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TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company’s U.S. income tax returns filed for the tax years ending December 31, 20142016 to present, remain open tax years. The Company has been notified of the intent to audit or is currently under audit of income taxes for the United States for tax year 2017, Canada for tax years 2009, 2010 and 2010,2018, the Philippines for tax year 2018; and the state of Michigan in the United StatesNew York for tax years 20122015 through 2015, for the Philippines branch for tax year 2015, for Belgium for tax years 2014 and 2015, and for eLoyalty in Ireland for tax year 2016.2017. Although the outcome of examinations by taxing authorities are always uncertain, it is the opinion of management that the resolution of these audits will not have a material effect on the Company’s Consolidated Financial Statements. During

When there is a change in judgment concerning the thirdrecovery of deferred tax assets in future periods, a valuation allowance is recorded into earnings during the quarter of 2017,in which the Company closed the auditchange in Hong Kong for 2014 with no changes. Additionally, duringjudgment occurred. In the second quarter of 2016,2019 and the Company successfully closedfirst quarter of 2020, changes to the auditvaluation allowance were recorded in the U.S.amounts of $2.3 million and $0.3 million, respectively, for deferred tax assets that did not meet the acquired entity Technology Solutions Group for“more-likely-than-not” standard. In the tax year 2012 (priorsecond quarter of 2020, changes to acquisition) with no changes. The Company also closedthe valuation allowance were recorded in the fourth quarteramount of 2016$0.9 million for assets that were redetermined to meet the audit in New Zealand for tax years 2013 and 2014 with no changes.“more-likely-than-not” standard.

The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the government of the Philippines. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted multiple agreements with an initial period of four years and additional periods for varying years, expiring at various times between 20112019 and 2020.2022. The aggregate effect on income tax expense for the three months ended SeptemberJune 30, 20172020 and 20162019 was approximately $2.8$(0.3) million expense and $1.9 million benefit, respectively, which had an impact on diluted net income per share of $(0.01) and $0.04, respectively. The aggregate effect on income tax expense for the six months ended June 30, 2020 and 2019 was approximately $1.2 million and $2.0$4.0 million, respectively, which had a favorable impact on diluted net income per share of $0.06$0.02 and $0.04, respectively. The aggregate effect on income tax expense for the nine months ended September 30, 2017 and 2016 was approximately $8.9 million and $4.5 million, respectively, which had a favorable impact on diluted net income per share of $0.19 and $0.10,$0.09, respectively.

(9)RESTRUCTURING CHARGES, INTEGRATION CHARGES AND IMPAIRMENT LOSSES

Restructuring Charges

During the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company continued restructuring activities primarily associated with reductions in the Company’s capacity, workforce and related management in several of theboth segments to better align the capacity and workforce with current business needs.

During the three and nine months ended September 30, 2017, several restructuring activities were completed regarding the purchase of Connextions (see Note 2). Several of the delivery centers that were included in the purchase will be closed over the next few quarters. During the second quarter of 2017, a $1.7 million severance accrual was recorded in relation to these closures and included in the Consolidated Statements of Comprehensive Income (Loss) for the quarter ended June 30, 2017. In conjunction with closing one delivery center, a $0.6 million termination fee was recorded in the third quarter of 2017. During the third quarter of 2017, the severance accrual was reviewed and a reversal of $0.7 million was recorded as of September 30, 2017. These charges and reversals were included in the Consolidated Statements of Comprehensive Income (Loss) during the quarter ended September 30, 2017.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of the expenses recorded in Restructuring and integration charges, net in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, is as follows (in thousands):

Three Months Ended 

Six Months Ended 

June 30,

June 30,

2020

    

2019

    

2020

    

2019

 

    

 

Reduction in force

TTEC Digital

$

114

 

$

 

$

321

$

TTEC Engage

 

3

 

308

 

239

 

770

Total

$

117

 

$

308

 

$

560

$

770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Reduction in force

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

(213)

 

$

2,485

 

$

1,548

 

$

2,482

 

Customer Growth Services

 

 

 —

 

 

108

 

 

 —

 

 

108

 

Customer Technology Services

 

 

 —

 

 

314

 

 

93

 

 

324

 

Customer Strategy Services

 

 

13

 

 

82

 

 

13

 

 

92

 

Total

 

$

(200)

 

$

2,989

 

$

1,654

 

$

3,006

 

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TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Facility exit and other charges

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

600

 

$

699

 

$

642

 

$

852

 

Customer Growth Services

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Customer Technology Services

 

 

 —

 

 

 —

 

 

84

 

 

33

 

Customer Strategy Services

 

 

21

 

 

 —

 

 

21

 

 

 —

 

Total

 

$

621

 

$

699

 

$

747

 

$

885

 

Three Months Ended 

Six Months Ended 

 

June 30,

June 30,

2020

    

2019

    

2020

    

2019

    

 

Facility exit and other charges

TTEC Digital

$

 

$

 

$

$

TTEC Engage

 

676

 

120

 

771

 

619

Total

$

676

 

$

120

 

$

771

$

619

A rollforward of the activity in the Company’s restructuring accrualsaccrual is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Reduction

    

Facility Exit and

    

 

 

    

in Force

    

Other Charges

    

           Total           

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

1,468

 

$

98

 

$

1,566

 

    

Reduction

    

Facility Exit and

    

 

    

in Force

    

Other Charges

    

           Total           

 

Balance as of December 31, 2019

$

251

 

$

74

 

$

325

Expense

 

 

2,384

 

 

747

 

 

3,131

 

 

560

771

 

1,331

Payments

 

 

(987)

 

 

(841)

 

 

(1,828)

 

 

(719)

(807)

 

(1,526)

Change due to foreign currency

 

 

(23)

 

 

 —

 

 

(23)

 

(14)

(5)

(19)

Change in estimates

 

 

(730)

 

 

 —

 

 

(730)

 

 

 

Balance as of September 30, 2017

 

$

2,112

 

$

 4

 

$

2,116

 

Balance as of June 30, 2020

$

78

 

$

33

 

$

111

The remaining restructuring and other accruals are expected to be paid or extinguished during the next twelve months and are all classified as current liabilities within Other accrued expenses in the Consolidated Balance Sheets.

IntegrationSeverance Charges

In the normal course of business, the Company will pay severance to terminated employees related to programs that are ending who are no longer needed and cannot be repurposed to a new program.

During the second quarter of 2020, a $2.9 million accrual was recorded with the expense included in Cost of services during the quarter ended June 30, 2020. The accrual is expected to be paid or extinguished during the next six months and thus is classified as current liabilities within Other accrued expenses in the Consolidated Balance Sheets.

Impairment Losses

During each of the periods presented, the Company evaluated the annual recoverability of its leasehold improvement assets at certain customer engagement centers. An asset is considered to be impaired when the anticipated undiscounted future cash flows of its asset group are estimated to be less than the asset group’s carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. To determine fair value, the Company used Level 3 inputs in its discounted cash flows analysis. Assumptions included the amount and timing of estimated future cash flows and assumed discount rates. During the three and six months ended SeptemberJune 30, 2017, as a result of2020, the Connextions acquisition, certain integration activities were completed and $5.6 million of additional expenses were incurred and paid. These integration activities included the hiring, training and licensing of a group of employees at new delivery centers as one of the acquired centers was closed during the third quarter of 2017 and one of the acquired centers will be closed during the fourth quarter of 2017. The Company has also incurred significant expensesrecognized impairment losses related to leasehold improvement assets and right of use lease assets of 0 and $0.7 million, respectively, for the integrationTTEC Digital segment. During the three and six months ended June 30, 2019, the Company recognized impairment losses related to leasehold improvement assets and right of use lease assets of $1.1 million and $2.6 million, respectively, across the IT systemsTTEC Digital and has paid duplicative software costs and facilities expenses for several areas during the transition period.TTEC Engage segments.

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TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

(10)COMMITMENTS AND CONTINGENCIES

Credit Facility

On February 11, 2016,14, 2019, the Company entered into a FirstFourth Amendment to its June 3, 2013 Amended and Restated Credit Agreement and Amended and Restated Security Agreement originally dated as of June 3, 2013 (collectively the “Credit Agreement”) for a senior secured revolving credit facility (the “Credit Facility”) with a syndicate of lenders led by Wells Fargo Bank, National Association. The Credit Agreement provides for a secured revolving credit facility thatAssociation, as agent, swing line and fronting lender which matures on February 11, 2021 with an initial14, 2024 (the “Credit Facility”).

The maximum aggregate commitment ofunder the Credit Facility is $900.0 million, andwith an accordion feature of up to $1.2 billion in the aggregate, if certain conditions are satisfied.

On October 30, 2017, the Company entered into a Third Amendment The Credit Facility commitment fees are payable to the Credit Agreement and exercisedlenders in an amount equal to the Credit Facility’s accordion feature to increase the total commitment underunused portion of the Credit Facility multiplied by a rate per annum as determined by reference to $1.2 billion. All other material termsthe Company’s net leverage ratio. The Credit Agreement contains customary affirmative, negative, and financial covenants, which remained unchanged from the 2016 Credit Facility, except that the Company is now obligated to maintain a maximum net leverage ratio of 3.50 to 1.00, and a minimum Interest coverage Ratio of 2.50 to 1.00. The Credit Agreement permits accounts receivable factoring up to the greater of $75 million or 25 percent of the Credit Agreement remained unchanged.average book value of all accounts receivable over the most recent twelve-month period.

Base rate loans bear interest at a rate equal to the greatest of (i) Wells Fargo’s prime rate, (ii) one half of 1% in excess of the federal funds effective rate, and (iii) 1.25% in excess of the one month London Interbank Offered Rate (“LIBOR”); plus in each case a margin of 0% to 0.75% based on the Company’s net leverage ratio. Eurodollar loans bear interest at LIBOR plus a margin of 1.0% to 1.75% based on the Company’s net leverage ratio. Alternate currency loans bear interest at rates applicable to their respective currencies.

Letter of credit fees are one eighth of 1% of the stated amount of the letter of credit on the date of issuance, renewal or amendment, plus an annual fee equal to the borrowing margin for Eurodollar loans.

The Credit Facility commitment fees are payable to the lenders in an amount equal to the unused portion of the Credit Facility at a rate of 0.125% to 0.250% based on the Company’s net leverage ratio.

The Company is obligated to maintain a maximum net leverage ratio of 3.25 to 1.00, and a minimum interest coverage ratio of 2.50 to 1.00.

The Company primarily utilizes its Credit Agreement to fund working capital, general operations, stock repurchases, dividends and other strategic activities, such as the acquisitions described in Note 2. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had borrowings of $255.0$700.0 million and $217.3$290.0 million, respectively, under its Credit Agreement, and its average daily utilization was $474.3$548.8 million and $359.5$324.0 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The increased borrowings under the Credit Agreement at June 30, 2020 relate to precautionary measures taken to proactively strengthen the Company’s cash reserves and financial flexibility in response to COVID-19 related uncertainties. Based on the current level of availability based on the covenant calculations, the Company’s remaining borrowing capacity was approximately $390.0$195 million as of SeptemberJune 30, 2017.2020. As of SeptemberJune 30, 2017,2020, the Company was in compliance with all covenants and conditions under its Credit Agreement.

Letters of Credit

As of SeptemberJune 30, 2017,2020, outstanding letters of credit under the Credit Agreement totaled $3.9$2.6 million and primarily guaranteed workers’ compensation and other insurance related obligations. As of SeptemberJune 30, 2017,2020, letters of credit and contract performance guarantees issued outside of the Credit Agreement totaled $7.6$0.4 million.

Legal Proceedings

From time to time, the Company has been involved in legal actions, both as plaintiff and defendant, which arise in the ordinary course of business. The Company accrues for exposures associated with such legal actions to the extent that losses are deemed both probable and reasonably estimable. To the extent specific reserves have not been made for certain legal proceedings, their ultimate outcome, and consequently, an estimate of possible loss, if any, cannot reasonably be determined at this time.

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TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

Based on currently available information and advice received from counsel, the Company believes that the disposition or ultimate resolution of any current legal proceedings, except as otherwise specifically reserved for in its financial statements, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.

(11)LEASES

(11)

Operating leases are included in the Consolidated Balance Sheet as Operating lease assets, Current operating lease liabilities and Non-current operating lease liabilities. Finance leases are included in Property, plant and equipment, Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheet. The Company primarily leases real estate and equipment under various arrangements that provide the Company the right of use for the underlying asset which require lease payments over the lease term. The Company determines the value of each lease by computing the present value of each lease payment using the interest rate implicit in the lease, if available; otherwise the Company estimates its incremental borrowing rate over the lease term. The Company determines its incremental borrowing rate based on its estimated credit risk with adjustments for each individual leases’ geographical risk and lease term. Operating lease assets also include prepaid rent and initial direct costs less any tenant improvements.

The Company’s real estate portfolio typically includes one or more options to renew, with renewal terms that generally can extend the lease term from one to 10 years. The exercise of these lease renewal options is at the Company’s discretion and is included in the lease term only if the Company is reasonably certain to exercise. The Company also has service arrangements whereby it controls specific space provided by a third-party service provider. These arrangements meet the definition of a lease and are accounted for under ASC 842. Rent expense for operating leases is recognized on a straight-line basis over the lease term and is included in the Consolidated Statements of Comprehensive Income (Loss). The Company’s lease agreements do not contain any material residual value guarantees or restrictive guarantees.

The components of lease expense for the three and six months ended June 30, 2020 and 2019 are as follows (in thousands):

Location in Statements of

Three Months Ended June 30,

Description

Comprehensive Income (Loss)

    

2020

    

2019

    

Amortization of ROU assets - finance leases

Depreciation and amortization

$

1,928

$

1,798

Interest on lease liabilities - finance leases

Interest expense

52

32

 

Operating lease cost (cost resulting from lease payments)

Cost of services

 

11,642

 

12,647

Operating lease cost (cost resulting from lease payments)

Selling, general and administrative

858

1,363

Operating lease cost (cost resulting from lease payments)

Other income (expense), net

287

242

Short-term lease cost

Cost of services

 

883

 

1,247

Variable lease cost (cost excluded from lease payments)

Cost of services

(284)

Less: Sublease income

Selling, general and administrative

(212)

(126)

Less: Sublease income

Other income (expense), net

 

(616)

 

(496)

Total lease cost

$

14,538

 

$

16,707

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TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Location in Statements of

Six Months Ended June 30,

Description

Comprehensive Income (Loss)

    

2020

    

2019

Amortization of ROU assets - finance leases

Depreciation and amortization

$

3,844

$

3,405

Interest on lease liabilities - finance leases

Interest expense

108

40

Operating lease cost (cost resulting from lease payments)

Cost of services

 

23,680

 

23,346

Operating lease cost (cost resulting from lease payments)

Selling, general and administrative

1,400

2,630

Operating lease cost (cost resulting from lease payments)

Other income (expense), net

529

484

Short-term lease cost

Cost of services

 

1,880

 

2,312

Variable lease cost (cost excluded from lease payments)

Cost of services

(284)

Less: Sublease income

Selling, general and administrative

(394)

(193)

Less: Sublease income

Other income (expense), net

 

(1,112)

 

(992)

Total lease cost

$

29,651

 

$

31,032

Other supplementary information for the three and six months ended June 30, 2020 and 2019 are as follows (dollar values in thousands):

Three Months Ended June 30,

    

2020

    

2019

    

Finance lease - operating cash flows

$

17

$

32

Finance lease - financing cash flows

$

1,735

$

2,202

Operating lease - operating cash flows (fixed payments)

$

13,280

$

13,741

New ROU assets - operating leases

$

247

$

5,368

Modified ROU assets - operating leases

$

6,221

$

10,202

New ROU assets - finance leases

$

320

$

1,657

Six Months Ended June 30,

    

2020

    

2019

    

Finance lease - operating cash flows

$

36

$

40

Finance lease - financing cash flows

$

3,867

$

5,985

Operating lease - operating cash flows (fixed payments)

$

27,417

$

26,075

New ROU assets - operating leases

$

6,795

$

7,057

Modified ROU assets - operating leases

$

6,221

$

23,201

New ROU assets - finance leases

$

828

$

4,247

June 30, 2020

December 31, 2019

Weighted average remaining lease term - finance leases

2.63 years

2.91 years

Weighted average remaining lease term - operating leases

4.02 years

4.27 years

Weighted average discount rate - finance leases

1.60%

1.43%

Weighted average discount rate - operating leases

6.90%

7.22%

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TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Operating and financing lease right-of-use assets and lease liabilities within the Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019 are as follows (in thousands):

Description

Location in Balance Sheet

June 30, 2020

December 31, 2019

 

Assets

Operating lease assets

Operating lease assets

$

142,701

$

150,808

Finance lease assets

Property, plant and equipment, net

 

14,989

 

18,016

Total leased assets

$

157,690

$

168,824

Liabilities

Current

Operating

Current operating lease liabilities

$

45,121

$

45,218

Finance

Other current liabilities

6,987

7,470

Non-current

Operating

Non-current operating lease liabilities

116,558

127,395

Finance

Other long-term liabilities

6,423

8,896

Total lease liabilities

$

175,089

$

188,979

The future minimum operating lease and finance lease payments required under non-cancelable leases as of June 30, 2020 and December 31, 2019 are as follows (in thousands):

June 30, 2020

    

Operating

    

Sub-lease

    

Finance

 

Leases

Income

Leases

 

Year 1

$

54,344

$

(3,401)

$

6,829

Year 2

 

47,643

 

(3,437)

 

4,149

Year 3

 

41,159

 

(3,433)

 

1,609

Year 4

 

21,523

 

(2,828)

 

817

Year 5

 

13,215

 

(2,940)

 

104

Thereafter

 

10,230

 

(1,960)

 

Total minimum lease payments

$

188,114

$

(17,999)

$

13,508

Less imputed interest

(26,435)

(98)

Total lease liability

$

161,679

$

13,410

December 31, 2019

    

Operating

    

Sub-lease

    

Finance

 

Leases

Income

Leases

 

Year 1

$

54,903

$

(2,976)

$

7,594

Year 2

 

47,892

 

(621)

 

5,587

Year 3

 

43,590

 

(345)

 

2,139

Year 4

 

28,124

 

(201)

 

1,109

Year 5

 

14,494

 

 

331

Thereafter

 

14,734

 

 

Total minimum lease payments

$

203,737

$

(4,143)

$

16,760

Less imputed interest

(31,124)

(394)

Total lease liability

$

172,613

$

16,366

27

Table of Contents

TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In 2008, the Company sub-leased one of its customer engagement centers to a third party for the remaining term of the lease. The sub-lease began on January 1, 2009 and rental income will be recognized on a straight-line basis over the term of the sub-lease through 2026. In 2017, the Company sub-leased one of its office spaces for the remaining term of the original lease. The sub-lease began on November 6, 2017 and ends May 31, 2021. In 2019, the Company sub-leased one of its office spaces for the remaining term of the original lease. The sub-lease began on March 1, 2019 and ends July 31, 2023. In 2020, the Company sub-leased one of its office spaces for the remaining term of the original lease. The sub-lease began on February 6, 2020 and ends June 14, 2023.

(12)OTHER LONG-TERM LIABILITIES

The components of Other long-term liabilities as of June 30, 2020 and December 31, 2019 are as follows (in thousands):

June 30, 2020

    

December 31, 2019

Deferred revenue

$

17,353

 

$

23,142

Deferred compensation plan

20,801

20,370

Other

 

30,318

 

36,129

Total

$

68,472

 

$

79,641

(13)NONCONTROLLING INTEREST

The following table reconciles equity attributable to noncontrolling interest in the Company’s subsidiary (in thousands):

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

    

2017

    

2016

 

Six Months Ended June 30,

 

    

2020

    

2019

 

Noncontrolling interest, January 1

 

$

6,981

 

$

7,201

 

 

$

13,186

 

$

7,677

Net income attributable to noncontrolling interest

 

 

2,828

 

 

2,804

 

 

3,880

 

3,290

Dividends distributed to noncontrolling interest

 

 

(2,745)

 

 

(2,745)

 

 

(4,850)

 

(2,250)

Equity contribution

 

 

3,362

Foreign currency translation adjustments

 

 

325

 

 

(70)

 

 

(313)

 

Equity-based compensation expense

 

 

(291)

 

 

96

 

Other

 

 

 —

 

 

10

 

Noncontrolling interest, September 30

 

$

7,098

 

$

7,296

 

Noncontrolling interest, June 30

 

$

11,903

 

$

12,079

(12)MANDATORILY REDEEMABLE NONCONTROLLING INTEREST

The Company held an 80% interest in iKnowtion until January 1, 2016 when the additional 20% was purchased. In the event iKnowtion met certain EBITDA targets for calendar year 2015, the purchase and sale agreement required TeleTech to purchase the remaining 20% interest in iKnowtion in 2016 for an amount equal to a multiple of iKnowtion’s 2015 EBITDA as defined in the purchase and sale agreement. These terms represented a contingent redemption feature which the Company determined was probable of being achieved.

Based on final EBITDA for 2015, the payment for the remaining 20% was completed in April 2016 for the value shown in the table below in accordance with the purchase and sale agreement.

The Company recorded the mandatorily redeemable noncontrolling interest at the redemption value based on the corresponding EBITDA multiples as prescribed in the purchase and sale agreement at the end of each reporting period. At the end of each reporting period the changes in the redemption value were recorded in retained earnings. Since the EBITDA multiples as defined in the purchase and sale agreement were below the current market multiple, the Company determined that there was no preferential treatment to the noncontrolling interest shareholders resulting in no impact to earnings per share.

A rollforward of the mandatorily redeemable noncontrolling interest is included in the table below (in thousands).

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2017

    

2016

 

Mandatorily redeemable noncontrolling interest, January 1

 

$

 —

 

$

4,131

 

Net income attributable to mandatorily redeemable noncontrolling interest

 

 

 —

 

 

 —

 

Working capital distributed to mandatorily redeemable noncontrolling interest

 

 

 —

 

 

(492)

 

Change in redemption value

 

 

 —

 

 

466

 

Purchase of mandatorily redeemable noncontrolling interest

 

 

 —

 

 

(4,105)

 

Mandatorily redeemable noncontrolling interest, September 30

 

$

 —

 

$

 —

 

2728


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

(13)(14)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents changes in the accumulated balance for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Foreign

    

 

 

    

 

 

    

 

 

 

 

Currency

 

Derivative

 

 

 

 

 

 

 

 

Translation

 

Valuation, Net

 

Other, Net

 

 

 

 

 

Adjustment

 

of Tax

 

of Tax

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 31, 2015

 

$

(71,196)

 

$

(26,885)

 

$

(3,284)

 

$

(101,365)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Foreign

    

    

    

 

Currency

Derivative

 

Translation

Valuation, Net

Other, Net

 

Adjustment

of Tax

of Tax

Totals

 

Accumulated other comprehensive income (loss) at December 31, 2018

$

(114,168)

 

$

(8,278)

 

$

(2,150)

 

$

(124,596)

Other comprehensive income (loss) before reclassifications

 

 

(7,999)

 

 

9,519

 

 

2,330

 

 

3,850

 

 

6,380

 

10,096

 

116

 

16,592

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

(11,189)

 

 

(1,128)

 

 

(12,317)

 

 

 

(2,583)

 

(99)

 

(2,682)

Net current period other comprehensive income (loss)

 

 

(7,999)

 

 

(1,670)

 

 

1,202

 

 

(8,467)

 

 

6,380

 

7,513

 

17

 

13,910

 

 

��

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at September 30, 2016

 

$

(79,195)

 

$

(28,555)

 

$

(2,082)

 

$

(109,832)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 31, 2016

 

$

(92,008)

 

$

(32,393)

 

$

(2,563)

 

$

(126,964)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at June 30, 2019

$

(107,788)

 

$

(765)

 

$

(2,133)

 

$

(110,686)

Accumulated other comprehensive income (loss) at December 31, 2019

$

(107,480)

 

$

4,182

 

$

(2,936)

 

$

(106,234)

Other comprehensive income (loss) before reclassifications

 

 

8,089

 

 

25,290

 

 

738

 

 

34,117

 

 

(18,521)

(4,187)

510

 

(22,198)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

(10,694)

 

 

(352)

 

 

(11,046)

 

 

168

(264)

 

(96)

Net current period other comprehensive income (loss)

 

 

8,089

 

 

14,596

 

 

386

 

 

23,071

 

 

(18,521)

 

(4,019)

 

246

 

(22,294)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at September 30, 2017

 

$

(83,919)

 

$

(17,797)

 

$

(2,177)

 

$

(103,893)

 

Accumulated other comprehensive income (loss) at June 30, 2020

$

(126,001)

 

$

163

 

$

(2,690)

 

$

(128,528)

The following table presents the classification and amount of the reclassifications from Accumulated other comprehensive income (loss) to the statement of comprehensive income (loss) (in thousands):

Statement of

For the Three Months Ended June 30,

Comprehensive Income

    

2020

    

2019

    

(Loss) Classification

Derivative valuation

Gain (loss) on foreign currency forward exchange contracts

$

79

$

(1,011)

 

Revenue

Tax effect

 

(21)

 

273

 

Provision for income taxes

$

58

$

(738)

 

Net income (loss)

Other

Actuarial loss on defined benefit plan

$

(147)

$

(55)

 

Cost of services

Tax effect

 

15

 

6

 

Provision for income taxes

$

(132)

$

(49)

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of

 

 

 

For the Three Months Ended September 30,

 

Comprehensive Income

 

 

    

2017

    

2016

    

(Loss) Classification

 

 

 

 

 

 

 

 

 

 

 

Derivative valuation

 

 

 

 

 

 

 

 

 

Loss on foreign currency forwards

 

$

(5,812)

 

$

(7,103)

 

Revenue

 

Loss on interest rate swaps

 

 

 —

 

 

(104)

 

Interest expense

 

Tax effect

 

 

2,325

 

 

3,028

 

Provision for income taxes

 

 

 

$

(3,487)

 

$

(4,179)

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Actuarial loss on defined benefit plan

 

$

(130)

 

$

(804)

 

Cost of services

 

Tax effect

 

 

13

 

 

80

 

Provision for income taxes

 

 

 

$

(117)

 

$

(724)

 

Net income (loss)

 

2829


Table of Contents

TELETECHTTEC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements

(UNAUDITED)(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of

 

 

 

For the Nine Months Ended September 30,

 

Comprehensive Income

 

 

    

2017

    

2016

    

(Loss) Classification

 

 

 

 

 

 

 

 

 

 

 

Derivative valuation

 

 

 

 

 

 

 

 

 

Loss on foreign currency forwards

 

$

(17,709)

 

$

(18,860)

 

Revenue

 

Loss on interest rate swaps

 

 

(115)

 

 

(435)

 

Interest expense

 

Tax effect

 

 

7,130

 

 

8,106

 

Provision for income taxes

 

 

 

$

(10,694)

 

$

(11,189)

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Actuarial loss on defined benefit plan

 

$

(391)

 

$

(1,252)

 

Cost of services

 

Tax effect

 

 

39

 

 

124

 

Provision for income taxes

 

 

 

$

(352)

 

$

(1,128)

 

Net income (loss)

 

Statement of

 

For the Six Months Ended June 30,

Comprehensive Income

 

    

2020

    

2019

    

(Loss) Classification

 

Derivative valuation

Gain (loss) on foreign currency forward exchange contracts

$

230

$

(3,538)

 

Revenue

Tax effect

 

(62)

 

955

 

Provision for income taxes

$

168

$

(2,583)

 

Net income (loss)

Other

Actuarial loss on defined benefit plan

$

(294)

$

(110)

 

Cost of services

Tax effect

 

30

 

11

 

Provision for income taxes

$

(264)

$

(99)

 

Net income (loss)

(15)WEIGHTED AVERAGE SHARE COUNTS

(14)NET INCOME PER SHARE

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

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Shares used in basic earnings per share calculation

46,619

 

46,318

 

46,559

 

46,261

Effect of dilutive securities:

Restricted stock units

242

 

366

 

279

 

375

Performance-based restricted stock units

 

 

 

Total effects of dilutive securities

242

 

366

 

279

 

375

Shares used in dilutive earnings per share calculation

46,861

 

46,684

 

46,838

 

46,636

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 
September 30,

 

Nine Months Ended 
September 30,

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Shares used in basic earnings per share calculation

 

45,838

 

47,081

 

45,816

 

47,771

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Stock options

 

10

 

 6

 

 9

 

11

Restricted stock units

 

517

 

214

 

513

 

292

Performance-based restricted stock units

 

 2

 

14

 

10

 

15

Total effects of dilutive securities

 

529

 

234

 

532

 

318

Shares used in dilutive earnings per share calculation

 

46,367

 

47,315

 

46,348

 

48,089

For the three months ended SeptemberJune 30, 20172020 and 2016, options to purchase 0.0 million and 0.1 million shares of common stock, respectively,2019, there were outstanding, but not included in the computation of diluted net income per share because the exercise price exceeded the value of the shares and the effect would have been anti-dilutive. For the nine months ended September 30, 2017 and 2016, options to purchase 0.0 million and 0.1 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted net income per share because the exercise price exceeded the value of the shares and the effect would have been anti-dilutive. For the three months ended September 30, 2017 and 2016, restricted stock units (“RSUs”) of 0.0 million64 thousand and 0.1 million,10 thousand, respectively, outstanding which were outstanding, but not included inexcluded from the computation of diluted net income per share because the effect would have been anti-dilutive. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, there were RSUs of 0.0 million64 thousand and 0.1 million,20 thousand, respectively, outstanding which were outstanding, but not included inexcluded from the computation of diluted net income per share because the effect would have been anti-dilutive.

29


Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(15)(16)EQUITY-BASED COMPENSATION PLANS

All equity-based awards to employees are recognized in the Consolidated Statements of Comprehensive Income (Loss) at the fair value of the award on the grant date. During the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company recognized total equity-based compensation expense of $3.5$3.1 million and $8.4$6.0 million and $2.7$3.3 million and $7.3$6.5 million, respectively. Of thethis total compensation expense, $1.4$1.1 million and $2.9$2.0 million waswere recognized in Cost of services and $2.1$2.0 million and $5.5$4.0 million waswere recognized in Selling, general and administrative during the three and ninesix months ended SeptemberJune 30, 2017.2020, respectively. During the three and ninesix months ended SeptemberJune 30, 2016,2019, the Company recognized compensation expense of $1.0$1.4 million and $2.3$2.6 million in Cost of services and $1.7$1.9 million and $5.0$3.9 million in Selling, general and administrative, respectively.

30

Table of Contents

TTEC HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Restricted Stock Unit Grants

During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company granted 724,951130,885 and 443,87540,246 RSUs, respectively, to new and existing employees, which vest in equal installments over four or to five years. The Company recognized compensation expense related to RSUs of $3.5$2.7 million and $8.7$5.3 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively. The Company recognized compensation expense related to RSUs of $2.6$3.1 million and $7.2$6.3 million for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively. As of SeptemberJune 30, 2017,2020, there was approximately $25.0$13.9 million of total unrecognized compensation cost (including the impact of expected forfeitures) related to RSUs granted under the Company’s equity plans.

Performance Based Restricted Stock OptionsUnit Grants

During 2019, the Company awarded performance restricted stock units (“PRSUs”) that are subject to service and performance vesting conditions. If defined minimum targets are met, the annual value of the PRSUs issued will be between $0.4 million and $1.4 million and vest immediately. If the defined minimum targets are not met, then no shares will be issued. The award amounts are based on the Company’s annual adjusted operating income for the fiscal years 2019, 2020, 2021. Each fiscal year’s adjusted operating income will determine the award amount. The Company recognized compensation expense related to subsidiary performance optionsPRSUs of zero$0.35 million and $(0.3)$0.70 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. The option benefit for 2017 resulted from2020.

During 2020, the Company concludingawarded PRSUs that are subject to service and performance vesting conditions. If defined minimum targets are met, Company shares will be issued that vest immediately. If the performancedefined minimum targets are not met, then no shares will be issued. The number of shares awarded are based on the Company’s annual revenue and adjusted operating income for the fiscal years 2021 and 2022. Each fiscal year’s revenue and adjusted operating income will determine the award amount. Expense for these awards will begin at the start of the subsidiary will not be achieved.requisite service period, beginning January 1, 2021.

(16)(17)RELATED PARTY

The Company entered into an agreement under which Avion, LLC (“Avion”) and Airmax LLC (“Airmax”) provide certain aviation flight services as requested by the Company. Such services include the use of an aircraft and flight crew. Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company, has a directan indirect 100% beneficial ownership interest in Avion and Airmax. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company expensed $0.6$0.2 million and $0.7$0.6 million, respectively, to Avion and Airmax for services provided to the Company. There was $114were $50 thousand in payments due and outstanding to Avion and Airmax as of SeptemberJune 30, 2017.

During 2014, the Company entered into a vendor contract with Convercent Inc. to provide learning management and web and telephony based global helpline solutions. This contract was renewed, after an arms-length market pricing review, in the fourth quarter of 2016. The majority owner of Convercent is a company which is owned and controlled by Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company. During the nine months ended September 30, 2017 and 2016, the Company paid $55 thousand and $75 thousand, respectively.2020.

During 2015, the Company entered into a contract to purchase software from CaféX, in which is a company that TeleTechthe Company holds a 17.2%17.8% equity investment in.investment. During the three and ninesix months ended SeptemberJune 30, 2017,2020 and 2019, the Company purchased $0.0 million0 and $0.1 million,$33 thousand, respectively, of software from CaféX. See Note 2 for further information regarding this investment.

Ms. Regina M. Paolillo, Chief Financial and Administrative Officer of the Company, is a member of the board of directors of Welltok, Inc., a consumer health SaaS company, and partner of the Company in a joint venture. During the six months ended June 30, 2020 and 2019, the Company recorded revenue of $1.8 million and $2.8 million, respectively, in connection with work performed through the joint venture.

3031


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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, (“Litigation Reform Act”), relating to our future operations, expected financial condition and prospects,position, results of operation, continuation of client relationships, and other business matters that are based on our current expectations, assumptions, business strategy, and projections with respect to the future, and are not a guarantee of performance. Forward-looking statements may appear throughoutIn this report, including without limitation, the following sections: Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors.” Forward-looking statements generally can be identified bywhen we use words such as “anticipates,“may,“believes,“believe,“estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,“plan,” “will, be,“will continue,“anticipate,“will likely result,“estimate,and“expect,” “intend,” “project,” “would,” “could,” “target,” or similar expressions. Whenexpressions, or when we discuss our strategy, plans, goals, initiatives, or objectives, we are making forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Litigation Reform Act.

We caution you not to rely unduly on any forward-looking statements. Actual results may differ materially from what is expressed in the forward-looking statements, and you should review and consider carefully the risks, uncertainties and other factors that affect our business and may cause such differences, as outlinedincluding but not limited to factors discussed in the “Risk Factors” section of our 2016 Annualfound in Item 1A. Risk Factors in this Report on Form 10-K. The risk factors10-Q and in the Report on Form 10-K for the year ended December 31, 2019. Specifically, we wish forbelieve you to be aware of in particular include but are not limitedshould note the risks related to the risk inherentCOVID-19 global pandemic and the various government mandates designed to contain the pandemic, and how these risks may impact our business in the volatileshort and uncertain economic conditions,longer term; the fact that a large portion of our revenue is generated from a limited number of clients and the loss of one or more of these clients or a large portion of one client’s business could adversely affect our results of operations, the risk of client consolidation, the possibility that the current trend among clients to outsource their customer care may not continue, the competitiveness of our markets, the risk of information systems breach and the related impact on our clients and their data, our geographic concentration, the risk inherent in the terms of our contracts that we do not always have the opportunity to negotiate, the riskrisks related to our international footprint, howstrategy execution; our foreign currency exchange risk can adversely impactability to innovate and introduce technologies that are sufficiently disruptive to allow us to maintain and grow our resultsmarket share; cybersecurity; consolidation activities undertaken by our clients; geographic concentration of operations, the risk ofour brick and mortar delivery platform and our global footprint; changes in lawlaws that impact our business and our ability to comply with all thethose and other laws that relate togoverning our operations, the risk related tooperations; the reliability of theour information technology infrastructure that we use and our ability to consistently deliver uninterrupted service to our clients,clients; the risk of not being ableneed to forecast demand for services accurately and the related impact of such forecasts on our capacity utilization,utilization; our inabilityability to attract and retain qualified and skilled personnel impact of changing technologies onat a price point that we can afford and our services and solutions, the restrictive covenants contained in our credit facility that may impact our abilityclients are willing to execute our strategy and operate our business, the supply chain disruption related risk, the risk to innovation due to unforeseen intellectual property infringement, the risk related topay; our M&A activity, andincluding our ability to identify, acquire and properly integrate acquired businesses in accordance with our strategy, thestrategy; and our equity structure including our controlling shareholder risk, the limited market float of our stock, and the potential volatility of our stock price that may result in loss of investment.  resulting therefrom.

TheOur forward-looking statements are based on information available as of the date that this Report on Form 10-Q is filed with the United States Securities and Exchange Commission (“SEC”) and we. We undertake no obligation to update them, except as may be required by applicable laws. They are based on numerous assumptions and developments that are not within our control.law. Although we believe thesethat our forward-looking statements are reasonable, they depend on many factors outside of our control and we cannot assure youcan provide no assurance that they will turn outprove to be correct.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Executive Summary

TeleTechTTEC Holdings, Inc. (“TeleTech”TTEC”, “the Company”, “we”, “our” or “us”) is a leading global provider of technology enabled customer experience services. We help leading brands improve customer experiencestechnology and operational effectiveness through a unique combinationservices company focused on the design, implementation and delivery of technological innovation and operational expertise. Our portfolio of solutions includes consulting, technology, operations and analytics to enable a seamlesstransformative customer experience across every interaction channel and phaseoutcomes for many of the customer lifecycle. Our solutions are supported by 49,500 employees delivering services in 23 countries from 92 customer engagement centers on six continents. Our revenue for the quarter ended September 30, 2017 was $359.0 million.

world’s most iconic and disruptive brands. Since our establishmentinception in 1982, we have helpedbeen helping clients deliver frictionless customer experiences, strengthen their customer relationships, brand recognition and loyalty through personalized interactions, significantly improve their Net Promoter Score ("NPS"), and lower their total cost to serve by simplifyingenabling and personalizing interactions with their customers. We deliverdelivering simplified, consistent and seamless customer experience across channels and phases of the customer lifecycle.

Our customer experience thought leadership technology and innovationoffers innovative programs that create customer strategies designed to differentiate our clients from their competition; datacompetition.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. Within weeks of this announcement, travel bans, the state of emergency, quarantines, lockdowns, “shelter in place” orders, and business restrictions and shutdowns were issued in most countries where TTEC does business. The need to comply with these measures, which came into effect with little notice, has impacted our day-to-day operations and disrupted our business. Although we activated our business continuity plans, we have experienced temporary suspension of operations in some of our TTEC Engage customer experience delivery sites; and some of our employees were not able to get to work because their mobility was restricted by government restrictions. While some of our operations were deemed essential and could have continued operating, to support the health and well-being of our employees and communities and to provide a stable service delivery platform to our clients, we made a business decision to transition as many employees as was reasonably possible to a work from home environment.

Between mid-March and mid-April 2020, we transitioned over 43,000 employees, or 80%, to our work from home environment. With the easing of some of the government restrictions, some of those employees returned to our brick and mortar sites by the end of the second quarter of 2020, but most continue to work from home.

For those sites that continued to operate and those that re-opened since the lockdown and “shelter-in-place” restrictions eased beginning in June 2020, we have taken extensive measures to protect the health and safety of our employees, in accordance with the recommendations and guidelines provided by the World Health Organization, the U.S. and European Centers for Disease Control and Prevention, the U.S. Occupational Safety Association, and local governments in jurisdictions where our customer experience centers are located.

Although our business began to experience the effects of COVID-19 at the end of the first quarter 2020, our rapid implementation of business continuity plans and our geographic diversification of delivery centers allowed us to mitigate potentially more severe impacts. Through the period ended June 30, 2020 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results. While approximately 20% of our business is comprised of clients in  industries that have been negatively impacted by the COVID-19 pandemic, significant surge volumes from commercial and public sector clients who have realized spikes in customer, patient and citizen engagement have contributed to a12.5% increase in revenue when comparing the six months ended June 30, 2020 to the six months ended June 30, 2019. While we expect this positive trend to continue for the remainder of 2020, there is uncertainty about our COVID-19 surge volumes and our non-COVID-19 related business beyond 2020. Additionally, we cannot accurately predict the severity of the economic and operational challenges of a pro-longed COVID-19 pandemic on our clients’ businesses and its effect on the magnitude and timing of their buying decisions. Further, while to date we have been successful in managing service delivery from those of our delivery sites that could not be replaced with work from home delivery, arbitrary lockdown decisions in some jurisdictions where we do business may impact our offshore delivery capability with little notice, thus potentially impacting our results of operations in the future.

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Table of Contents

In March 2020, we launched multiple cost reduction, optimization, and liquidity preservation initiatives to align our expenses with anticipated changes in revenue and increased costs related to COVID-19 pandemic and government mandated restriction measures. These initiatives included freezes on hiring, cuts in non-essential spending, reduction and deferral in spend on third-party service providers and vendors, suspension of merit increases, contributions to tax deferred saving plans and other retirement plans, where permitted by law, suspension of some incentive programs, staff reductions and furloughs in markets where that option is available. We also intensified our cash flow discipline, including working capital management,  deferral of  capital expenditures, where possible, and engaged in negotiations for rent abatement and deferral for those facilities that we are unable to use during the government restrictions related to the COVID-19 pandemic. We have also taken steps to strengthen our financial position during this period of heightened uncertainty including a proactive draw down on our line of credit in late March 2020. Our results of operations for the first two quarters of 2020 is permitting us to reverse some of these decisions, and we are resuming strategic hiring on a limited basis, returning furloughed employees to work where it is possible, and reinstating certain incentive plans. In light of the continued COVID-19 related uncertainties, however, we remain vigilant in our cost management. With the greater adoption of our work at home solution during the COVID-19 pandemic, we are also reviewing our global footprint model and working to balance our commitments to physical facilities around the globe against evolving client preferences with respect to traditional physical delivery centers and work from home delivery mix.

For further discussion of this matter, refer “Item 1A. Risk Factors” in Part II of this Form 10-Q.

The Company reports its financial information based on two segments: TTEC Digital and TTEC Engage.

TTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience solutions through our professional services and suite of technology offerings. These solutions are critical to enabling and accelerating digital transformation for our clients.
TTEC Engage provides the essential technologies, human resources, infrastructure and processes to operate customer care, acquisition, and fraud detection and prevention services.

TTEC Digital and TTEC Engage come together under our unified offering, Humanify™ Customer Experience as a Service ("CXaas"), which drives measurable customer results for clients through the delivery of personalized, omnichannel experiences. Our Humanify™ cloud platform provides a fully integrated ecosystem of Customer Experience ("CX") offerings, including omnichannel, messaging, artificial intelligence (“AI”), machine learning (“ML”), robotic process automation (“RPA”), analytics, that personalize interactions and increase customer value; and integration services that connect clients’cybersecurity, customer relationship management (“CRM”("CRM") system to a cloud-based collaboration platform, leading to customer interactions that are seamless, knowledge management and relevant.

journey orchestration. 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 servicesend-to-end platform differentiates the Companyus from many competitors by combining design, strategic consulting, best in class technology, data analytics, process optimization, system designintegration and integration, operational excellence,excellence. This unified offering is value-oriented, outcome-based and technology solutionsdelivered to large enterprise and services.governments on a global scale.

We have developed tailored expertise inOur revenue for the automotive, communications, financial services, government, healthcare, logistics, mediathree months ended June 30, 2020 was $453.1 million. Approximately $376 million, or 83%, came from our TTEC Engage segment and entertainment, retail, technology, travel and transportation industries. We target customer-focused industry leaders in the Global 1000 and serve approximately 300 global clients.$77 million, or 17%, came from our TTEC Digital segment.

To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and service offerings for mainstream and high growth disruptive businesses, diversifying and strengthening our heritage business process outsourcingcore customer care services of our CMS segment into higher-valuewith consulting, data analytics, digital marketinginsights, and technology-enabled, outcome-focused services. Of the $359.0 million in revenue

We also invest to expand our geographic footprint, broaden our product and service capabilities, increase our global client base and industry expertise, and further scale our end-to-end integrated solutions platform. To this end we reportedhave been highly acquisitive in the current period, approximately 23% or $81.7 million came fromlast several years, including an acquisition in the CGS, CTSfirst quarter of 2020 of a U.S. based autonomous customer experience and CSS segments, focused on customer-centric strategy, growthintelligent automation solutions provider and technology-based services, withan acquisition in the remainderfourth quarter of our revenue coming from the heritage2019 of a U.S. based provider of customer care, social media community management, content moderation, technical support and business process outsourcing focused CMS segment.solutions.

Our strong balance sheet, cash flows from operationsWe have extensive expertise in the automotive, communications, financial services, government, healthcare, logistics, media and access to debtentertainment, retail, technology, travel and capital markets have historically provided us the financial flexibility to effectively fund our organictransportation industries. We serve more than 300 diverse clients globally, including many iconic blue-chip brands, Fortune 1000 companies, and disruptive growth capital expenditures, strategic acquisitions and incremental investments. Additionally, we continue to return capital to our shareholders via an ongoing stock repurchase program and regular semi-annual dividends. As of September 30, 2017, our cumulative authorized repurchase allowance was $762.3 million, of which we repurchased 46.1 million shares for $735.8 million. For the period from September 30, 2017 through October 31, 2017, we did not repurchase any additional shares. The stock repurchase program does not have an expiration date.

companies.

3234


On February 24, 2015, our Board of Directors adopted a dividend policy, with the intent to distribute a periodic cash dividend to stockholders of our common stock, after consideration of, among other things, TeleTech’s performance, cash flows, capital needs and liquidity factors. Given our cash flow generation and balance sheet strength, we believe cash dividends and early returns to shareholders through share repurchases, in balance with our investments in innovation and strategic acquisitions, align shareholder interests with the needs of the Company. The initial dividend of $0.18 per common share was paid on March 16, 2015 to shareholders of record as of March 6, 2015. Thereafter, the Company has been paying a semi-annual dividend in October and April of each year in amount ranging between $0.18 and $0.22 per common share. On September 21, 2017, the Board of Directors authorized a dividend of $0.25 per common share, which was paid on October 17, 2017 to shareholders of record as of October 5, 2017.

Our Integrated Service Offerings and Business Segments

We have four operatingprovide strategic value and reportable segments, which provide an integrated setdifferentiation through our two business segments:  TTEC Digital and TTEC Engage.

TTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience solutions through our professional services and suite of services including:

Customer Strategy Services

We typically begin by engaging our clients at a strategic level. Through our strategytechnology offerings. These solutions are critical to enabling and operations, analytics, learning and performance, change management and consulting expertise, we help our clients design, build and execute their customer engagement strategies. We help our clients to better understand and predict their customers’ behaviors and preferences along with their current and future economic value. Using proprietary analytic models, we provide the insight clients need to build the business case for customer centricity, to better optimize their marketing spend and then work alongside them to help implement our recommendations. A key component of this segment involves instilling a high performance culture through management and leadership alignment and process optimization.

Customer Technology Services

Once the design of the customer engagement is completed, our ability to architect, deploy and host or manage the client’s customer management environment becomes a key enabler to achieving and sustaining the client’s customer engagement vision. Given the proliferation of mobile communication technologies and devices, we enable our clients’ operations to interact with their customers across the growing array of channels including email, social networks, mobile, web, SMS text, voice and chat. We design, implement and manage cloud, on-premise or hybrid customer management environments to deliver a consistent and superior experience across all touch points on a global scale that we believe result in higher quality, lower costs and reduced riskaccelerating digital transformation for our clients. Through our Humanify™ platform, we also provide data-driven context aware software-as-a-service (“SaaS”) based solutions that link customers seamlessly

Technology Services:  Our technology services design, integrate and operate highly scalable, digital omnichannel technology solutions in the cloud, on premise, or hybrid, including journey orchestration, automation and AI, knowledge management, and workforce productivity.
Professional Services:  Our management consulting practices deliver customer experience strategy, analytics, process optimization, and learning and performance services.

TTEC Engage provides the essential technologies, human resources, infrastructure 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-commerceoperate customer care, acquisition, 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 relationshipsfraud detection 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.prevention services.

Customer Growth Services

We offer integrated sales and marketing solutions to help our clients boost revenue in new, fragmented or underpenetrated business-to-consumer or business-to-business markets. We deliver approximately $3 billion in client revenue annually via the discovery, acquisition, growth and retention of customers through a combination of our highly trained, client-dedicated sales professionals and our proprietary Revana Analytic Multichannel PlatformTM. This platform continuously aggregates individual customer information across all channels into one holistic view so as to ensure more relevant and personalized communications.

Customer Acquisition Services:  Our customer growth and acquisition services optimize the buying journeys for acquiring new customers by leveraging technology and analytics to deliver personal experiences that increase the quantity and quality of leads and customers.
Customer Care Services:  Our customer care services provide turnkey contact center solutions, including digital omnichannel technologies, associate recruiting and training, facilities, and operational expertise to create exceptional customer experiences across all touchpoints.
Fraud Prevention Services:  Our digital fraud detection and prevention services proactively identify and prevent fraud and provide community content moderation and compliance.

Based on our clients’ requirements,preference, we provide our services on an integrated cross-business segment andand/or on a discrete basis.

33


Additional information with respect to our segments and geographic footprint is included in Part I. Item 1. Financial Statements, Note 3 to the Consolidated Financial Statements.

Financial Highlights

In the thirdsecond quarter of 2017,2020, our revenue increased 14.8%$60.6, or 15.4%, to $359.0$453.1 million over the same period in 20162019 including an increasea decrease of 0.5%$3.5 million, or $1.7 million0.9%, due to foreign currency fluctuations. ThisThe increase in revenue iswas comprised of an increase from the Atelka and Connextions acquisitions and organic growth in the CMS and CTS segments. Revenue, adjusted for the $1.7 million increase related to foreign exchange, increased by $44.5a $61.9 million, or 14.2%19.7%, over the prior year.increase for TTEC Engage offset by a $1.4 million, or 1.8%, decrease for TTEC Digital.

Our thirdsecond quarter 20172020 income from operations increased 26.1% to $15.8$26.1 million, or 4.4%114.1%, to $ 49.0 million or 10.8% of revenue, from $12.5compared to $22.9 million or 4.0%5.8% of revenue in the thirdsecond quarter of 2016. This2019. The change in operating income is comprised of a number of factors across the segments. The TTEC Digital operating income expanded with an 86.5% improvement over the same period last year primarily on the growth of its higher margin cloud business. The TTEC Engage operating income increased 128.1% compared to the prior year quarter based on the increase is primarily duein revenue including, but not limited to, increasesthe acquisition of FCR and significant surge volumes in CMS organicour commercial and inorganic volumes, a $3.8 million increase duepublic sector clients experiencing spikes in customer interactions related to foreign currency fluctuations and a deprioritization of certain non-essential businesses and activities, offset by investments to build out, hire and train for the increased fourth quarter 2017 seasonal volumes, which increased third quarter 2017 CMS costs. In addition, incomeCOVID-19.

Income from operations in the thirdsecond quarter of 20172020 and 20162019 included $6.0$0.8 million ($5.6 million of which related to the planned integration of the Connextions acquisition) and $9.3$2.5 million of restructuring and integration charges and asset impairments, respectively.

Our offshore customer engagement centers serve clients based in the U.S. and in other countries and spans fivespanning six countries with 23,00024,600 workstations, representing 56%57% of our global delivery capability. Revenue for our CMS and CGS segments that isTTEC Engage segment provided infrom these offshore locations was $111 million and represented 36%29% of our revenue for the thirdsecond quarter of 2017,2020, as compared to $111 million and 43%38% of our revenue for 2016.the corresponding period in 2019.

Our cash flow from operations and available credit allowed us to finance a significant portion35

Table of our capital needs through internally generated cash flows. Contents

As of SeptemberJune 30, 2017, we had $78.8 million of cash2020, the total production workstations for our TTEC Engage segment was 43,432 and cash equivalents, total debt of $270.8 million, and a total debt to total capitalization ratio of 40.4%.

We internally target capacity utilization in our customer engagement centers at 80% to 90% of our available workstations. As of September 30, 2017, the overall capacity utilization in our centers was 78%, up from 71%,68%. The utilization is lower than the previous year due to decreases in the prior period.Company’s seasonal healthcare in combination with an increase in seats at sites that are less than one year old, both of which are in the process of being optimized. During COVID-19 utilized seats include all seats currently generating revenue either through actual usage or contractually committed to clients who plan, at some level, to return to brick and mortar sites. The table below presents workstation data for all of our centers as of SeptemberJune 30, 20172020 and 2016.2019. Our utilization percentage is defined as the total number of utilized production workstations compared to the total number of available production workstations.

June 30, 2020

June 30, 2019

 

    

Total

    

    

    

Total

    

    

 

Production

% In

Production

% In

 

Workstations

In Use

Use

Workstations

In Use

Use

 

Total centers

Sites open >1 year

 

40,470

 

26,783

66

%  

40,493

 

29,144

72

%

Sites open <1 year

 

2,962

 

2,534

86

%  

2,560

 

1,704

67

%

Total workstations

 

43,432

 

29,317

68

%  

43,053

 

30,848

72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

 

    

Total

    

 

    

 

    

Total

    

 

    

 

 

 

 

Production

 

 

 

% In

 

Production

 

 

 

% In

 

 

 

Workstations

 

In Use

 

Use

 

Workstations

 

In Use

 

Use

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total centers

 

 

 

 

 

 

 

 

 

 

 

 

 

Sites open >1 year

 

39,856

 

30,916

 

78

%  

34,538

 

24,284

 

70

%

Sites open <1 year

 

969

 

949

 

98

%  

1,104

 

967

 

88

%

Total workstations

 

40,825

 

31,865

 

78

%  

35,642

 

25,251

 

71

%

WhilePost COVID-19 we expect our clients to leverage a more diversified geographic footprint and an increased mix of work from home vs. brick and mortar seats. We will continue to see demand from all geographic regions to utilizerefine our offshore delivery capabilitiessite strategy and expect this trend to continuecapacity as we finalize plans with our clients someand prospects.

Some of our clients havemay be subject to regulatory pressures to bring the services onshore to the United States. In light of these trends weserve clients onshore. We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity in the United States.onshore. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we will continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.

Recently Issued Accounting Pronouncements

Refer to Part I, Item I, Financial Statements, Note 1 to the Consolidated Financial Statements for a discussion of recently adopted and issued accounting pronouncements.

34


Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. For further information, please refer to the discussion of all critical accounting policies in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.

36

Table of Contents

Results of Operations

Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019

The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated.

Customer Management ServicesTTEC Digital

Three Months Ended June 30,

 

    

2020

    

2019

    

$ Change

    

% Change

 

Revenue

$

77,143

$

78,519

$

(1,376)

 

(1.8)

%

Operating Income

 

14,376

 

7,709

 

6,667

 

86.5

%

Operating Margin

 

18.6

%  

 

9.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

277,373

 

$

223,664

 

$

53,709

 

24.0

%

Operating Income

 

 

9,133

 

 

12,255

 

 

(3,122)

 

(25.5)

%

Operating Margin

 

 

3.3

%  

 

5.5

%  

 

 

 

 

 

The increasedecrease in revenue for the Customer Management ServicesTTEC Digital segment was related to significant increases in the cloud platform and the acquisition of Serendebyte, offset by reductions in the legacy facility based training business and the middle east consulting practice, both of which the Company has exited. Within the core Digital business and excluding a large multi-year term government contract, for the quarters ended June 30, 2020 and 2019 revenue from the cloud offering represented $19.5 million and $13.9 million, respectively, and the systems integration offering represented $11.2 million and $13.0 million, respectively.

The operating income expansion is primarily attributable to the continued improved utilization of technology and people assets as the business scales its cloud and system integration revenue as well as the exit of the less profitable facilities based training and middle east consulting practices. Also the second quarter of 2019 included a $55.3$2.0 million net increase in organicimpairment of intangible and inorganic client programs includingother long-lived assets (See Part I. Item 1. Financial Statements, Notes 5 and 9 to the Atelka and Connextions acquisitions  and a $1.4 million increase due to foreign currency fluctuations, offset by program completions of $3.0 million. 

Consolidated Financial Statements). The operating income as a percentage of revenue decreasedincreased to 3.3%18.6% in the thirdsecond quarter of 20172020 as compared to 5.5%9.8% in the prior period. The operating margin decreased due to $5.6 million of planned restructuring and integration charges for the Connextions acquisition related to severance, center closure costs, the hiring, training and licensing of employees in new delivery centers and the integration of the IT systems, as well as investments to buildout, hire, and train for the increased fourth quarter 2017 seasonal volumes, which necessitated increased third quarter 2017 costs. These were partially offset by higher revenue, a $3.7 million benefit due to improved foreign exchange trends, increased capacity utilization, and efficiencies realized from the expense rationalization activities completed during the second half of 2016. Included in the operating income was amortization expense related to acquired intangibles of $1.2$0.6 million and $0.2$0.6 million for the quarters ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Customer Growth ServicesTTEC Engage

Three Months Ended June 30,

 

    

2020

    

2019

    

$ Change

    

% Change

 

Revenue

$

375,938

$

313,996

$

61,942

 

19.7

%

Operating Income

 

34,586

 

15,164

 

19,422

 

128.1

%

Operating Margin

 

9.2

%  

 

4.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

30,829

 

$

35,301

 

$

(4,472)

 

(12.7)

%

Operating Income

 

 

1,564

 

 

161

 

 

1,403

 

871.4

%

Operating Margin

 

 

5.1

%  

 

0.5

%  

 

 

 

 

 

The decreaseincrease in revenue for the Customer Growth ServicesTTEC Engage segment was due to a $1.6net increase of $85.2 million increase in client programs including the acquisition of FCR in the fourth quarter of 2019 and certain surge programs for several clients in connection with the COVID-19 pandemic, offset by a decrease for program completions of $6.1 million.

35


$20.0 million and a $3.3 million decrease due to foreign currency fluctuations.

The operating income increased in line with improved revenue including the acquisition of FCR as well as continued improved profitability in our @Home, fraud prevention and detection and customer acquisition offerings and auto and hypergrowth portfolios, offset by increases in amortization for acquired intangibles. As a result, the operating income as a percentage of revenue increased to 5.1%9.2% in the thirdsecond quarter of 20172020 as compared to 0.5%4.8% in the prior period. This increase in margin is related to pricing improvements and other profit optimization actions, along with a reduction in the operating losses for the Digital Marketing unit which we are holding for sale. Included in the operating income was amortization expense related to acquired intangibles of zero$3.3 million and $0.5$2.0 million for the quarters ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Customer Technology Services37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

34,563

 

$

36,580

 

$

(2,017)

 

(5.5)

%

Operating Income

 

 

4,158

 

 

3,776

 

 

382

 

10.1

%

Operating Margin

 

 

12.0

%  

 

10.3

%  

 

 

 

 

 

The decrease in revenue for the Customer Technology Services segment was driven by a decrease in the Avaya offerings as we wound down and then sold the business unit in the second quarterTable of 2017, offset by revenue increases in the CISCO offerings.Contents

The operating income as a percentage of revenue increased to 12.0% in the third quarter of 2017 as compared to 10.3% in the prior period. This increase is primarily due to a decrease in amortization. Included in the operating income was amortization expense related to acquired intangibles of $0.3 million and $1.2 million for the quarters ended September 30, 2017 and 2016, respectively.

Customer Strategy Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

16,271

 

$

17,251

 

$

(980)

 

(5.7)

%

Operating Income

 

 

945

 

 

(3,666)

 

 

4,611

 

125.8

%

Operating Margin

 

 

5.8

%  

 

(21.3)

%  

 

 

 

 

 

The decrease in revenue for the Customer Strategy Services segment was related to growth in the Content and Collaboration practice offset by decreases in the Mindset and Sales Transformation and Customer Insights practices across multiple delivery regions.

The operating income as a percentage of revenue increased to 5.8% in the third quarter of 2017 as compared to an operating loss of (21.3)% in the prior period. The increase is primarily related to the $4.5 million charge for the impairment of two trade name intangibles recorded during the third quarter of 2016.  Included in the operating income was amortization expense of $0.5 million and $0.8 million for the quarters ended September 30, 2017 and 2016, respectively.

Interest Income (Expense)

For the three months ended SeptemberJune 30, 20172020 interest income increased to $0.9$0.5 million from $0.4 million in the same period in 2016.2019. Interest expense increaseddecreased to $3.5$3.1 million during 20172020 from $2.0$4.2 million during 20162019 due to larger outstanding balances onhigher utilization of the line of credit, primarily dueoffset by lower interest rates and a $0.7 million decrease in the charge related to acquisitions, and higherthe future purchase of the remaining 30% interest rates.in Motif versus the prior year period, which was finalized during the second quarter of 2020.

Other Income (Expense)

For the three months ended June 30, 2020 Other income (expense), net decreased to net expense of $1.8 million from net income of $1.9 million during the prior year quarter.

Included in the three months ended SeptemberJune 30, 20172020 was a $3.2$1.1 million gainbenefit related to the fair value adjustment of contingent consideration for an acquisition (see Part I. Item 1. Financial Statements, Notes 2 and 7 to the Consolidated Financial Statements), offset by a $2.5 million expense related to the dissolution of a foreign entity and a release of its cumulative translation adjustment.subsidiary.

Included in the three months ended SeptemberJune 30, 20162019 was a $4.3$2.4 million benefit related to a fair value adjustment of contingent consideration for one of our acquisitions (see Part I. Item 1. Financial Statements, Note 7 to the Consolidated Financial Statements).an acquisition.

36


Income Taxes

The effective tax rate for the three months ended SeptemberJune 30, 20172020 was 11.7%24.8%. This compares to an effective tax rate of (6.9)%35.0% for the comparable period of 2016.2019. The effective tax rate for the three months ended SeptemberJune 30, 20172020 was influenced by earnings in international jurisdictions currently under an income tax holiday, and the distribution of income between the U.S. and international tax jurisdictions.jurisdictions and the associated U.S. tax impacts of increased foreign earnings. Without a  $1.0 million benefit related to excess taxes on equity compensation, $0.2$0.3 million of expense related to returnadjustments to contingent consideration, a $0.2 million benefit related to restructuring, a $0.9 million benefit related to changes in valuation allowances, $0.4 million of expense related to provision to return adjustments, $2.4and $0.2 million of benefit from restructuring expenses, and  $0.1 million of other expense, the Company’s effective tax rate for the thirdsecond quarter of 20172020 would have been 22.1%24.2%.

Results of Operations

NineSix months ended SeptemberJune 30, 20172020 compared to ninesix months ended SeptemberJune 30, 20162019

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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated.

Customer Management ServicesTTEC Digital

Six Months Ended June 30,

 

    

2020

    

2019

    

$ Change

    

% Change

 

Revenue

$

154,699

$

144,372

$

10,327

 

7.2

%

Operating Income

 

24,634

 

15,468

 

9,166

 

59.3

%

Operating Margin

 

15.9

%  

 

10.7

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

798,508

 

$

664,392

 

$

134,116

 

20.2

%

Operating Income

 

 

43,804

 

 

36,189

 

 

7,615

 

21.0

%

Operating Margin

 

 

5.5

%  

 

5.4

%  

 

 

 

 

 

The increase in revenue for the Customer Management ServicesTTEC Digital segment was related to significant increases in the cloud platform and the systems integration practice including a large multi-year governmental contract and the acquisition of Serendebyte, offset by reductions in the legacy facility based training business and the middle east consulting practice, both of which the Company has exited. Within the core Digital business and excluding the large multi-year government contract, for the six months ended June 30, 2020 and 2019, revenue from the cloud offering represented $38.4 million and $26.9 million, respectively, and the systems integration offering represented $24.2 million and $25.8 million, respectively.

38

Table of Contents

The operating income expansion is primarily attributable to a $145.9 million netthe increased revenue and continued improved utilization of technology and people assets as the business scales its cloud and system integration revenue, as well as the exit of the less profitable facilities based training and middle east consulting practices. The operating income increase in organic and inorganic client programs including Atelka and Connextionswas offset by program completionsa $2.0 million impairment of $12.1 million. Revenue was further impacted by a $0.3 million increase dueintangible and other long-lived assets for one of the consulting components in this segment (See Part I. Item 1. Financial Statements, Notes 5 and 9 to foreign currency fluctuations.

the Consolidated Financial Statements) recorded during 2019. The operating income as a percentage of revenue increased to 5.5%15.9% for the ninesix months ended SeptemberJune 30, 20172020 as compared to 5.4%10.7% in the prior period. The operating margin increased due to higher revenue, a $10.6 million benefit due to improved foreign exchange trends, increased capacity utilization, and efficiencies realized from the expense rationalization activities completed during the second half of 2016. These increases were partially offset by $9.0 million of restructuring and integration charges for the Connextions acquisition related to severance, center closure costs, the hiring, training and licensing of employees in new delivery centers and the integration of the IT systems, as well as investments to buildout, hire and train for the increased fourth quarter 2017 seasonal volumes. Included in the operating income was amortization expense related to acquired intangibles of $3.0$1.1 million and $0.6$1.3 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Customer Growth ServicesTTEC Engage

Six Months Ended June 30,

 

    

2020

    

2019

    

$ Change

    

% Change

 

Revenue

$

730,595

$

642,499

$

88,096

 

13.7

%

Operating Income

 

65,044

 

39,497

 

25,547

 

64.7

%

Operating Margin

 

8.9

%  

 

6.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

96,890

 

$

105,713

 

$

(8,823)

 

(8.3)

%

Operating Income

 

 

6,295

 

 

4,138

 

 

2,157

 

52.1

%

Operating Margin

 

 

6.5

%  

 

3.9

%  

 

 

 

 

 

The decreaseincrease in revenue for the Customer Growth ServicesTTEC Engage segment was due to a $10.2net increase of $135.2 million increase in client programs including the acquisition of FCR in the fourth quarter of 2019 and certain surge programs for several clients in connection with the COVID-19 pandemic, offset by a decrease for program completions of $19.0 million.

37


$42.6 million and a $4.5 million decrease due to foreign currency fluctuations.

The operating income increased in line with improved revenue including the acquisition of FCR as well as continued improved profitability in our @Home, fraud prevention and detection and customer acquisition offerings and auto and hypergrowth portfolios, offset by increases in amortization for acquired intangibles. As a result, the operating income as a percentage of revenue increased to 6.5%8.9% for the ninesix months ended SeptemberJune 30, 20172020 as compared to 3.9%6.1% in the prior period. This was attributable to pricing improvements and other profit optimization actions, along with reductions in amortization expenses and a reduction in the operating loss for the Digital Marketing unit which we are holding for sale. Included in the operating income was amortization expense related to acquired intangibles of zero$6.6 million and $1.8$4.0 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Customer Technology Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

105,054

 

$

109,198

 

$

(4,144)

 

(3.8)

%

Operating Income

 

 

11,034

 

 

9,932

 

 

1,102

 

11.1

%

Operating Margin

 

 

10.5

%  

 

9.1

%  

 

 

 

 

 

The decrease in revenue for the Customer Technology Services segment was driven by an increase for the CISCO offerings offset by  a decrease in the Avaya offerings as we wound down and then sold the business unit in the second quarter of 2017.

The operating income as a percentage of revenue increased to 10.5% for the nine months ended September 30, 2017 as compared to 9.1% in the prior period. The increase is due to increased profitability in the CISCO offerings and a reduction in amortization. Included in the operating income was amortization expense related to acquired intangibles of $0.8 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Customer Strategy Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Revenue

 

$

50,290

 

$

51,008

 

$

(718)

 

(1.4)

%

Operating Income (Loss)

 

 

2,746

 

 

(3,752)

 

 

6,498

 

173.2

%

Operating Margin

 

 

5.5

%  

 

(7.4)

%  

 

 

 

 

 

The decrease in revenue for the Customer Strategy Services segment was related to growth in the Content and Collaboration and Service Optimization practices offset by decreases in the Mindset and Sales Transformation and Customer Insights practices across multiple delivery regions.

The operating income as a percentage of revenue was 5.5% for the nine months ended September 30, 2017 as compared to a loss of (7.4)% in the prior period. The operating income increased primarily due to the $4.5 million charge for the impairment of two trade name intangibles recorded during the third quarter of 2016, as well as expense rationalization, decreased amortization and reduced losses for the PRG Middle East unit which we are holding for sale. Included in the operating income was amortization expense of $1.5 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Interest Income (Expense)

For the ninesix months ended SeptemberJune 30, 20172020 interest income increased to $2.0$0.9 million from $0.8 million in the same period in 2016.2019. Interest expense increased to $8.7$12.7 million during 20172020 from $5.8$9.5 million during 20162019 due to larger outstanding balances onhigher utilization of the line of credit primarily dueoffset by lower interest rates and a $4.5 million period over period increase in the charge related to the acquisitions, and higher averagefuture purchase of the remaining 30% interest rates.in Motif, which was finalized during the second quarter of 2020.

Other Income (Expense)

For the six months ended June 30, 2020 Other income (expense), Netnet decreased to net income of $1.6 million from net income of $2.7 million during the prior year quarter.

Included in the ninesix months ended SeptemberJune 30, 20172020 was a $3.2$4.3 million gainbenefit related to dissolutionthe fair value adjustments of a foreign entity and a release of its cumulative translation adjustment.

Included in the nine months ended September 30, 2017 was $3.2 million of estimated losses related to a business unit which has been classified as assets heldcontingent consideration for salean acquisition (see Part I. Item 1. Financial Statements, NoteNotes 2 and 7 to the Consolidated Financial Statements).

38


a subsidiary.

Included in the ninesix months ended SeptemberJune 30, 20162019 was a $4.3$2.4 million benefit related to athe fair value adjustment of contingent consideration for onean acquisition.

39

Table of our acquisitions (see Part I. Item 1. Financial Statements, Note 7 to the Consolidated Financial Statements for further details).Contents

Income Taxes

The effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 was 15.0%26.7%. This comparescompared to an effective tax rate of 15.2%30.3% for the comparable period of 2016.2019. The effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 was influenced by earnings in international jurisdictions currently under an income tax holiday, and the distribution of income between the U.S. and international tax jurisdictions.jurisdictions and associated U.S. tax impacts of increased foreign earnings. Without a $2.0$0.5 million benefit from restructuring expenses, $0.5 million of expense related to provision to return adjustments, a $0.6 million benefit related to excess taxes on equity compensation, $0.2changes in valuation allowances, $1.2 million benefitof expense related to returnchanges to provision, $3.9contingent consideration and $0.4 million benefit related to restructuring expenses and $1.3 million benefit related to businesses held for sale,other expense, the Company’s effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 would have been 22.3%23.7%.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Facility. During the ninesix months ended SeptemberJune 30, 2017,2020, we generated positive operating cash flows of $149.6$105.3 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months.

We manage a centralized global treasury function in the United States with a focus on concentrating and safeguarding our global cash and cash equivalents. While theThe majority of our cash is in U.S. dollars, primarily held in the U.S and to a lesser extent outside of the U.S., we prefer to hold U.S. Dollars in addition to thecash held in local currencies of our foreign subsidiaries. We expect to use our offshore cash to support working capital, global operations and growth of our foreign operations.strategic investments. While there are no assurances, we believe our global cash is protected given our cash management practices, banking partners and utilization of diversified, high quality investments.

We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts and interest rate swaps through our cash flow hedging program. Please refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.

During the first quarter 2020, we borrowed $350.0 million under our revolving credit facility as a precautionary measure to provide additional liquidity during the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.

The following discussion highlights our cash flow activities during the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.

Cash and Cash Equivalents

We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $78.8$482.3 million and $55.3$82.4 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.

We reinvest our cash flows to grow our client base, expand our infrastructure, for investment in research and development, for strategic acquisitions for the purchase of our outstanding stock and to pay dividends.

Cash Flows from Operating Activities

For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, net cash flows provided by operating activities was $149.6$105.3 million and $110.8$121.3 million, respectively. The increase wasdecrease is primarily due to a $41.9 million decrease in payments made for operating expenses,  an  $18.8$35.9 million increase in collections for deferred revenue,net cash income from operations offset by a $10.3$51.9 million decreasereduction in cash collected from accounts receivable.net working capital.

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Table of Contents

Cash Flows from Investing Activities

For the ninesix months ended SeptemberJune 30, 20172020 and 2016, we reported2019, net cash flows used in investing activities of $126.3was $36.3 million and $39.2$28.1 million, respectively. The increase was due to a $5.1$3.5 million increase in capital expenditures and an additional  $81.7a $4.4 million increase related to funding for an acquisition.acquisitions.

39


Cash Flows from Financing Activities

For the ninesix months ended SeptemberJune 30, 20172020 and 2016, we reported2019, net cash flows used inprovided by (used in) financing activities of $1.4was $332.8 million and $61.0($84.7) million, respectively. The change in net cash flows from 20162019 to 20172020 was primarily due to a $8.7$464.0 million net million additional draw on the line of credit, which included the $350 million discussed above, offset by a $42.8 million increase in the Credit Facility, a $39.0 million decrease in purchasesrelated to payments of our outstanding common stock, a  $12.9 million decrease in contingent consideration and purchase of non-controlling interesthold-back payments and a decrease of $1.9 million related to the 2016 payment of debt issuance costs.several acquisitions.

Free Cash Flow

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increaseddecreased for the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 20162019 primarily due to an increase in net cash flow from operations offset by a decrease in working capital.capital and higher outflow related to acquisitions including payments of contingent consideration. Free cash flow was $105.7$73.4 million and $72.0$92.8 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Presentation of Non-GAAP Measurements

Free Cash Flow

Free cash flow is a non-GAAP liquidity measurement. We believe that free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property, plant and equipment. Free cash flow is not a measure determined by GAAP and should not be considered a substitute for “income from operations,” “net income,” “net cash provided by operating activities,” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful, in addition to the most directly comparable GAAP measure of “net cash provided by operating activities,” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also includes cash that may be necessary for acquisitions, investments and other needs that may arise.

The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 
September 30,

 

Nine Months Ended
 September 30,

    

2017

    

2016

    

2017

    

2016

 

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Net cash provided by operating activities

 

$

24,188

 

$

55,793

 

$

149,643

 

$

110,838

 

$

43,113

$

41,303

$

105,278

$

121,266

Less: Purchases of property, plant and equipment

 

 

14,343

 

 

11,120

 

 

43,932

 

 

38,863

 

 

15,102

 

15,228

 

31,915

 

28,428

Free cash flow

 

$

9,845

 

$

44,673

 

$

105,711

 

$

71,975

 

$

28,011

$

26,075

$

73,363

$

92,838

Obligations and Future Capital Requirements

Future maturitiesThere were no material changes to the Company’s contractual obligations and future capital requirements outside the normal course of business from the date of our outstanding debt and contractual obligations as2019 Form 10-K filing on March 4, 2020 through the filing of September 30, 2017 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Less than

    

1 to 3

    

3 to 5

    

Over 5

    

 

 

 

 

 

1 Year

 

Years

 

Years

 

Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Facility(1)

 

$

6,702

 

 

13,405

 

 

257,793

 

 

 —

 

$

277,900

 

Equipment financing arrangements

 

 

3,216

 

 

4,675

 

 

1,378

 

 

 —

 

 

9,269

 

Contingent consideration

 

 

1,178

 

 

 —

 

 

 —

 

 

 —

 

 

1,178

 

Purchase obligations

 

 

10,761

 

 

8,589

 

 

1,007

 

 

 —

 

 

20,357

 

Operating lease commitments

 

 

44,438

 

 

59,522

 

 

36,894

 

 

25,661

 

 

166,515

 

Other debt

 

 

2,763

 

 

3,388

 

 

387

 

 

 —

 

 

6,538

 

Total

 

$

69,058

 

$

89,579

 

$

297,459

 

$

25,661

 

$

481,757

 


(1)

Includes estimated interest payments based on the weighted-average interest rate, unused commitment fees, current interest rate swap arrangements, and outstanding debt as of September 30, 2017.

this report.

40


·

Contractual obligations to be paid in a foreign currency are translated at the period end exchange rate.

·

Purchase obligations primarily consist of outstanding purchase orders for goods or services not yet received, which are not recognized as liabilities in our Consolidated Balance Sheets until such goods and/or services are received.

·

The contractual obligation table excludes our liabilities of $4.0 million related to uncertain tax positions because we cannot reliably estimate the timing of cash payments.

Our outstanding debt is primarily associated with the use of funds under our Credit Agreement to fund working capital, repurchase our common stock, pay dividends, and for other cash flow needs across our global operations.

Future Capital Requirements

We currently expect total capital expenditures in 20172020 to be approximately 4.4% of revenue.between $55 million and $59 million. Approximately 70% of these expected capital expenditures are to support growth in our business and 30% relate to the maintenance for existing assets. The anticipated level of 20172020 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.

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Table of Contents

The amount of capital required over the next 12 months will depend on our levels of investment in infrastructure necessary to maintain, upgrade or replace existing assets. Our working capital and capital expenditure requirements could also increase materially in the event of acquisitions or joint ventures, among other factors. These factors could require that we raise additional capital through future debt or equity financing. We can provide no assurance that we will be able to raise additional capital upon commercially reasonable terms acceptable to us.

Client Concentration

During the ninesix months ended SeptemberJune 30, 2017, one2020 and 2019, none of our clients represented 9.5%more than 10% of our total revenue. Our five largest clients, collectively, accounted for 35.2%39.9% and 36.4%37.4% of our consolidated revenue for the three months ended SeptemberJune 30, 20172020 and 2016, respectively. Our five largest clients, collectively, accounted for 34.3%2019, respectively and 35.8%37.1% and 36.7% of our consolidated revenue for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. We have experiencedhad long-term relationships with our top five Engage clients, ranging from 1014 to 2124 years, with the majorityall 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.clients if they terminated our contract for convenience.

TheSome contracts with our five largest clients expire between 20182020 and 2020. Additionally, a particular client2023, but most of our largest clients may have multiple contracts with us with different expiration dates.dates for different lines of work. We have historically renewed most of our contracts with our largest clients. However,clients, but there iscan be no assurance that future contracts will be renewed or, if renewed, will be on terms as favorable as the existing contracts.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our consolidated financial position, consolidated results of operations, or consolidated cash flows due to adverse changes in financial and commodity market prices and rates. Market risk also includes credit and non-performance risk by counterparties to our various financial instruments. We are exposed to market risk due to changes in interest rates and foreign currency exchange rates (as measured against the U.S. dollar); as well as credit risk associated with potential non-performance of our counterparty banks. These exposures are directly related to our normal operating and funding activities. We enter into derivative instruments to manage and reduce the impact of currency exchange rate changes, primarily between the U.S. dollar/Philippine peso, the U.S. dollar/Mexican peso, and the Australian dollar/Philippine peso. We enter into interest rate derivative instruments to reduce our exposure to interest rate

41


fluctuations associated with our variable rate debt. To mitigate against credit and non-performance risk, it is our policy to only enter into derivative contracts and other financial instruments with investment grade counterparty financial institutions and, correspondingly, our derivative valuations reflect the creditworthiness of our counterparties. As of the date of this report, we have not experienced, nor do we anticipate, any issues related to derivative counterparty defaults.

Interest Rate Risk

We have previously entered into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. The interest rate on our Credit Agreement is variable based upon the Prime Rate the Federal Funds rate, orand LIBOR and, therefore, is affected by changes in market interest rates. As of SeptemberJune 30, 2017,2020, we had $255.0$700.0 million of outstanding borrowings under the Credit Agreement. Based upon average outstanding borrowings during the three and nine months ended SeptemberJune 30, 2017,2020, interest accrued at a rate of approximately 2.3% and 2.1%1.6% per annum, respectively. If the Prime Rate or LIBOR increased by 100 basis points, during the quarter, there would be aan annualized $1.0 million of additional interest expense per $100.0 million of outstanding borrowing under the Credit Agreement.

The Company’s interest rate swap arrangement has expired as42

Table of May 31, 2017 and no additional swaps have been entered into. As of December 31, 2016 the outstanding interest rate swap was as follows:Contents

Contract

Contract

Notional

Variable Rate

Fixed Rate

Commencement

Maturity

December 31, 2016

Amount

Received

Paid

Date

Date

Swap

$

15 million

1 - month LIBOR

3.14

%  

May 2012

May 2017

Foreign Currency Risk

Our subsidiaries in Bulgaria, Costa Rica, Mexico, Poland, and the Philippines, Mexico, India, Bulgaria and Poland 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 ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, revenue associated with this foreign exchange risk was 27%19% and 33%22% of our consolidated revenue, respectively.

In order to mitigate the risk of these non-functional foreign currencies weakening against the functional currencies of the servicing subsidiaries, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, though not 100%, of the projected foreign currency exposure related to client programs served from these foreign countries through our cash flow hedging program. While our hedging strategy can protect us from adverse changes in foreign currency rates in the short term, an overall weakening of the non-functional foreign currencies would adversely impact margins in the segments of the servicing subsidiary over the long term.

Cash Flow Hedging Program

To reduce our exposure to foreign currency exchange rate fluctuations associated with forecasted revenue in non-functional currencies, we purchase forward and/or option contracts to acquire the functional currency of the foreign subsidiary at a fixed exchange rate at specific dates in the future. We have designated and account for these derivative instruments as cash flow hedges for forecasted revenue in non-functional currencies.

While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could adversely affect our consolidated operating results.

42


Our cash flow hedging instruments as of SeptemberJune 30, 20172020 and December 31, 20162019 are summarized as follows (in thousands). All hedging instruments are forward contracts, except as noted.

    

Local

    

    

    

    

    

 

Currency

U.S. Dollar

% Maturing

Contracts

 

Notional

Notional

in the next

Maturing

 

As of June 30, 2020

Amount

Amount

12 months

Through

 

Philippine Peso

 

6,955,000

 

132,470

(1)  

59.9

%  

April 2023

Mexican Peso

 

1,221,000

 

56,033

52.7

%  

December 2022

$

188,503

    

Local

    

 

    

    

Currency

U.S. Dollar

 

Notional

Notional

 

As of December 31, 2019

Amount

Amount

 

Philippine Peso

 

7,715,000

 

147,654

(1)  

Mexican Peso

 

1,299,500

 

61,529

$

209,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Local

    

 

 

    

    

 

    

    

 

 

 

 

Currency

 

U.S. Dollar

 

 

% Maturing

 

 

Contracts

 

 

 

Notional

 

Notional

 

 

in the next

 

 

Maturing

 

As of September 30, 2017

 

Amount

 

Amount

 

 

12 months

 

 

Through

 

Philippine Peso

 

10,490,000

 

 

218,413

(1)  

 

53.2

%  

 

August 2021

 

Mexican Peso

 

1,774,000

 

 

104,652

 

 

37.2

%  

 

May 2021

 

 

 

 

 

$

323,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Local

    

 

 

 

    

 

 

    

 

 

 

 

Currency

 

U.S. Dollar

 

 

 

 

 

 

 

 

 

Notional

 

Notional

 

 

 

 

 

 

 

As of December 31, 2016

 

Amount

 

Amount

 

 

 

 

 

 

 

Philippine Peso

 

14,315,000

 

 

301,134

(1)  

 

 

 

 

 

 

Mexican Peso

 

2,089,000

 

 

129,375

 

 

 

 

 

 

 

 

 

 

 

$

430,509

 

 

 

 

 

 

 


(1)

(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 SeptemberJune 30, 20172020 and December 31, 2016.

2019.

43

The fair value of our cash flow hedges at SeptemberJune 30, 20172020 was assets/(liabilities) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Maturing in the

 

    

September 30, 2017

    

Next 12 Months

 

Maturing in the

    

June 30, 2020

    

Next 12 Months

 

Philippine Peso

 

 

(15,688)

 

 

(9,399)

 

$

5,199

$

2,902

Mexican Peso

 

 

(13,785)

 

 

(7,617)

 

 

(4,974)

 

(2,785)

 

$

(29,473)

 

$

(17,016)

 

$

225

$

117

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 increasedecrease in fair value from December 31, 2016 largely2019 reflects a broad weakeningchanges in the U.S. dollar.currency translation between the U.S dollar and Mexican Peso.

We recorded net lossesgains (losses) of approximately $17.7$0.2 million and $18.9($3.5) million for settled cash flow hedge contracts and the related premiums for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. These lossesgains (losses) were reflected in Revenue in the accompanying Consolidated Statements of Comprehensive Income (Loss). If the exchange rates between our various currency pairs were to increase or decrease by 10% from current period-end levels, we would incur a material gain or loss on the contracts. However, any gain or loss would be mitigated by corresponding increases or decreases in our underlying exposures.

Other than the transactions hedged as discussed above and in Part I, Item 1. Financial Statements, Note 6 to the Consolidated Financial Statements, the majority of the transactions of our U.S. and foreign operations are denominated in their respective local currency. However, transactions are denominated in other currencies from time-to-time. We do not currently engage in hedging activities related to these types of foreign currency risks because we believe them to be insignificant as we endeavor to settle these accounts on a timely basis. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, approximately 25%15% and 22%21%, respectively, of revenue was derived from contracts denominated in currencies other than the U.S. Dollar. Our results from operations and revenue could be adversely affected if the U.S. Dollar strengthens significantly against foreign currencies.

Fair Value of Debt and Equity Securities

We did not have any investments in marketable debt or equity securities as of SeptemberJune 30, 20172020 or December 31, 2016.2019.

43


ITEM 4. CONTROLS AND PROCEDURES

This report includes the certifications of our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”) required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended)Act) 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, as appropriate, to allow timely decisions regarding required disclosures.disclosure.

Management ofWe carried out an evaluation under the Company,supervision and with the participation of itsmanagement, including the CEO and CFO, evaluatedof the effectiveness of the Company’sour disclosure controls and procedures, as of SeptemberJune 30, 2017. Based on that evaluation, as of2020, the end of the period covered by this Form 10-Q, the Company’s10-Q. Based on this evaluation, our CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective to provideat the reasonable assurance becauselevel.

44

At the year ended December 31, 2016, material weaknesses existed in the Company’s internal control over financial reporting. Certain material weaknesses that existed at the year ended December 31, 2016 continued to exist as of September 30, 2017. These material weaknesses are fully described in our Annual Report on Form 10-K for the year ended December 31, 2016.

While these material weaknesses did not result in errors that were material to our annual or interim financial statements, they could result in misstatements of our consolidated financial statements and disclosures which would result in material misstatement of our consolidated financial statements and disclosures which would not be prevented or detected.

Notwithstanding such material weaknesses in internal control over financial reporting, our CEO and CFO have concluded that our consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Inherent Limitations of Internal Controls

Our management, including the CEO and CFO, believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal controls must consider the benefits of controls relative to their costs. Inherent limitations within internal controls include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of controls. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. While the objective of the design of any system of controls is to provide reasonable assurance of the effectiveness of controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such assumptions, while reasonable, may not take into account all potential future conditions. Thus, even effective internal control over financial reporting can only provide reasonable assurance of achieving their objectives. Therefore, because of the inherent limitations in cost effective internal controls, misstatements due to error or fraud may occur and may not be prevented or detected.

44


Remediation of Prior Material Weakness

The following captures the progress made by management related to the revenue material weakness that has been remediated.

Revenue: Management previously identified a material weakness in the design and operating effectiveness of controls over the revenue process. During 2016, management took the necessary steps to redesign the control framework, including the implementation of (i) a revenue quality assurance organization, (ii) standardized contract and invoice review and approval templates, and (iii) a document storage system for improved organization and evidence of review. Additionally, management established a quarterly control owner certification process and invested in employee training.  Management completed the design and implementation of this control framework in the quarter ended December 31, 2016. Based on the results of our testing, management has concluded that the controls are adequately designed and have operated effectively for a sufficient period of time during 2017. Accordingly, the revenue material weakness is remediated.

Remediation Efforts and Status of Remaining Material Weaknesses

Impairments:  During 2016, management has taken the necessary steps to redesign the control framework, including implementation of specific preparation and review procedures to (i) ensure the accuracy of the valuation models used to calculate fair market values, (ii) validate the source of the financial forecasts, and (iii) evidence the assessment of the models for reasonableness. In addition, TeleTech has engaged a third-party valuation expert to assist management with the underlying valuation models supporting the goodwill and intangible impairment assessments. Management has completed the design and implementation of the control framework and has tested the impairment controls in the quarter ending December 31, 2016. Management will continue to test the controls for impairment in 2017 to ensure they have operated for a sufficient period of time before concluding on remediation.

Control Environment: During 2016 TeleTech invested significantly in the quality of our accounting talent including management, technical, process improvement and financial system roles. Additionally, we implemented a number of programs to: improve our talent acquisition and retention platforms; enhance technical, transactional and control knowledge of our accounting teams; create a culture of accountability and control. These programs have significantly improved the stability of our global accounting organization. In order to consider this material weakness to be fully remediated, we believe additional time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources.

Changes in Internal Control over Financial Reporting

There have beenwere no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Part I, Item 1. Financial Statements, Note 10 to the Consolidated Financial Statements of this Form 10-Q is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

There were no material changesIn addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A, Risk Factors, in our 2019 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. In addition to the risk factors identified in our 2019 Annual Report, please consider the following additional Risk Factors.

Our business is adversely affected by the COVID-19 pandemic and it may result in material adverse impact on our operations and financial condition.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. Within weeks of this announcement, travel bans, the state of emergency, quarantines, lockdowns, “shelter in place” orders, and business restrictions and shutdowns were issued in most countries where TTEC does business. While we are unable to accurately predict the full impact that COVID-19 pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and its containment measures, our compliance with these measures has impacted our day-to-day operations and disrupted our business.

We have experienced temporary suspension of operations in some of our TTEC Engage customer experience delivery sites as a result of COVID-19 pandemic and related government-mandated restrictions. To support the health and well-being of our employees and communities and to provide a stable service delivery platform to our clients, we made a business decision to transition as many employees as was reasonably possible to our work from home environment between March and April 2020. Such large-scale rapid transition resulted in certain inefficiencies, additional costs unlikely to be recouped from our clients, and heightened cybersecurity, regulatory compliance, and fraud risks. Our inability to manage these risk and costs effectively could have a material adverse effect on our business, financial condition and results of operations.

45

The social distancing rules and other government mandates that continue during the sustained pandemic are likely to impact the structure and configuration of large-scale facilities, like our customer experience delivery centers, where employees work in close proximity. These new regulatory requirements are forcing TTEC to make investments to reconfigure our existing customer experience centers and to accept lower capacity utilization than the utilization priced under our multi-year contracts. If we are unable to renegotiate our contracts to recoup these additional costs, manage these costs by continuing to maintain a large work at home delivery platform, or adjust our cost structure to absorb them, our margins and profitability will be impacted and will result in adverse impact on our results of operations.

The COVID-19 pandemic and government-mandated restrictions on business adopted to contain it, is resulting in what is likely to be an extended global economic downturn, which could affect demand for our services and impact our results of operations and financial condition, even after the pandemic is contained and the business restrictions and “shelter in place” orders are lifted.

Although COVID-19 pandemic disruptions did not have a material adverse impact on our financial results for the first two quarters of fiscal 2020, there can be no assurances that we will not experience such impacts through the end of 2020 and beyond. Due to the evolving and highly uncertain nature of the global response to the COVID-19 pandemic, we cannot predict at this time the full extent to which the pandemic will adversely impact our business, results of operations and financial condition, which will depend on many factors that are not known at this time.

The operations of some of our clients are adversely impacted by COVID-19 pandemic and it may have a material adverse impact on our business.

The operations of some of our clients, especially our clients in travel, hospitality, retail and automotive industries, have been materially impacted by the COVID-19 pandemic and government restrictions on travel and people’s mobility around the globe. Approximately 20% of our revenue for the fiscal year ended December 31, 2019 was generated from the clients in these affected industries. On-going travel restrictions and large-scale unemployment that resulted from government-mandated restrictions on businesses around the globe is likely to continue to affect certain of our clients and their business volumes through the end of 2020 and beyond. While we are unable to predict the magnitude of such impact on our operations at this time and to what extent this impact may be offset by other business that we are able to secure due to a shift in our clients’ and their consumers’ buying preferences during and in the aftermath of COVID-19 pandemic, the loss of the business from the impacted clients may materially impair our operating results and financial condition. We may also experience payment defaults or bankruptcy of some of our clients, which could also have a material adverse effect our financial condition and results of operation.

Our ability to recruit, hire, and retain qualified employees at a price point acceptable to our clients may be impacted by the COVID-19 pandemic and by the US government pandemic recovery measures such as enhanced unemployment benefits.

Our business is labor intensive and our ability to recruit and hire employees with the right skills, at the right price point is critical to meeting our contractual commitments and attaining our growth objective. We sign multi-year client contracts that are priced based on prevailing labor rates in jurisdictions where we deliver services. The inability of some of our employees in some parts of the world to work from home resulted in the need to transition some of our service delivery to other jurisdictions where work from home is easier to facilitate, which further increases our need to rapidly hire qualified employees. The recent adoption of various pandemic recovery measures by the U.S. and other governments in jurisdictions where we hire employees is aimed at supporting citizens who lost their jobs due to COVID-19 pandemic. Such individuals may be attractive employment prospects for TTEC, but COVID-19 enhanced unemployment benefits in some jurisdictions where we hire may exceed local prevailing wages and may make it more difficult for us to hire a sufficient number of employees to support our contractual commitments or may result in higher costs, lower contract profitability, higher turnover and reduced operational efficiencies, which could, in the aggregate, have a material adverse impact on our results of operations.

.* * *

46

To the extent the COVID-19 pandemic or any worsening of the global business and economic environment as a result of the pandemic or government actions to contain it adversely affects our business and financial results, it may also have the effect of heightening or exacerbating many of the other risks described in Part I, Item 1A. Risk1A, “Risk Factors, described in our Annual Report on Form 10-K for theour fiscal year ended December 31, 2016.2019, such as the risk factors relating to our strategy execution, cyber security of our information systems, consolidation activities being undertaken by our clients, geographic concentration of our operations in jurisdictions ill prepared to manage large scale health crisis and pandemics, our ability to comply with laws and regulations that impact our business, the reliability of our information technology infrastructure and our ability to delivery uninterrupted service to our clients; our clients’ ability to forecast demand for our services accurately; our ability to expand and maintain our customer experience delivery centers in offshore jurisdictions with stable wage rates, risks generally associated with international business operations, and the impact of the limited market float of our stock and potential volatility of our stock price resulting therefrom.

45


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Following is the detail of the issuer purchases made during the quarter ended SeptemberJune 30, 2017:2020:

    

    

    

Total Number of

    

Approximate Dollar

 

Shares

Value of Shares that

 

Purchased as

May Yet Be

 

Part of Publicly

Purchased Under

 

Total Number

Announced

the Plans or

 

of Shares

Average Price

Plans or

Programs (In

 

Period

Purchased

Paid per Share

Programs

thousands)(1)

 

March 31, 2020

$

26,580

April 1, 2020 - April 30, 2020

 

$

 

$

26,580

May 1, 2020 - May 31, 2020

 

$

 

$

26,580

June 1, 2020 - June 30, 2020

 

$

 

$

26,580

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Approximate Dollar

 

 

 

 

 

 

 

 

Shares

 

Value of Shares that

 

 

 

 

 

 

 

 

Purchased as

 

May Yet Be

 

 

 

 

 

 

 

 

Part of Publicly

 

Purchased Under

 

 

 

Total Number

 

 

 

 

Announced

 

the Plans or

 

 

 

of Shares

 

Average Price

 

Plans or

 

Programs (In

 

Period

 

Purchased

 

Paid per Share

 

Programs

 

thousands)(1)

 

June 30, 2017

 

 

 

 

 

 

 

 

$

26,580

 

July 1, 2017 - July 31, 2017

 

 —

 

$

 —

 

 —

 

$

26,580

 

August 1, 2017 - August 31, 2017

 

 —

 

$

 —

 

 —

 

$

26,580

 

September 1, 2017 - September 30, 2017

 

 —

 

$

 —

 

 —

 

$

26,580

 

Total

 

 —

 

 

 

 

 —

 

 

 

 

(1)In November 2001, our Board of Directors (“Board”) authorized a stock repurchase program with the objective of increasing stockholder returns. The Board periodically authorizes additional increases to the program. The most recent Board authorization to purchase additional common stock occurred in February 2017, whereby the Board increased the program allowance by $25.0 million. Since inception of the program through June 30, 2020, the Board has authorized the repurchase of shares up to a total value of $762.3 million, of which we have purchased 46.1 million shares on the open market for $735.8 million. As of June 30, 2020 the remaining amount authorized for repurchases under the program was approximately $26.6 million. The stock repurchase program does not have an expiration date.


(1)

In November 2001, our Board of Directors (“Board”) authorized a stock repurchase program with the objective of increasing stockholder returns. The Board periodically authorizes additional increases to the program. The most recent Board authorization to purchase additional common stock occurred in February 2017, whereby the Board increased the program allowance by $25.0 million. Since inception of the program through September 30, 2017, the Board has authorized the repurchase of shares up to a total value of $762.3 million, of which we have purchased 46.1 million shares on the open market for $735.8 million. As of September 30, 2017 the remaining amount authorized for repurchases under the program was approximately $26.6 million. The stock repurchase program does not have an expiration date. 

ITEM 5. OTHER INFORMATION

None

46


ITEM 6. EXHIBITS

Exhibit 

Incorporated Herein by Reference

No.

    

Exhibit Description

Form

Exhibit

Filing Date

10.31*

Independent Director Restricted Stock Unit Award Agreement  (effective May 14, 2020)

Exhibit No.

Exhibit Description

10.85*

Employment Agreement between Anthony Y. Tsai and TeleTech Services Corporation effective as of September 5, 2017.

10.92

Third Amendment to Amended and Restated Credit Agreement and Incremental Increase Agreement for a senior secured revolving credit facility with a syndicate of lenders, led by Wells Fargo Bank, National Association, as agent, swing line and fronting lender, effective as of October 31, 2017 (incorporated by reference as Exhibit 10.92 to TeleTech’s Current Report on Form 8-K filed on November 1, 2017).

10.97*

Stock Purchase Agreement of November 8, 2017 by and among TeleTech Services Corporation, Motif, Inc. (“Motif”), Kaushal Mehta and Parul Mehta (referred to collectively as the “Founders”), the shareholders of Motif (other than Founders, referred to as “Sellers”), and Outforce LLC (the Sellers’ Agent).

10.98*

Share Purchase Agreement of November 8, 2017 by and among TeleTech Services Corporation, the Founders, The Anishi Mehta Irrevocable Trust, The Ishan Mehta Irrevocable Trust, Anishi Mehta, and Ishan Mehta.

31.1*

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

31.2*

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

47

32.1*

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

32.2*

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

101.INS**101.INS

XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH**101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL**101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB**101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

The cover page from TTEC Holdings, Inc’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

*

Filed or furnished herewith.

**

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language):  (i) Notes to the Consolidated Financial Statements, (ii) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016 (unaudited), (iv) Consolidated Statements of Stockholders’ Equity as of and for the nine months ended September 30, 2017 (unaudited), and (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited).

��

4748


SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TTEC HOLDINGS, INC.

TELETECH HOLDINGS, INC.

(Registrant)

Date: November 8, 2017August 5, 2020

By:

/s/ Kenneth D. Tuchman

Kenneth D. Tuchman

Chairman and Chief Executive Officer

Date: November 8, 2017August 5, 2020

By:

/s/ Regina M. Paolillo

Regina M. Paolillo

Chief Financial Officer

4849