Edgar Filing: TELETECH HOLDINGS INC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission File Number 001-11919

TeleTech Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		84-1291044
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

9197 South Peoria Street

Englewood, Colorado 80112

(Address of principal executive offices)

Registrant’s telephone number, including area code: (303) 397-8100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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

Large accelerated filer o		Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2015, there were 48,300,694 shares of the registrant’s common stock outstanding.

Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

JUNE 30, 2015 FORM 10-Q

TABLE OF CONTENTS

		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited)	1

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014 (unaudited)	2

	Consolidated Statement of Equity as of and for the six months ended June 30, 2015 (unaudited)	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)	4

	Notes to the Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	41

SIGNATURES		42

EXHIBIT INDEX		43

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

(unaudited)

		June 30, 2015		December 31, 2014

ASSETS
Current assets
Cash and cash equivalents	$	93,842	$	77,316
Accounts receivable, net		259,833		276,432
Prepaids and other current assets		66,792		64,702
Deferred tax assets, net		22,135		22,501
Income tax receivable		2,052		4,532
Total current assets		444,654		445,483

Long-term assets
Property, plant and equipment, net		159,669		150,212
Goodwill		126,798		128,705
Deferred tax assets, net		32,022		31,512
Other intangible assets, net		53,036		59,905
Other long-term assets		47,026		36,658
Total long-term assets		418,551		406,992
Total assets	$	863,205	$	852,475

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	41,608	$	37,019
Accrued employee compensation and benefits		74,439		70,069
Other accrued expenses		30,474		34,430
Income taxes payable		5,755		10,141
Deferred tax liabilities, net		33		-
Deferred revenue		29,013		29,887
Other current liabilities		20,890		17,085
Total current liabilities		202,212		198,631

Long-term liabilities
Line of credit		115,000		100,000
Deferred tax liabilities, net		3,182		4,675
Deferred rent		10,103		8,956
Other long-term liabilities		73,727		74,149
Total long-term liabilities		202,012		187,780
Total liabilities		404,224		386,411

Commitments and contingencies (Note 10)

Mandatorily redeemable noncontrolling interest		3,410		2,814

Stockholders’ equity
Preferred stock - $0.01 par value: 10,000,000 shares authorized; zero shares outstanding as of June 30, 2015 and December 31, 2014		-		-
Common stock - $0.01 par value; 150,000,000 shares authorized; 48,232,405 and 48,452,852 shares outstanding as of June 30, 2015 and December 31, 2014, respectively		483		485
Additional paid-in capital		356,047		356,792
Treasury stock at cost: 33,819,848 and 33,599,401 shares as of June 30, 2015 and December 31, 2014, respectively		(535,507)		(527,595)
Accumulated other comprehensive income (loss)		(74,751)		(52,274)
Retained earnings		701,714		677,859
Noncontrolling interest		7,585		7,983
Total stockholders’ equity		455,571		463,250
Total liabilities and stockholders’ equity	$	863,205	$	852,475

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

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014

Revenue	$	310,223	$	295,490	$	635,744	$	597,711

Operating expenses
Cost of services	223,617		212,315		456,601		426,102
Selling, general and administrative	47,376		47,802		97,613		98,169
Depreciation and amortization	15,680		14,089		31,043		27,259
Restructuring charges, net	198		617		1,007		1,157
Total operating expenses	286,871		274,823		586,264		552,687

Income from operations	23,352		20,667		49,480		45,024

Other income (expense)
Interest income	364		492		681		1,003
Interest expense	(1,676)		(1,861)		(3,374)		(3,551)
Other income (expense), net	1,294		4,249		987		5,250
Total other income (expense)	(18)		2,880		(1,706)		2,702

Income before income taxes	23,334		23,547		47,774		47,726

Provision for income taxes	(7,841)		(5,417)		(12,246)		(8,293)

Net income	15,493		18,130		35,528		39,433

Net income attributable to noncontrolling interest	(797)		(1,268)		(2,060)		(2,353)

Net income attributable to TeleTech stockholders	$	14,696	$	16,862	$	33,468	$	37,080

Other comprehensive income (loss)
Net income	$	15,493	$	18,130	$	35,528	$	39,433
Foreign currency translation adjustment	(6,062)		7,010		(17,345)		5,287
Derivative valuation, gross	(4,662)		17,780		(6,307)		13,863
Derivative valuation, tax effect	1,845		(6,775)		3,338		(5,393)
Other, net of tax	234		280		(2,361)		556
Total other comprehensive income (loss)	(8,645)		18,295		(22,675)		14,313
Total comprehensive income (loss)	6,848		36,425		12,853		53,746

Less: Comprehensive income attributable to noncontrolling interest	(731)		(1,167)		(1,537)		(2,159)

Comprehensive income (loss) attributable to TeleTech stockholders	$	6,117	$	35,258	$	11,316	$	51,587

Weighted average shares outstanding
Basic	48,325		49,351		48,347		49,696
Diluted	49,064		50,111		49,113		50,536

Net income per share attributable to TeleTech stockholders
Basic	$	0.30	$	0.34	$	0.69	$	0.75
Diluted	$	0.30	$	0.34	$	0.68	$	0.73

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

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Amounts in thousands)

(Unaudited)

	Stockholders’ Equity of the Company

	Preferred Stock			Common Stock								Additional			Accumulated Other
	Shares	Amount		Shares		Amount			Treasury Stock			Paid-in Capital			Comprehensive Income (Loss)			Retained Earnings			Noncontrolling interest			Total Equity
Balance as of December 31, 2014	-	$	-	48,453		$	485		$	(527,595	)	$	356,792		$	(52,274	)	$	677,859		$	7,983		$	463,250
Net income	-	-		-		-			-			-			-			33,468			1,735			35,203
Dividends to shareholders	-	-		-		-			-			-			-			(8,710		)	-			(8,710		)
Adjustments to redemption value of mandatorily redeemable noncontrolling interest	-	-		-		-			-			-			-			(903		)	-			(903		)
Dividends distributed to noncontrolling interest	-	-		-		-			-			-			-			-			(2,025		)	(2,025		)
Foreign currency translation adjustments	-	-		-		-			-			-			(17,147		)	-			(198		)	(17,345		)
Derivatives valuation, net of tax	-	-		-		-			-			-			(2,969		)	-			-			(2,969		)
Vesting of restricted stock units	-	-		251		3			3,882			(6,127		)	-			-			-			(2,242		)
Exercise of stock options	-	-		29		-			455			(23		)	-			-			-			432
Excess tax benefit from equity-based awards	-	-		-		-			-			274			-			-			-			274
Equity-based compensation expense	-	-		-		-			-			5,131			-			-			90			5,221
Purchases of common stock	-	-		(501	)	(5		)	(12,249		)	-			-			-			-			(12,254		)
Other	-	-		-		-			-			-			(2,361		)	-			-			(2,361		)
Balance as of June 30, 2015	-	$	-	48,232		$	483		$	(535,507	)	$	356,047		$	(74,751	)	$	701,714		$	7,585		$	455,571

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

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2015		2014

Cash flows from operating activities
Net income	$	35,528	$	39,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	31,043		27,259
Amortization of contract acquisition costs	537		657
Amortization of debt issuance costs	356		349
Imputed interest expense and fair value adjustments to contingent consideration	(123)		(3,710)
Provision for doubtful accounts	406		219
Gain on disposal of assets	(69)		-
Deferred income taxes	(341)		5,035
Excess tax benefit from equity-based awards	(409)		(1,050)
Equity-based compensation expense	5,278		5,881
Loss (gain) on foreign currency derivatives	2,600		(2,955)

Changes in assets and liabilities, net of acquisitions:
Accounts receivable	9,191		(9,238)
Prepaids and other assets	790		(631)
Accounts payable and accrued expenses	13,282		(22,965)
Deferred revenue and other liabilities	(12,556)		(6,654)
Net cash provided by operating activities	85,513		31,630

Cash flows from investing activities
Proceeds from sale of long lived assets	116		135
Purchases of property, plant and equipment, net of acquisitions	(29,505)		(34,483)
Investments in non-marketable equity investments	(9,000)		-
Acquisitions, net of cash acquired of zero and $812, respectively	(1,775)		(8,732)
Net cash used in investing activities	(40,164)		(43,080)

Cash flows from financing activities
Proceeds from line of credit	1,185,200		1,001,500
Payments on line of credit	(1,170,200)		(1,001,500)
Proceeds from other debt	-		-
Payments on other debt	(1,720)		(3,127)
Payments of contingent consideration related to acquisitions	(11,883)		(8,547)
Dividends paid to shareholders	(8,710)		-
Payments to noncontrolling interest	(2,657)		(3,713)
Proceeds from exercise of stock options	432		313
Excess tax benefit from equity-based awards	409		1,050
Payments of debt issuance costs	(35)		-
Purchase of treasury stock	(12,254)		(37,049)
Net cash provided by (used in) financing activities	(21,418)		(51,073)

Effect of exchange rate changes on cash and cash equivalents	(7,405)		2,284

Increase (decrease) in cash and cash equivalents	16,526		(60,239)
Cash and cash equivalents, beginning of period	77,316		158,017
Cash and cash equivalents, end of period	$	93,842	$	97,778

Supplemental disclosures
Cash paid for interest	$	2,693	$	2,670
Cash paid for income taxes	$	7,761	$	7,486

Non-cash investing and financing activities
Acquisition of long lived assets through capital leases	$	5,353	$	—
Acquisition of equipment through increase in accounts payable	$	2,625	$	1,420

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

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) OVERVIEW AND BASIS OF PRESENTATION

Summary of Business

TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) is a customer engagement management services provider, delivering integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of product and service capabilities allows us to design and deliver enhanced, value-driven customer experiences across numerous communication channels. TeleTech’s 40,000 employees serve clients in the automotive, communication, financial services, government, healthcare, logistics, media and entertainment, retail, technology, transportation and travel industries via operations in the U.S., Australia, Belgium, Brazil, Bulgaria, Canada, China, Costa Rica, Germany, Hong Kong, Ireland, Israel, Lebanon, Macedonia, Mexico, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.

Basis of Presentation

The Consolidated Financial Statements are comprised of the accounts of TeleTech, its wholly owned subsidiaries, its 55% equity owned subsidiary Percepta, LLC, and its 80% interest in iKnowtion, LLC. All intercompany balances and transactions have been eliminated in consolidation.

The unaudited Consolidated Financial Statements do not include all of the disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company and the consolidated results of operations and comprehensive income (loss) and the consolidated cash flows of the Company. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

During the three and six months ended June 30, 2015, an additional expense of $1.75 million was recorded as an additional estimated tax liability that should have been recorded in prior periods related to ongoing discussions with relevant government authorities related to site compliance with tax advantaged status. The total amount of $1.75 million should have been recorded as additional tax expense in the amount of $466 thousand in 2012, $406 thousand in 2013, $645 thousand in 2014 and $234 thousand in the first quarter of 2015.

During the three months ended June 30, 2015, we recorded an additional $3.2 million loss related to foreign currency translation within Other comprehensive income (loss) that should have been recorded in 2014 and the three months ended March 31, 2015 to correct for an error in translating the financial results of Sofica Group AD, which we acquired on February 28, 2014. Of the $3.2 million recorded, approximately $1.7 million and $1.5 million should have been recorded in the year ended December 31, 2014 and the three months ended March 31, 2015, respectively. The Company also recorded an additional $2.7 million loss to “other, net of tax” within Other comprehensive income (loss) in the three months ended March 31, 2015 and the six months ended June 30, 2015 related to our annual actuarial analysis for our Philippines pension liability that should have been recorded in the fourth quarter of 2014.

The Company has evaluated the aggregate impact of these adjustments and concluded that these adjustments were not material to the previously issued or current period consolidated financial statements.

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, 2014.

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TELETECH 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-going basis, the Company evaluates its estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, self-insurance reserves, litigation reserves, restructuring reserves, allowance for doubtful accounts, contingent consideration, and valuation of goodwill, long-lived and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

Recently Issued Accounting Pronouncements

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 requires all costs incurred in connection with the issuance of debt to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. This ASU is effective for interim and annual periods beginning on or after December 15, 2015 and early adoption is permitted. The Company is evaluating when it will adopt the standard but does not expect the adoption of this standard to have a material impact on its financial position, results of operation or related disclosures.

(2) ACQUISITIONS

rogenSi

In the third quarter of 2014, as an addition to the Customer Strategy Services (“CSS”) segment, the Company acquired substantially all operating assets of rogenSi Worldwide PTY, Ltd., a global leadership, change management, sales, performance training and consulting company.

The total purchase price was $34.4 million, subject to certain working capital adjustments, and consists 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 payment for contingencies as defined in the sale and purchase agreement which will be paid in the first quarter of 2016, if required. The total contingent consideration possible per the sale and purchase agreement ranges from zero to $17.6 million and the earn-out payments are payable in early 2015, 2016 and 2017, based on July 1, 2014 through December 31, 2014, and full year 2015 and 2016 performance, respectively.

The fair value of the contingent consideration was measured by applying a probability weighted discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.6% and expected future value of payments of $15.3 million. The $15.3 million of expected future payments was calculated using a probability weighted EBITDA assessment with the highest probability associated with rogenSi achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent consideration was approximately $14.5 million. During the fourth quarter of 2014, the Company recorded a fair value adjustment of the contingent consideration of $0.5 million based on revised estimates noting higher probability of exceeding the EBITDA targets (see Note 7). As of June 30, 2015, the fair value of the remaining contingent consideration was $9.0 million, of which $5.0 million and $4.0 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Preliminary Estimate of Acquisition Date Fair Value
Cash	$	2,670
Accounts receivable, net	6,417
Other assets	2,880
Property, plant and equipment	578
Deferred tax assets, net	449
Customer relationships	9,349
Goodwill	20,960
	43,303

Accounts payable	708
Accrued employee compensation and benefits	2,203
Accrued expenses	1,146
Other	4,843
	8,900

Total purchase price	$	34,403

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

The rogenSi customer relationships have been estimated based on similar acquisitions and are amortized over an estimated useful life of five years. The goodwill recognized from the rogenSi acquisition is estimated to be attributable, but not limited to, the acquired workforce and expected synergies within CSS. None of the tax basis of the acquired intangibles and goodwill will be deductible for income tax purposes. The acquired goodwill and the operating results of rogenSi are reported, as its own reporting unit, within the CSS segment from the date of acquisition.

Sofica

In the first quarter of 2014, as an addition to the Customer Management Services (“CMS”) segment, the Company acquired a 100% interest in Sofica Group, a Bulgarian joint stock company (“Sofica”). Sofica provides customer lifecycle management and other business process services across multiple channels in multiple sites in over 18 languages.

The purchase price of $14.2 million included $9.4 million in cash consideration (including working capital adjustments) and an estimated $3.8 million in earn-out payments, payable in 2015 and 2016, contingent on Sofica achieving specified EBITDA targets, as defined by the stock purchase agreement. The total contingent consideration possible per the stock purchase agreement ranges from zero to $7.5 million. Additionally, the purchase price includes a $1.0 million hold-back payment for contingencies as defined in the stock purchase agreement which will be paid in the second quarter of 2016, if required.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The fair value of the contingent consideration was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 5.0% and expected future value of payments of $4.0 million. The $4.0 million of expected future payments was calculated using a probability weighted EBITDA assessment with the highest probability associated with Sofica achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent consideration was approximately $3.8 million. During the third and fourth quarters of 2014, the Company recorded fair value adjustments of the contingent consideration of $1.8 million and $0.6 million, respectively, based on revised estimates noting higher probability of exceeding the EBITDA targets (see Note 7). During the second quarter of 2015, the Company recorded a negative fair value adjustment for contingent consideration of $0.5 million based on revised estimates noting lower profitability than initially estimated. As of June 30, 2015, the fair value of the remaining contingent consideration was $3.1 million which was included in Other accrued expenses in the accompanying Consolidated Balance Sheets.

Financial Impact of Acquired Businesses

The acquired businesses purchased in 2014 noted above contributed revenues of $14.7 million and $27.3 million, and income from operations of $2.1 million and $3.2 million, inclusive of $0.7 million and $1.4 million of acquired intangible amortization, to the Company for the three and six months ended June 30, 2015, respectively.

Investments

CaféX

In the first quarter of 2015, the Company invested $9.0 million in CafeX Communications, Inc. (“CafeX”) through the purchase of a portion of the Series B Preferred Stock of CafeX. After the transaction, the Company owns 17.3% of the total equity of CafeX. CaféX is a provider of omni-channel web-based real time communication (WebRTC) solutions that enhance mobile applications and websites with in-app video communication and screen share technology to increase customer satisfaction and enterprise efficiency. TeleTech anticipates deploying the CafeX technology as part of the TeleTech customer experience offerings within the CMS business segment and as part of its Humanify platform.

(3) SEGMENT INFORMATION

The Company reports the following four segments:

·	the CMS segment includes the customer experience delivery solutions which integrate innovative technology with highly-trained customer experience professionals to optimize the customer experience across all channels and all stages of the customer lifecycle from an onshore, offshore or work-from-home environment;

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

·	the CTS segment includes operational and design consulting, systems integration, and cloud and on-premise managed services, the requirements needed to design, deliver and maintain best-in-class multichannel customer engagement platforms; and

·	the CSS segment provides professional services in customer experience strategy, customer intelligence analytics, 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.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Three Months Ended June 30, 2015

		Gross Revenue		Intersegment Sales			Net Revenue		Depreciation & Amortization		Income from Operations
Customer Management Services	$	219,316	$	-		$	219,316	$	11,053	$	13,324
Customer Growth Services		30,570		-			30,570		1,523		2,122
Customer Technology Services		38,094		(7	)		38,087		2,195		3,250
Customer Strategy Services		22,250		-			22,250		909		4,656
Total	$	310,230	$	(7	)	$	310,223	$	15,680	$	23,352

Three Months Ended June 30, 2014

		Gross Revenue		Intersegment Sales			Net Revenue		Depreciation & Amortization		Income from Operations
Customer Management Services	$	218,683	$	-		$	218,683	$	10,169	$	16,493
Customer Growth Services		28,875		-			28,875		1,468		1,831
Customer Technology Services		35,753		(16	)		35,737		2,008		1,616
Customer Strategy Services		12,195		-			12,195		444		727
Total	$	295,506	$	(16	)	$	295,490	$	14,089	$	20,667

Six Months Ended June 30, 2015

		Gross Revenue		Intersegment Sales			Net Revenue		Depreciation & Amortization		Income from Operations
Customer Management Services	$	462,325	$	-		$	462,325	$	21,850	$	35,026
Customer Growth Services		56,526		-			56,526		3,008		2,148
Customer Technology Services		73,815		(14	)		73,801		4,359		5,259
Customer Strategy Services		43,092		-			43,092		1,826		7,047
Total	$	635,758	$	(14	)	$	635,744	$	31,043	$	49,480

Six Months Ended June 30, 2014

		Gross Revenue		Intersegment Sales			Net Revenue		Depreciation & Amortization		Income from Operations
Customer Management Services	$	446,607	$	-		$	446,607	$	19,634	$	37,316
Customer Growth Services		57,780		-			57,780		3,024		3,601
Customer Technology Services		68,532		(19	)		68,513		3,723		1,927
Customer Strategy Services		24,811		-			24,811		878		2,180
Total	$	597,730	$	(19	)	$	597,711	$	27,259	$	45,024

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Capital Expenditures
Customer Management Services	$	12,569	$	14,587	$	22,016	$	24,499
Customer Growth Services	1,832		1,289		3,137		1,669
Customer Technology Services	1,785		3,407		4,067		8,038
Customer Strategy Services	280		105		284		277
Total	$	16,467	$	19,388	$	29,505	$	34,483

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(UNAUDITED)

	June 30, 2015			December 31, 2014
Total Assets
Customer Management Services	$		517,396	$	514,957
Customer Growth Services	84,079			88,394
Customer Technology Services	171,581			159,441
Customer Strategy Services	90,149			89,683
Total	$	863,205		$	852,475

	June 30, 2015		December 31, 2014
Goodwill
Customer Management Services	$	24,265	$	25,871
Customer Growth Services	30,395		30,395
Customer Technology Services	42,709		42,709
Customer Strategy Services	29,429		29,730
Total	$	126,798	$	128,705

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenue
United States	$	157,740	$	137,596	$	329,393	$	284,065
Philippines	85,585		85,541		170,572		172,207
Latin America	37,623		43,258		78,177		85,304
Europe / Middle East / Africa	19,290		22,267		38,603		41,484
Asia Pacific	8,437		5,358		16,111		11,758
Canada	1,548		1,470		2,888		2,893
Total	$	310,223	$	295,490	$	635,744	$	597,711

(4) SIGNIFICANT CLIENTS AND OTHER CONCENTRATIONS

The Company had one client that contributed in excess of 10% of total revenue for the six months ended June 30, 2015 and 2014. This client operates in the communications industry and is included in the CMS segment. This client contributed 11.5% and 12.0% of total revenue for the three months ended June 30, 2015 and 2014, respectively. This client contributed 10.9% and 11.8% of total revenue for the six months ended June 30, 2015 and 2014, respectively. This client had an outstanding receivable balance of $29.2 million and $28.6 million as of June 30, 2015 and 2014, respectively.

The loss of one or more of its significant clients could have a material adverse effect on the Company’s business, operating results, or financial condition. The Company does not require collateral from its clients. To limit the Company’s credit risk, management performs periodic credit evaluations of its clients and maintains allowances for uncollectible accounts and may require pre-payment for services. Although the Company is impacted by economic conditions in various industry segments, management does not believe significant credit risk existed as of June 30, 2015.

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(UNAUDITED)

(5) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill consisted of the following (in thousands):

	December 31, 2014		Acquisitions/ Adjustments		Impairments		Effect of Foreign Currency		June 30, 2015

Customer Management Services	$	25,871	$	-	$	-	$	(1,606)	$	24,265
Customer Growth Services	30,395		-		-		-		30,395
Customer Technology Services	42,709		-		-		-		42,709
Customer Strategy Services	29,730		100		-		(401)		29,429
Total	$	128,705	$	100	$	-	$	(2,007)	$	126,798

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.

The Company concluded that goodwill for all reporting units was not impaired at December 1, 2014. While no impairment indicators were identified, due to the small margin of fair value in excess of carrying value for two reporting units, Revana (approximately 6%) and WebMetro (approximately 11%), these reporting units remain at considerable risk for future impairment if projected operating results are not met or other inputs into the fair value measurement change.

At June 30, 2015, the Company updated its quantitative assessment of these reporting units fair value using an income based approach. The determination of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rates for the businesses, the useful lives over which the cash flows will occur and determination of appropriate discount rates (based in part on the Company’s weighted average cost of capital). Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. As of June 30, 2015, the updated fair values continue to exceed the carrying values for Revana (approximately 14%) and WebMetro (approximately 15%). The Company will continue to review the calculated fair value of these reporting units until the fair value is substantially in excess of its carrying value.

(6) DERIVATIVES

Cash Flow Hedges

The Company enters into foreign exchange and interest rate related derivatives. Foreign exchange derivatives entered into consist of forward and option contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. Interest rate derivatives consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. It is the Company’s policy to only enter into derivative contracts with investment grade counterparty financial institutions, and correspondingly, the fair value of derivative assets consider, among other factors, the creditworthiness of these counterparties. Conversely, the fair value of derivative liabilities reflects the Company’s creditworthiness. As of June 30, 2015, 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 six months ended June 30, 2015 and 2014 (in thousands and net of tax):

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(UNAUDITED)

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014

Aggregate unrealized net gain/(loss) at beginning of period	$	(18,497)	$	(10,886)	$	(18,345)	$	(8,352)
Add: Net gain/(loss) from change in fair value of cash flow hedges	(4,119)		9,946		(5,410)		6,297
Less: Net (gain)/loss reclassified to earnings from effective hedges	1,301		1,059		2,440		2,174
Aggregate unrealized net gain/(loss) at end of period	$	(21,315)	$	119	$	(21,315)	$	119

The Company’s foreign exchange cash flow hedging instruments as of June 30, 2015 and December 31, 2014 are summarized as follows (amounts in thousands). All hedging instruments are forward contracts unless noted otherwise.

As of June 30, 2015	Local Currency Notional Amount	U.S. Dollar Notional Amount			% Maturing in the Next 12 Months	Contracts Maturing Through
Philippine Peso	16,856,000	380,216		(1)	43.0 %	February 2020
Mexican Peso	2,684,000	183,258			28.2 %	May 2020
		$	563,474

As of December 31, 2014	Local Currency Notional Amount	U.S. Dollar Notional Amount
Canadian Dollar	1,500	$	1,441
Philippine Peso	17,428,000	398,046		(1)
Mexican Peso	2,532,000	179,089
New Zealand Dollar	490	381
		$	578,957

(1) Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on June 30, 2015 and December 31, 2014.

The Company’s interest rate swap arrangements as of June 30, 2015 and December 31, 2014 were as follows:

Notional
Amount

Variable Rate
Received

Fixed Rate
Paid

Contract
Commencement
Date

Contract
Maturity
Date

As of June 30, 2015

25 million

1 - month LIBOR

2.55

April 2012

April 2016

and December 31, 2014

15 million

1 - month LIBOR

3.14

May 2012

May 2017

40 million

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 June 30, 2015 and December 31, 2014 the total notional amounts of the Company’s forward contracts used as fair value hedges were $241.3 million and $242.5 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Derivative Valuation and Settlements

The Company’s derivatives as of June 30, 2015 and December 31, 2014 were as follows (in thousands):

	June 30, 2015
Designation:	Designated as Hedging Instruments				Not Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange		Interest Rate		Foreign Exchange
Derivative classification:	Cash Flow		Cash Flow		Fair Value

Fair value and location of derivative in the Consolidated Balance Sheet:
Prepaids and other current assets	$	578	$	-	$	47
Other long-term assets	2		-		-
Other current liabilities	(14,400)		(951)		(1,871)
Other long-term liabilities	(21,985)		(158)		-
Total fair value of derivatives, net	$	(35,805)	$	(1,109)	$	(1,824)

	December 31, 2014
Designation:	Designated as Hedging Instruments				Not Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange		Interest Rate		Foreign Exchange
Derivative classification:	Cash Flow		Cash Flow		Fair Value

Fair value and location of derivative in the Consolidated Balance Sheet:
Prepaids and other current assets	$	192	$	-	$	797
Other long-term assets	389		-		-
Other current liabilities	(12,680)		(988)		(5)
Other long-term liabilities	(17,070)		(452)		-
Total fair value of derivatives, net	$	(29,169)	$	(1,440)	$	792

The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2015 and 2014 were as follows (in thousands):

	Three Months Ended June 30,
	2015				2014
Designation:	Designated as Hedging Instruments				Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange		Interest Rate		Foreign Exchange		Interest 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	$	(1,453)	$	152	$	10,049	$	(103)

Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion:
Revenue	$	(2,505)	$	-	$	(1,472)	$	-
Interest Expense	-		(262)		-		(265)

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(UNAUDITED)

	Three Months Ended June 30,
	2015				2014
Designation:	Not Designated as Hedging Instruments				Not Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange				Foreign Exchange
Derivative classification:	Option and Forward Contracts		Fair Value		Option and 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	$	-	$	(2,416)	$	-	$	(2,825)

The effects of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2015 and 2014 were as follows (in thousands):

	Six Months Ended June 30,
	2015				2014
Designation:	Designated as Hedging Instruments				Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange		Interest Rate		Foreign Exchange		Interest 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	$	(2,443)	$	301	$	6,457	$	(160)

Amount and location of net gain or (loss) reclassified from Accumulated OCI to income - effective portion:
Revenue	$	(4,213)	$	-	$	(3,043)	$	-
Interest Expense	-		(519)		-		(523)

	Six Months Ended June 30,
	2015				2014
Designation :	Not Designated as Hedging Instruments				Not Designated as Hedging Instruments
Derivative contract type:	Foreign Exchange				Foreign Exchange
Derivative classification:	Option and Forward Contracts		Fair Value		Option and Forward Contracts		Fair Value

Amount and location of net gain or (loss) recognized in the Consolidated Statement of Comprehensive Income:
Costs of services	$	-	$	-	$	-	$	-
Other income (expense), net	$	-	$	(2,496)	$	-	$	(2,206)

(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.

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(UNAUDITED)

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.

The following presents information as of June 30, 2015 and December 31, 2014 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.

Debt - The Company’s debt consists primarily of the Company’s Credit Agreement, which permits floating-rate borrowings based upon the current Prime Rate or LIBOR plus a credit spread as determined by the Company’s leverage ratio calculation (as defined in the Credit Agreement). As of June 30, 2015 and December 31, 2014, the Company had $115.0 million and $100.0 million, respectively, of borrowings outstanding under the Credit Agreement. During the second quarter of 2015 outstanding borrowings accrued interest at an average rate of 1.2% 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.

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 June 30, 2015, 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 June 30, 2015 and December 31, 2014 (in thousands):

As of June 30, 2015

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		At Fair Value
Cash flow hedges	$	-	$	(35,805)	$	-	$	(35,805)
Interest rate swaps	-		(1,109)		-		(1,109)
Fair value hedges	-		(1,824)		-		(1,824)
Total net derivative asset (liability)	$	-	$	(38,738)	$	-	$	(38,738)

As of December 31, 2014

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		At Fair Value
Cash flow hedges	$	-	$	(29,169)	$	-	$	(29,169)
Interest rate swaps	-		(1,440)		-		(1,440)
Fair value hedges	-		792		-		792
Total net derivative asset (liability)	$	-	$	(29,817)	$	-	$	(29,817)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following is a summary of the Company’s fair value measurements as of June 30, 2015 and December 31, 2014 (in thousands):

As of June 30, 2015

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Derivative instruments, net	-		-		-
Total assets	$	-	$	-	$	-

Liabilities
Deferred compensation plan liability	$	-	$	(9,645)	$	-
Derivative instruments, net	-		(38,738)		-
Contingent consideration	-		-		(12,611)
Total liabilities	$	-	$	(48,383)	$	(12,611)

As of December 31, 2014

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Derivative instruments, net	-		-		-
Total assets	$	-	$	-	$	-

Liabilities
Deferred compensation plan liability	$	-	$	(8,478)	$	-
Derivative instruments, net	-		(29,817)		-
Contingent consideration	-		-		(24,744)
Total liabilities	$	-	$	(38,295)	$	(24,744)

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.

Contingent Consideration — The Company recorded contingent consideration related to the acquisitions of iKnowtion, Guidon, TSG, WebMetro, Sofica and rogenSi. These contingent payables were recognized at fair value using a discounted cash flow approach and a discount rate of 21.0%, 21.0%, 4.6%, 5.3%, 5.0% or 4.6%, respectively. The discount rates vary dependant 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 will record interest expense each period using the effective interest method until the future value of these contingent payables reaches their expected future value of $13.1 million. Interest expense related to all recorded contingent payables is included in Interest expense in the Consolidated Statements of Comprehensive Income (Loss).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the second and fourth quarters of 2014, the Company recorded fair value adjustments of the contingent consideration associated with the TSG reporting unit within the CTS segment based on revised estimates noting achievement of the targeted 2014 and 2015 EBITDA was remote. Accordingly, a $4.0 million and $3.9 million, respectively, reductions in the payable were recorded as of June 30, 2014 and December 31, 2014 and were included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss).

During the third and fourth quarters of 2014, the Company recorded fair value adjustments of the contingent consideration associated with the Sofica reporting unit within the CMS segment of $1.8 million and $0.6 million, respectively, as the Company’s revised estimates reflected Sofica exceeding its EBITDA targets for both 2014 and 2015. Accordingly, the $1.8 million and $0.6 million increases in the payable were recorded as of September 30, 2014 and December 31, 2014 and were included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss).

During the third quarter of 2014, the Company recorded a fair value adjustment of the contingent consideration associated with the WebMetro reporting unit within the CGS segment based on revised estimates noting achievement of the targeted 2014 EBITDA was remote. Accordingly, a $1.7 million reduction in the payable was recorded as of September 30, 2014 and was included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss).

During the fourth quarter of 2014, the Company recorded a fair value adjustment of the contingent consideration associated with the rogenSi reporting unit within the CSS segment based on revised estimates reflecting rogenSi exceeding its EBITDA targets for 2014. Accordingly a $0.5 million increase in the payable was recorded as of December 31, 2014 and was included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss).

During the second quarter of 2015, the Company recorded a fair value adjustment of the contingent consideration associated with the Sofica reporting unit within the CMS segment based on revised estimates reflecting Sofica earnings will be lower than revised estimates for 2015. Accordingly a $0.5 million decrease in the payable was recorded as of June 30, 2015 and was included in Other income (expense) in the Consolidated Statements of Comprehensive Income (Loss).

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

	December 31, 2014		Acquisitions		Payments		Imputed Interest / Adjustments		June 30, 2015

iKnowtion	$	2,265	$	-	$	(1,800)	$	24	$	489
Guidon	1,000		-		(1,000)		-		-
TSG	-		-		-		-		-
WebMetro	-		-		-		-		-
Sofica	6,317		-		(2,838)		(406)		3,073
rogenSi	15,162		-		(6,372)		259		9,049
Total	$	24,744	$	-	$	(12,010)	$	(123)	$	12,611

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(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.

During the first quarter of 2014, a benefit of $1.2 million was recorded due to the closing of statutes of limitations in Canada.

In accordance with ASC 740, the Company recorded a liability during the second quarter of 2015 of $1.75 million, inclusive of penalties and interest, for an uncertain tax position. See Note 1.

When there is a change in judgment concerning the recovery of deferred tax assets in future periods, a valuation allowance is recorded into earnings during the quarter in which the change in judgment occurred. During the second quarter of 2015, the Company increased its valuation allowance by $0.8 million. This net increase was related to a $0.3 million increase in the Netherlands and Israel for deferred tax assets that do not meet the “more likely than not” standard under current accounting guidance, a $0.3 million increase related to deferred tax assets in the Philippines related to the future utilization of NOL’s, and a $0.2 million increase in various other jurisdictions.

As of June 30, 2015, the Company had $54.2 million of gross deferred tax assets (after a $10.5 million valuation allowance) and net deferred tax assets (after deferred tax liabilities) of $50.9 million related to the U.S. and international tax jurisdictions whose recoverability is dependent upon future profitability.

The effective tax rate for the three and six months ended June 30, 2015 was 33.6% and 25.6%, respectively. The effective tax rate for the three and six months ended June 30, 2014 was 23.0% and 17.4%, respectively.

The Company’s U.S. income tax returns filed for the tax years ending December 31, 2011 to present remain open tax years. The Company has been notified of the intent to audit, or is currently under audit, of income taxes in the U.S. specifically for the acquired entity Technology Solutions Group for the tax year 2012 (prior to acquisition), for rogenSi in Hong Kong for the tax year 2014 and Canada for tax years 2009 and 2010. 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.

(9) RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

Restructuring Charges

During the three and six months ended June 30, 2015 and 2014, the Company undertook a number of restructuring activities primarily associated with reductions in the Company’s capacity and workforce in several of its segments to better align the capacity and workforce with current business needs.

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(UNAUDITED)

A summary of the expenses recorded in Restructuring, net in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014, respectively, is as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Reduction in force
Customer Management Services	$	39	$	535	$	815	$	1,046
Customer Growth Services	-		8		-		37
Customer Technology Services	-		74		-		74
Customer Strategy Services	159		-		192		-
Total	$	198	$	617	$	1,007	$	1,157

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

	Closure of Delivery Centers		Reduction in Force		Total

Balance as of December 31, 2014	$	-	$	2,071	$	2,071
Expense	-		1,007		1,007
Payments	-		(1,838)		(1,838)
Change in estimates	-		-		-
Balance as of June 30, 2015	$	-	$	1,240	$	1,240

The remaining restructuring accruals are expected to be paid or extinguished during 2015 and are all classified as current liabilities within Other accrued expenses in the Consolidated Balance Sheets.

(10) COMMITMENTS AND CONTINGENCIES

Credit Facility

In the second quarter of 2013, the Company entered into a $700.0 million, five-year, multi-currency revolving credit facility (the “Credit Agreement”) with a syndicate of lenders which includes an accordion feature that permits the Company to request an increase in total commitments up to $1.0 billion, under certain conditions. Wells Fargo Securities, LLC, KeyBank National Association, Bank of America Merrill Lynch, BBVA Compass and HSBC Bank USA, National Association served as Joint Lead Arrangers. The Credit Agreement amends and restates in its entirety the Company’s prior credit facility entered into during 2010 and amended in 2012.

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(UNAUDITED)

The Credit Agreement provides for a secured revolving credit facility that matures on June 3, 2018 with an initial maximum aggregate commitment of $700.0 million. At the Company’s discretion, direct borrowing options under the Credit Agreement include (i) Eurodollar loans with one, two, three, and six month terms, and/or (ii) overnight base rate loans. The Credit Agreement also provides for a sub-limit for loans or letters of credit in both U.S. dollars and certain foreign currencies, with direct foreign subsidiary borrowing capabilities up to 50% of the total commitment amount. The Company may increase the maximum aggregate commitment under the Credit Agreement to $1.0 billion if certain conditions are satisfied, including that the Company is not in default under the Credit Agreement at the time of the increase and that the Company obtains the commitment of the lenders participating in the increase.

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 June 30, 2015 and December 31, 2014, the Company had borrowings of $115.0 million and $100.0 million, respectively, under its Credit Agreement, and its average daily utilization was $323.5 million and $280.5 million for the six months ended June 30, 2015 and 2014, respectively. After consideration for issued letters of credit under the Credit Agreement, totaling $3.2 million, and current level of availability based on covenant calculations, the Company’s remaining borrowing capacity was approximately $385 million as of June 30, 2015. As of June 30, 2015, the Company was in compliance with all covenants and conditions under its Credit Agreement.

From time-to-time, the Company has unsecured, uncommitted lines of credit to support working capital for a few foreign subsidiaries. As of June 30, 2015, no foreign loans were outstanding.

Letters of Credit

As of June 30, 2015, outstanding letters of credit under the Credit Agreement totaled $3.2 million and primarily guaranteed workers’ compensation and other insurance related obligations. As of June 30, 2015, letters of credit and contract performance guarantees issued outside of the Credit Agreement totaled $5.6 million.

Legal Proceedings

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

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

(11) NONCONTROLLING INTEREST

The following table reconciles equity attributable to noncontrolling interest (in thousands):

	Six Months Ended June 30,
	2015		2014
Noncontrolling interest, January 1	$	7,983	$	8,081
Net income attributable to noncontrolling interest	1,735		2,074
Dividends distributed to noncontrolling interest	(2,025)		(2,025)
Foreign currency translation adjustments	(198)		85
Equity-based compensation expense	90