Edgar Filing: TELETECH HOLDINGS INC

ttec_Current folio_10Q

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 June 30, 2017


☐	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 ☑ 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 ☐
		(Do not check if a smaller reporting company)	Emerging 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 July 31, 2017, there were 45,842,430 shares of the registrant’s common stock outstanding.

Table of Contents

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

JUNE 30, 2017 FORM 10-Q

TABLE OF CONTENTS


		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (unaudited)	1

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016 (unaudited)	2

	Consolidated Statement of Equity as of and for the six months ended June 30, 2017 (unaudited)	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (unaudited)	4

	Notes to the Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

SIGNATURES		45

EXHIBIT INDEX		46

Table of Contents

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,		December 31,
	2017		2016
ASSETS
Current assets
Cash and cash equivalents	$	77,910	$	55,264
Accounts receivable, net		288,041		300,808
Prepaids and other current assets		67,080		59,905
Income tax receivable		7,703		7,035
Assets held for sale		8,969		10,715
Total current assets		449,703		433,727

Long-term assets
Property, plant and equipment, net		160,321		151,037
Goodwill		166,874		129,648
Deferred tax assets, net		32,988		53,585
Other intangible assets, net		60,742		30,787
Other long-term assets		59,495		47,520
Total long-term assets		480,420		412,577
Total assets	$	930,123	$	846,304

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	36,022	$	38,197
Accrued employee compensation and benefits		81,544		66,133
Other accrued expenses		23,911		14,830
Income tax payable		9,822		7,040
Deferred revenue		22,964		23,318
Other current liabilities		23,089		29,154
Liabilities held for sale		1,908		1,357
Total current liabilities		199,260		180,029

Long-term liabilities
Line of credit		257,000		217,300
Deferred tax liabilities, net		137		160
Deferred rent		15,800		15,256
Other long-term liabilities		62,668		71,664
Total long-term liabilities		335,605		304,380
Total liabilities		534,865		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 June 30, 2017 and December 31, 2016		—		—
Common stock; $0.01 par value; 150,000,000 shares authorized; 45,694,081 and 46,113,693 shares outstanding as of June 30, 2017 and December 31, 2016, respectively		458		462
Additional paid-in capital		351,006		348,739
Treasury stock at cost: 36,358,172 and 35,938,560 shares as of June 30, 2017 and December 31, 2016, respectively		(618,452)		(603,262)
Accumulated other comprehensive income (loss)		(104,707)		(126,964)
Retained earnings		759,809		735,939
Noncontrolling interest		7,144		6,981
Total stockholders’ equity		395,258		361,895
Total liabilities and stockholders’ equity	$	930,123	$	846,304

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,
	2017		2016		2017		2016
Revenue	$	353,429	$	305,105	$	691,706	$	617,515

Operating expenses
Cost of services (exclusive of depreciation and amortization presented separately below)		268,004		226,768		521,902		458,108
Selling, general and administrative		43,985		44,774		87,205		90,274
Depreciation and amortization		16,258		17,221		30,758		34,950
Restructuring and integration charges, net		3,593		114		3,762		202
Impairment losses		—		—		—		—
Total operating expenses		331,840		288,877		643,627		583,534

Income from operations		21,589		16,228		48,079		33,981

Other income (expense)
Interest income		695		263		1,121		429
Interest expense		(2,912)		(1,753)		(5,230)		(3,717)
Other income (expense), net		1,197		756		2,157		1,234
Loss on assets held for sale		(3,178)		—		(3,178)		—
Total other income (expense)		(4,198)		(734)		(5,130)		(2,054)

Income before income taxes		17,391		15,494		42,949		31,927

Benefit from (provision for) income taxes		(1,597)		(2,952)		(6,988)		(7,480)

Net income		15,794		12,542		35,961		24,447

Net income attributable to noncontrolling interest		(1,100)		(926)		(2,022)		(1,606)

Net income attributable to TeleTech stockholders	$	14,694	$	11,616	$	33,939	$	22,841

Other comprehensive income (loss)
Net income	$	15,794	$	12,542	$	35,961	$	24,447
Foreign currency translation adjustments		3,339		(9,484)		9,567		472
Derivative valuation, gross		7,517		(5,965)		21,492		3,614
Derivative valuation, tax effect		(3,038)		2,363		(8,829)		(1,737)
Other, net of tax		130		225		259		400
Total other comprehensive income (loss)		7,948		(12,861)		22,489		2,749
Total comprehensive income (loss)		23,742		(319)		58,450		27,196

Less: Comprehensive income attributable to noncontrolling interest		(1,240)		(792)		(2,254)		(1,532)

Comprehensive income (loss) attributable to TeleTech stockholders	$	22,502	$	(1,111)	$	56,196	$	25,664

Weighted average shares outstanding
Basic		45,662		47,873		45,805		48,120
Diluted		46,150		48,221		46,224		48,483

Net income per share attributable to TeleTech stockholders
Basic	$	0.32	$	0.24	$	0.74	$	0.47
Diluted	$	0.32	$	0.24	$	0.73	$	0.47

Dividends declared per share outstanding	$	—	$	—	$	0.22	$	0.185

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
											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	—		—	—		—		—		—		—		33,939		2,022		35,961
Dividends to shareholders ($0.22 per common share)	—		—	—		—		—		—		—		(10,069)		—		(10,069)
Dividends distributed to noncontrolling interest	—		—	—		—		—		—		—		—		(1,800)		(1,800)
Foreign currency translation adjustments	—		—	—		—		—		—		9,335		—		232		9,567
Derivatives valuation, net of tax	—		—	—		—		—		—		12,663		—		—		12,663
Vesting of restricted stock units	—		—	130		1		2,139		(4,016)		—		—		—		(1,876)
Exercise of stock options	—		—	60		1		993		1,156		—		—		—		2,150
Excess tax benefit from equity-based awards, net	—		—	—		—		—		—		—		—		—		—
Equity-based compensation expense	—		—	—		—		—		5,127		—		—		(291)		4,836
Purchases of common stock	—		—	(610)		(6)		(18,322)		—		—		—		—		(18,328)
Other, net of tax	—		—	—		—		—		—		259		—		—		259
Balance as of June 30, 2017	—	$	—	45,694	$	458	$	(618,452)	$	351,006	$	(104,707)	$	759,809	$	7,144	$	395,258

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,
	2017		2016
Cash flows from operating activities
Net income	$	35,961	$	24,447
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		30,758		34,950
Amortization of contract acquisition costs		809		334
Amortization of debt issuance costs		341		412
Imputed interest expense and fair value adjustments to contingent consideration		31		195
Provision for doubtful accounts		313		224
(Gain) loss on disposal of assets		12		(41)
Gain on sale of business		(30)		—
Impairment losses		—		—
Loss on held for sale assets		3,178		—
Deferred income taxes		5,901		5,897
Excess tax benefit from equity-based awards		(703)		(521)
Equity-based compensation expense		4,836		4,584
(Gain) loss on foreign currency derivatives		575		62
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		26,669		23,945
Prepaids and other assets		(22,656)		(14,544)
Accounts payable and accrued expenses		27,281		(19,423)
Deferred revenue and other liabilities		12,179		(5,476)
Net cash provided by operating activities		125,455		55,045

Cash flows from investing activities
Proceeds from sale of long-lived assets		22		63
Purchases of property, plant and equipment, net of acquisitions		(29,589)		(27,743)
Proceeds from sale of business		250		—
Investments in non-marketable equity investments		(1,384)		—
Acquisitions, net of cash acquired of zero and zero, respectively		(79,574)		(400)
Net cash used in investing activities		(110,275)		(28,080)

Cash flows from financing activities
Proceeds from line of credit		1,151,700		1,186,500
Payments on line of credit		(1,112,000)		(1,151,500)
Payments on other debt		(3,025)		(1,214)
Payments of contingent consideration and hold back payments to acquisitions		(435)		(9,467)
Dividends paid to shareholders		(10,069)		(8,923)
Payments to noncontrolling interest		(1,800)		(2,202)
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		(1,876)		(2,019)
Excess tax benefit from equity-based awards		—		521
Payments of debt issuance costs		(3)		(1,883)
Purchase of treasury stock		(18,328)		(36,111)
Net cash used in financing activities		6,314		(30,032)

Effect of exchange rate changes on cash and cash equivalents		1,152		(1,907)

Increase (decrease) in cash and cash equivalents		22,646		(4,974)
Cash and cash equivalents, beginning of period		55,264		60,304
Cash and cash equivalents, end of period	$	77,910	$	55,330

Supplemental disclosures
Cash paid for interest	$	4,857	$	3,155
Cash paid for income taxes	$	5,905	$	13,705
Non-cash operating, investing and financing activities
Acquisition of long-lived assets through capital leases	$	874	$	2,667
Acquisition of equipment through increase in accounts payable, net	$	(1,274)	$	289
Contract acquisition costs credited to accounts receivable	$	—	$	200

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 leading global provider of technology enabled customer experience services. The Company helps leading brands improve customer experiences and operational effectiveness through a unique combination of technological innovation and operational expertise. The Company’s portfolio of solutions includes consulting, technology, operations and analytics to enable a seamless customer experience across every interaction channel and phase of the customer lifecycle. TeleTech’s 48,000 employees serve clients in the automotive, communication, financial services, government, healthcare, logistics, media and entertainment, retail, technology, transportation and travel industries across all the segments and via operations in the U.S., Australia, Belgium, Brazil, Bulgaria, Canada, China, Costa Rica, Germany, Hong Kong, Ireland, Lebanon, Macedonia, Mexico, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.

Basis of Presentation

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

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

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

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

These unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, self-insurance reserves, litigation reserves, restructuring reserves, allowance for doubtful accounts, contingent consideration, and valuation of goodwill, long-lived and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued 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, is working through the project assessment phase, and is determining its implementation approach. As the Company has not yet completed the assessment, the Company has not made any conclusions regarding the potential impact to the financials.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases and making targeted changes to lessor accounting. The ASU also requires new disclosures regarding the amounts, timing, and uncertainty of cash flows arising from leases. The ASU is effective for interim and annual periods beginning on or after December 15, 2018 and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently assessing the impact on the consolidated financial statements and related disclosures, evaluating software solutions and other tracking methods, and determining the implementation timeline.

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

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”. ASU 2016-15 is intended to reduce diversity in practice regarding how certain cash transactions are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The ASU is effective for interim and annual periods beginning on or after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on the consolidated statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other: Simplifying the Accounting for Goodwill Impairment”. ASU 2017-04 removes the need to complete Step 2 of any goodwill impairment test that has failed Step 1. The goodwill impairment will now be calculated as the amount by which a reporting unit’s carrying value exceeds its fair value. The ASU is effective for interim and annual periods beginning on or after December 15, 2019 and early adoption is permitted. The Company early adopted this standard as of January 1, 2017.

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(2)ACQUISITIONS AND DIVESTITURES

Connextions

On April 3, 2017, the Company acquired all of the outstanding shares of Connextions, Inc., a health care customer service provider company, from OptumHealth Holdings, LLC. Connextions is being integrated into the health care vertical of the Customer Management Services (“CMS”) segment of the Company. Connextions employed approximately 2,000 at several centers in the U.S.

The total cash paid at acquisition was $80 million. The purchase price is subject to customary representations and warranties, indemnities, and net working capital adjustment. In connection with the acquisition, the Company and OptumHealth (directly and through affiliates) also entered into long-term technology and customer services agreements, and into transition services agreements to facilitate the transfer of the business. The Company is required to pay an estimated $1.8 million additional for the working capital adjustment, which will be paid during the third quarter of 2017. Additionally, fair value adjustments related to the transition services agreements are expected to reduce the purchase price by $4.1 million resulting in a net estimated purchase price of $77.7 million.

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


	Preliminary
	Estimate of
	Acquisition Date
	Fair Value
Cash	$	—
Accounts receivable, net		15,959
Prepaid expenses		241
Other current assets		51
Property, plant and equipment		7,594