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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-K

 


 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2014

 

or

 

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

 

For the transition period from              to             

 

Commission File Number: 001-11919

 


 

TeleTech Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

84-1291044

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9197 South Peoria Street

Englewood, Colorado 80112

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:

(303) 397-8100

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

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

Yesx   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer  o

 

Accelerated filer x

 

 

 

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 x

 

As of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, there were 48,732,502 shares of the registrant’s common stock outstanding. The aggregate market value of the registrant’s voting and non-voting common stock that was held by non-affiliates on such date was $495,904,505 based on the closing sale price of the registrant’s common stock on such date as reported on the NASDAQ Global Select Market.

 

As of February 28, 2015, there were 48,307,893 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required for Part III of this report is incorporated by reference to the proxy statement for the registrant’s 2015 annual meeting of stockholders.

 

 

 



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

DECEMBER 31, 2014 FORM 10-K

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

ii

 

 

 

AVAILABILITY OF INFORMATION

ii

 

 

 

PART I

 

 

 

 

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

7

 

 

 

Item 1B.

Unresolved Staff Comments

16

 

 

 

Item 2.

Properties

16

 

 

 

Item 3.

Legal Proceedings

17

 

 

 

Item 4.

Mine Safety Disclosures

17

 

 

 

PART II.

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17

 

 

 

Item 6.

Selected Financial Data

20

 

 

 

Item 7.

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

22

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 8.

Financial Statements and Supplementary Data

41

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

41

 

 

 

Item 9A.

Controls and Procedures

41

 

 

 

Item 9B.

Other Information

42

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

43

 

 

 

Item 11.

Executive Compensation

43

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

 

 

 

Item 14.

Principal Accountants Fees and Services

43

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

44

 

 

 

SIGNATURES

47

 

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC.

F-1

 

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Table of Contents

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, relating to our operations, expected financial position, results of operation, and other business matters that are based on our current expectations, assumptions, and projections with respect to the future, and are not a guarantee of performance.  In this report, when we use words such as “may,” “believe,” “plan,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “would,” “could,” “target,” or similar expressions, or when we discuss our strategy, plans, goals, initiatives, or objectives, we are making forward-looking statements.

 

We caution you not to rely unduly on any forward-looking statements. Actual results may differ materially from what is expressed in the forward-looking statements, and you should review and consider carefully the risks, uncertainties and other factors that affect our business and may cause such differences as outlined but are not limited to factors discussed in the section of this report entitled “Risk Factors”. Our forward looking statements speak only as of the date that this report is filed with the United States Securities and Exchange Commission (“SEC”) and we undertake no obligation to update them, except as may be required by applicable laws.

 

AVAILABILITY OF INFORMATION

 

TeleTech Holdings, Inc.’s principal executive offices are located at 9197 South Peoria Street, Englewood, Colorado 80112. Electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and any amendments to these reports are available free of charge by (i) visiting our website at http://www.teletech.com/investors/sec-filings/ or (ii) sending a written request to Investor Relations at our corporate headquarters or to investor.relations@teletech.com. TeleTech’s SEC filings are posted on our corporate website as soon as reasonably practical after we electronically file such materials with, or furnish them to, the SEC. Information on our website is not incorporated by reference into this report.

 

You may also access  any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549 (telephone number 1-800-SEC-0330); or via  the SEC’s public website at www.sec.gov.

 

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PART I

 

ITEM 1.  BUSINESS

 

Our Business

 

TeleTech Holdings, Inc. (“TeleTech”, “the Company”, “we”, “our” or “us”) is a customer engagement management service provider that delivers integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of product and service capabilities allows us to design and deliver enhanced, value-driven customer experiences across numerous communication channels. Our solutions are supported by 46,000 employees delivering services in 24 countries from 59 delivery centers on six continents. Our revenue for fiscal 2014 was $1,242 million.

 

Since our establishment as a Delaware corporation in 1982, we have helped clients strengthen their customer relationships, brand recognition and loyalty through customer engagement solutions. We deliver thought leadership, technology and innovation that create customer strategies designed to differentiate our clients from their competition; data analytics that personalize interactions and increase customer value; and integration services that connect clients’ customer relationship management (“CRM”) system to a cloud-based collaboration platform, leading to customer interactions that are seamless and relevant.

 

Our services are value-oriented, outcome-based, and delivered on a global scale across all of our business segments: Customer Management Services (“CMS”), Customer Growth Services (“CGS”), Customer Technology Services (“CTS”) and Customer Strategy Services (“CSS”). Our integrated customer experience platform differentiates the Company by combining strategic consulting, data analytics, process optimization, system design and integration, operational excellence, and technology solutions and services.

 

We have developed tailored expertise in the automotive, communications, financial services, government, healthcare, logistics, media and entertainment, retail, technology, travel and transportation industries. We target customer-focused industry leaders in the Global 1000 and serve more than 250 global clients.

 

To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and growth businesses, diversifying our traditional business process outsourcing services of our CMS segment into higher-value consulting, data analytics, digital marketing and technology-enabled services. Of the $1,242 million in revenue we reported in 2014, approximately 26% or $318 million came from the CGS, CTS and CSS segments (our “Emerging Segments”), focused on customer-centric strategy, growth or technology-based services, with the remainder of our revenue coming from the traditional business process outsourcing focused CMS segment.

 

Consistent with our growth and diversification strategy, we continue to invest in technology differentiation, analytics, cloud computing and digital marketing. We also invest in businesses that accelerate our strategy: in 2014, we acquired Sofica Group, a Bulgarian customer management services company which provides our clients with the capabilities of 18 additional languages while contributing to the geographic and time zone diversity of our footprint; and rogenSi, a global leadership, change management and sales consulting company that further diversifies our consulting offerings.

 

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Our business is structured and reported in the following four segments:

 

Operating Segments and Industry Verticals

 

CMS

 

CGS

 

CTS

 

CSS

 

 

 

 

 

 

 

Automotive

 

Automotive

 

Communication

 

Automotive

Communication

 

Communication

 

Financial Services

 

Communication

Financial Services

 

Financial Services

 

Government

 

Financial Services

Government

 

Healthcare

 

Healthcare

 

Healthcare

Healthcare

 

Logistics

 

Media and Entertainment

 

Media and Entertainment

Media and Entertainment

 

Media and Entertainment

 

Retail

 

Technology

Retail

 

Technology

 

Technology

 

 

Travel and Transportation

 

 

 

 

 

 

Technology

 

 

 

 

 

 

 

Our strong balance sheet, cash flows from operations and access to debt and capital markets provide us the financial flexibility to effectively fund our organic growth, capital expenditures, strategic acquisitions and incremental investments. Additionally, we continue to return capital to our shareholders via an ongoing stock repurchase program. As of December 31, 2014, our cumulative authorized repurchase allowance was $637.3 million, of which we repurchased 42.1 million shares for $625.5 million. For the period from January 1, 2015 through February 28, 2015, we purchased 212,100 additional shares at a cost of $4.7 million. The stock repurchase program does not have an expiration date. Effective February 24, 2015, the Board of Directors authorized an additional $25 million for stock repurchases.

 

On February 24, 2015, our Board of Directors adopted a dividend policy, with the intent to distribute a periodic cash dividend to stockholders of our common stock, after consideration of, among other things, TeleTech’s performance, cash flows, capital needs and liquidity factors. Given our cash flow generation and balance sheet strength, we believe cash dividends and early returns to shareholders through share repurchases, in balance with our investments in innovation and strategic acquisitions, align shareholder interests with the needs of the Company. The initial dividend of $0.18 per common share will be paid on March 16, 2015 to shareholders of record as of March 6, 2015.

 

Our Market Opportunity

 

We believe that exceptional customer engagement creates sustainable economic value for our clients and our market opportunities are defined by the following trends:

 

·

Increasing focus on customer engagement to sustain competitive advantage. — Our ability to sustain a competitive advantage based on price or product differentiation has significantly narrowed given the speed of technological innovation. As customers become more connected and widely broadcast their experiences across a variety of social networking channels, the quality of the experience has a profound impact on brand loyalty and business performance. We believe customers are increasingly shaping their attitudes, behaviors and willingness to recommend or stay with a brand on the totality of their experience, including not only the superiority of the product or service but more importantly on the quality of their ongoing service interactions. Given the strong correlation between high customer satisfaction and improved profitability, we believe more companies are increasingly focused on selecting third-party partners, such as TeleTech, who can deliver an analytic-driven, integrated solution that increases the lifetime value of each customer relationship versus merely reducing costs.

 

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·

Increasing percentage of companies consolidating their customer engagement requirements with the few select partners who can deliver measurable business outcomes by offering an integrated, technology-rich solution.The proliferation of mobile communication technologies and devices along with customers’ increased access to information and heightened expectations are driving the need for companies to implement enabling technologies that ensure customers have the best experience across all devices and channels. These two-way interactions need to be received or delivered seamlessly via the customer channel of choice and include voice, email, chat, SMS text, intelligent self serve, virtual agents and the social network. We believe companies will continue to consolidate to third-party partners, like TeleTech, who have demonstrated expertise in increasing brand value by delivering a holistic, integrated customer-centric solution that spans strategy to execution versus the time, expense and often failed returns resulting from linking together a series of point solutions from different providers.

 

 

·

Focus on speed-to-market by companies launching new products or entering new geographic locations. — As companies broaden their product offerings and enter new markets, they are looking for partners that can provide speed-to-market while reducing their capital and operating risk. To achieve these benefits, companies select us because of our extensive operating track record, established global footprint, financial strength, commitment to innovation, and our ability to quickly scale infrastructure and complex business processes around the globe in a short period of time while assuring a high-quality experience for their customers.

 

Our Strategy

 

We aim to grow our revenue and profitability by focusing on higher margin, data and technology-enabled services that drive a superior customer experience and engagement. To that end we plan to continue:

 

·

Building deeper, more strategic relationships with existing global clients to drive enduring, transformational change within their organizations;

 

 

·

Pursuing new clients who lead their respective industries and who are committed to the customer engagement as a differentiator;

 

 

·

Continued Investment in our Global Markets and Industries sales leadership team;

 

 

·

Executing strategic acquisitions that further complement and expand our integrated solution; and

 

 

·

Investing in innovative technology-enabled platforms and innovating through proprietary technology advancements, broader and globally protected intellectual property, and process optimization.

 

Our Integrated Service Offerings and Business Segments

 

We operate our business utilizing four operating and reportable segments, which provide an integrated set of services offering through design, technology enablement, management and growth:

 

Customer Strategy Services

 

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

 

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Customer Technology Services

 

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

 

Customer Management Services

 

We design and manage clients’ front-to-back office processes to deliver just-in-time, personalized, multi-channel interactions. Our front-office solutions seamlessly integrate voice, chat, email, e-commerce and social media to optimize the customer experience for our clients. In addition, we manage certain client back-office processes to enhance their customer-centric view of relationships and maximize operating efficiencies. Our delivery of integrated business processes via our onshore, offshore or work-from-home associates reduces operating costs and allows customer needs to be met more quickly and efficiently, resulting in higher satisfaction, brand loyalty and a stronger competitive position for our clients.

 

Customer Growth Services

 

We offer integrated sales and marketing solutions to help our clients boost revenue in new, fragmented or underpenetrated business-to-consumer or business-to-business markets. We deliver approximately $1 billion in client revenue annually via the acquisition, growth and retention of customers through a combination of our highly trained, client-dedicated sales professionals and our proprietary Revana Analytic Multichannel PlatformTM. This platform continuously aggregates individual customer information across all channels into one holistic view so as to ensure more relevant and personalized communications. As a result of our acquisition of the digital agency Web Metro, we have developed an integrated marketing-to-sales platform that links online searches to live sales through a closed loop, multichannel interface. This platform uses proprietary tools and methodology to capture and use more than 400 marketing and sales data points to engage with customers in relevant conversations.

 

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

 

Additional information with respect to our segments and geographic footprint is contained in Part II, Item 8. Financial Statements and Supplementary Data, Note 3 to the Consolidated Financial Statements.

 

Our Competitive Strengths

 

We believe our integrated suite of services and holistic approach to customer engagement is an industry differentiator. Our end-to-end capabilities, from customer strategy and technology services to customer management and growth services, improve customer outcomes, increase satisfaction and loyalty, strengthen operating effectiveness and efficiencies, and drive long-term growth and profitability for our clients. We also believe that our technological solutions, innovative human capital strategies and globally scaled and deployed best practices are key elements to our continued industry leadership.

 

As the complexity and pace of technological change required to deliver a multi-channel customer engagement increases, the successful execution of our principal corporate strategies is based on our competitive strengths, which are briefly described below:

 

·

Our industry reputation and leadership position with over three decades of expertise delivering integrated customer engagement solutions provides our clients with the ability to enable, manage and grow the value of every customer relationship;

 

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·

Multi-channel, multi-modal solutions that meet the rapidly changing profile of the customer and their heightened expectations;

 

 

·

Scalable technology and human capital infrastructure using globally deployed best practices to ensure a consistent, high-quality service;

 

 

·

Tailored and optimized customer care delivery through the use of proprietary workforce hiring, training and performance optimization methodology and tools; and

 

 

·

Commitment to continued product and services innovation that enhances the strategic capabilities of our clients.

 

Technological Excellence

 

Our technology platform is based on a secure, private, 100% internet protocol based infrastructure. This architecture enables us to centralize and standardize our worldwide delivery capabilities resulting in improved scalability and quality of delivery for our clients, as well as lower capital, and lower information technology (“IT”) operating costs.

 

The foundation of this platform is our four IP hosting centers known as TeleTech GigaPOPs®, which are located on three continents. Our GigaPOPs® provide a fully integrated suite of voice and data routing, workforce management, quality monitoring, business analytic and storage capabilities, enabling seamless operations from any location around the globe. This hub and spoke model enables us to provide our services at the lowest cost while increasing scalability, reliability, asset utilization and the diversity of our service offerings. It also provides an effective redundancy to address ordinary course system interruptions and outages due to natural disasters and other force majeure conditions.

 

To ensure high end-to-end security and reliability of this critical infrastructure, we monitor and manage the TeleTech GigaPOPs® 24 x 7, 365 days per year from several strategically located global command centers as well as providing redundant, fail-over capabilities for each GigaPOP® to address ordinary course system interruptions and outages due to natural disasters and other force majeure conditions.

 

Importantly, this platform has become the foundation for new, innovative offerings including TeleTech’s cloud-based offerings, TeleTech@Home and our suite of human capital solutions.

 

Innovative Human Capital Strategies

 

Our globally located, highly trained employees are a crucial component of the success of our business. We have made significant investments in proprietary technologies, management tools, methodologies and training processes in the areas of talent acquisition, learning services, knowledge management, workforce collaboration and performance optimization. These capabilities are the culmination of more than three decades of experience in managing large, global workforces combined with the latest technology, innovation and strategy in the field of human capital management. This capability has enabled us to deliver a consistent, scalable and flexible workforce that is highly engaged in achieving or exceeding our clients’ business objectives.

 

Globally Deployed Best Operating Practices

 

Globally deployed best operating practices assure that we deliver a consistent, scalable, high-quality experience to our clients’ customers from any of our 59 delivery centers and work from home associates around the world. Standardized processes include our approach to attracting, screening, hiring, training, scheduling, evaluating, coaching and maximizing associate performance to meet our clients’ needs. We provide real-time reporting on performance across the globe to ensure consistency of delivery. In addition, this information provides valuable insight into what is driving customer inquiries, enabling us to proactively recommend process changes to our clients to optimize their customers’ experience.

 

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Our global operating model includes delivery centers in 14 countries on six continents that operate 24 hours a day, 365 days a year. New delivery centers are established and existing centers are expanded or scaled down to accommodate anticipated business demands or specific client needs. We continue to expand our capacity in the Philippines and Latin America to leverage demand and favorable cost efficiencies, and are exploring opportunities in Central Europe and Africa to augment our multi-lingual service offerings and continue to diversify our footprint.

 

Of the 14 countries from which we provide customer management solutions, nine provide services for onshore clients including the U.S., Australia, Brazil, Germany, Ireland, Macedonia, New Zealand, South Africa, and the United Kingdom. The total number of workstations in these countries is 11,300, or 36% of our total delivery capacity. The other five countries provide services, partially or entirely, for offshore clients including Bulgaria, Canada, Costa Rica, Mexico and the Philippines. The total number of workstations in these countries is 19,900, or 64% of our total delivery capacity.

 

See Item 1A. Risk Factors for a description of the risks associated with our foreign operations.

 

Clients

 

We develop long-term relationships with Global 1000 companies in customer intensive industries, whose business complexities and customer focus requires a partner that can quickly and globally scale integrated technology and data-enabled services.

 

In 2014, our top five and ten clients represented 38% and 50% of total revenue, respectively; and one of our clients, Telstra Corporation Limited, represented 11% of our total annual revenue. In several of our operating segments, we enter into long-term relationships which provide us with a more predictable revenue stream. Although most of our contracts can be terminated for convenience by either party, our relationships with our top five clients have ranged from two to 18 years including multiple contract renewals for several of these clients. In 2014, we had a 97% client retention rate for the combined Customer Management Services and Customer Growth Services segments.

 

Certain of our communications clients provide us with telecommunication services through arm’s length negotiated transactions. These clients currently represent approximately 17% of our total annual revenue. Expenditures under these supplier contracts represent less than one percent of our total operating costs.

 

Competition

 

We are a diverse, global customer engagement management company. Our competitors vary by geography and business segment, and range from large multinational corporations to smaller, narrowly-focused enterprises. Across our lines of business, the principal competitive factors include: client relationships, technology and process innovation; integrated solutions, operational performance and efficiencies, pricing, brand recognition and financial strength.

 

Our strategy in maintaining market leadership is to prudently invest, innovate and provide integrated value-driven services, all centered around customer engagement management. Today, we are executing on a more expansive, holistic strategy by transforming our business into higher-value offerings through organic investments and strategic acquisitions. As we execute, we are differentiating ourselves in the marketplace and entering new markets that introduce us to an expanded competitive landscape.

 

In our core customer care and management competency, we primarily compete with the in-house customer management operations of our current and potential clients, as well as other companies that provide customer care and business process outsourcing (“BPO”) services, including: Convergys, Sykes, and Teleperformance, among others. As we expand our offerings into customer engagement consulting, technology, and growth, we are competing with smaller specialized companies and divisions of multinational companies, including Bain & Company, McKinsey & Company, Accenture, IBM, AT&T, Interactive Intelligence, LiveOps, inContact, Five9, WPP, Publicis Groupe, Dentsu, Sitel, and others.

 

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Employees

 

Our people are our most valuable asset. As of December 31, 2014, we had 46,000 employees in 24 countries on six continents. Although a small percentage of these employees are hired seasonally to address the fourth quarter higher business volumes in retail and other seasonal industries, most remain employed throughout the year and work at 59 locations and through our @home environment. Approximately 67% of our employees are located outside of the U.S. Approximately 17% of our employees are covered by collective bargaining agreements, most of which are mandated under national labor laws outside of the United States. These agreements are subject to periodic renegotiations and we anticipate that they will be renewed in the ordinary course of business without material impact to our business or in a manner materially different from other companies covered by such industry-wide agreements.

 

Research, Innovation, Intellectual Property and Proprietary Technology

 

We recognize the value of innovation in our business and are committed to developing leading-edge technologies and proprietary solutions. Research and innovation has been a major factor in our success and we believe that it will continue to contribute to our growth in the future. We use our investment in research and development to create, commercialize and deploy innovative business strategies and high-value technology solutions.

 

We deliver value to our clients through, and our success in part depends on, certain proprietary technologies and methodologies. We leverage U.S. and foreign patent, trade secret, copyright and trademark laws as well as confidentiality, proprietary information non-disclosure agreements, and key staff non-competition agreements to protect our proprietary technology.

 

As of December 31, 2014 we had 94 patent applications pending in eight jurisdictions; and own 103 U.S. and non-U.S. patents that we leverage in our operations and as market place differentiation for our service offerings. Our trade name, logos and names of our proprietary solution offerings are protected by their historic use and by trademarks and service marks registered in 59 countries.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information presented in this Annual Report on Form 10-K, you should carefully consider the risks and uncertainties discussed in this section when evaluating our business. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations (including revenue and profitability) could be materially adversely affected and the market price of our stock may decline.

 

Our markets are highly competitive and we might not be able to compete effectively

 

The markets where we offer our services are highly competitive. Our future performance is largely dependent on our ability to compete successfully in markets we currently serve, while expanding into new, profitable markets. We compete with large multinational service providers (including the service arms of global technology providers); offshore service providers from lower-cost jurisdictions that offer similar services, often at highly competitive prices and more aggressive contract terms; niche solution or service providers that compete with us in a specific geographic markets, industry segments or service areas, including companies that rely on new technologies or delivery models; and in-house functions of large companies that use their own resources, rather than outsourcing customer care services we provide. Some of our competitors have greater financial or marketing resources than we do and, therefore, may be better able to compete.

 

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Further, the recent trend of consolidation in the technology sector and among business process outsourcing competitors may result in new competitors with greater scale, a broader footprint, better technologies and price efficiencies attractive to our clients. If we are unable to compete successfully and provide our clients with superior service and solutions at competitive prices, we could lose market share and clients to competitors, which would materially adversely affect our business, financial condition, and results of operations.

 

If the TeleTech leadership team is unsuccessful in implementing our business strategy or if our new investments are not successful, the company’s financial condition could be adversely affected

 

Our growth strategy included a diversification of our business beyond contact center customer care outsourcing to an integrated customer experience platform that unites innovative technologies, strategic consulting, data analytics, digital marketing, client growth solutions, and customer care focused system design and integration. The strategy also includes an accelerated investment in the development of proprietary technologies, and the deployment of a multi business line sales function. These investments in technologies, integrated solution development and sales, however, may not lead to increased revenue and profitability as we may not be successful in deploying our new products and services. If the company is not successful in creating value from these investments, the investments and lack of new integrated sales could have a negative impact on the company’s operating results and financial condition.

 

Our profitability could suffer if our cost-management strategies are unsuccessful

 

Our ability to improve or maintain our profitability is dependent on our ability to successfully manage our costs. Our cost management strategies include optimizing the alignment between the demand for our services and our resource capacity, the costs of service delivery, the cost of sales, and general and administrative costs, as a percentage of revenues. If we are not effective in managing our operating and administrative costs in response to changes in demand and pricing for our services; if we are unable to absorb or pass on to our clients the increases in our costs of operations, our results of operations could be materially adversely affected.

 

Cyber attacks on our systems and disclosure of personal information could result in harm to our reputation, legal liability, and service outages, any of which could adversely affect our business and results of operations

 

Our business is dependent upon our information technology systems. Information security breaches, computer viruses, interruption or loss of business data and cyber attacks on any of these systems could disrupt the normal operations of our contact centers, our cloud platform offerings, and our enterprise services, impeding our ability to provide critical services to our clients and preventing key personnel from being able to perform their duties or communicate within our organization. Our business involves the use, storage and transmission of information about our clients, customers of our clients, and our employees. While we take measures to protect the security of and unauthorized access to our systems and the privacy of personal and proprietary information that we access and store, our security controls over our systems may not prevent the improper access to or disclosure of this information. Such unauthorized access or disclosure could harm our reputation and subject us to liability under our contracts and laws, resulting loss of revenue, and loss of business opportunities.

 

In recent years there have been an increasing number of high profile security breaches at other companies and government agencies, and security experts have warned about the growing risks of hackers, cyber criminals and other potential attacks targeting information technology systems. While we have taken measures to protect our systems from intrusion, we cannot be certain that advances in cyber criminal capabilities, discovery of new system vulnerabilities and attempts to exploit such vulnerabilities will not compromise or breach the technology protecting our systems and the information that we manage and control. New cyber attacks may force us to expend significant additional resources in response to a security breach, including repairing system damage, increasing cyber security protection costs, and litigating and resolving related legal claims. A significant security breach could materially harm our business, financial condition and operating results.

 

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Continuing expansion of our service offerings into technology and consulting solutions subjects our business to different operational risk than our tradition business process outsourcing business

 

We continue to expand our services and solutions into new business areas such as technology and analytics, focused customer care consulting, and technology development and integration services. Expanding into new areas and providing services to new types of clients with different revenue models may expose us to additional operational and regulatory risks specific to these new areas. While our business process outsourcing contracts are usually long term arrangements, most consulting service contracts are short lived and require aggressive sales and contract renewal process; the services are usually paid based on milestone attainment that may be subject to subjective determination of achievement. Unless we effectively manage special risks involved in providing technology and strategic consulting services, our business may be materially adversely affected impacting our results of operations and financial position.

 

Our results of operations and ability to grow could be materially adversely affected if we cannot adapt our services offerings to changes in technology

 

Our success depends on our ability to develop and implement technology, consulting and outsourcing services and solutions that anticipate and respond to rapid and continuing changes in technology. Areas of significant change include mobility, cloud-based computing, and processing and analyzing large and unstructured data. Our growth and profitability will depend on our ability to develop and adopt new technologies that expand our existing solutions and service offerings to leverage new technological trends and developments, and achieve cost efficiencies in our operations. We may not be successful in anticipating or responding to new technology developments and our integration of new technologies may not achieve their intended cost reductions. Services and technologies offered by our competitors may make our service offerings obsolete. Our failure to innovate, maintain technological advantage, or respond effectively and timely to transformational changes in technology could have a material adverse effect on our business, financial condition, and results of operations.

 

If we are unable to attract and retain industry leaders for key positions in our business, our business and our strategy execution can be adversely impacted

 

Our business success depends on contributions of senior management and key personnel. Our ability to attract, motivate and retain key senior management staff is conditioned on our willingness to pay adequate compensation and incentives. We compete for top senior staff candidates with other, often larger, companies that at times have access to greater resources. Our ability to attract senior managers is also impacted by our requirement that members of senior staff sign non-compete agreements as a condition to joining TeleTech. If we are not able to attract and retain industry leaders, we would be unable to compete effectively and our growth may be limited, which could have a material adverse effect on our business, results of operations, and prospects.

 

A large portion of our revenue is generated from a limited number of clients and the loss of one or more of our clients could cause adversely effect on our business

 

We rely on strategic, long-term relationships with large, global companies in targeted industries. As a result, we derive a substantial portion of our revenue from relatively few clients. Our five and ten largest clients collectively represented 38% and 50% of our revenue in 2014; while the largest client represented 11% of our revenue in 2014.

 

Although we have multiple engagements with each of our largest clients and all contracts are unlikely to terminate at the same time, the contracts with our five largest clients expire between 2015 and 2017 and there can be no assurance that these contracts will continue to be renewed at all or be renewed on favorable terms. The loss of all or part of a major client’s business could have a material adverse effect on our business, financial condition and results of operations, if the loss of revenue was not replaced with profitable business from other clients.

 

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We serve clients in industries that have historically experienced a significant level of consolidation. If one of our clients is acquired by another company (including another one of our clients) our business volume and revenue may materially decrease due to the termination or phase out of an existing client contract, volume discounts or other contract concessions which could have an adverse effect on our business, financial condition, and results of operations.

 

Our delivery model involves geographic concentration exposing us to significant operational risks

 

Our business model is dependent on our service delivery centers and enterprise support functions being located in low cost jurisdictions around the globe. We have presence in 24 countries, but our customer care management delivery capacity and our back office functions are concentrated in the Philippines and Latin America, and our technology solutions delivery centers are concentrated in a few locations in the United States. Natural disasters (floods, winds and earthquakes), terrorist attacks, pandemics, insufficient infrastructure (large-scale utilities outages, telecommunication and transportation disruptions), labor or political unrest, and restriction on repatriation of funds at some of these locations may interrupt or limit our ability to operate or may increase our costs. Our business continuity and disaster recovery plans, while extensive, may not be effective, particularly if catastrophic events occur.

 

Our dependence on our delivery centers and enterprise services support functions in the Philippines, which is subject to frequent severe weather, natural disasters, and occasional security threats, represents a particular risk. This geographic concentration can result in material adverse effect on our business, financial condition and results of operations. Although we procure business interruption insurance to cover some of these exposures, adequate insurance may not be available on an ongoing basis for a reasonable price.

 

Our growth of operations could strain our resources and cause our business to suffer

 

We plan to continue growing our business organically through aggressive expansion and sales efforts and through strategic acquisitions, while maintaining tight controls on our expenses and overhead. Lean overhead functions combined with focused growth may place a strain on our management systems, infrastructure and resources, resulting in internal control failures, missed opportunities, and staff attrition which could impact our business and results of operations.

 

Our financial results depend on our capacity utilization and our ability to forecast demand and make timely decisions about staffing levels, investments and operating expenses

 

Our ability to meet our strategic growth and profitability objectives depends on how effectively we manage our contact center capacity against the fluctuating and seasonal client demands. Predicting customer demand and making timely staffing level decisions, investments and other operating expenditure commitments in each of our delivery center locations is key to our successful project execution and profitability maximization. We can provide no assurance that we will continue to be able to achieve or maintain desired delivery center capacity utilization, because quarterly variations in client volumes, many of which are outside our control, can have a material adverse effect on our utilization rates. If our utilization rates are below expectations, because of our very high fixed costs of operation, our financial conditions and results of operations could be adversely affected.

 

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If we cannot recruit, hire, train, and retain qualified employees in balance with the demand of our clients, our business will be adversely affected

 

Our business is labor intensive and our ability to locate and train employees with the right skills at the right price point is critical to achieving our growth objective. Demand for qualified personnel with multiple language capabilities and fluency in English may exceed supply. Employees with new backgrounds and skills may also be required to keep pace with evolving technologies and client demands. While we invest and make progress in employee retention, we continue to experience high employee turnover and are continuously recruiting and training replacement staff. Some of our facilities are located in geographies with low unemployment, which makes it costly to hire personnel and in several jurisdictions, jurisdiction-specific wage regulations are changing quickly which make it difficult to recruit. Our inability to attract and retain qualified personnel at costs acceptable under our contracts, our costs associated with attracting, training, and retaining employees, and the challenge of managing the continuously changing and seasonal client demands could have a material adverse affect on our business, financial condition, and results of operations.

 

Our commercial success is subject to the terms of our client contracts, many of which can increase the volatility of our revenue and could impact our margins

 

Many of our contracts have termination for convenience clauses, which could have a material adverse effect on our results of operation. Although many of our contracts can be terminated for convenience, our relationships with our top five clients have ranged from two to 18 years with the majority of these clients having completed multiple contract renewals with us. Yet, our contracts, do not guarantee a minimum revenue level or profitability, and clients may terminate them or materially reduce customer interaction volumes, which would reduce our earning potential. This could have a material adverse effect on our results of operations and makes it harder to make projections.

 

Many of our contracts utilize performance pricing that link some of our fees to the attainment of performance criteria, which could increase the variability of our revenue and operating margin. A majority of our contracts include performance clauses that condition our fees on the achievement of agreed-upon performance criteria. These performance criteria can be complex, and at times they are not entirely within our control. If we fail to satisfy our contract performance metrics, our revenue under the contracts and our operating margin are reduced.

 

We may not always offset increased costs with increased fees under long-term contracts. Not all our larger long-term contracts allow for escalation of fees as our cost of operations increase. While many of our contracts allow periodic fee adjustments based on increases in certain price indices, in the past several years, our payroll costs, including healthcare costs, have increased at rates much greater than increases in these indices. If we cannot negotiate long-term contract terms that provide for fee adjustments to reflect increases in our cost of service delivery, our business, financial conditions and results of operation would be materially impacted.

 

Our contracts seldom address the impacts of currency fluctuation on our costs of delivery. As we continue to leverage our global delivery model, more of our expenses are incurred in currencies other than those in which we bill for services. An increase in the value of certain currencies, such as Australian dollar against the US dollar and Philippine peso, could increase costs for our delivery at offshore sites by increasing our labor and other costs that are denominated in local currencies. Our contractual provisions, cost management efforts, and currency hedging activities may not be able to offset the currency fluctuation impact, resulting in the decrease of the profitability of our contracts.

 

Our pricing depends on effectiveness of our forecasting of the level of effort. Pricing for our services in our technology and strategic consulting businesses is highly contingent on our ability to accurately forecast the level of effort and cost necessary to deliver our services, which is data dependent and could turn out to be materially inaccurate. The inaccurate level of effort in project estimates could yield lower profit margins or become unprofitable, resulting in adverse impacts on our results of operations.

 

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We face special risks associated with our business outside of the United States

 

An important component of our growth strategy is service delivery outside of the United States and our continuing international expansion. In 2014 we derived approximately 51% of our revenue from operations outside of the United States. Conducting business abroad is subject to a variety of risks, including:

 

·

currency exchange rate fluctuations, restrictions on currency movement, and impact of international tax laws could adversely affect our results of operations, if we are forced to maintain assets in currencies other than the US dollars, while our financial results are reported in US dollars;

 

 

·

longer payment cycles and/or difficulties in accounts receivable collections could impact our cash flows and results of operations;

 

 

·

political and economic instability and unexpected changes in regulatory regimes could adversely affect our ability to deliver services overseas and our ability to repatriate cash;

 

 

·

inconsistent regulations, licensing and legal requirements may increase our cost of operations as we endeavor to comply with multiple, complex laws that differ from one country to another;

 

 

·

terrorist attacks and civil unrests in some of the countries where we do business (e.g. tension in the Middle East and Latin America, and terror attacks in Europe), and the resulting need for enhanced security measures may impact our ability to deliver services, threaten the safety of our employees, and increase our costs of operations; and

 

 

·

special challenges in managing risks inherent in international operations, such as unique and prescriptive labor rules and corrupt business environments may cause an inadvertent violation of laws that we may not be able to immediately detect or correct.

 

While we are monitoring and endeavoring to timely mitigate the relevant regulatory, geopolitical and other risk factors related to our operations outside of the United States, we cannot assess with certainty what impact such risks are likely to have over time on business and can provide no assurance that we will always be able to mitigate these risks successfully and avoid material impact to our business and results of operations.

 

Our strategy of growing through selective acquisitions and mergers involves risks of failing to successfully identify, acquire and integrate businesses and realize returns on our investments

 

We evaluate opportunities to expand the scope of our services through acquisitions and mergers. Yet, we may be unable to identify companies that complement our strategies and which are available to be acquired at valuation levels accretive to our business.

 

Our acquisition strategy involves other potential risks, including the inability to integrate acquired companies effectively and realize the full amounts of anticipated synergies and benefits from the acquisitions; the diversion of management’s attention to the integration of the acquired businesses at the expense of delivering results for the legacy business; the risk that we will not be able to retain key employees of the acquired business or that they will not be effective as part of TeleTech operations; the impact of liabilities of the acquired business undiscovered or underestimated as part of the acquisition due diligence; and the unforeseen difficulties experienced by the acquired operations due to the acquisition or the integration which could result in short or longer term effects on our operating results.

 

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Intellectual property infringement by us and by others may adversely impact our ability to innovate and compete

 

Our services or solutions could infringe intellectual property of others impacting our ability to deploy them with clients. There can be no assurance that services and solutions we utilize in our business or offer to clients do not infringe the intellection property rights of others. From time to time, we and members of our supply chain receive assertions that our service offerings or technologies infringe on the patents or other intellectual property rights of third parties. These claims could require us to cease activities, incur expensive licensing costs, or engage in costly litigation, which could adversely affect our business and results of operation.

 

Our intellectual property may not always receive favorable treatment from the United States Patent and Trademark Office, the European Patent Office or similar foreign intellectual property adjudication and registration agencies; and our “patent pending” intellectual property may not receive a patent or may be subject to prior art limitations. The lack of legal system sophistication in certain countries where we do business or lack of commitment to protection of intellectual property rights, may prevent us from being able to defend our intellectual property and related technology against infringement by others, leading to a material adverse effect on our business, results of operations and financial condition.

 

Our results of operation and share price could be adversely affected if we are unable to maintain effective internal controls and we are not able to prevent or timely detect all errors or acts of fraud

 

Any internal and disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individuals acting alone or in collusion with others to override controls. Accordingly, because of the inherent limitations in the design of a cost effective control system, misstatements due to error or fraud may occur and may not always be prevented or timely detected.

 

Our management is required to furnish a report regarding the effectiveness of TeleTech’s internal controls over financial reporting, including a statement as to whether or not our internal controls are effective. If we are unable to conclude that our internal controls over financial reporting are effective now or in the future, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

 

Increases in the cost of communication and data services or significant interruptions in such services could adversely affect our business

 

Our business is significantly dependent on telephone, internet and data service provided by various domestic and foreign communication companies. Any disruption of these services could adversely affect our business. We have taken steps to mitigate our exposure to service disruptions by investing in complex and multi-layered redundancies, and we can transition services among different of our contact centers around the world. Despite these efforts, there can be no assurance, however, that the redundancies we have in place would be sufficient to maintain operations without disruption.

 

Our inability to obtain communication and data services at favorable rates could negatively affect our business results. Where possible, we have entered into long-term contracts with various providers to mitigate short term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of communication services that is not recoverable through an increase in the price of our services could adversely affect our business.

 

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Our financial results may be adversely impacted by foreign currency exchange risk

 

Many contracts that we service from delivery centers outside of the United States (for example in Bulgaria, Canada, Costa Rica, Mexico, and the Philippines) are typically priced, invoiced, and paid in U.S. and Australian dollars, and Euro, while the costs incurred to operate these delivery centers are denominated in the functional currency of the applicable operating subsidiary. The fluctuations between the currencies of the contract and operating currencies present foreign currency exchange risks. Furthermore, because our financial statements are denominated in US dollars, but approximately 24% of our revenue is derived from contracts denominated in other currencies, our results of operations could be adversely affected if the US dollar strengthens significantly against foreign currencies.

 

While we hedge against the effect of exchange rate fluctuations, we can provide no assurance that we will be able to continue to successfully manage this foreign currency exchange risk and avoid adverse impacts on our business, financial condition, and results of operations.

 

Compliance with laws, including unexpected changes to such laws could adversely affect our results of operations

 

Our business is subject to extensive regulation by U.S. and foreign national, state and provincial authorities relating to confidential client and customer data, customer communications, telemarketing practices, and licensed healthcare and financial services activities, among other areas. Costs and complexity of compliance with existing and future regulations could adversely affect our profitability. If we fail to comply with regulations relevant to our business, we could be subject to civil or criminal liability, monitory damages and fines. Private lawsuits and enforcement actions by regulatory agencies may materially increase our costs of operations and impact our ability to serve our clients.

 

As we provide services to clients’ customers residing in over 80 countries, we are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as import/export controls, communication content requirements, trade restrictions and sanctions, tariffs, taxation, data privacy, labor relations, wages and severance, health care requirements, internal and disclosure control obligations, and immigration. Violations of these regulations could impact our reputation and result in financial liability, criminal prosecution, unfavorable publicity, restrictions on our ability to process information and breach of our contractual commitments.

 

Adverse changes in laws or regulations that impact our business may negatively affect the sale of our services, slow the growth of our operations, or mandate changes to how we deliver our services, including our ability to use offshore resources. These changes could threaten our ability to continue to serve certain markets.

 

Volatile and uncertain economic conditions and effect of these conditions on our clients could have an adverse effect on the profitability of our business

 

Ever changing and increasingly unstable global economic conditions affect our clients’ businesses and may, therefore, affect our business and our profitability. We generate revenue based, in large part, on the amount of time our employees devote to our clients’ customers, and our clients’ willingness to invest in their customer relationships. Consequently, our revenue depends on consumers’ interest in and use of our clients’ products and services, which may be adversely affected by general economic conditions. Uncertain economic conditions and slow economic recovery may impact our clients’ willingness to procure our technology and strategic consulting services and may impact products and services that require their customers to use our customer care services. Our business, financial condition, results of operations and cash flows would be adversely affected if any of our major clients were unable to pay for our services due to volatile economic conditions.

 

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The current trend to outsource customer care may not continue and the prices that clients are willing to pay for the services may diminish, adversely affecting our business

 

Our growth depends, in large part, on the willingness of our clients and potential clients to outsource customer care and management services to companies like TeleTech. There can be no assurance that the customer care outsourcing trend will continue; and our clients and potential clients may elect to perform in-house customer care and management services that they currently outsource. Reduction in demand for our services and increased competition from other providers and in-house service alternatives would create pricing pressures and excess capacity that could have an adverse effect on our business, financial condition, and results of operations.

 

Health epidemics could disrupt our business and adversely affect our financial results

 

Our contact centers typically seat hundreds of employees in one location. Accordingly, an outbreak of a contagious infection in one or more of the markets in which we do business may result in significant worker absenteeism, lower capacity utilization rates, voluntary or mandatory closure of our delivery centers, travel restrictions on our employees, and other disruptions to our business. Any prolonged or widespread health epidemic could severely disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations.

 

Our credit facility contains covenant restrictions that may limit our ability to operate our business or execute on our strategy

 

Our credit facility contains common operating and financial covenants that impose operating and financial restrictions on how we operate our business and require us to meet certain financial metrics quarterly. Complying with these covenant restrictions may limit our ability to engage in certain activities, including incurring additional indebtedness, making certain investments and capital expenditures, acquisitions, selling certain assets, stock repurchases, payment of existing obligations, or replenishment of cash reserves.

 

As a result of these covenant restrictions, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. We can provide no assurance that we will be able to meet the financial covenants under our credit facility, or that in the event of noncompliance, will be able to obtain waivers or amendments from the lenders. If we fail to comply with the covenants the lenders could elect to declare all amounts outstanding under the credit facilities, together with accrued interest, to be immediately due and payable, and there can be no assurance that we would have adequate resources to comply with the accelerated repayment schedule or that the assets securing such indebtedness would be sufficient to repay it in full that indebtedness, which could have a material and adverse effect on our financial condition.

 

The volatility of our stock price may result in loss of investment

 

Our share price has been and may continue to be subject to substantial fluctuation. We believe that market prices of outsourced customer care management services stock in general have experienced volatility and such volatility will affect our stock price. As we continue to diversify our service offerings to include growth, technology and strategic consulting, our stock price volatility may stabilize or it may be further impacted by stock price fluctuations in these new relevant industries. In addition to fluctuations specific to our industry and service offerings, we believe that various other factors such as general economic conditions, changes or volatility in the financial markets, and changing market condition for our clients could impact the valuation of our stock. The quarterly variations in our financial results, acquisition and divestiture announcements by us or our competitors, strategic partnerships and new service offering, our failure to meet our growth objectives or exceeding our targets, and securities analysts’ perception about our performance could cause the market price of our shares to fluctuate substantially in the future.

 

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Our Chairman and Chief Executive Officer controls majority of our stock and has control over all matters requiring action by our stockholders

 

Kenneth D. Tuchman, our Chairman and Chief Executive Officer, directly and beneficially owns approximately 65.0% of TeleTech’s common stock. As a result, Mr. Tuchman could exercise control over all matters requiring action by our stockholders, including the election of our entire Board of Directors. Therefore, a change in control of our company could not be effected without his approval, even when such a change of control could benefit our other stockholders.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

We have not received written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2014 fiscal year that remain unresolved.

 

ITEM 2.  PROPERTIES

 

Our corporate headquarters are located in Englewood, Colorado, which consists of approximately 264,000 square feet of owned office space. In addition to our headquarters and the delivery centers used by our Customer Management Services and Customer Growth Services segments discussed below, we also maintain sales and consulting offices in several countries around the world which serve our Customer Technology Services and Customer Strategy Services segments.

 

As of December 31, 2014 we operated 59 delivery centers that are classified as follows:

 

·                  Multi-Client Center — We lease space for these centers and serve multiple clients in each facility;

 

·                  Dedicated Center — We lease space for these centers and dedicate the entire facility to one client; and

 

·                  Managed Center — These facilities are leased or owned by our clients and we staff and manage these sites on behalf of our clients in accordance with facility management contracts.

 

As of December 31, 2014, our delivery centers were located in the following countries:

 

 

 

Multi-Client

Centers

 

Dedicated
Centers

 

Managed
Centers

 

Total
Number of
Delivery
Centers

 

Australia

 

1

 

1

 

 

2

 

Brazil

 

2

 

 

 

2

 

Bulgaria

 

2

 

 

 

2

 

Canada

 

1

 

 

1

 

2

 

Costa Rica

 

 

1

 

 

1

 

Germany

 

 

 

1

 

1

 

Ireland

 

1

 

 

 

1

 

Macedonia

 

1

 

 

 

1

 

Mexico

 

3

 

 

 

3

 

New Zealand

 

1

 

 

 

1

 

Philippines

 

14

 

3

 

 

17

 

South Africa

 

 

 

1

 

1

 

United Kingdom

 

 

1

 

2

 

3

 

United States of America

 

13

 

5

 

4

 

22

 

Total

 

39

 

11

 

9

 

59

 

 

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The leases for our delivery centers have remaining terms ranging from one to seven years and generally contain renewal options, with the exception of one center which we have subleased for the remainder of the lease term through 2021. We believe that our existing delivery centers are suitable and adequate for our current operations, and we have plans to build additional centers to accommodate future business.

 

ITEM 3.  LEGAL 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.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol “TTEC.” The following table sets forth the range of the high and low sales prices per share of the common stock for the quarters indicated as reported on the NASDAQ Global Select Market:

 

 

 

High

 

Low

 

Fourth Quarter 2014

 

$

25.87

 

$

21.81

 

Third Quarter 2014

 

$

29.54

 

$

24.58

 

Second Quarter 2014

 

$

29.24

 

$

23.58

 

First Quarter 2014

 

$

24.98

 

$

21.29

 

 

 

 

 

 

 

Fourth Quarter 2013

 

$

27.07

 

$

23.31

 

Third Quarter 2013

 

$

25.79

 

$

23.03

 

Second Quarter 2013

 

$

24.84

 

$

20.37

 

First Quarter 2013

 

$

21.36

 

$

17.53

 

 

As of December 31, 2014, we had approximately 291 holders of record of our common stock and in previous years we have not declared or paid any dividends on our common stock.

 

On February 24, 2015, our Board of Directors adopted a dividend policy, with the intent to distribute a periodic cash dividend to stockholders of our common stock, after consideration of, among other things, TeleTech’s performance, cash flows, capital needs and liquidity factors. Given our cash flow generation and balance sheet strength, we believe cash dividends and early returns to shareholders through share repurchases, in balance with our investments in innovation and strategic acquisitions, align shareholder interests with the needs of the Company. The initial dividend of $0.18 per common share will be paid on March 16, 2015 to shareholders of record as of March 6, 2015.

 

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Stock Repurchase Program

 

We continue to return capital to our shareholders via an ongoing stock repurchase program (originally authorized by the Board of Directors in 2001). As of December 31, 2014, the cumulative authorized repurchase allowance was $637.3 million, of which we have purchased 42.1 million shares for $625.5 million.

 

Issuer Purchases of Equity Securities During the Fourth Quarter of 2014

 

The following table provides information about our repurchases of equity securities during the quarter ended December 31, 2014:

 

Period

 

Total Number
of Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs (In
thousands)

 

September 30, 2014

 

 

 

 

 

 

 

$

21,614

 

October 1, 2014 - October 31, 2014

 

80,200

 

$

24.65

 

80,200

 

$

19,637

 

November 1, 2014 - November 30, 2014

 

23,000

 

$

24.52

 

23,000

 

$

19,073

 

December 1, 2014 - December 31, 2014

 

311,045

 

$

23.31

 

311,045

 

$

11,822

 

Total

 

414,245

 

 

 

414,245

 

 

 

 

In 2015, through February 28, 2015, we purchased 212,100 additional shares at a cost of $4.7 million. The stock repurchase program does not have an expiration date and the Board authorizes additional stock repurchases under the program from time to time. Effective February 24, 2015, the Board of Directors authorized an additional $25 million for stock repurchases.

 

Equity Compensation Plan Information

 

The following table sets forth, as of December 31, 2014, the number of shares of our common stock to be issued upon exercise of outstanding options, RSUs, warrants and rights, the weighted-average exercise price of outstanding options, warrants and rights, and the number of securities available for future issuance under equity-based compensation plans.

 

Plan Category

 

Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, RSUs,
Warrants and
Rights (a)

 

Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights (b)

 

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

2,975,077

(1)

$

13.67

(2)

1,237,579

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

 

$

 

 

 

 

 

 

 

 

 

 

Total

 

2,975,077

 

 

 

1,237,579

 

 


(1)                Includes options to purchase 1,151,999 shares and 1,823,078 RSUs issued under our equity incentive plans.

(2)                Weighted average exercise price of outstanding stock options; excludes RSUs, which have no exercise price.

 

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Stock Performance Graph

 

The graph depicted below compares the performance of TeleTech common stock with the performance of the NASDAQ Composite Index; the Russell 2000 Index; and customized peer group over the period beginning on December 31, 2009 and ending on December 31, 2014. We have chosen a “New Peer Group” composed of Convergys Corporation (NYSE: CVG), Sykes Enterprises, Incorporated (NASDAQ: SYKE) and Teleperformance (NYSE Euronext: RCF). We believe that the companies in the New Peer Group are relevant to our current business model, market capitalization and position in the overall BPO industry.

 

The graph assumes that $100 was invested on December 31, 2009 in our common stock and in each comparison index, and that all dividends were reinvested. We have not declared any dividends on our common stock. Stock price performance shown on the graph below is not necessarily indicative of future price performance.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among TeleTech Holdings, Inc., The NASDAQ Composite Index,

The Russell 2000 Index, And A Peer Group

 

 

 

December 31,

 

 

 

2009

 

2010

 

2011

 

2012

 

2013

 

2014

 

TeleTech Holdings, Inc.

 

$

100

 

$

103

 

$

81

 

$

89

 

$

120

 

$

118

 

NASDAQ Composite

 

$

100

 

$

118

 

$

119

 

$

139

 

$

197

 

$

224

 

Russell 2000

 

$

100

 

$

127

 

$

122

 

$

141

 

$

196

 

$

206

 

Old Peer Group

 

$

100

 

$

103

 

$

91

 

$

116

 

$

158

 

$

168

 

New Peer Group

 

$

100

 

$

104

 

$

83

 

$

114

 

$

172

 

$

185

 

 

 

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Table of Contents

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the related notes appearing elsewhere in this Form 10-K (amounts in thousands except per share amounts).

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,241,781

(1)

$

1,193,157

(6)

$

1,162,981

(11)

$

1,179,388

(15)

$

1,094,906

 

Cost of services

 

(886,492

)

(846,631

)

(834,803

)

(848,362

)

(789,697

)

Selling, general and administrative

 

(198,553

)

(193,423

)

(182,634

)

(188,802

)

(165,812

)

Depreciation and amortization

 

(56,538

)

(46,064

)

(41,166

)

(44,889

)

(50,218

)

Other operating expenses

 

(3,723

)(2)

(5,640

)(7)

(25,833

)(12)

(3,881

)(16)

(15,434

)(19)

Income from operations

 

96,475

 

101,399

 

78,545

 

93,454

 

73,745

 

Other income (expense)

 

3,984

(3)

(9,330

)(8)

(4,683

)

(1,900

)

8,224

(20)

(Provision for) benefit from income taxes

 

(23,042

)(4)

(20,598

)(9)

61

(13)

(13,279

)(17)

(28,431

)(21)

Noncontrolling interest

 

(5,124

)

(4,083

)

(3,908

)

(4,101

)

(3,664

)

Net income attributable to TeleTech stockholders

 

$

72,293

 

$

67,388

 

$

70,015

 

$

74,174

 

$

49,874

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

49,297

 

51,338

 

54,738

 

56,669

 

60,361

 

Diluted

 

50,102

 

52,244

 

55,540

 

57,963

 

61,792

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.47

 

$

1.31

 

$

1.28

 

$

1.31

 

$

0.83

 

Diluted

 

$

1.44

 

$

1.29

 

$

1.26

 

$

1.28

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

852,475

(5)

$

842,342

(10)

$

847,173

(14)

$

746,978

(18)

$

660,623

 

Total long-term liabilities

 

$

187,780

(5)

$

175,564

(10)

$

175,431

(14)

$

106,720

(18)

$

33,554

 

 


(1)

Includes $30.0 million in revenue generated by Sofica and rogenSi which were acquired in 2014.

(2)

Includes $3.3 million expense related to reductions in force and $0.4 million expense related to the impairment of property and equipment.

(3)

Includes a net $6.7 million benefit related to fair value adjustments to the contingent consideration based on revised estimates of performance against targets for four of our acquisitions.

(4)

Includes a $1.3 million benefit related to restructuring charges, a $0.4 million benefit related to a valuation allowance for equity compensation, a $1.2 million benefit related to the closing of statute of limitations in Canada, $3.8 million of expense related to future contingent payments, $1.3 million of expense related to the resolution of an audit in the Netherlands, and $0.2 million of expense related to other discrete items.

(5)

The Company spent $23.8 million net of cash acquired of $3.5 million in 2014 for the acquisitions of Sofica and rogenSi. Upon acquisitions of Sofica and rogenSi, the Company acquired $59.5 million in assets and assumed $11.1 million in liabilities ($5.4 million in long-term liabilities). The Company also assumed a purchase price payable of $22.4 million related to this acquisition. Of the $22.4 million purchase price payable, $13.2 million was included in long-term liabilities.

(6)

Includes $51.4 million in revenue generated by WebMetro which was acquired in 2013 and TSG which was acquired on December 31, 2012.

 

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(7)

Includes $4.1 million expense related to reductions in force, $0.3 million related to facilities exit charges, $0.1 million expense related to the impairment of property and equipment and $1.1 million expense related to the impact of intangible assets.

(8)

Includes a $3.7 million charge related to the deconsolidation of a subsidiary and a $1.9 million charge related to a fair value adjustment to the contingent consideration based on revised estimates of performance against targets for three of our acquisitions.

(9)

Includes a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments, and $1.8 million of expense related to valuation allowance increases.

(10)

The Company spent $8.9 million net of cash acquired of $6.4 million in 2013 for the acquisition of WebMetro. Upon acquisition of WebMetro, the Company acquired $27.5 million in assets and assumed $9.7 million in liabilities ($0.8 million in long-term liabilities). The Company also assumed a purchase price payable of $2.5 million related to this acquisition. Of the $2.5 million purchase price payable, $1.8 million was included in long-term liabilities.

(11)

Includes $8.9 million in revenue generated by OnState, iKnowtion and Guidon which were acquired in 2012.

(12)

Includes $22.5 million expense related to reductions in force, $0.4 million expense related to facilities exit charges, and $2.9 million expense related to the impairment of property and equipment.

(13)

Includes a $7.6 million benefit related to Australia and New Zealand Transfer Pricing Arrangements, a $1.4 million benefit from the release of uncertain tax positions, a $9.2 million benefit related to restructuring charges, a $1.9 benefit related to return to provision adjustments and $0.1 of expense related to other discrete items.

(14)

The Company spent $35.8 million, net of cash acquired of $3.7 million, in 2012 for the acquisitions of OnState, iKnowtion, Guidon, and TSG through an increase in borrowings on its line of credit. Upon acquisition of these companies, the Company acquired $65.6 million in assets and assumed $12.4 million in liabilities ($3.1 million in long-term liabilities). The Company also assumed a purchase price payable of $12.7 million related to these acquisitions. Of the $12.7 million purchase price payable, $10.8 million was included in long-term liabilities.

(15)

Includes $80.0 million in revenue generated by PRG and eLoyalty which were acquired in late 2010 and mid-2011, respectively.

(16)

Includes $3.6 million expense related to reductions in force, $0.1 million expense related to facilities exit charges, and $0.2 million expense related to the impairment of property and equipment.

(17)

Includes an $8.6 million expense related to the adverse decision by the Canada Revenue Agency regarding the Company’s request for relief from double taxation, an $11.7 million benefit related to the Company’s mediated settlement with the IRS related to U.S. tax refund claims, a $1.4 million benefit related to the 2010 foreign earnings repatriation, and $0.2 million benefit for other discrete items.

(18)

The Company spent $38.0 million for the acquisition of eLoyalty through an increase in borrowings on its line of credit. Upon acquisition of eLoyalty, the Company acquired $64.1 million in assets and assumed $26.1 million in liabilities ($22.7 million in long-term liabilities).

(19)

Includes $13.1 million expense related to reductions in force, $0.4 million expense related to facility exit charges, and a $2.0 million expense related to the impairment of property and equipment.

(20)

Includes a $5.9 million gain due to the settlement of a Newgen legal claim.

(21)

Includes a $5.6 million expense related to repatriation of $105 million of foreign earnings previously considered permanently invested outside the U.S., an increase of $2.5 million in the U.S. deferred tax liability related to foreign tax assets that can no longer offset taxable income in more than one jurisdiction, an increase of $6.6 million in the deferred tax valuation allowance, and a $2.3 million tax expense related to the legal settlement included in Other income (expense) (as discussed above), offset by a $4.0 million benefit related to foreign tax planning strategies associated with the Company’s international operations.

 

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Table of Contents

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Executive Summary

 

TeleTech Holdings, Inc. (“TeleTech”, “the Company”, “we”, “our” or “us”) is a customer engagement management service provider that delivers 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. Our solutions are supported by 46,000 employees delivering services in 24 countries from 59 delivery centers on six continents. Our revenue for fiscal 2014 was $1,242 million.

 

Since our establishment in 1982, we have helped clients strengthen their customer relationships, brand recognition and loyalty through customer engagement solutions. We deliver thought leadership, technology and innovation that create customer strategies designed to differentiate our clients from their competition; data analytics that personalize interactions and increase customer value; and integration services that connect clients’ customer relationship management (“CRM”) system to a cloud-based collaboration platform, leading to customer interactions that are seamless and relevant.

 

Our services are value-oriented, outcome-based, and delivered on a global scale across all of our business segments: Customer Management Services (“CMS”), Customer Growth Services (“CGS”), Customer Technology Services (“CTS”) and Customer Strategy Services (“CSS”). Our integrated customer experience platform differentiates the Company by combining strategic consulting, data analytics, process optimization, system design and integration, operational excellence, and technology solutions and services.

 

We have developed tailored expertise in the automotive, communications, financial services, government, healthcare, logistics, media and entertainment, retail, technology, travel and transportation industries. We target customer-focused industry leaders in the Global 1000 and serve more than 250 global clients.

 

To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and growth businesses, diversifying our traditional business process outsourcing services of our CMS segment into higher-value consulting, data analytics, digital marketing and technology-enabled services. Of the $1,242 million in revenue we reported in 2014, approximately 26% or $318 million came from the CGS, CTS and CSS segments (our “Emerging Segments”), focused on customer-centric strategy, growth or technology-based services, with the remainder of our revenue coming from the traditional business process outsourcing focused CMS segment.

 

We operate our business utilizing four operating and reportable segments, which provide an integrated set of services offering through design, technology enablement, management and growth:

 

Customer Strategy Services

 

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

 

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Table of Contents

 

Customer Technology Services

 

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

 

Customer Management Services

 

We design and manage clients’ front-to-back office processes to deliver just-in-time, personalized, multi-channel interactions. Our front-office solutions seamlessly integrate voice, chat, email, e-commerce and social media to optimize the customer experience for our clients. In addition, we manage certain client back-office processes to enhance their customer-centric view of relationships and maximize operating efficiencies. Our delivery of integrated business processes via our onshore, offshore or work-from-home associates reduces operating costs and allows customer needs to be met more quickly and efficiently, resulting in higher satisfaction, brand loyalty and a stronger competitive position for our clients.

 

Customer Growth Services

 

We offer integrated sales and marketing solutions to help our clients boost revenue in new, fragmented or underpenetrated business-to-consumer or business-to-business markets. We deliver approximately $1 billion in client revenue annually via the acquisition, growth and retention of customers through a combination of our highly trained, client-dedicated sales professionals and our proprietary Revana Analytic Multichannel PlatformTM. This platform continuously aggregates individual customer information across all channels into one holistic view so as to ensure more relevant and personalized communications. As a result of our acquisition of the digital agency Web Metro, we have developed an integrated marketing-to-sales platform that links online searches to live sales through a closed loop, multichannel interface. This platform uses proprietary tools and methodology to capture and use more than 400 marketing and sales data points to engage with customers in relevant conversations.

 

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

 

See Note 3 to the Notes to the Consolidated Financial Statements for additional discussion regarding our segment information.

 

Our 2014 Financial Results

 

In 2014, our revenue increased 4.1% to $1,242 million over the same period in 2013, despite a decrease of 2.4% or $28.0 million due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real. Revenue adjusted for the $28.0 million decrease related to foreign exchange and $1.2 million of lost revenue due to a typhoon in 2013, increased 6.3% over the prior year. The increase in revenue is comprised of growth in the CMS, CGS and CSS segments which collectively grew 6.0%, offset by a decline in the CTS segment. The decline in the CTS segment is primarily related to a decline in revenue from our Avaya based offerings.

 

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Table of Contents

 

Our 2014 income from operations decreased $4.9 million to $96.5 million or 7.8% of revenue, from $101.4 or 8.5% of revenue for 2013. The decrease is primarily due to a $15.4 million reduction in CTS income from operations with $5.6 million related to the decrease in revenue from Avaya based offerings, $3.3 million in additional selling, general and administrative expenses related to investments in sales, marketing and research and development associated with the build out of the CISCO Cloud Solution, $1.4 million of one-time technology and managed services expenses, and $1.0 million associated with severance and other costs related to the integration of TSG into the Customer Technology Services segment. Income from operations in 2014 and 2013 included $3.7 million and $5.6 million of restructuring charges and asset impairments, respectively.

 

Our offshore delivery centers serve clients based in North America and in other countries spans five countries with 19,900 workstations and representing 64% of our global delivery capabilities. Revenue from services provided in these offshore locations was $457 million and represented 43% of our revenue for 2014, as compared to $490 million and 49% of our revenue for 2013, with both years excluding revenue from acquisitions completed outside the CMS and CGS segments.

 

Our cash flow from operations and available credit allowed us to finance a significant portion of our capital needs and stock repurchases through internally generated cash flows. At December 31, 2014, we had $77.3 million of cash and cash equivalents, total debt of $105.9 million, and a total debt to total capitalization ratio of 18.6%.

 

We internally target capacity utilization in our delivery centers at 80% to 90% of our available workstations. As of December 31, 2014, the overall capacity utilization in our multi-client centers was 85%. The table below presents workstation data for our multi-client centers as of December 31, 2014 and 2013. Dedicated and Managed Centers (5,261 and 4,550 workstations, at December 31, 2014 and 2013, respectively) are excluded from the workstation data as unused workstations in these facilities are not available for sale. Our utilization percentage is defined as the total number of utilized multi-client production workstations compared to the total number of available multi-client production workstations. We may change the designation of shared or dedicated centers based on the normal changes in our business environment and client needs.

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

Total
Production
Workstations

 

In Use

 

% In
Use

 

Total
Production
Workstations

 

In Use

 

% In
Use

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-client centers

 

 

 

 

 

 

 

 

 

 

 

 

 

Sites open >1 year

 

24,948

 

21,093

 

85%

 

22,358

 

18,731

 

84%

 

Sites open <1 year

 

982

 

982

 

100%

 

2,028

 

1,417

 

70%

 

Total multi-client centers

 

25,930

 

22,075

 

85%

 

24,386

 

20,148

 

83%

 

 

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Table of Contents

 

We continue to see demand from all geographic regions to utilize our offshore delivery capabilities and expect this trend to continue with our clients. In light of this trend, we plan to continue to selectively retain capacity and expand into new offshore markets. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. Below is a discussion of the policies that we believe may involve a high degree of judgment and complexity.

 

Revenue Recognition

 

We recognize revenue when evidence of an arrangement exists, the delivery of service has occurred, the fee is fixed or determinable and collection is reasonably assured. The BPO inbound and outbound service fees are based on either a per minute, per hour, per transaction or per call basis. Certain client programs provide for adjustments to monthly billings based upon whether we achieve, exceed or fail certain performance criteria. Adjustments to monthly billings consist of contractual bonuses/penalties, holdbacks and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of future services or meeting other specified performance conditions.

 

Revenue also consists of services for agent training, program launch, professional consulting, fully-hosted or managed technology and learning innovation. These service offerings may contain multiple element arrangements whereby we determine if those service offerings represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenue is recognized as services are provided. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into one unit of accounting and recognized over the life of the arrangement or at the time all services and deliverables have been delivered and satisfied. We allocate revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on our best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once we allocate revenue to each deliverable, we recognize revenue when all revenue recognition criteria are met.

 

Periodically, we will make certain expenditures related to acquiring contracts or provide up-front discounts for future services. These expenditures are capitalized as contract acquisition costs and amortized in proportion to the expected future revenue from the contract, which in most cases results in straight-line amortization over the life of the contract. Amortization of these costs is recorded as a reduction to revenue.

 

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Table of Contents

 

During 2014, new guidance was issued related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for years beginning after December 15, 2016 and can be adopted retrospectively or as a cumulative effect adjustment. We are currently determining our implementation approach and assessing the impact on the consolidated financial statements.

 

Income Taxes

 

Accounting for income taxes requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from future projected taxable income.

 

We continually review the likelihood that deferred tax assets will be realized in future tax periods under the “more-likely-than-not” criteria. In making this judgment, we consider all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is required.

 

We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, and settlement of issues under audit.

 

Interest and penalties relating to income taxes and uncertain tax positions are accrued net of tax in Provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income.

 

In the future, our effective tax rate could be adversely affected by several factors, many of which are outside our control. Our effective tax rate is affected by the proportion of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. Further, we are subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate, as well as the requirements, pronouncements and rulings of certain tax, regulatory and accounting organizations. We estimate our annual effective tax rate each quarter based on a combination of actual and forecasted results of subsequent quarters. Consequently, significant changes in our actual quarterly or forecasted results may impact the effective tax rate for the current or future periods.

 

Impairment of Long-Lived Assets

 

We evaluate the carrying value of property, plant and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates.

 

Goodwill and Indefinite-Lived Intangible Assets

 

We evaluate goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

 

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Table of Contents

 

We use a three step process to assess the realizability of goodwill. The first step, Step 0, is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, we analyze changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit. A qualitative assessment also includes analyzing the excess fair value of a reporting unit over its carrying value from impairment assessments performed in previous years. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.

 

If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, we will proceed to Step 1 testing where we calculate the fair value of a reporting unit based on discounted future probability-weighted cash flows. If Step 1 indicates that the carrying value of a reporting unit is in excess of its fair value, we will proceed to Step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as it would in a business combination. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in Step 2.

 

We estimate fair value using discounted cash flows of the reporting units. The most significant assumptions used in these analyses are those made in estimating future cash flows. In estimating future cash flows, we use financial assumptions in our internal forecasting model such as projected capacity utilization, projected changes in the prices we charge for our services, projected labor costs, as well as contract negotiation status. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate. We use a discount rate we consider appropriate for the country where the business unit is providing services.

 

Similar to goodwill, the Company may first use a qualitative analysis to assess the realizability of its indefinite-lived intangible assets. The qualitative analysis will include a review of changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of an indefinite-lived intangible asset. If a quantitative analysis is completed, an indefinite-lived intangible asset (such as a trade name) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value. Fair value was estimated as the discounted value of future revenues arising from a trade name using a royalty rate that a market participant would pay for use of that trade name. An impairment charge is recorded if the trade name’s carrying value exceeds its estimated fair value.

 

Restructuring Liability

 

We routinely assess the profitability and utilization of our delivery centers and existing markets. In some cases, we have chosen to close under-performing delivery centers and complete reductions in workforce to enhance future profitability. Severance payments that occur from reductions in workforce are in accordance with postemployment plans and/or statutory requirements that are communicated to all employees upon hire date; therefore, we recognize severance liabilities when they are determined to be probable and reasonably estimable. Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, rather than upon commitment to a plan.

 

Derivatives

 

We enter into foreign exchange forward and option contracts to reduce our exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. We enter into interest rate swaps to reduce our exposure to interest rate fluctuations associated with our variable rate debt. Upon proper qualification, these contracts are accounted for as cash flow hedges under current accounting standards. From time-to-time, we also enter into foreign exchange forward contracts to hedge our net investment in a foreign operation.

 

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All derivative financial instruments are reported in the accompanying Consolidated Balance Sheets at fair value. Changes in fair value of derivative instruments designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss), a component of Stockholders’ Equity, to the extent they are deemed effective. Based on the criteria established by current accounting standards, all of our cash flow hedge contracts are deemed to be highly effective. Changes in fair value of any net investment hedge are recorded in cumulative translation adjustment in Accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets offsetting the change in cumulative translation adjustment attributable to the hedged portion of our net investment in the foreign operation. Any realized gains or losses resulting from the foreign currency cash flow hedges are recognized together with the hedged transactions within Revenue. Any realized gains or losses resulting from the interest rate swaps are recognized in interest income (expense). Gains and losses from the settlements of our net investment hedges remain in Accumulated other comprehensive income (loss) until partial or complete liquidation of the applicable net investment.

 

We also enter into fair value derivative contracts to reduce our exposure to foreign currency exchange rate fluctuations associated with changes in asset and liability balances. Changes in the fair value of derivative instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income.

 

While we expect that our derivative instruments will continue to be highly effective and in compliance with applicable accounting standards, if our hedges did not qualify as highly effective or if we determine that forecasted transactions will not occur, the changes in the fair value of the derivatives used as hedges would be reflected currently in earnings.

 

Contingencies

 

We record a liability for pending litigation and claims where losses are both probable and reasonably estimable. Each quarter, management reviews all litigation and claims on a case-by-case basis and assigns probability of loss and range of loss.

 

Explanation of Key Metrics and Other Items

 

Cost of Services

 

Cost of services principally include costs incurred in connection with our customer management services, including direct labor, telecommunications, technology costs, printing, sales and use tax and certain fixed costs associated with the delivery centers. In addition, cost of services includes income related to grants we may receive from local or state governments as an incentive to locate delivery centers in their jurisdictions which reduce the cost of services for those facilities.

 

Selling, General and Administrative

 

Selling, general and administrative expenses primarily include costs associated with administrative services such as sales, marketing, product development, legal settlements, legal, information systems (including core technology and telephony infrastructure) and accounting and finance. It also includes outside professional fees (i.e., legal and accounting services), building expense for non-delivery center facilities and other items associated with general business administration.

 

Restructuring Charges, Net

 

Restructuring charges, net primarily include costs incurred in conjunction with reductions in force or decisions to exit facilities, including termination benefits and lease liabilities, net of expected sublease rentals.

 

Interest Expense

 

Interest expense includes interest expense, amortization of debt issuance costs associated with our Credit Facility, and the accretion of deferred payments associated with our acquisitions.

 

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Other Income

 

The main components of other income are miscellaneous income not directly related to our operating activities, such as foreign exchange gains.

 

Other Expenses

 

The main components of other expenses are expenditures not directly related to our operating activities, such as foreign exchange losses.

 

RESULTS OF OPERATIONS

 

Year Ended December 31, 2014 Compared to December 31, 2013

 

The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the years ended December 31, 2014 and 2013 (amounts in thousands). All inter—company transactions between the reported segments for the periods presented have been eliminated.

 

Customer Management Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Revenue

 

$

923,497

 

$

890,883

 

$

32,614

 

3.7

%

Operating Income

 

76,792

 

75,689

 

1,103

 

1.5

%

Operating Margin

 

8.3

%

8.5

%

 

 

 

 

 

The change in revenue for the Customer Management Services segment was attributable to a $79.5 million net increase in client programs and acquisitions offset by program completions of $20.8 million. Revenue was further impacted by a $26.1 million reduction due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real.

 

The operating income as a percentage of revenue decreased slightly to 8.3% in 2014 as compared to 8.5% in 2013. Adjusted for the negative $5.5 million of foreign currency impact, the operating margin increased on operational efficiencies, increased revenue and the related increase in capacity utilization. Included in the operating income was amortization related to acquired intangibles of $0.8 million and zero for the years ended December 31, 2014 and 2013, respectively.

 

Customer Growth Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Revenue

 

$

115,434

 

$

100,996

 

$

14,438

 

14.3

%

Operating Income

 

7,255

 

3,024

 

4,231

 

139.9

%

Operating Margin

 

6.3

%

3.0

%

 

 

 

 

 

The change in revenue for the Customer Growth Services segment was due to the combination of net increases in client programs and the acquisition of WebMetro in August 2013 of $20.7 million collectively, offset by program completions of $5.1 million and a $1.2 million reduction due to foreign currency fluctuations.

 

The operating income as a percentage of revenue increased to 6.3% in 2014 as compared to 3.0% in 2013. This increase was primarily driven by operational improvements and a shift in program mix to higher margin outcome based programs. Included in the operating income was amortization related to acquired intangibles of $2.7 million and $1.5 million for the year ended December 31, 2014 and 2013, respectively.

 

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Table of Contents

 

Customer Technology Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Revenue

 

$

139,182

 

$

152,485

 

$

(13,303

)

(8.7

)%

Operating Income

 

4,519

 

19,965

 

(15,446

)

(77.4

)%

Operating Margin

 

3.2

%

13.1

%

 

 

 

 

 

Revenue for the Customer Technology Services segment decreased by $13.3 million compared to the prior year. The decrease in revenue was primarily attributable to a $13.1 million decrease in revenue from the Avaya based offerings offset, in part, by approximately $2.4 million of additional CISCO Cloud revenue.

 

The operating income as a percentage of revenue decreased to 3.2% in 2014 as compared to 13.1% in 2013. The decrease in operating income was primarily the result of a $5.6 million decline tied to the lower Avaya platform revenue, $3.3 million of additional selling, general and administrative expenses related to investments in sales, marketing and research and development expenses related to the build out of the CISCO cloud solution, $1.4 million related to one-time charges for technology and managed service expenses, a $1.3 million increase in depreciation expense tied to the increased number of cloud solutions in service, and $1.0 million in severance and other cost associated with the integration of TSG into the Customer Technology Services segment. Included in the operating income was amortization related to acquired intangibles of $4.4 million and $4.1 million for the year ended December 31, 2014 and 2013, respectively.

 

Customer Strategy Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

 

Revenue

 

$

63,668

 

$

48,793

 

$

14,875

 

30.5

%

Operating Income

 

7,909

 

2,721

 

5,188

 

190.7

%

Operating Margin

 

12.4

%

5.6

%

 

 

 

 

 

The increase in revenue for the Customer Strategy Services segment was related to organic growth across our geographies and our consulting practices including our strategy, operations and technology, analytics and learning innovations practices and the acquisition of rogenSi in August 2014.

 

The operating income as a percentage of revenue increased to 12.4% in 2014 as compared to 5.6% in 2013. The improvement in the CSS operating income was primarily the result of the 30.5% increase in revenue in combination with the restructure and full integration of this segment’s multiple acquisitions initiated in the third quarter of 2013. Additionally the increase in operating income was partially related to the impairment charges of $1.1 million recorded as a result of decreased revenues resulting from the deconsolidation of a subsidiary in the prior period (see Note 12 to the Consolidated Financial Statements for further details). Included in the operating income was amortization expense related to acquired intangibles of $2.1 million and $1.6 million for the year ended December 31, 2014 and 2013, respectively.

 

Interest Income (Expense)

 

Interest income decreased to $1.8 million in 2014 from $2.6 million in 2013. Interest expense decreased to $6.9 million during 2014 from $7.5 million for the comparable period in 2013, primarily due to decreased accretion of deferred acquisition costs.

 

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Other Income (Expense), Net

 

Included in the year ended December 31, 2014, was a combined net $6.7 million benefit related to fair value adjustments of the contingent consideration based on revised estimates of performance against targets for four of our acquisitions (see Note 10 of the Notes to the Consolidated Financial Statements for further details).

 

Included in the year ended December 31, 2013, was a $3.7 million charge related to the deconsolidation of a subsidiary (see Note 24 of the Notes to the Consolidated Financial Statements for further details).

 

Income Taxes

 

The reported effective tax rate for 2014 was 22.9% as compared to 22.4% for 2013. The effective tax rate for 2014 was impacted by earnings in international jurisdictions currently under an income tax holiday, a $1.3 million benefit related to restructuring charges, a $0.4 million benefit related to a valuation allowance for equity compensation, a $1.2 million benefit related to the closing of statute of limitations in Canada, $3.8 million of expense related to future contingent payments, $1.3 million of expense related to the resolution of an audit in the Netherlands, and $0.2 million of expense related to other discrete items. Without these items our effective tax rate for the year ended December 31, 2014 would have been 19.8%. In the year ended December 31, 2013, our effective tax rate was 22.4%. Without a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments and $1.8 million of expense related to changes in valuation allowance, our effective tax rate for the year ended December 31, 2013 would have been 21.5%.

 

Year Ended December 31, 2013 Compared to 2012

 

The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the years ended December 31, 2013 and 2012 (amounts in thousands). All inter—company transactions between the reported segments for the periods presented have been eliminated.

 

Customer Management Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

Revenue

 

$

890,883

 

$

923,774

 

$

(32,891

)

(3.6

)%

Operating Income

 

75,689

 

60,271

 

15,418

 

25.6

%

Operating Margin

 

8.5

%

6.5

%

 

 

 

 

 

The change in revenue for the Customer Management Services segment was attributable to a $68.5 million net increase in client programs offset by program completions of $52.2 million. Revenue was further impacted by a $10.4 million reduction due to foreign currency fluctuations, primarily the Australian dollar, a $37.6 million reduction related to the exit of our business in Spain, and $1.2 million in lost revenue due to a typhoon in the third quarter of 2013.

 

The operating income as a percentage of revenue increased to 8.5% in 2013 as compared to 6.5% in 2012. This increase in margin was primarily due to the improvement in utilization of our capacity, exit of our business in Spain as described above and the reduction of restructuring expenses noted below. These increases were offset by a $6.6 million adverse impact from foreign currency fluctuations and a $0.8 million negative impact due to lost revenue from a typhoon. During 2013 and 2012, we recorded $4.2 million and $8.2 million, respectively, in restructuring and impairment charges in various locations to better align our capacity and workforce with current business needs. In addition, during 2012, we recorded $15.1 million in restructuring charges and $0.4 million in impairment charges as a result of our decision to exit Spain. These items were offset during 2012 in part by a $4.6 million accrual release for salaries expense due to an authoritative ruling in Spain related to the legally required cost of living adjustments for our employees’ salaries.

 

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Table of Contents

 

Customer Growth Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

Revenue

 

$

100,996

 

$

100,772

 

$

224

 

0.2

%

Operating Income

 

3,024

 

2,258

 

766

 

33.9

%

Operating Margin

 

3.0

%

2.2

%

 

 

 

 

 

The change in revenue for the Customer Growth Services segment was due to the combination of net increase in client programs and the acquisition of WebMetro in August 2013 of $20.0 million in an aggregate amount, offset by program completions of $19.8 million.

 

The operating income as a percentage of revenue increased to 3.0% in 2013 as compared to 2.2% in 2012. Increases in income were primarily driven by a $1.8 million charge related to the impairment of the trade-name intangible asset due to the rebranding of our Direct Alliance subsidiary to Revana during the first quarter of 2012. There were also operational improvements and a shift in program mix to additional outcome-based higher margin programs. These increases were offset by net declines in client volumes, changes in pricing, the cost of ramping multiple clients and increases in amortization expense related to WebMetro. Included in the operating income was amortization related to acquired intangibles of $1.5 million and $0.7 million for the year ended December 31, 2013 and 2012, respectively.

 

Customer Technology Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

Revenue

 

$

152,485

 

$

96,848

 

$

55,637

 

57.4

%

Operating Income

 

19,965

 

15,714

 

4,251

 

27.1

%

Operating Margin

 

13.1

%

16.2

%

 

 

 

 

 

The increase in revenue for the Customer Technology Services segment was related to organic growth for eLoyalty in consulting and managed services and the acquisition of TSG on December 31, 2012.

 

The operating income as a percentage of revenue decreased to 13.1% in 2013 as compared to 16.2% in 2012. This decrease was related to investments to integrate TSG, increases in sales and marketing expenses, and a $2.6 million increase in amortization expense related to TSG. Included in the operating income was amortization related to acquired intangibles of $4.1 million and $1.8 million for the year ended December 31, 2013 and 2012, respectively.

 

Customer Strategy Services

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

Revenue

 

$

48,793

 

$

41,587

 

$

7,206

 

17.3

%

Operating Income

 

2,721

 

302

 

2,419

 

801.0

%

Operating Margin

 

5.6

%

0.7

%

 

 

 

 

 

The increase in revenue for the Customer Strategy Services segment was related to a combination of growth in operational consulting, analytics and learning innovations revenue, and the acquisitions of iKnowtion, LLC (“iKnowtion”) and Guidon Performance Solutions (“Guidon”) during 2012.

 

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The operating income as a percentage of revenue increased to 5.6% in the 2013 as compared to 0.7% in 2012. This increase was related to the full integration of the businesses comprising the Customer Strategy Services segment, including their leadership, consultants, the services portfolio and infrastructure, and a consolidation of their geographies and personnel realignment. This integration allowed for additional revenue to be generated as well as cost savings based on the realignment.  The increase also included the impairment charges of $1.1 million recorded as a result of decreased revenues resulting from the deconsolidation of a subsidiary in the second quarter of 2013 (see Notes 12 and 24 of the Notes to the Consolidated Financial Statements for further details). Included in the operating income was amortization expense related to acquired intangibles of $1.6 million and $1.2 million for the year ended December 31, 2013 and 2012, respectively.

 

Interest Income (Expense)

 

Interest income decreased to $2.6 million in 2013 from $3.0 million in 2012. Interest expense increased to $7.5 million during 2013 from $6.7 million for the comparable period in 2012, due to higher average borrowings on our credit facility and additional accretion of deferred acquisition costs.

 

Other Income (Expense), Net

 

Included in the year ended December 31, 2013, was a $3.7 million charge related to the deconsolidation of a subsidiary (see Note 24 of the Notes to the Consolidated Financial Statements for further details). Also included was a $1.9 million charge related to a fair value adjustment of the contingent consideration based on revised estimates of performance against targets for three of our acquisitions (see Note 10 of the Notes to the Consolidated Financial Statements for further details).

 

Income Taxes

 

The reported effective tax rate for 2013 was 22.4% as compared to (0.1)% for 2012. The effective tax rate for 2013 was impacted by earnings in international jurisdictions currently under an income tax holiday, a $1.8 million benefit related to restructuring charges, a $1.5 million benefit related to return to provision adjustments, and $1.8 million of expenses related to changes in valuation allowance. Without these items our effective tax rate for the year ended December 31, 2013 would have been 21.5%. In the year ended December 31, 2012, our effective tax rate would have been 19.9% without a $7.6 million tax benefit related to Australia and New Zealand transfer pricing, a $1.4 million benefit from the release of uncertain tax positions, a $9.2 million benefit related to restructuring charges, a $1.9 million benefit related to return to provision adjustments and $0.1 million of expense related to other discrete items.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Agreement, dated June 3, 2013 (the “Credit Agreement”). During the year ended December 31, 2014, we generated positive operating cash flows of $94.1 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months.

 

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

 

We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts and interest rate swaps through our cash flow hedging program. Please refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.

 

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We primarily utilize our Credit Agreement to fund working capital, general operations, stock repurchases and other strategic activities, such as the acquisitions described in Note 2 of the Notes to Consolidated Financial Statements. As of December 31, 2014 and 2013, we had borrowings of $100.0 million and $100.0 million, respectively, under our Credit Agreement, and our average daily utilization was $285.9 million and $238.1 million for the years ended December 31, 2014 and 2013, respectively. After consideration for issued letters of credit under the Credit Agreement, totaling $3.2 million, our remaining borrowing capacity was $596.8 million as of December 31, 2014. As of December 31, 2014, we were in compliance with all covenants and conditions under our Credit Agreement.

 

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

 

The following discussion highlights our cash flow activities during the years ended December 31, 2014, 2013, and 2012.

 

Cash and Cash Equivalents

 

We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $77.3 million and $158.0 million as of December 31, 2014 and 2013, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.

 

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

 

Cash Flows from Operating Activities

 

For the years 2014, 2013 and 2012 we reported net cash flows provided by operating activities of $94.1 million, $138.0 million and $106.9 million, respectively. Despite increases in net income and depreciation and amortization of $16.4 million, the decrease was primarily due to a $48.3 million decrease in cash collected from accounts receivable and an increase of $5.6 million in payments made for operating expenses. The net increase of $31.1 million from 2012 to 2013 was primarily due to a $20.3 million decrease in cash spent on prepaid and other assets, a $13.8 million decrease in payments made for operating expenses, a $9.2 million increase in cash from net income and a $6.9 million increase in cash collected from accounts receivable. This increase was partially offset by a $19.1 million decrease in cash prepayments from customers.

 

Cash Flows from Investing Activities

 

For the years 2014, 2013 and 2012, we reported net cash flows used in investing activities of $91.9 million, $59.5 million and $80.9 million, respectively. The net increase in cash used in investing activities from 2013 to 2014 was primarily due to increased spending on acquisitions of $15.3 million along with a $17.3 increase in capital expenditures. The net decrease in cash used in investing activities from 2012 to 2013 was primarily due to the $31.7 million decrease in acquisition related spending offset partially by a $10.3 million increase in net spend on capital expenditures.

 

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Table of Contents

 

Cash Flows from Financing Activities

 

For the years 2014, 2013 and 2012, we reported net cash flows used in financing activities of $74.2 million, $70.7 million and $35.0 million, respectively. The change in net cash flows from 2013 to 2014 was primarily due to $8.5 million of payments for contingent consideration related to acquisitions and an increase of $1.5 million in dividends paid to noncontrolling interests, partially offset by a $8.0 million increase in net borrowings from our line of credit. The change from 2012 to 2013 was due to a decrease in net borrowings on our line of credit of $52.0 million, a decrease in proceeds received from other debt of $4.3 million and an increase in dividends paid to noncontrolling interests of $2.3 million. This increase in cash used in financing activities was partially offset against a decrease in cash used to repurchase common stock of $24.7 million.

 

Free Cash Flow

 

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) was $26.5 million, $87.6 million and $66.4 million for the years 2014, 2013 and 2012, respectively. The decrease from 2013 to 2014 resulted primarily from a decrease in cash flow from operating activities and a $17.3 million increase in capital expenditures. The increase from 2012 to 2013 resulted primarily from the $31.1 million increase in cash flow from operating activities offset by a $9.8 million increase in capital expenditures, net of grant funds received.

 

Presentation of Non-GAAP Measurements

 

Free Cash Flow

 

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

 

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

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Net cash provided by operating activities

 

$

94,090

 

$

137,979

 

$

106,920

 

Less: Purchases of property, plant and equipment

 

67,641

 

50,364

 

40,543

(1)

Free cash flow

 

$

26,449

 

$

87,615

 

$

66,377

 

 


(1)                Purchases of property, plant and equipment for the year ended 2012 is net of proceeds from a government grant of $0.1 million.

 

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Table of Contents

 

Obligations and Future Capital Requirements

 

Future maturities of our outstanding debt and contractual obligations as of December 31, 2014 are summarized as follows (amounts in thousands):

 

 

 

Less than
1 Year

 

1 to 3
Years

 

3 to 5
Years

 

Over 5
Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Facility(1)

 

$

2,582

 

$

4,446

 

$

100,828

 

$

 

$

107,856

 

Equipment financing arrangements

 

171

 

447

 

78

 

 

696

 

Contingent consideration

 

11,991

 

13,703

 

 

 

25,694

 

Purchase obligations

 

31,363

 

22,164

 

 

 

53,527

 

Operating lease commitments

 

43,411

 

60,753

 

28,247

 

3,826

 

136,237

 

Other debt

 

3,052

 

1,795

 

390

 

 

5,237

 

Total

 

$

92,570

 

$

103,308

 

$

129,543

 

$

3,826

 

$

329,247

 

 


(1)                Includes estimated interest payments based on the weighted-average interest rate, unused commitment fees, current interest rate swap arrangements, and outstanding debt as of December 31, 2014.

 

·     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 $1.9 million related to uncertain tax positions because we cannot reliably estimate the timing of future cash payments. See Note 11 to the Notes to the Consolidated Financial Statements for further discussion.

 

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

 

Purchase Obligations

 

Occasionally we contract with certain of our communications clients to provide us with telecommunication services. These clients currently represent approximately 17% of our total annual revenue. We believe these contracts are negotiated on an arm’s-length basis and may be negotiated at different times and with different legal entities.

 

Future Capital Requirements

 

We expect total capital expenditures in 2015 to be within the range of $70 to $80 million. Approximately 70% of these expected capital expenditures are to support growth in our business and 30% relate to the maintenance of existing assets. The anticipated level of 2015 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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We may consider restructurings, dispositions, mergers, acquisitions and other similar transactions. Such transactions could include the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures or the incurrence, assumption, or refinancing of indebtedness and could be material to the consolidated financial condition and consolidated results of our operations. Our capital expenditures requirements could also increase materially in the event of acquisition or joint ventures. In addition, as of December 31, 2014, we were authorized to purchase an additional $11.8 million of common stock under our stock repurchase program (see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Form 10-K). Our stock repurchase program does not have an expiration date.

 

The launch of large client contracts may result in short-term negative working capital because of the time period between incurring the costs for training and launching the program and the beginning of the accounts receivable collection process. As a result, periodically we may generate negative cash flows from operating activities.

 

Debt Instruments and Related Covenants

 

On June 3, 2013, we 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 us to request an increase in total commitments up to $1.0 billion, under certain conditions, including additional commitments from members of the syndicate. 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 our prior credit facility entered into during 2010 and as amended in 2012.

 

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 our discretion, direct borrowing options under the Credit Agreement include (i) Eurodollar loans with one, two, three, and six month terms, and/or (ii) overnight base rate loans. 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. We may increase the maximum aggregate commitment under the Credit Agreement to $1.0 billion if certain conditions are satisfied.

 

We primarily utilize our credit facilities to fund working capital, general operations, stock repurchases, acquisitions, and other strategic activities. As of December 31, 2014 and 2013, we had borrowings of $100.0 million and $100.0 million, respectively, under the Credit Agreement. During 2014, 2013 and 2012, borrowings accrued interest at an average rate of approximately 1.2%, 1.4%, and 1.6% per annum, respectively, excluding unused commitment fees. Our daily average borrowings during 2014, 2013 and 2012 were $285.9 million, $238.1 million and $154.5 million, respectively. Availability was $596.8 million as of December 31, 2014, reduced from $700.0 million by the outstanding borrowing and by $3.2 million in issued letters of credit; and was $596.5 million as of December 31, 2013, reduced from $700.0 million by the outstanding borrowing and by $3.5 million in issued letters of credit.

 

From time-to-time, we may have unsecured, uncommitted bank lines of credit to support working capital for a few foreign subsidiaries. As of December 31, 2014 and 2013, we had no foreign loans outstanding.

 

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Client Concentration

 

During 2014, one of our clients represented 11% of our total annual revenue. Our five largest clients accounted for 38%, 40% and 39% of our annual revenue for the years ended December 31, 2014, 2013 and 2012, respectively. We have long-term relationships with our top five clients, ranging from two to 18 years, with the majority of these clients having completed multiple contract renewals with us. The relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis and varies greatly based upon specific contract terms. In addition, clients may adjust business volumes served by us based on their business requirements. We believe the risk of this concentration is mitigated, in part, by the long-term contracts we have with our largest clients. Although certain client contracts may be terminated for convenience by either party, we believe this risk is mitigated, in part, by the service level disruptions and transition/migration costs that would arise for our clients.

 

The contracts with our five largest clients expire between 2015 and 2017. Additionally, a particular client may have multiple contracts with different expiration dates. We have historically renewed most of our contracts with our largest clients, but there can be no assurance that future contracts will be renewed or, if renewed, will be on terms as favorable as the existing contracts.

 

Recently Issued Accounting Pronouncements

 

We discuss the potential impact of recent accounting pronouncements in Note 1 to the Notes to the Consolidated Financial Statements.

 

ITEM 7A.  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 risks due to changes in interest rates and foreign currency exchange rates (as measured against the U.S. dollar); as well as credit risk associated with potential non-performance of our counterparty banks. These exposures are directly related to our normal operating and funding activities. We enter into derivative instruments to manage and reduce the impact of currency exchange rate changes, primarily between the U.S. dollar/Canadian dollar, the U.S. dollar/Philippine peso, the U.S. dollar/Mexican peso, and the Australian dollar/Philippine peso. We enter into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. To mitigate against credit and non-performance risk, it is our policy to only enter into derivative contracts and other financial instruments with investment grade counterparty financial institutions and, correspondingly, our derivative valuations reflect the creditworthiness of our counterparties. As of the date of this report, we have not experienced, nor do we anticipate, any issue related to derivative counterparty defaults.

 

Interest Rate Risk

 

We entered into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. The interest rate on our Credit Agreement is variable based upon the Prime Rate and LIBOR and, therefore, is affected by changes in market interest rates. As of December 31, 2014, we had $100.0 million of outstanding borrowings under the Credit Agreement. Based upon average daily outstanding borrowings during the years ended December 31, 2014 and 2013, interest accrued at a rate of approximately 1.2% and 1.4% per annum, respectively. If the Prime Rate or LIBOR increased by 100 basis points during the quarter, there would not have been a material impact to our consolidated financial position or results of operations.

 

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The Company’s interest rate swap arrangements as of December 31, 2014 and 2013 were as follows:

 

 

 

Notional
Amount

 

Variable Rate
Received

 

Fixed Rate
Paid

 

Contract
Commencement
Date

 

Contract
Maturity
Date

 

As of December 31, 2014

 

$

25 million

 

1 - month LIBOR

 

2.55

%

April 2012

 

April 2016

 

and 2013

 

15 million

 

1 - month LIBOR

 

3.14

%

May 2012

 

May 2017

 

 

 

$

40 million

 

 

 

 

 

 

 

 

 

 

Foreign Currency Risk

 

Our subsidiaries in Canada, Costa Rica, Mexico, and the Philippines use the local currency as their functional currency for paying labor and other operating costs. Conversely, revenue for these foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. dollars or other foreign currencies. As a result, we may experience foreign currency gains or losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. For the years ended December 31, 2014, 2013 and 2012, revenue associated with this foreign exchange risk was 31%, 32% and 37% of our consolidated revenue, respectively.

 

The following summarizes relative (weakening) strengthening of local currencies that are relevant to our business:

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Canadian Dollar vs. U.S. Dollar

 

(8.7

)%

(7.3

)%

2.3

%

Philippine Peso vs. U.S. Dollar

 

(0.9

)%

(7.6

)%

6.4

%

Mexican Peso vs. U.S. Dollar

 

(13.0

)%

(0.3

)%

7.0

%

Australian Dollar vs. U.S. Dollar

 

(8.8

)%

(16.9

)%

1.9

%

Euro vs. U.S. Dollar

 

(13.3

)%

4.0

%

2.0

%

Philippine Peso vs. Australian Dollar

 

7.2

%

7.9

%

6.4

%

 

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

 

Cash Flow Hedging Program

 

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

 

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

 

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Table of Contents

 

Our cash flow hedging instruments as of December 31, 2014 and 2013 are summarized as follows (in thousands). All hedging instruments are forward contracts, except as noted.

 

As of December 31, 2014

 

Local
Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

% Maturing
in 2015

 

Contracts
Maturing
Through

 

Canadian Dollar

 

1,500

 

$

1,441

 

100.0

%

June 2015

 

Philippine Peso

 

17,428,000

 

398,046

(1)

40.0

%

August 2019

 

Mexican Peso

 

2,532,000

 

179,089

 

29.7

%

September 2019

 

New Zealand Dollar

 

490

 

381

 

100.0

%

July 2015

 

 

 

 

 

$

578,957

 

 

 

 

 

 

As of December 31, 2013

 

Local
Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

 

 

 

 

Canadian Dollar

 

7,500

 

$

7,336

 

 

 

 

 

Philippine Peso

 

17,355,000

 

404,638

(1)

 

 

 

 

Mexican Peso

 

2,305,500

 

166,132

 

 

 

 

 

British Pound Sterling

 

1,200

 

1,853

(2)

 

 

 

 

New Zealand Dollars

 

150

 

117

 

 

 

 

 

 

 

 

 

$

580,076

 

 

 

 

 

 


(1)                Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on December 31, 2014 and December 31, 2013.

(2)                Includes contracts to purchase British pound sterling in exchange for Euros, which are translated into equivalent U.S. dollars on December 31, 2013.

 

The fair value of our cash flow hedges at December 31, 2014 was assets/(liabilities) (in thousands):

 

 

 

December 31,

 

Maturing in

 

 

 

2014

 

2015

 

Canadian Dollar

 

$

(152

)

$

(152

)

Philippine Peso

 

(14,816

)

(7,210

)

Mexican Peso

 

(14,196

)

(5,121

)

New Zealand Dollar

 

(3

)

(3

)

 

 

$

(29,167

)

$

(12,486

)

 

Our cash flow hedges are valued using models based on market observable inputs, including both forward and spot foreign exchange rates, implied volatility, and counterparty credit risk. The fair value of our cash flow hedges decreased by $17.7 million from December 31, 2013 to December 31, 2014. The decrease in fair value from December 31, 2013 largely reflects a broader strengthening in the U.S. dollar during 2014.

 

We recorded net (losses)/gains of $(2.4) million, $8.0 million, and $4.6 million for settled cash flow hedge contracts for the years ended December 31, 2014, 2013, and 2012, respectively. These (losses)/gains were reflected in Revenue in the accompanying Consolidated Statements of Comprehensive Income (Loss). If the exchange rates between our various currency pairs were to increase or decrease by 10% from current period-end levels, we would incur a material gain or loss on the contracts. However, any gain or loss would be mitigated by corresponding increases or decreases in our underlying exposures.

 

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Table of Contents

 

Other than the transactions hedged as discussed above and in Note 9 in the accompanying Consolidated Financial Statements, the majority of the transactions of our U.S. and foreign operations are denominated in their respective local currency. However, transactions are denominated in other currencies from time-to-time. We do not currently engage in hedging activities related to these types of foreign currency risks because we believe them to be insignificant as we endeavor to settle these accounts on a timely basis. For the years ended 2014 and 2013, approximately 24% and 22%, respectively, of revenue was derived from contracts denominated in currencies other than the U.S. Dollar. Our results from operations and revenue could be adversely affected if the U.S. Dollar strengthens significantly against foreign currencies.

 

Fair Value of Debt and Equity Securities

 

We did not have any investments in debt or equity securities as of December 31, 2014 or 2013.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements required by this item are located beginning on page F-1 of this report and incorporated herein by reference.

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

This Form 10-K includes the certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of TeleTech’s disclosure controls and procedures (as required by Rule 13a-15(b) and 15d-15(b) under the “Exchange Act”) as of December 31, 2014. Based on that evaluation, the principal executive officer and the principal financial officer of TeleTech have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide such reasonable assurance.

 

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 the control system are met. Further, the design of a control system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. 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 design of any system of controls is to provide reasonable assurance of the effectiveness of disclosure controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such assumptions, while reasonable, may not take into account all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be prevented or detected.

 

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Table of Contents

 

Our management has conducted an assessment of its internal control over financial reporting as of December 31, 2014 as required by Section 404 of the Sarbanes-Oxley Act. Management’s report on our internal control over financial reporting is included below. The Independent Registered Public Accounting Firm’s report with respect to the effectiveness of our internal control over financial reporting is included on page F-2. Management has concluded that internal control over financial reporting is effective as of December 31, 2014.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Management, under the supervision of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of Directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

 

During 2014, the Company acquired Sofica and rogenSi and have excluded these businesses, from its assessment of internal control over financial reporting as of December 31, 2014. Sofica’s total assets and total revenues represent 2% and 1%, respectively, and rogenSi’s total assets and total revenues represent 5% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.

 

In connection with the preparation of this Form 10-K, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the framework established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of that evaluation, management has concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2014.

 

The effectiveness of our internal control over financial reporting as of December 31, 2014 has also been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included in “Part II — Item 8 — Financial Statements and Supplementary Data.”

 

ITEM 9B.  OTHER INFORMATION

 

None.

 

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Table of Contents

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information in our 2015 Definitive Proxy Statement on Schedule 14A, which will be filed no later than 120 days after December 31, 2014 (the “2015 Proxy Statement”) regarding our executive officers under the heading “Information Regarding Executive Officers” is incorporated herein by reference. We have both a Code of Ethical Conduct for Executive and Financial Managers and a Code of Conduct. The Code of Ethical Conduct for Executive and Financial Officers applies to our Chief Executive Officer, Chief Financial Officer, presidents of our business segments, Controller, Treasurer, the General Counsel, Chief Audit executive, senior financial officers of each operating segment and other persons performing similar functions. The Code of Conduct applies to all directors, officers, employees and members of our supply chain (as applicable). Both the Code of Ethical Conduct for Executive and Financial Officers and the Code of Conduct are posted on our website at www.teletech.com on the Corporate Governance page. We will post on our website any amendments to or waivers of the Code of Ethical Conduct for Executive and Financial Officers and our Code of Conduct, in accordance with applicable laws and regulations.

 

There have been no material changes to the procedures by which stockholders may recommend nominees to the board of directors. The remaining information called for by this Item 10 is incorporated by reference herein from our 2015 Proxy Statement.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

The information in our 2015 Proxy Statement is incorporated herein by reference.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information regarding these matters is included in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”. Also the information in our 2015 Proxy Statement is incorporated herein by reference.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information in our 2015 Proxy Statement is incorporated herein by reference.

 

ITEM 14.  PRINCIPAL ACCOUNTANTS FEES AND SERVICES

 

The information in our 2015 Proxy Statement is incorporated herein by reference.

 

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PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)         The following documents are filed as part of this report:

 

1.             Consolidated Financial Statements.

 

The Index to Consolidated Financial Statements is set forth on page F-1 of this report.

 

2.             Financial Statement Schedules.

 

All schedules for TeleTech have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information is included in the respective Consolidated Financial Statements or notes thereto.

 

3.             Exhibits.

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

3.01**

 

Restated Certificate of Incorporation of TeleTech Holdings, Inc. filed with the State of Delaware on August 1, 1996 (incorporated by reference to Exhibit 3.1 to TeleTech’s Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996)

 

 

 

3.02**

 

Second Amended and Restated Bylaws of TeleTech (incorporated by reference to Exhibit 3.02 to TeleTech’s Current Report on Form 8-K filed on May 28, 2009)

 

 

 

10.04**

 

TeleTech Holdings, Inc. Amended and Restated 1999 Stock Option and Incentive Plan (incorporated by reference as Exhibit 10.04 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2012)

 

 

 

10.06**

 

TeleTech Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference as Appendix A to TeleTech’s Definitive Proxy Statement, filed April 12, 2010)

 

 

 

10.20**

 

Form of Non-Qualified Stock Option Agreement (below Vice President) (incorporated by reference as Exhibit 10.06 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.21**

 

Form of Non-Qualified Stock Option Agreement (Vice President and above) (incorporated by reference as Exhibit 10.07 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.22**

 

Form of Amendment to Restricted Stock Unit Agreement (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

 

 

10.23**

 

Form of Restricted Stock Unit Agreement (incorporated by reference as Exhibit 10.3 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

 

 

10.24**

 

Form of Restricted Stock Unit Agreement (Section 16 Officers) (incorporated by reference as Exhibit 4.3 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.25**

 

Form of Restricted Stock Unit Agreement (Non-Section 16 Employees) (incorporated by reference as Exhibit 4.4 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.26**

 

Form of Independent Director Restricted Stock Unit Agreement (incorporated by reference as Exhibit 4.5 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.27**

 

Form of Global Restricted Stock Unit Agreement (Operating Committee Member) (incorporated by reference to Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013)

 

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Table of Contents

 

Exhibit No.

 

Description

10.28**

 

Form of Global Restricted Stock Unit Agreement (Non-Operating Committee Member) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013)

 

 

 

10.29*

 

Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (other employees) effective July 1, 2014

 

 

 

10.30*

 

Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (Directors and Executive Committee Members) effective July 1, 2014

 

 

 

10.31**

 

Form of Non-Qualified Stock Option Agreement (Non-Employee Director) (incorporated by reference as Exhibit 10.08 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.32*

 

Independent Director Compensation Arrangements (effective January 1, 2015)

 

 

 

10.33**

 

Form of Indemnification Agreement with Directors (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

 

 

10.40**

 

Employment Agreement between Kenneth D. Tuchman and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.68 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001)

 

 

 

10.41**

 

Amendment to Employment Agreement between Kenneth D. Tuchman and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.17 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.42**

 

Amendment dated September 17, 2008 to Stock Option Agreement between Kenneth D. Tuchman and TeleTech (incorporated by reference as Exhibit 10.19 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.50**

 

Employment Agreement between James E. Barlett and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.66 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001)

 

 

 

10.52**

 

Amendment to Employment Agreement between James E. Barlett and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.13 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.53**

 

Amendment dated September 17, 2008 to Stock Option Agreement between James E. Barlett and TeleTech (incorporated by reference as Exhibit 10.15 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.54**

 

Second Amendment, dated as of April 19, 2011, to TeleTech Holdings, Inc. Restricted Stock Unit Agreement by and between TeleTech Holdings, Inc. and James E. Barlett dated June 22, 2007 (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed April 22, 2011)

 

 

 

10.60**

 

Employment Agreement between Regina Paolillo and TeleTech Holdings, Inc. effective as of November 3, 2011 (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed October 27, 2011)

 

 

 

10.62**

 

Restricted Stock Unit Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (RSU Performance Agreement) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011)

 

 

 

10.63**

 

Non-Qualified Stock Option Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (Option Agreement)(incorporated by reference as Exhibit 10.3 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011)

 

 

 

10.70*

 

Separation Agreement and Release of Claims between Brian Shepherd and TeleTech Services Corporation effective as of January 31, 2015

 

45



Table of Contents

 

Exhibit No.

 

Description

10.80**

 

Employment Agreement between Keith Gallacher and TeleTech Services Corporation effective as of June 3, 2013 (incorporated by reference as Exhibit 10.2 to TeleTech’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013)

 

 

 

10.90**

 

Amended and Restated Credit Agreement, dated as of June 3, 2013, among TeleTech Holdings, Inc., the foreign borrowers party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and Fronting Lender, KeyBank National Association, Bank of America, N.A., BBVA Compass, and HSBC Bank USA, National Association, each as Documentation Agent and Wells Fargo Securities, LLC, KeyBank National Association, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BBVA Compass and HSBC Bank USA, National Association, as Joint Lead Arrangers (incorporated by reference to Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on June 7, 2013)

 

 

 

21.1*

 

List of subsidiaries

 

 

 

23.1*

 

Consent of Independent Registered Public Accounting Firm

 

 

 

24.1*

 

Power of Attorney

 

 

 

31.1*

 

Rule 13a-14(a) Certification of CEO of TeleTech

 

 

 

31.2*

 

Rule 13a-14(a) Certification of CFO of TeleTech

 

 

 

32.1*

 

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

 

 

 

32.2*

 

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

 

 

 

101.INS***

 

XBRL Instance Document

 

 

 

101.SCH***

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL***

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB***

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE***

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF***

 

XBRL Taxonomy Extension Definition Linkbase Document

 


*

Filed herewith.

**

Identifies exhibit that consists of or includes a management contract or compensatory plan or arrangement.

***

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012, (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, and (v) Notes to Consolidated Financial Statements.

 

46



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized on March 9, 2015.

 

 

TELETECH HOLDINGS, INC.

 

 

 

 

 

By:

/s/ KENNETH D. TUCHMAN

 

 

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 9, 2015, by the following persons on behalf of the registrant and in the capacities indicated:

 

Signature

 

Title

 

 

 

/s/ KENNETH D. TUCHMAN

 

PRINCIPAL EXECUTIVE OFFICER

Kenneth D. Tuchman

 

Chief Executive Officer and Chairman of the Board

 

 

 

 

 

 

/s/ REGINA M. PAOLILLO

 

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

Regina M. Paolillo

 

Chief Financial Officer

 

 

 

*

 

DIRECTOR

James E. Barlett

 

 

 

 

 

*

 

DIRECTOR

Tracy L. Bahl

 

 

 

 

 

*

 

DIRECTOR

Gregory A. Conley

 

 

 

 

 

*

 

DIRECTOR

Robert Frerichs

 

 

 

 

 

*

 

DIRECTOR

Marc L. Holtzman

 

 

 

 

 

*

 

DIRECTOR

Shrikant Mehta

 

 

 

* By /s/ Regina M. Paolillo under Power of Attorney as attached hereto as Exhibit 24.1

 

47




Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of TeleTech Holdings, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income (loss), of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of TeleTech Holdings, Inc. and its subsidiaries (the “Company”) at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded rogenSi and Sofica from its assessment of internal control over financial reporting as of December 31, 2014, because they were acquired by the Company during 2014. We have also excluded rogenSi and Sofica Group, both 100% owned subsidiaries, from our audit of internal control over financial reporting. rogenSi’s total assets and total revenues represent 5% and 1%, respectively, and Sofica’s total assets and total revenues represent 2% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.

 

/s/ PricewaterhouseCoopers LLP

Denver, CO

March 9, 2015

 

F - 2



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

 

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

77,316

 

$

158,017

 

Accounts receivable, net

 

276,432

 

236,099

 

Prepaids and other current assets

 

64,702

 

52,332

 

Deferred tax assets, net

 

22,501

 

11,905

 

Income tax receivable

 

4,532

 

11,198

 

Total current assets

 

445,483

 

469,551

 

 

 

 

 

 

 

Long-term assets

 

 

 

 

 

Property, plant and equipment, net

 

150,212

 

126,719

 

Goodwill

 

128,705

 

102,743

 

Deferred tax assets, net

 

31,512

 

42,791

 

Other intangible assets, net

 

59,905

 

54,812

 

Other long-term assets

 

36,658

 

45,726

 

Total long-term assets

 

406,992

 

372,791

 

Total assets

 

$

852,475

 

$

842,342

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

37,019

 

$

32,031

 

Accrued employee compensation and benefits

 

70,069

 

80,130

 

Other accrued expenses

 

34,430

 

31,659

 

Income tax payable

 

10,141

 

6,066

 

Deferred tax liabilities, net

 

 

590

 

Deferred revenue

 

29,887

 

28,799

 

Other current liabilities

 

17,085

 

11,512

 

Total current liabilities

 

198,631

 

190,787

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

Line of credit

 

100,000

 

100,000

 

Deferred tax liabilities, net

 

4,675

 

2,281

 

Deferred rent

 

8,956

 

9,635

 

Other long-term liabilities

 

74,149

 

63,648

 

Total long-term liabilities

 

187,780

 

175,564

 

Total liabilities

 

386,411

 

366,351

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable noncontrolling interest

 

2,814

 

2,509

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock; $0.01 par value; 10,000,000 shares authorized; zero shares outstanding as of December 31, 2014 and 2013

 

 

 

Common stock; $.01 par value; 150,000,000 shares authorized; 48,452,852 and 50,352,881 shares outstanding as of December 31, 2014 and 2013, respectively

 

485

 

503

 

Additional paid-in capital

 

356,792

 

356,381

 

Treasury stock at cost: 33,599,401 and 31,699,372 shares as of December 31, 2014 and 2013, respectively

 

(527,595

)

(477,399

)

Accumulated other comprehensive income (loss)

 

(52,274

)

(20,586

)

Retained earnings

 

677,859

 

606,502

 

Noncontrolling interest

 

7,983

 

8,081

 

Total stockholders’ equity

 

463,250

 

473,482

 

Total liabilities and stockholders’ equity

 

$

852,475

 

$

842,342

 

 

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

 

F - 3



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands, except per share amounts)

 

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,241,781

 

$

1,193,157

 

$

1,162,981

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Cost of services

 

886,492

 

846,631

 

834,803

 

Selling, general and administrative

 

198,553

 

193,423

 

182,634

 

Depreciation and amortization

 

56,538

 

46,064

 

41,166

 

Restructuring charges, net

 

3,350

 

4,435

 

22,875

 

Impairment losses

 

373

 

1,205

 

2,958

 

Total operating expenses

 

1,145,306

 

1,091,758

 

1,084,436

 

 

 

 

 

 

 

 

 

Income from operations

 

96,475

 

101,399

 

78,545

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

1,769

 

2,560

 

2,978

 

Interest expense

 

(6,946

)

(7,513

)

(6,696

)

Loss on deconsolidation of subsidiary

 

 

(3,655

)

 

Other income (expense), net

 

9,161

 

(722

)

(965

)

Total other income (expense)

 

3,984

 

(9,330

)

(4,683

)

 

 

 

 

 

 

 

 

Income before income taxes

 

100,459

 

92,069

 

73,862

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

(23,042

)

(20,598

)

61

 

 

 

 

 

 

 

 

 

Net income

 

77,417

 

71,471

 

73,923

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

(5,124

)

(4,083

)

(3,908

)

 

 

 

 

 

 

 

 

Net income attributable to TeleTech stockholders

 

$

72,293

 

$

67,388

 

$

70,015

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Net income

 

$

77,417

 

$

71,471

 

$

73,923

 

Foreign currency translation adjustments

 

(23,120

)

(26,342

)

12,648

 

Derivative valuation, gross

 

(16,970

)

(29,465

)

25,266

 

Derivative valuation, tax effect

 

6,978

 

11,554

 

(9,855

)

Other, net of tax

 

1,076

 

598

 

527

 

Total other comprehensive income (loss)

 

(32,036

)

(43,655

)

28,586

 

Total comprehensive income (loss)

 

45,381

 

27,816

 

102,509

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

(4,163

)

(3,995

)

(4,039

)

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to TeleTech stockholders

 

$

41,218

 

$

23,821

 

$

98,470

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

49,297

 

51,338

 

54,738

 

Diluted

 

50,102

 

52,244

 

55,540

 

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

 

Basic

 

$

1.47

 

$

1.31

 

$

1.28

 

Diluted

 

$

1.44

 

$

1.29

 

$

1.26

 

 

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

 

F - 4



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Amounts in thousands)

 

 

 

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, 2011

 

 

$

 

56,635

 

$

566

 

$

(357,267

)

$

350,386

 

$

(5,474

)

$

470,776

 

$

11,260

 

$

470,247

 

Net income

 

 

 

 

 

 

 

 

70,015

 

3,908

 

73,923

 

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

 

941

 

941

 

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(2,205

)

(2,205

)

Transfer of noncontrolling interest to mandatorily redeemable noncontrolling interest

 

 

 

 

 

 

 

 

 

(1,067

)

(1,067

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

12,517

 

 

131

 

12,648

 

Derivatives valuation, net of tax

 

 

 

 

 

 

 

15,411

 

 

 

15,411

 

Vesting of restricted stock units

 

 

 

575

 

5

 

8,041

 

(12,626

)

 

 

 

(4,580

)

Exercise of stock options

 

 

 

121

 

1

 

1,703

 

(330

)

 

 

 

1,374

 

Excess tax benefit from equity-based awards

 

 

 

 

 

 

(1

)

 

 

 

(1

)

Equity-based compensation expense

 

 

 

 

 

 

13,285

 

 

 

10

 

13,295

 

Purchases of common stock

 

 

 

 

 

(5,043

)

(50

)

(81,193

)

 

 

 

 

(81,243

)

Other, net of tax

 

 

 

 

 

 

 

527

 

 

 

527

 

Balance as of December 31, 2012

 

 

$

 

52,288

 

$

522

 

$

(428,716

)

$

350,714

 

$

22,981

 

$

540,791

 

$

12,978

 

$

499,270

 

Net income

 

 

 

 

 

 

 

 

67,388

 

3,601

 

70,989

 

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(4,183

)

(4,183

)

Purchases of outstanding noncontrolling interest

 

 

 

 

 

 

3,715

 

 

 

(4,140

)

(425

)

Adjustments to redemption value of mandatorily redeemable noncontrolling interest

 

 

 

 

 

 

 

 

(1,677

)

 

(1,677

)

Deconsolidation of a subsidiary

 

 

 

 

 

 

 

 

 

(121

)

(121

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(26,254

)

 

(88

)

(26,342

)

Derivatives valuation, net of tax

 

 

 

 

 

 

 

(17,911

)

 

 

(17,911

)

Vesting of restricted stock units

 

 

 

455

 

5

 

6,530

 

(11,509

)

 

 

 

(4,974

)

Exercise of stock options

 

 

 

91

 

1

 

1,294

 

(433

)

 

 

 

862

 

Excess tax benefit from equity-based awards

 

 

 

 

 

 

787

 

 

 

 

787

 

Equity-based compensation expense

 

 

 

 

 

 

13,107

 

 

 

34

 

13,141

 

Purchases of common stock

 

 

 

(2,481

)

(25

)

(56,507

)

 

 

 

 

(56,532

)

Other, net of tax

 

 

 

 

 

 

 

598

 

 

 

598

 

Balance as of December 31, 2013

 

 

$

 

50,353

 

$

503

 

$

(477,399

)

$

356,381

 

$

(20,586

)

$

606,502

 

$

8,081

 

$

473,482

 

Net income

 

 

 

 

 

 

 

 

72,293

 

4,512

 

76,805

 

Dividends distributed to noncontrolling interest

 

 

 

 

 

 

 

 

 

(4,275

)

(4,275

)

Adjustments to redemption value of mandatorily redeemable noncontrolling interest

 

 

 

 

 

 

 

 

(936

)

 

(936

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(22,771

)

 

(349

)

(23,120

)

Derivatives valuation, net of tax

 

 

 

 

 

 

 

(9,993

)

 

 

(9,993

)

Vesting of restricted stock units

 

 

 

396

 

4

 

5,979

 

(11,362

)

 

 

 

(5,379

)

Exercise of stock options

 

 

 

58

 

1

 

876

 

(434

)

 

 

 

443

 

Excess tax benefit from equity-based awards

 

 

 

 

 

 

1,015

 

 

 

 

1,015

 

Equity-based compensation expense

 

 

 

 

 

 

11,192

 

 

 

14

 

11,206

 

Purchases of common stock

 

 

 

(2,354

)

(23

)

(57,051

)

 

 

 

 

(57,074

)

Other, net of tax

 

 

 

 

 

 

 

1,076

 

 

 

1,076

 

Balance as of December 31, 2014

 

 

$

 

48,453

 

$

485

 

$

(527,595

)

$

356,792

 

$

(52,274

)

$

677,859

 

$

7,983

 

$

463,250

 

 

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

 

F - 5



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

77,417

 

$

71,471

 

$

73,923

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

56,538

 

46,063

 

41,166

 

Amortization of contract acquisition costs

 

856

 

1,160

 

1,017

 

Amortization of debt issuance costs

 

705

 

659

 

808

 

Imputed interest expense and fair value adjustments to contingent consideration

 

(6,233

)

3,301

 

904

 

Provision for doubtful accounts

 

633

 

695

 

368

 

Loss (gain) on disposal of assets

 

141

 

 

305

 

Impairment losses

 

373

 

1,205

 

2,958

 

Deferred income taxes

 

9,514

 

6,892

 

2,354

 

Excess tax benefit from equity-based awards

 

(1,399

)

(1,343

)

(462

)

Equity-based compensation expense

 

11,307

 

13,234

 

13,376

 

Loss on foreign currency derivatives

 

(1,548

)

234

 

414

 

Loss on deconsolidation of subsidiary, net of cash of zero, $897, and zero, respectively

 

 

2,758

 

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

(41,005

)

7,291

 

400

 

Prepaids and other assets

 

(5,300

)

(5,374

)

(25,664

)

Accounts payable and accrued expenses

 

(8,115

)

(2,549

)

(16,301

)

Deferred revenue and other liabilities

 

206

 

(7,718

)

11,354

 

Net cash provided by operating activities

 

94,090

 

137,979

 

106,920

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from grant for property, plant and equipment

 

 

 

110

 

Proceeds from sale of long-lived assets

 

135

 

 

450

 

Purchases of property, plant and equipment, net of acquisitions

 

(67,641

)

(50,364

)

(40,653

)

Acquisitions, net of cash acquired of $3,525, $6,423 and $3,744, respectively

 

(24,416

)

(9,166

)

(40,839

)

Net cash used in investing activities

 

(91,922

)

(59,530

)

(80,932

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from line of credit

 

2,077,400

 

1,533,550

 

1,179,850

 

Payments on line of credit

 

(2,077,400

)

(1,541,550

)

(1,135,850

)

Proceeds from other debt

 

 

3,709

 

8,014

 

Payments on other debt

 

(4,504

)

(5,789

)

(4,900

)

Payments of contingent consideration related to acquisitions

 

(8,547

)

 

 

Dividends paid to noncontrolling interest

 

(5,962

)

(4,455

)

(2,205

)

Proceeds from exercise of stock options

 

443

 

862

 

1,374

 

Excess tax benefit from equity-based awards

 

1,399

 

1,343

 

462

 

Purchase of treasury stock

 

(57,074

)

(56,532

)

(81,243

)

Payments of debt issuance costs

 

 

(1,800

)

(467

)

Net cash used in financing activities

 

(74,245

)

(70,662

)

(34,965

)

Effect of exchange rate changes on cash and cash equivalents

 

(8,624

)

(14,255

)

17,091

 

(Decrease) increase in cash and cash equivalents

 

(80,701

)

(6,468

)

8,114

 

Cash and cash equivalents, beginning of period

 

158,017

 

164,485

 

156,371

 

Cash and cash equivalents, end of period

 

$

77,316

 

$

158,017

 

$

164,485

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for interest

 

$

5,404

 

$

4,220

 

$

4,412

 

Cash paid for income taxes

 

$

14,545

 

$

16,757

 

$

16,388

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Purchases of equipment through financing agreements

 

$

696

 

$

 

$

6,100

 

Acquisition of equipment through increase in accounts payable

 

$

4,170

 

$

2,762

 

$

 

Landlord incentives credited to deferred rent

 

$

 

$

1,016

 

$

1,723

 

Contract acquisition costs credited to accounts receivable

 

$

471

 

$

1,000

 

$

 

 

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

 

F - 6



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(1)                                 OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Overview

 

TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) is a customer engagement management services provider, delivering integrated consulting, technology, growth and customer care solutions on a global scale. Our suite of product and service capabilities allows us to design and deliver enhanced, value-driven customer experiences across numerous communication channels. TeleTech’s 46,000 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, Costa Rica, Germany, Ghana, Ireland, Israel, Lebanon, Macedonia, Mexico, New Zealand, the Philippines, Poland, Singapore, South Africa, Spain, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.

 

Basis of Presentation

 

The Consolidated Financial Statements are comprised of the accounts of TeleTech, its wholly owned subsidiaries, its 55% equity owned subsidiary Percepta, LLC, its 80% interest in iKnowtion, LLC, and its 80% interest in Peppers & Rogers Group through the third quarter of 2013 when the final 20% interest was repurchased (see Note 2). All intercompany balances and transactions have been eliminated in consolidation.

 

Certain amounts for 2013 have been reclassified in the Consolidated Financial Statements to conform to the 2014 presentation.

 

Use of Estimates

 

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, self-insurance reserves, litigation reserves, restructuring reserves, allowance for doubtful accounts, contingent consideration, and valuation of goodwill, long-lived and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions. In the year ended December 31, 2012, the Company recorded a change in estimate which resulted in a decrease of $4.6 million to employee related expenses in connection with an authoritative ruling in Spain related to the legally required cost of living adjustment for employees’ salaries for the year 2010, 2011 and 2012.

 

Concentration of Credit Risk

 

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and derivative instruments. Historically, the losses related to credit risk have been immaterial. The Company regularly monitors its credit risk to mitigate the possibility of current and future exposures resulting in a loss. The Company evaluates the creditworthiness of its clients prior to entering into an agreement to provide services and as necessary through the life of the client relationship. The Company does not believe it is exposed to more than a nominal amount of credit risk in its derivative hedging activities, as the Company diversifies its activities across six well-capitalized, investment-grade financial institutions.

 

Fair Value of Financial Instruments

 

Fair values of cash equivalents and accounts receivable and payable approximate the carrying amounts because of their short-term nature.

 

F - 7



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Cash and Cash Equivalents

 

The Company considers all cash and highly liquid short-term investments with an original maturity of 90 days or less to be cash equivalents. The Company manages a centralized global treasury function in the United States with a focus on concentrating and safeguarding its global cash and cash equivalents. While the majority of the Company’s cash is held outside the U.S., the Company prefers to hold U.S. Dollars in addition to the local currencies of the foreign subsidiaries. The Company believes that it has effectively mitigated and managed its risk relating to its global cash through its cash management practices, banking partners, and utilization of diversified, high quality investments. However, the Company can provide no assurances that it will not sustain losses.

 

Accounts Receivable

 

An allowance for doubtful accounts is determined based on the aging of the Company’s accounts receivable, historical experience, client financial condition, and management judgment. The Company writes off accounts receivable against the allowance when the Company determines a balance is uncollectible.

 

Derivatives

 

The Company enters into foreign exchange forward and option contracts to reduce its exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. The Company also enters into interest rate derivatives which consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. The Company formally documents at the inception of the hedge all relationships between hedging instruments and hedged items as well as its risk management objective and strategy for undertaking various hedging activities.

 

All derivative financial instruments are reported at fair value and recorded in Other assets and Other liabilities in the accompanying Consolidated Balance Sheets at fair value. Changes in fair value of derivative instruments designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss), a component of Stockholders’ Equity, to the extent they are deemed effective. Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged. Based on the criteria established by current accounting standards, the Company’s cash flow hedge contracts are deemed to be highly effective. Any realized gains or losses resulting from the foreign currency cash flow hedges are recognized together with the hedged transaction within Revenue.  Any realized gains or losses from the interest rate swaps are recognized in interest income (expense). Gains and losses from the settlements of the Company’s net investment hedges remain in Accumulated other comprehensive income (loss) until partial or complete liquidation of the applicable net investment.

 

The Company also enters into fair value derivative contracts that hedge against foreign currency exchange gains and losses primarily associated with short-term payables and receivables. Changes in the fair value of derivative instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

In addition to hedging activities, the Company has embedded derivatives in certain foreign lease contracts. The Company bifurcates and calculates the fair values of the embedded derivative feature from the host contract with any changes in fair value of the embedded derivatives recognized in Cost of services.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization. Maintenance, repairs and minor renewals are expensed as incurred.

 

F - 8



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Depreciation and amortization are computed on the straight-line method based on the following estimated useful lives:

 

Building

 

25 years

Computer equipment and software

 

3 to 7 years

Telephone equipment

 

4 to 7 years

Furniture and fixtures

 

5 years

Leasehold improvements

 

Lesser of economic useful life (typically 10 years)

 

 

or original lease term

Other

 

3 to 7 years

 

The Company evaluates the carrying value of property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of forecasted future cash flows.

 

Software Development Costs

 

The Company capitalizes costs incurred to acquire or develop software for internal use. Capitalized software development costs are amortized using the straight-line method over the estimated useful life equal to the lesser of the license term or 4 years. The amortization expense is recorded in Depreciation and amortization in the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

Goodwill

 

The Company evaluates goodwill for possible impairment at least annually on December 1, and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses a three step process to assess the realizability of goodwill. The first step, Step 0, is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, the Company analyzes changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of a particular reporting unit. A qualitative assessment also includes analyzing the excess fair value of a reporting unit over its carrying value from impairment assessments performed in previous years. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.

 

If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, the Company will proceed to Step 1 testing where the Company calculates the fair value of a reporting unit. If Step 1 indicates that the carrying value of a reporting unit is in excess of its fair value, the Company will proceed to Step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as they would in a business combination. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in Step 2.

 

Contract Acquisition Costs

 

Amounts paid to or on behalf of clients to obtain long-term contracts are capitalized and amortized in proportion to the initial expected future revenue from the contract, which in most cases results in straight-line amortization over the life of the contract. These costs are recorded as a reduction to Revenue. The Company evaluates the recoverability of these costs based on the individual underlying client contracts’ forecasted future cash flows.

 

F - 9



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Other Intangible Assets

 

The Company has other intangible assets that include customer relationships (definite-lived) and trade names (indefinite-lived and definite-lived) and non-compete agreements (definite-lived). Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from four to 11 years. The Company evaluates the carrying value of its definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of its asset group are estimated to be less than its carrying value.

 

The Company evaluates indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Similar to goodwill, the Company may first use a qualitative analysis to assess the realizability of its indefinite-lived intangible assets. The qualitative analysis will include a review of changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there would be a significant decline to the fair value of an indefinite-lived intangible asset. If a quantitative analysis is completed, an indefinite-lived intangible asset (a trade name) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value. Fair value is estimated as the discounted value of future revenues arising from a trade name using a royalty rate that a market participant would pay for use of that trade name. An impairment charge is recorded if the trade name’s carrying value exceeds its estimated fair value.

 

Self Insurance Liabilities

 

The Company self-insures for certain levels of workers’ compensation, employee health, property, errors and omissions, cyber risks, and general liability insurance. The Company records estimated liabilities for these insurance lines based upon analyses of historical claims experience. The most significant assumption the Company makes in estimating these liabilities is that future claims experience will emerge in a similar pattern with historical claims experience. The liabilities related to workers’ compensation and employee health insurance are included in Accrued employee compensation and benefits in the accompanying Consolidated Balance Sheets. The liability for other general liability insurance is included in Other accrued expenses in the accompanying Consolidated Balance Sheets.

 

Restructuring Liabilities

 

The Company routinely assesses the profitability and utilization of its delivery centers and existing markets. In some cases, the Company has chosen to close under-performing delivery centers and complete reductions in workforce to enhance future profitability. Severance payments that occur from reductions in workforce are in accordance with the Company’s postemployment plans and/or statutory requirements that are communicated to all employees upon hire date; therefore, severance liabilities are recognized when they are determined to be probable and reasonably estimable. Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, rather than upon commitment to a plan.

 

Grant Advances

 

The Company receives grants from various government agencies as an incentive to locate delivery centers in their jurisdictions. The Company’s policy is to account for grant monies received in advance as a liability and recognize to income as either a reduction to Cost of services or Depreciation expense over the term of the grant, when it is reasonably assured that the conditions of the grant have been or will be met.

 

F - 10



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Income Taxes

 

Accounting for income taxes requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Gross deferred tax assets may then be reduced by a valuation allowance for amounts that do not satisfy the realization criteria established by current accounting standards.

 

The Company accounts for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, and settlement of issues under audit. The Company recognizes interest and penalties related to uncertain tax positions as a part of the Provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

The Company provides for U.S. income tax expense on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S.

 

Equity-Based Compensation Expense

 

Equity-based compensation expense for all share-based payment awards granted is determined based on the grant-date fair value net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, which is typically the vesting term of the share-based payment award. The Company estimates the forfeiture rate annually based on its historical experience of forfeited awards.

 

Foreign Currency Translation

 

The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is not the U.S. Dollar, are translated at the exchange rates in effect on the last day of the period and income and expenses are translated using the monthly average exchange rates in effect for the period in which the items occur. Foreign currency translation gains and losses are recorded in Accumulated other comprehensive income (loss) within Stockholders’ Equity. Foreign currency transaction gains and losses are included in Other income (expense), net in the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

Revenue Recognition

 

The Company recognizes revenue when evidence of an arrangement exists, the delivery of service has occurred, the fee is fixed or determinable and collection is reasonably assured. The BPO inbound and outbound service fees are based on either a per minute, per hour, per transaction or per call basis. Certain client programs provide for adjustments to monthly billings based upon whether the Company achieves, exceeds or fails certain performance criteria. Adjustments to monthly billings consist of contractual bonuses/penalties, holdbacks and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of future services or meeting other specified performance conditions.

 

F - 11



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Revenue also consists of services for agent training, program launch, professional consulting, fully-hosted or managed technology and learning innovation services. These service offerings may contain multiple element arrangements whereby the Company determines if those service offerings represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenue is recognized as services are provided. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into one unit of accounting and recognized over the life of the arrangement or at the time all services and deliverables have been delivered and satisfied. The Company allocates revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on the Company’s best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once the Company allocates revenue to each deliverable, the Company recognizes revenue when all revenue recognition criteria are met.

 

Deferred Revenue and Costs

 

The Company records amounts billed and received, but not earned, as deferred revenue. These amounts are recorded in Deferred revenue or as a component of Other long-term liabilities in the accompanying Consolidated Balance Sheets based on the period over which the Company expects to render services.

 

We defer revenue for initial training that occurs upon commencement of a new contract if that training is billed separately because the training is not considered to provide standalone value from other services. Accordingly, the corresponding training costs, consisting primarily of labor and related expenses, are also deferred. In these circumstances, both the training revenue and costs are amortized straight-line over the life of the contract as a component of Revenue and Cost of services, respectively. In situations where these initial training costs are not billed separately, but rather included in the hourly service rates paid by the client over the life of the contract, no deferral is necessary as the revenue is being recognized over the life of the contract and the associated training costs are expensed as incurred.

 

Rent Expense

 

The Company has negotiated certain rent holidays, landlord/tenant incentives and escalations in the base price of rent payments over the initial term of its operating leases. The initial term includes the “build-out” period of leases, where no rent payments are typically due. The Company recognizes rent holidays and rent escalations on a straight-line basis to rent expense over the lease term. The landlord/tenant incentives are recorded as an increase to deferred rent liabilities and amortized on a straight line basis to rent expense over the initial lease term.

 

Asset Retirement Obligations

 

Asset retirement obligations relate to legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.

 

The Company records all asset retirement obligations at estimated fair value. The Company’s asset retirement obligations primarily relate to clauses in its delivery center operating leases which require the Company to return the leased premises to its original condition. The associated asset retirement obligations are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability, reported within Other long-term liabilities, is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement.

 

F - 12



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Recently Issued Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This new guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within those years. Beginning in 2015, the Company will apply the new guidance, as applicable, to future disposals of components or classifications as held for sale, but the Company does not expect it to have a significant impact on its financial position, results of operation or related disclosures.

 

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. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and 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. The Company is currently determining its implementation approach and assessing the impact on the consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. Beginning in 2016, the Company will apply the new guidance as applicable and is currently assessing the impact on the consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern”, as a new Sub-topic, Accounting Standards Codification Sub-topic 205.40. The new going concern standard codifies in GAAP management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU is effective for interim and annual periods beginning on or after December 15, 2016 and early adoption is permitted. The Company is evaluating when it will adopt the standard but does not expect it to have a significant 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 $34.3 million, subject to certain working capital adjustments, and consists of $18.0 million in cash at closing and an estimated $14.5 million in three earn-out payments, contingent on the acquired companies and TeleTech’s CSS segment achieving certain agreed earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets, as defined in the sale and purchase agreement. Additionally, the estimated purchase price included a $1.8 million hold-back payment for contingencies as defined in the sale and purchase agreement which will be paid in the first quarter of 2016, if required. The total contingent consideration possible per the sale and purchase agreement ranges from zero to $17.6 million and the earn-out payments are payable in early 2015, 2016 and 2017, based on July 1, 2014 through December 31, 2014, and full year 2015 and 2016 performance, respectively.

 

F - 13



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The fair value of the contingent consideration was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 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 10). As of December 31, 2014, the fair value of the contingent consideration was $15.2 million, of which $6.4 million and $8.8 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

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

 

3,328

 

Property, plant and equipment

 

578

 

Customer relationships

 

9,314

 

Goodwill

 

20,860

 

 

 

43,167

 

 

 

 

 

Accounts payable

 

708

 

Accrued employee compensation and benefits

 

2,203

 

Accrued expenses

 

1,146

 

Other

 

4,845

 

 

 

8,902

 

 

 

 

 

Total purchase price

 

$

34,265

 

 

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.

 

F - 14



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

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.

 

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 10). As of December 31, 2014, the fair value of the contingent consideration was $6.3 million, of which $2.8 million and $3.5 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

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

 

 

 

Acquisition Date
Fair Value

 

Cash

 

$

857

 

Accounts receivable, net

 

3,175

 

Other assets

 

378

 

Property, plant and equipment

 

653

 

Customer relationships

 

4,915

 

Goodwill

 

6,358

 

 

 

16,336

 

 

 

 

 

Accounts payable

 

296

 

Accrued employee compensation and benefits

 

697

 

Accrued expenses

 

664

 

Other

 

507

 

 

 

2,164

 

 

 

 

 

Total purchase price

 

$

14,172

 

 

The Sofica customer relationships, trade name and non-compete agreements have an estimated useful life of six years, three years and five years, respectively. The goodwill recognized from the Sofica acquisition was attributable primarily to the acquired workforce of Sofica, expected synergies, and other factors. 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 Sofica are reported within the CMS segment from the date of acquisition.

 

WebMetro

 

In the third quarter of 2013, as an addition to the Customer Growth Services (“CGS”) segment, the Company acquired 100% of WebMetro, a California corporation (“WebMetro”), a digital marketing agency.

 

The total purchase price was $17.8 million, including $15.3 million in cash consideration (inclusive of working capital adjustments) and an estimated $2.5 million in earn-out payments, payable in 2014 and 2015, contingent on WebMetro achieving specified EBITDA targets, as defined by the stock purchase agreement.

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company was also obligated to make earn-out payments over the next two years if WebMetro achieved specified EBITDA targets, as defined by the stock purchase agreement. The fair value of the contingent payments was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 5.3% and expected future value of payments of $2.6 million. The $2.6 million of expected future payments was calculated using a bell curve probability weighted EBITDA assessment with the highest probability associated with WebMetro achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent payments was approximately $2.5 million. The first contingent payment of $1.0 million was completed in the second quarter of 2014. During the third quarter of 2014, the Company recorded a fair value adjustment to reduce the contingent consideration by $1.7 million based on revised estimates noting the achievement of the EBITDA target is remote (see Note 10). As of December 31, 2014, the fair value of the remaining contingent consideration was zero.

 

In the third quarter of 2014, the Company finalized its valuation of WebMetro for the acquisition date assets acquired and liabilities assumed. There were no material measurement period adjustments in 2014.

 

Other Acquisitions

 

iKnowtion

 

In the first quarter of 2012, as an addition to the CSS segment, the Company acquired an 80% interest in iKnowtion, LLC (“iKnowtion”).  iKnowtion integrates proven marketing analytics methodologies and business consulting capabilities to help clients improve their return on marketing expenditures in such areas as demand generation, share of wallet, and channel mix optimization.

 

The total cash consideration paid was $1.2 million.

 

The Company is also obligated to make earn-out payments over the next four years if iKnowtion achieves specified earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets, as defined by the purchase and sale agreement. The fair value of the contingent payments was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 21% and expected future value of payments of $4.3 million. The $4.3 million of expected future payments was calculated using a probability weighted EBITDA assessment with higher probability associated with iKnowtion achieving the maximum EBITDA targets. As of the acquisition date, the fair value of the contingent payments was approximately $2.9 million. The first contingent payment of $1.4 million was completed during the first quarter of 2014. As of December 31, 2014, the fair value of the remaining contingent consideration was $2.3 million, of which $1.8 million and $0.5 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

In the event iKnowtion meets certain EBITDA targets for calendar year 2015, the purchase and sale agreement requires 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. Refer to Note 17 for more information related to the mandatorily redeemable noncontrolling interest.

 

Guidon

 

In the fourth quarter of 2012, as an addition to the CSS segment, the Company acquired 100% of the stock of Guidon Performance Solutions’ (“Guidon”) parent company. Guidon provides operational consulting services and designs solutions for operational and cultural transformation for global clients.

 

The total cash consideration paid was $5.7 million.

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company was also obligated to make earn-out payments over the next two years if Guidon achieved specified EBITDA targets as defined in the stock purchase agreement. The fair value of the contingent payments was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions included in the fair value calculation include a discount rate of 21% and expected future value of payments of $2.8 million. The $2.8 million of expected future payments was calculated using a probability weighted EBITDA assessment with higher probability associated with Guidon achieving the maximum EBITDA targets. As of the acquisition date, the fair value of the contingent payments was approximately $2.1 million.  The first contingent payment of $1.4 million was completed during the first quarter of 2014. During the first quarter of 2014, an agreement was reached in which a fixed final payment was established of $1.0 million which will be paid in the first quarter of 2015. As of December 31, 2014, the $1.0 million accrual was included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets.

 

TSG

 

In the fourth quarter of 2012, as an addition to the Customer Technology Services (“CTS”) segment, the Company acquired a 100% interest in Technology Solutions Group, Inc. (“TSG”). TSG designs and implements custom communications systems for a variety of business types and sizes.

 

The total purchase price was $44.5 million and the total up-front cash consideration paid was $33.3 million.

 

The Company is also obligated to make earn-out payments over three years if TSG achieves specified EBITDA targets, as defined by the stock purchase agreement. The fair value of the contingent payments was measured based on significant inputs not observable in the market (Level 3 inputs). Key assumptions included in the fair value calculation include a discount rate of 4.6% and expected future value of payments of $12.2 million. The $12.2 million of expected future payments was calculated using a bell curve probability weighted EBITDA assessment with the highest probability associated with TSG achieving the targeted EBITDA for each earn-out year. As of the acquisition date, the fair value of the contingent payments was approximately $11.1 million.  The first contingent payment of $5.3 million was completed during the second quarter of 2014. During the second and fourth quarters of 2014, the Company recorded fair value adjustments of $4.0 million and $3.9 million, respectively, to reduce the contingent consideration based on revised estimates noting the achievement of the EBITDA targets for 2014 and 2015 are remote (see Note 10). As of December 31, 2014 the fair value of the contingent consideration was zero.

 

Globant

 

The Company signed an agreement effective January 31, 2014 to transfer its assets, operations and employees in Argentina to IAFH Global S.A., better known as Globant, a technology service provider based in Argentina. This action placed our assets and employees with a leader focused on developing innovative software products. As part of this agreement, Globant will provide services to TeleTech through their Development Center in Buenos Aires.

 

Financial Impact of Acquired Businesses

 

The acquired businesses purchased in 2014, 2013 and 2012 noted above contributed revenues of $91.9 million, $69.1 million and $8.9 million and income from operations of $7.7 million, $10.0 million and $1.4 million, inclusive of $6.3 million, $4.2 million and $0.4 million of acquired intangible amortization, to the Company for the years ended December 31, 2014, 2013 and 2012, respectively.

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(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.

 

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

 

Year Ended December 31, 2014

 

 

 

Gross
Revenue

 

Intersegment
Sales

 

Net
Revenue

 

Depreciation
&
Amortization

 

Income from
Operations

 

Customer Management Services

 

$

923,497

 

$

 

$

923,497

 

$

40,577

 

$

76,792

 

Customer Growth Services

 

115,434

 

 

115,434

 

6,048

 

7,255

 

Customer Technology Services

 

139,218

 

(36

)

139,182

 

7,489

 

4,519

 

Customer Strategy Services

 

63,668

 

 

63,668

 

2,424

 

7,909

 

Total

 

$

1,241,817

 

$

(36

)

$

1,241,781

 

$

56,538

 

$

96,475

 

 

Year Ended December 31, 2013

 

 

 

Gross
Revenue

 

Intersegment
Sales

 

Net
Revenue

 

Depreciation
&
Amortization

 

Income from
Operations

 

Customer Management Services

 

$

892,145

 

$

(1,262

)

$

890,883

 

$

33,884

 

$

75,689

 

Customer Growth Services

 

100,996

 

 

100,996

 

4,127

 

3,024

 

Customer Technology Services

 

152,769

 

(284

)

152,485

 

6,201

 

19,965

 

Customer Strategy Services

 

49,643

 

(850

)

48,793

 

1,852

 

2,721

 

Total

 

$

1,195,553

 

$

(2,396

)

$

1,193,157

 

$

46,064

 

$

101,399

 

 

Year Ended December 31, 2012

 

 

 

Gross
Revenue

 

Intersegment
Sales

 

Net
Revenue

 

Depreciation
&
Amortization

 

Income from
Operations

 

Customer Management Services

 

$

923,774

 

$

 

$

923,774

 

$

32,714

 

$

60,271

 

Customer Growth Services

 

100,846

 

(74

)

100,772

 

3,904

 

2,258

 

Customer Technology Services

 

101,430

 

(4,582

)

96,848

 

3,026

 

15,714

 

Customer Strategy Services

 

43,358

 

(1,771

)

41,587

 

1,522

 

302

 

Total

 

$

1,169,408

 

$

(6,427

)

$

1,162,981

 

$

41,166

 

$

78,545

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

 

 

As of and for the Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Capital Expenditures

 

 

 

 

 

 

 

Customer Management Services

 

$

49,630

 

$

40,007

 

$

32,736

 

Customer Growth Services

 

3,195

 

3,421

 

3,983

 

Customer Technology Services

 

14,423

 

6,450

 

3,390

 

Customer Strategy Services

 

393

 

486

 

544

 

Total

 

$

67,641

 

$

50,364

 

$

40,653

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

Customer Management Services

 

$

514,957

 

$

554,015

 

$

588,627

 

Customer Growth Services

 

88,394

 

86,416

 

54,164

 

Customer Technology Services

 

159,441

 

157,040

 

152,500

 

Customer Strategy Services

 

89,683

 

44,871

 

56,339

 

Total

 

$

852,475

 

$

842,342

 

$

851,630

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

 

Customer Management Services

 

$

25,871

 

$

19,819

 

$

20,288

 

Customer Growth Services

 

30,395

 

30,128

 

24,439

 

Customer Technology Services

 

42,709

 

42,709

 

42,153

 

Customer Strategy Services

 

29,730

 

10,087

 

11,361

 

Total

 

$

128,705

 

$

102,743

 

$

98,241

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following tables present certain financial data based upon the geographic location where the services are provided (in thousands):

 

 

 

As of and for the

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

United States

 

$

603,297

 

$

556,239

 

$

474,236

 

Philippines

 

348,339

 

354,942

 

334,541

 

Latin America

 

172,270

 

176,906

 

188,071

 

Europe / Middle East / Africa

 

83,944

 

72,644

 

111,304

 

Asia Pacific

 

28,294

 

18,489

 

17,652

 

Canada

 

5,637

 

13,937

 

37,177

 

Total

 

$

1,241,781

 

$

1,193,157

 

$

1,162,981

 

 

 

 

 

 

 

 

 

Property, plant and equipment, gross

 

 

 

 

 

 

 

United States

 

$

382,508

 

$

337,311

 

$

311,904

 

Philippines

 

119,482

 

101,123

 

107,676

 

Latin America

 

67,193

 

75,618

 

70,915

 

Europe / Middle East / Africa

 

13,367

 

12,311

 

8,767

 

Asia Pacific

 

26,502

 

28,195

 

29,884

 

Canada

 

19,299

 

20,941

 

25,908

 

Total

 

$

628,351

 

$

575,499

 

$

555,054

 

 

 

 

 

 

 

 

 

Other long-term assets

 

 

 

 

 

 

 

United States

 

$

27,728

 

$

34,891

 

$

35,978

 

Philippines

 

5,202

 

4,408

 

4,124

 

Latin America

 

1,456

 

5,299

 

4,696

 

Europe / Middle East / Africa

 

692

 

311

 

887

 

Asia Pacific

 

1,309

 

779

 

1,004

 

Canada

 

271

 

38

 

95

 

Total

 

$

36,658

 

$

45,726

 

$

46,784

 

 

(4)                                 ACCOUNTS RECEIVABLE AND SIGNIFICANT CLIENTS

 

Accounts receivable, net in the accompanying Consolidated Balance Sheets consists of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Accounts receivable 

 

$

279,857

 

$

239,914

 

Less: Allowance for doubtful accounts 

 

(3,425

)

(3,815

)

Accounts receivable, net 

 

$

276,432

 

$

236,099

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Activity in the Company’s Allowance for doubtful accounts consists of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

2012

 

Balance, beginning of year

 

$

3,815

 

$

3,635

 

$

3,559

 

Provision for doubtful accounts

 

633

 

695

 

368

 

Uncollectible receivables written-off

 

(681

)

(315

)

(209

)

Effect of foreign currency

 

(342

)

(200

)

(83

)

Balance, end of year

 

$

3,425

 

$

3,815

 

$

3,635

 

 

Significant Clients

 

The Company had one client that contributed in excess of 10% of total revenue in the years ended December 31, 2014, 2013 and 2012. This client operates in the communications industry and is included in the Customer Management Services segment. The revenue from this client as a percentage of total revenue was as follows:

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Telecommunications client

 

11

%

12

%

10

%

 

Accounts receivable from this client was as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Telecommunications client

 

$

38,400

 

$

24,120

 

$

25,471

 

 

The loss of one or more of its significant clients could have a material adverse effect on the Company’s business, operating results, or financial condition. The Company does not require collateral from its clients. To limit the Company’s credit risk, management performs periodic credit evaluations of its clients and maintains allowances for uncollectible accounts and may require pre-payment for services. Although the Company is impacted by economic conditions in various industry segments, management does not believe significant credit risk exists as of December 31, 2014.

 

(5)                                 PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Land and buildings

 

$

38,833

 

$

38,833

 

Computer equipment and software

 

334,127

 

297,567

 

Telephone equipment

 

38,925

 

39,238

 

Furniture and fixtures

 

57,411

 

50,638

 

Leasehold improvements

 

158,844

 

148,890

 

Motor vehicles

 

175

 

188

 

Construction-in-progress and other

 

36

 

145

 

Property, plant and equipment, gross

 

628,351

 

575,499

 

Less: Accumulated depreciation and amortization

 

(478,139

)

(448,780

)

Property, plant and equipment, net

 

$

150,212

 

$

126,719

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Depreciation and amortization expense for property, plant and equipment was $46.9 million, $38.7 million and $37.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

(6)                                 GOODWILL

 

Goodwill consisted of the following (in thousands):

 

 

 

 

December 31,
2013

 

Acquisitions /
Adjustments

 

Impairments

 

Deconsolidation
of Subsidiary

 

Effect of
Foreign
Currency

 

December 31,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

19,819

 

$

6,358

 

$

 

$

 

$

(306

)

$

25,871

 

Customer Growth Services

 

30,128

 

267

 

 

 

 

30,395

 

Customer Technology Services

 

42,709

 

 

 

 

 

42,709

 

Customer Strategy Services

 

10,087

 

21,210

 

 

 

(1,567

)

29,730

 

Total

 

$

102,743

 

$

27,835

 

$

 

$

 

$

(1,873

)

$

128,705

 

 

 

 

December 31,
2012

 

Acquisitions /
Adjustments

 

Impairments

 

Deconsolidation
of Subsidiary

 

Effect of
Foreign
Currency

 

December 31,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

20,288

 

$

 

$

 

$

 

$

(469

)

$

19,819

 

Customer Growth Services

 

24,439

 

5,689

 

 

 

 

30,128

 

Customer Technology Services

 

42,153

 

478

 

 

 

78

 

42,709

 

Customer Strategy Services

 

11,361

 

 

 

(1,274

)

 

10,087

 

Total

 

$

98,241

 

$

6,167

 

$

 

$

(1,274

)

$

(391

)

$

102,743

 

 

Impairment

 

The Company has eleven reporting units with goodwill and performs a goodwill impairment test on at least an annual basis. The Company conducts its annual goodwill impairment test during the fourth quarter, or more frequently, if indicators of impairment exist. During 2014, the Company identified indicators of impairment for the TSG reporting unit, including lower revenues and profits than had been anticipated at the time of the acquisition and the 2014 budget/forecast. Upon identification of the impairment indicators, we completed a quantitative assessment of goodwill (Step 1 of the goodwill impairment analysis). The carrying value of TSG was $34.1 million at December 1, 2014, including $23.0 million of goodwill. Based on our assessment, the estimated fair value of the TSG reporting unit exceeded its carrying value by approximately 19.0%. 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.

 

For the annual goodwill impairment analysis, the Company elected to perform a Step 1 evaluation for all of its reporting units, which includes comparing a reporting unit’s estimated fair value to its carrying value. The determination of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rates for the businesses, the useful lives over which the cash flows will occur and determination of appropriate discount rates (based in part on the Company’s weighted average cost of capital). Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. As of December 1, 2014, the date of the annual impairment testing, the Company concluded that the fair values of all reporting units were in excess of their respective carrying values and the goodwill for those reporting units was not impaired.

 

The process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. We used an income approach to determine our best estimates of fair value which incorporated the following significant assumptions:

 

·                  Revenue projections, including revenue growth during the forecast periods ranging from 3% to 20%;

·                  EBITDA margin projections held flat over the forecast periods ranging from 10% to 15%;

·                  Estimated income tax rates of 27% to 40%;

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

·                  Estimated capital expenditures ranging from $0.1 million to $24 million; and

·                 Discount rates ranging from 12% to 17% based on various inputs, including the risks associated with the specific reporting units as well as their revenue growth and EBITDA margin assumptions.

 

As noted above, the Company has 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 6.0%) 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.

 

If all assumptions are held constant, a 1% increase in the discount rate would result in approximately $4.5 million decrease in the estimated fair value of the Revana reporting unit. A 5% percentage annual decrease in the projected revenue over the forecast period would result in a $9.2 million decrease in the estimated fair value of the Revana reporting unit. Such a change in either of these assumptions individually would have resulted in the Revana reporting unit failing Step 1 of the goodwill impairment analysis at December 1, 2014.

 

If all assumptions are held constant, a 1.5% point increase in the discount rate would result in approximately $2.8 million decrease in the estimated fair value of the WebMetro reporting unit. A 5% annual decrease in the projected revenue over the forecast period would result in a $3.3 million decrease in the estimated fair value of the WebMetro reporting unit. Such a change in either of these assumptions individually would have resulted in the WebMetro reporting unit failing Step 1 of the goodwill impairment analysis at December 1, 2014.

 

(7)                                 CONTRACT ACQUISITION COSTS

 

Contract acquisition costs, net, which are included in Other long-term assets in the accompanying Consolidated Balance Sheets, consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Contract acquisition costs, gross

 

$

2,415

 

$

5,278

 

Less: Accumulated amortization

 

(1,187

)

(3,636

)

Contract acquisition costs, net

 

$

1,228

 

$

1,642

 

 

Amortization of contract acquisition costs recorded as a reduction to Revenue was $0.9 million, $1.2 million and $1.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Expected future amortization of contract acquisition costs as of December 31, 2014 is as follows (in thousands):

 

2015 

 

$

510

 

2016 

 

302

 

2017 

 

301

 

2018 

 

115

 

Total

 

$

1,228

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(8)                                 OTHER INTANGIBLE ASSETS

 

Other intangible assets which are included in Other long-term assets in the accompanying Consolidated Balance Sheets consisted of the following (in thousands):

 

 

 

 

December 31,
2013

 

Amortization
and
Impairment

 

Acquisitions

 

Effect of
Foreign
Currency

 

December 31,
2014

 

Customer relationships, gross

 

$

50,830

 

$

 

14,115

 

(1,031

)

$

63,914

 

Customer relationships - accumulated amortization

 

(13,547

)

(6,779

)

 

 

(20,326

)

Other intangible assets, gross

 

11,634

 

 

1,607

 

(128

)

13,114

 

Other intangible assets - accumulated amortization

 

(3,818

)

(2,691

)

 

 

(6,509

)

Trade name - indefinite life

 

9,713

 

 

 

 

9,713

 

Other intangible assets, net

 

$

54,812

 

$

(9,470

)

$

15,722

 

$

(1,159

)

$

59,905

 

 

 

 

 

December 31,
2012

 

Amortization
and
Impairment

 

Acquisitions

 

Effect of
Foreign
Currency

 

December 31,
2013

 

Customer relationships, gross

 

$

46,171

 

$

 

$

5,920

 

$

(1,261

)

$

50,830

 

Customer relationships - accumulated amortization

 

(8,588

)

(5,343

)

 

384

 

(13,547

)

Other intangible assets, gross

 

8,021

 

 

3,600

 

13

 

11,634

 

Other intangible assets - accumulated amortization

 

(1,943

)

(1,875

)

 

 

(3,818

)

Trade name - indefinite life

 

10,800

 

(1,087

)

 

 

9,713

 

Other intangible assets, net

 

$

54,461

 

$

(8,305

)

$

9,520

 

$

(864

)

$

54,812

 

 

Customer relationships are being amortized over the remaining weighted average useful life of 8.4 years and other intangible assets are being amortized over the remaining weighted average useful life of 3.7 years. Amortization expense related to intangible assets was $9.6 million, $7.2 million and $3.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Expected future amortization of other intangible assets as of December 31, 2014 is as follows (in thousands):

 

2015 

 

$

10,768

 

2016 

 

10,403

 

2017 

 

9,075

 

2018 

 

7,203

 

2019 

 

6,027

 

Thereafter

 

7,434

 

Total

 

$

50,910

 

 

F - 24



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

In connection with the reorganization of the CSS segment an interim impairment analysis was completed during the second quarter of 2013. The indefinite-lived intangible asset evaluated for impairment consisted of the PRG trade name. The Company calculated the fair value of the trade name using a relief from royalty method based on forecasted revenues sold under the trade name using significant inputs not observable in the market (Level 3 inputs). The valuation assumptions included an estimated royalty rate of 6.0%, a discount rate specific to the trade name of 38.0% and a perpetuity growth rate of 7.0%. Based on the calculated fair value of $5.3 million, the Company recorded impairment expense of $1.1 million in the three months ended June 30, 2013. The Company reevaluated the PRG trade name for impairment as of December 31, 2013. The Company used the same method to fair value the PRG trade name and similar inputs described above. The forecasted revenues used to fair value the PRG trade name changed resulting in a fair value of $5.7 million. This fair value was approximately 7% higher than the book value of $5.3 million. As a result, the Company continues to evaluate the PRG trade name for impairment.

 

Definite-lived long-lived assets consisted of fixed assets and an intangible asset related to the PRG customer relationships. The Company determined that the undiscounted future cash flows would be sufficient to cover the net book value of all definite-lived long-lived assets upon reorganization of the Customer Strategy Services segment and as of December 31, 2013.

 

(9)                                 DERIVATIVES

 

Cash Flow Hedges

 

The Company enters into foreign exchange and interest rate related derivatives. Foreign exchange derivatives entered into consist of forward and option contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. Interest rate derivatives consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. It is the Company’s policy to only enter into derivative contracts with investment grade counterparty financial institutions, and correspondingly, the fair value of derivative assets consider, among other factors, the creditworthiness of these counterparties. Conversely, the fair value of derivative liabilities reflects the Company’s creditworthiness. As of December 31, 2014, the Company had not experienced, nor did 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 years ended December 31, 2014, 2013 and 2012 (in thousands and net of tax):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

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

 

$

(8,352

)

$

9,559

 

$

(5,852

)

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

 

(12,121

)

(13,721

)

17,748

 

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

 

2,128

 

(4,190

)

(2,337

)

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

 

$

(18,345

)

$

(8,352

)

$

9,559

 

 

F - 25



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company’s foreign exchange cash flow hedging instruments as of December 31, 2014 and 2013 are summarized as follows (in thousands). All hedging instruments are forward contracts.

 

As of December 31, 2014

 

Local
Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

% Maturing
in 2015

 

Contracts
Maturing
Through

 

Canadian Dollar

 

1,500

 

$

1,441

 

100.0

%

June 2015

 

Philippine Peso

 

17,428,000

 

398,046 

(1)

40.0

%

August 2019

 

Mexican Peso

 

2,532,000

 

179,089

 

29.7

%

September 2019

 

New Zealand Dollar

 

490

 

381

 

100.0

%

July 2015

 

 

 

 

 

$

578,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

Local
Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

 

 

 

 

Canadian Dollar

 

7,500

 

$

7,336

 

 

 

 

 

Philippine Peso

 

17,355,000

 

404,638 

(1)

 

 

 

 

Mexican Peso

 

2,305,500

 

166,132

 

 

 

 

 

British Pound Sterling

 

1,200

 

1,853 

(2)

 

 

 

 

New Zealand Dollars

 

150

 

117

 

 

 

 

 

 

 

 

 

$

580,076

 

 

 

 

 

 


(1)                Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on  December 31, 2014 and December 31, 2013.

(2)                Includes contracts to purchase British pound sterling in exchange for Euros, which are translated into equivalent U.S. dollars on  December 31, 2013.

 

The Company’s interest rate swap arrangements as of December 31, 2014 and 2013 were as follows:

 

 

 

Notional
Amount

 

Variable Rate
Received

 

Fixed Rate
Paid

 

Contract
Commencement
Date

 

Contract
Maturity
Date

 

As of December 31, 2014

 

$

25 million

 

1 - month LIBOR

 

2.55

%

April 2012

 

April 2016

 

and 2013

 

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 December 31, 2014 and 2013, the total notional amount of the Company’s forward contracts used as fair value hedges was $242.5 million and $204.5 million, respectively.

 

F - 26



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Derivative Valuation and Settlements

 

The Company’s derivatives as of December 31, 2014 and 2013 were as follows (in thousands):

 

 

 

December 31, 2014

 

Designation:

 

Designated as Hedging
Instruments

 

Not Designated as Hedging
Instruments

 

Derivative contract type:

 

Foreign
Exchange

 

Interest
Rate

 

Foreign
Exchange

 

Leases

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Fair Value

 

Embedded
Derivative

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

 

 

 

December 31, 2013

 

Designation:

 

Designated as Hedging
Instruments

 

Not Designated as Hedging
Instruments

 

Derivative contract type:

 

Foreign
Exchange

 

Interest
Rate

 

Foreign
Exchange

 

Leases

 

Derivative classification:

 

Cash Flow

 

Cash Flow

 

Fair Value

 

Embedded
Derivative

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

$

3,379

 

$

 

$

97

 

$

 

Other long-term assets

 

1,439

 

 

 

 

Other current liabilities

 

(4,595

)

(1,028

)

(815

)

(116

)

Other long-term liabilities

 

(11,708

)

(1,124

)

 

 

Total fair value of derivatives, net

 

$

(11,485

)

$

(2,152

)

$

(718

)

$

(116

)

 

F - 27



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The effect of derivative instruments on the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2014 and 2013 were as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

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

 

$

(11,926

)

$

(195

)

$

(13,530

)

$

(191

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Revenue

 

$

(2,429

)

$

 

$

7,973

 

$

 

Interest expense

 

 

(1,060

)

 

(1,047

)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

Designation:

 

Not Designated as Hedging Instruments

 

Not Designated as Hedging Instruments

 

Derivative contract type:

 

Foreign Exchange

 

Leases

 

Foreign Exchange

 

Leases

 

Derivative classification:

 

Option and
Forward
Contracts

 

Fair Value

 

Embedded
Derivative

 

Option and
Forward
Contracts

 

Fair Value

 

Embedded
Derivative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

$

 

$

 

$

(116

)

$

 

$

 

$

162

 

Other income (expense), net

 

 

(386

)

 

 

(6,360

)

 

 

(10)                          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.

 

F - 28



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following presents information as of December 31, 2014 and 2013 of 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 December 31, 2014 and 2013, the Company had $100.0 million and $100.0 million, respectively, of borrowings outstanding under the Credit Agreement. During 2014 and 2013, borrowings accrued interest at an average rate of 1.2% and 1.4% per annum, respectively, 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 December 31, 2014, 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 December 31, 2014 and 2013 (in thousands):

 

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

 

Embedded derivatives

 

 

 

 

 

Total net derivative asset (liability)

 

$

 

$

(29,817

)

$

 

$

(29,817

)

 

As of December 31, 2013

 

 

 

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

 

$

 

$

(11,485

)

$

 

$

(11,485

)

Interest rate swaps

 

 

(2,152

)

 

(2,152

)

Fair value hedges

 

 

(718

)

 

(718

)

Embedded derivatives

 

 

(116

)

 

(116

)

Total net derivative asset (liability)

 

$

 

$

(14,471

)

$

 

$

(14,471

)

 

F - 29



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following is a summary of the Company’s fair value measurements as of December 31, 2014 and 2013 (in thousands):

 

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

 

 

 

 

 

 

 

Money market investments

 

$

 

$

 

$

 

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

)

 

As of December 31, 2013

 

 

 

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

 

 

 

 

 

 

 

Money market investments

 

$

 

$

240

 

$

 

Derivative instruments, net

 

 

 

 

Total assets

 

$

 

$

240

 

$

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deferred compensation plan liability

 

$

 

$

(6,829

)

$

 

Derivative instruments, net

 

 

(14,471

)

 

Contingent consideration

 

 

 

(21,748

)

Total liabilities

 

$

 

$

(21,300

)

$

(21,748

)

 

Money Market Investments - The Company invests in various well-diversified money market funds which are managed by financial institutions. These money market funds are not publicly traded, but have historically been highly liquid. The value of the money market funds are determined by the banks based upon the funds’ net asset values (“NAV”). As of December 31, 2013, the money market funds permitted daily investments and redemptions at a $1.00 NAV.

 

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.

 

F - 30



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

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 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 factors. These measurements were based on significant inputs not observable in the market. The Company will accrete interest expense each period using the effective interest method until the future value of these contingent payables reaches their expected future value of $25.7 million. Interest expense related to all recorded contingent payables is included in Interest expense in the Consolidated Statements of Comprehensive Income (Loss).

 

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).

 

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

 

 

 

December 31,
2013

 

Acquisitions

 

Payments

 

Imputed
Interest /
Adjustments

 

December 31,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

iKnowtion

 

$

3,470

 

$

 

$

(1,400

)

$

195

 

$

2,265

 

Guidon

 

2,637

 

 

(1,426

)

(211

)

1,000

 

TSG

 

12,933

 

 

(5,292

)

(7,641

)

 

WebMetro

 

2,708

 

 

(1,026

)

(1,682

)

 

Sofica

 

 

3,830

 

 

2,487

 

6,317

 

rogenSi

 

 

14,543

 

 

619

 

15,162

 

Total

 

$

21,748

 

$

18,373

 

$

(9,144

)

$

(6,233

)

$

24,744

 

 

F - 31



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

 

 

December 31,
2012

 

Acquisitions

 

Payments

 

Imputed
Interest /
Adjustments

 

December 31,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

iKnowtion

 

$

3,633

 

$

 

$

(1,100

)

$

937

 

$

3,470

 

Guidon

 

2,200

 

 

 

437

 

2,637

 

TSG

 

11,157

 

 

 

1,776

 

12,933

 

WebMetro

 

 

2,557

 

 

151

 

2,708

 

Total

 

$

16,990

 

$

2,557

 

$

(1,100

)

$

3,301

 

$

21,748

 

 

(11)                          INCOME TAXES

 

The sources of pre-tax operating income (loss) are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Domestic

 

$

20,569

 

$

10,816

 

$

(8,336

)

Foreign

 

79,890

 

81,253

 

82,198

 

Total

 

$

100,459

 

$

92,069

 

$

73,862

 

 

The components of the Company’s Provision for (benefit from) income taxes are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Current provision for (benefit from)

 

 

 

 

 

 

 

Federal

 

$

(699

)

$

(320

)

$

(2,211

)

State

 

270

 

150

 

(1,013

)

Foreign

 

13,957

 

13,876

 

809

 

Total current provision for (benefit from)

 

13,528

 

13,706

 

(2,415

)

Deferred provision for (benefit from)

 

 

 

 

 

 

 

Federal

 

10,148

 

4,674

 

1,215

 

State

 

423

 

195

 

64

 

Foreign

 

(1,057

)

2,023

 

1,075

 

Total deferred provision for (benefit from)

 

9,514

 

6,892

 

2,354

 

Total provision for (benefit from) income taxes

 

$

23,042

 

$

20,598

 

$

(61

)

 

F - 32



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following reconciles the Company’s effective tax rate to the federal statutory rate (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Income tax per U.S. federal statutory rate (35%)

 

$

35,161

 

$

32,224

 

$

25,852

 

State income taxes, net of federal deduction

 

1,525

 

210

 

(345

)

Change in valuation allowances

 

256

 

3,266

 

(315

)

Foreign income taxes at different rates than the U.S.

 

(17,824

)

(20,529

)

(24,507

)

Foreign withholding taxes

 

257

 

2,504

 

2,876

 

Losses in international markets without tax benefits

 

1,649

 

779

 

4,329

 

Nondeductible compensation under Section 162(m)

 

817

 

1,847

 

1,451

 

Liabilities for uncertain tax positions

 

1,435

 

77

 

(2,988

)

Permanent difference related to foreign exchange gains

 

(11

)

(122

)

(13

)

(Income) losses of foreign branch operations

 

225

 

1,447

 

(4,263

)

Non-taxable earnings of minority interest

 

(1,141

)

(1,172

)

(213

)

Foreign dividend less foreign tax credits

 

(1,428

)

(2,587

)

(2,935

)

Increase in deferred tax liability - branch losses in UK

 

(75

)

(954

)

(1,012

)

Decrease (increase) to deferred tax asset - change in tax rate

 

(443

)

(68

)

946

 

State income tax credits and net operating losses

 

(142

)

615

 

709

 

Foreign earnings taxed currently in U.S.

 

2,696

 

2,907

 

 

Other

 

85

 

154

 

367

 

Income tax per effective tax rate

 

$

23,042

 

$

20,598

 

$

(61

)

 

F - 33



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company’s deferred income tax assets and liabilities are summarized as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

Deferred tax assets, gross

 

 

 

 

 

Accrued workers compensation, deferred compensation and employee benefits

 

$

17,030

 

$

7,866

 

Allowance for doubtful accounts, insurance and other accruals

 

4,554

 

4,037

 

Amortization of deferred rent liabilities

 

2,201

 

1,903

 

Net operating losses

 

11,296

 

11,023

 

Equity compensation

 

2,997

 

6,566

 

Customer acquisition and deferred revenue accruals

 

16,241

 

15,228

 

Federal and state tax credits, net

 

10,621

 

15,886

 

Unrealized losses on derivatives

 

11,686

 

4,446

 

Other

 

12,749

 

9,467

 

Total deferred tax assets, gross

 

89,375

 

76,422

 

Valuation allowances

 

(10,721

)

(10,792

)

Total deferred tax assets, net

 

78,654

 

65,630

 

Deferred tax liabilities

 

 

 

 

 

Long-term lease obligations

 

 

(12

)

Depreciation and amortization

 

(7,035

)

1,067

 

Contract acquisition costs

 

(11,768

)

(11,653

)

Future losses in UK

 

(2,530

)

(2,606

)

Intangible assets

 

(7,628

)

 

Other

 

(355

)

(600

)

Total deferred tax liabilities

 

(29,316

)

(13,804

)

Net deferred tax assets

 

$

49,338

 

$

51,826

 

 

Quarterly, the Company assesses the likelihood by jurisdiction 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.

 

As of December 31, 2014 the Company had approximately $32.3 million of net deferred tax assets in the U.S. and $17.0 million of net deferred tax assets related to certain international locations whose recoverability is dependent upon their future profitability. As of December 31, 2014 the deferred tax valuation allowance was $10.7 million and related primarily to tax losses in foreign jurisdictions and U.S. federal and state tax credits which do not meet the “more-likely-than-not” standard under current accounting guidance. The utilization of these federal and state tax credits are subject to numerous factors including various expiration dates, generation of future taxable income over extended periods of time and state income tax apportionment factors which are subject to change.

 

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. In 2014, the Company made adjustments to its deferred tax assets and corresponding valuation allowances. The net reduction to the valuation allowance of $0.1 million was due to a $0.5 million increase in certain state credits and NOLs that do not meet the “more-likely-than-not” standard, a $0.4 million increase in valuation allowance in Argentina and Ghana for deferred tax assets that do not meet the “more-likely-than-not” standard, a $0.7 million release of valuation allowance in the Philippines for deferred tax assets, and a $0.3 million release of valuation allowance in various other jurisdictions for deferred tax assets.

 

F - 34



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Activity in the Company’s valuation allowance accounts consists of the following (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Beginning balance

 

$

10,792

 

$

20,909

 

$

16,555

 

Additions of deferred income tax expense

 

946

 

4,218

 

5,560

 

Reductions of deferred income tax expense

 

(1,017

)

(14,335

)

(1,206

)

Ending balance

 

$

10,721

 

$

10,792

 

$

20,909

 

 

As of December 31, 2014, after consideration of all tax loss and tax credit carry back opportunities, the Company had net tax loss carry forwards worldwide expiring as follows (in thousands):

 

2015 

 

$

 

2016 

 

1,325

 

2017 

 

1,079

 

2018 

 

 

After 2018

 

4,442

 

No expiration

 

3,102

 

Total

 

$

9,948

 

 

As of December 31, 2014, domestically, the Company had federal tax credit carry forwards in the amount of $3.5 million that if unused will expire in 2020, $3.7 million that if unused will expire in 2021, $2.2 million that if unused will expire in 2022 and $2.3 million that if unused will expire in 2023 and $0.9 million that if unused will expire in 2024. The Company also had state tax credit carry-forwards of $1.8 million that if unused will expire between 2014 and 2023.

 

As of December 31, 2014 the cumulative amount of foreign earnings considered permanently invested outside the U.S. was $445.0 million. Those earnings do not include earnings from certain subsidiaries which the Company intends to repatriate to the U.S. or are otherwise considered available for distribution to the U.S. Accordingly, no provision for U.S. federal or state income taxes or foreign withholding taxes has been provided on these undistributed earnings. If these earnings become taxable in the U.S, the Company would be subject to incremental tax expense, after any applicable foreign tax credit, and foreign withholding tax expense. It is not practicable to estimate the additional taxes that may become payable upon the eventual remittance of these foreign earnings.

 

The Company has been granted “Tax Holidays” as an incentive to attract foreign investment by the governments of the Philippines and Costa Rica. Generally, a Tax Holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export-related activities. In the Philippines, the Company has been granted multiple agreements with an initial period of four years and additional periods for varying years, expiring at various times between 2011 and 2020. The aggregate effect on income tax expense for the years ended December 31, 2014, 2013 and 2012 was approximately $20.2 million, $14.6 million and $20.1 million, respectively, which had a favorable impact on diluted net income per share of $0.27, $0.28 and $0.36, respectively.

 

Accounting for Uncertainty in Income Taxes

 

In accordance with ASC 740, the Company has recorded a reserve for uncertain tax positions. The total amount of interest and penalties recognized in the accompanying Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2014, 2013 and 2012 was approximately $132 thousand, $77 thousand and $40 thousand, respectively.

 

The Company had a reserve for uncertain tax benefits, on a net basis, of $1.9 million and $0.5 million for the years ended December 31, 2014 and 2013, respectively. The liability for uncertain tax positions was not changed in 2014 for tax positions that were resolved favorably or expired.

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The tabular reconciliation of the reserve for uncertain tax benefits on a gross basis without interest for the three years ended December 31, 2014 is presented below (in thousands):

 

Balance as of December 31, 2011

 

$

2,735

 

Additions for current year tax positions

 

369

 

Reductions in prior year tax positions

 

(2,746

)

Balance as of December 31, 2012

 

358

 

Additions for current year tax positions

 

 

Reductions in prior year tax positions

 

 

Balance as of December 31, 2013

 

358

 

Additions for current year tax positions

 

1,303

 

Reductions in prior year tax positions

 

 

Balance as of December 31, 2014

 

$

1,661

 

 

At December 31, 2014, the amount of uncertain tax benefits that, if recognized, would reduce tax expense was $1.9 million. Within the next 12 months, it is not expected that unrecognized tax benefits will change as the result of the expiration of various statutes of limitation.

 

The Company and its domestic and foreign subsidiaries (including Percepta LLC and its domestic and foreign subsidiaries) file income tax returns as required in the U.S. federal jurisdiction and various state and foreign jurisdictions. The following table presents the major tax jurisdictions and tax years that are open as of December 31, 2014 and subject to examination by the respective tax authorities:

 

Tax Jurisdiction

 

Tax Year Ended

United States

 

2011 to present

Argentina

 

2009 to present

Australia

 

2010 to present

Brazil

 

2009 to present

Canada

 

2006 to present

Mexico

 

2009 to present

Philippines

 

2012 to present

Spain

 

2010 to present

 

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

 

During the third quarter of 2014, the Company settled an audit with the taxing authorities in the Netherlands for tax years 2010 and 2011. An expense of $1.3 million was recorded in the quarter as a result of that settlement and the related impact through 2014.

 

The Company’s U.S. income tax returns filed for the tax years ending December 31, 2011 to present, remain open tax years. The IRS has concluded its audit in the United States for tax years 2009, 2011 and 2012 resulting in no changes to the Company’s financial statements or tax liabilities as previously reported.

 

The Company has been notified of the intent to audit, or is currently under audit of incomes taxes in the U.S., specifically for the acquired entity TSG, for the tax year 2012 (prior to acquisition) 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.

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(12)                          RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

 

Restructuring Charges

 

During the years ended December 31, 2014, 2013 and 2012, 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.

 

During the second quarter of 2012, the Company made the decision to cease operations in Spain and terminated the contracts with its clients. The Company notified the employees and commenced severance procedures as required under Spanish law. The Company recorded $14.7 million of severance expense and $0.4 million of center closure expenses for the year ended December 31, 2012 of which all has been paid as of December 31, 2014.

 

A summary of the expenses recorded in Restructuring, net in the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012, respectively, is as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Reduction in force

 

 

 

 

 

 

 

Customer Management Services

 

$

2,182

 

$

3,832

 

$

22,371

 

Customer Growth Services

 

56

 

43

 

201

 

Customer Technology Services

 

709

 

73

 

60

 

Customer Strategy Services

 

389

 

189

 

 

Total

 

$

3,336

 

$

4,137

 

$

22,632

 

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Facility exit charges

 

 

 

 

 

 

 

Customer Management Services

 

$

14

 

$

298

 

$

243

 

Customer Growth Services

 

 

 

 

Customer Technology Services

 

 

 

 

Customer Strategy Services

 

 

 

 

Total

 

$

14

 

$

298

 

$

243

 

 

A rollforward of the activity in the Company’s restructuring accruals for the years ended December 31, 2014 and 2013, respectively, is as follows (in thousands):

 

 

 

Closure of
Delivery
Centers

 

Reduction
in Force

 

Total

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

 

$

4,079

 

$

4,079

 

Expense

 

298

 

4,352

 

4,650

 

Payments

 

(298

)

(6,863

)

(7,161

)

Changes in estimates

 

 

(215

)

(215

)

Balance as of December 31, 2013

 

 

1,353

 

1,353

 

Expense

 

14

 

3,442

 

3,456

 

Payments

 

(14

)

(2,618

)

(2,632

)

Changes in estimates

 

 

(106

)

(106

)

Balance as of December 31, 2014

 

$

 

$

2,071

 

$

2,071

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

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.

 

Impairment Losses

 

During each of the periods presented, the Company evaluated the recoverability of its leasehold improvement assets at certain delivery 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 2014, 2013 and 2012, the Company recognized impairment losses related to leasehold improvement assets of $0.4 million, $0.1 million, and $1.2 million, respectively, in its Customer Management Services segment.

 

During the second quarter of 2013, the Company recorded an impairment charge of $1.1 million related to the PRG trade name intangible asset within the CSS segment. See Note 8 for further information. This expense was included in the Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).

 

During the first quarter of 2012, the Company rebranded its Direct Alliance Corporation (“DAC”) subsidiary to RevanaTM, thus the $1.8 million DAC trade name was impaired as of March 31, 2012. This expense was included in the Impairment losses in the Consolidated Statements of Comprehensive Income (Loss).

 

(13)                          INDEBTEDNESS

 

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.

 

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 and other strategic activities, such as the acquisitions described in Note 2. As of December 31, 2014, and 2013, the Company had borrowings of $100.0 million and $100.0 million, respectively, under its Credit Agreement, and its average daily utilization was $285.9 million and $238.1 million for the years ended December 31, 2014 and 2013, respectively. After consideration for issued letters of credit under the Credit Agreement, totaling $3.2 million, the Company’s remaining borrowing capacity was $596.8 million as of December 31, 2014. As of December 31, 2014, 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 December 31, 2014 and 2013, no foreign loans were outstanding.

 

F - 38



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(14)                          DEFERRED REVENUE AND COSTS

 

Deferred revenue in the accompanying Consolidated Balance Sheets consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Deferred Revenue - Current

 

$

29,887

 

$

28,799

 

Deferred Revenue - Long-term

 

18,771

 

9,978

 

Total Deferred Revenue

 

$

48,658

 

$

38,777

 

 

Deferred costs in the accompanying Consolidated Balance Sheets consist of the following (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Deferred Costs - Current

 

$

16,845

 

$

15,953

 

Deferred Costs - Long-term

 

12,213

 

13,202

 

Total Deferred Costs

 

$

29,059

 

$

29,155

 

 

(15)                          COMMITMENTS AND CONTINGENCIES

 

Letters of Credit

 

As of December 31, 2014, outstanding letters of credit under the Credit Agreement totaled $3.2 million and primarily guaranteed workers’ compensation and other insurance related obligations. As of December 31, 2014, letters of credit and contract performance guarantees issued outside of the Credit Agreement totaled $1.3 million.

 

Guarantees

 

Indebtedness under the Credit Agreement is guaranteed by certain of the Company’s present and future domestic subsidiaries.

 

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.

 

(16)                          LEASES

 

The Company has various operating leases primarily for equipment, delivery centers and office space, which generally contain renewal options. Rent expense under operating leases was approximately $33.2 million, $33.3 million and $33.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

In 2008, the Company sub-leased one of its delivery centers to a third party for the remaining term of the original lease. The sub-lease began on January 1, 2009 and rental income is recognized on a straight-line basis over the term of the sub-lease through 2021. Future minimum sub-lease rental receipts are shown in the table below.

 

F - 39



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The future minimum rental payments and receipts required under non-cancelable operating leases as of December 31, 2014 are as follows (in thousands):

 

 

 

Operating
Leases

 

Sub-Lease
Income

 

2015 

 

$

43,411

 

$

(2,234

)

2016 

 

34,248

 

(2,234

)

2017 

 

26,505

 

(2,234

)

2018 

 

18,582

 

(2,470

)

2019 

 

9,665

 

(2,470

)

Thereafter

 

3,826

 

(2,675

)

Total

 

$

136,237

 

$

(14,317

)

 

The Company records operating lease expense on a straight-line basis over the life of the lease as described in Note 1. The deferred lease liability as of December 31, 2014 and 2013 was $9.0 million and $9.6 million, respectively.

 

Asset Retirement Obligations

 

The Company records asset retirement obligations (“ARO”) for its delivery center leases. Capitalized costs related to ARO’s are included in Other long-term assets in the accompanying Consolidated Balance Sheets while the ARO liability is included in Other long-term liabilities in the accompanying Consolidated Balance Sheets. Following is a summary of the amounts recorded (in thousands):

 

 

 

Balance at
December 31,
2013

 

Additions and
Modifications

 

Accretion

 

Settlements

 

Balance at
December 31,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

ARO liability total

 

$

1,888

 

$

39

 

$

14

 

$

 

$

1,941

 

 

 

 

Balance at
December 31,
2012

 

Additions and
Modifications

 

Accretion

 

Settlements

 

Balance at
December 31,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

ARO liability total

 

$

2,061

 

$

 

$

42

 

$

(215

)

$

1,888

 

 

Increases to ARO result from a new lease agreement or modifications on an ARO from a preexisting lease agreement. Modifications to ARO liabilities and accumulated accretion occur when lease agreements are amended or when assumptions change, such as the rate of inflation. Modifications are accounted for prospectively as changes in estimates. Settlements occur when leased premises are vacated and the actual cost of restoration is paid. Differences between the actual costs of restoration and the balance recorded as ARO liabilities are recognized as gains or losses in the accompanying Consolidated Statements of Comprehensive Income (Loss).

 

(17)                          MANDATORILY REDEEMABLE NONCONTROLLING INTEREST

 

The Company holds an 80% interest in iKnowtion. In the event iKnowtion meets certain EBITDA targets for calendar year 2015, the purchase and sale agreement requires 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 represent a contingent redemption feature which the Company determined is probable of being achieved.

 

F - 40



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company has 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 are recorded in retained earnings. Since the EBITDA multiples as defined in the purchase and sale agreement are below the current market multiple, the Company has determined that there is 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 as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

Mandatorily redeemable noncontrolling interest, January 1

 

$

2,509

 

$

1,067

 

Net income attributable to mandatorily redeemable noncontrolling interest

 

613

 

482

 

Working capital distributed to mandatorily redeemable noncontrolling interest

 

(1,244

)

(717

)

Change in redemption value

 

936

 

1,677

 

Mandatorily redeemable noncontrolling interest, December 31

 

$

2,814

 

$

2,509

 

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(18)                          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
Translation
Adjustment

 

Derivative
Valuation, Net
of Tax

 

Other, Net
of Tax

 

Totals

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 31, 2011

 

$

3,156

 

$

(5,852

)

$

(2,778

)

$

(5,474

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

12,517

 

17,748

 

(302

)

29,963

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(2,337

)

829

 

(1,508

)

Net current period other comprehensive income (loss)

 

12,517

 

15,411

 

527

 

28,455

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 30, 2012

 

$

15,673

 

$

9,559

 

$

(2,251

)

$

22,981

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 31, 2012

 

$

15,673

 

$

9,559

 

$

(2,251

)

$

22,981

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

(26,254

)

(13,721

)

29

 

(39,946

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(4,190

)

569

 

(3,621

)

Net current period other comprehensive income (loss)

 

(26,254

)

(17,911

)

598

 

(43,567

)

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 30, 2013

 

$

(10,581

)

$

(8,352

)

$

(1,653

)

$

(20,586

)

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 31, 2013

 

$

(10,581

)

$

(8,352

)

$

(1,653

)

$

(20,586

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

(22,771

)

(12,121

)

44

 

(34,848

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

2,128

 

1,032

 

3,160

 

Net current period other comprehensive income (loss)

 

(22,771

)

(9,993

)

1,076

 

(31,688

)

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at December 30, 2014

 

$

(33,352

)

$

(18,345

)

$

(577

)

$

(52,274

)

 

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Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

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

 

 

 

For the Year Ended December 31,

 

Statement of
Comprehensive Income

 

 

 

2014

 

2013

 

2012

 

(Loss) Classification

 

 

 

 

 

 

 

 

 

 

 

Derivative valuation

 

 

 

 

 

 

 

 

 

Gain (loss) on foreign currency forward exchange contracts

 

$

(2,429

)

$

7,973

 

$

4,638

 

Revenue

 

Loss on interest rate swaps

 

(1,060

)

(1,047

)

(741

)

Interest expense

 

Tax effect

 

1,361

 

(2,736

)

(1,560

)

Provision for income taxes

 

 

 

$

(2,128

)

$

4,190

 

$

2,337

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Actuarial loss on defined benefit plan

 

$

(1,098

)

$

(605

)

$

(882

)

Cost of services

 

Tax effect

 

66

 

36

 

53

 

Provision for income taxes

 

 

 

$

(1,032

)

$

(569

)

$

(829

)

Net income (loss)

 

 

(19)                          NET INCOME PER SHARE

 

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

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Shares used in basic earnings per share calculation

 

49,297

 

51,338

 

54,738

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

413

 

417

 

378

 

Restricted stock units

 

392

 

489

 

424

 

Performance-based restricted stock units

 

 

 

 

Total effects of dilutive securities

 

805

 

906

 

802

 

Shares used in dilutive earnings per share calculation

 

50,102

 

52,244

 

55,540

 

 

For the years ended December 31, 2014, 2013 and 2012, 0.1 million, 0.1 million and 0.1 million, respectively, of options to purchase shares of common stock 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 years ended December 31, 2014, 2013 and 2012, restricted stock units of 0.2 million, 0.2 million, and 0.8 million, respectively, were outstanding but not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the years ended December 31, 2014, 2013 and 2012, there were no performance-based restricted stock units outstanding but not included in the computation of diluted net income per share. For the years ended December 31, 2014, 2013 and 2012, restricted stock units that vest based on the Company achieving specified operating income performance targets of 0.1 million, 0.1 million and 0.1 million, respectively, were outstanding but not included in the computation of diluted net income per share because they were determined not to be contingently issuable.

 

F - 43



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(20)                          EMPLOYEE COMPENSATION PLANS

 

Employee Benefit Plan

 

The Company currently has one 401(k) profit-sharing plan that allows participation by U.S. employees who have completed six months of service, as defined, and are 21 years of age or older. Participants may defer up to 75% of their gross pay, up to a maximum limit determined by U.S. federal law. Participants are also eligible for a matching contribution. The Company may from time to time, at its discretion, make a “matching contribution” based on the amount and rate of the elective deferrals. The Company determines how much, if any, it will contribute for each dollar of elective deferrals. Participants vest in matching contributions over a three-year period. Company matching contributions to the 401(k) plan(s) totaled $4.8 million, $4.2 million and $3.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Equity Compensation Plans

 

In February 1999, the Company adopted the TeleTech Holdings, Inc. 1999 Stock Option and Incentive Plan (the “1999 Plan”). The purpose of the 1999 Plan was to enable the Company to continue to (a) attract and retain high quality directors, officers, employees, consultants and independent contractors; (b) motivate such persons to promote the long-term success of the Company and its subsidiaries; and (c) induce employees of companies that are acquired by TeleTech to accept employment with TeleTech following such an acquisition. An aggregate of 14.0 million shares of common stock were reserved for issuance under the 1999 Plan, which permitted the award of incentive stock options, non-qualified stock options, stock appreciation rights, shares of restricted common stock and restricted stock units (“RSUs”). The 1999 Plan also provided for annual equity-based compensation grants to members of the Company’s Board of Directors. Options granted to employees generally vested over four to five years and had a contractual life of ten years. Options issued to Directors vested immediately and had a contractual life of ten years. In May 2009, the Company adopted a policy to issue RSUs to Directors, which generally vest over one year.

 

In May 2010, the Company adopted the 2010 Equity Incentive Plan (the “2010 Plan”). Upon adoption of the 2010 Plan, all authorized and unissued equity in the 1999 Plan was cancelled. An aggregate of 4.0 million shares of common stock has been reserved for issuance under the 2010 Plan, which permits the award of incentive stock options, non-qualified stock options, stock appreciation rights, shares of restricted common stock and RSUs. As of December 31, 2014, a total of 4.0 million shares were authorized and 1.2 million shares were available for issuance under the 2010 Plan.

 

For the years ended December 31, 2014, 2013, and 2012, the Company recorded total equity-based compensation expense under all equity-based arrangements (stock options and RSUs) of $11.3 million, $13.3 million and $13.4 million, respectively. For 2014, 2013 and 2012, of the total compensation expense, $2.3 million, $2.2 million and $1.9 million was recognized in Cost of services and $9.0 million, $11.1 million and $11.5 million, was recognized in Selling, general and administrative in the Consolidated Statements of Comprehensive Income (Loss), respectively. For the years ended December 31, 2014, 2013, and 2012, the Company recognized a tax benefit under all equity-based arrangements (stock options and RSUs) of $6.3 million, $5.8 million and $5.7 million, respectively.

 

Restricted Stock Units

 

2012, 2013 and 2014 RSU Awards: The Company granted RSUs in 2012, 2013 and 2014 to new and existing employees that vest over four or five years. The Company also granted RSUs in 2012, 2013 and 2014 to members of the Board of Directors that vest over one year.

 

During 2011, the Company granted 100,000 performance-based RSUs to a key employee that vest based on the Company achieving specified revenue and operating income performance in 2014. The Company determined the performance targets were not met; and therefore these RSU’s did not vest and were forfeited. During 2014, the Company granted to a different key employee RSU’s based on revenue and operating income performance for a reporting segment of the Company; these performance conditions were partially met and therefore 8,394 RSU’s were issued. These RSU vest over a four year period.

 

F - 44



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Summary of RSUs:  Settlement of the RSUs shall be made in shares of the Company’s common stock by delivery of one share of common stock for each RSU then being settled. The Company calculates the fair value for RSUs based on the closing price of the Company’s stock on the date of grant and records compensation expense over the vesting period using a straight-line method. The Company factors an estimated forfeiture rate in calculating compensation expense on RSUs and adjusts for actual forfeitures upon the vesting of each tranche of RSUs.

 

The weighted average grant-date fair value of RSUs, including performance-based RSUs, granted during the years ended December 31, 2014, 2013, and 2012 was $26.92, $21.66, and $15.91, respectively. The total intrinsic value and fair value of RSUs vested during the years ended December 31, 2014, 2013, and 2012 was $12.4 million, $12.3 million, and $15.5 million, respectively.

 

A summary of the status of the Company’s non-vested RSUs and performance-based RSUs and activity for the year ended December 31, 2014 is as follows:

 

 

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

 

 

 

 

 

 

Unvested as of December 31, 2013

 

1,973,575

 

$

20.39

 

Granted

 

666,656

 

$

26.92

 

Vested

 

(626,070

)

$

19.85

 

Cancellations/expirations

 

(191,083

)

$

19.62

 

Unvested as of December 31, 2014

 

1,823,078

 

$

23.02

 

 

All RSU’s vested during the year ended December 31, 2014 were issued out of treasury stock. As of December 31, 2014, there was approximately $27.6 million of total unrecognized compensation expense and approximately $42.4 million in total intrinsic value related to non-vested RSU grants. The unrecognized compensation expense will be recognized over the remaining weighted-average vesting period of 1.5 years using the straight-line method.

 

Stock Options

 

During the year ended December 31, 2011, the Company granted 150,000 stock options to a key employee. The stock option award is made up of four separate tranches. Each tranche will vest based on certain stock price targets (market conditions). The grant date fair values of each tranche were calculated using a Monte Carlo simulation model in addition to a time-based binomial lattice model. The following table provides the assumptions used in the time-based binomial lattice model for each tranche granted:

 

 

 

Year Ended December 31,

 

 

 

2011

 

Risk-free interest rate

 

2.1%

 

Expected life in years

 

1.3 - 2.7

 

Expected volatility

 

54.4%

 

Dividend yield

 

0.0%

 

Weighted-average volatility

 

54.4%

 

 

The Company estimated the expected term based on historical averages of option exercises and expirations. The calculation of expected volatility is based on the historical volatility of the Company’s common stock over the expected term. The risk-free interest rate is based on the yield on the grant measurement date of a traded zero-coupon U.S. Treasury bond, as reported by the U.S. Federal Reserve, with a term equal to the expected term of the stock option granted. The Company factored an estimated forfeiture rate and adjusted for actual forfeitures upon the vesting of each tranche of options.

 

F - 45



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

A summary of stock option activity for the year ended December 31, 2014 is as follows:

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contract
Term in Years

 

Aggregate
Intrinsic
Value
(000’s)

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2013

 

1,220,474

 

$

13.43

 

 

 

 

 

Exercises

 

(53,100

)

$

9.60

 

 

 

 

 

Post-vest cancellations/expirations

 

(15,375

)

$

8.90

 

 

 

 

 

Outstanding as of December 31, 2014

 

1,151,999

 

$

13.67

 

1.9

 

$

11,540

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable as of December 31, 2014

 

1,001,999

 

$

13.12

 

1.2

 

$

10,584

 

 

There were no stock options granted during 2012, 2013 or 2014. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $0.8 million, $1.0 million and $0.6 million, respectively. The total fair value of shares vested during the years ended December 31, 2014, 2013 and 2012 was zero, respectively.

 

As of December 31, 2014, there was approximately $20 thousand of unrecognized compensation expense related to non-vested stock options. The unrecognized compensation expense will be recognized over the remaining weighted-average derived service period of 2.1 years using the straight-line method.

 

Cash received from option exercises under the Plans for the years ended December 31, 2014, 2013 and 2012 was $0.4 million, $0.9 million and $1.4 million, respectively. The recognized tax benefit from option exercises for the years ended December 31, 2014, 2013 and 2012 was $0.3 million, $0.4 million and $0.2 million, respectively. Shares issued for options exercised during the year ended December 31, 2014 were issued out of treasury stock.

 

(21)                          STOCK REPURCHASE PROGRAM

 

Stock Repurchase Program

 

The Company has a stock repurchase program, which was initially authorized by the Company’s Board of Directors in November 2001. As of December 31, 2014, the cumulative authorized repurchase allowance was $637.3 million. During the year ended December 31, 2014, the Company purchased 2.4 million shares for $57.1 million. Since inception of the program, the Company has purchased 42.1 million shares for $625.5 million. As of December 31, 2014, the remaining allowance under the program was approximately $11.8 million. For the period from January 1, 2015 through February 28, 2015, the Company purchased 212,100 additional shares at a cost of $4.7 million. The stock repurchase program does not have an expiration date. Effective February 24, 2015, the Board of Directors authorized an additional $25 million for stock repurchases.

 

(22)                          RELATED PARTY TRANSACTIONS

 

The Company has entered into an agreement under which Avion, LLC (“Avion”) provides certain aviation flight services as requested by the Company. Such services include the use of an aircraft and flight crew. Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company, has a direct 100% beneficial ownership interest in Avion. During 2014, 2013 and 2012, the Company paid $1.0 million, $0.6 million and $0.9 million, respectively, to Avion for services provided to the Company. There was $30 thousand outstanding to Avion as of December 31, 2014.

 

F - 46



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

During 2014, the Company entered into a vendor contract with Conversent to provide learning management and web and telephony based global helpline solutions. The majority owner of Conversent is a company which is owned and controlled by Kenneth D. Tuchman, Chairman and Chief Executive Officer of the Company. During 2014, the Company paid $20 thousand to Conversent and is expecting to spend another $100 thousand during 2015 and 2016.

 

The Audit Committee of the Board of Directors reviews the related party transactions quarterly and has determined that the fees charged by these related parties are at fair market value.

 

(23)                          OTHER FINANCIAL INFORMATION

 

Self-insurance liabilities of the Company which are included in Accrued employee compensation and benefits and Other accrued expenses in the accompanying Consolidated Balance Sheets were as follows (in thousands):

 

 

 

December 31,

 

 

 

2014

 

2013

 

Worker’s compensation

 

$

2,007

 

$

1,649

 

Employee health and dental insurance

 

4,769

 

3,633

 

Other insurance

 

1,068

 

631

 

Total self-insurance liabilities

 

$

7,844

 

$

5,913

 

 

(24)                          DECONSOLIDATION OF A SUBSIDIARY

 

During the second quarter of 2013, the Company concluded that it no longer had controlling influence over Peppers & Rogers Gulf WLL (“PRG Kuwait”), a once consolidated subsidiary in the CSS segment, because the Company was no longer confident that it could exercise its beneficial ownership rights. Upon deconsolidation of PRG Kuwait, the Company wrote off all PRG Kuwait assets and liabilities resulting in a loss of $3.7 million which was recorded in Loss on deconsolidation of subsidiary in the Consolidated Statements of Comprehensive Income (Loss). The $3.7 million loss included $1.3 million of goodwill allocated to PRG Kuwait immediately prior to deconsolidation based on PRG Kuwait’s relative fair value of the CSS segment. Effective April 2014, the Company entered into a stock and membership interest purchase agreement with PRG Kuwait’s other shareholder to sell its 48% interest in the Company for $175 thousand.

 

(25)                          SUBSEQUENT EVENTS

 

On February 24, 2015, our Board of Directors adopted a dividend policy, with the intent to distribute a periodic cash dividend to stockholders of our common stock, after consideration of, among other things, TeleTech’s performance, cash flows, capital needs and liquidity factors. Given our cash flow generation and balance sheet strength, we believe cash dividends and early returns to shareholders through share repurchases, in balance with our investments in innovation and strategic acquisitions, align shareholder interests with the needs of the Company. The initial dividend of $0.18 per common share will be paid on March 16, 2015 to shareholders of record as of March 6, 2015.

 

F - 47



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

(26)                          QUARTERLY FINANCIAL DATA (UNAUDITED)

 

The following tables present certain quarterly financial data for the year ended December 31, 2014 (in thousands except per share amounts).

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

302,221

 

$

295,490

 

$

305,900

 

$

338,170

 

Cost of services

 

213,787

 

212,315

 

220,244

 

240,146

 

Selling, general and administrative

 

50,367

 

47,802

 

49,847

 

50,537

 

Depreciation and amortization

 

13,170

 

14,089

 

13,893

 

15,386

 

Restructuring charges, net

 

540

 

617

 

593

 

1,600

 

Impairment losses

 

 

 

 

373

 

Income from operations

 

24,357

 

20,667

 

21,323

 

30,128

 

Other income (expense)

 

(178

)

2,880

 

(856

)

2,138

 

Provision for income taxes

 

(2,876

)

(5,417

)

(5,778

)

(8,971

)

Non-controlling interest

 

(1,085

)

(1,268

)

(1,442

)

(1,329

)

Net income attributable to TeleTech stockholders

 

$

20,218

 

$

16,862

 

$

13,247

 

$

21,966

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

50,045

 

49,351

 

49,093

 

48,714

 

Diluted

 

50,973

 

50,111

 

49,940

 

49,514

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

 

 

 

Basic

 

$

0.40

 

$

0.34

 

$

0.27

 

$

0.45

 

Diluted

 

$

0.40

 

$

0.34

 

$

0.27

 

$

0.44

 

 

Included in Other income (expense) in the second and the fourth quarters are a $4.0 million benefit and a net $2.7 million benefit related to fair value adjustments to the contingent consideration related to revised estimates of the performance against the targets for four of the Company’s acquisitions.

 

Included in the Provision for Income Taxes is a $0.2 million benefit in the first quarter, a $0.2 million benefit in the second quarter, a $0.2 million benefit in the third quarter and a $0.6 million benefit in the fourth quarter related to restructuring charges. Also included are a $0.6 million of benefit in the first quarter and $0.2 million of expense in the third quarter related to changes in valuation allowances. Additionally, in the second quarter there was $1.6 million of expense, $0.7 million of expense in the third quarter and $1.6 million of expense in the fourth quarter related to changes in the value of future contingent payments. Finally, there was $1.2 million of benefit in the first quarter related to the closing of a statute of limitations and $1.3 million of expense in the third quarter related to the Netherlands audit.

 

F - 48



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following tables present certain quarterly financial data for the year ended December 31, 2013 (in thousands except per share amounts).

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

288,383

 

$

289,692

 

$

296,995

 

$

318,087

 

Cost of services

 

208,232

 

208,809

 

208,648

 

220,942

 

Selling, general and administrative

 

45,747

 

46,168

 

50,165

 

51,343

 

Depreciation and amortization

 

10,555

 

11,263

 

11,463

 

12,783

 

Restructuring charges, net

 

851

 

2,572

 

758

 

254

 

Impairment losses

 

 

1,205

 

 

 

Income from operations

 

22,998

 

19,675

 

25,961

 

32,765

 

Other income (expense)

 

(2,004

)

(3,099

)

(434

)

(3,793

)

(Provision for) benefit from income taxes

 

(2,391

)

(3,854

)

(6,358

)

(7,995

)

Non-controlling interest

 

(642

)

(407

)

(1,526

)

(1,508

)

Net income attributable to TeleTech stockholders

 

$

17,961

 

$

12,315

 

$

17,643

 

$

19,469

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

52,347

 

51,861

 

50,732

 

50,439

 

Diluted

 

53,217

 

52,628

 

51,678

 

51,465

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.24

 

$

0.35

 

$

0.39

 

Diluted

 

$

0.34

 

$

0.23

 

$

0.34

 

$

0.38

 

 

Included in Other income (expense) in the second quarter is a $3.7 million charge related to the deconsolidation of our subsidiary in Kuwait, and in the fourth quarter is a $1.9 million charge related to a fair value adjustment to the contingent consideration for three of the Company’s acquisitions.

 

Included in the (Provision) benefit for Income Taxes is a $0.2 million benefit in the first quarter, a $1.2 million benefit in the second quarter, a $0.3 million benefit in the third quarter and a $0.1 million benefit in the fourth quarter related to restructuring charges. Also included are a $0.9 million of benefit in the first quarter, $0.3 million of expense in the second quarter, $0.4 million of expense in the third quarter and a $2.0 million of expense in the fourth quarter related to changes in valuation allowances. Additionally, there was a $0.6 million benefit in the first quarter, $0.5 million of benefit in the second quarter, $0.3 million of expense in the third quarter, and a $0.7 million of benefit in the fourth quarter related to return to provision adjustments.

 

F - 49



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

3.01**

 

Restated Certificate of Incorporation of TeleTech Holdings, Inc. filed with the State of Delaware on August 1, 1996 (incorporated by reference to Exhibit 3.1 to TeleTech’s Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996)

 

 

 

3.02**

 

Second Amended and Restated Bylaws of TeleTech (incorporated by reference to Exhibit 3.02 to TeleTech’s Current Report on Form 8-K filed on May 28, 2009)

 

 

 

10.04**

 

TeleTech Holdings, Inc. Amended and Restated 1999 Stock Option and Incentive Plan (incorporated by reference as Exhibit 10.04 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2012)

 

 

 

10.06**

 

TeleTech Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference as Appendix A to TeleTech’s Definitive Proxy Statement, filed April 12, 2010)

 

 

 

10.20**

 

Form of Non-Qualified Stock Option Agreement (below Vice President) (incorporated by reference as Exhibit 10.06 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.21**

 

Form of Non-Qualified Stock Option Agreement (Vice President and above) (incorporated by reference as Exhibit 10.07 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.22**

 

Form of Amendment to Restricted Stock Unit Agreement (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

 

 

10.23**

 

Form of Restricted Stock Unit Agreement (incorporated by reference as Exhibit 10.3 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

 

 

10.24**

 

Form of Restricted Stock Unit Agreement (Section 16 Officers) (incorporated by reference as Exhibit 4.3 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.25**

 

Form of Restricted Stock Unit Agreement (Non-Section 16 Employees) (incorporated by reference as Exhibit 4.4 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.26**

 

Form of Independent Director Restricted Stock Unit Agreement (incorporated by reference as Exhibit 4.5 to TeleTech’s Form S-8 Registration Statement (Registration No. 333-167300) filed on June 3, 2010)

 

 

 

10.27**

 

Form of Global Restricted Stock Unit Agreement (Operating Committee Member) (incorporated by reference to Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013)

 

 

 

10.28**

 

Form of Global Restricted Stock Unit Agreement (Non-Operating Committee Member) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K filed on May 1, 2013)

 

 

 

10.29*

 

Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (other employees) effective July 1, 2014

 

 

 

10.30*

 

Form of TeleTech Holdings, Inc. Restricted Stock Unit Award Agreement (Directors and Executive Committee Members) effective July 1, 2014

 

 

 

10.31**

 

Form of Non-Qualified Stock Option Agreement (Non-Employee Director) (incorporated by reference as Exhibit 10.08 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2007)

 

 

 

10.32*

 

Independent Director Compensation Arrangements (effective January 1, 2015)

 

 

 

10.33**

 

Form of Indemnification Agreement with Directors (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on February 22, 2010)

 

48



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Exhibit No.

 

Description

 

 

 

10.40**

 

Employment Agreement between Kenneth D. Tuchman and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.68 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001)

 

 

 

10.41**

 

Amendment to Employment Agreement between Kenneth D. Tuchman and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.17 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.42**

 

Amendment dated September 17, 2008 to Stock Option Agreement between Kenneth D. Tuchman and TeleTech (incorporated by reference as Exhibit 10.19 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.50**

 

Employment Agreement between James E. Barlett and TeleTech dated October 15, 2001 (incorporated by reference as Exhibit 10.66 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2001)

 

 

 

10.52**

 

Amendment to Employment Agreement between James E. Barlett and TeleTech dated December 31, 2008 (incorporated by reference as Exhibit 10.13 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.53**

 

Amendment dated September 17, 2008 to Stock Option Agreement between James E. Barlett and TeleTech (incorporated by reference as Exhibit 10.15 to TeleTech’s Annual Report on Form 10-K for the year ended December 31, 2008)

 

 

 

10.54**

 

Second Amendment, dated as of April 19, 2011, to TeleTech Holdings, Inc. Restricted Stock Unit Agreement by and between TeleTech Holdings, Inc. and James E. Barlett dated June 22, 2007  (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed April 22, 2011)

 

 

 

10.60**

 

Employment Agreement between Regina Paolillo and TeleTech Holdings, Inc. effective as of November 3, 2011 (incorporated by reference as Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed October 27, 2011)

 

 

 

10.62**

 

Restricted Stock Unit Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (RSU Performance Agreement) (incorporated by reference as Exhibit 10.2 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011)

 

 

 

10.63**

 

Non-Qualified Stock Option Agreement dated as of November 15, 2011 between TeleTech Holdings, Inc. and Regina Paolillo (Option Agreement)(incorporated by reference as Exhibit 10.3 to TeleTech’s Current Report on Form 8-K/A filed November 21, 2011)

 

 

 

10.70*

 

Separation Agreement and Release of Claims between Brian Shepherd and TeleTech Services Corporation effective as of January 31, 2015

 

 

 

10.80**

 

Employment Agreement between Keith Gallacher and TeleTech Services Corporation effective as of June 3, 2013 (incorporated by reference as Exhibit 10.2 to TeleTech’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013)

 

 

 

10.90**

 

Amended and Restated Credit Agreement, dated as of June 3, 2013, among TeleTech Holdings, Inc., the foreign borrowers party thereto, the lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and Fronting Lender, KeyBank National Association, Bank of America, N.A., BBVA Compass, and HSBC Bank USA, National Association, each as Documentation Agent and Wells Fargo Securities, LLC, KeyBank National Association, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BBVA Compass and HSBC Bank USA, National Association, as Joint Lead Arrangers (incorporated by reference to Exhibit 10.1 to TeleTech’s Current Report on Form 8-K filed on June 7, 2013)

 

49



Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Exhibit No.

 

Description

 

 

 

21.1*

 

List of subsidiaries

 

 

 

23.1*

 

Consent of Independent Registered Public Accounting Firm

 

 

 

24.1*

 

Power of Attorney

 

 

 

31.1*

 

Rule 13a-14(a) Certification of CEO of TeleTech

 

 

 

31.2*

 

Rule 13a-14(a) Certification of CFO of TeleTech

 

 

 

32.1*

 

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

 

 

 

32.2*

 

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

 

 

 

101.INS***

 

XBRL Instance Document

 

 

 

101.SCH***

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL***

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB***

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE***

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF***

 

XBRL Taxonomy Extension Definition Linkbase Document

 


*

Filed herewith.

**

Identifies exhibit that consists of or includes a management contract or compensatory plan or arrangement.

***

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012, (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, and (v) Notes to Consolidated Financial Statements.

 

50