XNAS:TTEC TeleTech Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2012

 

OR

 

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

 

For the transition period from            to

_______________________________

Commission File Number 001-11919

                        _______________________________

 

TeleTech Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

84-1291044

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

9197 South Peoria Street

Englewood, Colorado 80112

(Address of principal executive offices)

 

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

 

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

Yes R   No £

 

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

Yes þ   No £

 

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

 

Large accelerated filer o

 

Accelerated filer þ

 

 

 

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

 

Smaller reporting company o

 

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

 

As of April 26, 2012, there were 55,464,125 shares of the registrant’s common stock outstanding.

 



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

MARCH 31, 2012 FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

1

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited)

2

 

 

 

 

Consolidated Statement of Equity as of and for the three months ended March 31, 2012 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

4

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

5

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 6.

Exhibits

41

 

 

 

Signatures

42

 

 

 

Exhibit Index

43

 



 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

 

 

 

March 31,
2012

 

 

 

December 31,
2011

 

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

172,761

 

 

$

156,371

 

Accounts receivable, net

 

244,212

 

 

243,636

 

Prepaids and other current assets

 

46,611

 

 

37,434

 

Deferred tax assets, net

 

19,886

 

 

22,994

 

Income tax receivable

 

5,856

 

 

17,847

 

Total current assets

 

489,326

 

 

478,282

 

 

 

 

 

 

 

 

Long-term assets

 

 

 

 

 

 

Property, plant and equipment, net

 

98,645

 

 

100,321

 

Goodwill

 

74,069

 

 

70,844

 

Contract acquisition costs, net

 

2,624

 

 

2,866

 

Deferred tax assets, net

 

31,652

 

 

32,512

 

Other long-term assets

 

74,799

 

 

62,153

 

Total long-term assets

 

281,789

 

 

268,696

 

Total assets

 

$

771,115

 

 

$

746,978

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

20,793

 

 

$

27,555

 

Accrued employee compensation and benefits

 

70,019

 

 

71,500

 

Other accrued expenses

 

29,778

 

 

33,816

 

Income taxes payable

 

8,695

 

 

10,051

 

Deferred tax liabilities, net

 

1,832

 

 

912

 

Deferred revenue

 

13,546

 

 

15,895

 

Other current liabilities

 

5,161

 

 

10,282

 

Total current liabilities

 

149,824

 

 

170,011

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

Line of credit

 

85,000

 

 

64,000

 

Negative investment in deconsolidated subsidiary

 

76

 

 

76

 

Deferred tax liabilities, net

 

3,242

 

 

3,020

 

Deferred rent

 

7,516

 

 

6,729

 

Other long-term liabilities

 

45,229

 

 

32,895

 

Total long-term liabilities

 

141,063

 

 

106,720

 

Total liabilities

 

290,887

 

 

276,731

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock - $0.01 par value: 10,000,000 shares authorized; zero shares outstanding as of March 31, 2012 and December 31, 2011

 

-

 

 

-

 

Common stock - $0.01 par value; 150,000,000 shares authorized; 55,678,427 and 56,635,319 shares outstanding as of March 31, 2012 and December 31, 2011, respectively

 

556

 

 

566

 

Additional paid-in capital

 

342,895

 

 

350,386

 

Treasury stock at cost: 26,373,826 and 25,416,934 shares as of March 31, 2012 and December 31, 2011, respectively

 

(373,440

)

 

(357,267

)

Accumulated other comprehensive income (loss)

 

10,707

 

 

(5,474

)

Retained earnings

 

486,657

 

 

470,776

 

Noncontrolling interest

 

12,853

 

 

11,260

 

Total stockholders’ equity

 

480,228

 

 

470,247

 

Total liabilities and stockholders’ equity

 

$

771,115

 

 

$

746,978

 

 

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

 

1


 


 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Amounts in thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Revenue

 

$

292,654

 

 

$

280,979

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

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

 

211,895

 

 

199,121

 

Selling, general and administrative

 

48,135

 

 

47,801

 

Depreciation and amortization

 

10,116

 

 

11,598

 

Restructuring charges, net

 

1,958

 

 

739

 

Impairment losses

 

1,800

 

 

230

 

Total operating expenses

 

273,904

 

 

259,489

 

 

 

 

 

 

 

 

Income from operations

 

18,750

 

 

21,490

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

Interest income

 

760

 

 

666

 

Interest expense

 

(1,098

)

 

(1,380

)

Other income, net

 

258

 

 

444

 

Total other income (expense)

 

(80

)

 

(270

)

 

 

 

 

 

 

 

Income before income taxes

 

18,670

 

 

21,220

 

 

 

 

 

 

 

 

Provision for income taxes

 

(1,853

)

 

(9,849

)

 

 

 

 

 

 

 

Net income

 

16,817

 

 

11,371

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

(936

)

 

(898

)

 

 

 

 

 

 

 

Net income attributable to TeleTech stockholders

 

$

15,881

 

 

$

10,473

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

Net income

 

$

16,817

 

 

$

11,371

 

Foreign currency translation adjustment

 

8,751

 

 

5,091

 

Derivative valuation, gross

 

11,671

 

 

(2,287

)

Derivative valuation, tax effect

 

(4,574

)

 

830

 

Other

 

345

 

 

110

 

Total other comprehensive income

 

16,193

 

 

3,744

 

Total comprehensive income

 

33,010

 

 

15,115

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

(948

)

 

(951

)

 

 

 

 

 

 

 

Comprehensive income attributable to TeleTech stockholders

 

$

32,062

 

 

$

14,164

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

56,493

 

 

57,190

 

Diluted

 

57,418

 

 

58,797

 

 

 

 

 

 

 

 

Net income per share attributable to TeleTech stockholders

 

 

 

 

 

 

Basic

 

$

0.28

 

 

$

0.18

 

Diluted

 

$

0.28

 

 

$

0.18

 

 

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

 

2



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Amounts in thousands)

(Unaudited)

 

 

 

Stockholders' Equity of the Company

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Retained
Earnings

 

Noncontrolling
interest

 

Total
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2011

 

-

 

$

-

 

56,635

 

$

566

 

$

(357,267

)

$

350,386

 

$

(5,474

)

$

470,776

 

$

11,260

 

$

470,247

 

Net income

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

15,881

 

936

 

16,817

 

Acquisition of noncontrolling interest

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1,365

 

1,365

 

Dividends distributed to noncontrolling interest

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(720

)

(720

)

Foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

8,739

 

-

 

12

 

8,751

 

Derivatives valuation, net of tax

 

-

 

-

 

-

 

-

 

-

 

-

 

7,097

 

-

 

-

 

7,097

 

Vesting of restricted stock units

 

-

 

-

 

436

 

4

 

6,079

 

(9,814

)

-

 

-

 

-

 

(3,731

)

Exercise of stock options

 

-

 

-

 

28

 

-

 

390

 

(48

)

-

 

-

 

-

 

342

 

Excess tax benefit from equity-based awards

 

-

 

-

 

-

 

-

 

-

 

(1,017

)

-

 

-

 

-

 

(1,017

)

Equity-based compensation expense

 

-

 

-

 

-

 

-

 

-

 

3,388

 

-

 

-

 

-

 

3,388

 

Purchases of common stock

 

-

 

-

 

(1,421

)

(14

)

(22,642

)

-

 

-

 

-

 

-

 

(22,656

)

Other

 

-

 

-

 

-

 

-

 

-

 

-

 

345

 

-

 

-

 

345

 

Balance as of March 31, 2012

 

-

 

$

-

 

55,678

 

$

556

 

$

(373,440

)

$

342,895

 

$

10,707

 

$

486,657

 

$

12,853

 

$

480,228

 

 

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

 

3



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

2012

 

 

2011

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

16,817

 

 

$

11,371

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

 

 

 

 

 

Depreciation and amortization

 

10,116

 

 

11,598

Amortization of contract acquisition costs

 

256

 

 

635

Amortization of debt issuance costs

 

153

 

 

228

Accretion expense

 

64

 

 

196

Provision for doubtful accounts

 

40

 

 

(208)

Loss (gain) on disposal of assets

 

110

 

 

-

Impairment losses

 

1,800

 

 

230

Deferred income taxes

 

(1,222

)

 

5,361

Excess tax benefit from equity-based awards

 

(462

)

 

(2,066)

Equity-based compensation expense

 

3,388

 

 

3,760

(Gain) loss on foreign currency derivatives

 

(299

)

 

(35)

 

 

 

 

 

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

3,031

 

 

11,627

Prepaids and other assets

 

(7,826

)

 

(386)

Accounts payable and accrued expenses

 

(15,526

)

 

(23,665)

Deferred revenue and other liabilities

 

4,224

 

 

5,962

Net cash provided by operating activities

 

14,664

 

 

24,608

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from grant for property, plant and equipment

 

110

 

 

-

Purchases of property, plant and equipment

 

(6,484

)

 

(3,870)

Acquisitions, net of cash acquired of $1,373 and zero, respectively

 

(4,627

)

 

-

Net cash used in investing activities

 

(11,001

)

 

(3,870)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from line of credit

 

248,550

 

 

258,900

Payments on line of credit

 

(227,550

)

 

(179,400)

Proceeds from other debt

 

6,821

 

 

-

Payments on other debt

 

(655

)

 

(537)

Dividends distributed to noncontrolling interest

 

(720

)

 

(990)

Proceeds from exercise of stock options

 

342

 

 

1,750

Excess tax benefit from equity-based awards

 

462

 

 

2,066

Purchase of treasury stock

 

(22,656

)

 

(33,829)

Payments of debt issuance costs

 

(419

)

 

(22)

Net cash provided by financing activities

 

4,175

 

 

47,938

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

8,552

 

 

1,646

 

 

 

 

 

 

Increase in cash and cash equivalents

 

16,390

 

 

70,322

Cash and cash equivalents, beginning of period

 

156,371

 

 

119,385

Cash and cash equivalents, end of period

 

$

172,761

 

 

$

189,707

 

 

 

 

 

 

Supplemental disclosures

 

 

 

 

 

Cash paid for interest

 

$

873

 

 

$

1,050

Cash paid for income taxes

 

$

1,887

 

 

$

11,860

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Acquisition of equipment through installment purchase agreements

 

$

-

 

 

$

110

Recognition of asset retirement obligations

 

$

-

 

 

$

278

Landlord incentives credited to deferred rent

 

$

604

 

 

$

-

 

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

 

4


 


 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)        OVERVIEW AND BASIS OF PRESENTATION

 

Overview

TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) serve their clients through the primary businesses of Business Process Outsourcing (“BPO”), which includes data-driven strategic consulting and marketing services, customer management, hosted and managed technologies, for a variety of industries via operations in the U.S., Argentina, Australia, Belgium, Brazil, Canada, China, Costa Rica, England, France, Germany, Ghana, Italy, Kuwait, Lebanon, Mexico, New Zealand, Northern Ireland, the Philippines, Scotland, South Africa, Spain, Turkey and the United Arab Emirates.

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 Peppers & Rogers Group (“PRG”) and its 80% interest in iKnowtion which was acquired on February 27, 2012 (see Note 2 for additional information). All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited Consolidated Financial Statements do not include all of the disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of March 31, 2012, and the consolidated results of operations and comprehensive income and cash flows of the Company for the three months ended March 31, 2012 and 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Certain amounts for 2011 have been reclassified in the Consolidated Financial Statements to conform to the 2012 presentation.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing 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 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.

 

5



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Issued Accounting Pronouncements

In May 2011, the FASB amended its guidance, to converge fair value measurement and disclosure guidance in U.S. GAAP with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. The amendment changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The FASB does not intend for the amendment to result in a change in the application of the requirements in the current authoritative guidance. The amendment became effective prospectively for the Company’s interim period ended March 31, 2012. The adoption of this guidance did not have a material impact on its financial position, results of operations or cash flows.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity has the option to present comprehensive income in either one or two consecutive financial statements. The Company decided to present a single statement setting the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. The amendment became effective retrospectively for the Company’s interim period ended March 31, 2012.

In December 2011, the FASB issued additional guidance related to the presentation of other comprehensive income. This guidance is intended to allow the FASB time to re-deliberate whether it is necessary to require entities to present the effects of reclassifications out of accumulated other comprehensive income in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This guidance defers the effective date of only those provisions in the other comprehensive income guidance that relate to the presentation of reclassification adjustments out of other comprehensive income and reinstates the previous requirements to present reclassification adjustments either on the face of the statement in which other comprehensive income is reported or to disclose them in a note to the financial statements. The amendments in this new guidance became effective at the same time as the amendments in the other comprehensive income guidance explained above. The Company’s adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

(2)        ACQUISITIONS

OnState

On January 1, 2012, the Company entered into an asset purchase agreement with OnState Communications Corporation (“OnState”) to acquire 100% of its assets and assume certain of its liabilities for total cash consideration of $3.3 million. OnState provides hosted business process outsourcing solutions to a variety of small businesses. OnState was headquartered in Boston, MA with a minimal employee base.

The Company paid $3.1 million towards the purchase price with the remaining $0.2 million payable during the second quarter of 2012. The $0.2 million was included within Other accrued expenses in the accompanying Consolidated Balance Sheets as of March 31, 2012. The Company paid $0.1 million of acquisition related expenses as part of the OnState purchase. These costs were recorded in Selling, general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income during the three months ended March 31, 2012.

 

6



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following summarizes the preliminary estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands). The estimates of fair value of identifiable assets acquired and liabilities assumed, are preliminary, pending completion of the valuation, thus are subject to revisions that may result in adjustments to the values presented below:

 

 

 

Preliminary
Estimates of
Acquisition Date
Fair Value

 

Cash

 

$

36

 

Accounts Receivable

 

68

 

Property, plant and equipment

 

33

 

Software

 

2,100

 

Goodwill

 

1,132

 

 

 

3,369

 

 

 

 

 

Accounts payable

 

93

 

 

 

 

 

Total purchase price

 

$

3,276

 

 

The software acquired will be amortized over four years as soon as the software is placed into service. The goodwill recognized from the OnState acquisition is primarily attributable to incorporating the acquired software into current technology platforms in addition to the acquisition of the employees who developed the acquired software. Since this acquisition is considered an asset acquisition for tax purposes, the goodwill and software will be deductible.

iKnowtion

On February 27, 2012, 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. iKnowtion is located in Boston, MA and has approximately 40 employees.

The up-front cash consideration paid was $1.0 million. The Company is also obligated to pay a working capital adjustment equivalent to any acquired working capital from iKnowtion in excess of a working capital floor as defined in the purchase and sale agreement. As of March 31, 2012, the working capital adjustment was estimated to be $0.2 million, which will be paid during the second quarter of 2012 and was included in Other accrued expenses in the accompanying Consolidated Balance Sheets.

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 Company expects iKnowtion to achieve the maximum EBITDA targets and has calculated the fair value of these contingent payments to be approximately $4.3 million. 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 10% and expected future value of payments of $4.8 million. The fair value of the contingent consideration was $4.3 million as of March 31, 2012, of which $1.1 million and $3.2 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

The fair value of the 20% noncontrolling interest in iKnowtion of $1.4 million is preliminary and based on an estimate of 20% of the total purchase price.

 

7



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 iKnowtions’s 2015 EBITDA as defined in the purchase and sale agreement. The preliminary fair value of this feature is minimal and included in the fair value of the noncontrolling interest as of March 31, 2012.

The Company paid $0.1 million of acquisition related expenses as part of the iKnowtion purchase. These costs were recorded in selling, general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income during the three months ended March 31, 2012.

The following summarizes the preliminary estimated fair values of the identifiable assets acquired and liabilities and noncontrolling interest assumed as of the acquisition date (in thousands). The estimates of fair value of identifiable assets acquired and liabilities assumed, are preliminary, pending completion of the valuation, and thus are subject to revisions that will result in adjustments to the values presented below:

 

 

 

Preliminary
Estimates of
Acquisition Date
Fair Value

 

Cash

 

$

1,337

 

Accounts Receivable

 

1,792

 

Property, plant and equipment

 

161

 

Other assets

 

95

 

Customer relationships

 

1,640

 

Goodwill

 

1,996

 

 

 

7,021

 

 

 

 

 

Accounts payable

 

12

 

Accrued expenses

 

19

 

Deferred rent

 

164

 

 

 

195

 

 

 

 

 

Noncontrolling interest

 

1,365

 

 

 

 

 

Total purchase price

 

$

5,461

 

 

The iKnowtion customer relationships have an estimated useful life of 7 years. The goodwill recognized from the iKnowtion acquisition is primarily attributable to the acquired workforce of iKnowtion, expected synergies, and other factors. None of the goodwill is deductible for income tax purposes. The acquired goodwill and the operating results of iKnowtion are reported within the Customer Strategy Services segment from the date of acquisition.

eLoyalty

On May 28, 2011, the Company acquired certain assets and assumed certain liabilities of eLoyalty Corporation (“eLoyalty”), related to the Integrated Contract Solutions (“ICS”) business unit, and the eLoyalty trade name. The ICS business unit focuses on helping clients improve customer service business performance through the implementation of a variety of service centers. The ICS business unit generates revenue in three ways: (i) managed services that support and maintain clients’ customer service center environment over the long-term; (ii) consulting services that assist the customer in implementation and integration of a customer service center solution; and (iii) product resale through the sale of third party software and hardware. eLoyalty operates out of an office in Austin, TX with an additional administrative location in Chicago, IL and has approximately 160 employees.

 

The up-front cash consideration in the eLoyalty transaction was $40.9 million, subject to certain balance sheet adjustments of ($2.9) million as defined in the purchase and sale agreement, for a total purchase price of $38.0 million, all of which was paid by December 31, 2011.

 

8



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

 

 

Acquisition Date
Fair Value

 

Cash

 

$

14

 

Accounts Receivable

 

7,702

 

Prepaid assets - cost deferrals

 

14,726

 

Property, plant and equipment

 

897

 

Other assets

 

869

 

Deferred tax asset

 

3,735

 

Customer relationships

 

11,700

 

Software

 

1,200

 

Noncompete agreements

 

900

 

Trade name

 

3,300

 

Consulting services backlog

 

500

 

Goodwill

 

18,516

 

 

 

64,059

 

 

 

 

 

Accounts payable

 

2,156

 

Accrued expenses

 

1,211

 

Deferred revenue

 

22,525

 

Other

 

192

 

 

 

26,084

 

 

 

 

 

Total purchase price

 

$

37,975

 

 

The customer relationship intangible asset is being amortized over 11 years. The goodwill recognized from the eLoyalty acquisition is attributable primarily to the assembled workforce of eLoyalty and significant opportunity for Company growth and marketing based on additional service offerings and capabilities. Since this acquisition is treated as an asset acquisition for tax purposes, the goodwill and associated intangible assets will be deductible for income tax purposes. The operating results of eLoyalty are reported within the Customer Technology Services segment from the date of acquisition.

The acquired businesses contributed revenues of $21.1 million and income from operations of $2.4 million to the Company for the quarter ended March 31, 2012.

 

9



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(3)                                 SEGMENT INFORMATION

Effective January 1, 2012, the Company completed certain changes focused on streamlining the organization to more closely align the Company’s reporting structure with its products and services and to increase management accountability. Beginning in the first quarter of 2012, the Company will now report the following four segments:

·                 the Customer Management  Services  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 Customer Growth Services segment includes the technology-enabled sales and marketing business;

·                  the Customer Technology Services segment includes the hosted and managed technology offerings, including certain acquired assets of eLoyalty; and

·                  the Customer Strategy Services segment includes the customer experience strategy and data analytics offerings.

 

TeleTech revised previously reported segment information to conform to its new segments in effect as of January 1, 2012.

All intercompany transactions between the reported segments for the periods presented have been eliminated.

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

Q1 2012

 

 

 

Gross
Revenue

 

Intersegment
Sales

 

Net
Revenue

 

Depreciation &
Amortization

 

Income (Loss)
from Operations

Customer Management Services

$

 

234,876

 

$

-

 

$

234,876

 

$

6,140

 

$

45,422

Customer Growth Services

 

22,764

 

-

 

22,764

 

565

 

1,079

Customer Technology Services

 

26,484

 

(931)

 

25,553

 

787

 

3,635

Customer Strategy Services

 

10,362

 

(901)

 

9,461

 

350

 

885

Total segments

 

294,486

 

(1,832)

 

292,654

 

7,842

 

51,021

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

-

 

-

 

-

 

2,274

 

(32,271)

Total

$

 

294,486

 

$

(1,832)

 

$

292,654

 

$

10,116

 

$

18,750

 

 

Q1 2011

 

 

 

Gross
Revenue

 

Intersegment
Sales

 

Net
Revenue

 

Depreciation &
Amortization

 

Income (Loss)
from Operations

Customer Management Services

$

 

246,073

 

$

-

 

$

246,073

 

$

8,431

 

$

48,251

Customer Growth Services

 

22,143

 

-

 

22,143

 

785

 

2,982

Customer Technology Services

 

4,657

 

-

 

4,657

 

69

 

2,712

Customer Strategy Services

 

8,106

 

-

 

8,106

 

299

 

463

Total segments

 

280,979

 

-

 

280,979

 

9,584

 

54,408

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

-

 

-

 

-

 

2,014

 

(32,918)

Total

$

 

280,979

 

$

-

 

$

280,979

 

$

11,598

 

$

21,490

 

10



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

2012

 

2011

Capital Expenditures

 

 

 

 

Customer Management Services

 

$

2,178

 

$

2,121

Customer Growth Services

 

369

 

106

Customer Technology Services

 

326

 

70

Customer Strategy Services

 

66

 

138

Corporate

 

3,545

 

1,435

Total

 

$

6,484

 

$

3,870

 

 

 

March 31, 2012

 

December 31, 2011

Total Assets

 

 

 

 

Customer Management Services

 

$

479,624

 

$

479,818

Customer Growth Services

 

46,388

 

50,950

Customer Technology Services

 

82,442

 

70,745

Customer Strategy Services

 

50,340

 

42,882

Corporate

 

112,321

 

102,583

Total

 

$

771,115

 

$

746,978

 

 

 

March 31, 2012

 

December 31, 2011

Goodwill

 

 

 

 

Customer Management Services

 

$

20,691

 

$

20,594

Customer Growth Services

 

24,439

 

24,439

Customer Technology Services

 

19,648

 

18,516

Customer Strategy Services

 

9,291

 

7,295

Total

 

$

74,069

 

$

70,844

 

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

 

 

 

Three Months Ended March 31,

 

 

2012

 

2011

Revenue

 

 

 

 

United States

 

$

110,576

 

$

84,629

Philippines

 

78,665

 

83,507

Latin America

 

47,896

 

55,598

Europe / Middle East / Africa

 

38,366

 

39,758

Canada

 

12,953

 

12,798

Asia Pacific

 

4,198

 

4,689

Total

 

$

292,654

 

$

280,979

 

(4)        SIGNIFICANT CLIENTS and other concentrations

The Company did not have any clients that contributed in excess of 10% of total revenue for the three months ended March 31, 2012 or 2011.

The loss of one or more of its significant clients could have a material adverse effect on the Company’s business, operating results, or financial condition. The Company does not require collateral from its clients. To limit the Company’s credit risk, management performs periodic credit evaluations of its clients and maintains allowances for uncollectible accounts and may require pre-payment for services. Although the Company is impacted by economic conditions in various industry segments, management does not believe significant credit risk existed as of March 31, 2012.

 

11



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(5)        GOODWILL

Goodwill consisted of the following (amounts in thousands):

 

 

 

December 31,
2011

 

Acquisitions

 

Impairments

 

Effect of
Foreign
Currency

 

March 31,
2012

 

 

 

 

 

 

 

 

 

 

 

Customer Management Services

 

$

20,594

 

$

-

 

$

-

 

$

97

 

$

20,691

Customer Growth Services

 

24,439

 

-

 

-

 

-

 

24,439

Customer Technology Services

 

18,516

 

1,132

 

-

 

-

 

19,648

Customer Strategy Services

 

7,295

 

1,996

 

-

 

-

 

9,291

Total

 

$

70,844

 

$

3,128

 

$

-

 

$

97

 

$

74,069

 

The Company 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 the quarter ended March 31, 2012, the Company assessed whether any such indicators of impairment existed and concluded that there were none.

(6)        DERIVATIVES

Cash Flow Hedges

The Company enters into foreign exchange and interest rate related derivatives. Foreign exchange derivatives entered into consist of forward and option contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations. Interest rate derivatives consist of interest rate swaps to reduce the Company’s exposure to interest rate fluctuations associated with its variable rate debt. Upon proper qualification, these contracts are designated as cash flow hedges. It is the Company’s policy to only enter into derivative contracts with investment grade counterparty financial institutions, and correspondingly, the fair value of derivative assets consider, among other factors, the creditworthiness of these counterparties. Conversely, the fair value of derivative liabilities reflects the Company’s creditworthiness. As of March 31, 2012, the Company has not experienced, nor does it anticipate, any issues related to derivative counterparty defaults. The following table summarizes the aggregate unrealized net gain or loss in Accumulated other comprehensive income (loss) for the three months ended March 31, 2012 and 2011 (amounts in thousands and net of tax):

 

 

 

Three Months Ended March 31,

 

 

2012

 

2011

 

 

 

 

 

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

 

$

(5,852)

 

$

7,091

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

 

7,071

 

758

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

 

26

 

(2,215)

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

 

$

1,245

 

$

5,634

 

12



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company’s foreign exchange cash flow hedging instruments as of March 31, 2012 and December 31, 2011 are summarized as follows (amounts in thousands). All hedging instruments are forward contracts unless noted otherwise.

 

 

As of March 31, 2012

 

Local Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

% Maturing in
the Next 12
Months

 

Contracts
Maturing
Through

Canadian Dollar

 

20,500

 

$

19,935

 

62.2 %

 

March 2014

Costa Rican Colon

 

1,250,000

 

2,415

 

100.0 %

 

August 2012

Philippine Peso

 

11,260,000

 

255,373

(1)

48.3 %

 

December 2014

Mexican Peso (Forwards)

 

952,000

 

70,505

 

40.7 %

 

November 2014

Mexican Peso (Collars)

 

105,224

 

9,000

(3)

100.0 %

 

December 2012

British Pound Sterling

 

7,484

 

11,832

(2)

53.0 %

 

June 2014

 

 

 

 

$

369,060

 

 

 

 

 

As of December 31, 2011

 

Local Currency
Notional
Amount

 

U.S. Dollar
Notional
Amount

 

 

 

 

Canadian Dollar

 

25,750

 

$

25,137

 

 

 

 

Costa Rican Colon

 

2,000,000

 

3,874

 

 

 

 

Philippine Peso

 

13,304,000

 

301,361

(1)

 

 

 

Mexican Peso (Forwards)

 

1,081,000

 

80,735

 

 

 

 

Mexican Peso (Collars)

 

140,298

 

12,000

(4)

 

 

 

British Pound Sterling

 

8,808

 

13,822

(2)

 

 

 

 

 

 

 

$

436,929

 

 

 

 

 

(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 March 31, 2012 and December 31, 2011.

(2)          Includes contracts to purchase British pound sterling in exchange for Euros, which are translated into equivalent U.S. dollars on March 31, 2012 and December 31, 2011.

(3)          The Mexican peso collars include call options with a floor total of MXN 105.2 million and put options with a cap total of MXN (120.2 million) as of March 31, 2012.

(4)          The Mexican peso collars include call options with a floor total of MXN 140.3 million and put options with a cap total of MXN (157.0 million) as of December 31, 2011.

 

The Company’s interest rate swap arrangements as of March 31, 2012 and December 31, 2011 were as follows:

 

 

 

Notional
Amount

 

Variable Rate
Received

 

Fixed Rate
Paid

 

Contract
Commencement
Date

 

Contract
Maturity
Date

 

As of March 31, 2012

 

$

25 million

 

1 - month LIBOR

 

2.55   %

 

April 2012

 

April 2016

 

 

 

15 million

 

1 - month LIBOR

 

3.14   %

 

May 2012

 

May 2017

 

 

 

$

40 million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

$

25 million

 

1 - month LIBOR

 

2.55   %

 

April 2012

 

April 2016

 

 

 

15 million

 

1 - month LIBOR

 

3.14   %

 

May 2012

 

May 2017

 

 

 

$

40 million

 

 

 

 

 

 

 

 

 

 

13



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 March 31, 2012 and December 31, 2011 the total notional amount of the Company’s forward contracts used as fair value hedges were $67.3 million and $49.8 million, respectively.

Embedded Derivatives

In addition to hedging activities, the Company’s foreign subsidiary in Argentina was party to U.S. dollar denominated lease contracts which the Company determined contain embedded derivatives. As such, the Company bifurcates the embedded derivative features of the lease contracts and valued these features as foreign currency derivatives. During 2011, the Company amended its leases to remove the embedded derivative feature which reduced the fair value to zero as of December 31, 2011.

Derivative Valuation and Settlements

The Company’s derivatives as of March 31, 2012 and December 31, 2011 were as follows (amounts in thousands):

 

 

 

March 31, 2012

 

 

Designated as Hedging Instruments

 

Not Designated as Hedging
Instruments

Derivative contracts:

 

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

 

$

4,237

 

$

-

 

$

9

 

$

-

Other long-term assets

 

3,046

 

-

 

-

 

-

Other current liabilities

 

(2,135)

 

-

 

(38)

 

-

Other long-term liabilities

 

(377)

 

(2,535)

 

-

 

-

Total fair value of derivatives, net

 

$

4,771

 

$

(2,535)

 

$

(29)

 

$

-

 

 

 

December 31, 2011

 

 

Designated as Hedging Instruments

 

Not Designated as Hedging
Instruments

Derivative contracts:

 

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

 

$

2,325

 

$

-

 

$

12

 

$

-

Other long-term assets

 

1,119

 

-

 

-

 

-

Other current liabilities

 

(7,828)

 

-

 

(341)

 

-

Other long-term liabilities

 

(2,786)

 

(2,263)

 

-

 

-

Total fair value of derivatives, net

 

$

(7,170)

 

$

(2,263)

 

$

(329)

 

$

-

 

14


 


 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The effects of derivative instruments on the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 were as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

 

2012

 

2011

 

 

Designated as Hedging Instruments

 

Designated as Hedging Instruments

Derivative contracts:

 

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 - effective portion, net of tax:

 

$

7,234

 

$

(163)

 

$

570

 

$

188

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

(43)

 

$

-

 

$

3,691

 

$

-

 

 

 

 

 

 

 

 

 

Amount and location of net gain or (loss) reclassified from accumulated OCI to income - ineffective portion and amount excluded from effectiveness testing:

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

Three Months Ended March 31,

 

 

2012

 

2011

 

 

Not Designated as Hedging Instruments

 

Not Designated as Hedging Instruments

Derivative contracts:

 

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 Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of services

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

44

Other income (expense), net

 

$

-

 

$

2,169

 

$

-

 

$

-

 

$

711

 

$

-

 

(7)        FAIR VALUE

 

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

 

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

 

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

 

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

 

The following presents information as of March 31, 2012 and December 31, 2011 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.

 

15



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 March 31, 2012 and December 31, 2011, the Company had $85.0 million and $64.0 million, respectively, of borrowings outstanding under the Credit Agreement. During the first quarter of 2012 outstanding borrowings accrued interest at an average rate of 1.6% per annum, excluding unused commitment fees. The amounts recorded in the accompanying balance sheets approximate fair value due to the variable nature of the debt.

 

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 March 31, 2012, 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 March 31, 2012 and December 31, 2011 (amounts in thousands):

 

As of March 31, 2012

 

 

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

 

$

-

 

$

4,771

 

$

-

 

$

4,771

Interest rate swaps

 

-

 

(2,535)

 

-

 

(2,535)

Fair value hedges

 

-

 

(29)

 

-

 

(29)

Total net derivative asset (liability)

 

$

-

 

$

2,207

 

$

-

 

$

2,207

 

As of December 31, 2011

 

 

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

 

$

-

 

$

(7,170)

 

$

-

 

$

(7,170)

Interest rate swaps

 

-

 

(2,263)

 

-

 

(2,263)

Fair value hedges

 

-

 

(329)

 

-

 

(329)

Total net derivative asset (liability)

 

$

-

 

$

(9,762)

 

$

-

 

$

(9,762)

 

16



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following is a summary of the Company’s fair value measurements as of March 31, 2012 and December 31, 2011 (amounts in thousands):

 

As of March 31, 2012

 

 

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

 

$

-

 

$

523

 

$

-

Derivative instruments, net

 

-

 

2,207

 

-

Total assets

 

$

-

 

$

2,730

 

$

-

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred compensation plan liability

 

$

-

 

$

(4,761)

 

$

-

Derivative instruments, net

 

-

 

-

 

-

Purchase price payable

 

-

 

-

 

(4,303)

Total liabilities

 

$

-

 

$

(4,761)

 

$

(4,303)

 

As of December 31, 2011

 

 

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

 

$

-

 

$

507

 

$

-

Derivative instruments, net

 

-

 

-

 

-

Total assets

 

$

-

 

$

507

 

$

-

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred compensation plan liability

 

$

-

 

$

(3,990

)

$

-

Derivative instruments, net

 

-

 

(9,762

)

-

Purchase price payable

 

-

 

-

 

(4,985)

Total liabilities

 

$

-

 

$

(13,752

)

$

(4,985)

 

Money Market InvestmentsThe 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”). All of the money market funds currently permit daily investments and redemptions at a $1.00 NAV.

 

Deferred Compensation PlanThe 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.

 

17



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Purchase Price Payable — The Company recorded a purchase price payable related to the acquisition of iKnowtion. The purchase price payable was recognized at fair value using a discounted cash flow approach and a discount rate of 10.0%. This measurement was based on significant inputs not observable in the market. The Company will record accretion expense each period using the effective interest method until the future value of this purchase price payable reaches $4.8 million in 2016. Accretion expense related to all recorded purchase price payables is included in Interest expense in the Consolidated Statements of Comprehensive Income.

 

The Company also had a future payable related to the purchase of PRG. As part of the PRG acquisition, the Company paid the previously recognized purchase price payable of $5.0 million on March 1, 2012. The Company recorded accretion expense each period using the effective interest rate method until the payable reached the $5.0 million payment.

 

(8)        INCOME TAXES

 

The Company accounts for income taxes in accordance with the accounting literature for income taxes, which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. Quarterly, the Company assesses the likelihood that its net deferred tax assets will be recovered. Based on the weight of all available evidence, both positive and negative, the Company records a valuation allowance against deferred tax assets when it is more-likely-than-not that a future tax benefit will not be realized.

 

On February 20, 2011, the Company received notice of an adverse decision by the Canadian Revenue Agency (“CRA”) in regards to the Company’s attempt to recover taxes paid to Canada with respect to the years 2001 and 2002. In 2005, through the Competent Authority process, the Company sought relief under the United States-Canada Income Tax Convention for avoidance of double taxation arising from adjustments to the taxable income originally reported to these jurisdictions. Consistent with accounting for tax positions that no longer meet the recognition criteria, the Company derecognized income tax positions totaling $8.6 million through income tax expense in the first quarter of 2011. The Company continues to believe in the merits of its claim for which it sought relief from double taxation through the Competent Authority process. In response to the February 2011 notice, the Company has filed for Judicial Review in the Federal Court of Canada seeking a writ of mandamus to compel the CRA to accept the Company’s application for Competent Authority consideration.

 

On December 20, 2011, the Company received written notice from the Internal Revenue Service that the Joint Committee on Taxation had completed its consideration of the mediated settlement reached with the IRS concerning tax refund claims and taken no exception to the conclusions reached. During 2011, the Company recognized, as a reduction to income tax expense, income tax positions (including interest net of tax) of $11.7 million related to these claims. During the first quarter of 2012, the Company fully collected these amounts.

 

As of March 31, 2012, the Company had $51.5 million of gross deferred tax assets (after a $15.0 million valuation allowance) and net deferred tax assets (after deferred tax liabilities) of $46.5 million related to the U.S. and international tax jurisdictions whose recoverability is dependent upon future profitability.

 

The effective tax rate for the three months ended March 31, 2012 and 2011 was 9.9% and 46.4%, respectively.

 

The Company is currently under audit of income taxes in the Philippines for 2008. 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.

 

18



 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(9)        RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

 

Restructuring Charges

 

During the three months ended March 31, 2012 and 2011, the Company undertook a number of restructuring activities primarily associated with reductions in the Company’s capacity and workforce in both the Customer Management Services and Customer Growth Services segments to better align the capacity and workforce with current business needs.

 

A summary of the expenses recorded in Restructuring, net in the accompanying Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, respectively, is as follows (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Reduction in force

 

 

 

 

 

Customer Management Services

 

$

1,544

 

$

852

 

Customer Growth Services

 

103

 

110

 

Customer Technology Services

 

-

 

-

 

Customer Strategy Services

 

-

 

-

 

Corporate

 

311

 

-

 

Total

 

$

1,958

 

$

962

 

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Facility exit charges

 

 

 

 

 

Customer Management Services

 

$

-

 

$

7

 

Customer Growth Services

 

-

 

-

 

Customer Technology Services

 

-

 

-

 

Customer Strategy Services

 

-

 

-

 

Corporate

 

-

 

-

 

Total

 

$

-

 

$

7

 

 

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

 

 

 

Closure of
Delivery Centers

 

Reduction in
Force

 

Total

 

 

 

 

 

 

 

Balance as of December 31, 2011

 

$

415

 

$

1,652

 

$

2,067

Expense

 

-

 

1,958

 

1,958

Payments

 

(30)

 

(1,608)

 

(1,638)

Reversals

 

-

 

-

 

-

Balance as of March 31, 2012

 

$

385

 

$