TTEC Holdings, Inc. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

For the quarterly period ended September 30, 2013

 

OR

 

 

For the transition period from              to              

 

 

Commission File Number 001-11919

 

 

TeleTech Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

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 x   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 x   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.

 

 

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 October 24, 2013, there were 50,424,066 shares of the registrant’s common stock outstanding.

 

 

Table of Contents

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

SEPTEMBER 30, 2013 FORM 10-Q

TABLE OF CONTENTS

 

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	1
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013 (unaudited)	3
	Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2013 and 2012 (unaudited)	4
	Notes to the Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	47
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	49
SIGNATURES		50
EXHIBIT INDEX		51

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

		September 30, 2013			December 31, 2012
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	144,903		$	164,485
Accounts receivable, net		245,080			251,206
Prepaids and other current assets		58,987			58,702
Deferred tax assets, net		8,672			14,169
Income tax receivable		9,367			14,982
Total current assets		467,009			503,544
Long-term assets
Property, plant and equipment, net		120,111			112,276
Goodwill		98,695			94,679
Contract acquisition costs, net		2,077			1,860
Deferred tax assets, net		46,720			35,429
Other long-term assets		103,757			99,385
Total long-term assets		371,360			343,629
Total assets		$	838,369		$	847,173
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	35,719		$	23,494
Accrued employee compensation and benefits		67,982			71,621
Other accrued expenses		26,365			29,056
Income taxes payable		4,504			12,650
Deferred tax liabilities, net		300			341
Deferred revenue		33,609			26,892
Other current liabilities		10,519			7,351
Total current liabilities		178,998			171,405
Long-term liabilities
Line of credit		118,000			108,000
Deferred tax liabilities, net		2,277			3,029
Deferred rent		9,826			8,589
Other long-term liabilities		57,897			55,813
Total long-term liabilities		188,000			175,431
Total liabilities		366,998			346,836
Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred stock - $0.01 par value: 10,000,000 shares authorized; zero shares outstanding as of September 30, 2013 and December 31, 2012		—			—
Common stock - $0.01 par value; 150,000,000 shares authorized; 50,496,816 and 52,288,567 shares outstanding as of September 30, 2013 and December 31, 2012, respectively		504			522
Additional paid-in capital		354,501			350,714
Treasury stock at cost: 31,555,437 and 29,763,686 shares as of September 30, 2013 and December 31, 2012, respectively		(473,318		)	(428,716		)
Accumulated other comprehensive income (loss)		(7,886		)	22,981
Retained earnings		588,710			540,791
Noncontrolling interest		8,860			14,045
Total stockholders’ equity		471,371			500,337
Total liabilities and stockholders’ equity		$	838,369		$	847,173

 

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

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Amounts in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
Revenue		$	296,995		$	286,268		$	875,070		$	867,720
Operating expenses
Cost of services (exclusive of depreciation and amortization presented separately below)		208,648			201,766			625,689			622,782
Selling, general and administrative		50,165			43,845			142,080			137,689
Depreciation and amortization		11,463			10,695			33,281			31,040
Restructuring charges, net		758			2,440			4,181			20,694
Impairment losses		—			161			1,205			2,958
Total operating expenses		271,034			258,907			806,436			815,163
Income from operations		25,961			27,361			68,634			52,557
Other income (expense)
Interest income		938			780			2,182			2,235
Interest expense		(1,799		)	(2,129		)	(5,567		)	(4,810		)
Loss on deconsolidation of subsidiary		—			—			(3,655		)	—
Other income (expense), net		427			97			1,503			(227		)
Total other income (expense)		(434		)	(1,252		)	(5,537		)	(2,802		)
Income before income taxes		25,527			26,109			63,097			49,755
(Provision for) benefit from income taxes		(6,358		)	3,611			(12,603		)	3,030
Net income		19,169			29,720			50,494			52,785
Net income attributable to noncontrolling interest		(1,526		)	(1,291		)	(2,575		)	(3,152		)
Net income attributable to TeleTech stockholders		$	17,643		$	28,429		$	47,919		$	49,633
Other comprehensive income (loss)
Net income		$	19,169		$	29,720		$	50,494		$	52,785
Foreign currency translation adjustment		(1,708		)	7,358			(18,191		)	10,607
Derivative valuation, gross		(1,440		)	7,260			(21,851		)	21,650
Derivative valuation, tax effect		412			(2,906		)	8,620			(8,480		)
Other, net of tax		152			298			451			933
Total other comprehensive income (loss)		(2,584		)	12,010			(30,971		)	24,710
Total comprehensive income		16,585			41,730			19,523			77,495
Comprehensive income attributable to noncontrolling interest		(1,642		)	(1,357		)	(2,471		)	(3,265		)
Comprehensive income attributable to TeleTech stockholders		$	14,943		$	40,373		$	17,052		$	74,230
Weighted average shares outstanding
Basic		50,732			54,093			51,643			55,233
Diluted		51,678			54,905			52,499			55,991
Net income per share attributable to TeleTech stockholders
Basic		$	0.35		$	0.53		$	0.93		$	0.90
Diluted		$	0.34		$	0.52		$	0.91		$	0.89

 

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

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Amounts in thousands)

(Unaudited)

 

		Stockholders’ Equity of the Company
																		Accumulated
															Additional			Other
		Preferred Stock					Common Stock					Treasury			Paid-in			Comprehensive			Retained			Noncontrolling			Total
		Shares		Amount			Shares		Amount			Stock			Capital			Income (Loss)			Earnings			interest			Equity
Balance as of December 31, 2012		—		$	—		52,288		$	522		$	(428,716	)	$	350,714		$	22,981		$	540,791		$	14,045		$	500,337
Net income		—		—			—		—			—			—			—			47,919			2,575			50,494
Dividends distributed to noncontrolling interest		—		—			—		—			—			—			—			—			(3,420		)	(3,420		)
Purchases of outstanding noncontrolling interest		—		—			—		—			—			3,715			—			—			(4,140		)	(425		)
Deconsolidation of a subsidiary		—		—			—		—			—			—			—			—			(121		)	(121		)
Foreign currency translation adjustments		—		—			—		—			—			—			(18,087		)	—			(104		)	(18,191		)
Derivatives valuation, net of tax		—		—			—		—			—			—			(13,231		)	—			—			(13,231		)
Vesting of restricted stock units		—		—			400		4			5,717			(9,866		)	—			—			—			(4,145		)
Exercise of stock options		—		—			90		1			1,285			(430		)	—			—			—			856
Excess tax benefit from equity-based awards		—		—			—		—			—			644			—			—			—			644
Equity-based compensation expense		—		—			—		—			—			9,724			—			—			25			9,749
Purchases of common stock		—		—			(2,281	)	(23		)	(51,604		)	—			—			—			—			(51,627		)
Other		—		—			—		—			—			—			451			—			—			451
Balance as of September 30, 2013		—		$	—		50,497		$	504		$	(473,318	)	$	354,501		$	(7,886	)	$	588,710		$	8,860		$	471,371

 

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

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2013			2012
Cash flows from operating activities
Net income		$	50,494		$	52,785
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		33,281			31,040
Amortization of contract acquisition costs		753			763
Amortization of debt issuance costs		488			531
Imputed interest expense		933			600
Provision for doubtful accounts		412			490
(Gain) loss on disposal of assets		(94		)	180
Impairment losses		1,205			2,958
Deferred income taxes		5,467			2,134
Excess tax benefit from equity-based awards		(1,074		)	(1,005		)
Equity-based compensation expense		9,842			10,310
Gain on foreign currency derivatives		(75		)	(574		)
Loss on deconsolidation of subsidiary, net of cash of $897 and zero, respectively		2,758			—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		709			1,091
Prepaids and other assets		(11,241		)	(30,893		)
Accounts payable and accrued expenses		(14,020		)	(15,696		)
Deferred revenue and other liabilities		(3,225		)	8,697
Net cash provided by operating activities		76,613			63,411
Cash flows from investing activities
Proceeds from grant for property, plant and equipment		—			110
Proceeds from sale of long-lived assets		—			450
Purchases of property, plant and equipment, net of acquisitions		(31,832		)	(33,259		)
Acquisitions, net of cash acquired of $6,423 and $1,373, respectively		(8,956		)	(4,809		)
Net cash used in investing activities		(40,788		)	(37,508		)
Cash flows from financing activities
Proceeds from line of credit		1,114,050			857,650
Payments on line of credit		(1,104,050		)	(833,650		)
Proceeds from other debt		3,709			8,014
Payments on other debt		(4,293		)	(2,783		)
Dividends distributed to noncontrolling interest		(3,420		)	(1,440		)
Proceeds from exercise of stock options		856			1,135
Excess tax benefit from equity-based awards		1,074			1,005
Purchase of treasury stock		(51,627		)	(55,211		)
Payments of debt issuance costs		(1,800		)	(432		)
Net cash used in financing activities		(45,501		)	(25,712		)
Effect of exchange rate changes on cash and cash equivalents		(9,906		)	13,815
(Decrease) increase in cash and cash equivalents		(19,582		)	14,006
Cash and cash equivalents, beginning of period		164,485			156,371
Cash and cash equivalents, end of period		$	144,903		$	170,377
Supplemental disclosures
Cash paid for interest		$	3,271		$	3,168
Cash paid for income taxes		$	12,329		$	13,213
Non-cash investing and financing activities
Purchases of equipment through financing agreements		$	—		$	6,100
Acquisition of equipment through increase in accounts payable		$	3,803		$	396
Landlord incentives credited to deferred rent		$	1,016		$	1,723
Contract acquisition costs credited to accounts receivable		$	1,000		$	—

 

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

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)                                 OVERVIEW AND BASIS OF PRESENTATION

 

Overview

 

TeleTech Holdings, Inc. and its subsidiaries (“TeleTech” or the “Company”) is a geographically diverse global provider of technology-enabled, fully-integrated customer experience management solutions for Global 1000 clients and their customers. A global provider of data-driven, technology-enabled business process outsourcing, technology integration, consulting and customer management, and hosted and managed technology services. TeleTech’s 39,000 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., Argentina, Australia, Belgium, Brazil, Canada, China, Costa Rica, France, Germany, Ghana, Italy, Lebanon, Mexico, New Zealand, the Philippines, 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% interest in Percepta, LLC, and its 80% interest in iKnowtion, LLC. 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 and the consolidated results of operations and comprehensive income (loss) and the consolidated cash flows of the Company. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

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, 2012.

 

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. In the three months ended June 30, 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 years 2010, 2011 and 2012.

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Issued Accounting Pronouncements

 

In February 2013, the FASB issued new accounting guidance that improves the reporting of reclassifications out of accumulated other comprehensive income. This new guidance requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when applicable or to cross-reference the reclassifications with other disclosures that provide additional detail about the reclassifications made when the reclassifications are not made to net income. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012. The Company’s adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows since it was an enhancement to current required disclosures.

 

(2)                                 ACQUISITONS

 

Peppers & Rogers Group

 

On September 18, 2013, the Company acquired the remaining 20% interest in Peppers & Rogers Group (“PRG”) for $425 thousand. The buy-out accelerated TeleTech’s rights pursuant to the sale and purchase agreement to acquire the remaining portion of the business in 2015. All future earn-out payment entitlements tied to the PRG’s performance as a part of TeleTech’s Customer Strategy Services segment have been extinguished with this transaction.

 

WebMetro

 

On August 9, 2013, the Company acquired 100% of the stock of WebMetro. WebMetro is a digital marketing agency that provides online direct marketing services. WebMetro has offices in San Dimas and Los Angeles, California and Modiin, Israel and has approximately 90 employees.

 

The expected total purchase price was $16.4 million, subject to an up and down dollar for dollar working capital adjustment equivalent to any acquired working capital from WebMetro against an agreed working capital level as defined in the stock purchase agreement. This adjustment will be determined during the fourth quarter of 2013.

 

The Company is also obligated to make earn-out payments over the next two years if WebMetro achieves specified earnings before interest, taxes, depreciation and amortization (“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 $1.4 million. The $1.4 million of expected future payments was calculated using a probability weighted EBITDA assessment with higher probability associated with WebMetro achieving the smaller EBITDA targets. As of the acquisition date, the fair value of the contingent payments was approximately $1.3 million. As of September 30, 2013, the fair value of the contingent consideration was $1.3 million, of which $0.2 million and $1.1 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

		Preliminary Estimate of Acquisition Date Fair Value
Cash		$	6,423
Accounts receivable, net		3,692
Other assets		215
Property, plant and equipment		887
Customer relationships		6,120
Software		3,700
Goodwill		5,042
		26,079
Accounts payable		7,232
Accrued expenses		422
Customer deposits		1,316
Capital lease obligation		444
Other		274
		9,688
Total purchase price		$	16,391

 

The WebMetro customer relationships and software have an estimated useful life of six years and four years, respectively. The goodwill recognized from the WebMetro acquisition was attributable primarily to the acquired workforce of WebMetro, expected synergies, and other factors. The tax basis of the acquired intangibles and goodwill are deductible for income tax purposes. The acquired goodwill and the operating results of WebMetro are reported within the Customer Growth Services segment from the date of acquisition.

 

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.

 

As of September 30, 2013, the Company paid $3.1 million towards the purchase price. The remaining purchase price of $0.2 million will be paid out once the potential for covered losses has expired per the purchase agreement, which is expected to be in early 2014. The remaining purchase price of $0.2 million was included within Other accrued expenses in the accompanying Consolidated Balance Sheets as of September 30, 2013. 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 first quarter of 2012.

 

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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		$	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 once it is placed into service. The goodwill recognized from the OnState acquisition is primarily attributable to the synergies resulting from incorporating the acquired software into the Company’s current technology platforms in addition to the acquisition of the employees who developed the acquired software. Since this acquisition is an asset acquisition for tax purposes, the goodwill and software are deductible over their respective tax lives. The acquired goodwill of OnState is reported within the Customer Technology Services segment from the date of acquisition.

 

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 was 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. The working capital adjustment was $0.2 million and was paid during the second quarter of 2012.

 

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. As of September 30, 2013, $1.1 million of contingent consideration has been paid and the fair value of the remaining contingent consideration was $3.0 million, of which $1.1 million and $1.9 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 at the date of acquisition was $0.9 million and was estimated based on a 20% interest of the fair value of a 100% interest in iKnowtion and was discounted for a lack of control at a rate of 23.1%.

 

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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. These terms represent a contingent redemption feature. The fair value of the redemption feature is based on a comparison of EBITDA multiples and the EBITDA multiple to purchase the remaining 20% of iKnowtion approximates EBITDA multiples in the market for similar acquisitions.

 

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 months ended June 30, 2012.

 

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

 

		Acquisition Date Fair Value
Cash		$	1,337
Accounts Receivable		1,792
Property, plant and equipment		161
Other assets		90
Customer relationships		1,400
Goodwill		447
		5,227
Accounts payable		18
Accrued expenses		19
Other		164
		201
Noncontrolling interest		941
Total purchase price		$	4,085

 

The iKnowtion customer relationships have an estimated useful life of five years. The goodwill recognized from the iKnowtion acquisition was attributable primarily to the acquired workforce of iKnowtion, expected synergies, and other factors. The tax basis of the acquired intangibles and goodwill are 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.

 

Guidon

 

On October 4, 2012, 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. Guidon is located in Mesa, AZ and has approximately 25 employees.

 

The up-front cash consideration paid was $5.6 million. The Company was also obligated to pay a working capital adjustment equivalent to any acquired working capital from Guidon in excess of a working capital floor defined in the stock purchase agreement. The working capital payment was less than $0.1 million and was paid during the fourth quarter of 2012.

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company is also obligated to make earn-out payments over the next two years if Guidon achieves 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. As of September 30, 2013, the fair value of the contingent consideration was $2.5 million, of which $1.4 million and $1.1 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

The Company paid $0.1 million of acquisition related expenses as part of the Guidon purchase. These costs were recorded in Selling, general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income for the year ended December 31, 2012.

 

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		$	376
Accounts Receivable		1,375
Property, plant and equipment		49
Other assets		228
Customer relationships		2,490
Goodwill		3,619
		8,137
Accounts payable		202
Accrued expenses		122
Other		65
		389
Total purchase price		$	7,748

 

The Guidon customer relationships have an estimated useful life of five years. The goodwill recognized from the Guidon acquisition was attributable primarily to the acquired workforce of Guidon, expected synergies, and other factors. The tax basis of the acquired intangibles and goodwill are deductible for income tax purposes. The acquired goodwill and the operating results of Guidon are reported within the Customer Strategy Services segment from the date of acquisition.

 

TSG

 

On December 31, 2012, 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. TSG is located in Aurora, IL and has approximately 90 employees.

 

The up-front cash consideration paid was $32.7 million. The Company was also obligated to pay a working capital adjustment equivalent to any acquired working capital from TSG in excess of a working capital floor as defined in the stock purchase agreement. The working capital adjustment was $0.6 million and was paid during the second quarter of 2013.

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 $7.3 million. The $7.3 million of expected future payments was calculated using a probability weighted EBITDA assessment with higher probability associated with TSG achieving the maximum EBITDA targets. As of the acquisition date, the fair value of the contingent payments was approximately $6.7 million. As of September 30, 2013 the fair value of the contingent consideration was $6.9 million of which $2.4 million and $4.5 million were included in Other accrued expenses and Other long-term liabilities in the accompanying Consolidated Balance Sheets, respectively.

 

The Company paid $0.1 million of acquisition related expenses as part of the TSG purchase. These costs were recorded in Selling, general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income during the year ended December 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 a valuation, thus are subject to revisions that may result in adjustments to the values presented below:

 

		Preliminary Estimate of Acquisition Date Fair Value
Cash		$	1,995
Accounts receivable		4,871
Prepaid assets - cost deferrals		3,665
Property, plant and equipment		583
Other assets		1,886
Customer relationships		15,300
Noncompete agreements		2,300
Trade name		1,100
Consulting services backlog		800
Goodwill		19,421
		51,921
Accounts payable		3,091
Accrued expenses		1,539
Deferred revenue		7,295
		11,925
Total purchase price		$	39,996

 

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TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The TSG customer relationships have an estimated useful life of 10 years. The goodwill recognized from the TSG acquisition was attributable primarily to the acquired workforce of TSG, expected synergies, and other factors. The tax basis of the acquired intangibles and goodwill are deductible for income tax purposes. The acquired goodwill and the operating results of TSG are reported within the Customer Technology Services segment from the date of acquisition.

 

The acquired businesses noted above contributed revenues of $19.4 million and $47.1 million and income from operations of $2.7 million and $4.9 million, inclusive of $1.2 million and $2.9 million of acquired intangible amortization, to the Company for the three and nine months ended September 30, 2013, respectively. The acquired businesses noted above contributed revenues of $2.2 million and $4.9 million and income from operations of $0.4 million and $0.8 million, inclusive of $0.1 million and $0.2 million of acquired intangible amortization, to the Company for the three and nine months ended September 30, 2012, respectively.

 

(3)                                 SEGMENT INFORMATION

 

The Company reports 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, including certain acquired assets of the digital marketing business of WebMetro;

 

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

 

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

 

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 (amounts in thousands):

 

Three Months Ended September 30, 2013

 

		Gross Revenue			Intersegment Sales			Net Revenue			Depreciation & Amortization			Income (Loss) from Operations
Customer Management Services		$	217,347		$	(312	)	$	217,035		$	8,322		$	17,944
Customer Growth Services		25,893			—			25,893			1,148			588
Customer Technology Services		40,712			(63		)	40,649			1,538			5,165
Customer Strategy Services		13,418			—			13,418			455			2,264
Total		$	297,370		$	(375	)	$	296,995		$	11,463		$	25,961

 

Three Months Ended September 30, 2012

 

		Gross Revenue			Intersegment Sales			Net Revenue			Depreciation & Amortization			Income (Loss) from Operations
Customer Management Services		$	224,041		$	—		$	224,041		$	8,349		$	21,001
Customer Growth Services		28,200			—			28,200			1,201			2,487
Customer Technology Services		25,219			(2,876		)	22,343			794			3,054
Customer Strategy Services		11,913			(229		)	11,684			351			819
Total		$	289,373		$	(3,105	)	$	286,268		$	10,695		$	27,361

 

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