e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-11919
TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
84-1291044 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices)
Registrants telephone number, including area code: (303) 397-8100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past (90) days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
As of October 19, 2006, there were 69,264,782 shares of the registrants common stock outstanding.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2006 FORM 10-Q
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page No. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CERTIFICATIONS |
|
|
|
|
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
55,192 |
|
|
$ |
32,505 |
|
Accounts receivable, net |
|
|
220,668 |
|
|
|
207,090 |
|
Prepaid and other assets |
|
|
38,494 |
|
|
|
30,270 |
|
Deferred tax assets, net |
|
|
11,960 |
|
|
|
12,990 |
|
Income tax receivable |
|
|
16,146 |
|
|
|
16,298 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
342,460 |
|
|
|
299,153 |
|
|
|
|
|
|
|
|
|
|
Long-term assets |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
154,614 |
|
|
|
133,635 |
|
Goodwill |
|
|
57,385 |
|
|
|
32,077 |
|
Contract acquisition costs, net |
|
|
10,734 |
|
|
|
12,874 |
|
Deferred tax assets, net |
|
|
38,563 |
|
|
|
30,621 |
|
Other assets |
|
|
22,540 |
|
|
|
9,871 |
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
283,836 |
|
|
|
219,078 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
626,296 |
|
|
$ |
518,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
28,318 |
|
|
$ |
30,096 |
|
Accrued employee compensation and benefits |
|
|
82,933 |
|
|
|
59,196 |
|
Other accrued expenses |
|
|
36,632 |
|
|
|
40,422 |
|
Income tax payable |
|
|
18,108 |
|
|
|
17,398 |
|
Deferred tax liabilities, net |
|
|
1,542 |
|
|
|
2,556 |
|
Customer advances and deferred income |
|
|
8,367 |
|
|
|
10,515 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
175,900 |
|
|
|
160,183 |
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
680 |
|
|
|
976 |
|
Line of credit |
|
|
77,750 |
|
|
|
26,700 |
|
Grant advances |
|
|
7,163 |
|
|
|
6,476 |
|
Deferred tax liabilities |
|
|
6,329 |
|
|
|
6,821 |
|
Other long-term liabilities |
|
|
21,240 |
|
|
|
17,157 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
113,162 |
|
|
|
58,130 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
289,062 |
|
|
|
218,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
6,731 |
|
|
|
6,544 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock $.01 par value; 150,000,000 shares authorized;
69,333,375 and 69,162,448 shares outstanding as of
September 30, 2006 and December 31, 2005, respectively |
|
|
693 |
|
|
|
694 |
|
Additional paid-in capital |
|
|
150,617 |
|
|
|
146,367 |
|
Accumulated other comprehensive income |
|
|
6,167 |
|
|
|
3,698 |
|
Retained earnings |
|
|
173,026 |
|
|
|
142,615 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
330,503 |
|
|
|
293,374 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
626,296 |
|
|
$ |
518,231 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
303,804 |
|
|
$ |
274,259 |
|
|
$ |
874,560 |
|
|
$ |
782,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
220,702 |
|
|
|
202,492 |
|
|
|
649,718 |
|
|
|
580,663 |
|
Selling, general and administrative |
|
|
49,271 |
|
|
|
46,642 |
|
|
|
145,132 |
|
|
|
136,728 |
|
Depreciation and amortization |
|
|
12,929 |
|
|
|
12,659 |
|
|
|
36,705 |
|
|
|
40,650 |
|
Restructuring charges, net |
|
|
515 |
|
|
|
537 |
|
|
|
1,455 |
|
|
|
1,480 |
|
Impairment losses |
|
|
|
|
|
|
|
|
|
|
478 |
|
|
|
2,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
283,417 |
|
|
|
262,330 |
|
|
|
833,488 |
|
|
|
762,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
20,387 |
|
|
|
11,929 |
|
|
|
41,072 |
|
|
|
20,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
662 |
|
|
|
882 |
|
|
|
1,350 |
|
|
|
2,448 |
|
Interest expense |
|
|
(2,410 |
) |
|
|
(727 |
) |
|
|
(4,491 |
) |
|
|
(1,931 |
) |
Other, net |
|
|
1,151 |
|
|
|
369 |
|
|
|
2,028 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(597 |
) |
|
|
524 |
|
|
|
(1,113 |
) |
|
|
1,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
19,790 |
|
|
|
12,453 |
|
|
|
39,959 |
|
|
|
21,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
6,428 |
|
|
|
432 |
|
|
|
7,889 |
|
|
|
3,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest |
|
|
13,362 |
|
|
|
12,021 |
|
|
|
32,070 |
|
|
|
18,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
(583 |
) |
|
|
(401 |
) |
|
|
(1,659 |
) |
|
|
(713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,779 |
|
|
$ |
11,620 |
|
|
$ |
30,411 |
|
|
$ |
18,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
1,206 |
|
|
$ |
5,755 |
|
|
$ |
4,487 |
|
|
$ |
5,032 |
|
Derivatives valuation, net of tax |
|
|
(86 |
) |
|
|
2,675 |
|
|
|
(2,018 |
) |
|
|
(1,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
1,120 |
|
|
|
8,430 |
|
|
|
2,469 |
|
|
|
3,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,899 |
|
|
$ |
20,050 |
|
|
$ |
32,880 |
|
|
$ |
21,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
69,085 |
|
|
|
71,650 |
|
|
|
68,979 |
|
|
|
72,946 |
|
Diluted |
|
|
70,366 |
|
|
|
72,591 |
|
|
|
70,228 |
|
|
|
74,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.16 |
|
|
$ |
0.44 |
|
|
$ |
0.25 |
|
Diluted |
|
$ |
0.18 |
|
|
$ |
0.16 |
|
|
$ |
0.43 |
|
|
$ |
0.24 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
(Amounts in
thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Other |
|
|
|
|
|
Total |
|
|
Common Stock |
|
Paid-in |
|
Comprehensive |
|
Retained |
|
Stockholders |
|
|
Shares |
|
Amount |
|
Capital |
|
Income |
|
Earnings |
|
Equity |
|
|
|
Balance as of December 31, 2005 |
|
|
69,162 |
|
|
$ |
694 |
|
|
$ |
146,367 |
|
|
$ |
3,698 |
|
|
$ |
142,615 |
|
|
$ |
293,374 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,411 |
|
|
|
30,411 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,487 |
|
|
|
|
|
|
|
4,487 |
|
Derivatives valuation, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,018 |
) |
|
|
|
|
|
|
(2,018 |
) |
Exercise of stock options |
|
|
1,335 |
|
|
|
11 |
|
|
|
10,821 |
|
|
|
|
|
|
|
|
|
|
|
10,832 |
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
3,041 |
|
|
|
|
|
|
|
|
|
|
|
3,041 |
|
Compensation expense from stock options |
|
|
|
|
|
|
|
|
|
|
5,024 |
|
|
|
|
|
|
|
|
|
|
|
5,024 |
|
Purchases of common stock |
|
|
(1,164 |
) |
|
|
(12 |
) |
|
|
(14,636 |
) |
|
|
|
|
|
|
|
|
|
|
(14,648 |
) |
|
|
|
Balance as of September 30, 2006 |
|
|
69,333 |
|
|
$ |
693 |
|
|
$ |
150,617 |
|
|
$ |
6,167 |
|
|
$ |
173,026 |
|
|
$ |
330,503 |
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
30,411 |
|
|
$ |
18,073 |
|
Adjustment to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
36,705 |
|
|
|
40,650 |
|
Amortization of contract acquisition costs |
|
|
2,327 |
|
|
|
2,942 |
|
Provision for doubtful accounts |
|
|
1,714 |
|
|
|
378 |
|
Deferred income taxes |
|
|
(5,810 |
) |
|
|
(17,763 |
) |
Minority interest |
|
|
1,659 |
|
|
|
713 |
|
Impairment loss |
|
|
478 |
|
|
|
2,537 |
|
Compensation expense from stock options |
|
|
5,024 |
|
|
|
|
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
1,544 |
|
Loss on disposal of assets |
|
|
241 |
|
|
|
74 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,404 |
) |
|
|
(35,848 |
) |
Prepaids and other assets |
|
|
(12,578 |
) |
|
|
(3,760 |
) |
Accounts payable and accrued expenses |
|
|
13,534 |
|
|
|
39,089 |
|
Customer advances and deferred income |
|
|
311 |
|
|
|
4,103 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
72,612 |
|
|
|
52,732 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Acquisition of a business, net of cash acquired of $0.5 million |
|
|
(46,412 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(51,219 |
) |
|
|
(26,763 |
) |
Purchases of intangible assets |
|
|
(1,357 |
) |
|
|
(240 |
) |
Contract acquisition costs |
|
|
(179 |
) |
|
|
(2,160 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(99,167 |
) |
|
|
(29,163 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
380,700 |
|
|
|
243,100 |
|
Payments on line of credit |
|
|
(329,650 |
) |
|
|
(243,100 |
) |
Debt refinancing fees |
|
|
(811 |
) |
|
|
|
|
Payments on long-term debt and capital lease obligations |
|
|
(286 |
) |
|
|
(532 |
) |
Payments to minority shareholder |
|
|
(1,498 |
) |
|
|
(2,700 |
) |
Proceeds from employee stock purchase plan |
|
|
|
|
|
|
476 |
|
Excess tax benefit from exercise of stock options |
|
|
3,041 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
10,802 |
|
|
|
3,473 |
|
Purchases of treasury stock |
|
|
(14,648 |
) |
|
|
(44,266 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
47,650 |
|
|
|
(43,549 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,592 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
22,687 |
|
|
|
(19,603 |
) |
Cash and cash equivalents, beginning of period |
|
|
32,505 |
|
|
|
75,066 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
55,192 |
|
|
$ |
55,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,862 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
8,716 |
|
|
$ |
8,096 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(1) OVERVIEW AND BASIS OF PRESENTATION
Overview
TeleTech Holdings, Inc. (TeleTech or the Company) serves its clients through two primary
businesses: (i) Business Process Outsourcing (BPO), which provides outsourced business process,
customer management, and marketing services for a variety of industries via operations in the
United States (U.S.), Argentina, Australia, Brazil, Canada, China, Germany, India, Malaysia,
Mexico, New Zealand, the Philippines, Singapore, Spain, the United Kingdom, and Venezuela; and (ii)
Database Marketing and Consulting, which provides outsourced database management, direct marketing,
and related customer acquisition and retention services for automotive dealerships and
manufacturers in North America.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The
unaudited condensed consolidated financial statements reflect all adjustments (consisting only of
normal recurring entries) which, in the opinion of management, are necessary to present fairly the
financial position of the Company as of September 30, 2006, and the results of operations and cash
flows of the Company and its subsidiaries for the three months and nine months ended September 30,
2006 and 2005. Operating results for the three months and nine months ended September 30, 2006 are
not necessarily indicative of the results that may be expected for the year ended December 31,
2006.
The unaudited condensed consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2005.
Certain amounts in 2005 have been reclassified in the condensed consolidated financial statements
to conform to the 2006 presentation.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS 123(R)), which
replaces SFAS No. 123 Accounting for Stock Issued to Employees (SFAS 123). The Company adopted
SFAS 123(R) on January 1, 2006. The impact of the adoption of SFAS 123(R) is discussed in Note 4.
In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is effective as of the beginning of
the first annual period beginning after December 15, 2006. FIN 48 defines the threshold for
recognizing the tax benefits of a tax return filing position in the financial statements as
more-likely-than-not to be sustained by the taxing authority. This is different than the
accounting practice currently followed by the Company, which is to recognize the best estimate of
the impact of a tax position only when the position is probable of being sustained on audit based
solely on the technical merits of the position. The term probable is consistent with the use of
the term in SFAS No. 5 Accounting for Contingencies, to mean that the future event or events are
likely to occur.
The Company is currently studying the impact FIN 48 will have on its consolidated financial
statements when adopted. In the course of reevaluating the Companys tax return filing positions in
light of the new more-likely-than-not standard, it is likely that the Company will reduce its
liability for previously unrecognized tax benefits at the date of adoption. Consistent with the new
accounting standard, any change to adjust the Companys consolidated financial statements arising
from adoption of the new more-likely-than-not standard will be recognized in beginning retained
earnings in the period of adoption as a change in accounting method.
5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(2) ACQUISITION
On June 30, 2006, the Company acquired 100 percent of the outstanding common shares of Direct
Alliance Corporation (DAC) from Insight Enterprises, Inc. (NASDAQ: NSIT). DAC is a provider of
outsourced direct marketing services to third parties in the U.S. and its acquisition is consistent
with the Companys strategy to grow and to focus on providing outsourced marketing, sales, and BPO
solutions to large multinational clients. DAC is included in the Companys North American BPO
segment.
The preliminary total purchase price of $46.4 million in cash was funded utilizing the Companys
Credit Facility (see Note 7 to the Condensed Consolidated Financial Statements). The purchase
agreement provides for the seller to (i) receive a future payment of up to $11.0 million based upon
the gross profit of DAC for 2006 exceeding specified amounts and (ii) pay the Company up to $5.0
million in the event certain clients of DAC do not renew, on substantially similar terms, their
service agreement with DAC as set forth in the purchase agreement.
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed,
based upon the Companys intention to make a 338 election for income tax reporting for the
acquisition of DAC, is as follows (amounts in thousands):
|
|
|
|
|
Current assets |
|
$ |
14,548 |
|
Property and equipment |
|
|
4,410 |
|
Intangible assets |
|
|
9,100 |
|
Goodwill |
|
|
23,820 |
|
|
|
|
|
Total assets acquired |
|
$ |
51,878 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(5,505 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(5,505 |
) |
|
|
|
|
Net assets acquired |
|
$ |
46,373 |
|
|
|
|
|
The Company acquired identifiable intangible assets as a result of the acquisition of DAC. The
intangible assets acquired, excluding costs in excess of net assets acquired, are preliminarily
classified and valued as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
Amortization Period |
|
Trade name |
|
$ |
1,800 |
|
|
None; indefinite life |
Customer relationships |
|
|
7,300 |
|
|
10 years |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
The following table presents the pro-forma combined results of operations assuming (i) DACs
historical unaudited financial results, (ii) the DAC acquisition closed on January 1, 2005, (iii)
pro-forma amortization expense of the intangible assets, and (iv) pro-forma interest expense
assuming the Company utilized its Credit Facility to finance the acquisition (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Revenue |
|
$ |
908,655 |
|
|
$ |
839,184 |
|
Income from operations |
|
$ |
43,678 |
|
|
$ |
26,627 |
|
Net income |
|
$ |
31,001 |
|
|
$ |
20,303 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
68,979 |
|
|
|
72,946 |
|
Diluted |
|
|
70,228 |
|
|
|
74,604 |
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.45 |
|
|
$ |
0.28 |
|
Diluted |
|
$ |
0.44 |
|
|
$ |
0.27 |
|
The pro-forma results above are not necessarily indicative of the operating results that would have
actually occurred if the acquisition had been in effect on the date indicated, nor are they
necessarily indicative of future results of the combined companies.
(3) SEGMENT INFORMATION
The Company serves its clients through two primary businesses, BPO Services and Database Marketing
and Consulting. In previous filings the North American BPO segment was referred to as North
American Customer Management and the International BPO segment was referred to as International
Customer Management.
BPO provides business process, customer management, and marketing services for a variety of
industries via Customer Management Centers (CMC or Center) throughout the world. When the
Company begins operations in a new country, it determines whether the country is intended to
primarily serve U.S.-based clients, in which case the country is included in the North American BPO
segment, or the country is intended to serve both domestic clients from that country and U.S.-based
clients, in which case the country is included in the International BPO segment. This is consistent
with the Companys management of the business, internal financial reporting structure, and
operating focus. Operations for each segment of BPO Services are conducted in the following
countries:
|
|
|
North American BPO
|
|
International BPO |
|
|
|
United States
|
|
Argentina |
Canada
|
|
Australia |
India
|
|
Brazil |
Philippines
|
|
China |
|
|
Germany |
|
|
Malaysia |
|
|
Mexico |
|
|
New Zealand |
|
|
Singapore |
|
|
Spain |
|
|
United Kingdom |
|
|
Venezuela |
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
The Database Marketing and Consulting segment, which consists of one subsidiary company, provides
outsourced database management, direct marketing, and related customer acquisitions and retention
services for automobile dealerships and manufacturers operating in North America.
The Company allocates to each segment its estimated portion of corporate-level operating expenses.
All intercompany transactions between the reported segments for the periods presented have been
eliminated.
It is a significant Company strategy to garner additional business through the lower cost
opportunities offered by certain foreign countries. Accordingly, the Company provides services to
certain U.S. clients from CMCs in Argentina, Canada, India, Mexico, and the Philippines. Under this
arrangement, while the U.S. subsidiary invoices and collects from the client, the U.S. subsidiary
enters into a contract with the foreign subsidiary to reimburse the foreign subsidiary for its
costs plus a reasonable profit. This reimbursement is reflected as revenue by the foreign
subsidiary. As a result, a portion of the revenue from these client contracts is recorded by the
U.S. subsidiary, while a portion is recorded by the foreign subsidiary. For U.S. clients served
from Canada, India, and the Philippines, which represents the majority of these arrangements, all
the revenue remains within the North American BPO segment. For U.S. clients served from Argentina
and Mexico, a portion of the revenue is reflected in the International BPO segment. For the three
months ended September 30, 2006 and 2005, approximately $1.5 million and $0.7 million,
respectively, of income from operations in the International BPO segment were generated from these
arrangements. For the nine months ended September 30, 2006 and 2005, approximately $4.1 million and
$2.2 million, respectively, of income from operations in the International BPO segment were
generated from these arrangements.
The following table presents Revenue and Income (Loss) from Operations by segment (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
206,616 |
|
|
$ |
170,930 |
|
|
$ |
576,283 |
|
|
$ |
474,852 |
|
International BPO |
|
|
90,336 |
|
|
|
82,596 |
|
|
|
264,277 |
|
|
|
244,157 |
|
Database Marketing and Consulting |
|
|
6,852 |
|
|
|
20,733 |
|
|
|
34,000 |
|
|
|
63,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
303,804 |
|
|
$ |
274,259 |
|
|
$ |
874,560 |
|
|
$ |
782,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
25,194 |
|
|
$ |
15,654 |
|
|
$ |
55,995 |
|
|
$ |
40,752 |
|
International BPO |
|
|
182 |
|
|
|
(1,871 |
) |
|
|
(3,731 |
) |
|
|
(12,188 |
) |
Database Marketing and Consulting |
|
|
(4,989 |
) |
|
|
(1,854 |
) |
|
|
(11,192 |
) |
|
|
(8,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,387 |
|
|
$ |
11,929 |
|
|
$ |
41,072 |
|
|
$ |
20,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
The following table presents Revenue based on the geographic location where the services are
provided (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
108,421 |
|
|
$ |
119,158 |
|
|
$ |
318,448 |
|
|
$ |
330,898 |
|
Asia Pacific |
|
|
65,071 |
|
|
|
46,413 |
|
|
|
172,099 |
|
|
|
135,488 |
|
Canada |
|
|
48,311 |
|
|
|
49,689 |
|
|
|
157,001 |
|
|
|
146,511 |
|
Europe |
|
|
35,699 |
|
|
|
30,866 |
|
|
|
105,274 |
|
|
|
92,171 |
|
Latin America |
|
|
46,302 |
|
|
|
28,133 |
|
|
|
121,738 |
|
|
|
77,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
303,804 |
|
|
$ |
274,259 |
|
|
$ |
874,560 |
|
|
$ |
782,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) EQUITY-BASED COMPENSATION
The Company maintains several equity compensation plans (the Plans) for the benefit of certain of
its directors, officers, and employees.
During the first quarter of fiscal 2006, the Company adopted SFAS 123(R), applying the modified
prospective method. SFAS 123(R) requires all equity-based payments to employees, including grants
of employee stock options, to be recognized in the Condensed Consolidated Statements of Operations
and Comprehensive Income at the fair value of the award on the grant date. Under the modified
prospective method, the Company is required to record equity-based compensation expense for all
awards granted after the date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. The fair values of all stock options granted by the Company
were determined using the Black-Scholes-Merton model (B-S-M Model).
The fair values of the options granted to the Companys employees were estimated on the date of
grant using the B-S-M Model. The following table provides the range of assumptions used for stock
options granted during the three months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Risk-free interest rate
|
|
|
4.73% 5.03 |
% |
|
|
3.75% 4.17 |
% |
Expected life in years
|
|
|
3.8 4.8 |
|
|
|
4.4 |
|
Expected volatility
|
|
|
54.81 |
% |
|
|
75.53 |
% |
Dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Weighted-average volatility
|
|
|
54.81 |
% |
|
|
75.53 |
% |
Weighted-average fair value
|
|
$ |
5.85 |
|
|
$ |
5.09 |
|
9
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
A summary of option activity under the Plans as of September 30, 2006 and changes during the nine
months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Value (in |
|
|
Shares |
|
Price |
|
Term Years |
|
thousands) |
Outstanding as of December 31, 2005 |
|
|
8,486,681 |
|
|
$ |
10.26 |
|
|
|
|
|
|
|
|
|
Grants |
|
|
1,414,950 |
|
|
$ |
12.52 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(1,386,186 |
) |
|
$ |
7.58 |
|
|
|
|
|
|
|
|
|
Cancellations/expirations |
|
|
(511,966 |
) |
|
$ |
12.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2006 |
|
|
8,003,479 |
|
|
$ |
10.95 |
|
|
|
6.9 |
|
|
$ |
43,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of September 30, 2006 |
|
|
3,690,697 |
|
|
$ |
11.76 |
|
|
|
4.7 |
|
|
$ |
20,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys unvested shares as of September 30, 2006, and changes
during the nine months ended September 30, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average Grant- |
|
|
Shares |
|
Date Fair Value |
Unvested as of December 31, 2005 |
|
|
4,129,995 |
|
|
$ |
5.62 |
|
Granted |
|
|
1,414,950 |
|
|
$ |
5.85 |
|
Vested |
|
|
(914,655 |
) |
|
$ |
5.33 |
|
Forfeited |
|
|
(317,508 |
) |
|
$ |
5.57 |
|
|
|
|
|
|
|
|
|
|
Unvested as of September 30, 2006 |
|
|
4,312,782 |
|
|
$ |
5.76 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was approximately $19.8 million of total unrecognized compensation
cost (including the impact of expected forfeitures as required under SFAS 123(R)) related to
unvested share-based compensation arrangements granted under the Plans that the Company had not
recorded. That cost is expected to be recognized over the
weighted-average period of four years (the Company recognizes
compensation expense straight-line over the vesting term of the
option grant).
The total fair value of shares vested (excluding expected forfeitures) during the nine month period
ended September 30, 2006 was $4.9 million.
Cash received from option exercises under all share-based payment arrangements for the three months
ended September 30, 2006 and 2005 was $6.0 million and $1.1 million, respectively.
Cash received from option exercises under all share-based payment arrangements for the nine months
ended September 30, 2006 and 2005 was $10.8 million and $3.5 million, respectively.
As a result of adopting SFAS 123(R) on January 1, 2006, the Companys income before income taxes
and net income for the three months ended September 30, 2006 are $1.7 million and $1.0 million
lower, respectively, than if it had continued to account for share-based compensation under
Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to Employees (APB
25). For the nine months ended September 30, 2006, the Companys income before income taxes and
net income are $5.0 million and $3.0 million lower, respectively, than if it had continued to
account for share-based compensation under APB 25. Basic and diluted earnings per share for the
three months ended September 30, 2006 are $0.02 and $0.01 lower, respectively, than if the Company
had continued to account for share-based compensation under APB 25. Additionally, basic and diluted
earnings per share for the nine months ended September 30, 2006 are $0.04 and $0.04 lower,
respectively. The compensation cost that has been charged against income for the Plans is included
in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of
Operations and Comprehensive Income.
10
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
The following table illustrates the effect on net income and earnings per share for the three
months and nine months ended September 30, 2005, if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation (amounts in thousands
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
Net income as reported |
|
$ |
11,620 |
|
|
$ |
18,073 |
|
Add (deduct): Stock-based employee
compensation expense included in
reported net income, net of related tax
effects |
|
|
(1 |
) |
|
|
31 |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |
|
|
(995 |
) |
|
|
(3,109 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
10,624 |
|
|
$ |
14,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
71,650 |
|
|
|
72,946 |
|
Diluted |
|
|
72,591 |
|
|
|
74,604 |
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.16 |
|
|
$ |
0.25 |
|
Diluted as reported |
|
$ |
0.16 |
|
|
$ |
0.24 |
|
Basic pro forma |
|
$ |
0.15 |
|
|
$ |
0.21 |
|
Diluted pro forma |
|
$ |
0.15 |
|
|
$ |
0.20 |
|
(5) SIGNIFICANT CLIENTS
The Company has one client (in the communications industry) that contributed in excess of 10% of
the Companys revenue for the three months and nine months ended September 30, 2006 and two clients
(both in the communications industry) that contributed in excess of 10% of the Companys revenue
for the three months and nine months ended September 30, 2005. The revenue from these clients, as
a percentage of total consolidated revenue, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Client A
|
|
|
15.9 |
% |
|
|
17.1 |
% |
|
|
17.1 |
% |
|
|
17.8 |
% |
Client B
|
|
|
6.1 |
% |
|
|
9.9 |
% |
|
|
7.8 |
% |
|
|
10.6 |
% |
As of September 30, 2006 and December 31, 2005, accounts receivable from clients A and B were as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
December 31, 2005 |
Client A
|
|
$ |
31,200 |
|
|
$ |
34,600 |
|
Client B
|
|
$ |
12,200 |
|
|
$ |
18,500 |
|
The loss of one or more of its significant clients could have a material adverse effect on the
Companys business, operating results, or financial condition. The Company does not require
collateral from its clients. To limit the Companys credit risk, management performs ongoing credit
evaluations of its clients and maintains allowances for uncollectible accounts. Although the
Company is impacted by economic conditions in certain industries including communications and
media, automotive, financial services, healthcare, and government services, management does not
believe significant credit risk exists as of September 30, 2006.
11
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(6) DERIVATIVES
The Company conducts a significant portion of its business in currencies other than the U.S.
dollar, the currency in which the condensed consolidated financial statements are reported.
Correspondingly, the Companys operating results could be adversely affected by foreign currency
exchange rate volatility relative to the U.S. dollar. The Companys subsidiaries in Argentina,
Canada, and the Philippines use the local currency as their functional currency in addition to
paying labor and other operating costs. Conversely, revenue for these foreign subsidiaries is
derived principally from client contracts that are invoiced and collected in U.S. dollars. To hedge
against the risk of a weaker U.S. dollar, the Companys U.S. entity has contracted on behalf of its
foreign subsidiaries with several financial institutions to acquire (utilizing forward,
non-deliverable forward, and option contracts) the functional currency of the foreign subsidiary at
a fixed U.S. dollar exchange rate at specific dates in the future. The Company pays up-front
premiums to obtain option hedge instruments.
While the Company has implemented certain strategies to mitigate risks related to the impact of
fluctuations in currency exchange rates, it cannot ensure that it will not recognize gains or
losses from international transactions, as this is part of transacting business in an international
environment. Not every exposure is or can be hedged, and, where hedges are put in place based on
expected foreign exchange exposure, they are based on forecasts which may vary or which may later
prove to be inaccurate. Failure to successfully hedge or anticipate currency risks properly could
adversely affect the Companys operating results.
As of September 30, 2006, the notional amount of these derivative instruments is summarized as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
U.S. |
|
Dates |
|
|
Currency |
|
Dollar |
|
Contracts are |
|
|
Amount |
|
Amount |
|
Through |
Canadian Dollar
|
|
|
178,068 |
|
|
$ |
159,471 |
|
|
June 2010 |
Argentine Peso
|
|
|
36,900 |
|
|
|
11,710 |
|
|
December 2007 |
Philippine Peso
|
|
|
2,120,000 |
|
|
|
40,837 |
|
|
December 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
212,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
These derivatives, including option premiums, are classified as Prepaid and Other Assets of $4.0
million and $6.7 million; Other Assets of $0.1 million and $0.6 million; and Other Long-term
Liabilities of $1.4 million and $0.0 million as of September 30, 2006 and December 31, 2005,
respectively.
The Company recorded deferred tax liabilities of $0.6 million and $1.9 million related to these
derivatives as of September 30, 2006 and December 31, 2005, respectively. A total of $1.0 million
and $3.0 million of deferred gains, net of tax, on derivative instruments as of September 30, 2006
and December 31, 2005, respectively, were recorded in Accumulated Other Comprehensive Income.
During the three months ended September 30, 2006 and 2005, the Company recorded gains of $1.4
million and $1.1 million, respectively, for settled hedge contracts and the related premiums.
During the nine months ended September 30, 2006 and 2005, the Company recorded gains of $5.8
million and $4.7 million, respectively, for settled hedge contracts and the related premiums. These
are reflected in Revenue in the accompanying Condensed Consolidated Statements of Operations and
Comprehensive Income.
The Company also entered into a foreign exchange forward contract to reduce the short-term effect
of foreign currency fluctuations related to a $19.2 million intercompany note payable from its
Canadian subsidiary to a U.S. subsidiary. The gains and losses on this foreign exchange contract
offset the transaction gains and losses on this foreign currency obligation. These gains and losses
are recognized in earnings as the Company elected not to classify the hedge for hedge accounting
treatment.
12
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(7) INDEBTEDNESS
During the third quarter 2006, the Company refinanced its credit facility (Credit Facility) with
a syndication of banks. This Credit Facility permits the Company to borrow up to $150 million,
with an option to increase the borrowing limit to a maximum of $225 million (subject to approval by
the lenders) at any time up to 90 days prior to maturity of the Credit Facility. The Credit
Facility matures on September 27, 2011. The Company may request a one year extension of the
maturity date, subject to approval by the lenders. The Credit Facility is secured by the majority
of the Companys domestic accounts receivable and a pledge of 65% of the capital stock of specified
material foreign subsidiaries.
Subsequent to the end of the third quarter 2006, the Company exercised its option to increase the
borrowing limit of the Credit Facility to $180 million.
The Credit Facility, which includes customary financial covenants, may be used for general
corporate purposes, including working capital, purchases of treasury stock, and acquisition
financing. The Credit Facility accrues interest at a rate based on either (1) the Prime Rate,
defined as the higher of the lenders prime rate or the Federal Funds Rate plus 0.50%, or (2) the
London Interbank Offered Rate (LIBOR) plus an applicable credit spread, at the Companys option.
The interest rate will vary based on the Companys leverage ratio as defined in the Credit
Facility. As of September 30, 2006, interest accrued at the weighted-average rate of approximately
6%. As of September 30, 2006 and December 31, 2005, the Company had outstanding borrowings under
the Credit Facility of $77.8 million and $26.7 million, respectively.
(8) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes
(SFAS 109), which requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions that have been included in the Condensed
Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. When circumstances warrant, the Company assesses the likelihood that its net deferred tax
assets will more likely than not be recovered from future projected taxable income. Management
judgment has been used in forecasting future taxable income.
As required by SFAS 109, the Company continually reviews the likelihood that deferred tax assets
will be realized in future tax periods under the more likely than not criteria. In making this
judgment, SFAS 109 requires that all available evidence, both positive and negative, should be
considered to determine whether, based on the weight of that evidence, a valuation allowance is
required. As of September 30, 2006, the Company has $50.5 million of deferred tax assets (after a
$3.7 million valuation allowance) and net deferred tax assets (after deferred tax liabilities) of
$42.7 million, related to the U.S. and international tax jurisdictions whose recoverability is
dependent upon future profitability.
The effective tax rate, after minority interest, for the three months ended September 30, 2006 was 33.5%.
The effective tax rate, after minority interest, for the nine months
ended September 30, 2006 was 20.6%.
Excluding the $5.2 million change to the deferred tax valuation allowance accounted for in the second
quarter of 2006, the Companys effective tax rate for the nine months ended September 30, 2006 was 34.2%.
(9) RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES
Restructuring Charges
Restructuring Charges, Net for the three months ended September 30, 2006 of $0.5 million relates to
severance in the International BPO and Database Marketing and Consulting segments.
Restructuring Charges, Net for the nine months ended September 30, 2006 of $1.5 million includes
approximately (i) $0.7 million for the fair value of the liability for lease payments for a portion
of a CMC that the Company ceased to use in the International BPO segment, and (ii) $1.0 million in
severance costs, less (iii) a $0.2 million reversal of unused prior-period balances.
Restructuring Charges, Net for the three months ended September 30, 2005 of $0.5 million related to
the Companys decision to exercise an early lease termination.
13
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Restructuring Charges, Net for the nine months ended September 30, 2005 of $1.5 million related to
reductions in force across all three segments and the Companys decision to exercise an early lease
termination.
A roll-forward of the activity in the restructuring reserve liability is as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closure of |
|
|
Reduction |
|
|
|
|
|
|
CMCs |
|
|
in Force |
|
|
Total |
|
Balance as of December 31, 2004 |
|
$ |
599 |
|
|
$ |
233 |
|
|
$ |
832 |
|
Expense |
|
|
682 |
|
|
|
2,139 |
|
|
|
2,821 |
|
Payments |
|
|
(193 |
) |
|
|
(1,145 |
) |
|
|
(1,338 |
) |
Reversal of unused balances |
|
|
|
|
|
|
(148 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
1,088 |
|
|
|
1,079 |
|
|
|
2,167 |
|
Expense |
|
|
724 |
|
|
|
935 |
|
|
|
1,659 |
|
Payments |
|
|
(733 |
) |
|
|
(1,246 |
) |
|
|
(1,979 |
) |
Reversal of unused balances |
|
|
(55 |
) |
|
|
(149 |
) |
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
1,024 |
|
|
$ |
619 |
|
|
$ |
1,643 |
|
|
|
|
|
|
|
|
|
|
|
The restructuring reserve liability is included in Other Accrued Expenses in the accompanying
Condensed Consolidated Balance Sheets.
Impairment Losses
Impairment Losses for the nine months ended September 30, 2006 of $0.5 million includes
approximately (i) $0.3 million to reduce the net book value of long-lived assets in New Zealand and
Malaysia to their then estimated fair value and (ii) $0.2 million for the difference between
assumed values to be received for assets in closed CMCs versus actual value received.
Impairment Losses for the nine months ended September 30, 2005 of $2.5 million were to reduce the
net book value of long-lived assets in the Glasgow, Scotland facility to its then estimated fair
value.
(10) CONTINGENCIES
Legal Proceedings
From time-to-time, the Company may be involved in claims or lawsuits that arise in the ordinary
course of business. Accruals for claims or lawsuits have been provided for to the extent that
losses are deemed both probable and estimable. Although the ultimate outcome of these claims or
lawsuits cannot presently be ascertained, on the basis of present information and advice received
from counsel, it is managements opinion that the disposition or ultimate determination of such
claims or lawsuits will not have a material adverse effect on the Company.
Guarantees
The Companys Credit Facility is guaranteed by the majority of the Companys domestic accounts
receivable and a pledge of 65% of the capital stock of specified material foreign subsidiaries.
Letters of Credit
As of September 30, 2006, outstanding letters of credit and other performance guarantees totaled
approximately $13.8 million, which primarily guarantee workers compensation, other insurance
related obligations, and facility leases.
14
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(11) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the
periods indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Shares used in basic per share calculation |
|
|
69,085 |
|
|
|
71,650 |
|
|
|
68,979 |
|
|
|
72,946 |
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,281 |
|
|
|
841 |
|
|
|
1,249 |
|
|
|
1,558 |
|
Restricted stock |
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effects of dilutive securities |
|
|
1,281 |
|
|
|
941 |
|
|
|
1,249 |
|
|
|
1,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per share calculation |
|
|
70,366 |
|
|
|
72,591 |
|
|
|
70,228 |
|
|
|
74,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2006 and 2005, 0.5 million and 3.9 million, respectively,
of options to purchase shares of common stock were outstanding but not included in the computation
of diluted earnings per share because the effect would have been anti-dilutive. For the nine months
ended September 30, 2006 and 2005, 1.3 million and 2.6 million, respectively, of options to
purchase shares of common stock were outstanding but not included in the computation of diluted
earnings per share because the effect would have been anti-dilutive. The Company has also excluded
the impact of outstanding warrants, as the impact would be anti-dilutive for all periods presented.
(12) OTHER FINANCIAL INFORMATION
As of September 30, 2006, Accumulated Other Comprehensive Income included in the Companys
Condensed Consolidated Balance Sheets consisted of $5.1 million and $1.0 million of foreign
currency translation adjustments and derivatives valuation, net of tax, respectively. As of
December 31, 2005, Accumulated Other Comprehensive Income consisted of $0.7 million and $3.0
million of foreign currency translation adjustments and derivatives valuation, net of tax,
respectively.
15
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
certain forward-looking statements that involve risks and uncertainties. The projections and
statements contained in these forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance, or achievements to
be materially different from any future results, performance, or achievements expressed or implied
by the forward-looking statements.
All statements not based on historical fact are forward-looking statements that involve substantial
risks and uncertainties. In accordance with the Private Securities Litigation Reform Act of 1995,
following are important factors that could cause our actual results to differ materially from those
expressed or implied by such forward-looking statements, including but not limited to the
following: our belief that we are continuing to see strong demand for our services and that sales
cycles are shortening; risks associated with successfully integrating Direct Alliance Corporation
(DAC) and achieving anticipated future revenue growth, profitability, and synergies; estimated
revenue from new, renewed, and expanded client business as volumes may not materialize as
forecasted or be sufficient to achieve our Business Outlook; achieving continued profit improvement
in our International Business Process Outsourcing (BPO) operations; the ability to close and ramp
new business opportunities that are currently being pursued or that are in the final stages with
existing and/or potential clients in order to achieve our Business Outlook; our ability to execute
our growth plans, including sales of new products (such as TeleTech On DemandTM); our
ability to achieve our year-end 2006 and 2007 financial goals, including those set forth in our
Business Outlook; the possibility of our Database Marketing and Consulting segment not increasing
revenue, lowering costs, or returning to profitability resulting in an impairment of its $13.4
million of Goodwill; the possibility of lower revenue or price pressure from our clients
experiencing a business downturn or merger in their business; greater than anticipated competition
in the BPO and customer management market, causing adverse pricing and more stringent contractual
terms; risks associated with losing or not renewing client relationships, particularly large client
agreements, or early termination of a client agreement; the risk of losing clients due to
consolidation in the industries we serve; consumers concerns or adverse publicity regarding our
clients products; our ability to find cost effective locations, obtain favorable lease terms, and
build or retrofit facilities in a timely and economic manner; risks associated with business
interruption due to weather, pandemic, or terrorist-related events; risks associated with
attracting and retaining cost-effective labor at our customer management centers; the possibility
of additional asset impairments and restructuring charges; risks associated with changes in foreign
currency exchange rates; economic or political changes affecting the countries in which we operate;
changes in accounting policies and practices promulgated by standard setting bodies; and new
legislation or government regulation that impacts the BPO and customer management industry.
Executive Overview
We serve our clients through two primary businesses, BPO Services and Database Marketing and
Consulting. BPO Services provides outsourced business process, customer management, and marketing
services for a variety of industries via CMCs throughout the world. When we begin operations in a
new country, we determine whether the country is intended to primarily serve U.S.-based clients, in
which case we include the country in our North American BPO segment, or the country is intended to
serve both domestic clients from that country and U.S.-based clients, in which case we include the
country in our International BPO segment. This is consistent with our management of the business,
internal financial reporting structure, and operating focus. Operations for each segment of BPO
Services are conducted in the following countries:
16
|
|
|
North American BPO
|
|
International BPO |
|
|
|
United States
|
|
Argentina |
Canada
|
|
Australia |
India
|
|
Brazil |
Philippines
|
|
China |
|
|
Germany |
|
|
Malaysia |
|
|
Mexico |
|
|
New Zealand |
|
|
Singapore |
|
|
Spain |
|
|
United Kingdom |
|
|
Venezuela |
On June 30, 2006, we acquired 100 percent of the outstanding common shares of DAC. DAC is a
provider of outsourced direct marketing services to third parties in the U.S. and its acquisition
is consistent with our strategy to grow and to focus on providing outsourced marketing, sales, and
BPO solutions to large multinational clients. DAC is included in our North American BPO segment. We
project the acquisition of DAC will contribute approximately $35 million of revenue during the last
six months of 2006 since acquisition and will be slightly accretive to earnings during the first twelve months of
combined operations.
Database Marketing and Consulting provides outsourced database management, direct marketing, and
related customer acquisition and retention services for automobile dealerships and manufacturers.
Segment accounting policies are the same as those used in the Companys Condensed Consolidated
Financial Statements. See Note 3 to the Condensed Consolidated Financial Statements for additional
discussion regarding our preparation of segment information.
BPO Services
The BPO Services business generates revenue based primarily on the amount of time our
representatives devote to a clients program. We primarily focus on large global corporations in
the following industries; automotive, communications and media, financial services, healthcare,
government, logistics, retail, technology, and travel. Revenue is recognized as services are
provided. The majority of our revenue is, and we anticipate that the majority of our future revenue
will continue to be, from multi-year contracts. However, we do provide certain client programs on a
short-term basis. We have historically experienced annual attrition of existing client programs of
approximately 7% to 15% of our revenue. Attrition of existing client programs during the first nine
months of 2006 was 8% (approximately the same rate during the first nine months of 2005), excluding
the short-term contract with the U.S. Government during the third quarter 2005. However, during all
of 2005, we experienced net attrition of existing client programs of 3% (attrition of existing
client programs was greater than the expansion of existing client programs) whereas during the
first nine months of 2006, excluding the short-term contract with the U.S. Government during the
third quarter 2005, we experienced net growth of existing client programs of 4% as expansion of
existing client programs exceeded attrition of existing client programs. We believe this trend is
attributable to our investment in an account management and operations team focused on client
service. Our invoice terms with clients range from 30 to 60 days, with longer terms in Europe.
The BPO Services industry is highly competitive. Our ability to sell our existing services or gain
acceptance for new products or services is challenged by the competitive nature of the industry.
There can be no assurance that we will be able to sell services to new clients, renew relationships
with existing clients, or gain client acceptance of our new products.
17
We compete primarily with the in-house BPO operations of our current and potential clients. We also
compete with certain companies that provide BPO services on an outsourced basis. In general, during
the last several years, the global economy has negatively impacted the BPO market. More
specifically, sales cycles lengthened, competition increased, and contract values were reduced.
However, we believe that sales cycles have recently begun shortening. Nonetheless, pricing
pressures continue within our industry due to the rapid growth of offshore labor capabilities.
When renewing contracts, clients may request that all or a portion of the renewed work be located
within offshore CMCs. These requests decrease our revenue as the billing rate we charge for
offshore CMCs is lower than for our North American CMCs, and, in the short-term, increase our costs
as we incur expenses related to relocating the work. For the three months and nine months ended
September 30, 2006, we incurred contract relocation costs of approximately $0.2 million and $0.5
million, respectively. For the three months and nine months ended September 30, 2006, revenue was
negatively impacted by $0.0 million and $2.6 million, respectively, as a result of relocating
working from North American CMCs to International CMCs.
Quarterly, we review capacity utilization and projected demand for future capacity. In conjunction
with these quarterly reviews, we may decide to consolidate or close under-performing CMCs,
including those impacted by the loss of a major client program, in order to maintain or improve
targeted utilization and margins.
Because clients may request that we serve their customers from International CMCs with lower
prevailing labor rates, in the future we may decide to close one or more U.S.-based CMCs, even
though it is generating positive cash flow, because we believe the future profits from conducting
such work outside the U.S. may more than compensate for the one-time charges related to closing the
facility.
The short-term focus of management is to increase revenue in both the North American and
International BPO segments by:
|
|
|
Selling new business to existing clients; |
|
|
|
|
Continuing to focus sales efforts on large, complex, multi-center opportunities; |
|
|
|
|
Differentiating our products and services by developing and offering new solutions to clients; and |
|
|
|
|
Exploring merger and acquisition possibilities. |
It is possible that the contemplated benefits of any future acquisitions may not materialize within
the expected time periods or to the extent anticipated. Critical to the success of our acquisition
strategy in the future is the orderly, effective integration of acquired businesses into our
organization. If this integration is unsuccessful, our business may be adversely impacted. There is
also the risk that our valuation assumptions and models for an acquisition may be overly optimistic
or incorrect.
Our ability to enter into new or renewed multi-year contracts, particularly large complex
opportunities, is dependent upon the macroeconomic environment in general and the specific industry
environments in which our clients operate. A weakening of the U.S. and/or the global economy could
lengthen sales cycles or cause delays in closing new business opportunities.
As previously announced, we were recently awarded new business with new and existing clients. As a
result, we are expanding our capacity in select International markets with the addition of an
estimated 2,500 workstations in Argentina, Canada, Mexico, and the Philippines. We may have
difficulties managing the timeliness of launching new or expanded client programs, and the
associated internal allocation of personnel and resources. This could cause a decline or delay in
recognition of revenues and an increase in costs, either of which could adversely affect our
operating results. In the event we do not successfully expand our capacity or launch the new or
expanded client programs, we may be unable to achieve the revenue and profitability targets set
forth in the Business Outlook section below.
18
Our profitability is significantly influenced by our ability to increase capacity utilization in
our CMCs, the number of new or expanded programs during a period, and our success at managing
personnel turnover and employee costs. Managing our costs is critical since we continue to see
pricing pressure within our industry. These pricing pressures have been accentuated by the rapid
growth in the availability of offshore labor.
We attempt to minimize the financial impact resulting from idle capacity when planning the
development and opening of new CMCs or the expansion of existing CMCs. As such, management
considers numerous factors that affect capacity utilization, including anticipated expirations,
reductions, terminations, or expansions of existing programs, and the potential size and timing of
new client contracts that we expect to obtain.
However, to respond more rapidly to changing market demands, to implement new programs, and to
expand existing programs, we may be required to commit to additional capacity prior to the
contracting of additional business, which may result in idle capacity. This is largely due to the
significant time required to negotiate and execute a client contract as we concentrate our
marketing efforts toward obtaining large, complex BPO programs.
We internally target capacity utilization in our Centers at 85% to 90% of our available
workstations. As of September 30, 2006, the overall capacity utilization in our multi-client
Centers was 75% (see Workstation Utilization below for further details).
As mentioned above, our profitability is influenced by the number of new or expanded client
programs. We defer revenue for the initial training that occurs upon commencement of a new client
contract (Start-Up Training) if that training is billed separately to the client. Accordingly,
the corresponding training costs, consisting primarily of labor and related expenses, are also
deferred. In these circumstances, both the training revenue and costs are amortized straight-line
over the life of the client contract. In situations where Start-Up Training is not billed
separately, but rather included in the hourly production rates paid by the client over the life of
the contract, no deferral is necessary as the revenue is being recognized over the life of the
contract, and the associated training expenses are expensed as incurred. For the three months and
nine months ended September 30, 2006, we incurred $0.8 million and $2.3 million, respectively, of
training expenses for client programs for which we did not separately bill Start-Up Training.
The following summarizes the impact of the deferred Start-Up Training on the three months and nine
months ended September 30, 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
Income |
|
|
|
|
|
|
|
from |
|
|
|
|
|
|
from |
|
|
|
Revenue |
|
|
Operations |
|
|
Revenue |
|
|
Operations |
|
Amounts deferred due to new business |
|
$ |
(3,538 |
) |
|
$ |
(2,214 |
) |
|
$ |
(9,072 |
) |
|
$ |
(5,336 |
) |
Amortization of prior period deferrals |
|
|
1,542 |
|
|
|
610 |
|
|
|
3,581 |
|
|
|
1,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) for the period |
|
$ |
(1,996 |
) |
|
$ |
(1,604 |
) |
|
$ |
(5,491 |
) |
|
$ |
(3,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, we had $8.2 million of net deferred Start-Up Training that will be
amortized straight-line over the life of the corresponding client contracts (approximately 36
months).
Our potential clients typically obtain bids from multiple vendors and evaluate many factors in
selecting a service provider including, among other factors, the scope of services offered, the
service record of the vendor, and price. We generally price our bids with a long-term view of
profitability and, accordingly, we consider all of our fixed and variable costs in developing our
bids. We believe that our competitors, at times, may bid business based upon a short-term view, as
opposed to our longer-term view, resulting in a lower price bid. While we believe our clients
perceptions of the value we provide results in our being successful in certain competitive bid
situations, there are often situations where a potential client may prefer a lower cost.
19
Our industry is labor-intensive and the majority of our operating costs relate to wages, employee
benefits, and employment taxes. An improvement in the local or global economies where our CMCs are
located could lead to increased labor-related costs. In addition, our industry experiences high
personnel turnover, and the length of training time required to implement new programs continues to
increase due to increased complexities of our clients businesses. This may create challenges if we
obtain several significant new clients or implement several new, large-scale programs, and need to
recruit, hire, and train qualified personnel at an accelerated rate.
Our success in improving our profitability will depend on successful execution of a comprehensive
business plan, including the following broad steps:
|
|
|
Increasing sales to absorb unused capacity in existing global CMCs; |
|
|
|
|
Reducing costs and continued focus on cost controls; and |
|
|
|
|
Managing the workforce in our CMCs in a cost-effective manner. |
Database Marketing and Consulting
As of September 30, 2006, our Database Marketing and Consulting segment has relationships with more
than 2,500 automobile dealers representing 27 different automotive brand names. These contracts
generally have terms ranging from month-to-month to twenty-four months. For a few major automotive
manufacturers, the automotive manufacturer collects from the individual automobile dealers on our
behalf. Our average collection period is thirty to sixty days.
A majority of the revenue from this segment is generated utilizing a database and contact system to
promote the service business of automobile dealership customers using targeted marketing solutions
through the phone, mail, e-mail, and Web. A combination of factors contributed to this segment
generating a loss from operations of approximately $5.0 million and $11.2 million, after corporate
allocations, for the three months and nine months ended September 30, 2006. In our Quarterly Report
on Form 10-Q for the three months ended June 30, 2006, we projected this segment would generate a
loss from operations in the range of $4.0 million to $5.0 million. Excluding corporate allocations,
this segment generated a loss from operations of $4.5 million and $9.3 million, respectively, for
the three months and nine months ended September 30, 2006.
For 2006, we modified our agreement with Ford Motor Company (Ford; whose dealers represented
approximately 32% of the revenue of our Database Marketing and Consulting segment for the third
quarter of 2006), to provide services to Fords automotive dealerships on a preferred basis, rather
than on an exclusive basis as was the previous agreement, as Ford was to commence offering a
competing product. The new agreement gives us flexibility to customize service offerings and the
ability to contract directly with Fords dealerships under our defined terms and conditions.
Primarily due to Ford offering a competing product, our dealer attrition rate has exceeded our new
account growth in 2006, resulting in a significant decrease in revenue from the prior year period.
At the same time, we continue to focus on developing a field sales organization to approach
dealers outside of the Ford family of automotive brands.
Due to the factors discussed above, we believe this segment will incur a loss from operations in
the fourth quarter of 2006 in the range of $3.5 million to $4.5 million, as we work to implement
the plans outlined below to return this segment to profitability.
We plan to continue our focus on the following during the fourth quarter 2006:
|
|
|
Diversifying our client base by establishing relations with new automotive manufacturers
and dealer groups; |
|
|
|
|
Reducing our client attrition rate by improving customer service and increasing customer contact; |
|
|
|
|
Continuing to manage costs through operational effectiveness; and |
|
|
|
|
Acquiring business platforms for similar and related services. |
20
The clients of our Database Marketing and Consulting segment, as well as our joint venture with
Ford, come primarily from the automotive industry. The U.S. automotive industry is currently
reporting declining earnings, which may result in client losses, lower volumes, or place additional
pricing pressures on our operations.
Overall
As shown in the Financial Comparison below (see Net increase to income from BPO operations), we
believe that we have been successful in improving income from operations for our North American and
International BPO segments. The increases are attributable to a variety of factors such as
expansion of work on certain client programs, our multi-phased cost reduction plan, transitioning
work on certain client programs to lower cost operating centers, and taking actions to improve
individual client program profit margins and/or eliminate unprofitable client programs.
Adoption of SFAS No. 123(R) and Equity-Based Compensation Expense
During the first quarter of 2006, we adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004) Share-Based Payment (SFAS 123(R)) applying the modified prospective
method. SFAS 123(R) requires all equity-based payments to employees, including grants of employee
stock options, to be recognized in the Condensed Consolidated Statement of Operations and
Comprehensive Income based on the grant date fair value of the award. Prior to the adoption of SFAS
123(R), we accounted for equity-based awards under the intrinsic value method, which followed
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations and equity-based compensation was
included as pro-forma disclosure within the notes to the financial statements.
We did not modify the terms of any previously granted options in anticipation of the adoption of
SFAS 123(R).
Income from operations for the three months ended September 30, 2006 was adversely affected by the
impact of equity-based compensation due to the implementation of SFAS 123(R). For the three months
and nine months ended September 30, 2006 we recorded $1.7 million and $5.0 million, respectively,
for equity-based compensation. We expect that equity-based compensation expense for fiscal 2006
will be approximately $6.9 million based on current outstanding awards and assumptions applied.
However, any significant awards granted during the remainder of fiscal 2006, required changes in
the estimated forfeiture rates or significant changes in the market price of our common stock may
impact this estimate. Based on current outstanding awards, compensation expense related to
equity-based payments to employees is expected to be $6.7 million and $5.8 million during fiscal
years 2007 and 2008, respectively. See Note 4 to the Condensed Consolidated Financial Statements
for additional information.
Critical Accounting Policies
We have identified the policies below as critical to our business and results of operations. For
further discussion on the application of these and other accounting policies, see Note 1 to our
Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31,
2005.
Our reported results are impacted by the application of the following accounting policies, certain
of which require management to make subjective or complex judgments. These judgments involve making
estimates about the effect of matters that are inherently uncertain and may significantly impact
quarterly or annual results of operations. Specific risks associated with these critical accounting
policies are described in the following paragraphs.
For all of these policies, management cautions that future events rarely develop exactly as
expected, and the best estimates routinely require adjustment. Descriptions of these critical
accounting policies follow.
21
Revenue Recognition
For each client arrangement, we determine whether evidence of an arrangement exists, delivery of
our service has occurred, the fee is fixed or determinable, and collection is probable. If all
criteria are met, we recognize revenue at the time services are performed. If any of these criteria
are not met, revenue recognition is deferred until such time as all of the criteria are met.
Our BPO segments recognize revenue under three models which are:
|
|
|
Production Rate. Revenue is recognized based on the billable time or
transactions of each customer service representative (CSR), as defined in the client
contract. The rate per billable time or transaction is based on a predetermined contractual
rate. This contractual rate can fluctuate based on our performance against certain
pre-determined criteria related to quality and performance. |
|
|
|
|
Performance-based. Under performance-based arrangements, we are paid by our
clients based on achievement of certain levels of sales or other client-determined criteria
specified in the client contract. We recognize performance-based revenue by measuring our
actual results against the performance criteria specified in the contracts. Amounts
collected from clients prior to the performance of services are recorded as customer
advances. |
|
|
|
|
Hybrid. Under hybrid models we are paid a fixed fee or production element as
well as a performance-based element. |
Certain client programs provide for adjustments to monthly billings based upon whether we meet or
exceed certain performance criteria as set forth in the contract. Increases or decreases to monthly
billings arising from such contract terms are reflected in Revenue as earned or incurred.
Our Database Marketing and Consulting segment recognizes revenue when services are rendered. Most
agreements require the billing of predetermined monthly rates. Where the contractual billing
periods do not coincide with the periods over which services are provided, we recognize revenue
straight-line over the life of the contract (typically six to twenty-four months).
From time-to-time, we make certain expenditures related to acquiring contracts (recorded as
Contract Acquisition Costs in the accompanying Condensed Consolidated Balance Sheets). Those
expenditures are capitalized and amortized in proportion to the initial expected future revenue
from the contract, which in most cases results in straight-line amortization over the life of the
contract. Amortization of these costs is recorded as a reduction of Revenue.
Income Taxes
We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes (SFAS
109), which requires recognition of deferred tax assets and liabilities for the expected future
income tax consequences of transactions that have been included in the Condensed Consolidated
Financial Statements. Under this method, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. When
circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely
than not be recovered from future projected taxable income.
As required by SFAS 109, the Company continually reviews the likelihood that deferred tax assets
will be realized in future tax periods under the more likely than not criteria. In making this
judgment SFAS 109 requires that all available evidence, both positive and negative, should be
considered to determine whether, based on the weight of that evidence, a valuation allowance is
required. As of September 30, 2006, the Company has $50.5 million of deferred tax assets (after a
$3.7 million valuation allowance) and net deferred tax assets (after deferred tax liabilities) of
$42.7 million related to the U.S. and international tax jurisdictions whose recoverability is
dependent upon future profitability.
22
In the future, our effective tax rate could be adversely affected by several factors, many of which
are outside of our control. Our effective tax rate is affected by the proportion of revenues and
income before taxes in the various domestic and international jurisdictions in which we operate.
Further, we are subject to changing tax laws, regulations, and interpretations in multiple
jurisdictions in which we operate, as well as the requirements, pronouncements, and rulings of
certain tax, regulatory, and accounting organizations. We estimate our annual effective tax rate
each quarter based on a combination of actual and forecasted results of subsequent quarters.
Consequently, significant changes in our actual quarterly or forecasted results may impact the
effective tax rate for the current or future periods.
The FASB recently issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN
48), an interpretation of SFAS 109. FIN 48 will be effective for our 2007 fiscal year. See Note 1
to the Condensed Consolidated Financial Statements for a more complete description of the impact
FIN 48 will have on our consolidated financial statements.
Allowance for Doubtful Accounts
We have established an allowance for doubtful accounts to reserve for uncollectible accounts
receivable. Each quarter, management reviews the receivables on an account-by-account basis and
assigns a probability of collection. Managements judgment is used in assessing the probability of
collection. Factors considered in making this judgment include, among other things, the age of the
identified receivable, client financial wherewithal, previous client history, and any recent
communications with the client.
Impairment of Long-Lived Assets
We evaluate the carrying value of our individual CMCs in accordance with SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires that a
long-lived asset group be reviewed for impairment only when events or changes in circumstances
indicate that the carrying amount of the long-lived asset group may not be recoverable. When the
operating results of a Center have deteriorated to the point it is likely that losses will continue
for the foreseeable future, or we expect that a CMC will be closed or otherwise disposed of before
the end of its estimated useful life, we select the CMC for further review.
For CMCs selected for further review, we estimate the probability-weighted future cash flows, using
EBITDA (see Presentation of Non-GAAP (Generally Accepted Accounting Practices (GAAP))
Measurements) as a surrogate for cash flows, resulting from operating the CMC over its useful
life. Significant judgment is involved in projecting future capacity utilization, pricing, labor
costs, and the estimated useful life of the CMC. We do not subject to the same test CMCs that have
been operated for less than two years or those CMCs that have been impaired within the past two
years (the Two Year Rule) because we believe sufficient time is necessary to establish a market
presence and build a client base for such new or modified CMCs in order to adequately assess
recoverability. However, such CMCs are nonetheless evaluated in case other factors would indicate
an impairment had occurred. For impaired CMCs, we write the assets down to their estimated fair
market value. If the assumptions used in performing the impairment test prove insufficient, the
fair value estimate of the CMCs may be significantly lower, thereby causing the carrying value to
exceed fair value and indicating an impairment had occurred.
23
The following table presents a sensitivity analysis of the impairment evaluation assuming that the
future results were 10% less than the two-year forecasted EBITDA for these CMCs (excluding
Glasgow, which was impaired in 2005). As shown in the table below, the analysis indicates that an
impairment of approximately $3.0 million (a decrease of $1.8 million from the second quarter of
2006) would arise. However, for the CMCs tested, the current probability-weighted projection
scenarios indicated that impairment had not occurred as of September 30, 2006 (amounts in
thousands, except number of CMCs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
Net Book |
|
|
Number |
|
|
Under |
|
|
|
Value |
|
|
of CMCs |
|
|
Sensitivity Test |
|
Tested based on Two Year Rule |
|
|
|
|
|
|
|
|
|
|
|
|
Positive cash flow in period |
|
$ |
58,978 |
|
|
|
53 |
|
|
$ |
419 |
|
Negative cash flow in period |
|
|
2,036 |
|
|
|
4 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
61,014 |
|
|
|
57 |
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not tested based on Two Year Rule |
|
|
|
|
|
|
|
|
|
|
|
|
Positive cash flow in period |
|
|
20,637 |
|
|
|
9 |
|
|
|
|
|
Negative cash flow in period |
|
|
6,865 |
|
|
|
5 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
27,502 |
|
|
|
14 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Positive cash flow in period |
|
|
79,615 |
|
|
|
62 |
|
|
|
419 |
|
Negative cash flow in period |
|
|
8,901 |
|
|
|
9 |
|
|
|
2,545 |
|
|
|
|
|
|
|
|
|
|
|
Grand total |
|
$ |
88,516 |
|
|
|
71 |
|
|
$ |
2,964 |
|
|
|
|
|
|
|
|
|
|
|
We also assess the realizable value of capitalized software on a quarterly basis based upon current
estimates of future cash flows from services utilizing the software (principally utilized by our
Database Marketing and Consulting segment). No impairment had occurred as of September 30, 2006.
Goodwill
Goodwill is tested for impairment at least annually at the segment level for the Database Marketing
and Consulting segment (which consists of one subsidiary company) and for reporting units one level
below the segment level for the other two segments in accordance with SFAS No. 142 Goodwill and
Other Intangible Assets. Impairment occurs when the carrying amount of goodwill exceeds its
estimated fair value. The impairment, if any, is measured based on the estimated fair value of the
reporting unit. Fair value can be determined based on discounted cash flows, comparable sales, or
valuations of other similar businesses. Our policy is to test goodwill for impairment in the fourth
quarter of each year unless an indicator of impairment arises during an intervening period.
We have
plans to improve the future profitability of our Database Marketing and Consulting segment.
The goodwill for that segment is $13.4 million as of September 30, 2006. As a result of this
segments financial performance in the third quarter of 2006, we updated our cash flow analyses
(which assume annual revenue increases ranging from 10 percent to 13 percent per annum, calculated
on a smaller revenue base than our historical revenue base and following our planned efforts to
sell business to non-Ford dealers). Our analyses indicated that an impairment in goodwill had not
occurred as of September 30, 2006. However, a sensitivity analysis of the forecast indicated that,
without considering corresponding reductions in future operating expenses that we would implement
in the event of a further revenue decline, it would not take a material change in the revenue
forecast for an impairment to arise.
Restructuring Reserve Liability
We routinely assess the profitability and utilization of our CMCs. In some cases, we have chosen to
close under-performing CMCs and complete reductions in workforce to enhance future profitability.
We follow SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities, which
specifies that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than upon commitment to a plan.
A significant assumption used in determining the amount of the estimated liability for closing CMCs
is the estimated liability for future lease payments on vacant centers, which we determine based on
a third-party brokers assessment of our ability to successfully negotiate early termination
agreements with landlords and/or our ability to sublease the facility. If our assumptions regarding
early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be
required to record additional losses, or conversely, a future gain.
24
Contingencies
We record a liability for pending litigation and claims where losses are both probable and
reasonably estimable. Each quarter, management, with the advice of legal counsel, reviews these
matters on a case-by-case basis and assigns probability of loss and range of loss based upon the
assessments of in-house counsel and outside counsel, as appropriate.
Explanation of Key Metrics and Other Items
Cost of Services
Cost of Services principally include costs incurred in connection with our BPO operations and
database marketing services, including direct labor, telecommunications, printing, postage, sales
and use tax, and certain fixed costs associated with CMCs.
Selling, General and Administrative
Selling, General and Administrative expenses primarily include costs associated with administrative
services such as sales, marketing, product development, regional legal settlements, legal,
information systems (including core technology and telephony infrastructure), accounting, and
finance. It also includes equity-based compensation expense, outside professional fees (i.e. legal
and accounting services), building maintenance expense for non-CMC facilities, and other items
associated with administration.
Restructuring Charges, Net
Restructuring Charges, Net primarily include costs incurred in conjunction with reductions in force
or decisions to exit facilities, including termination benefits and lease liabilities, net of
expected sublease rentals.
Interest Expense
Interest Expense includes interest expense and amortization of debt issuance costs associated with
our grants, debt, and capitalized lease obligations.
Other Expenses
The main components of Other Expenses are expenditures not directly related to our operating
activities, such as corporate legal settlements and foreign exchange transaction losses.
Other Income
The main components of Other Income are miscellaneous receipts not directly related to our
operating activities, such as foreign exchange transaction gains and corporate legal settlements.
In addition, Other Income includes income related to grants we may receive from time-to-time from
local or state governments as an incentive to locate CMCs in their jurisdictions.
Free Cash Flow
We define Free Cash Flow as Net Cash Flows from Operating Activities less purchases of Property and
Equipment, as shown in our Condensed Consolidated Statements of Cash Flows.
Quarterly Average Daily Revenue
We define Quarterly Average Daily Revenue as Revenue for the quarter divided by the calendar days
during the quarter.
Days Sales Outstanding
We define days sales outstanding (DSO) as Accounts Receivable divided by Quarterly Average Daily
Revenue.
25
Presentation of Non-GAAP Measurements
Free Cash Flow
Free Cash Flow is a non-GAAP liquidity measurement. We believe that Free Cash Flow is useful to our
investors because it measures, during a given period, the amount of cash generated that is
available for debt obligations and investments other than purchases of Property and Equipment. Free
Cash Flow is not a measure determined in accordance with GAAP and should not be considered a
substitute for Income from operations, Net Income, Net cash provided by operating activities,
or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure
is useful, in addition to the most directly comparable GAAP measure of Net cash provided by
operating activities, because Free Cash Flow includes investments in operational assets. Free Cash
Flow does not represent residual cash available for discretionary expenditures, since it includes
cash required for debt service. Free Cash Flow also excludes cash that may be necessary for
acquisitions, investments, and other needs that may arise.
The following table reconciles Free Cash Flow to Net cash provided by operating activities for our
consolidated results (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Free cash flow |
|
$ |
25,960 |
|
|
$ |
6,774 |
|
|
$ |
21,393 |
|
|
$ |
25,969 |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Property and Equipment |
|
|
22,753 |
|
|
|
10,645 |
|
|
|
51,219 |
|
|
|
26,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
48,713 |
|
|
$ |
17,419 |
|
|
$ |
72,612 |
|
|
$ |
52,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We discuss factors affecting Free Cash Flow between periods in the Liquidity and Capital Resources
section below.
The following table reconciles Free Cash Flow to Net cash provided by operating activities for our
Database Marketing and Consulting segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Free cash flow |
|
$ |
(3,266 |
) |
|
$ |
(332 |
) |
|
$ |
(4,586 |
) |
|
$ |
(571 |
) |
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of Property and Equipment |
|
|
474 |
|
|
|
630 |
|
|
|
1,074 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
(2,792 |
) |
|
$ |
298 |
|
|
$ |
(3,512 |
) |
|
$ |
1,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Interest, Taxes, Depreciation, and Amortization
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a non-GAAP liquidity
and profitability measurement. We use EBITDA to evaluate the profitability and cash flow of our
CMCs when testing the impairment of long-lived assets. EBITDA is not a measure determined in
accordance with GAAP and should not be considered a substitute for Income from operations, Net
cash provided by operating activities, or any other measure determined in accordance with GAAP. As
shown in the table below, EBITDA is calculated as earnings before interest, income taxes,
depreciation, and amortization. Because not all companies calculate EBITDA identically, this
presentation of EBITDA may not be comparable to similarly titled measures of other companies.
EBITDA is not intended to be a measure of free cash flow for managements discretionary use, as it
does not consider certain cash requirements such as interest expense, income taxes, or debt service
payments.
26
The following table reconciles Net Income to EBITDA for our consolidated results (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net Income |
|
$ |
12,779 |
|
|
$ |
11,620 |
|
|
$ |
30,411 |
|
|
$ |
18,073 |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
6,428 |
|
|
|
432 |
|
|
|
7,889 |
|
|
|
3,204 |
|
Interest expense (income), net |
|
|
1,748 |
|
|
|
(155 |
) |
|
|
3,141 |
|
|
|
(517 |
) |
Depreciation and amortization |
|
|
12,929 |
|
|
|
12,659 |
|
|
|
36,705 |
|
|
|
40,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
33,884 |
|
|
$ |
24,556 |
|
|
$ |
78,146 |
|
|
$ |
61,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Results of Operations
Operating Review
The following tables are presented to facilitate Managements Discussion and Analysis of Financial
Condition and Results of Operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
2006 |
|
|
Revenue |
|
|
2005 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
206,616 |
|
|
|
68.0 |
% |
|
$ |
170,930 |
|
|
|
62.3 |
% |
|
$ |
35,686 |
|
|
|
20.9 |
% |
International BPO |
|
|
90,336 |
|
|
|
29.7 |
% |
|
|
82,596 |
|
|
|
30.1 |
% |
|
|
7,740 |
|
|
|
9.4 |
% |
Database Marketing and Consulting |
|
|
6,852 |
|
|
|
2.3 |
% |
|
|
20,733 |
|
|
|
7.6 |
% |
|
|
(13,881 |
) |
|
|
(67.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
303,804 |
|
|
|
100.0 |
% |
|
$ |
274,259 |
|
|
|
100.0 |
% |
|
$ |
29,545 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
146,537 |
|
|
|
70.9 |
% |
|
$ |
127,416 |
|
|
|
74.5 |
% |
|
$ |
19,121 |
|
|
|
15.0 |
% |
International BPO |
|
|
69,671 |
|
|
|
77.1 |
% |
|
|
63,695 |
|
|
|
77.1 |
% |
|
|
5,976 |
|
|
|
9.4 |
% |
Database Marketing and Consulting |
|
|
4,494 |
|
|
|
65.6 |
% |
|
|
11,381 |
|
|
|
54.9 |
% |
|
|
(6,887 |
) |
|
|
(60.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
220,702 |
|
|
|
72.6 |
% |
|
$ |
202,492 |
|
|
|
73.8 |
% |
|
$ |
18,210 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
27,716 |
|
|
|
13.4 |
% |
|
$ |
21,002 |
|
|
|
12.3 |
% |
|
$ |
6,714 |
|
|
|
32.0 |
% |
International BPO |
|
|
16,070 |
|
|
|
17.8 |
% |
|
|
16,579 |
|
|
|
20.1 |
% |
|
|
(509 |
) |
|
|
(3.1 |
)% |
Database Marketing and Consulting |
|
|
5,485 |
|
|
|
80.0 |
% |
|
|
9,061 |
|
|
|
43.7 |
% |
|
|
(3,576 |
) |
|
|
(39.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,271 |
|
|
|
16.2 |
% |
|
$ |
46,642 |
|
|
|
17.0 |
% |
|
$ |
2,629 |
|
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
7,169 |
|
|
|
3.5 |
% |
|
$ |
6,310 |
|
|
|
3.7 |
% |
|
$ |
859 |
|
|
|
13.6 |
% |
International BPO |
|
|
4,005 |
|
|
|
4.4 |
% |
|
|
4,193 |
|
|
|
5.1 |
% |
|
|
(188 |
) |
|
|
(4.5 |
)% |
Database Marketing and Consulting |
|
|
1,755 |
|
|
|
25.6 |
% |
|
|
2,156 |
|
|
|
10.4 |
% |
|
|
(401 |
) |
|
|
(18.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,929 |
|
|
|
4.3 |
% |
|
$ |
12,659 |
|
|
|
4.6 |
% |
|
$ |
270 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
548 |
|
|
|
0.3 |
% |
|
$ |
(548 |
) |
|
|
(100.0 |
)% |
International BPO |
|
|
408 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
408 |
|
|
|
N/A |
|
Database Marketing and Consulting |
|
|
107 |
|
|
|
1.6 |
% |
|
|
(11 |
) |
|
|
(0.1 |
)% |
|
|
118 |
|
|
|
(1072.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
515 |
|
|
|
0.2 |
% |
|
$ |
537 |
|
|
|
0.2 |
% |
|
$ |
(22 |
) |
|
|
(4.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
|
|
|
|
0.0 |
% |
International BPO |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Database Marketing and Consulting |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
25,194 |
|
|
|
12.2 |
% |
|
$ |
15,654 |
|
|
|
9.2 |
% |
|
$ |
9,540 |
|
|
|
60.9 |
% |
International BPO |
|
|
182 |
|
|
|
0.2 |
% |
|
|
(1,871 |
) |
|
|
(2.3 |
)% |
|
|
2,053 |
|
|
|
(109.7 |
)% |
Database Marketing and Consulting |
|
|
(4,989 |
) |
|
|
(72.8 |
)% |
|
|
(1,854 |
) |
|
|
(8.9 |
)% |
|
|
(3,135 |
) |
|
|
169.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,387 |
|
|
|
6.7 |
% |
|
$ |
11,929 |
|
|
|
4.3 |
% |
|
$ |
8,458 |
|
|
|
70.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
$ |
(597 |
) |
|
|
(0.2 |
)% |
|
$ |
524 |
|
|
|
0.2 |
% |
|
$ |
(1,121 |
) |
|
|
(213.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
$ |
6,428 |
|
|
|
2.1 |
% |
|
$ |
432 |
|
|
|
0.2 |
% |
|
$ |
5,996 |
|
|
|
1388.0 |
% |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% |
|
|
|
2006 |
|
|
Revenue |
|
|
2005 |
|
|
Revenue |
|
|
$ Change |
|
|
Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
576,283 |
|
|
|
65.9 |
% |
|
$ |
474,852 |
|
|
|
60.7 |
% |
|
$ |
101,431 |
|
|
|
21.4 |
% |
International BPO |
|
|
264,277 |
|
|
|
30.2 |
% |
|
|
244,157 |
|
|
|
31.2 |
% |
|
|
20,120 |
|
|
|
8.2 |
% |
Database Marketing and Consulting |
|
|
34,000 |
|
|
|
3.9 |
% |
|
|
63,509 |
|
|
|
8.1 |
% |
|
|
(29,509 |
) |
|
|
(46.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
874,560 |
|
|
|
100.0 |
% |
|
$ |
782,518 |
|
|
|
100.0 |
% |
|
$ |
92,042 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
423,097 |
|
|
|
73.4 |
% |
|
$ |
352,360 |
|
|
|
74.2 |
% |
|
$ |
70,737 |
|
|
|
20.1 |
% |
International BPO |
|
|
207,418 |
|
|
|
78.5 |
% |
|
|
194,415 |
|
|
|
79.6 |
% |
|
|
13,003 |
|
|
|
6.7 |
% |
Database Marketing and Consulting |
|
|
19,203 |
|
|
|
56.5 |
% |
|
|
33,888 |
|
|
|
53.4 |
% |
|
|
(14,685 |
) |
|
|
(43.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
649,718 |
|
|
|
74.3 |
% |
|
$ |
580,663 |
|
|
|
74.2 |
% |
|
$ |
69,055 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
77,788 |
|
|
|
13.5 |
% |
|
$ |
60,064 |
|
|
|
12.6 |
% |
|
$ |
17,724 |
|
|
|
29.5 |
% |
International BPO |
|
|
47,352 |
|
|
|
17.9 |
% |
|
|
46,511 |
|
|
|
19.0 |
% |
|
|
841 |
|
|
|
1.8 |
% |
Database Marketing and Consulting |
|
|
19,992 |
|
|
|
58.8 |
% |
|
|
30,153 |
|
|
|
47.5 |
% |
|
|
(10,161 |
) |
|
|
(33.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145,132 |
|
|
|
16.6 |
% |
|
$ |
136,728 |
|
|
|
17.5 |
% |
|
$ |
8,404 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
19,277 |
|
|
|
3.3 |
% |
|
$ |
20,582 |
|
|
|
4.3 |
% |
|
$ |
(1,305 |
) |
|
|
(6.3 |
)% |
International BPO |
|
|
11,538 |
|
|
|
4.4 |
% |
|
|
12,797 |
|
|
|
5.2 |
% |
|
|
(1,259 |
) |
|
|
(9.8 |
)% |
Database Marketing and Consulting |
|
|
5,890 |
|
|
|
17.3 |
% |
|
|
7,271 |
|
|
|
11.4 |
% |
|
|
(1,381 |
) |
|
|
(19.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,705 |
|
|
|
4.2 |
% |
|
$ |
40,650 |
|
|
|
5.2 |
% |
|
$ |
(3,945 |
) |
|
|
(9.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
126 |
|
|
|
0.0 |
% |
|
$ |
1,094 |
|
|
|
0.2 |
% |
|
$ |
(968 |
) |
|
|
(88.5 |
)% |
International BPO |
|
|
1,222 |
|
|
|
0.5 |
% |
|
|
85 |
|
|
|
0.0 |
% |
|
|
1,137 |
|
|
|
1337.6 |
% |
Database Marketing and Consulting |
|
|
107 |
|
|
|
0.3 |
% |
|
|
301 |
|
|
|
0.5 |
% |
|
|
(194 |
) |
|
|
(64.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,455 |
|
|
|
0.2 |
% |
|
$ |
1,480 |
|
|
|
0.2 |
% |
|
$ |
(25 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
0 |
|
|
|
0.0 |
% |
International BPO |
|
|
478 |
|
|
|
0.2 |
% |
|
|
2,537 |
|
|
|
1.0 |
% |
|
|
(2,059 |
) |
|
|
(81.2 |
)% |
Database Marketing and Consulting |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
478 |
|
|
|
0.1 |
% |
|
$ |
2,537 |
|
|
|
0.3 |
% |
|
$ |
(2,059 |
) |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American BPO |
|
$ |
55,995 |
|
|
|
9.7 |
% |
|
$ |
40,752 |
|
|
|
8.6 |
% |
|
$ |
15,243 |
|
|
|
37.4 |
% |
International BPO |
|
|
(3,731 |
) |
|
|
(1.4 |
)% |
|
|
(12,188 |
) |
|
|
(5.0 |
)% |
|
|
8,457 |
|
|
|
(69.4 |
)% |
Database Marketing and Consulting |
|
|
(11,192 |
) |
|
|
(32.9 |
)% |
|
|
(8,104 |
) |
|
|
(12.8 |
)% |
|
|
(3,088 |
) |
|
|
38.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,072 |
|
|
|
4.7 |
% |
|
$ |
20,460 |
|
|
|
2.6 |
% |
|
$ |
20,612 |
|
|
|
100.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
$ |
(1,113 |
) |
|
|
(0.1 |
)% |
|
$ |
1,530 |
|
|
|
0.2 |
% |
|
$ |
(2,643 |
) |
|
|
(172.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
$ |
7,889 |
|
|
|
0.9 |
% |
|
$ |
3,204 |
|
|
|
0.4 |
% |
|
$ |
4,685 |
|
|
|
146.2 |
% |
29
Financial Comparison
The following table is a condensed presentation of the components of the change in Net Income
between the three months and nine months ended September 30, 2006 and 2005 and is designed to
facilitate the discussion of results of operations in this Form 10-Q (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Current period (2006) reported net income |
|
$ |
12,779 |
|
|
$ |
30,411 |
|
Prior period (2005) reported net income |
|
|
11,620 |
|
|
|
18,073 |
|
|
|
|
|
|
|
|
Difference |
|
$ |
1,159 |
|
|
$ |
12,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Explanation |
|
|
|
|
|
|
|
|
Net increase to income from BPO operations |
|
$ |
11,593 |
|
|
$ |
23,700 |
|
Net increase to loss in Database
Marketing and Consulting segment |
|
|
(3,135 |
) |
|
|
(3,088 |
) |
Increase in interest expense |
|
|
(1,683 |
) |
|
|
(2,560 |
) |
Decrease in interest income |
|
|
(220 |
) |
|
|
(1,098 |
) |
Other |
|
|
600 |
|
|
|
69 |
|
Increase in taxes |
|
|
(5,996 |
) |
|
|
(4,685 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,159 |
|
|
$ |
12,338 |
|
|
|
|
|
|
|
|
Workstation Utilization
The table below presents workstation data for multi-client Centers as of September 30, 2006 and
December 31, 2005. Workstations in Dedicated and Managed Centers of 11,219 and 11,081,
respectively, for the same periods are excluded from the workstation data as unused seats in these
facilities are not available for sale. Our utilization percentage is defined as the total number of
utilized production workstations compared to the total number of available production workstations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
December 31, 2005 |
|
|
Total |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Production |
|
|
|
|
|
% In |
|
Production |
|
|
|
|
|
|
Workstations |
|
In Use |
|
Use |
|
Workstations |
|
In Use |
|
% In Use |
North American BPO |
|
|
9,806 |
|
|
|
7,360 |
|
|
|
75 |
% |
|
|
6,514 |
|
|
|
4,834 |
|
|
|
74 |
% |
International BPO |
|
|
10,572 |
|
|
|
7,904 |
|
|
|
75 |
% |
|
|
9,447 |
|
|
|
6,695 |
|
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,378 |
|
|
|
15,264 |
|
|
|
75 |
% |
|
|
15,961 |
|
|
|
11,529 |
|
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown above, there was a significant increase in the total production workstations arising from
our expansion plans (see discussion under BPO Services above), a corresponding increase in the
number of production workstations in use, and an increase in the utilization percentage.
Three Months Ended September 30, 2006 Compared to September 30, 2005
Revenue
The increase in North American BPO between periods was due to new client programs, expansion of
existing client programs, and the acquisition of DAC.
Revenue in the International BPO segment increased due to new client programs and expansion of
existing client programs in Latin America and Europe.
Database Marketing and Consulting revenue decreased due to a net decrease in the customer base as
discussed earlier.
30
Cost of Services
Cost of Services as a percentage of revenue in North American BPO primarily decreased compared to
the prior year due to the increase in revenue discussed above. In absolute dollars, the increase in
Cost of Services corresponds to revenue growth from the implementation of new or expanded client
programs and the acquisition of DAC.
Cost of Services, as a percentage of revenue, in International BPO remained constant as compared to
the prior year. In absolute dollars, Cost of Services increased due to the implementation of new or
expanded client programs.
Cost of Services for Database Marketing and Consulting decreased from the prior year primarily due
to a decrease in revenue and our efforts to reduce costs.
Selling, General and Administrative
On a consolidated basis, Selling, General and Administrative increased by $2.6 million, principally
comprised of $1.7 million of stock option expense required by the adoption of SFAS No. 123(R),
additional incentive compensation related to increased earnings over the prior year period, and the
acquisition of DAC.
Selling, General and Administrative expenses for North American BPO increased in both absolute
dollars and as a percentage of revenue primarily due to increased salaries and related benefits
resulting principally from the Companys expenditures to implement an eLearning strategy,
compensation expense related to share-based payments (see Note 4 to the Condensed Consolidated
Financial Statements), increased incentive compensation, and the acquisition of DAC.
Selling, General and Administrative expenses for International BPO decreased in both absolute
dollars and as a percentage of revenue due primarily to decreased salaries and benefits expense
resulting from headcount reductions in our European and Asia Pacific operations.
The decrease in Selling, General and Administrative expenses for Database Consulting and Marketing
was primarily due to our efforts to reduce costs and a lower allocation of corporate-level
operating expenses as discussed above.
Depreciation and Amortization
In absolute dollars, Depreciation and Amortization in our North American BPO segment increased due
to the addition of new CMCs and the expansion of existing CMCs. In absolute dollars and as a
percentage of revenue, Depreciation and Amortization in our International BPO segment decreased
between periods due primarily to the closure of certain facilities. Depreciation and Amortization
in our Database Marketing and Consulting segment decreased compared to the prior year primarily due
to assets reaching the end of their depreciable lives.
Restructuring Charges, Net and Impairment Losses
Restructuring Charges, Net for the three months ended September 30, 2006 of $0.5 million relates to
severance resulting from a reduction in force in the International BPO and Database Marketing and
Consulting segments.
Other Income (Expense)
During the three months ended September 30, 2006, Interest Expense increased by $1.7 million due to
increased borrowings compared to the prior year due primarily to the acquisition of DAC and the
Companys share repurchase program. Interest Income decreased by $0.2 million due to lower cash
investment balances during the quarter.
31
Income Taxes
The effective tax rate, after minority interest, for the three months ended September 30, 2006 was
33.5%. The effective tax rate, after minority interest, for the three months ended September 30,
2005 was 3.6%. Excluding the $9.9 million reversal of the U.S. deferred tax valuation allowance
and $3.9 million in taxes associated with our Dividend Repatriation Plan completed and accounted
for in the third quarter of 2005, the effective tax rate would have been 53.3%. For succeeding
quarters, our effective tax rate will be affected by many factors including (i) the amount and
placement of new business into tax jurisdictions with valuation allowances and without valuation
allowances, (ii) the recognition of tax benefits that may arise related to tax planning strategies
not recorded in the financial statements as their benefit is currently uncertain, (iii) the impact
of tax holidays in overseas tax jurisdictions, and (iv) adoption of the new accounting standard for
tax uncertainties (see Note 1 to the Condensed Consolidated Financial Statements). We expect our
effective tax rate for the year ending December 31, 2006 will be approximately 30% to 35%,
excluding the $5.2 million reversal of a portion of the deferred tax valuation allowance in the
second quarter of 2006.
Nine Months Ended September 30, 2006 Compared to September 30, 2005
Revenue
The increase in North American BPO revenue between periods was due to new client programs,
expansion of existing client programs, and the acquisition of DAC.
Revenue in the International BPO segment increased due to new client programs and expansion of
existing client programs in Latin America and Europe.
Database Marketing and Consulting revenue decreased due to a net decrease in the customer base as
discussed above.
Cost of Services
Cost of Services as a percentage of revenue in North American BPO remained relatively constant as
compared to the prior year. In absolute dollars, Cost of Services increased due to the
implementation of new client programs, the expansion of existing client programs, and the
acquisition of DAC.
Cost of Services, as a percentage of revenue, in International BPO remained relatively constant as
compared to the prior year. In absolute dollars, Cost of Services increased due to the
implementation of new client programs and the expansion of existing client programs.
Cost of Services for Database Marketing and Consulting decreased from the prior year in absolute
dollars primarily due to a decrease in revenue and our efforts to reduce costs.
Selling, General and Administrative
On a consolidated basis, the increase in Selling, General and Administrative expenses of $8.4
million is related to stock option expense, increased incentive compensation related to the
increase in earnings, and the acquisition of DAC.
Selling, General and Administrative expenses for North American BPO increased in absolute dollars
due to increased salaries and related benefits resulting principally from the Companys
expenditures in an eLearning strategy, compensation expense related to share-based payments (see
Note 4 to the Condensed Consolidated Financial Statements), increased incentive compensation, and
the acquisition of DAC.
Selling, General and Administrative expenses for International BPO increased in absolute dollars
due primarily to increased technology-related expenses and the recording of compensation expense
related to share-based payments (see Note 4 to the Condensed Consolidated Financial Statements).
The decrease in Selling, General and Administrative expenses for Database Consulting and Marketing
was primarily due to our efforts to reduce costs and a lower allocation of corporate-level
operating expenses as discussed above.
32
Depreciation and Amortization
In absolute dollars, Depreciation and Amortization in our North American BPO and
International BPO segments decreased between periods due primarily to the closure of certain
facilities. Depreciation and Amortization in our Database Marketing and Consulting segment
decreased compared to the prior year primarily due to assets reaching
the end of their depreciable lives.
Restructuring Charges, Net and Impairment Losses
Restructuring Charges, Net for the nine months ended September 30, 2006 of $1.5 million includes
approximately (i) $0.7 million for the fair value of the liability for lease payments for a portion
of a CMC that the Company ceased to use in the International BPO segment, and (ii) $1.0 million in
severance costs, less (iii) a $0.2 million reversal of unused prior-period balances.
Restructuring Charges, Net for the nine months ended September 30, 2005 of $1.5 million related to
termination benefits for administrative employees.
Impairment Losses for the nine months ended September 30, 2006 of $0.5 million includes
approximately (i) $0.3 million to reduce the net book value of long-lived assets in New Zealand and
Malaysia to their then estimated fair value and (ii) $0.2 million for the difference between
assumed values to be received for assets in closed CMCs versus actual value received.
Impairment Losses for the three months and nine months ended September 30, 2005 of $2.5 million
were to reduce the net book value of long-lived assets in our Glasgow, Scotland facility to their
then estimated fair value.
Other Income (Expense)
During the nine months ended September 30, 2006, Interest Expense increased by $2.6 million due to
increased borrowings compared to the prior year and the acquisition of DAC. Interest Income
decreased by $1.1 million due to less cash investment balances during the quarter.
Income Taxes
The effective tax rate, after minority interest, for the nine months ended September 30, 2006 was
20.6%. Excluding the $5.2 million change to the deferred tax valuation allowance accounted for in
the second quarter of 2006, the Companys effective tax rate for the nine months ended September
30, 2006 was 34.2%. The effective tax rate, after minority interest, for the nine months ended
September 30, 2005 was 15.1%. Excluding the $9.9 million reversal of the U.S. deferred tax
valuation allowance and $3.9 million in taxes associated with our Dividend Repatriation Plan
completed and accounted for in the third quarter of 2005, the effective tax rate would have been
43.3%. We expect our effective tax rate for the year ending December 31, 2006 will be
approximately 30% to 35%, excluding the $5.2 million reversal of a portion of the deferred tax
valuation allowance in the second quarter of 2006.
Liquidity and Capital Resources
Our primary sources of liquidity during the nine months ended September 30, 2006 were existing cash
balances, cash generated from operating activities, and borrowings under our revolving line of
credit. We expect that our future working capital, capital expenditures, and debt service
requirements will be satisfied primarily from existing cash balances and cash generated from
operations. Our ability to generate positive future operating and net cash flows is dependent upon,
among other things, our ability to (i) sell new business, (ii) expand existing client
relationships, and (iii) efficiently manage our operating costs.
The amount of capital required in 2006 will also depend on our level of investment in
infrastructure necessary to build new CMCs and maintain and upgrade existing CMCs. We currently
expect that capital expenditures in 2006 will be higher than our 2005 capital expenditures
resulting from our plans to expand our capacity in select markets with the addition of an estimated
2,500 workstations in Argentina, Canada, Mexico, and the Philippines.
The following discussion highlights our cash flow activities during the nine months ended September
30, 2006.
33
Cash and Cash Equivalents
We consider all liquid investments purchased within 90 days of their maturity to be cash
equivalents. Our Cash and Cash Equivalents totaled $55.2 million as of September 30, 2006 compared
to $32.5 million as of December 31, 2005.
Cash Flows From Operating Activities
We
reinvest the cash flows from operating activities in our business or in purchases of treasury stock. For the nine months ended
September 30, 2006 and 2005, we reported net cash flows provided by
operating activities of $72.6 million and $52.7 million,
respectively. The increase for the nine months ended September 30,
2006 compared to the same period in 2005 is due primarily to higher
net income and the recognition of a deferred tax benefit associated
with changes in our deferred tax valuation allowance in the prior
period.
Cash Flows From Investing Activities
We reinvest cash in our business primarily to grow our client base, expand our infrastructure, and
complete select acquisitions. For the nine months ended September 30, 2006 and 2005, we reported
net cash flows used in investing activities of $99.2 million and $29.2 million, respectively. The
increase from 2005 to 2006 is due primarily to the expansion of CMCs in certain markets and the
completion of the DAC acquisition in the second quarter of 2006.
Cash Flows from Financing Activities
For the nine months ended September 30, 2006 and 2005, we reported net cash flows provided by (used
in) financing activities of $47.7 million and $(43.5) million, respectively. The change from 2005
to 2006 principally resulted from increased utilization of our Credit Facility, principally to
finance the acquisition of DAC, offset by less repurchases of treasury stock compared to the prior
year.
Free Cash Flow and EBITDA
Free Cash Flow (see Presentation of Non-GAAP Measurements for the definition of Free Cash Flow)
was $26.0 million and $6.8 million for the three months ended September 30, 2006 and 2005,
respectively, and $21.4 million and $26.0 million for the nine months ended September 30, 2006 and
2005, respectively. EBITDA (see Presentation of Non-GAAP Measurements for the definition of
EBITDA), was $33.9 million and $24.6 million for the three months ended September 30, 2006 and
2005, respectively, and $78.1 million and $61.4 million for the nine months ended September 30,
2006 and 2005, respectively. The increase in EBITDA for the three months and nine months ended
September 30, 2006, is primarily due to an increase in net income compared to the prior year
periods.
Obligations and Future Capital Requirements
Future maturities of our outstanding debt and contractual obligations are summarized as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
than 5 |
|
|
|
|
|
|
year |
|
|
2-3 years |
|
|
4-5 years |
|
|
years |
|
|
Total |
|
Line of credit1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
77,750 |
|
|
$ |
|
|
|
$ |
77,750 |
|
Capital lease obligations1 |
|
|
202 |
|
|
|
227 |
|
|
|
227 |
|
|
|
226 |
|
|
|
882 |
|
Grant advances1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,163 |
|
|
|
7,163 |
|
Purchase obligations2 |
|
|
18,003 |
|
|
|
10,239 |
|
|
|
6,613 |
|
|
|
785 |
|
|
|
35,640 |
|
Operating lease commitments2 |
|
|
25,087 |
|
|
|
39,448 |
|
|
|
26,348 |
|
|
|
36,847 |
|
|
|
127,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,292 |
|
|
$ |
49,914 |
|
|
$ |
110,938 |
|
|
$ |
45,021 |
|
|
$ |
249,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Reflected in the accompanying Condensed Consolidated Balance Sheets |
|
2 |
|
Not reflected in the accompanying Condensed
Consolidated Balance Sheets |
34
Purchase Obligations
Occasionally, we contract with certain of our communication clients (which represent approximately
one-third of our annual Revenue) to provide us with telecommunication services. We believe these
contracts are negotiated on an arms-length basis and may be negotiated at different times and with
different legal entities.
Future Capital Requirements
We expect
total capital expenditures in 2006 to be approximately
$65 million, including capital expenditures for DAC. Expected
capital expenditures in 2006 are related to the opening and/or expansion of
CMCs as described above, which represents approximately 70% of
expected capital expenditures, and maintenance capital for existing
assets and internal technology projects, which represents the
remaining 30%. The
anticipated level of 2006 capital expenditures is primarily dependent upon new client contracts and
the corresponding requirements for additional CMC capacity and enhancements to our technological
infrastructure.
We may consider restructurings, dispositions, mergers, acquisitions, and other similar
transactions. Such transactions could include the transfer, sale, or acquisition of significant
assets, businesses, or interests, including joint ventures, or the incurrence, assumption, or
refinancing of indebtedness, and could be material to our consolidated financial condition and
consolidated results of operations.
Debt Instruments and Related Covenants
We discuss debt instruments and related covenants in Note 7 to the Condensed Consolidated Financial
Statements.
Client Concentration
Our five largest clients accounted for 40% and 47% of our revenue for the three months ended
September 30, 2006 and 2005, respectively. The five largest clients accounted for 43% and 49% of
our revenue for the nine months ended September 30, 2006 and 2005, respectively. In addition, these
five clients accounted for an even greater proportional share of our consolidated earnings. The
profitability of services provided to these clients varies greatly based upon the specific contract
terms with any particular client. In addition, clients may adjust business volumes served by us based on their
business requirements. The relative contribution of any single client to consolidated earnings is not
always proportional to the relative revenue contribution on a consolidated basis. We believe the
risk of this concentration is mitigated, in part, by the long-term contracts we have with our
largest clients. Although certain client contracts may be terminated for convenience by either
party, this risk is mitigated, in part, by the service level disruptions that would arise for our
clients.
The
contracts with our five largest clients expire between 2007 and 2011. Additionally, a
particular client can have multiple contracts with different expiration dates. We have historically
renewed most of our contracts with our largest clients. However, there is no assurance that future
contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts.
Based upon recent discussions, Client B (see Note 5 to the Condensed Consolidated Financial
Statements) plans to utilize its internal offshore centers to perform a portion of the BPO work
that we previously performed on their behalf from a North American CMC. The North American CMC that
previously served Client B, and the corresponding Customer Service Representatives, have been
assigned to new client engagements. This information was considered in developing our Business
Outlook below.
Recent Accounting Pronouncements
We discuss the potential impact of recent accounting pronouncements in Note 1 to the Condensed
Consolidated Financial Statements.
Business Outlook
For the full year 2006, we project revenue to grow approximately 11% to 12% over 2005. This
projection includes a contribution of approximately $35 million of revenue during the last six
months of 2006 associated with the acquisition of DAC.
35
We believe our fourth quarter 2006 EBITDA margin will approximate 11% to 12% and our operating
margin will approximate 7% to 8% excluding unusual charges, if any.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated financial position,
consolidated results of operations, or consolidated cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk in the areas of changes in
U.S. interest rates, LIBOR, and foreign currency exchange rates as measured against the U.S.
dollar. These exposures are directly related to our normal operating and funding activities. As of
September 30, 2006, we had entered into financial hedge instruments with several financial
institutions to manage and reduce the impact of changes, principally the U.S./Canadian dollar
exchange rates.
Interest Rate Risk
The interest rate on our Credit Facility is variable based upon the Prime Rate and LIBOR and,
therefore, is affected by changes in market interest rates. As of September 30, 2006, there was a
$77.8 million outstanding balance under the Credit Facility. If the Prime Rate increased 100 basis
points, there would not be a material impact to the Company.
Foreign Currency Risk
We have operations in Argentina, Australia, Brazil, Canada, China, Germany, India, Malaysia,
Mexico, New Zealand, the Philippines, Singapore, Spain, the United Kingdom, and Venezuela. The
expenses from these operations, and in some cases the revenue, are denominated in local currency,
thereby creating exposures to changes in exchange rates. As a result, we may experience substantial
foreign currency translation gains or losses due to the volatility of other currencies compared to
the U.S. dollar, which may positively or negatively affect our revenue and net income attributed to
these subsidiaries. For the three months ended September 30, 2006 and 2005, revenue from non-U.S.
countries represented 64% and 57% of consolidated revenue, respectively. For the nine months ended
September 30, 2006 and 2005, revenue from non-U.S. countries represented 64% and 58% of
consolidated revenue, respectively.
A business strategy for our North American BPO segment is to serve certain U.S.-based clients from
CMCs located in foreign countries, including Argentina, Canada, India, Mexico, and the Philippines,
in order to leverage lower operating costs in these foreign countries. In order to mitigate the
risk of these foreign currencies strengthening against the U.S. dollar, which thereby decreases the
economic benefit of performing work in these countries, we may hedge a portion, but not 100%, of
the foreign currency exposure related to client programs served from these foreign countries. While
our hedging strategy can protect us from changes in the U.S./foreign currency exchange rates in the
short-term, an overall strengthening of the foreign currencies would adversely impact margins in
the North American BPO segment over the long-term.
The majority of this exposure is related to work performed from CMCs located in Canada. During the
three months ended September 30, 2006 and 2005, the Canadian dollar weakened against the U.S.
dollar by 0.3% and strengthened against the U.S. dollar by 5.3%, respectively. During the nine
months ended September 30, 2006 and 2005, the Canadian dollar strengthened against the U.S. dollar
by 4.3% and 3.7%, respectively. We have contracted with several financial institutions on behalf of
our Canadian subsidiary to acquire a total of $178.1 million Canadian dollars through June 2010 at
a fixed price in U.S. dollars of $159.5 million.
As of September 30, 2006, we had total derivative assets and liabilities associated with foreign
exchange contracts of $4.1 million and $1.4 million, respectively, of which Canadian dollar
derivative assets and liabilities represented $2.7 million and $1.4 million, respectively. 100% of
the asset value and none of the liability balance settle within the next twelve months. If the
U.S./Canadian dollar exchange rate were to increase or decrease 10% from period-end levels, we
would incur a material gain or loss on the contracts. However, any gain or loss would be mitigated
by corresponding gains or losses in the underlying exposures.
36
Other than the transactions hedged as discussed above and in Note 6 to the Condensed Consolidated
Financial Statements, the majority of the transactions of our U.S. and foreign operations are
denominated in the respective local currency while some transactions are denominated in other
currencies. For example, the intercompany transactions that are expected to be settled are
denominated in the local currency of the billing company. Since the accounting records of our
foreign operations are kept in the respective local currency, any transactions denominated in other
currencies are accounted for in the respective local currency at the time of the transaction. Upon
settlement of such a transaction, any foreign currency gain or loss results in an adjustment to
income. We do not currently engage in hedging activities related to these types of foreign currency
risks because we believe them to be insignificant as we endeavor to settle these accounts on a
timely basis.
Fair Value of Debt and Equity Securities
We did not have any investments in debt or equity securities as of September 30, 2006.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods specified in SEC
rules and forms. Our disclosure controls and procedures have also been designed to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including the principal
executive officer and principal financial officer, to allow timely decisions regarding required
disclosure.
Based on their evaluation as of September 30, 2006, the principal executive officer and principal
financial officer of the Company have concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
are effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the
quarter ended September 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time-to-time, we may be involved in claims or lawsuits that arise in the ordinary course of
business. Accruals for claims or lawsuits have been provided for to the extent that losses are
deemed both probable and estimable. Although the ultimate outcome of these claims or lawsuits
cannot be ascertained, it is our opinion, based on present information and advice received from
counsel, that the disposition or ultimate determination of all such claims or lawsuits will not
have a material adverse effect on the Company.
Item 1A. RISK FACTORS
The following is in addition to the risk factors titled Our business may be affected by risks
associated with international operations and expansion, Our financial results may be impacted by
our ability to find new locations, Our financial results depend on our ability to manage capacity
utilization, Our future success requires continued growth, and Our success depends on key
personnel in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
37
Our financial results may be adversely affected if we are unsuccessful in launching new client
programs. As previously announced, we were recently awarded new business with new and existing
clients. As a result, we are expanding our capacity in select markets with the addition of an
estimated 2,500 workstations in Argentina, Canada, Mexico, and the Philippines. We may have
difficulties finding cost effective locations; obtaining favorable lease terms; building or
retrofitting facilities in a timely and economic manner; launching new or expanded client programs;
and successfully managing the associated internal allocation of personnel and resources. This could
cause a decline in or delay in recognition of revenues and an increase in costs, either of which
could adversely affect our operating results. In the event we do not successfully expand our
capacity or launch the new or expanded client programs, we may be unable to achieve the revenue and
profitability expectations outlined in the Business Outlook section.
The following restates the risk factor titled Our success may be affected by our ability to
complete and integrate acquisitions and joint ventures in the Companys Annual Report on Form 10-K
for the year ended December 31, 2005.
Our success may be affected by our ability to complete and integrate acquisitions and joint
ventures. We may pursue strategic acquisitions of companies with services, technologies, industry
specializations, or geographic coverage that extend or complement our existing business. We may
face increased competition for acquisition opportunities, which may inhibit our ability to complete
suitable acquisitions on favorable terms. We may pursue strategic alliances in the form of joint
ventures and partnerships, which involve many of the same risks as acquisitions as well as
additional risks associated with possible lack of control if we do not have a majority ownership
position. There can be no assurance that we will be successful in integrating acquisitions or joint
ventures into our existing businesses, or that any acquisition or joint venture will enhance our
business, results of operations, or financial condition.
Further, it is possible that the contemplated benefits of acquisitions, including the acquisition
of DAC in the second quarter of 2006, may not materialize within the expected time periods or to
the extent anticipated. Critical to the success of our acquisition strategy in the future is the
orderly, effective integration of acquired businesses into our organization. If this integration is
unsuccessful, our business may be adversely impacted. There is also the risk that our valuation
assumptions and models for an acquisition may be overly optimistic or incorrect. The acquisition
model for DAC assumed revenue growth of $18 million in 2007, including revenue growth within the
existing client base. In the event we are not successful in growing DACs revenue by $18 million in
2007, or achieving revenue growth within the existing client base, we may not achieve the
profitability expectations outlined in the DAC acquisition model, which could adversely affect our
consolidated operating results.
The following restates the risk factor titled, Our financial results may be adversely impacted by
our Database Marketing and Consulting segment in the Companys Annual Report on Form 10-K for the
year ended December 31, 2005.
Our financial results may be adversely impacted by our Database Marketing and Consulting segment.
Prior to 2005, our Database Marketing and Consulting segment historically experienced high levels
of profitability. During 2005 and the nine months ended September 30, 2006, this segment reported
an operating loss. We are taking steps to return this segment to profitability. There can be no
assurance that we will be successful in executing our plans to return this segment to prior levels
of profitability. In the event we are not successful in executing our plans, all or a portion of
this segments recorded goodwill of $13.4 million would be impaired, with a corresponding adverse
impact on our financial results in the period of impairment. Our current sensitivity testing of the
fair value of this segment is such that it would not take a material change to the forecasted
results used for estimating the fair value of this segment for an impairment to arise and,
accordingly, our success at implementing our plans, as discussed above, during the remainder of
2006 will determine whether our assumptions used for evaluating the fair market value of this
segment were sufficient. We plan to evaluate this matter again for the quarter ended December 31,
2006.
38
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In November 2001, the Board of Directors (Board) authorized a stock repurchase program to
repurchase up to $5 million of our common stock. That plan was subsequently amended by the Board
resulting in the authorized repurchase amount increasing to $165 million. During the three months
ended September 30, 2006, we purchased 0.3 million shares for $4.0 million. During the nine months
ended September 30, 2006, we purchased 1.2 million shares
for $14.6 million. From inception of the
program through September 30, 2006, we have purchased 13.1 million shares for $113.7 million,
leaving $51.3 million remaining under the repurchase program as of September 30, 2006. The program
does not have an expiration date.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Shares |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Yet Be |
|
|
Total Number |
|
|
|
|
|
Announced |
|
Purchased |
|
|
of Shares |
|
Average |
|
Plans or |
|
Under the Plans |
|
|
Purchased |
|
Price Paid |
|
Programs |
|
or Programs |
Period |
|
(000s) |
|
per Share |
|
(000s) |
|
(000s) |
July 1, 2006 July 31,
2006 |
|
|
45,000 |
|
|
$ |
11.52 |
|
|
|
45,000 |
|
|
$ |
54,723 |
|
August 1, 2006 August 31,
2006 |
|
|
52,000 |
|
|
$ |
13.04 |
|
|
|
52,000 |
|
|
$ |
54,045 |
|
Sept. 1, 2006 Sept. 30, 2006 |
|
|
184,400 |
|
|
$ |
15.06 |
|
|
|
184,400 |
|
|
$ |
51,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
281,400 |
|
|
$ |
14.12 |
|
|
|
281,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
39
Item 6. EXHIBITS
|
|
|
Exhibit No. |
|
Exhibit Description |
10.42
|
|
Amended and Restated Credit Agreement among TeleTech Holdings,
Inc., as borrower, The Lenders named herein, as Lenders, and
KeyBank National Association, as Lead Arranger, Sole Book
Runner and Administrative Agent dated as of September 28,
2006. |
|
|
|
10.43
|
|
First Amendment to the Amended and Restated Credit Agreement
among TeleTech Holdings, Inc., as borrower, The Lenders named
herein, as Lenders, and KeyBank National Association, as Lead
Arranger, Sole Book Runner and Administrative Agent dated as
of October 24, 2006. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
31.2
|
|
Certification of Acting Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
32.2
|
|
Certification of Acting Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TELETECH HOLDINGS, INC.
(Registrant)
|
|
Date: October 25, 2006 |
By: |
/s/ KENNETH D. TUCHMAN
|
|
|
|
Kenneth D. Tuchman |
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: October 25, 2006 |
By: |
/s/ JOHN R. TROKA
|
|
|
|
John R. Troka |
|
|
|
Vice President and
Acting Chief Financial Officer |
|
|
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit Description |
10.42
|
|
Amended and Restated Credit Agreement among TeleTech Holdings,
Inc., as borrower, The Lenders named herein, as Lenders, and
KeyBank National Association, as Lead Arranger, Sole Book
Runner and Administrative Agent dated as of September 28,
2006. |
|
|
|
10.43
|
|
First Amendment to the Amended and Restated Credit Agreement
among TeleTech Holdings, Inc., as borrower, The Lenders named
herein, as Lenders, and KeyBank National Association, as Lead
Arranger, Sole Book Runner and Administrative Agent dated as
of October 24, 2006. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
31.2
|
|
Certification of Acting Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
|
|
|
32.2
|
|
Certification of Acting Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) |