Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements (unaudited) and the Notes thereto.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or other similar words.
These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
These risks and uncertainties include, but are not limited to, the risk that the proposed transaction with affiliates of Apollo Global Management, LLC may not be completed in a timely manner, or at all, which may adversely affect our business and the price of our common stock; the failure to satisfy the conditions to the consummation of the proposed transaction, including the receipt of certain governmental and regulatory approvals; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined below); the effect of the announcement or pendency of the proposed transaction on our business relationships, operating results, and business generally; risks that the proposed transaction disrupts our current plans and operations and potential difficulties in our employee retention as a result of the proposed transaction; risks related to diverting management’s attention from our ongoing business operations; the outcome of any legal proceedings that may be instituted against us, our officers or directors related to the Merger Agreement or the proposed transaction; the possibility that competing offers or acquisition proposals for us will be made; risks regarding the failure to obtain the necessary financing to complete the proposed transaction; and risks related to the equity and debt financing and related guarantee arrangements entered into in connection with the proposed transaction;
as well as those described in the “Risk Factors” section contained in our Annual Report on Form 10-K for the year ended December 31, 2016 the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.
The forward-looking statements in this report represent our views as of the date of this report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this report.
Business Overview
We are a global provider of communication and network infrastructure services. “We,” “us” the “Company” and “our” also refer to West Corporation and its consolidated subsidiaries, as applicable. We believe our products and services help our clients more effectively communicate, collaborate and connect with their audiences through a diverse portfolio of solutions that include unified communications services, safety services, interactive services such as automated notifications, specialized agent services and telecom services.
The scale and processing capacity of our technology platforms, combined with our expertise in managing multichannel interactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients and help them build smarter, more meaningful connections. We are dedicated to delivering and improving upon new channels, new capabilities and new choices for how businesses and consumers collaborate, connect and transact.
Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries. We have sales and/or operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.
29
On May 9, 2017,
West entered into
an Agreement and Plan of Merger (the “Merger Agreement”) by and among Mount Olympus Holdings, Inc., a Delaware corporation (“Parent”), Olympus Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Sub”), and the Company,
provi
ding for, subject to the satisfaction or waiver of specified conditions, the acquisition of West by Parent at a price of
$23.50 per share in cash.
Parent and Sub are affiliates of certain funds managed by affiliates of Apollo Global Management, LLC.
Subjec
t to the terms and conditions of the Merger Agreement, Sub will be merged into West (the “Merger”), with West surviving the Merger as a wholly-owned subsidiary of Parent. The Merger Agreement and the consummation of the transactions contemplated by the Mer
ger Agreement have been unanimously approved by the Company’s board of directors.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock of the Company (a “Share”) issued and outstanding immediately prior to the Effective Time (other than (i) Shares held by stockholders of the Company who have properly exercised and perfected appraisal rights under Delaware law and (ii) Shares that are held in the treasury of the Company or owned of record by any wholly-owned subsidiary of the Company, Parent or any wholly-owned subsidiary of Parent) will be converted into the right to receive $23.50 per Share in cash, without interest, subject to any applicable withholding taxes.
The consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger by the holders of a majority of the voting power of the outstanding Shares entitled to vote thereon, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the receipt of certain required foreign antitrust approvals, (iii) receipt of approval by the Federal Communications Commission, (iv) receipt of certain required state telecommunications regulatory approvals, (v) the absence of the occurrence of a Company Material Adverse Effect (as defined in the Merger Agreement) after the date of the Merger Agreement and (vi) other customary closing conditions. The consummation of the Merger is not subject to a financing condition. Early termination of the waiting period under the HSR Act was granted on June 6, 2017 and the required foreign antitrust approvals were obtained in July 2017. The Company received approval from the Federal Communications Commission in July 2017. On July 26, 2017, the Company’s stockholders approved the Merger. The Merger remains subject to the closing conditions described above (to the extent not already satisfied) and is expected to close during the second half of 2017.
Financial Operations Overview
Revenue
Services in Unified Communications Services are generally billed, and revenue recognized, on a per participant minute basis or, in the case of license arrangements, generally billed in advance and revenue recognized ratably over the service life period. We also charge clients for additional features, such as conference call recording, transcription services or professional services. Some Unified Communications Services revenue is recognized on a “Per User Per Month” or network circuit basis. Telecom Services revenue is primarily comprised of switched access charges for toll-free origination services, which are paid primarily by interexchange carriers. Revenue is billed monthly and recognized based on usage.
Safety Services revenue is generated primarily from monthly fees and recognized as billed, based on the number of billing telephone numbers and cell towers covered under contract. In addition, product sales that may include hardware, software, and professional services (installation, training and project management) are generally recognized when shipment of the hardware and software has occurred and for professional services when client acceptance of a fully functional system is received. Contracts for annual recurring services such as support and maintenance agreements and contracts where guaranteed minimums exist are generally billed in advance and are recognized as revenue ratably (on a monthly basis) over the contractual periods.
Services in Interactive Services are generally billed, and revenue recognized, on a per call, per message or per minute basis, or in the case of subscription arrangements, generally billed in advance and revenue recognized ratably over the contract term.
Services in Specialized Agent Services are generally billed based on hours of input, number of contacts, number of personnel assigned, on a contingent basis or recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. Revenue for healthcare advocacy services is generally based on “Per Employee Per Month” fees charged under prepayment agreements for services and is recognized ratably over the service period.
Cost of Services
The principal component of cost of services is our variable telephone expense, labor related expenses and commissions for our sales force. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients.
30
Selling, General and Administrative Expenses
The principal component of our selling, general and administrative expenses (“SG&A”) is salary and benefits for our sales force, client support staff, technology and development personnel, senior management and other personnel involved in business support functions. SG&A also includes certain fixed telephone costs as well as other expenses that support the ongoing operation of our business, such as facilities costs, certain service contract costs, depreciation, maintenance and amortization of finite-lived intangible assets.
Key Drivers Affecting Our Financial Position and Results of Operations
Factors Related to our Indebtedness.
On June 17, 2016, we completed a partial refinancing of our outstanding indebtedness through an amendment (“the Seventh Amendment”) to our term and revolving senior secured credit facilities (“Senior Secured Credit Facilities”) and a private offering of $400 million aggregate principal amount of 4.75% senior secured notes due 2021 (the “2021 Senior Secured Notes”). The amendment to our Senior Secured Credit Facilities,
among other things, established commitments for a new seven-year senior secured term loan B-12 facility in an aggregate principal amount of $870 million (the “2023 Maturity Term Loans”), a new five-year senior secured term loan A-2 facility in an aggregate principal amount of $650 million (the “2021 Maturity A Term Loans”), and a new five-year senior secured term loan B-14 facility in an aggregate principal amount of $260 million (the “2021 Maturity B Term Loans”). We used the proceeds of the new notes and new facilities, together with cash on hand, to repay $1,678 million of our existing term loan B-10 facility (the “2018 Maturity Term Loans”), $252.6 million on the term A-1 facility (the “2019 Maturity Term Loans”) and all $249.4 million outstanding on the term loan B-11 facility (the “B-11 Term Loans”). In addition, the Seventh Amendment provided for an extended senior secured revolving credit facility with a maturity date of June 17, 2021 in an aggregate amount of $300 million.
On December 19, 2016, we completed an eighth amendment to our Senior Secured Credit Facilities (the “Eighth Amendment”). With respect to our term loans, the Eighth Amendment provided for:
|
•
|
an interest rate margin applicable to the 2023 Maturity Term Loans equal to 2.50% for LIBOR rate loans and 1.50% for base rate loans, subject to a 0.75% interest rate floor for the LIBOR component of LIBOR rate 2023 Maturity Term Loans, and subject to a 1.75% interest rate floor for the base rate component of base rate 2023 Maturity Term Loans; and
|
|
•
|
an interest rate margin applicable to the 2021 Maturity B Term Loans equal to 2.50% for LIBOR rate loans, and 1.50% for base rate loans, subject to a 0.0% interest rate floor for the LIBOR component of LIBOR rate 2021 Maturity B Term Loans, and subject to a 0.0% interest rate floor for the base rate component of base rate 2021 Maturity B Term Loans.
|
Acquisition Activities.
Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our growth strategy. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for stockholders. Since 2002, we have invested approximately $3.0 billion in strategic acquisitions.
During the six months ended June 30, 2017, we closed two acquisitions for an aggregate purchase price of $29.9 million. On March 7, 2017, we completed the acquisition of the cloud collaboration practice and assets from Vocus Group (“Vocus”). Results from this business have been integrated into our Unified Communications Services reportable segment. On May 2, 2017, we completed the acquisition of Callpointe, a provider of automated appointment messaging services for healthcare providers. Results from this business have been integrated into our Interactive Services reportable segment. Both acquisitions have been included in our financial statements since their respective acquisition dates.
Overview of 2017 Results
The following overview highlights the areas we believe are important in understanding the results of our operations for the three and six months ended June 30, 2017. This summary is not intended as a substitute for the detail provided elsewhere in this quarterly report or for our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report.
|
•
|
Our revenue decreased $8.0 million, or 1.4%, during the three months ended June 30, 2017 compared to revenue during the three months ended June 30, 2016. This decrease was due to a decrease in conferencing revenue partially offset by growth in UCaaS and all other operating segments
|
|
•
|
Our revenue decreased $6.2 million, or 0.5%, during the six months ended June 30, 2017 compared to revenue during the six months ended June 30, 2016. This decrease was partially offset by growth in UCaaS and all other operating segments
|
|
•
|
Our operating income decreased $20.5 million, or 16.7%, during the three months ended June 30, 2017 compared to operating income during the three months ended June 30, 2016. Operating income during the three months ended June 30, 2016 included a $12.8 million gain recognized on the sale of buildings that were previously occupied by the businesses we divested in 2015.
|
31
|
•
|
Our operating income decreased $
21.2
million, or
9.1
%, during the six months ended June 30, 2017 compared to operating income
during the six months ended June 30, 2016. Operating income during the six months ended June 30, 2016 included a $
12.8
million gain recognized on the sale of buildings that were previously occupied by the businesses we divested in 2015.
|
|
•
|
Our cash flows from operating activities were $160.0 million, a decrease of $37.4 million, or 19.0%, during the six months ended June 30, 2017 compared to cash flows from operating activities during the six months ended June 30, 2016. This decrease was primarily due to the timing of collections on accounts receivable and increased income tax payments of $11.9 million primarily related to tax audit settlements.
|
|
•
|
Our earnings per share-diluted was $0.52 during the three months ended June 30, 2017 compared to $0.39 during the three months ended June 30, 2016. Net income during the three months ended June 30, 2016 included the negative impact of the acceleration of deferred financing costs as a result of our refinancing and accelerated debt principal prepayments.
|
|
•
|
Our earnings per share-diluted was $1.16 during the six months ended June 30, 2017 compared to $0.92 during the six months ended June 30, 2016. Net income during the six months ended June 30, 2016 included the negative impact of the acceleration of deferred financing costs as a result of our refinancing and accelerated debt principal prepayments.
|
|
•
|
On March 7, 2017, we completed the acquisition of the cloud collaboration practice and assets from Vocus.
The purchase price was approximately
$4.0 million and was funded with cash on hand. This business is included in the Unified Communications Services reportable segment.
|
|
•
|
On May 2, 2017, we completed the acquisition of Callpointe, a provider of automated appointment messaging services for healthcare providers. The purchase price was approximately $25.9 million and was funded with cash on hand. Results from this business have been integrated into our Interactive Services reportable segment.
|
|
•
|
During the three and six months ended June 30, 2017 we incurred $4.4 million and $5.1 million, respectively, for acquisition costs, recorded in SG&A expense for the pending acquisition of West by certain funds managed by affiliates of Apollo Global Management, LLC.
|
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2017 and 2016
Revenue:
The tables below summarize the changes in our revenue for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016.
|
|
Amounts in Millions
|
|
|
Contribution to
Growth %
|
|
Revenue for the three months ended June 30, 2016
|
|
$
|
582.4
|
|
|
|
|
|
Revenue from acquired entities
|
|
|
3.3
|
|
|
|
0.6
|
%
|
Estimated impact of foreign exchange rates
|
|
|
(4.0
|
)
|
|
|
(0.7
|
)%
|
Adjusted organic growth, net
|
|
|
(7.3
|
)
|
|
|
(1.3
|
)%
|
Revenue for the three months ended June 30, 2017
|
|
$
|
574.4
|
|
|
|
(1.4
|
)%
|
Total revenue for the three months ended June 30, 2017 decreased approximately $8.0 million, or 1.4%, to $574.4 million from $582.4 million for the three months ended June 30, 2016. During the three months ended June 30, 2017, we experienced lower revenue from our on-demand automated conferencing services and operator-assisted conferencing products. Conferencing clients also migrated from higher priced solutions, such as operator-assisted calls, to lower priced automated conferencing services and reduced add-on services. Our
non-conferencing businesses grew approximately
8.7
%, with particularly strong results in our safety services, healthcare advocacy and interactive services businesses.
The decrease in total revenue was partially offset by revenue of $3.3
million from the acquisitions of 911 ETC, Vocus and Callpointe.
Foreign exchange rates had a negative impact of approximately $4.0 million on our revenue for the three months ended June 30, 2017 when comparing the foreign exchange rates in place during this quarter to those in place during the three months ended June 30, 2016.
32
Our consolidated revenues and expenses are subject to variations caused by the net effect of foreign currency tran
slation due to our international operations. It is difficult to predict the future fluctuations of foreign exchange rates and how those fluctuations will impact our Condensed Consolidated Statements of Income. Our revenues and expenses from our internation
al operations are generally denominated in local currencies,
t
herefore, the impact of currency fluctuations on our operating income and operating margin is partially mitigated. In order to provide a framework for assessing how our underlying businesses per
formed excluding the effect of foreign currency fluctuations, we compare the percentage change in the results from one period to another period using constant currency presentation. The constant currency growth rates are calculated by translating the 2017
results at the 2016 average exchange rates. Constant currency growth rates are a non-GAAP measure.
Adjusted organic growth, net is a non-GAAP measure that excludes revenue from acquired entities and the estimated impact of foreign currency exchange rates. We believe adjusted organic revenue growth, net provides a useful measure of growth in our ongoing business.
|
|
Amounts in Millions
|
|
|
Contribution to
Growth %
|
|
Revenue for the six months ended June 30, 2016
|
|
$
|
1,153.2
|
|
|
|
|
|
Revenue from acquired entities
|
|
|
5.6
|
|
|
|
0.5
|
%
|
Estimated impact of foreign exchange rates
|
|
|
(8.5
|
)
|
|
|
(0.7
|
)%
|
Adjusted organic growth, net
|
|
|
(3.4
|
)
|
|
|
(0.3
|
)%
|
Revenue for the six months ended June 30, 2017
|
|
$
|
1,146.9
|
|
|
|
(0.5
|
)%
|
Total revenue for the six months ended June 30, 2017 decreased approximately $6.2 million, or 0.5%, to $1,146.9 million from $1,153.2 million for the six months ended June 30, 2016. During the six months ended June 30, 2017, we experienced lower revenue from our on-demand automated conferencing services and operator-assisted conferencing products. Conferencing clients also migrated from higher priced solutions, such as operator-assisted calls, to lower priced automated conferencing services and reduced add-on services. This decrease was partially offset by growth in o
ur non-conferencing businesses, which increased approximately
8.6
%, with particularly strong results in our safety services, healthcare advocacy and interactive services businesses. During the six months ended June 30, 2017, the
acquisitions of Synrevoice, 911 ETC, Vocus and Callpointe contributed an additional $5.6 million to consolidated revenue.
Foreign exchange rates had a negative impact of approximately $8.5 million on our revenue for the six months ended June 30, 2017 when comparing the foreign exchange rates in place during these six months to those in place during the six months ended June 30, 2016.
Revenue by reportable segment:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
|
% of Total
Revenue
|
|
|
2016
|
|
|
% of Total
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
348,546
|
|
|
|
60.7
|
%
|
|
$
|
370,158
|
|
|
|
63.5
|
%
|
|
$
|
(21,612
|
)
|
|
|
(5.8
|
)%
|
Safety Services
|
|
|
80,419
|
|
|
|
14.0
|
%
|
|
|
74,423
|
|
|
|
12.8
|
%
|
|
|
5,996
|
|
|
|
8.1
|
%
|
Interactive Services
|
|
|
79,179
|
|
|
|
13.8
|
%
|
|
|
73,232
|
|
|
|
12.6
|
%
|
|
|
5,947
|
|
|
|
8.1
|
%
|
Specialized Agent Services
|
|
|
69,354
|
|
|
|
12.1
|
%
|
|
|
67,495
|
|
|
|
11.6
|
%
|
|
|
1,859
|
|
|
|
2.8
|
%
|
Intersegment eliminations
|
|
|
(3,105
|
)
|
|
|
(0.6
|
)%
|
|
|
(2,911
|
)
|
|
|
(0.5
|
)%
|
|
|
(194
|
)
|
|
NM
|
|
Total
|
|
$
|
574,393
|
|
|
|
100.0
|
%
|
|
$
|
582,397
|
|
|
|
100.0
|
%
|
|
$
|
(8,004
|
)
|
|
|
(1.4
|
)%
|
NM—Not Meaningful
During the three months ended June 30, 2017, Unified Communications Services revenue decreased $21.6 million, or 5.8%, to $348.5 million from $370.2 million for the three months ended June 30, 2016. The revenue decrease is primarily due to a decline in conferencing revenue and the negative impacts of foreign exchange rates of approximately $4.0 million, partially offset by growth in the UCaaS and telecom services lines of business. The acquisition of Vocus contributed revenue of $1.0
million to the UCaaS line of business.
33
Conferencing revenue declined primarily due to lower revenue from automated conferencing services, operator-assisted conferencing and web services, partially offset by growth in streaming services. Automated conferencing services, which accounts for just o
ver half of the Unified Communications Services revenue, decreased due to a reduction in average rate per minute of approximately
7.8
%
and a decrease in the volume
of
minutes of 3.2%
. Average rate per minute for automated conferencing services declined due
to price compression, product mix and an increasing shift of minutes to VoIP access, which has a lower price point due to the lower cost to provide VoIP access. Using constant currency foreign exchange rates, our average rate per minute for automated conf
erencing services declined by approximately
7.0
% for the three months ended
June 30
, 2017. In addition, operator-assisted revenue declined due to clients purchasing fewer call features and migrating operator-assisted calls to lower cost solutions.
During the three months ended June 30, 2017, Safety Services revenue increased $6.0 million, or 8.1%, to $80.4 million from $74.4 million for the three months ended June 30, 2016. The increase was primarily due to sales to customers adopting new technologies and $1.0
million in revenue from the December 2016 acquisition of 911 ETC.
During the three months ended June 30, 2017, Interactive Services revenue increased $5.9 million, or 8.1%, to $79.2 million from $73.2 million for the three months ended June 30, 2016. The May 2017 acquisition of Callpointe contributed $1.3 million of the increase in revenue. The remaining increase was primarily due to new clients and increased volumes from existing clients, across multiple vertical markets, including commercial and healthcare, partially offset by price compression.
During the three months ended June 30, 2017, Specialized Agent Services revenue increased $1.9
million, or 2.8%, to $69.4 million from $67.5 million for the three months ended June 30, 2016. This increase in revenue was primarily due to mid-single-digit revenue growth in our healthcare advocacy and cost management services due to increased volume, favorable product and customer mix, and higher recoveries. Revenue generation services revenue was flat compared to the three months ended June 30, 2016.
During the three months ended June 30, 2017, our international revenue was $108.4 million a decrease of 11.9% over the three months ended June 30, 2016. On a constant currency basis, our international revenue declined 8.7% during the three months ended June 30, 2017 compared to the three months ended June 30, 2016. Excluding the acquisition of Vocus, constant currency international revenue declined by 9.4% due primarily to a decline in conferencing minutes and average rate per minute in the EMEA and APAC regions.
During the three months ended June 30, 2017 and 2016, our largest 100 clients accounted for approximately 42% and 41% of our total revenue, respectively. In each of these periods, no client accounted for more than 6% of our aggregate revenue.
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
% of Total
Revenue
|
|
|
2016
|
|
|
% of Total
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
699,621
|
|
|
|
61.0
|
%
|
|
$
|
732,871
|
|
|
|
63.5
|
%
|
|
$
|
(33,250
|
)
|
|
|
(4.5
|
)%
|
Safety Services
|
|
|
156,674
|
|
|
|
13.7
|
%
|
|
|
145,587
|
|
|
|
12.6
|
%
|
|
|
11,087
|
|
|
|
7.6
|
%
|
Interactive Services
|
|
|
156,672
|
|
|
|
13.7
|
%
|
|
|
144,961
|
|
|
|
12.6
|
%
|
|
|
11,711
|
|
|
|
8.1
|
%
|
Specialized Agent Services
|
|
|
141,102
|
|
|
|
12.3
|
%
|
|
|
135,873
|
|
|
|
11.8
|
%
|
|
|
5,229
|
|
|
|
3.8
|
%
|
Intersegment eliminations
|
|
|
(7,134
|
)
|
|
|
(0.7
|
)%
|
|
|
(6,116
|
)
|
|
|
(0.5
|
)%
|
|
|
(1,018
|
)
|
|
NM
|
|
Total
|
|
$
|
1,146,935
|
|
|
|
100.0
|
%
|
|
$
|
1,153,176
|
|
|
|
100.0
|
%
|
|
$
|
(6,241
|
)
|
|
|
(0.5
|
)%
|
NM—Not Meaningful
During the six months ended June 30, 2017, Unified Communications Services revenue decreased $33.3 million, or 4.5%, to $699.6 million from $732.9 million for the six months ended June 30, 2016. The revenue decrease is primarily due to a decline in conferencing revenue and the negative impacts of foreign exchange rates of approximately $8.5 million, partially offset by growth in the UCaaS and telecom services lines of business. The acquisition of Vocus contributed revenue of $1.2
million to the UCaaS line of business.
Conferencing revenue declined primarily due to lower revenue from automated conferencing services, operator-assisted conferencing and web services, partially offset by growth in streaming services. Automated conferencing services, which accounts for just over half of the Unified Communications Services revenue, decreased due to a reduction in average rate per minute of approximately 7.9% and a decrease in the volume of minutes of 0.6%. Average rate per minute for automated conferencing services declined due to price compression, product mix and an increasing shift of minutes to VoIP access, which has a lower price point due to the lower cost to provide VoIP access. Using constant currency foreign exchange rates, our average rate per minute for automated conferencing services declined by approximately 6.8% for the six months ended June 30, 2017. In addition, operator-assisted revenue declined due to clients purchasing fewer call features and migrating operator-assisted calls to lower cost solutions.
34
During the six months ended June 30, 2017, Safety Services revenue increased $
11.1
million, or
7.6
%, to $
156.7
million
from $145.6 million for the six months ended June 30, 2016. The increase was primarily due to sales to customers ado
pting new technologies and $
1.9
million in revenue from the December 2016 acquisition of 911 ETC.
During the six months ended June 30, 2017, Interactive Services revenue increased $11.7 million, or 8.1%, to $156.7 million from $145.0 million for the six months ended June 30, 2016. The acquisitions of Callpointe and Synrevoice contributed $2.6 million of the increase in revenue. The remaining increase was primarily due to new clients and increased volumes from existing clients, across multiple vertical markets, partially offset by price compression.
During the six months ended June 30, 2017, Specialized Agent Services revenue increased $5.2 million, or 3.8%, to $141.1 million from $135.9 million for the six months ended June 30, 2016. The increase in revenue is primarily the result of mid-single-digit revenue growth in our healthcare advocacy services due to increased volume as well as expanded product offerings. Receivables management and revenue generation experienced low-single-digit revenue growth.
During the six months ended June 30, 2017, international revenue was $216.1 million, a decrease of 10.5% over the six months ended June 30, 2016. On a constant currency basis, our international revenue declined 7.0% during the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Excluding the acquisition of Vocus, constant currency international revenue declined by 7.4% due primarily to a decline in conferencing minutes and average rate per minute in the EMEA and APAC regions.
During the six months ended June 30, 2017 and 2016, our largest 100 clients accounted for approximately 43% and 42% of our total revenue, respectively. In each of these periods, no client accounted for more than 6% of our aggregate revenue.
Cost of Services:
Cost of services consists of direct labor, telephone expense, and other costs directly related to providing services to our clients. Cost of services decreased approximately $4.1 million, or 1.6%, in the three months ended June 30, 2017, to $245.3 million, from $249.4 million for the three months ended June 30, 2016 primarily due to revenue mix. The decrease in cost of services during the three months ended June 30, 2017 was partially offset by $0.9 million from acquisitions completed in 2017 and 2016. As a percentage of revenue, cost of services decreased to 42.7% for the three months ended June 30, 2017, from 42.8% for the three months ended June 30, 2016.
Cost of Services by reportable segment:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Cost of services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
168,102
|
|
|
|
48.2
|
%
|
|
$
|
173,651
|
|
|
|
46.9
|
%
|
|
$
|
(5,549
|
)
|
|
|
(3.2
|
)%
|
Safety Services
|
|
|
28,206
|
|
|
|
35.1
|
%
|
|
|
26,689
|
|
|
|
35.9
|
%
|
|
|
1,517
|
|
|
|
5.7
|
%
|
Interactive Services
|
|
|
17,035
|
|
|
|
21.5
|
%
|
|
|
16,918
|
|
|
|
23.1
|
%
|
|
|
117
|
|
|
|
0.7
|
%
|
Specialized Agent Services
|
|
|
33,528
|
|
|
|
48.3
|
%
|
|
|
33,760
|
|
|
|
50.0
|
%
|
|
|
(232
|
)
|
|
|
(0.7
|
)%
|
Intersegment eliminations
|
|
|
(1,530
|
)
|
|
NM
|
|
|
|
(1,592
|
)
|
|
NM
|
|
|
|
62
|
|
|
NM
|
|
Total
|
|
$
|
245,341
|
|
|
|
42.7
|
%
|
|
$
|
249,426
|
|
|
|
42.8
|
%
|
|
$
|
(4,085
|
)
|
|
|
(1.6
|
)%
|
NM—Not Meaningful
During the three months ended June 30, 2017, Unified Communications Services cost of services decreased $5.5
million, or 3.2%, to $168.1 million from $173.7 million for the three months ended June 30, 2016. The decrease in cost of services is primarily due to a decline in conferencing revenue partially offset by growth in the UCaaS and telecom services lines of business. Using constant currency foreign exchange rates, cost of services for the three months ended June 30, 2017 would have been approximately $2.4 million higher. As a percentage of revenue, Unified Communications Services cost of services during the three months ended June 30, 2017 increased to 48.2% from 46.9% for the three months ended June 30, 2016. The increase in cost of services as a percentage of revenue was due primarily to product mix and the decline in the average rate per minute for automated conferencing services.
During the three months ended June 30, 2017, Safety Services cost of services increased $1.5 million, or 5.7% to $28.2 million from $26.7
million for the three months ended June 30, 2016. The increase in cost of services was primarily due to the increase in revenue. Cost of services for the three months ended June 30, 2017 included $0.4 million of cost of services from the acquisition of 911 ETC.
As a percentage of revenue, Safety Services cost of services during the three months ended June 30, 2017 decreased to 35.1% from 35.9% for the three months ended June 30, 2016.
35
During the three months ended
June 30
, 2017, Interact
ive Services cost of services increased $
0.1
million, or
0.7
%, to $
17.0
million from $16.
9
million for the three months ended
June 30
, 2016. The increase in cost of services
includes $0.2
million from the
Callpointe
acquisition made in
May
201
7
. As a perce
ntage of revenue, Interactive Services cost of services during the three months ended
June 30
, 2017 decreased to
21.5
% from
23.1
% for the three months ended
June 30
, 2016. The decrease in cost of services as a percentage of revenue is due primarily to prod
uct mix.
During the three months ended June 30, 2017, Specialized Agent Services cost of services decreased $0.2 million, or 0.7%, to $33.5 million from $33.8 million for the three months ended June 30, 2016 primarily due to product mix. As a percentage of revenue, Specialized Agent Services cost of services during the three months ended June 30, 2017 decreased to 48.3% from 50.0% for the three months ended June 30, 2016 primarily due to product mix.
Cost of services decreased approximately $2.7 million, or 0.5%, in the six months ended June 30, 2017, to $487.8 million, from $490.4 million for the six months ended June 30, 2016 primarily due to revenue mix. The decrease in cost of services during the six months ended June 30, 2017 was partially offset by $1.6 million from the acquisitions completed in 2017 and 2016. As a percentage of revenue, cost of services was 42.5% for both the six months ended June 30, 2017 and 2016.
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Cost of services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
335,249
|
|
|
|
47.9
|
%
|
|
$
|
339,847
|
|
|
|
46.4
|
%
|
|
$
|
(4,598
|
)
|
|
|
(1.4
|
)%
|
Safety Services
|
|
|
53,731
|
|
|
|
34.3
|
%
|
|
|
54,004
|
|
|
|
37.1
|
%
|
|
|
(273
|
)
|
|
|
(0.5
|
)%
|
Interactive Services
|
|
|
34,320
|
|
|
|
21.9
|
%
|
|
|
33,070
|
|
|
|
22.8
|
%
|
|
|
1,250
|
|
|
|
3.8
|
%
|
Specialized Agent Services
|
|
|
68,797
|
|
|
|
48.8
|
%
|
|
|
66,911
|
|
|
|
49.2
|
%
|
|
|
1,886
|
|
|
|
2.8
|
%
|
Intersegment eliminations
|
|
|
(4,314
|
)
|
|
NM
|
|
|
|
(3,394
|
)
|
|
NM
|
|
|
|
(920
|
)
|
|
NM
|
|
Total
|
|
$
|
487,783
|
|
|
|
42.5
|
%
|
|
$
|
490,438
|
|
|
|
42.5
|
%
|
|
$
|
(2,655
|
)
|
|
|
(0.5
|
)%
|
NM—Not Meaningful
During the six months ended June 30, 2017, Unified Communications Services cost of services decreased $4.6 million, or 1.4%, to $335.2 million from $339.8 million for the six months ended June 30, 2016. The decrease in cost of services is primarily due to a decline in conferencing revenue partially offset by growth in the UCaaS and telecom services lines of business. Using constant currency foreign exchange rates, cost of services for the six months ended June 30, 2017 would have been approximately $5.0
million higher. As a percentage of this segment’s revenue, Unified Communications Services cost of services during the six months ended June 30, 2017 increased to 47.9% from 46.4% for the six months ended June 30, 2016. The increase in cost of services as a percentage of revenue was due primarily to product mix and the decline in the average rate per minute for automated conferencing services.
During the six months ended June 30, 2017, Safety Services cost of services decreased $0.3 million, or 0.5%, to $53.7 million from $54.0 million for the six months ended June 30, 2016. The decrease in cost of services was primarily due to cost savings initiatives which offset volume related cost increases. As a percentage of revenue, Safety Services cost of services during the six months ended June 30, 2017 decreased to 34.3% from 37.1% for the six months ended June 30, 2016 due to product mix and cost savings initiatives.
During the six months ended June 30, 2017, Interactive Services cost of services increased $1.3 million, or 3.8%, to $34.3 million from $33.1 million for the six months ended June 30, 2016. The increase in cost of services included $0.6 million from acquisitions made in 2016. As a percentage of revenue, Interactive Services cost of services during the six months ended June 30, 2017 decreased to 21.9% from 22.8% for the six months ended June 30, 2016. The decrease in cost of services as a percentage of revenue is due primarily to product mix.
During the six months ended June 30, 2017, Specialized Agent Services cost of services increased $1.9 million, or 2.8%, to $68.8 million from $66.9 million for the six months ended June 30, 2016. The increase in cost of services was primarily due to increased expenses to support revenue growth. As a percentage of revenue, Specialized Agent Services cost of services during the six months ended June 30, 2017 decreased to 48.8% from 49.2% for the six months ended June 30, 2016. The decrease in cost of services as a percentage of revenue is due to product and customer mix.
SG&A expenses:
SG&A expenses increased by approximately $16.6 million, or 7.9%, to $226.5 million for the three months ended June 30, 2017 from $209.9 million for the three months ended June 30, 2016. During the three months ended June 30, 2016 SG&A expenses included a gain on the sale of buildings that were previously occupied by the businesses we divested in 2015. The
36
increase in SG&A expenses during the three months ended
June 30
, 2017 included
costs incurred for the pending acquisition of West Corporation by certain funds managed by affiliates of Apollo Global Ma
nagement, LLC, a
n
increase in corporate unallocated expenses due to the mark-to-market adjustment for the increase in the value of investments in our non-qualified retirement plans and foreign exchange rate losses, and
an increase in
severance expense rela
ted to workforce adjustments.
The increase in SG&A w
as
partially offset by
the results of
cost savings initiatives implemented in 2016 and lower amortization of intangible assets.
As a percentage of revenue, SG&A expenses increased to
39.4
% for the three m
onths ended
June 30
, 2017 from
36.0
% for the three months ended
June
3
0
, 2016.
As discussed above, the following table summarizes the primary changes in SG&A expenses for the three months ended June 30, 2017:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
SG&A (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of buildings
|
|
$
|
—
|
|
|
$
|
(12,848
|
)
|
|
$
|
12,848
|
|
West - Olympus Holdings, Inc. merger costs
|
|
|
4,420
|
|
|
|
—
|
|
|
|
4,420
|
|
Mark-to-market expense for non-qualified retirement plans
|
|
|
2,434
|
|
|
|
1,052
|
|
|
|
1,382
|
|
Foreign currency exchange rate losses (gains)
|
|
|
335
|
|
|
|
(1,808
|
)
|
|
|
2,143
|
|
Severance expense
|
|
|
3,839
|
|
|
|
1,789
|
|
|
|
2,050
|
|
Total
|
|
$
|
11,028
|
|
|
$
|
(11,815
|
)
|
|
$
|
22,843
|
|
SG&A expenses by reportable segment:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
SG&A (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
108,424
|
|
|
|
31.1
|
%
|
|
$
|
107,745
|
|
|
|
29.1
|
%
|
|
$
|
679
|
|
|
|
0.6
|
%
|
Safety Services
|
|
|
31,316
|
|
|
|
38.9
|
%
|
|
|
35,863
|
|
|
|
48.2
|
%
|
|
|
(4,547
|
)
|
|
|
(12.7
|
)%
|
Interactive Services
|
|
|
54,316
|
|
|
|
68.6
|
%
|
|
|
50,356
|
|
|
|
68.8
|
%
|
|
|
3,960
|
|
|
|
7.9
|
%
|
Specialized Agent Services
|
|
|
31,295
|
|
|
|
45.1
|
%
|
|
|
30,829
|
|
|
|
45.7
|
%
|
|
|
466
|
|
|
|
1.5
|
%
|
Corporate other - unallocated
|
|
|
2,674
|
|
|
NM
|
|
|
|
(13,604
|
)
|
|
NM
|
|
|
|
16,278
|
|
|
NM
|
|
Intersegment eliminations
|
|
|
(1,575
|
)
|
|
NM
|
|
|
|
(1,319
|
)
|
|
NM
|
|
|
|
(256
|
)
|
|
NM
|
|
Total
|
|
$
|
226,450
|
|
|
|
39.4
|
%
|
|
$
|
209,870
|
|
|
|
36.0
|
%
|
|
$
|
16,580
|
|
|
|
7.9
|
%
|
NM—Not Meaningful
During the three months ended June 30, 2017, Unified Communications Services SG&A expenses increased $0.7 million, or 0.6%, to $108.4 million from $107.7 million for the three months ended June 30, 2016. Using constant currency foreign exchange rates, SG&A expenses for Unified Communications Services during the three months ended June 30, 2017 would have been approximately $1.3 million higher. The increase was primarily due to $2.9 million in severance expense incurred as part of cost reduction initiatives and $0.7 million from the Vocus acquisition, partially offset by the results of cost savings initiatives initiated in 2016 and lower depreciation and amortization expense. As a percentage of this segment’s revenue, Unified Communications Services SG&A expenses during the three months ended June 30, 2017 increased to 31.1% compared to 29.1% for the three months ended June 30, 2016, primarily due to lower revenue. Savings from headcount management and the workforce reduction implemented in June are estimated at $12 million annually and are expected to be fully realized by January 1, 2018.
During the three months ended June 30, 2017, Safety Services SG&A expenses decreased $4.5 million, or 12.7%, to $31.3 million from $35.9 million for the three months ended June 30, 2016. The decrease in SG&A expenses during the three months ended June 30, 2017 was primarily due to results of cost savings initiatives, partially offset by $0.7 million from the 911 ETC acquisition. As a percentage of this segment’s revenue, Safety Services SG&A expenses during the three months ended June 30, 2017 decreased to 38.9% compared to 48.2% for the three months ended June 30, 2016.
During the three months ended June 30, 2017, Interactive Services SG&A expenses increased $4.0 million, or 7.9%, to $54.3 million from $50.4 million for the three months ended June 30, 2016. The increase in SG&A expenses during the three months ended June 30, 2017 included $1.6 million from the Callpointe acquisition. The remaining increase in SG&A expenses was primarily due to increased headcount levels to meet current and expected customer demand. As a percentage of this segment’s revenue, Interactive Services SG&A expenses during the three months ended June 30, 2017, decreased to 68.6% compared to 68.8% for the three months ended June 30, 2016.
37
During the three months ended
June 30
, 2017, Specialized Agent Services SG&A expenses increased $
0.5
million, or
1.5
%, to $
3
1
.
3
million from $30.
8
million for the three months ended
June 30
, 2016.
Th
e
increase in SG&A expense was primarily due to
an incre
ase in depreciation expense on investments in
new and enhanced
product offerings
.
As a percentage of this segment’s revenue, Specialized Agent Services SG&A expenses during the three months ended
June 30
, 2017
de
creased to
45.
1
% compared to
45.7
% for the t
hree months ended
June
3
0
, 2016.
During the three months ended June 30, 2017, Corporate other unallocated SG&A expenses included $0.3 million of unallocated foreign currency losses on third-party transactions denominated in currencies other than the functional currency and $2.4 million of mark-to-market gains on investments in our non-qualified retirement plans. These mark-to-market gains resulted in an increase in SG&A and a corresponding increase in other non-operating income. During the three months ended June 30, 2016, Corporate other unallocated SG&A expenses consisted of a $12.8 million gain recognized on the sale of buildings that were previously occupied by the businesses we divested in 2015, $1.8 million of unallocated foreign currency gains on third-party transactions denominated in currencies other than the functional currency and $1.1 million of mark-to-market gains on investments in our non-qualified retirement plans. All other corporate expenses are allocated to our four reportable segments.
SG&A expenses increased by $17.6 million, or 4.1%, to $448.3 million for the six months ended June 30, 2017 from $430.7 million for the six months ended June 30, 2016. SG&A expenses during the six months ended June 30, 2016 included a gain on the sale of buildings that were previously occupied by the businesses we divested in 2015. The increase in SG&A expenses during the six months ended June 30, 2017 included an increase in corporate unallocated expenses due to the mark-to-market adjustment for the increase in the value of investments in our non-qualified retirement plans and foreign exchange rate losses, acquisition costs incurred for the pending acquisition of West Corporation by certain funds managed by affiliates of Apollo Global Management, LLC,, and severance expense related to workforce adjustments. As a percentage of revenue, SG&A expenses increased to 39.1% for the six months ended June 30, 2017 compared to 37.4% for the six months ended June 30, 2016. As discussed above, the following table summarizes the primary changes in SG&A expenses for the six months ended June 30, 2017:
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
SG&A (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of buildings
|
|
$
|
—
|
|
|
$
|
(12,848
|
)
|
|
$
|
12,848
|
|
West - Olympus Holdings, Inc. merger costs
|
|
|
5,060
|
|
|
|
—
|
|
|
|
5,060
|
|
Mark-to-market expense for non-qualified retirement plans
|
|
|
5,707
|
|
|
|
1,061
|
|
|
|
4,646
|
|
Foreign currency exchange rate losses (gains)
|
|
|
1,524
|
|
|
|
(2,374
|
)
|
|
|
3,898
|
|
Severance expense
|
|
|
5,674
|
|
|
|
2,658
|
|
|
|
3,016
|
|
Total
|
|
$
|
17,965
|
|
|
$
|
(11,503
|
)
|
|
$
|
29,468
|
|
SG&A expenses by reportable segment:
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
SG&A (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
210,962
|
|
|
|
30.2
|
%
|
|
$
|
215,194
|
|
|
|
29.4
|
%
|
|
$
|
(4,232
|
)
|
|
|
(2.0
|
)%
|
Safety Services
|
|
|
62,760
|
|
|
|
40.1
|
%
|
|
|
70,739
|
|
|
|
48.6
|
%
|
|
|
(7,979
|
)
|
|
|
(11.3
|
)%
|
Interactive Services
|
|
|
106,169
|
|
|
|
67.8
|
%
|
|
|
100,125
|
|
|
|
69.1
|
%
|
|
|
6,044
|
|
|
|
6.0
|
%
|
Specialized Agent Services
|
|
|
64,216
|
|
|
|
45.5
|
%
|
|
|
61,538
|
|
|
|
45.3
|
%
|
|
|
2,678
|
|
|
|
4.4
|
%
|
Corporate other - unallocated
|
|
|
7,040
|
|
|
NM
|
|
|
|
(14,161
|
)
|
|
NM
|
|
|
|
21,201
|
|
|
NM
|
|
Intersegment eliminations
|
|
|
(2,820
|
)
|
|
NM
|
|
|
|
(2,722
|
)
|
|
NM
|
|
|
|
(98
|
)
|
|
NM
|
|
Total
|
|
$
|
448,327
|
|
|
|
39.1
|
%
|
|
$
|
430,713
|
|
|
|
37.4
|
%
|
|
$
|
17,614
|
|
|
|
4.1
|
%
|
NM—Not Meaningful
38
During the six months ended June 30, 2017, Unified Communications Services SG&A expenses
de
creased
$
4.2
million, or
2.0
%, to $21
1.0
million from $215.2 million for the six months ended June 30, 2016. Using constant currency foreign exchange rates, SG&A exp
enses for Unified Communications Services during the six months ended June 30, 2017 would have been approximately $
3
.
0
million higher. The
de
crease was primarily due to
the results of cost savings initiatives and lower depreciation and amortization expense
, partially offset by
$3.1 million in severance expense incurred as part of the cost reduction initiative,
increased expenses to support growth in the UCaaS
line of business
and $
1.0
million from the acquisition of Vocus
.
As a percentage of this segment’s
revenue, Unified Communications Services SG&A expenses during the six months ended June 30, 2017 increased to
30.2
% compared to 29.4% for the six months ended June 30, 2016.
Savings from headcount management and the workforce reduction implemented in June
are estimated at $12 million annually and are expected to be fully realized by January 1, 2018.
During the six months ended June 30, 2017, Safety Services SG&A expenses decreased $8.0 million, or 11.3%, to $62.8 million from $70.7 million for the six months ended June 30, 2016. The decrease in SG&A expenses during the six months ended June 30, 2017, was due to the results of cost savings initiatives and lower depreciation and amortization expense, partially offset by $1.5 million of expenses from the acquisition of 911 ETC. As a percentage of this segment’s revenue, Safety Services SG&A expenses during the six months ended June 30, 2017 decreased to 40.1% compared to 48.6% for the six months ended June 30, 2016.
During the six months ended June 30, 2017, Interactive Services SG&A expenses increased $6.0 million, or 6.0%, to $106.2 million from $100.1 million for the six months ended June 30, 2016. The increase in SG&A expenses during the six months ended June 30, 2017 included $2.5 million from acquisitions made in 2017 and 2016. The remaining increase in SG&A expenses was primarily due to increased headcount levels to meet current and expected customer demand. As a percentage of this segment’s revenue, Interactive Services SG&A expenses during the six months ended June 30, 2017, decreased to 67.8% compared to 69.1% for the six months ended June 30, 2016.
During the six months ended June 30, 2017, Specialized Agent Services SG&A expenses increased $2.7 million, or 4.4%, to $64.2 million from $61.5 million for the six months ended June 30, 2016. This increase in SG&A expense was primarily due to $1.6 million of severance expense in our revenue generation services business unit as part of a cost savings initiative and an increase in depreciation expense. As a percentage of this segment’s revenue, Specialized Agent Services SG&A expenses during the six months ended June 30, 2017 increased to 45.5% compared to 45.3% for the six months ended June 30, 2016.
During the six months ended June 30, 2017, Corporate other unallocated SG&A expenses included $1.5 million of unallocated foreign currency losses on third-party transactions denominated in currencies other than the functional currency and $5.7 million of mark-to-market gains on investments in our non-qualified retirement plans. These mark-to-market gains resulted in an increase in SG&A and a corresponding increase in other non-operating income. During the six months ended June 30, 2016, Corporate other unallocated SG&A expenses consisted of a $12.8 million gain recognized on the sale of buildings that were previously occupied by the businesses we divested in 2015, $2.4 million of unallocated foreign currency gains on third-party transactions denominated in currencies other than the functional currency and $1.1 million of mark-to-market gains on investments in our non-qualified retirement plans. All other corporate expenses are allocated to our four reportable segments.
Operating income:
Operating income decreased $20.5 million, or 16.7%, to $102.6 million for the three months ended June 30, 2017 from $123.1 million for the three months ended June 30, 2016. The decrease in operating income is primarily due to the $12.8 million gain on the sale of buildings last year previously discussed, partially offset by the results of cost savings initiatives. In addition to the $1.4
million negative impact of the mark-to-market adjustment and $2.1
million change in foreign currency losses, total operating income declined due to lower operating income in the Unified Communications Services segment resulting from the revenue decline in conferencing, partially offset by strong operating performance in Safety Services and Interactive Services. As a percentage of revenue, operating income decreased to 17.9% for the three months ended June 30, 2017 from 21.1% for the three months ended June 30, 2016.
39
Operating income by reportable segment:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Operating income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
72,020
|
|
|
|
20.7
|
%
|
|
$
|
88,762
|
|
|
|
24.0
|
%
|
|
$
|
(16,742
|
)
|
|
|
(18.9
|
)%
|
Safety Services
|
|
|
20,897
|
|
|
|
26.0
|
%
|
|
|
11,871
|
|
|
|
16.0
|
%
|
|
|
9,026
|
|
|
|
76.0
|
%
|
Interactive Services
|
|
|
7,828
|
|
|
|
9.9
|
%
|
|
|
5,958
|
|
|
|
8.1
|
%
|
|
|
1,870
|
|
|
|
31.4
|
%
|
Specialized Agent Services
|
|
|
4,531
|
|
|
|
6.5
|
%
|
|
|
2,906
|
|
|
|
4.3
|
%
|
|
|
1,625
|
|
|
|
55.9
|
%
|
Corporate other unallocated
|
|
|
(2,674
|
)
|
|
NM
|
|
|
|
13,604
|
|
|
NM
|
|
|
|
(16,278
|
)
|
|
NM
|
|
Total
|
|
$
|
102,602
|
|
|
|
17.9
|
%
|
|
$
|
123,101
|
|
|
|
21.1
|
%
|
|
$
|
(20,499
|
)
|
|
|
(16.7
|
)%
|
NM—Not Meaningful
Operating income decreased $21.2 million, or 9.1%, to $210.8 million for the six months ended June 30, 2017 from $232.0 million for the six months ended June 30, 2016. The decrease in operating income is primarily due to the sale of the buildings last year previously discussed, partially offset by the results of cost savings initiatives. In addition to the $4.6
million negative impact of the mark-to-market adjustment and the $3.9
million change in foreign currency losses, total operating income declined due to lower operating income in the Unified Communications Services segment resulting from the revenue decline in conferencing, partially offset by strong operating performance in Safety Services and Interactive Services. As a percentage of revenue, operating income decreased to 18.4% for the six months ended June 30, 2017 from 20.1% for the six months ended June 30, 2016.
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
% of
Revenue
|
|
|
2016
|
|
|
% of
Revenue
|
|
|
Change
|
|
|
% Change
|
|
Operating income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Communications Services
|
|
$
|
153,410
|
|
|
|
21.9
|
%
|
|
$
|
177,830
|
|
|
|
24.3
|
%
|
|
$
|
(24,420
|
)
|
|
|
(13.7
|
)%
|
Safety Services
|
|
|
40,183
|
|
|
|
25.6
|
%
|
|
|
20,844
|
|
|
|
14.3
|
%
|
|
|
19,339
|
|
|
|
92.8
|
%
|
Interactive Services
|
|
|
16,183
|
|
|
|
10.3
|
%
|
|
|
11,766
|
|
|
|
8.1
|
%
|
|
|
4,417
|
|
|
|
37.5
|
%
|
Specialized Agent Services
|
|
|
8,089
|
|
|
|
5.7
|
%
|
|
|
7,424
|
|
|
|
5.5
|
%
|
|
|
665
|
|
|
|
9.0
|
%
|
Corporate other unallocated
|
|
|
(7,040
|
)
|
|
NM
|
|
|
|
14,161
|
|
|
NM
|
|
|
|
(21,201
|
)
|
|
NM
|
|
Total
|
|
$
|
210,825
|
|
|
|
18.4
|
%
|
|
$
|
232,025
|
|
|
|
20.1
|
%
|
|
$
|
(21,200
|
)
|
|
|
(9.1
|
)%
|
NM—Not Meaningful
Other income (expense):
Other income (expense) includes interest expense from borrowings under credit facilities and outstanding notes, the aggregate foreign exchange gain (loss) on affiliate transactions denominated in currencies other than the functional currency, expenses, net of recoveries, of transition service agreements in connection with the sale of certain of our agent-based businesses and interest income from short-term investments.
Other expense for the three months ended June 30, 2017 was $35.2 million compared to $71.7 million for the three months ended June 30, 2016. Other expense for the six months ended June 30, 2017 was $67.7 million compared to $111.3 million for the six months ended June 30, 2016. Other expense for the three and six months ended June 30, 2016 included $35.2 million of accelerated amortization of deferred financing costs as a result of our refinancing and accelerated debt principal prepayments. Interest expense for the three and six months ended June 30, 2017 was $36.5 million and $71.7 million, respectively, compared to $37.7 million and $76.5 million, respectively, for the three and six months ended June 30, 2016.
During the three and six months ended June 30, 2017, we recognized losses of $1.2 million and $1.9 million, respectively, on affiliate transactions denominated in foreign currencies. During the three and six months ended June 30, 2016, we recognized losses of $0.7 million and $3.3 million, respectively, on affiliate transactions denominated in foreign currencies.
During the three and six months ended June 30, 2017, we recognized gains of $2.4 million and $5.7 million, respectively, in marking the investments in our non-qualified retirement plans to market. During the three and six months ended June 30, 2016 we recognized a gain of $1.1 million in each period in marking the investments in our non-qualified retirement plans to market. Mark-to-market gains or losses, recognized in other income, on the investments in our non-qualified retirement plans are offset by additional or reduced compensation expense related to the non-qualified retirement plans that is recorded in Corporate other unallocated SG&A expense.
40
Net Income:
Our net income increased $
11.8
million for the three months ended
June 30
, 2017 to $
44.8
million from $
33.0
million fo
r the three months ended
June 30
, 2016.
The increase in net income was driven primarily
by
the $14.3 million net income impact of the accelerated amortization of deferred financing costs, $35.2 million pre-tax,
partially offset by the
$12.8 million pre-tax
gain
recognized
on the sale of buildings
in 2016
.
For the three months ended June 30, 2017, net income includes a provision for income tax expense at an effective rate of approximately 33.6% compared to 35.8% for the three months ended June 30, 2016.
Our net income increased $21.3 million for the six months ended June 30, 2017 to $98.9 million from $77.5 million for the six months ended June 30, 2016. The net impact on net income from the accelerated amortization and sale of the buildings in 2016 was a reduction of $14.3 million in the 2016 period. Net income includes a provision for income tax expense at an effective rate of approximately 30.9% for the six months ended June 30, 2017 compared to 35.8% for the six months ended June 30, 2016. The reduction in the effective tax rate was due primarily to several tax settlements impacting the balance in our uncertain tax position liability.
Earnings per common share:
Earnings per common share-basic and diluted for the three months ended June 30, 2017 were $0.54 and $0.52, respectively, compared to earnings per common share-basic and diluted for the three months ended June 30, 2016 of $0.40 and $0.39, respectively. Earnings per common share-basic and diluted for the six months ended June 30, 2017 were $1.18 and $1.16, respectively, compared to earnings per common share-basic and diluted for the six months ended June 30, 2016 of $0.94 and $0.92, respectively.
Liquidity and Capital Resources
We have historically financed our operations and capital expenditures primarily through cash flows from operations supplemented by borrowings under our senior secured credit facilities, revolving credit facilities and asset securitization facilities. In March 2015, we filed a registration statement with the Securities and Exchange Commission using a shelf registration process. As permitted under the registration statement, we may, from time to time, sell shares of our common stock, as market conditions permit, to finance our operations and capital expenditures or provide additional liquidity.
The Company’s Board of Directors has approved a share repurchase program under which the Company may repurchase up to an aggregate of $75.0 million of its outstanding common stock of which $53.0 million remains unused. Purchases under the program may be made from time to time through open market purchases, block transactions or privately negotiated transactions. The Company historically has funded the program using its cash on hand and cash generated from operations. The program may be suspended or discontinued at any time without prior notice. Pursuant to the terms of the Merger Agreement, the Company may not repurchase its shares without the prior consent of Parent.
Our current and anticipated uses of our cash, cash equivalents and marketable securities are to fund operating expenses, acquisitions, capital expenditures, interest payments, tax payments and repay principal on debt.
The following table summarizes our net cash flows by category for the periods presented:
|
|
For the Six Months Ended June 30,
|
|
(Amounts in thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
Net cash flows provided by operating activities
|
|
$
|
160,046
|
|
|
$
|
197,485
|
|
|
$
|
(37,439
|
)
|
|
|
(19.0
|
)%
|
Net cash flows used in investing activities
|
|
$
|
(79,993
|
)
|
|
$
|
(42,584
|
)
|
|
$
|
(37,409
|
)
|
|
|
87.8
|
%
|
Net cash flows used in financing activities
|
|
$
|
(76,647
|
)
|
|
$
|
(112,546
|
)
|
|
$
|
35,899
|
|
|
|
(31.9
|
)%
|
Net cash flows from operating activities decreased $37.4 million, or 19.0%, to $160.0 million for the six months ended June 30, 2017 compared to $197.5 million for the six months ended June 30, 2016. The decrease in net cash flows from operations is primarily due to the timing of collections on accounts receivable and increased income tax payments of $11.9 million primarily due to the settlement of several tax audits. Days sales outstanding (“DSO”), a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 63 days at June 30, 2017 compared to 61 days at June 30, 2016. An increase or decrease in DSO of approximately one day increases or decreases our net cash flows from operating activities by approximately $6.3 million.
41
Net cash flows used in investing activities
in
creased $
37.4
million to $
80.0
million for the
six
months ended
June 30
, 2017 compared to $
42.6
mil
lion for the
six
months ended
June
3
0
, 2016. During the
six
months ended
June 30
, 2017, cash used for capital expenditures, primarily for capacity expansion, product enhancements, development of new products and services, upgrades at existing facilities an
d data center consolidations, was $
53.2
million compared to $
73.9
million for the
six
months ended
June
3
0
, 201
6
. Net cash flows used for business acquisitions during the
six
months ended
June 30
, 2017 were
$
20.1
million
higher
than the
six
months ended
June 30
, 2016.
Net cash flows from investing activities for the six months ended June 30, 2016 included $38.4 million for the sale of buildings that were previously occupied by the businesses we divested in 2015.
Net cash flows used in financing activities decreased $35.9 million to $76.6 million for the six months ended June 30, 2017 compared to $112.5 million for the six months ended June 30, 2016. The decrease in cash used for financing activities is primarily due to $22.0 million used to repurchase one million shares of our common stock during the six months ended June 30, 2016 and a decrease of $18.6 million in dividend payments during the six months ended June 30, 2017. Repayments on long-term obligations during the six months ended June 30, 2017 were $28.7 million higher than last year partially offset by $25.2 million of lower debt issuance expenditures.
As of June 30, 2017, the amount of cash and cash equivalents held by our foreign subsidiaries was $108.9 million. We have accrued U.S. taxes on $98.3 million of unremitted foreign earnings and profits. We have determined foreign earnings of approximately $241.4 million will be indefinitely reinvested. Based on our current projected capital needs and the current amount of cash and cash equivalents held by our foreign subsidiaries, we do not anticipate incurring any material tax costs beyond our accrued tax position in connection with such repatriation, but we may be required to accrue for unanticipated additional tax costs in the future if our expectations or the amount of cash held by our foreign subsidiaries change.
Given the Company’s current levels of cash on hand, anticipated cash flows from operations and available borrowing capacity, the Company believes it has sufficient liquidity to conduct its normal operations and pursue its business strategy in the ordinary course.
Prior to July 31, 2017, we were party to a revolving trade accounts receivable financing facility among the Company, certain of our originating domestic subsidiaries, West Receivables Holding LLC, West Receivables LLC and Wells Fargo (“Securitization Facility”).
Long-term Obligations
Our long-term obligations are comprised of the following:
|
(i)
|
Senior Secured Credit Facilities;
|
|
(ii)
|
5.375% notes due 2022 (the “2022 Senior Notes”) issued under an indenture; and
|
|
(iii)
|
4.75% senior secured notes due 2021 (the “2021 Senior Secured Notes”).
|
We and our subsidiaries, affiliates or significant stockholders may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.
Senior Secured Credit Facilities
Term Loans
We have three tranches of term loans outstanding under our Senior Secured Credit Facilities: the 2021 Maturity A Term Loans, the 2021 Maturity B Term Loans and the 2023 Maturity Term Loans. As of June 30, 2017, we had outstanding approximately, $629.7 million of 2021 Maturity A Term Loans, $257.4 million of 2021 Maturity B Term Loans and $861.3 million of 2023 Maturity Term Loans.
42
On each of June 17, 2016 (the
“
Seventh Amendment Effective Date
”
) and December 19, 2016 (the “Eighth Amendment Effective Date”), the Company, certai
n domestic subsidiaries of the Company, as subsidiary borrowers, Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the various lenders party thereto modified the Senior Secured Credit Facilities by entering into the Seven
th Amendment and Eighth Amendment, respectively, in each case, amending the Company’s Amended and Restated Credit Agreement, dated as of October 5, 2010, by and among the Company, Wells Fargo, as administrative agent, and the various lenders and other part
ies party thereto from time to time (as previously amended by Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 15, 2012, Amendment No. 2 to Amended and Restated Credit Agreement, dated as of October 24, 2012, Amendment No. 3 to
Amended and Restated Credit Agreement, dated as of February 20, 2013, Amendment No. 4 to Amended and Restated Credit Agreement, dated as of January 24, 2014, Amendment No. 5 to Amended and Restated Credit Agreement, dated as of July 1, 2014, Amendment No.
6 to Amended and Restated Credit Agreement, dated as of November 24, 2015, the Seventh Amendment and, as further amended by the Eighth Amendment, the “Credit Agreement”).
With respect to our term loans, the Seventh Amendment:
|
•
|
extended the maturity of a portion of the 2019 Maturity Term Loans, which mature July 1, 2019, to June 17, 2021 by converting such existing term loans into 2021 Maturity A Term Loans;
|
|
•
|
extended the maturity of a portion of the 2018 Maturity Term Loans, which mature June 30, 2018, to June 17, 2023 by converting such existing term loans into 2023 Maturity Term Loans;
|
|
•
|
provided for an increase of 2021 Maturity A Term Loans with incremental 2021 Maturity A Term Loans, which were added to and constitute a single class of term loans with the 2021 Maturity A Term Loans, such that the aggregate amount of 2021 Maturity A Term Loans (after giving effect to the incurrence of the incremental 2021 Maturity A Term Loans) was $650.0 million;
|
|
•
|
provided for an increase of 2023 Maturity Term Loans with incremental 2023 Maturity Term Loans, which were added to and constitute a single class of term loans with the 2023 Maturity Term Loans, such that the aggregate amount of 2023 Maturity Term Loans (after giving effect to the incurrence of the incremental 2023 Maturity Term Loans) was $870.0 million;
|
|
•
|
provided for new 2021 Maturity B Term Loans in an aggregate amount of $260.0 million with a maturity date of June 17, 2021; and
|
|
•
|
provided for annual amortization (payable in quarterly installments and based on the original aggregate principal amount of the 2021 Maturity A Term Loans outstanding on the Seventh Amendment Effective Date) in respect of the 2021 Maturity A Term Loans payable at a 2.5% annual rate for the three fiscal quarters in the nine-month period ending March 31, 2017, a 5.0% annual rate for the four fiscal quarters in the year ending March 31, 2018, a 7.5% annual rate for the four fiscal quarters in the year ending March 31, 2019, a 10.0% annual rate for the four fiscal quarters in the year ending March 31, 2020 and a 2.5% quarterly rate thereafter until the maturity date, at which point all remaining outstanding 2021 Maturity A Term Loans shall become due and payable.
|
Proceeds of the 2021 Maturity A Term Loans, 2023 Maturity Term Loans and 2021 Maturity B Term Loans were used on the Seventh Amendment Effective Date, together with proceeds from the 2021 Senior Secured Notes offering described below, to partially prepay existing non-extending 2019 Maturity Term Loans and existing non-extending 2018 Maturity Term Loans and to fully prepay existing non-extending B-11 Term Loans.
With respect to our term loans, the Eighth Amendment:
|
•
|
reduced the applicable interest rate margin of the 2023 Maturity Term Loans by 50 basis points and of the 2021 Maturity B Term Loans by 25 basis points, as well as reduced the LIBOR floor and base rate floor on the 2021 Maturity B Term Loans from 0.75% to zero, and from 1.75% to zero, respectively;
|
|
•
|
reset the annual amortization (payable in quarterly installments) in respect of the 2023 Maturity Term Loans in an amount equal to 1.0% of the aggregate principal amount of the 2023 Maturity Term Loans outstanding on the Eighth Amendment Effective Date until the maturity date, at which point all remaining outstanding 2023 Maturity Term Loans shall become due and payable; and
|
|
•
|
reset the annual amortization (payable in quarterly installments) in respect of the 2021 Maturity B Term Loans in an amount equal to 1.0% of the aggregate principal amount of the 2021 Maturity B Term Loans outstanding on the Eighth Amendment Effective Date until the maturity date, at which point all remaining outstanding 2021 Maturity B Term Loans shall become due and payable.
|
43
T
he Eighth Amendment provided that, if the effective yield applicable to any incremental ter
m loans issued under the Credit Agreement within 18 months of the Eighth Amendment Effective Date that are “B” term loans ranking equal in priority with respect to the collateral with the 2023 Maturity Term Loans and 2021 Maturity B Term Loans under the Cr
edit Agreement exceeds the effective yield on the “B” term loans outstanding prior to such incremental borrowing by more than 50 basis points (giving effect to original issue discount, if any), then the effective yield on the “B” term loans (other than suc
h incremental term loans) shall be increased by the same amount minus 50 basis points.
Our Senior Secured Credit Facilities bear interest at variable rates. The effective annual interest rate, inclusive of debt amortization costs, on the Senior Secured Credit Facilities, for the six months ended June 30, 2017 was 3.67% compared to 4.25% during the six months ended June 30, 2016. After giving effect to the Seventh Amendment and the Eighth Amendment, interest rates for our term loans were as follows:
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•
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an interest rate margin applicable to the 2021 Maturity A Term Loans that is based on the Company’s total leverage ratio and ranges from 1.75% to 2.50% for LIBOR rate loans (2.25%, as of June 30, 2017), subject to a 0.0% interest rate floor for the LIBOR component of LIBOR rate 2021 Maturity A Term Loans, and from 0.75% to 1.50% for base rate loans (1.25%, as of June 30, 2017), for an all-in interest rate of 3.48% in effect as of June 30, 2017;
|
|
•
|
an interest rate margin applicable to the 2023 Maturity Term Loans equal to 2.50% for LIBOR rate loans and 1.50% for base rate loans, subject to a 0.75% interest rate floor for the LIBOR component of LIBOR rate 2023 Maturity Term Loans, and subject to a 1.75% interest rate floor for the base rate component of base rate 2023 Maturity Term Loans, for an all-in interest rate of 3.75% in effect as of June 30, 2017; and
|
|
•
|
an interest rate margin applicable to the 2021 Maturity B Term Loans equal to 2.50% for LIBOR rate loans, and 1.50% for base rate loans, subject to a 0.0% interest rate floor for both the LIBOR component of LIBOR rate 2021 Maturity B Term Loans, and the base rate component of base rate 2021 Maturity B Term Loans, for an all-in interest rate of 3.73% in effect as of June 30, 2017.
|
The Company may request additional committed term loan debt or increase the commitment amount to the revolving credit facility in an aggregate amount not to exceed $500.0 million, plus the aggregate principal payments made in respect of the term loans under the Credit Agreement following June 17, 2016 (excluding such payments made with proceeds of term loans issued in connection with the Seventh Amendment and the 2021 Senior Secured Notes offering). Availability of such additional tranches of term loans or increases to the revolving credit facility is subject to the absence of any default and pro forma compliance with financial covenants and, among other things, the receipt of commitments by existing or additional financial institutions.
During the six months ended June 30, 2017, we repaid $8.8 million in voluntary prepayments, which repaid the 2019 Maturity Term Loan in full and $17.8 million of scheduled debt amortization payments on the Senior Secured Credit Facilities.
Senior Secured Revolving Credit Facility
On June 17, 2016, we amended the Credit Agreement to provide for an extended senior secured revolving credit facility (the “Senior Secured Revolving Credit Facility”) in an aggregate principal amount of $300.0 million. The Senior Secured Revolving Credit Facility matures on June 17, 2021. The proceeds of the Senior Secured Revolving Credit Facility may be used for working capital and general corporate purposes (including dividends and distributions and acquisitions).
The interest rate margins applicable to the Senior Secured Revolving Credit Facility are based on the Company’s total leverage ratio and range from 1.75% to 2.50% for LIBOR rate loans, subject to a 0.0% interest rate floor for the LIBOR component of LIBOR rate loans, and from 0.75% to 1.50% for base rate loans. As of June 30, 2017, the interest rate margins applicable to the Senior Secured Revolving Credit Facility were 2.25% for LIBOR rate loans and 1.25% for base rate loans. We are required to pay each non-defaulting lender a commitment fee of 0.35% in respect of any unused commitments under the Senior Secured Revolving Credit Facility, which fee is subject to adjustment based upon our total leverage ratio.
The Senior Secured Revolving Credit Facility was undrawn at June 30, 2017 and its predecessor senior secured revolving credit facility was undrawn at December 31, 2016. The Senior Secured Revolving Credit Facility and its predecessor senior secured revolving credit facility were undrawn during the six months ended June 30, 2017 and June 30, 2016.
44
Senior Notes
2021 Senior Secured Notes
On June 17, 2016, we issued $400.0 million aggregate principal amount of 2021 Senior Secured Notes.
The 2021 Senior Secured Notes mature on July 15, 2021 and were issued at par. The 2021 Senior Secured Notes are secured, subject to certain exceptions and permitted liens, by a first-priority security interest in substantially all of our and our subsidiary guarantors’ property and assets which constitutes collateral under our Senior Secured Credit Facilities. The 2021 Senior Secured Notes were offered in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).
At any time prior to July 15, 2018, we may redeem all or a part of the 2021 Senior Secured Notes at a redemption price equal to 100% of the principal amount of 2021 Senior Secured Notes redeemed plus the applicable premium (as defined in the indenture governing the 2021 Senior Secured Notes) as of, and accrued and unpaid interest, if any, to, the date of redemption, subject to the rights of holders of 2021 Senior Secured Notes on the relevant record date to receive interest due on the relevant interest payment date.
At any time (which may be more than once) before July 15, 2018, we can choose to redeem up to 40% of the outstanding 2021 Senior Secured Notes with proceeds from one or more equity offerings, as long as (i) we pay 104.750% of the face amount of the notes, plus accrued and unpaid interest; (ii) we redeem the notes within 90 days after completing the equity offering; and (iii) at least 60% of the aggregate principal amount of the notes issued remains outstanding afterwards. We may
also redeem, during any twelve-month period commencing from July 15, 2016 until July 15, 2018, up to 10% of the original principal amount of the notes at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the applicable redemption date.
On or after July 15, 2018, we may redeem the 2021 Senior Secured Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of the 2021 Senior Secured Notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable date of redemption, subject to the right of holders of record of 2021 Senior Secured Notes on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:
Year
|
|
Percentage
|
|
2018
|
|
|
102.375
|
|
2019
|
|
|
101.188
|
|
2020 and thereafter
|
|
|
100.000
|
|
2022 Senior Notes
On July 1, 2014, we issued $1.0 billion aggregate principal amount of 2022 Senior Notes. The 2022 Senior Notes mature on July 15, 2022 and were issued at par. The 2022 Senior Notes were offered in a private offering exempt from the registration requirements of the Securities Act.
On and after July 15, 2017, we may redeem the 2022 Senior Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the 2022 Senior Notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of 2022 Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:
Year
|
|
Percentage
|
|
2017
|
|
|
104.031
|
|
2018
|
|
|
102.688
|
|
2019
|
|
|
101.344
|
|
2020 and thereafter
|
|
|
100.000
|
|
45
Securitization Facility
Prior to July 31, 2017 under our Securitization Facility, trade receivables originated by certain of our domestic subsidiaries were sold or contributed to West Receivables Holdings LLC, which sold or contributed such trade receivables to West Receivables LLC, which sold undivided interests in the purchased or contributed trade receivables for cash to one or more financial institutions. The proceeds of the facility were available for general corporate purposes. The Securitization Facility provided a LIBOR spread on borrowings of 1.35% and for an unused commitment fee of 0.45% at any time the average daily borrowings during the month were less than 25% of the average daily available funding during such month and 0.25% at all other times.
West Receivables LLC and West Receivables Holdings LLC are consolidated in our unaudited condensed consolidated financial statements included elsewhere in this report. At June 30, 2017 the Securitization Facility was undrawn. At December 31, 2016, $34.0 million was drawn under the Securitization Facility. The highest outstanding balance during the six months ended June 30, 2017 was $34.0 million.
The Securitization Facility was terminated on July 31, 2017.
Debt Covenants
Senior Secured Credit Facilities and Senior Secured Revolving Credit Facility
—We are required to comply on a quarterly basis with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. Pursuant to the Credit Agreement, the total leverage ratio of consolidated total debt to Consolidated EBITDA (as defined in our Credit Agreement) may not exceed 5.75 to 1.0 at June 30, 2017, and the interest coverage ratio of Consolidated EBITDA to the sum of consolidated interest expense must be not less than 1.85 to 1.0. The total leverage ratio will become more restrictive over time (adjusted annually until the maximum leverage ratio reaches 5.5 to 1.0 as of December 31, 2017). Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at June 30, 2017. Our ratio of total debt to Consolidated EBITDA (as defined in our Credit Agreement) was 4.31x at June 30, 2017, based on a trailing twelve month covenant adjusted EBITDA of $685.9 million, and 4.45x at December 31, 2016, based on a trailing twelve month covenant adjusted EBITDA of $672.9 million. The Credit Agreement also contains various negative covenants, including limitations on indebtedness, liens, mergers and consolidations, asset sales, dividends and distributions (excluding dividends and distributions to other restricted subsidiaries) or repurchases of our capital stock, investments, loans and advances, capital expenditures, payment of other debt, transactions with affiliates and changes in our lines of business. Each of the negative covenants is subject to specified exceptions. The Company has sufficient capacity under applicable exceptions included in the indentures governing the 2021 Senior Secured Notes and the 2022 Senior Notes, respectively, to complete a dividend in excess of the Company’s net income for the six months ended June 30, 2017.
The Credit Agreement includes certain customary representations and warranties, affirmative covenants and events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, the invalidity of material provisions of the documentation with respect to the Senior Secured Credit Facilities, the failure of collateral under the security documents for the Senior Secured Credit Facilities, the failure of the Senior Secured Credit Facilities to be senior debt under the subordination provisions of certain subordinated debt we may have outstanding from time to time and a change of control of us. If an event of default occurs, the lenders under the Senior Secured Credit Facilities will be entitled to take certain actions, including the acceleration of all amounts due under the Senior Secured Credit Facilities and all actions permitted to be taken by a secured creditor. We believe that for the foreseeable future, the Senior Secured Credit Facilities and the Senior Secured Revolving Credit Facility offer us sufficient capacity for our indebtedness financing requirements and we do not anticipate that the limitations on incurring additional indebtedness included in the Credit Agreement will materially impair our financial condition or results of operations.
2021 Senior Secured Notes and 2022 Senior Notes
—The indentures governing the 2021 Senior Secured Notes and the 2022 Senior Notes, respectively, contain covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to: incur additional debt or issue certain preferred shares, pay dividends on or make distributions in respect of our capital stock or make other restricted payments (excluding dividends, distributions and restricted payments to other restricted subsidiaries), make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets, enter into certain transactions with our affiliates and designate our subsidiaries as unrestricted subsidiaries. Each of the negative covenants is subject to specified exceptions. We were in compliance with these financial covenants at June 30, 2017. The Company has sufficient capacity under applicable exceptions included in the indentures governing the 2021 Senior Secured Notes and the 2022 Senior Notes, respectively, to complete a dividend in excess of the Company’s net income for the six months ended June 30, 2017.
46
Our failure to comply with these debt covenants may result in an event of default which, if not cured or waived, could accelerate the maturity of our indebtedness. If
our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. If our cash flows and capital resources are insufficient to fund our debt service obli
gations and keep us in compliance with the covenants under our Credit Agreement or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance o
ur indebtedness including the notes. We cannot ensure that we would be able to take any of these actions, that these actions would be successful and would permit us to meet our scheduled debt service obligations or that these actions would be permitted und
er the terms of our existing or future debt agreements, including our Senior Secured Credit Facilities and the indentures that govern the 2021 Senior Secured Notes and the 2022 Senior Notes. The Credit Agreement and the indentures that govern the 2021 Seni
or Secured Notes and the 2022 Senior Notes restrict our ability to dispose of assets and use the proceeds from the disposition. As a result, we may not be able to consummate those dispositions or use the proceeds to meet our debt service or other obligatio
ns, and any proceeds that are available may not be adequate to meet any debt service or other obligations then due.
If we cannot make scheduled payments on our debt, we will be in default, and as a result:
|
•
|
our debt holders could declare all outstanding principal and interest to be due and payable;
|
|
•
|
the lenders under our Senior Secured Credit Facilities and the Senior Secured Revolving Credit Facility could terminate their commitments to lend us money and, together with the holders of our 2021 Senior Secured Notes, foreclose against the assets securing our borrowings; and
|
|
•
|
we could be forced into bankruptcy or liquidation.
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Contractual Obligations
We have contractual obligations that may affect our financial condition. However, based on management’s assessment of the underlying provisions and circumstances of our material contractual obligations, management believes there is no known trend, demand, commitment, event or uncertainty that is reasonably likely to occur which would have a material effect on our financial condition or results of operations.
The following table summarizes our contractual obligations, in thousands, at June 30, 2017:
|
|
Payment due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 - 3 years
|
|
|
4 - 5 years
|
|
|
After 5 years
|
|
Senior Secured A Term Loans due 2021
|
|
$
|
629,688
|
|
|
$
|
36,562
|
|
|
$
|
117,813
|
|
|
$
|
475,313
|
|
|
$
|
—
|
|
Senior Secured B Term Loans due 2021
|
|
|
257,405
|
|
|
|
2,594
|
|
|
|
5,187
|
|
|
|
249,624
|
|
|
|
—
|
|
4
3
/
4
% Senior Secured Notes due 2021
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
—
|
|
5
3
/
8
% Senior Notes due 2022
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000,000
|
|
Senior Secured B Term Loans due 2023
|
|
|
861,316
|
|
|
|
8,678
|
|
|
|
17,357
|
|
|
|
17,356
|
|
|
|
817,925
|
|
Interest payments on fixed rate debt
|
|
|
347,781
|
|
|
|
72,750
|
|
|
|
145,499
|
|
|
|
127,292
|
|
|
|
2,240
|
|
Estimated interest payments on variable rate debt (1)
|
|
|
353,622
|
|
|
|
68,563
|
|
|
|
138,393
|
|
|
|
107,064
|
|
|
|
39,602
|
|
Operating leases
|
|
|
122,128
|
|
|
|
24,486
|
|
|
|
37,430
|
|
|
|
20,140
|
|
|
|
40,072
|
|
Contractual minimums under telephony agreements
|
|
|
39,650
|
|
|
|
39,650
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase obligations (2)
|
|
|
101,886
|
|
|
|
87,846
|
|
|
|
13,473
|
|
|
|
567
|
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
4,113,476
|
|
|
$
|
341,129
|
|
|
$
|
475,152
|
|
|
$
|
1,397,356
|
|
|
$
|
1,899,839
|
|
(1)
|
Interest rate assumptions based on June 30, 2017 LIBOR U.S. dollar swap rate curves for the next five years. Includes agency fees, unused commitment fees and the receipt of $12.8 million of cash settlements from interest rate swap hedges of variable-rate debt.
|
(2)
|
Represents future obligations for capital and expense projects that are in progress or are committed.
|
The table above excludes amounts to be paid for taxes and long-term obligations under our Executive Retirement Savings Plan and the Deferred Compensation Plan. The table also excludes amounts to be paid for income tax contingencies because the timing thereof is highly uncertain. At June 30, 2017, we had accrued $28.9 million, including interest and penalties for uncertain tax positions.
47
Capital Expenditures
Our operations require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $53.2
million for the six months ended June 30, 2017 compared to $73.9 million for the six months ended June 30, 2016. We currently estimate our capital expenditures for the remainder of 2017 to be between $46.8 million and $76.8
million, primarily for capacity expansion, product enhancements, development of new products and services, upgrades at existing facilities and data center consolidations.
Off-Balance Sheet Arrangements
Performance obligations of several of our subsidiaries are supported by performance bonds and letters of credit. These obligations will expire at various dates through 2018 and are renewed as required. The outstanding commitment on these obligations at June 30, 2017 was $6.3 million.
Effects of Inflation
We do not believe that inflation has had a material effect on our financial position or results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the use of estimates and assumptions on the part of management. The estimates and assumptions used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require significant or complex judgment on the part of management. The accounting policies we consider critical are our accounting policies with respect to revenue recognition, allowance for doubtful accounts, goodwill and other intangible assets, income taxes, property and equipment, capitalization of internal costs and share-based compensation.
For additional discussion of these critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2016. There have not been any significant changes with respect to these policies during the six months ended June 30, 2017.