West Corporation
WEST CORP (Form: 10-Q, Received: 11/03/2016 13:16:11)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                      to                     

Commission File Number 001-35846

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

47-0777362

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

 

11808 Miracle Hills Drive, Omaha, Nebraska

68154

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (402) 963-1200

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

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

At October 28, 2016, 83,251,349 shares of the registrant’s common stock were outstanding.

 

 

 

 


INDEX

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Report of Independent Registered Public Accounting Firm

3

 

Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2016 and 2015

4

 

Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and 2015

5

 

Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

6

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and 2015

7

 

Condensed Consolidated Statements of Stockholders’ Deficit - Nine Months Ended September 30,
2016 and 2015

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

47

PART II. OTHER INFORMATION

48

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

SIGNATURES

50

EXHIBIT INDEX

51

 

In this report, “West,” the “Company,” “we,” “us” and “our” refers to West Corporation and subsidiaries.

 

 

 

2


PART I. FINANCI AL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

West Corporation and subsidiaries

Omaha, Nebraska

 

We have reviewed the accompanying condensed consolidated balance sheet of West Corporation and subsidiaries (the “Company”) as of September 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015 and of cash flows and stockholders’ deficit for the nine-month periods ended September 30, 2016 and 2015. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Corporation and subsidiaries as of December 31, 2015, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for the year then ended (not presented herein); and in our report dated February 18, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche LLP

 

Omaha, Nebraska

November 3, 2016

 

 

3


WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

REVENUE

 

$

571,407

 

 

$

574,448

 

 

$

1,724,583

 

 

$

1,711,829

 

COST OF SERVICES

 

 

247,817

 

 

 

246,337

 

 

 

738,255

 

 

 

731,304

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

214,091

 

 

 

203,757

 

 

 

644,804

 

 

 

629,045

 

OPERATING INCOME

 

 

109,499

 

 

 

124,354

 

 

 

341,524

 

 

 

351,480

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

(36,794

)

 

 

(38,382

)

 

 

(112,989

)

 

 

(115,657

)

Accelerated amortization of deferred financing costs

 

 

(1,234

)

 

 

 

 

 

(36,469

)

 

 

 

Other, net

 

 

445

 

 

 

(6,322

)

 

 

619

 

 

 

(2,583

)

Other expense

 

 

(37,583

)

 

 

(44,704

)

 

 

(148,839

)

 

 

(118,240

)

INCOME FROM CONTINUING OPERATIONS BEFORE

   INCOME TAX EXPENSE

 

 

71,916

 

 

 

79,650

 

 

 

192,685

 

 

 

233,240

 

INCOME TAX EXPENSE ATTRIBUTED TO CONTINUING

   OPERATIONS

 

 

24,381

 

 

 

28,931

 

 

 

67,616

 

 

 

84,664

 

INCOME FROM CONTINUING OPERATIONS

 

 

47,535

 

 

 

50,719

 

 

 

125,069

 

 

 

148,576

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS,

   NET OF INCOME TAXES

 

 

 

 

 

(1,235

)

 

 

 

 

 

30,989

 

NET INCOME

 

$

47,535

 

 

$

49,484

 

 

$

125,069

 

 

$

179,565

 

EARNINGS PER COMMON SHARE—BASIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.57

 

 

$

0.61

 

 

$

1.51

 

 

$

1.78

 

Discontinued Operations

 

 

 

 

 

(0.01

)

 

 

 

 

 

0.37

 

Total Earnings Per Common Share—Basic

 

$

0.57

 

 

$

0.60

 

 

$

1.51

 

 

$

2.15

 

EARNINGS PER COMMON SHARE—DILUTED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.56

 

 

$

0.60

 

 

$

1.48

 

 

$

1.74

 

Discontinued Operations

 

 

 

 

 

(0.01

)

 

 

 

 

 

0.36

 

Total Earnings Per Common Share—Diluted

 

$

0.56

 

 

$

0.58

 

 

$

1.48

 

 

$

2.10

 

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Common

 

 

82,870

 

 

 

82,931

 

 

 

82,873

 

 

 

83,479

 

Diluted Common

 

 

84,607

 

 

 

84,834

 

 

 

84,486

 

 

 

85,554

 

DIVIDENDS DECLARED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.225

 

 

$

0.225

 

 

$

0.675

 

 

$

0.675

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

 

4


WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

47,535

 

 

$

49,484

 

 

$

125,069

 

 

$

179,565

 

Foreign currency translation adjustments, net of tax

   of $586, $4,404, $3,596 and $16,666

 

 

(1,050

)

 

 

(7,718

)

 

 

(6,448

)

 

 

(29,436

)

Unrealized loss on interest rate derivatives, net of tax of $412, $0,

   $412 and $0

 

 

(671

)

 

 

 

 

 

(671

)

 

 

 

Comprehensive income

 

$

45,814

 

 

$

41,766

 

 

$

117,950

 

 

$

150,129

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

 

5


WEST CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

191,317

 

 

$

182,338

 

Trust and restricted cash

 

 

16,398

 

 

 

19,829

 

Accounts receivable, net of allowance of $7,031 and $7,270

 

 

388,165

 

 

 

373,087

 

Income taxes receivable

 

 

 

 

 

19,332

 

Prepaid assets

 

 

45,976

 

 

 

43,093

 

Deferred expenses

 

 

49,515

 

 

 

65,781

 

Other current assets

 

 

29,800

 

 

 

22,040

 

Assets held for sale

 

 

 

 

 

17,672

 

Total current assets

 

 

721,171

 

 

 

743,172

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

 

Property and equipment

 

 

1,114,214

 

 

 

1,053,678

 

Accumulated depreciation and amortization

 

 

(780,039

)

 

 

(718,834

)

Total property and equipment, net

 

 

334,175

 

 

 

334,844

 

GOODWILL

 

 

1,920,742

 

 

 

1,915,690

 

INTANGIBLE ASSETS, net of accumulated amortization of $635,292 and $583,623

 

 

325,262

 

 

 

370,021

 

OTHER ASSETS

 

 

175,990

 

 

 

191,490

 

TOTAL ASSETS

 

$

3,477,340

 

 

$

3,555,217

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

71,682

 

 

$

92,935

 

Deferred revenue

 

 

165,147

 

 

 

161,828

 

Accrued expenses

 

 

220,202

 

 

 

219,234

 

Current maturities of long-term debt

 

 

35,675

 

 

 

24,375

 

Total current liabilities

 

 

492,706

 

 

 

498,372

 

LONG-TERM OBLIGATIONS, less current maturities

 

 

3,203,575

 

 

 

3,318,688

 

DEFERRED INCOME TAXES

 

 

97,335

 

 

 

104,222

 

OTHER LONG-TERM LIABILITIES

 

 

174,675

 

 

 

186,073

 

Total liabilities

 

 

3,968,291

 

 

 

4,107,355

 

COMMITMENTS AND CONTINGENCIES (Note 13)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Common Stock $0.001 par value, 475,000 shares authorized, 86,249 and

   85,459 shares issued and 83,157 and 83,367 shares outstanding

 

 

86

 

 

 

85

 

Additional paid-in capital

 

 

2,215,695

 

 

 

2,193,193

 

Retained deficit

 

 

(2,539,651

)

 

 

(2,607,415

)

Accumulated other comprehensive loss

 

 

(79,855

)

 

 

(72,736

)

Treasury stock at cost (3,092 and 2,092 shares)

 

 

(87,226

)

 

 

(65,265

)

Total stockholders’ deficit

 

 

(490,951

)

 

 

(552,138

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

3,477,340

 

 

$

3,555,217

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

 

6


WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

125,069

 

 

$

179,565

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

(30,989

)

Depreciation

 

 

85,969

 

 

 

81,931

 

Amortization

 

 

59,768

 

 

 

58,984

 

Provision for share-based compensation

 

 

19,929

 

 

 

16,785

 

Deferred income tax benefit

 

 

(15,383

)

 

 

(5,957

)

Amortization of deferred financing costs

 

 

46,508

 

 

 

15,017

 

Increase in acquisition contingent consideration

 

 

854

 

 

 

 

(Gain) loss on sale of property and equipment

 

 

(12,630

)

 

 

223

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,083

)

 

 

(29,029

)

Other assets

 

 

15,815

 

 

 

(18,867

)

Accounts payable

 

 

(19,070

)

 

 

13,269

 

Accrued wages and benefits

 

 

(11,788

)

 

 

3,204

 

Accrued interest

 

 

(18,242

)

 

 

(13,689

)

Other liabilities and income tax payable

 

 

32,886

 

 

 

12,774

 

Net cash flows from continuing operating activities

 

 

301,602

 

 

 

283,221

 

Net cash flows from discontinued operating activities

 

 

 

 

 

(8,197

)

Total net cash flows from operating activities

 

 

301,602

 

 

 

275,024

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Business acquisitions

 

 

(9,745

)

 

 

(17,296

)

Purchases of property and equipment

 

 

(99,303

)

 

 

(96,182

)

Proceeds from the sale of property and equipment

 

 

38,518

 

 

 

 

Other

 

 

3,463

 

 

 

(304

)

Net cash flows used in continuing investing activities

 

 

(67,067

)

 

 

(113,782

)

Net cash flows from discontinued investing activities

 

 

 

 

 

275,815

 

Total net cash flows used in investing activities

 

 

(67,067

)

 

 

162,033

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal repayments on long-term obligations

 

 

(2,378,198

)

 

 

(73,661

)

Proceeds from term loan facilities

 

 

1,780,000

 

 

 

 

Proceeds from issuance of notes

 

 

400,000

 

 

 

 

Proceeds from revolving credit facilities

 

 

85,000

 

 

 

139,000

 

Payments on revolving credit facilities

 

 

(10,000

)

 

 

(324,000

)

Payment of deferred financing and other debt-related costs

 

 

(27,122

)

 

 

(234

)

Proceeds from stock options and ESPP shares including excess tax benefits

 

 

4,724

 

 

 

10,491

 

Dividends paid

 

 

(55,978

)

 

 

(56,429

)

Repurchase of common stock

 

 

(21,961

)

 

 

(59,957

)

Net cash flows used in continuing financing activities

 

 

(223,535

)

 

 

(364,790

)

Net cash flows from discontinued financing activities

 

 

 

 

 

 

Total net cash flows used in financing activities

 

 

(223,535

)

 

 

(364,790

)

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

 

(2,021

)

 

 

(4,790

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

8,979

 

 

 

67,477

 

CASH AND CASH EQUIVALENTS, Beginning of period

 

 

182,338

 

 

 

115,061

 

CASH AND CASH EQUIVALENTS, End of period

 

$

191,317

 

 

$

182,538

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

 

7


WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

Stockholders’

Deficit

 

BALANCE, January 1, 2016

 

 

83,366,888

 

 

$

85

 

 

$

2,193,193

 

 

$

(2,607,415

)

 

$

(72,736

)

 

$

(65,265

)

 

$

(552,138

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125,069

 

 

 

 

 

 

 

 

 

 

 

125,069

 

Dividends declared (cash dividend of

   $0.675 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57,305

)

 

 

 

 

 

 

 

 

 

 

(57,305

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,448

)

 

 

 

 

 

 

(6,448

)

Unrealized loss on interest rate

   derivatives, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(671

)

 

 

 

 

 

 

(671

)

Purchase of stock at cost

 

 

(1,000,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,961

)

 

 

(21,961

)

Executive Deferred Compensation Plan

   activity

 

 

47,352

 

 

 

 

 

 

 

1,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,467

 

Shares issued from the Employee Stock

   Purchase Plan

 

 

294,951

 

 

 

1

 

 

 

5,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,342

 

Stock options exercised including related

   tax benefits

 

 

59,824

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95

 

Issuance of shares (vesting of restricted

   shares and Director awards)

 

 

388,127

 

 

 

 

 

 

 

(1,924

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,924

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

17,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,523

 

BALANCE, September 30, 2016

 

 

83,157,142

 

 

$

86

 

 

$

2,215,695

 

 

$

(2,539,651

)

 

$

(79,855

)

 

$

(87,226

)

 

$

(490,951

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, January 1, 2015

 

 

84,179,806

 

 

$

84

 

 

$

2,155,864

 

 

$

(2,772,775

)

 

$

(37,506

)

 

$

(5,308

)

 

$

(659,641

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179,565

 

 

 

 

 

 

 

 

 

 

 

179,565

 

Dividends declared (cash dividend of

   $0.675 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57,369

)

 

 

 

 

 

 

 

 

 

 

(57,369

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,436

)

 

 

 

 

 

 

(29,436

)

Purchase of stock at cost

 

 

(2,000,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,957

)

 

 

(59,957

)

Executive Deferred Compensation Plan

   activity

 

 

70,049

 

 

 

 

 

 

 

4,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,472

 

Shares issued from the Employee Stock

   Purchase Plan

 

 

208,559

 

 

 

 

 

 

 

5,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,707

 

Stock options exercised including related

   tax benefits

 

 

408,529

 

 

1

 

 

 

8,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,335

 

Issuance of shares (vesting of restricted

   shares and Director awards)

 

 

279,102

 

 

 

 

 

 

 

(2,742

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,742

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

15,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,562

 

BALANCE, September 30, 2015

 

 

83,146,045

 

 

$

85

 

 

$

2,187,197

 

 

$

(2,650,579

)

 

$

(66,942

)

 

$

(65,265

)

 

$

(595,504

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

 

 

8


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.

ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Business Description: West Corporation (the “Company” or “West”) is a global provider of technology-enabled communication services. “We,” “us” and “our” also refer to West and its consolidated subsidiaries, as applicable. We offer a broad range of communication and network infrastructure solutions that help manage or support essential communications. These solutions 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, including telecommunications, retail, financial services, public safety, education, technology and healthcare. We have sales and/or operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.

Our Services

Unified Communications Services. We provide our clients with a range of integrated unified communications services. We offer our clients a complete cloud-based unified communications solution which consists of enterprise voice, conferencing and collaboration, network management, unified messaging and presence, contact center and client application integration. We combine reliable technologies with experience and flexibility to provide solutions that are easy to use and scalable for every client’s specific needs. Our products and services can improve many aspects of business by enabling personalized engagement, meetings anywhere, enhanced productivity and immersive communication experiences.

Telecom Services. We provide local and national tandem switching services that facilitate an efficient exchange of network traffic between originating and terminating networks throughout the U.S. We connect people and unite networks by delivering interconnection services for all types of providers, including wireless, wireline, cable and voice over internet protocol (“VoIP”). We operate a next-generation technology-agnostic national network providing a cost effective means for time-division multiplexing to internet protocol (“IP”) conversion for IP networks that require access to the public switched telephone network. We provide carrier-grade interconnections that reduce cost and merge traditional telecom, mobile and IP technologies onto a common, efficient backbone. Telecom Services also provides much of the telecommunications network infrastructure that supports our conferencing and collaboration business.

Safety Services. We provide 9-1-1 call routing, call location creation and delivery, and call delivery and accuracy compliance tools to the majority of U.S.-based telecommunications service providers. We provide technology solutions for wireline and wireless carriers; satellite, telematics and cable operators; VoIP providers; alarm/security companies; as well as public safety, government agencies and enterprises. West services the public and personal safety ecosystem with networks and an understanding of safety needs. We continue to innovate and develop next-generation industry solutions that match new technologies. We connect people to first responders—firefighters, law enforcement, ambulance services, and the telecommunicators answering calls in public safety answering points. Our seamless and fault tolerant infrastructure along with our data management experience and expertise are the underpinning for individuals’ requests for assistance that require the ability to be located, and have calls routed and delivered to the correct public safety agency.

Interactive Services. We design, integrate, deliver, manage and optimize applications, services, platforms and networks that aim to create a better customer experience, strengthen customer engagement and drive efficiencies for our clients. We specialize in cloud-based communication solutions that drive a smart, personalized and convenient customer experience, including interactive voice response (“IVR”) self-service, proactive notifications and mobility, cloud contact center and comprehensive professional services. Our technology uses an omni-channel approach that brings together voice, text, email, push notification, fax, video, web, social media, hosted contact center and mobile to create a connected customer experience across channels. Our high-capacity and high-availability platform can be deployed in a number of ways and integrated with other inbound and outbound communication channels. In most cases, our technology also directly interfaces with our clients’ internal systems, including customer relationship management, private branch exchange and enterprise reporting platforms.

9


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Specialized Agent Services. We provide our clients a combination of highly skilled subject matter experts with proven a nalytics and technology to provide solutions for the fast-growing healthcare market. We believe we are the leading provider of healthcare advocacy products and services to employees of large organizations. We also help health insurance payers, third-party administrators and self-insured employers improve cash flow and reduce healthcare costs by identifying and recovering overpaid and third-party liability claims. Additionally, we offer business-to-business sales across multiple vertical markets with a focus on increasing our clients’ market share and improving customer relationships.

Our five operating segments (Unified Communications Services, Telecom Services, Safety Services, Interactive Services and Specialized Agent Services) are aggregated into four reportable segments as follows:

 

Unified Communications Services, which includes conferencing and collaboration services, unified communications as a service (“UCaaS”) solutions and telecom services;

 

Safety Services, including 9-1-1 network services, 9-1-1 telephony systems and services, 9-1-1 solutions for enterprises and database management;

 

Interactive Services, including proactive notifications and mobility, IVR self-service, cloud contact center and professional services; and

 

Specialized Agent Services, which includes healthcare advocacy services, cost management services and revenue generation services.

Discontinued Operations —On March 3, 2015, we divested several of our agent-based businesses, including our consumer facing customer sales and lifecycle management, account services and receivables management businesses, for $275.0 million in cash. We completed the divestiture pursuant to a purchase agreement executed January 7, 2015 and in accordance with a plan approved by our Board of Directors on December 30, 2014.

Basis of Consolidation —The unaudited condensed consolidated financial statements include the accounts of West and its wholly-owned subsidiaries and reflect all adjustments (all of which are normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2015. All intercompany balances and transactions have been eliminated in the consolidated financial statements. Our results for the three and nine months ended September 30, 2016 are not necessarily indicative of what our results will be for other interim periods or for the full fiscal year.

Use of Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition —Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable and collectability is reasonably assured. Amounts billed in advance of providing service are deferred and recorded as deferred revenue or other long-term liabilities on the balance sheet until service has been provided.

Dividend —We funded the dividends paid in 2015 and the first nine months of 2016 with cash generated by our operations and we anticipate funding future dividends with cash generated by our operations. The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors. On each of March 3, 2016, May 26, 2016 and September 1, 2016, we paid a $0.225 per common share quarterly dividend. The total dividend paid was approximately $18.8 million, $18.6 million and $18.6 million to stockholders of record as of the close of business on February 22, 2016, May 16, 2016 and August 22, 2016, respectively. On November 1, 2016, we announced a $0.225 per common share quarterly dividend. The dividend is payable November 23, 2016 to stockholders of record as of the close of business on November 14, 2016.

10


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Share Repurchase —Under a share repurchase program approved by the Company’s Board of Directors during the first quarter of 2016 authorizing the repurchase of up to an aggregate of $75 million of outstanding common stock, the Company purchased 1,000,000 shares of common stock through the open market during the firs t nine months of 2016 for an aggregate purchase price of approximately $22.0 million, which was funded with cash on hand.

Assets Held for Sale— On June 21, 2016, we completed the sale of land, buildings and improvements which were previously classified as held for sale and primarily used by the agent-based businesses we divested in 2015.  Proceeds from the sale were $38.8 million, excluding related expenses. In connection with this sale, we realized a pre-tax gain of approximately $19.0 million.  We also entered into a 12-year leaseback agreement for one of the buildings.  This lease is classified as an operating lease and the related $6.1 million gain, included in the $19.0 million realized gain, is being deferred and will be recognized over the lease term.

Recently Implemented Accounting Pronouncements —In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt instead of being classified as a deferred charge, as previously required. This ASU became effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, and interim periods within those annual periods. We adopted this guidance as of January 1, 2016, and as a result have recast the December 31, 2015 consolidated balance sheet to conform to the current period presentation. The adoption of this standard reduced previously presented other assets and long-term debt by $57.1 million each, based upon the balance of unamortized debt issuance costs relating to our senior secured term loan facilities and senior notes recorded as of December 31, 2015.

In November 2015, the FASB issued ASU 2015-017, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes the presentation of deferred income taxes in the balance sheet. Under the new guidance, deferred tax assets and liabilities will be classified as non-current in the balance sheet. The guidance is effective for annual periods beginning after December 15, 2016. The new guidance allows for prospective or retrospective application and early adoption is permitted. We adopted this guidance as of April 1, 2016, and elected retrospective application recasting the December 31, 2015 consolidated balance sheet to conform to the current period presentation. The adoption of this standard reduced previously presented accrued expenses and increased deferred income taxes by $1.7 million each, as of December 31, 2015.

Recent Accounting Pronouncements —In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) .  The amendments in this update will require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented at the net amount expected to be collected. This amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018.  Adoption of this update is required through a cumulative-effect adjustment to retained deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of assessing the impact of this standard on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718) . The amendments in this update will simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This amendment is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of assessing the impact of this standard on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented.  The Company is in the process of assessing the impact of this standard on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The new standard will become effective for the Company beginning with the first quarter of 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of assessing the impact and adoption transition options of this standard on its financial statements.

11


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

2.

DISCONTINUED OPERATIONS

On March 3, 2015, we divested several of our agent-based businesses for $275.0 million in cash. The divestiture resulted in a 2015 gain of $48.2 million on an after-tax basis which was included within income from discontinued operations. The $48.2 million gain included a $21.6 million tax benefit in 2015 due to the deferred tax benefit associated with excess outside basis over financial reporting basis.

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2015:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Amounts in thousands)

 

September 30, 2015

 

 

September 30, 2015

 

Revenue

 

$

 

 

$

102,251

 

Operating income

 

 

 

 

 

3,851

 

(Loss) gain on disposal

 

 

(1,900

)

 

 

46,656

 

(Loss) income before income tax expense

 

 

(1,900

)

 

 

50,334

 

Income tax (benefit) expense

 

 

(665

)

 

 

19,345

 

(Loss) income from discontinued operations

 

$

(1,235

)

 

$

30,989

 

 

There has been no income or loss from discontinued operations during the first three quarters of 2016.

We have agreed to indemnify the buyer, up to the full purchase price, with respect to the equity interests of the companies we sold, title to the equity and assets sold and the authority of the Company to sell the equity and assets. The Company has also agreed to indemnify the buyer for breaches of other representations and warranties in the purchase agreement for up to $13.75 million in losses.

 

 

3.

ACQUISITIONS

Synrevoice

On March 14, 2016, we completed the acquisition of substantially all of the assets of Synrevoice Technologies, Inc. (“Synrevoice”). Synrevoice, based in Markham, Ontario, is a provider of messaging and notification services to the K-12 education and commercial markets in North America. The purchase price was approximately $9.3 million and was funded with cash on hand. This business is included in the Interactive Services reportable segment.

In the preliminary purchase price allocation, approximately $4.9 million was allocated to goodwill, which is partially deductible for income tax purposes, and $6.5 million was allocated to other intangible assets. The primary factors that contributed to a purchase price resulting in the recognition of goodwill for the acquisition of Synrevoice were the expansion of our interactive services further into the education vertical market and anticipated synergies which are expected to result in a more efficient and faster growing K-12 business in North America.

ClientTell

On November 2, 2015, we completed the acquisition of ClientTell, Inc., and ClientTell Labs, LLC (collectively “ClientTell”), which provide automated notifications and lab reporting services in the healthcare industry. The purchase price was approximately $38.4 million in cash, plus assumed liabilities, and was funded with cash on hand. Up to an additional $10.5 million in cash may be paid based on achievement of certain financial objectives during the five years ending December 31, 2020. The fair value of this contingent consideration arrangement was $5.4 million as of the date of acquisition and $5.3 million as of September 30, 2016. Pursuant to this arrangement, $1.2 million of payments were made during the nine months ended September 30, 2016.

Approximately $15.0 million of the purchase price was allocated to goodwill and $26.3 million to other intangible assets. The goodwill is deductible for income tax purposes. The primary factors that contributed to a purchase price resulting in the recognition of goodwill for the acquisition of ClientTell were the expansion of our interactive services further into the healthcare vertical market,

12


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

anticipated synergies and other intangibles that do not qualify for separate recognition. This business has been integrated into the Interactive Services reportable segment.

Magnetic North

On October 31, 2015, we completed the acquisition of Magnetic North Software Limited (“Magnetic North”) for approximately $39.2 million in cash net of cash acquired, plus assumed liabilities, which was funded with cash on hand. Magnetic North is a U.K.-based provider of inbound/outbound/blended, multi-channel customer engagement technology solutions with multi-media routing, advanced analytics and compliance functionality and integrated, hosted voice and unified communications platforms to customers throughout Europe, the Middle East and Africa (“EMEA”) and the Americas.

In the preliminary purchase price allocation, approximately $24.8 million was allocated to goodwill and $16.4 million to other intangible assets. The goodwill is not deductible for income tax purposes. The primary factors that contributed to a purchase price resulting in the recognition of goodwill for the acquisition of Magnetic North were its portfolio of complementary customer contact center and unified communications solutions, anticipated synergies and other intangibles that do not qualify for separate recognition. This business has been integrated into the Unified Communications Services reportable segment.

SharpSchool

Effective June 1, 2015, we completed the acquisition of substantially all of the assets of Intrafinity, Inc., doing business as SharpSchool (“SharpSchool”), a leading provider of website and content management system software-as-a-service solutions for the K-12 education market. The purchase price was approximately $17.2 million and was funded with cash on hand.

In the purchase price allocation, goodwill of $8.3 million, partially deductible for tax purposes under Canadian tax rules governing asset acquisitions, and finite-lived intangible assets of $9.1 million were recorded. The primary factors that contributed to a purchase price resulting in the recognition of goodwill for the acquisition of SharpSchool were the expansion of our interactive services further into the education vertical market and anticipated synergies which are expected to result in a more efficient and faster growing K-12 business for West. SharpSchool has been integrated into the Interactive Services reportable segment.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the respective acquisition dates for Synrevoice and Magnetic North and the final fair value of assets acquired and liabilities assumed for ClientTell and SharpSchool.

 

(Amounts in thousands)

 

Synrevoice

 

 

ClientTell

 

 

Magnetic North

 

 

SharpSchool

 

Working Capital

 

$

(2,118

)

 

$

501

 

 

$

402

 

 

$

(1,042

)

Property and equipment

 

 

21

 

 

 

429

 

 

 

574

 

 

 

782

 

Other assets, net

 

 

 

 

 

2

 

 

 

 

 

 

77

 

Intangible assets

 

 

6,455

 

 

 

26,300

 

 

 

16,361

 

 

 

9,092

 

Goodwill

 

 

4,893

 

 

 

15,004

 

 

 

24,836

 

 

 

8,254

 

Total assets acquired

 

 

9,251

 

 

 

42,236

 

 

 

42,173

 

 

 

17,163

 

Non-current deferred taxes