West Corporation
WEST CORP (Form: 10-Q, Received: 05/10/2017 14:19:50)

 

 

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 March 31, 2017

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

At May 3, 2017, 83,563,032 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 Statement of Income – Three Months Ended March 31, 2017 and 2016

4

 

Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2017 and 2016

5

 

Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

6

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2017 and 2016

7

 

Condensed Consolidated Statement of Stockholders' Deficit – Three Months Ended March 31, 2017 and 2016

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

PART II. OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

SIGNATURES

44

EXHIBIT INDEX

45

 

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 March 31, 2017, and the related condensed consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for the three-month periods ended March 31, 2017 and 2016. 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, 2016, 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 16, 2017, 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, 2016 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

May 10, 2017

 

 

3


 

WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

REVENUE

 

$

572,542

 

 

$

570,779

 

COST OF SERVICES

 

 

242,442

 

 

 

241,012

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

221,877

 

 

 

220,843

 

OPERATING INCOME

 

 

108,223

 

 

 

108,924

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

Interest expense, net of interest income of $28 and $269

 

 

(35,216

)

 

 

(38,483

)

Other, net

 

 

2,670

 

 

 

(1,040

)

Other expense

 

 

(32,546

)

 

 

(39,523

)

INCOME BEFORE INCOME TAX EXPENSE

 

 

75,677

 

 

 

69,401

 

INCOME TAX EXPENSE

 

 

21,581

 

 

 

24,846

 

NET INCOME

 

$

54,096

 

 

$

44,555

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE—BASIC

 

$

0.65

 

 

$

0.54

 

EARNINGS PER COMMON SHARE—DILUTED

 

$

0.63

 

 

$

0.53

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic Common

 

 

83,361

 

 

 

83,149

 

Diluted Common

 

 

85,208

 

 

 

84,615

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED:

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.225

 

 

$

0.225

 

 

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

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net income

 

$

54,096

 

 

$

44,555

 

Foreign currency translation adjustments, net of tax

   of ($4,227) and ($1,769)

 

 

6,898

 

 

 

3,173

 

Unrealized gain on interest rate derivatives, net of tax of ($282) and $0

 

 

460

 

 

 

 

Comprehensive income

 

$

61,454

 

 

$

47,728

 

 

 

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)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

172,626

 

 

$

183,059

 

Trust and restricted cash

 

 

20,824

 

 

 

20,141

 

Accounts receivable, net of allowance of $7,029 and $6,738

 

 

395,912

 

 

 

369,068

 

Income taxes receivable

 

 

 

 

 

4,366

 

Prepaid assets

 

 

55,430

 

 

 

40,886

 

Deferred expenses

 

 

46,548

 

 

 

44,886

 

Other current assets

 

 

29,400

 

 

 

31,889

 

Total current assets

 

 

720,740

 

 

 

694,295

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

 

Property and equipment

 

 

1,109,300

 

 

 

1,088,205

 

Accumulated depreciation and amortization

 

 

(777,068

)

 

 

(755,754

)

Total property and equipment, net

 

 

332,232

 

 

 

332,451

 

GOODWILL

 

 

1,920,195

 

 

 

1,916,192

 

INTANGIBLE ASSETS, net of accumulated amortization of $666,169 and $651,180

 

 

302,003

 

 

 

315,474

 

OTHER ASSETS

 

 

180,826

 

 

 

182,426

 

TOTAL ASSETS

 

$

3,455,996

 

 

$

3,440,838

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

79,547

 

 

$

78,881

 

Deferred revenue

 

 

142,153

 

 

 

151,148

 

Accrued expenses

 

 

211,852

 

 

 

224,871

 

Current maturities of long-term debt

 

 

43,772

 

 

 

39,709

 

Total current liabilities

 

 

477,324

 

 

 

494,609

 

LONG-TERM OBLIGATIONS, less current maturities

 

 

3,112,016

 

 

 

3,129,963

 

DEFERRED INCOME TAXES

 

 

100,457

 

 

 

88,864

 

OTHER LONG-TERM LIABILITIES

 

 

156,834

 

 

 

169,251

 

Total liabilities

 

 

3,846,631

 

 

 

3,882,687

 

COMMITMENTS AND CONTINGENCIES (Note 12)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Common Stock $0.001 par value, 475,000 shares authorized, 86,523 and

   86,357 shares issued and 83,431 and 83,265 shares outstanding

 

 

87

 

 

 

86

 

Additional paid-in capital

 

 

2,232,275

 

 

 

2,223,379

 

Retained deficit

 

 

(2,455,496

)

 

 

(2,490,455

)

Accumulated other comprehensive loss

 

 

(80,275

)

 

 

(87,633

)

Treasury stock at cost (3,092 shares)

 

 

(87,226

)

 

 

(87,226

)

Total stockholders’ deficit

 

 

(390,635

)

 

 

(441,849

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

3,455,996

 

 

$

3,440,838

 

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

54,096

 

 

$

44,555

 

Depreciation

 

 

28,680

 

 

 

28,801

 

Amortization

 

 

17,753

 

 

 

19,694

 

Provision for share-based compensation

 

 

5,425

 

 

 

7,666

 

Deferred income tax benefit

 

 

9,898

 

 

 

2,377

 

Amortization of deferred financing costs

 

 

1,888

 

 

 

4,909

 

Increase in acquisition contingent consideration

 

 

173

 

 

 

260

 

Loss on sale of property and equipment

 

 

302

 

 

 

174

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(28,586

)

 

 

(15,737

)

Other assets

 

 

(13,769

)

 

 

(16,120

)

Accounts payable

 

 

1,252

 

 

 

(542

)

Accrued wages and benefits

 

 

(16,205

)

 

 

(7,772

)

Accrued interest

 

 

(19,951

)

 

 

(15,300

)

Other liabilities and income tax payable

 

 

11,817

 

 

 

7,087

 

Net cash flows provided by operating activities

 

 

52,773

 

 

 

60,052

 

CASH FLOWS USED IN INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Business acquisitions

 

 

(3,974

)

 

 

(9,295

)

Purchases of property and equipment

 

 

(26,672

)

 

 

(36,357

)

Other

 

 

(660

)

 

 

6,192

 

Net cash flows used in investing activities

 

 

(31,306

)

 

 

(39,460

)

CASH FLOWS USED IN FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal repayments on long-term obligations

 

 

(15,695

)

 

 

(30,855

)

Proceeds from revolving credit facilities

 

 

34,000

 

 

 

10,000

 

Payments on revolving credit facilities

 

 

(34,000

)

 

 

(10,000

)

Payment of deferred financing and other debt-related costs

 

 

(79

)

 

 

(181

)

Proceeds from stock options and ESPP shares

 

 

147

 

 

 

1,504

 

Dividends paid

 

 

(18,754

)

 

 

(18,752

)

Repurchase of common stock

 

 

 

 

 

(21,961

)

Net cash flows used in financing activities

 

 

(34,381

)

 

 

(70,245

)

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

 

2,481

 

 

 

610

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(10,433

)

 

 

(49,043

)

CASH AND CASH EQUIVALENTS, Beginning of period

 

 

183,059

 

 

 

182,338

 

CASH AND CASH EQUIVALENTS, End of period

 

$

172,626

 

 

$

133,295

 

 

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

 

 

7


 

WEST CORPORATION

CONDENSED CONSOLIDATED STATEM EN TS 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, 2017

 

 

83,264,912

 

 

$

86

 

 

$

2,223,379

 

 

$

(2,490,455

)

 

$

(87,633

)

 

$

(87,226

)

 

$

(441,849

)

Cumulative effect of adoption of

   ASC 2016-09

 

 

 

 

 

 

 

 

 

 

103

 

 

 

(103

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,096

 

 

 

 

 

 

 

 

 

 

 

54,096

 

Dividends declared (cash dividend of

   $0.225 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,034

)

 

 

 

 

 

 

 

 

 

 

(19,034

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,898

 

 

 

 

 

 

 

6,898

 

Unrealized gain on interest rate

   derivatives, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

460

 

 

 

 

 

 

 

460

 

Executive Deferred Compensation Plan

   activity

 

 

28,841

 

 

 

 

 

 

 

2,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,479

 

Shares issued from the Employee Stock

   Purchase Plan

 

 

60,709

 

 

 

1

 

 

 

1,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,279

 

Stock options exercised including related

   tax benefits

 

 

3,800

 

 

 

 

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86

 

Issuance of shares (vesting of restricted

   shares and Director awards)

 

 

72,580

 

 

 

 

 

 

 

(82

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

5,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,032

 

BALANCE, March 31, 2017

 

 

83,430,842

 

 

$

87

 

 

$

2,232,275

 

 

$

(2,455,496

)

 

$

(80,275

)

 

$

(87,226

)

 

$

(390,635

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, January 1, 2016

 

 

83,366,888

 

 

$

85

 

 

$

2,193,193

 

 

$

(2,607,415

)

 

$

(72,736

)

 

$

(65,265

)

 

$

(552,138

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,555

 

 

 

 

 

 

 

 

 

 

 

44,555

 

Dividends declared (cash dividend of

   $0.225 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,123

)

 

 

 

 

 

 

 

 

 

 

(19,123

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,173

 

 

 

 

 

 

 

3,173

 

Purchase of stock at cost

 

 

(1,000,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,961

)

 

 

(21,961

)

Executive Deferred Compensation Plan

   activity

 

 

12,964

 

 

 

 

 

 

 

860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

860

 

Shares issued from the Employee Stock

   Purchase Plan

 

 

72,026

 

 

1

 

 

 

1,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,321

 

Stock options exercised including related

   tax benefits

 

 

7,250

 

 

 

 

 

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

357

 

Issuance of shares (vesting of restricted

   shares and Director awards)

 

 

19,430

 

 

 

 

 

 

 

(63

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

6,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,805

 

BALANCE, March 31, 2016

 

 

82,478,558

 

 

$

86

 

 

$

2,202,472

 

 

$

(2,581,983

)

 

$

(69,563

)

 

$

(87,226

)

 

$

(536,214

)

 

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 communication and network infrastructure services. “We,” “us” and “our” also refer to West 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.

Our Services

Unified Communications Services. We provide our clients with a range of integrated unified communications (“UC”) services. 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.

Safety Services. We provide technology solutions for wireline and wireless carriers; satellite, telematics and cable operators; Voice over Internet Protocol (“VoIP”) service providers; alarm/security companies; as well as public safety organizations, government agencies and enterprises. West services the entire public and personal safety ecosystem with reliable networks and a deep 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, reliable, 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. 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 including all major Incumbent Local Exchange Carriers (“ILECs”), most Competitive Local Exchange Carriers (“CLECs”), as well as wireless carriers, VoIP service providers and telematics providers. We believe we are the leading database management provider in the industry, managing over 223 million ILEC, CLEC and VoIP records. We continue to develop and support new technologies for existing providers as well as support new entrants such as Over the Top (“OTT”) providers.

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, outbound proactive notifications and mobility, cloud contact center technologies, web, mobile application development and comprehensive professional services. Our applied technology uses an omni-channel approach that brings together multiple channels, including voice, text, email, push notification, fax, video, web, social media and cloud contact center technologies to create a connected customer, parent and/or patient experience. In most cases, our technology directly interfaces with our client’s internal systems, including customer relationship management, private branch exchange ("PBX") and enterprise reporting platforms. Our systems and platforms receive or deliver tens of millions of multichannel messages on behalf of our clients every day.

Specialized Agent Services. We provide our clients a combination of highly skilled subject matter experts with proven analytics 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.

9


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Telecom Services. We provide local and national tandem switching services that facilitate an efficient exchange of network traffic between origi nating 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 VoIP. We operate a next-generation technology-agnostic natio nal 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.

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

 

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

 

Safety Services, including carrier services, next generation 9-1-1, government solutions and advanced services;

 

Interactive Services, including outbound (proactive notification – voice/text/short message service (“SMS”) and chat), inbound speech solutions (IVR), cloud contact center technologies, web, mobile and professional services; and

 

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

Basis of Consolidation —The unaudited condensed consolidated financial statements include the accounts of West and its wholly-owned subsidiaries. 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, 2016. All intercompany balances and transactions have been eliminated in the consolidated financial statements. Our results for the three months ended March 31, 2017 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.

Income Tax —For the three months ended March 31, 2017 and March 31, 2016, income tax expense was $21.6 million and $24.8 million, respectively, and the effective income tax rate was 28.5% and 35.8%, respectively. The reduction in the effective tax rate was due primarily to several tax settlements. These settlements decreased our liability for unrecognized tax benefits by $15.7 million during the first quarter of 2017.

Dividend —We funded the dividends paid in 2016 and the first three months of 2017 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 March 2, 2017, we paid a $0.225 per common share quarterly dividend. The total dividend paid was approximately $18.8 million to stockholders of record as of the close of business on February 21, 2017.    On May 9, 2017, we announced the payment of future dividends had been suspended. 

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 first quarter of 2016 for an aggregate purchase price of approximately $22.0 million, which was funded with cash on hand. There was no repurchase of shares during the three months ended March 31, 2017.

10


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Implemented Accounting Pronouncements I n March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718) . The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits are no longer separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our consolidated cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. Under the new guidance, we elected to change our forfeiture policy and started to re cognize forfeitures of awards as they occur beginning January 1, 2017. The change in forfeiture policy was adopted using a modified-retrospective transition method. We recorded a cumulative-effect adjustment which increased our retained deficit by $0.1 mil lion upon transition on January 1, 2017. We elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. For the three months ended March 31, 2016, excess tax benefits on stock options recognized in additional paid-in capital was $0.3 million. This is included in the "Proceeds from stock options and ESPP shares" line in the condensed consolidated statement of cash flows. The impact of this standard on our consolidated financial statements at the time of impleme ntation is not material, however, the impact on our provision for income taxes in future periods will be dependent on the market price of our common stock on vesting dates of restricted stock awards compared to the fair value of those awards when they were granted.   

Recent Accounting Pronouncements —In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) . This update addresses the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, annual or interim goodwill impairment tests are to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, the income tax effects should be considered for any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendment also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendment requires disclosure of the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The amendments in this update should be applied on a prospective basis. This amendment will be effective for us in January 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash (Topic 230). The standard requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms “restricted cash” and “restricted cash equivalents.” The standard will be effective for us beginning January 1, 2018 and will require a retrospective approach. Early adoption is permitted. The Company is in the process of assessing the impact of this standard on its consolidated financial statements. 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments Credit Losses (Topic 230) . The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

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.

11


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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. Th is 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 repor ting 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 (Topic 606)”, (“ASU 2014-09”). This standard requires the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a Company expects to be entitled in exchange for those goods or services. The new standard also requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We plan to adopt ASU 2014-09 on January 1, 2018. The new standard can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. We will likely adopt this accounting standard on a cumulative-effect method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Based on our preliminary assessment, we do not believe there will be a material impact to our revenues upon adoption. We are continuing to evaluate the impacts of our pending adoption of this standard and our preliminary assessments are subject to change. Our implementation efforts are progressing as planned.

 

 

2.

ACQUISITIONS

Vocus

On March 7, 2017, we completed the acquisition of the cloud collaboration practice and assets from Vocus Group ("Vocus") in Australia for approximately $4.0 million in cash. The acquisition was funded with cash on hand. This business is included in the Unified Communications Services reportable segment.

In the preliminary purchase price allocation, approximately $1.0 million was allocated to goodwill, which is not deductible for tax purposes, and $0.7 million was allocated to other intangible assets. The primary factors that contributed to a purchase price resulting in the recognition of goodwill were the expansion of our position and capabilities throughout the Asia-Pacific region and the anticipated synergies which are expected to result in an enhanced global support and cost structure.

911 ETC

On December 9, 2016, we completed the acquisition of 911 ETC. 911 ETC is a leading provider of E911 solutions to the enterprise market space across the United States. The purchase price was approximately $10.2 million in cash, net of cash acquired, plus assumed liabilities. The acquisition was funded with cash on hand. This business is included in the Safety Services reportable segment.

In the preliminary purchase price allocation, approximately $5.3 million was allocated to goodwill, which is not 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 911 ETC were the expansion of our safety services further into the enterprise business space, their complementary customer base and anticipated synergies which are expected to result in cost savings.

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 $9.2 million and was funded with cash on hand. This business is included in the Interactive Services reportable segment.

Approximately $4.7 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.

12


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table summarizes the preliminary acquisition date estimated fair values of the assets acquired and liabilities assumed for Vocus and 911 ETC and the final acquisition date fair value of assets acquired and liabilities assumed for Synrevoice.

 

(Amounts in thousands)

 

Vocus

 

 

911 ETC

 

 

Synrevoice

 

Working Capital

 

$

(20

)

 

$

743

 

 

$

(1,967

)

Property and equipment

 

 

2,333

 

 

 

135

 

 

 

21

 

Other assets, net

 

 

32

 

 

 

 

 

 

 

Intangible assets

 

 

685

 

 

 

6,484

 

 

 

6,455

 

Goodwill

 

 

988

 

 

 

5,277

 

 

 

4,720

 

Total assets acquired

 

 

4,018

 

 

 

12,639

 

 

 

9,229

 

Long-term liabilities

 

 

23

 

 

 

2,464

 

 

 

 

Total liabilities assumed

 

 

23

 

 

 

2,464

 

 

 

 

Net assets acquired

 

$

3,995

 

 

$

10,175

 

 

$

9,229

 

 

Acquisition costs incurred for prospective acquisitions and completed acquisitions for the three months ended March 31, 2017 and 2016 of $1.3 million and $1.1 million, respectively, are included in selling, general and administrative expenses.    

The excess of the acquisition costs over the fair value of the assets acquired and liabilities assumed for the Vocus and 911 ETC purchases were assigned to goodwill based on preliminary estimates. We are in the process of completing the acquisition accounting for certain intangible assets and liabilities. The process of completing the acquisition accounting involves numerous time consuming steps for information gathering, verification and review. We expect to finalize this process within twelve months following the respective acquisition dates.

Pro forma

The following unaudited pro forma financial information presents the combined results of operations as if the acquisitions of Vocus, 911 ETC and Synrevoice occurred as of the beginning of the year prior to acquisition. The pro forma results contained in the table below include adjustments for amortization of acquired intangibles, finance and acquisition costs as well as related income taxes.

 

 

 

Three Months Ended March 31,

 

(Amounts in thousands)

 

2017

 

 

2016

 

Revenue

 

$

573,170

 

 

$

573,783

 

Net income

 

$

54,283

 

 

$

43,830

 

Income per common share—basic

 

$

0.65

 

 

$

0.53

 

Income per common share—diluted

 

$

0.64

 

 

$

0.52

 

 

The pro forma results above are not necessarily indicative of the operating results that would have actually occurred if the acquisitions had been in effect on the dates indicated, nor are they necessarily indicative of future results of operations.  

Our acquisitions completed in 2017 and 2016 were included in the consolidated results of operations from their respective dates of acquisition and included revenue of $2.3 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively. The net income impact of these acquisitions for the three months ended March 31, 2017 and 2016 was not material.

 

 

13


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3 .

GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2016 and the three months ended March 31, 2017:

 

(Amounts in thousands)

 

Unified

Communications

Services

 

 

Safety

Services

 

 

Interactive

Services

 

 

Specialized

Agent

Services

 

 

Total

 

Balance at January 1, 2016

 

$

873,782

 

 

$

508,679

 

 

$

244,879

 

 

$

288,350

 

 

$

1,915,690

 

Acquisitions

 

 

 

 

 

5,277

 

 

 

4,907

 

 

 

 

 

 

10,184

 

Acquisition accounting adjustments

 

 

515

 

 

 

 

 

 

(13

)

 

 

 

 

 

502

 

Foreign currency translation adjustments

 

 

(10,317

)

 

 

 

 

 

133

 

 

 

 

 

 

(10,184

)

Balance at December 31, 2016

 

 

863,980

 

 

 

513,956

 

 

 

249,906

 

 

 

288,350

 

 

 

1,916,192

 

Acquisitions

 

 

989

 

 

 

 

 

 

 

 

 

 

 

 

989

 

Acquisition accounting adjustments

 

 

 

 

 

 

 

 

(173

)

 

 

 

 

 

(173

)

Foreign currency translation adjustments

 

 

2,844

 

 

 

 

 

 

343

 

 

 

 

 

 

3,187

 

Balance at March 31, 2017

 

$

867,813

 

 

$

513,956

 

 

$

250,076

 

 

$

288,350

 

 

$

1,920,195

 

 

Other intangible assets

Below is a summary of the major intangible assets for each identifiable intangible asset:

 

 

 

As of  March 31, 2017

 

(Amounts in thousands)

 

Acquired

Cost

 

 

Accumulated

Amortization

 

 

Net Intangible

Assets

 

Client Relationships

 

$

660,477

 

 

$

(491,948

)

 

$

168,529

 

Technology & Patents

 

 

181,989

 

 

 

(115,070

)

 

 

66,919

 

Trade names and trademarks

 

 

103,490

 

 

 

(39,277

)

 

 

64,213

 

Other intangible assets

 

 

22,216

 

 

 

(19,874

)

 

 

2,342

 

Total

 

$

968,172

 

 

$

(666,169

)

 

$

302,003

 

 

 

 

As of  December 31, 2016

 

(Amounts in thousands)

 

Acquired

Cost

 

 

Accumulated

Amortization

 

 

Net Intangible

Assets

 

Client Relationships

 

$

659,877

 

 

$

(482,037

)

 

$

177,840

 

Technology & Patents

 

 

181,299

 

 

 

(113,011

)

 

 

68,288

 

Trade names and trademarks

 

 

103,391

 

 

 

(37,331

)

 

 

66,060

 

Other intangible assets

 

 

22,087

 

 

 

(18,801

)

 

 

3,286

 

Total

 

$

966,654

 

 

$

(651,180

)

 

$

315,474

 

 

Amortization expense for finite-lived intangible assets was $ 14.3 million and $16.4 million for the three months ended March 31, 2017 and 2016, respectively. Estimated amortization expense for the intangible assets noted above for 2017 and the next five years is as follows:

 

2017

 

$ 56.7 million

2018

 

$ 49.9 million

2019

 

$ 43.4 million

2020

 

$ 37.0 million

2021

 

$ 29.1 million

2022

 

$ 23.5 million

 

The March 7, 2017 acquisition of the cloud collaboration practice and assets from Vocus, included intangible assets consisting of technology ($0.6 million, with a four year life) and non-compete agreements ($0.1 million, with a three year life).        

 

 

14


WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4 .

ACCRUED EXPENS ES

Accrued expenses consisted of the following as of:

 

 

 

March 31,

 

 

December 31,

 

(Amounts in thousands)

 

2017