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WSTC > SEC Filings for WSTC > Form 10-K on 20-Feb-2014All Recent SEC Filings

Show all filings for WEST CORP

Form 10-K for WEST CORP


20-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a leading provider of technology-driven, communication services. We offer a broad portfolio of services, including conferencing and collaboration, unified communications, alerts and notifications, emergency communications, business process outsourcing and telephony / interconnect services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific, Latin America and South America.

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex communications needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified and platform-based, technology-driven voice and data services.

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and delivering operational excellence. In 2013, we managed over 58 billion telephony minutes and approximately 148 million conference calls, facilitated over 290 million 9-1-1 calls, and delivered over 1.4 billion notification calls and data messages. With approximately 748,000 telephony ports to handle conference calls, alerts and notifications and customer service at December 31, 2013, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new offerings. These ports include approximately 445,000 IP ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our technology-driven platforms allow us to provide a broad range of complementary automated and agent-based service offerings to our diverse client base.

Financial Operations Overview

Revenue

In our Unified Communications segment, our conferencing and collaboration services, event services and IP-based unified communication solutions are generally billed on a per participant minute or per seat basis and our alerts and notifications services are generally billed on a per message or per minute basis. Billing rates for


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these services vary depending on participant geographic location, type of service (such as audio, video or web conferencing) and type of message (such as voice, text, email or fax). We also charge clients for additional features, such as conference call recording, transcription services or professional services. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends. We expect this trend to continue for the foreseeable future.

In our Communication Services segment, our emergency communications solutions are generally billed per month based on the number of billing telephone numbers or cell towers covered under each client contract. We also bill monthly for our premise-based database solution. In addition, we bill for sales, installation and maintenance of our communication equipment technology solutions. Our platform-based and agent-based customer service solutions are generally billed on a per minute or per hour basis. We are generally paid on a contingent fee basis for our receivables management and overpayment identification and recovery services as well as for certain other agent-based services. Our telephony / interconnect services are generally billed based on usage of toll-free origination services.

Cost of Services

The principal component of cost of services for our Unified Communications segment is our variable telephone expense. Significant components of our cost of services in this segment also include labor expense, primarily related to commissions for our sales force. Because the services we provide in this segment are largely platform-based, labor expense is less significant than the labor expense we experience in our Communication Services segment.

The principal component of cost of services for our Communication Services segment is labor expense. Labor expense in costs of services primarily reflects compensation and benefits for the agents providing our agent-based services, but also includes compensation for personnel dedicated to emergency communications database management, manufacturing and development of our premise-based public safety solution as well as commissions for our sales professionals. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients. Significant components of our cost of services in this segment also include variable telephone expense.

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, equipment depreciation and maintenance, impairment charges and amortization of finite-lived intangible assets.

Key Drivers Affecting Our Financial Position and Results of Operations

Factors Related to Our Indebtedness. On each of February 20, 2013 and January 24, 2014, West, certain domestic subsidiaries of West, as subsidiary borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the various lenders party thereto modified our senior secured credit facilities ("Senior Secured Credit Facilities") by entering into Amendment No. 3 to Amended and Restated Credit Agreement (the "Third Amendment") and Amendment No. 4 to Amended and Restated Credit Agreement ("Fourth Amendment"), respectively, in each case, amending our Amended and Restated Credit Agreement, dated as of October 5, 2010, by and among West, Wells Fargo, as administrative agent, and the various lenders party thereto, as lenders (as 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, the Third Amendment and the Fourth Amendment, the "Amended Credit Agreement").


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The Third Amendment provided for a reduction in the applicable margins and interest rate floors of all term loans, extended the maturity of a portion of the term loans due July 2016 to June 2018, and added a further step down to the applicable margins of all term loans upon satisfaction of certain conditions, which conditions were satisfied effective as of April 30, 2013 and continued to apply as of December 31, 2013. As of December 31, 2013, we had outstanding the following senior secured term loans:

Term loans in an aggregate principal amount of approximately $2.1 billion (the "2018 Maturity Term Loans"). The 2018 Maturity Term Loans will mature on June 30, 2018, and the interest rate margins applicable to the 2018 Maturity Term Loans were 2.75%, for LIBOR rate loans, and 1.75%, for base rate loans; and

Term loans in an aggregate principal amount of approximately $312.1 million (the "2016 Maturity Term Loans"; and, together with the 2018 Maturity Term Loans, the "Term Loans"). The 2016 Maturity Term Loans will mature on July 15, 2016, and the interest rate margins applicable to the 2016 Maturity Term Loans were 2.25%, for LIBOR rate loans, and 1.25%, for base rate loans.

The Third Amendment also provided for interest rate floors applicable to the Term Loans. The interest rate floors as of December 31, 2013 were 1.00%, for LIBOR rate loans, and 2.00%, for base rate loans.

The Fourth Amendment provided for a further reduction in the applicable margins and interest rate floors of all Term Loans. As of January 24, 2014, the interest rate margins applicable to the 2018 Maturity Term Loans are 2.50% for LIBOR rate loans and 1.50% for base rate loans, and the interest rate margins applicable to the 2016 Maturity Term Loans are 2.0% for LIBOR rate loans and 1.0% for base rate loans. The Fourth Amendment also provides for interest rate floors applicable to the Term Loans. The interest rate floors effective January 24, 2014 are 0.75% for LIBOR rate loans and 1.75% for base rate loans.

On March 27, 2013, we completed an IPO of 21,275,000 shares of our common stock, par value $0.001 per share, registered pursuant to a Registration Statement on Form S-1 (File No. 333-162292). Proceeds received from the IPO, net of the underwriting discount were $401.0 million. We paid $25.0 million in Sponsor management fees to an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the "Sponsors") pursuant to that certain management agreement, dated October 24, 2006, and that certain management letter agreement, dated March 8, 2013. The management agreement terminated in accordance with its terms immediately prior to completion of the IPO.

On April 26, 2013, we redeemed our 11% $450.0 million principal amount senior subordinated notes due 2016. The redemption price was equal to 103.667% of the principal amount of the senior subordinated notes. We recorded a $16.5 million subordinated debt call premium and $6.6 million accelerated amortization of deferred financing costs as a non-operating expense. In addition, we paid accrued and unpaid interest on the redeemed senior subordinated notes up to April 26, 2013. Following this redemption, none of the senior subordinated notes remain outstanding.

On August 26, 2013, our revolving trade accounts receivable financing facility was amended and extended. The amended and extended facility provides for $185.0 million in available financing and was extended to June 30, 2018, reduced the unused commitment fee to 0.45% from 0.50% and lowered the LIBOR spread on borrowings to 135 basis points from 150 basis points.

Evolution into a Predominately Platform-based Solutions Business. We have evolved into a diversified and platform-based technology-driven service provider. Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 73% for 2013 and our operating income from platform-based services has grown from 53% of total operating income to 92% over the same period. As in the past, we will continue to seek and invest in higher margin businesses, irrespective of whether the associated services are delivered to our customers through an agent-based or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent-based services and as a result will continue to increase as a percentage of our total revenue. However, many of our customers require an integrated service offering that incorporates both


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agent-based and platform-based services - for example, an automated voice response system with the option for the client's customer to speak to an agent. Accordingly, we expect agent-based services will continue to represent a meaningful portion of our service offerings for the foreseeable future.

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our growth strategy. We will continue to seek opportunities to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily thru organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2005, we have invested approximately $2.0 billion in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability. In 2013, $20.9 million of our revenue growth was attributable to the acquisition of HyperCube completed in March of 2012.

Key Factors Related to Cash Flows

Our expectation is to return some portion of our cash flow to shareholders each year through a regular quarterly dividend. We expect to use the remaining cash flow to reduce leverage and fund acquisitions to accelerate growth.

Interest expense for 2013 was $232.9 million. Had the lower debt balances and lower interest rates applicable following our IPO been in effect at January 1, 2013, interest expense would have been $24.7 million lower than the reported amount. On April 26, 2013, we redeemed the entire outstanding $450.0 million principal amount of our 11% senior subordinated notes. The redemption price was 103.667% of the principal amount of the senior subordinated notes. The pricing of the Third Amendment and redemption of the 11% senior subordinated notes reduced our annual cash interest expense by approximately $97.0 million. Further, the Third Amendment extended the maturity of $1.1 billion of term loans to June 2018.

Overview of 2013 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the year ended December 31, 2013. This summary is not intended as a substitute for the detail provided elsewhere in this annual report, or for our consolidated financial statements and notes thereto included elsewhere in this annual report.

Our revenue increased $47.8 million, or 1.8% in 2013.

Our operating income increased $2.0 million, or 0.4%, in 2013 compared to operating income in 2012.

Our Adjusted EBITDA increased to $704.4 million in 2013, compared to $686.9 million in 2012, an increase of 2.6%. For information regarding the computation of Adjusted EBITDA, see "-Liquidity and Capital Resources-Adjusted EBITDA" below.

Our cash flows from operating activities were $384.1 million, an increase of $65.2 million, or 20.4%, during 2013 compared to cash flows from operating activities in 2012.

On February 20, 2013, we amended our Senior Secured Credit Facilities. The Third Amendment provided for a reduction in the applicable margins and interest rate floors of all term loans and extended the maturity of a portion of the term loans due July 2016 to June 2018. The applicable margins for each of the term loan tranches reflected a further step down of 0.50% based upon our initial public offering completed in March 2013 and maintaining a total leverage ratio less than or equal to 4.75:1.00, which conditions were satisfied effective as of April 30, 2013 and continued to apply as of December 31, 2013.

On March 8, 2013, we completed a 1-for-8 reverse stock split and amended our Amended and Restated Certificate of Incorporation by filing an amendment with the Delaware Secretary of State. We also adjusted the share amounts under our Executive Incentive Plan and Nonqualified Deferred Compensation Plan as a result of the 1-for-8 reverse stock split.


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On March 27, 2013, we completed our IPO of 21,275,000 shares of common stock. Proceeds from the offering, net of the underwriting discounts and commissions were $401.0 million.

On April 26, 2013, we redeemed our $450.0 million 11% senior subordinated notes. The redemption price was 103.667% of the principal amount of the senior subordinated notes. These notes were paid in full.

On each of May 16, 2013, August 22, 2013 and November 18, 2013 we paid a $0.225 per common share quarterly dividend. The dividend paid to shareholders of record as of the close of business on each of May 6, 2013, August 12, 2013 and November 8, 2013 was $18.8 million and the total payments were $56.5 million in the aggregate.

On April 26, 2013, Moody's Investors Service upgraded West Corporation's corporate family rating to B1 from B2.

On June 19, 2013, Standard & Poors Ratings Services upgraded West Corporation's corporate credit rating to BB- from B+ and raised the senior secured issue-level rating to BB from B+.

On August 26, 2013, we amended and extended our revolving trade accounts receivable financing facility. The amended and extended facility provides for $185.0 million in available financing and was extended to June 30, 2018, reduced the unused commitment fee to 0.45% from 0.50% and lowered the LIBOR spread on borrowings to 135 basis points from 150 basis points.

The following table sets forth our Consolidated Statements of Operations Data as a percentage of revenue for the periods indicated:

                                                              Year ended December 31,
                                                      2013              2012              2011
Revenue                                                 100.0 %           100.0 %           100.0 %
Cost of services                                         46.9              46.4              44.7
Selling, general and administrative expenses
("SG&A")                                                 35.2              35.5              36.5

Operating income                                         17.9              18.1              18.8
Interest expense                                          8.7              10.2              10.8
Refinancing expense                                       0.9               0.1                -
Other income                                              0.1               0.1               0.2

Income before income tax expense                          8.4               7.9               8.2
Income tax expense                                        3.1               3.1               3.1

Net income                                                5.3 %             4.8 %             5.1 %

Years Ended December 31, 2013 and 2012

Revenue: Total revenue in 2013 increased $47.8 million, or 1.8%, to $2,685.9 million from $2,638.0 million in 2012. This increase included revenue of $20.9 million from the acquisition of HyperCube. The HyperCube acquisition closed on March 23, 2012. HyperCube's results have been included in the Communication Services segment since that date. The remaining $26.9 million increase in revenue in 2013 was due to organic growth.

During the years ended December 31, 2013 and 2012, our largest 100 clients accounted for approximately 54% and 57% of total revenue, respectively. In 2013 and 2012, no client accounted for more than 10% of our aggregate revenue.


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Revenue by segment:

                                                                 For the year ended December 31,
                                                   % of Total                         % of Total
                                    2013            Revenue            2012            Revenue          Change         % Change
Revenue in thousands:
Unified Communications           $ 1,498,213              55.8 %    $ 1,451,301              55.0 %    $  46,912             3.2 %
Communication Services             1,223,855              45.6 %      1,198,320              45.4 %       25,535             2.1 %
Intersegment eliminations            (36,213 )            -1.4 %        (11,597 )            -0.4 %      (24,616 )         212.3 %

Total                            $ 2,685,855             100.0 %    $ 2,638,024             100.0 %    $  47,831             1.8 %

Unified Communications revenue in 2013 increased $46.9 million, or 3.2%, to $1,498.2 million from $1,451.3 million in 2012. The increase in revenue was primarily attributable to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. The increase in revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless services, which accounts for the majority of our Unified Communications revenue, grew approximately 10.8% in 2013 over 2012, while the average rate per minute for reservationless services declined by approximately 7.4%.

During 2013, revenue in the APAC and EMEA regions grew to $470.4 million, an increase of 2.6% over 2012 primarily related to volume growth in EMEA.

Communication Services revenue in 2013 increased $25.5 million, or 2.1%, to $1,223.9 million from $1,198.3 million in 2012. The increase in revenue in 2013 included $20.9 million from the acquisition of HyperCube. Revenue from agent-based services in 2013 decreased $19.9 million compared with revenue for 2012. Revenue growth from automated services offered by the Communication Services segment, primarily Telephony / Interconnect services, offset the decline in revenues from agent-based services.

Cost of Services: Cost of services consists of direct labor, telephone expense and other costs directly related to providing services to clients. Cost of services in 2013 increased $36.1 million, or 2.9%, to $1,260.6 million from $1,224.5 million in 2012. As a percentage of revenue, cost of services increased to 46.9% in 2013 from 46.4% in 2012.

Cost of Services by segment:

                                                                    For the year ended December 31,
                                2013             % of Revenue            2012             % of Revenue          Change           % Change
Cost of services in
thousands:
Unified Communications       $   639,105                  42.7 %      $   616,899                  42.5 %      $  22,206               3.6 %
Communication Services           655,380                  53.6 %          616,894                  51.5 %         38,486               6.2 %
Intersegment
eliminations                     (33,906 )                  NM             (9,334 )                  NM          (24,572 )           263.3 %

Total                        $ 1,260,579                  46.9 %      $ 1,224,459                  46.4 %      $  36,120               2.9 %

NM-Not Meaningful

Unified Communications cost of services in 2013 increased $22.2 million, or 3.6%, to $639.1 million from $616.9 million in 2012. The increase is primarily driven by increased service volume. As a percentage of this segment's revenue, Unified Communications cost of services increased to 42.7% in 2013 from 42.5% in 2012. The increase in cost of services as a percentage of revenue for 2013 is due primarily to changes in the product mix, geographic mix, and declines in the average rate per minute for reservationless services.


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Communication Services cost of services in 2013 increased $38.5 million, or 6.2%, to $655.4 million from $616.9 million in 2012. The increase in cost of services in 2013 was the result of $12.6 million of incremental cost of services from the HyperCube acquisition and increased service volume primarily for telephony / interconnect services. As a percentage of revenue, Communication Services cost of services increased to 53.6% in 2013 from 51.5% in 2012. This increase in cost of services as a percentage of this segment's revenue in 2013 is due primarily to reduced margins in agent-based services.

Selling, General and Administrative Expenses: SG&A expenses in 2013 increased $9.7 million, or 1.0%, to $945.1 million from $935.4 million for 2012. The increase in SG&A expenses in 2013, included $25.0 million for Sponsor management fees and related termination of the management agreement in connection with the IPO and $3.0 million of IPO related bonuses. As a percentage of revenue, SG&A expenses improved to 35.2% in 2013 from 35.5% in 2012. In 2013, the Sponsor management fee, related termination of the management agreement and IPO related bonuses had a 1.0% impact on SG&A expenses as a percentage of revenue. In 2012, SG&A included $18.3 million of share based compensation expense for the modification of vesting criteria of certain stock options and dividend equivalents paid on notional shares in our deferred compensation plan in connection with the special cash dividend declared by our Board of Directors on August 15, 2012.

Selling, general and administrative expenses by segment:

                                                                   For the year ended December 31,
                                2013            % of Revenue           2012            % of Revenue          Change           % Change
SG&A in thousands:
Unified Communications        $ 472,672                  31.5 %      $ 449,836                  31.0 %      $  22,836               5.1 %
Communication Services          474,697                  38.8 %        487,818                  40.7 %        (13,121 )            -2.7 %
Intersegment eliminations        (2,307 )                  NM           (2,264 )                  NM              (43 )             1.9 %

Total                         $ 945,062                  35.2 %      $ 935,390                  35.5 %      $   9,672               1.0 %

NM-Not meaningful

Unified Communications SG&A expenses in 2013 increased $22.8 million, or 5.1%, to $472.7 million from $449.8 million in 2012. As a percentage of this segment's revenue, Unified Communications SG&A expenses increased to 31.5% in 2013 compared to 31.0% in 2012. The Sponsor management fee, related termination of the management agreement and IPO related bonuses allocated to Unified Communications was $17.7 million, which had a 1.2% impact on SG&A expenses as a percentage of revenue for Unified Communications.

Communication Services SG&A expenses in 2013 decreased $13.1 million, or 2.7%, to $474.7 million from $487.8 million in 2012. During 2012, Communication Services recorded $10.9 million for site closure and severance expenses and asset impairment. Severance and site closure expenses in 2013 were $0.9 million. As a percentage of this segment's revenue, Communication Services SG&A expenses improved to 38.8% in 2013 from 40.7% in 2012. The Sponsor management fee, related termination of the management agreement and IPO related bonuses allocated to Communication Services was $10.3 million, which had a 0.8% impact on SG&A expenses as a percentage of revenue for Communication Services.

Operating Income: Operating income in 2013 increased $2.0 million, or 0.4%, to $480.2 million from $478.2 million in 2012. As a percentage of revenue, operating income decreased to 17.9% in 2013 from 18.1% in 2012.

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