TTEC Holdings, Inc. 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact our consolidated financial position, consolidated results of operations, or consolidated cash flows due to adverse changes in financial and commodity market prices and rates. Market risk also includes credit and non-performance risk by counterparties to our various financial instruments. We are exposed to market risk due to changes in interest rates and foreign currency exchange rates (as measured against the U.S. dollar); as well as credit risk associated with potential non-performance of our counterparty banks. These exposures are directly related to our normal operating and funding activities. We enter into derivative instruments to manage and reduce the impact of currency exchange rate changes, primarily between the U.S. dollar/Philippine peso, the U.S. dollar/Mexican peso, and the Australian dollar/Philippine peso. We enter into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. To mitigate against credit and non-performance risk, it is our policy to only enter into derivative contracts and other financial instruments with investment grade counterparty financial institutions and, correspondingly, our derivative valuations reflect the creditworthiness of our counterparties. As of the date of this report, we have not experienced, nor do we anticipate, any issues related to derivative counterparty defaults. Interest Rate Risk We have previously entered into interest rate derivative instruments to reduce our exposure to interest rate fluctuations associated with our variable rate debt. The interest rate on our Credit Agreement is variable based upon the Prime Rate and LIBOR and, therefore, is affected by changes in market interest rates. As of September 30, 2020, we had $325.0 million of outstanding borrowings under the Credit Agreement. Based upon average outstanding borrowings during the three months ended September 30, 2020, interest accrued at a rate of approximately 1.3% per annum, respectively. If the Prime Rate or LIBOR increased by 100 basis points, there would be an annualized $1.0 million of additional interest expense per $100.0 million of outstanding borrowing under the Credit Agreement. Foreign Currency Risk Our subsidiaries in the Philippines, Mexico, India, Bulgaria and Poland use the local currency as their functional currency for paying labor and other operating costs. Conversely, revenue for these foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. dollars or other foreign currencies. As a result, we may experience foreign currency gains or losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. For the nine months ended September 30, 2020 and 2019, revenue associated with this foreign exchange risk was 18% and 22% of our consolidated revenue, respectively. 43 Table of Contents In order to mitigate the risk of these non-functional foreign currencies weakening against the functional currencies of the servicing subsidiaries, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, though not 100%, of the projected foreign currency exposure related to client programs served from these foreign countries through our cash flow hedging program. While our hedging strategy can protect us from adverse changes in foreign currency rates in the short term, an overall weakening of the non-functional foreign currencies would adversely impact margins in the segments of the servicing subsidiary over the long term. Cash Flow Hedging Program To reduce our exposure to foreign currency exchange rate fluctuations associated with forecasted revenue in non-functional currencies, we purchase forward and/or option contracts to acquire the functional currency of the foreign subsidiary at a fixed exchange rate at specific dates in the future. We have designated and account for these derivative instruments as cash flow hedges for forecasted revenue in non-functional currencies. While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could adversely affect our consolidated operating results. Our cash flow hedging instruments as of September 30, 2020 and December 31, 2019 are summarized as follows (in thousands). All hedging instruments are forward contracts, except as noted. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Local ​ ​ ​ ​ ​ ​ Currency ​ U.S. Dollar ​ ​ % Maturing ​ ​ Contracts ​ ​ Notional ​ Notional ​ ​ in the next ​ ​ Maturing As of September 30, 2020 ​ Amount ​ Amount ​ ​ 12 months ​ ​ Through Canadian Dollar 3,500 ​ 2,646 ​ ​ 100.0 % ​ July 2021 ​ Philippine Peso 6,565,000 ​ 125,887 (1) ​ ​ 56.8 % ​ July 2023 ​ Mexican Peso 1,115,500 ​ 50,441 ​ ​ 53.0 % ​ July 2023 ​ ​ ​ ​ ​ $ 178,974 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Local ​ ​ ​ ​ ​ ​ ​ ​ Currency ​ U.S. Dollar ​ ​ ​ ​ ​ ​ ​ ​ Notional ​ Notional ​ ​ ​ ​ ​ ​ As of December 31, 2019 ​ Amount ​ Amount ​ ​ ​ ​ ​ ​ Philippine Peso 7,715,000 ​ 147,654 (1) ​ ​ ​ ​ ​ ​ ​ Mexican Peso 1,299,500 ​ 61,529 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 209,183 ​ ​ ​ ​ ​ ​ ​ ​ (1) Includes contracts to purchase Philippine pesos in exchange for New Zealand dollars and Australian dollars, which are translated into equivalent U.S. dollars on September 30, 2020 and December 31, 2019. ​ The fair value of our cash flow hedges as of September 30, 2020 was assets/(liabilities) (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Maturing in the ​ ​ September 30, 2020 Next 12 Months Canadian Dollar ​ $ (17) ​ $ (17) ​ Philippine Peso ​ ​ 7,644 ​ ​ 4,420 ​ Mexican Peso ​ (2,052) ​ (1,133) ​ ​ ​ $ 5,575 ​ $ 3,270 ​ ​ 44 Table of Contents Our cash flow hedges are valued using models based on market observable inputs, including both forward and spot foreign exchange rates, implied volatility, and counterparty credit risk. The decrease in fair value from December 31, 2019 reflects changes in the currency translation between the U.S dollar and Mexican Peso. We recorded net gains (losses) of $0.9 million and ($4.6) million for settled cash flow hedge contracts and the related premiums for the nine months ended September 30, 2020 and 2019, respectively. These gains (losses) were reflected in Revenue in the accompanying Consolidated Statements of Comprehensive Income (Loss). If the exchange rates between our various currency pairs were to increase or decrease by 10% from current period-end levels, we would incur a material gain or loss on the contracts. However, any gain or loss would be mitigated by corresponding increases or decreases in our underlying exposures. Other than the transactions hedged as discussed above and in Part I, Item 1. Financial Statements, Note 6 to the Consolidated Financial Statements, the majority of the transactions of our U.S. and foreign operations are denominated in their respective local currency. However, transactions are denominated in other currencies from time-to-time. We do not currently engage in hedging activities related to these types of foreign currency risks because we believe them to be insignificant as we endeavor to settle these accounts on a timely basis. For the nine months ended September 30, 2020 and 2019, approximately 14% and 22%, respectively, of revenue was derived from contracts denominated in currencies other than the U.S. Dollar. Our results from operations and revenue could be adversely affected if the U.S. Dollar strengthens significantly against foreign currencies. Fair Value of Debt and Equity Securities We did not have any investments in marketable debt or equity securities as of September 30, 2020 or December 31, 2019. ​