|
|
|
Item 1.
|
Consolidated Financial Statements
|
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands, except share and per share amounts)
|
September 30,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
23,881
|
|
|
$
|
27,831
|
|
Accounts receivable, net of allowance of $250 at September 30, 2016 and December 31, 2015
|
82,300
|
|
|
86,645
|
|
Unbilled receivables
|
27,309
|
|
|
23,250
|
|
Other current assets
|
14,645
|
|
|
13,306
|
|
Total current assets
|
148,135
|
|
|
151,032
|
|
Property and equipment, net
|
26,080
|
|
|
25,259
|
|
Goodwill
|
69,136
|
|
|
67,694
|
|
Acquisition-related intangible assets, net
|
45,888
|
|
|
48,991
|
|
Other assets
|
5,278
|
|
|
5,292
|
|
Total assets
|
$
|
294,517
|
|
|
$
|
298,268
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Debt, current portion
|
$
|
4,594
|
|
|
$
|
4,375
|
|
Accounts payable
|
24,368
|
|
|
27,726
|
|
Accrued compensation and benefits
|
18,669
|
|
|
21,242
|
|
Accrued outsourcing
|
13,251
|
|
|
9,874
|
|
Accrued restructuring
|
1,524
|
|
|
4,612
|
|
Income taxes payable
|
1,496
|
|
|
2,436
|
|
Accrued expenses and other current liabilities
|
7,388
|
|
|
9,877
|
|
Deferred revenue
|
7,317
|
|
|
9,398
|
|
Total current liabilities
|
78,607
|
|
|
89,540
|
|
Long-term debt, net of current portion
|
98,407
|
|
|
87,093
|
|
Deferred income taxes, net of current portion
|
6,961
|
|
|
6,833
|
|
Other long-term liabilities
|
21,385
|
|
|
21,665
|
|
Total liabilities
|
205,360
|
|
|
205,131
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 100,000,000 shares authorized; 61,674,010 and 63,654,103 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
|
617
|
|
|
637
|
|
Additional paid-in capital
|
259,563
|
|
|
270,225
|
|
Accumulated deficit
|
(182,710
|
)
|
|
(189,660
|
)
|
Accumulated other comprehensive income
|
11,687
|
|
|
11,935
|
|
Total stockholders’ equity
|
89,157
|
|
|
93,137
|
|
Total liabilities and stockholders’ equity
|
$
|
294,517
|
|
|
$
|
298,268
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands, except per share amounts)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue
|
$
|
135,182
|
|
|
$
|
138,604
|
|
|
$
|
415,837
|
|
|
$
|
419,172
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization included below)
|
89,595
|
|
|
92,977
|
|
|
276,426
|
|
|
277,825
|
|
Sales and marketing
|
10,788
|
|
|
11,083
|
|
|
34,511
|
|
|
35,163
|
|
General and administrative
|
21,280
|
|
|
21,888
|
|
|
66,546
|
|
|
69,024
|
|
Research and development
|
2,332
|
|
|
1,903
|
|
|
6,628
|
|
|
6,060
|
|
Depreciation and amortization
|
2,493
|
|
|
2,340
|
|
|
7,001
|
|
|
6,922
|
|
Amortization of acquisition-related intangible assets
|
1,293
|
|
|
993
|
|
|
3,943
|
|
|
2,979
|
|
Restructuring and other charges
|
1,869
|
|
|
2,957
|
|
|
5,283
|
|
|
9,359
|
|
Total operating expenses
|
129,650
|
|
|
134,141
|
|
|
400,338
|
|
|
407,332
|
|
Income from operations
|
5,532
|
|
|
4,463
|
|
|
15,499
|
|
|
11,840
|
|
Non-operating expense (income), net
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
Interest on outstanding debt
|
543
|
|
|
482
|
|
|
1,582
|
|
|
1,439
|
|
Amortization of deferred financing charges
|
93
|
|
|
94
|
|
|
281
|
|
|
279
|
|
Interest income
|
(10
|
)
|
|
(13
|
)
|
|
(32
|
)
|
|
(50
|
)
|
Interest expense, net
|
626
|
|
|
563
|
|
|
1,831
|
|
|
1,668
|
|
Other expense (income), net
|
614
|
|
|
417
|
|
|
2,704
|
|
|
(2,335
|
)
|
Total non-operating expense (income), net
|
1,240
|
|
|
980
|
|
|
4,535
|
|
|
(667
|
)
|
Income before income taxes
|
4,292
|
|
|
3,483
|
|
|
10,964
|
|
|
12,507
|
|
Provision for income taxes
|
1,630
|
|
|
755
|
|
|
4,014
|
|
|
1,181
|
|
Net income
|
$
|
2,662
|
|
|
$
|
2,728
|
|
|
$
|
6,950
|
|
|
$
|
11,326
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.19
|
|
Diluted
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
57,868
|
|
|
60,683
|
|
|
58,633
|
|
|
60,558
|
|
Diluted
|
58,960
|
|
|
62,623
|
|
|
59,532
|
|
|
62,528
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
2,662
|
|
|
$
|
2,728
|
|
|
$
|
6,950
|
|
|
$
|
11,326
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Impact to revalue unfunded projected benefit obligation, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Foreign currency translation adjustment, net of tax
|
(282
|
)
|
|
(65
|
)
|
|
(248
|
)
|
|
(3,966
|
)
|
Comprehensive income
|
$
|
2,380
|
|
|
$
|
2,663
|
|
|
$
|
6,702
|
|
|
$
|
7,362
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
6,950
|
|
|
$
|
11,326
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Stock-based compensation
|
5,350
|
|
|
5,663
|
|
Amortization of deferred financing charges
|
281
|
|
|
279
|
|
Depreciation and amortization
|
7,001
|
|
|
6,922
|
|
Amortization of acquisition-related intangible assets
|
3,943
|
|
|
2,979
|
|
Non-cash restructuring and other charges
|
1,150
|
|
|
—
|
|
Other
|
168
|
|
|
50
|
|
Changes in operating assets and liabilities, excluding impact of acquisitions:
|
|
|
|
Accounts receivable
|
3,869
|
|
|
(11,400
|
)
|
Unbilled receivables
|
(3,983
|
)
|
|
(1,168
|
)
|
Other current assets
|
(1,242
|
)
|
|
(329
|
)
|
Other assets
|
162
|
|
|
317
|
|
Accounts payable
|
(3,456
|
)
|
|
3,417
|
|
Accrued compensation and benefits
|
(4,884
|
)
|
|
(2,382
|
)
|
Accrued outsourcing
|
3,322
|
|
|
490
|
|
Accrued restructuring
|
(2,688
|
)
|
|
(1,020
|
)
|
Income tax payable
|
(909
|
)
|
|
(2,001
|
)
|
Accrued expenses, other current liabilities and other long-term liabilities
|
(3,792
|
)
|
|
(2,430
|
)
|
Deferred revenue
|
(2,302
|
)
|
|
(3,306
|
)
|
Net cash provided by operating activities
|
8,940
|
|
|
7,407
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of property and equipment
|
(7,874
|
)
|
|
(7,685
|
)
|
Cash paid for acquisitions, net of cash acquired
|
(398
|
)
|
|
(64,301
|
)
|
Net cash used in investing activities
|
(8,272
|
)
|
|
(71,986
|
)
|
Cash flows from financing activities:
|
|
|
|
Proceeds from borrowings on credit facility
|
41,214
|
|
|
137,467
|
|
Payments of borrowings on revolving line of credit
|
(28,214
|
)
|
|
(63,148
|
)
|
Payments of borrowings on term loan facility
|
(3,281
|
)
|
|
(1,313
|
)
|
Payments of acquired debt
|
—
|
|
|
(6,454
|
)
|
Payments of debt issuance costs
|
—
|
|
|
(1,414
|
)
|
Payments for share repurchases
|
(15,054
|
)
|
|
(1,459
|
)
|
Proceeds from issuance of common stock under stock option plans
|
374
|
|
|
561
|
|
Payments of deferred acquisition obligations
|
(270
|
)
|
|
(2,828
|
)
|
Payments of capital lease obligations
|
—
|
|
|
(5
|
)
|
Net cash (used in) provided by financing activities
|
(5,231
|
)
|
|
61,407
|
|
Net decrease in cash and cash equivalents
|
(4,563
|
)
|
|
(3,172
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
613
|
|
|
(2,795
|
)
|
Cash and cash equivalents at beginning of period
|
27,831
|
|
|
36,893
|
|
Cash and cash equivalents at end of period
|
$
|
23,881
|
|
|
$
|
30,926
|
|
Non-cash activities:
|
|
|
|
Property and equipment included in accounts payable
|
$
|
207
|
|
|
$
|
105
|
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
LIONBRIDGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nature of the Business
The accompanying consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, all of a normal recurring nature, necessary for the fair statement of results for the periods presented. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with U.S. generally accepted accounting principles (“GAAP”). The consolidated balance sheet data as of
December 31, 2015
was derived from audited financial statements, but does not include all disclosures required by GAAP for annual financial statements. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
The Company’s preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used (but not limited to) when accounting for collectability of receivables, calculating service revenue using a proportional performance assessment and valuing intangible assets and deferred tax assets. Actual results could differ from these estimates.
|
|
2.
|
Stockholders’ Equity and Stock-Based Compensation
|
Restricted Stock Awards
Lionbridge issued
1,876,500
and
195,252
shares of restricted common stock and restricted stock units, respectively, under the Company’s 2011 Stock Incentive Plan, during the
nine
months ended
September 30, 2016
representing an aggregate fair market value of
$9.6 million
. Of the total
2,071,752
shares of restricted common stock and restricted stock units issued in the
nine
months ended
September 30, 2016
,
1,486,252
have restrictions on disposition which lapse over
four years
from the date of grant and
585,500
shares of restricted common stock were granted to certain employees through the long-term incentive plan (the “LTIP”) as long-term performance-based stock incentive awards under the Company’s 2011 Stock Incentive Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will generally lapse upon the achievement of revenue and profitability targets within the
two
calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals and records expense accordingly. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee in accordance with the forfeiture table per the grant agreements.
Stock-based Compensation
The Company measures and recognizes stock-based compensation expense based on the fair value measurement for all
stock-based payment awards made to the Company's employees and directors, including employee stock options and restricted stock awards, over the service period for awards expected to vest. Total compensation expense related to stock options, performance-based restricted stock awards and time-based restricted stock awards are classified in the consolidated statements of operations line items as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenue
|
$
|
6
|
|
|
$
|
34
|
|
|
$
|
43
|
|
|
$
|
70
|
|
Sales and marketing
|
501
|
|
|
500
|
|
|
1,407
|
|
|
1,389
|
|
General and administrative
|
1,312
|
|
|
1,453
|
|
|
3,814
|
|
|
4,148
|
|
Research and development
|
48
|
|
|
20
|
|
|
86
|
|
|
56
|
|
Total stock-based compensation expense
|
$
|
1,867
|
|
|
$
|
2,007
|
|
|
$
|
5,350
|
|
|
$
|
5,663
|
|
As of
September 30, 2016
, future compensation cost related to unvested stock options, less estimated forfeitures, is approximately
$0.6 million
and will be recognized over an estimated weighted-average period of approximately
1.6 years
. Lionbridge currently expects to amortize
$11.8 million
of unamortized compensation in connection with restricted stock awards outstanding as of
September 30, 2016
over an estimated weighted-average period of approximately
2.3 years
.
Share Repurchasing Program
On October 30, 2012, Lionbridge’s Board of Directors authorized a share repurchasing program for up to
$18 million
over
three years
, which expired on October 30, 2015. On October 29, 2015, Lionbridge’s Board of Directors authorized a new share repurchasing program for up to
$50 million
during the period commencing in the fourth quarter of 2015 through December 31, 2018. Under the 2015 program, the Company is authorized to repurchase Lionbridge common shares subject to certain market rate conditions. At
September 30, 2016
, the Company had approximately
$29.4 million
remaining under this repurchase program. The Company made the following share repurchases during the
nine
months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(In thousands)
|
$
|
|
Shares
|
|
$
|
|
Shares
|
Shares repurchased under our 2012 share repurchase program
|
$
|
—
|
|
|
—
|
|
|
$
|
1,459
|
|
|
265
|
|
Shares repurchased under our 2015 share repurchase program
|
15,054
|
|
|
3,332
|
|
|
—
|
|
|
—
|
|
Shares repurchased under our share repurchase programs
|
$
|
15,054
|
|
|
3,332
|
|
|
$
|
1,459
|
|
|
265
|
|
On January 2, 2015, the Company amended and restated the Company's Credit Agreement with HSBC Bank, as Administrative Agent and a lender, and a syndicate of other lenders (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement includes a
$100 million
senior secured revolving credit facility, which includes (a) a
$10 million
sublimit for the issuance of standby letters of credit and (b) a
$10 million
sublimit for swing-line loans and a senior secured term loan facility in an aggregate amount of
$35 million
. The Company may request, at any time and from time to time, that the revolving credit facility be increased by an amount not to exceed
$65 million
, dependent upon certain conditions. The interest rates are in the range of Prime Rate plus
0.25%
—
1.00%
or LIBOR plus
1.25%
—
2.00%
(at the Company’s discretion), depending on certain conditions. Both facilities expire after
five years
from the date of entering into the Amended and Restated Credit Agreement, after which time the Company may need to secure new financing. The Company cannot assure that it will be able to secure new financing, or financing on terms that are acceptable. Debt, which is denominated in both the Euro and U.S. Dollar, consisted of the following at September 30:
|
|
|
|
|
(In thousands, except percentages)
|
2016
|
Senior secured revolving credit facility, 2.15%
|
$
|
73,991
|
|
Senior secured term loan facility, 2.41%
|
29,329
|
|
Total outstanding credit facility
|
103,320
|
|
Unamortized deferred financing charges
|
(319
|
)
|
Total
|
$
|
103,001
|
|
The debt is being serviced primarily in Ireland as the Company believes the Company's Irish operations will continue to generate sufficient earnings in future periods allowing the Company to pay down the debt. The fair value of total debt approximates its current value of
$103.3 million
at
September 30, 2016
and would be classified as a Level 2 fair value measurement due to the use of inputs based on similar liabilities in the market.
The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other non-financial covenants in the Amended and Restated Credit Agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquisition-related intangible assets, stock-based compensation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquisition-related intangible assets, stock-based compensation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other non-financial covenants as of
September 30, 2016
.
|
|
4.
|
Basic and Diluted Earnings per Share
|
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted-average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and unvested restricted stock, as determined using the treasury stock method. Shares used in calculating basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average number of shares of common stock outstanding-basic
|
57,868
|
|
|
60,683
|
|
|
58,633
|
|
|
60,558
|
|
Dilutive common stock equivalents relating to options and restricted stock
|
1,092
|
|
|
1,940
|
|
|
899
|
|
|
1,970
|
|
Weighted-average number of shares of common stock outstanding-diluted
|
58,960
|
|
|
62,623
|
|
|
59,532
|
|
|
62,528
|
|
The following table summarizes the restructuring charges for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
Restructuring charges recorded for reduction in workforce and other
|
$
|
2,850
|
|
|
$
|
6,435
|
|
Changes in estimated liabilities and restructuring charges recorded for vacated facility/lease termination
|
642
|
|
|
682
|
|
Total restructuring charges recorded
|
$
|
3,492
|
|
|
$
|
7,117
|
|
Cash payments related to liabilities recorded on exit or disposal activities
|
$
|
7,928
|
|
|
$
|
7,932
|
|
For the
nine
months ended
September 30, 2016
and 2015, the Company recorded primarily within the GLC segment restructuring charges for workforce reductions, vacated facilities and changes in estimated liabilities for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions are recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. The cash payments are primarily related to the Company's GLC segment.
The following table summarizes the restructuring accrual activity for the
nine
months ended
September 30, 2016
and
2015
, respectively, by category:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Beginning balance, January 1
|
$
|
6,311
|
|
|
$
|
4,821
|
|
Employee related matters:
|
|
|
|
Restructuring charges recorded
|
2,850
|
|
|
6,435
|
|
Cash payments
|
(6,408
|
)
|
|
(7,662
|
)
|
Net employee severance activity
|
(3,558
|
)
|
|
(1,227
|
)
|
Vacated facility/Lease termination:
|
|
|
|
Restructuring charges recorded
|
231
|
|
|
588
|
|
Changes in estimated liabilities
|
411
|
|
|
94
|
|
Cash payments
|
(1,520
|
)
|
|
(270
|
)
|
Net vacated facility/lease termination activity
|
(878
|
)
|
|
412
|
|
Ending balance, September 30
|
$
|
1,875
|
|
|
$
|
4,006
|
|
At
September 30, 2016
, the Company’s consolidated balance sheet includes accruals totaling
$1.9 million
related to employee termination costs and vacated facilities. Lionbridge currently anticipates that approximately
$1.4 million
of these will be fully paid within twelve months. The remaining
$0.4 million
relates to lease obligations on unused facilities expiring
through
2024
that extend out longer than twelve months and is included in other long-term liabilities on the Company’s consolidated balance sheet.
The provision for income taxes for the
three
months ended
September 30, 2016
and
2015
was
$1.6 million
and
$0.8 million
, respectively. The provision for income taxes for the
nine
months ended
September 30, 2016
and
2015
was
$4.0 million
and
$1.2 million
, respectively. The tax provision for the
three
and
nine
months ended
September 30, 2016
consisted primarily of taxes on income in foreign jurisdictions, and interest and penalties recorded in relation to the Company’s uncertain tax positions. The tax provision for the
three
and
nine
months ended
September 30, 2015
consisted primarily of taxes on income in foreign jurisdictions, interest and penalties recorded in relation to the Company’s uncertain tax positions and recorded a discrete benefit recognized in the second quarter of 2015 of approximately
$1.4 million
related to the release of certain existing reserves for uncertain tax positions, primarily due to a favorable tax ruling in India.
The balance of unrecognized tax benefits at
September 30, 2016
, not including interest and penalties, was
$2.9 million
, which, if recognized, would affect the effective income tax rate in future periods. Lionbridge also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At
September 30, 2016
, Lionbridge had approximately
$0.8 million
of interest and penalties accrued related to unrecognized tax benefits.
The Company conducts business globally and in the normal course of business is subject to examination by local, state and federal jurisdictions in the United States as well as in multiple foreign jurisdictions. Currently, no Internal Revenue Service audits are underway and audits in Canada, China, Germany and India are in varying stages of completion. Open audit years are dependent upon the tax jurisdiction and range from
2004
to present.
At
September 30, 2016
,
no
provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely.
Lionbridge’s management has evaluated the positive and negative evidence as it relates to the realizability of its deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax-planning strategies. Under the applicable accounting standards, management has determined that with the exception of certain foreign tax jurisdictions it is more-likely-than not that Lionbridge will not generate sufficient future taxable income to benefit from the tax assets prior to their expiration. Accordingly, full valuation allowances have been maintained against those tax assets. As a result,
no
federal income tax benefit has been recorded for the losses incurred for purposes only in the U.S. and certain foreign jurisdictions during the
nine
months ended
September 30, 2016
. Management reevaluates the need for a valuation periodically based on the weight of positive and negative evidence and as such future period determinations could differ.
Lionbridge operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is the Company's Chief Executive Officer.
The Company identifies such segments primarily based on the nature of services delivered. The Company considered qualitative factors, including the economic characteristics of each operating segment to determine if any qualified for aggregation. More specifically, the Company evaluated the economic characteristics, the nature of products and services, the methods used to provide services, the types of customers, and the nature of the corresponding regulatory environment of its operating segments. As a result, the Company identified the following
three
reportable segments:
Global Language and Content ("GLC")—this segment
translates, localizes and adapts clients’ content and products to meet the language, cultural, technical and industry-specific requirements of users in local markets throughout the world. As part of its GLC solutions, Lionbridge also provides global marketing services, and creates and translates technical documentation for clients who market to and support customers in global markets. Lionbridge GLC solutions utilize the Company’s cloud-based technology platforms and applications, its crowd based translation resources and its global service delivery model, which make the translation, localization and content management processes more efficient for Lionbridge and its clients.
Global Enterprise Solutions ("GES")—this segment
tests applications and online search results to help clients deliver high-quality, relevant applications and content in global markets. The Company’s GES solutions ensure the quality, usability, relevance and performance of clients’ web applications, content, software, search engines, online games, and technology products content globally. As part of its GES offering, Lionbridge also provides specialized professional crowdsourcing services including search relevance testing, in-country testing for mobile devices, and data management solutions.
Interpretation—this segment
provides interpretation services for government, business and healthcare organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than
360
languages and dialects, including over-the-phone and onsite interpretation services.
The Company’s internal reporting does not include the allocation of certain expenses to the operating segments but instead includes those other expenses in unallocated corporate and other expense. Unallocated expenses primarily include corporate expenses, such as interest expense, restructuring and other charges, foreign exchange gains and losses and governance expenses, as well as finance, information technology, human resources, legal, treasury and marketing expenses. The Company determines whether a cost is charged to a particular business segment or is retained as an unallocated cost based on whether the cost relates to a corporate function or to a direct expense associated with the particular business segment. For example, corporate finance, corporate information technology and corporate human resource expenses are unallocated, whereas operating segment finance, information technology and human resource expenses are charged to the applicable operating segment. The Company is currently in the process of realigning its strategic business units in order to streamline operations, increase productivity and achieve stronger alignment with its customers' priorities. The Company expects this process to be completed in 2017.
The table below presents information about the Company’s segment data for the
three
months ended
September 30, 2016
and
2015
. Asset information by reportable segment is not reported, since the Company does not produce such information internally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
GLC
|
|
GES
|
|
Interpretation
|
|
Corporate
and Other
|
|
Total
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
External revenue
|
$
|
99,460
|
|
|
$
|
32,805
|
|
|
$
|
2,917
|
|
|
$
|
—
|
|
|
$
|
135,182
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
63,820
|
|
|
23,838
|
|
|
1,937
|
|
|
—
|
|
|
89,595
|
|
Depreciation and amortization including amortization of acquisition-related intangible assets
|
2,182
|
|
|
493
|
|
|
7
|
|
|
1,104
|
|
|
3,786
|
|
Other operating expenses
|
22,909
|
|
|
3,287
|
|
|
280
|
|
|
—
|
|
|
26,476
|
|
Segment contribution
|
10,549
|
|
|
5,187
|
|
|
693
|
|
|
(1,104
|
)
|
|
15,325
|
|
Interest expense and other unallocated items
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,033
|
)
|
|
(11,033
|
)
|
Income (loss) before income taxes
|
10,549
|
|
|
5,187
|
|
|
693
|
|
|
(12,137
|
)
|
|
4,292
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
1,630
|
|
|
1,630
|
|
Net income (loss)
|
$
|
10,549
|
|
|
$
|
5,187
|
|
|
$
|
693
|
|
|
$
|
(13,767
|
)
|
|
$
|
2,662
|
|
Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
External revenue
|
$
|
98,762
|
|
|
$
|
33,919
|
|
|
$
|
5,923
|
|
|
$
|
—
|
|
|
$
|
138,604
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
63,510
|
|
|
24,163
|
|
|
5,304
|
|
|
—
|
|
|
92,977
|
|
Depreciation and amortization including amortization of acquisition-related intangible assets
|
1,846
|
|
|
675
|
|
|
10
|
|
|
802
|
|
|
3,333
|
|
Other operating expenses
|
22,177
|
|
|
4,457
|
|
|
509
|
|
|
—
|
|
|
27,143
|
|
Segment contribution
|
11,229
|
|
|
4,624
|
|
|
100
|
|
|
(802
|
)
|
|
15,151
|
|
Interest expense and other unallocated items
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,668
|
)
|
|
(11,668
|
)
|
Income (loss) before income taxes
|
11,229
|
|
|
4,624
|
|
|
100
|
|
|
(12,470
|
)
|
|
3,483
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
755
|
|
|
755
|
|
Net income (loss)
|
$
|
11,229
|
|
|
$
|
4,624
|
|
|
$
|
100
|
|
|
$
|
(13,225
|
)
|
|
$
|
2,728
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
External revenue
|
$
|
306,094
|
|
|
$
|
100,819
|
|
|
$
|
8,924
|
|
|
$
|
—
|
|
|
$
|
415,837
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
197,828
|
|
|
72,617
|
|
|
5,981
|
|
|
—
|
|
|
276,426
|
|
Depreciation and amortization including amortization of acquisition-related intangible assets
|
6,231
|
|
|
1,465
|
|
|
23
|
|
|
3,225
|
|
|
10,944
|
|
Other operating expenses
|
71,496
|
|
|
10,919
|
|
|
952
|
|
|
—
|
|
|
83,367
|
|
Segment contribution
|
30,539
|
|
|
15,818
|
|
|
1,968
|
|
|
(3,225
|
)
|
|
45,100
|
|
Interest expense and other unallocated items
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,136
|
)
|
|
(34,136
|
)
|
Income (loss) before income taxes
|
30,539
|
|
|
15,818
|
|
|
1,968
|
|
|
(37,361
|
)
|
|
10,964
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
4,014
|
|
|
4,014
|
|
Net income (loss)
|
$
|
30,539
|
|
|
$
|
15,818
|
|
|
$
|
1,968
|
|
|
$
|
(41,375
|
)
|
|
$
|
6,950
|
|
Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
External revenue
|
$
|
299,643
|
|
|
$
|
102,280
|
|
|
$
|
17,249
|
|
|
$
|
—
|
|
|
$
|
419,172
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
190,802
|
|
|
71,604
|
|
|
15,419
|
|
|
—
|
|
|
277,825
|
|
Depreciation and amortization including amortization of acquisition-related intangible assets
|
5,421
|
|
|
2,065
|
|
|
28
|
|
|
2,387
|
|
|
9,901
|
|
Other operating expenses
|
70,475
|
|
|
13,360
|
|
|
1,604
|
|
|
—
|
|
|
85,439
|
|
Segment contribution
|
32,945
|
|
|
15,251
|
|
|
198
|
|
|
(2,387
|
)
|
|
46,007
|
|
Interest expense and other unallocated items
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,500
|
)
|
|
(33,500
|
)
|
Income (loss) before income taxes
|
32,945
|
|
|
15,251
|
|
|
198
|
|
|
(35,887
|
)
|
|
12,507
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
1,181
|
|
|
1,181
|
|
Net income (loss)
|
$
|
32,945
|
|
|
$
|
15,251
|
|
|
$
|
198
|
|
|
$
|
(37,068
|
)
|
|
$
|
11,326
|
|
|
|
8.
|
Goodwill and Acquisition-Related Intangible Assets
|
Lionbridge assesses the impairment of goodwill and acquisition-related intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models and the market approach. In addition, goodwill is reviewed for impairment on an annual basis. At
December 31, 2015
, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value substantially exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling and the market approach. As a result,
no
impairment was recorded for the year ended
December 31, 2015
. There were no events or changes in circumstances during the
nine
months ended
September 30, 2016
which indicated that an assessment of the impairment of goodwill and acquisition-related intangible assets was required.
The Company evaluates whether there has been impairment in the carrying value of its long-lived assets if circumstances indicate that a possible impairment may exist. Impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset group is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of its long-lived assets include a worsening in customer attrition rates compared to historical attrition rates, lower than initially anticipated cash flows associated with customer relationships, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, identification of other impaired assets within a reporting unit, disposition of a significant portion of an operating segment, significant negative industry or economic trends, significant decline in our stock price for a sustained period and a decline in our market capitalization relative to net book value.
Acquisition-related intangible assets arose from acquisitions made prior to 2012 and the acquisitions of Productive Resources, LLC (“PRI”) in June 2012, Virtual Solutions, Inc. (“VSI”) in November 2012, E5 Global Holdings, Inc. (“E5”) in October 2013, Darwin Zone, S.A. ("Darwin") in May 2014, Clay Tablet Technologies ("Clay Tablet") in October 2014, CLS Communication Language Services Holding AG ("CLS") in January 2015 and Geotext Translations, Inc. ("Geotext") in November 2015 and consist of the following:
|
|
|
|
|
|
|
|
Method
|
|
Estimated
Useful
Life
|
Acquisitions prior to 2012:
|
|
|
|
|
Customer relationships
|
|
Economic consumption
|
|
3 to 12 years
|
Customer contracts
|
|
Straight-line
|
|
3 to 5 years
|
Technology
|
|
Straight-line
|
|
1 to 4 years
|
PRI, VSI, E5, Darwin, Clay Tablet and Geotext:
|
|
|
|
|
Technology
|
|
Straight-line
|
|
5 to 10 years
|
Customer relationships
|
|
Straight-line
|
|
2 to 12 years
|
Non-compete agreements
|
|
Straight-line
|
|
1 to 5 years
|
Trademark
|
|
Straight-line
|
|
1 to 5 years
|
CLS and Geotext:
|
|
|
|
|
Technology
|
|
Economic consumption
|
|
1 year
|
Customer relationships
|
|
Economic consumption
|
|
15 years
|
Trademark
|
|
Economic consumption
|
|
3 to 5 years
|
The following table summarizes acquisition-related intangible assets at
September 30, 2016
and
December 31, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
(In thousands)
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Effect of foreign exchange rates
|
|
Balance
|
Acquired customer relationships
|
$
|
80,360
|
|
|
$
|
(36,950
|
)
|
|
$
|
(2,190
|
)
|
|
$
|
41,220
|
|
Acquired customer contracts
|
14,000
|
|
|
(14,000
|
)
|
|
—
|
|
|
—
|
|
Acquired technology
|
5,447
|
|
|
(4,302
|
)
|
|
(5
|
)
|
|
1,140
|
|
Non-compete agreements
|
2,335
|
|
|
(1,523
|
)
|
|
—
|
|
|
812
|
|
Acquired trademarks
|
4,398
|
|
|
(1,480
|
)
|
|
(202
|
)
|
|
2,716
|
|
|
$
|
106,540
|
|
|
$
|
(58,255
|
)
|
|
$
|
(2,397
|
)
|
|
$
|
45,888
|
|
|
December 31, 2015
|
(In thousands)
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Effect of foreign exchange rates
|
|
Balance
|
Acquired customer relationships
|
$
|
80,360
|
|
|
$
|
(34,466
|
)
|
|
$
|
(2,955
|
)
|
|
$
|
42,939
|
|
Acquired customer contracts
|
14,000
|
|
|
(14,000
|
)
|
|
—
|
|
|
—
|
|
Acquired technology
|
5,447
|
|
|
(3,912
|
)
|
|
(10
|
)
|
|
1,525
|
|
Non-compete agreements
|
2,335
|
|
|
(1,174
|
)
|
|
—
|
|
|
1,161
|
|
Acquired trademarks
|
4,398
|
|
|
(760
|
)
|
|
(272
|
)
|
|
3,366
|
|
|
$
|
106,540
|
|
|
$
|
(54,312
|
)
|
|
$
|
(3,237
|
)
|
|
$
|
48,991
|
|
Lionbridge currently expects to amortize the following remaining amounts of acquisition-related intangible assets held at
September 30, 2016
in the fiscal periods as follows:
|
|
|
|
|
Year ending December 31, (in thousands)
|
|
2016
|
$
|
5,268
|
|
2017
|
5,816
|
|
2018
|
4,983
|
|
2019
|
4,506
|
|
2020
|
3,609
|
|
2021 and thereafter
|
21,706
|
|
|
$
|
45,888
|
|
A rollforward of goodwill is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
GLC
|
|
GES
|
|
Interpretation
|
|
Total
|
Balance at December 31, 2015
|
$
|
53,363
|
|
|
$
|
14,331
|
|
|
$
|
—
|
|
|
$
|
67,694
|
|
Effect of foreign exchange rates and other
|
1,442
|
|
|
—
|
|
|
—
|
|
|
1,442
|
|
Balance at September 30, 2016
|
$
|
54,805
|
|
|
$
|
14,331
|
|
|
$
|
—
|
|
|
$
|
69,136
|
|
Geotext Translations, Inc.
On November 4, 2015, the Company acquired
100%
of the outstanding shares of Geotext Translations, Inc. ("Geotext"), a U.S.-based privately-held provider of high quality translation services in the legal vertical market. The Company made an initial cash payment of approximately
$10.5 million
at closing, plus net adjustments of approximately
$1.2 million
for initial working capital and acquired cash and liabilities not included in working capital, for a total initial consideration of
$11.7 million
. Under the terms of the purchase agreement, the former owners of Geotext will be eligible to receive additional cash consideration of up to
$6.8 million
, contingent on the fulfillment of certain revenue based financial conditions during the three-year period ending October 31, 2018. The addition of Geotext will enable Lionbridge to meet growing demand for integrated, high-quality legal translation solutions and access Geotext’s long-standing relationships with clients in the legal industry. As such, Geotext is included in the Company's GLC operating segment.
The total preliminary acquisition date fair value of the consideration transferred was estimated at
$15.3 million
as follows:
|
|
|
|
|
(In thousands)
|
|
Initial cash payment
|
$
|
10,500
|
|
Initial working capital and acquired cash and liabilities not including in working capital
|
1,173
|
|
Fair value of contingent earn-out payments
|
3,650
|
|
Fair value of total consideration transferred
|
$
|
15,323
|
|
The Company determined the acquisition-date fair value of contingent consideration liability, based on the likelihood on the fulfillment of certain revenue based financial conditions. See "Note 10. Fair Value Measurements" for more information on how this contingent liability was valued.
The assets and liabilities associated with Geotext were recorded at their fair values as of the acquisition date and the amounts as follows:
|
|
|
|
|
(In thousands)
|
|
Cash
|
$
|
2,224
|
|
Accounts receivable
|
3,416
|
|
Unbilled receivables
|
530
|
|
Property and equipment
|
224
|
|
Intangible assets
|
6,520
|
|
Goodwill
|
6,185
|
|
Other assets
|
64
|
|
Total assets
|
19,163
|
|
Accrued expenses, accrued outsourcing, income taxes payable, deferred revenue and other current liabilities
|
(1,451
|
)
|
Deferred tax liability
|
(2,389
|
)
|
Fair value of total consideration transferred
|
$
|
15,323
|
|
Since the preliminary valuation performed in the fourth quarter of 2015, the Company recorded
$6.2 million
to goodwill related to the acquisition of Geotext on November 4, 2015, and recorded adjustments to the preliminary valuation of assets and liabilities, resulting in a net increase to goodwill of approximately
$0.4 million
in March 2016, resulting in an increase to goodwill during the first quarter of 2016.
Intangible assets acquired totaling
$6.5 million
include customer relationships of
$4.8 million
, trade name of
$1.1 million
and non-compete agreements executed by key employees (the "Geotext Non-Competition Agreements") of
$0.7 million
.
Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired and is primarily the result of expected synergies. None of the goodwill or identifiable intangibles associated with this transaction will be deductible for tax purposes. The values assigned to the acquired assets and liabilities are based on
preliminary estimates of fair value available as of the date of this filing and will be adjusted upon completion of final valuations
of certain assets and liabilities. Any changes in these fair values could potentially result in an adjustment to the goodwill
recorded for this transaction.
|
|
10.
|
Fair Value Measurements
|
ASC 820 –
Fair Value Measurements and Disclosures
(“ASC 820”) provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that Lionbridge uses to measure fair value, as well as the assets and liabilities that the Company values using those levels of inputs.
|
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. Lionbridge did not have any financial assets and liabilities as of
September 30, 2016
designated as Level 1.
|
|
|
Level 2:
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
|
|
|
Level 3:
|
Unobservable inputs that are supported by little or
no
market activity and that are significant to the fair value of the assets or liabilities. These liabilities are classified as Level 3 because the probability weighting of future payment scenarios is based on assumptions developed by management.
|
Contingent Considerations
Lionbridge has contingent consideration assumed as a result of the Geotext acquisition of
$4.8 million
at
September 30, 2016
. The Geotext contingent consideration represents the estimated fair value of future payments owed to the former owners based on Geotext achieving annual revenue targets in certain years as specified in the sale and purchase agreement. The Company determined the initial value of the contingent consideration by using the Monte Carlo simulation model. Inputs into the valuation model include a discount rate specific to the acquired entity, a measure of the estimated volatility and the risk free rate of return. As part of Lionbridge's quarterly assessment on the fair value of the Geotext contingent consideration, the Company recognized a
$1.2 million
increase to the contingent consideration during the
nine
months ended
September 30, 2016
driven by Geotext exceeding expectations inherent in the initial valuation. This adjustment is reflected in “Restructuring and other charges” on the Company’s Consolidated Statements of Operations and “Non-cash restructuring and other charges” on the Company’s Consolidated Statements of Cash Flows. Lionbridge had contingent consideration assumed as a result of the Geotext and VSI acquisitions of
$3.9 million
at
December 31, 2015
. The Company classified the Geotext considerations as Level 3, due to the lack of relevant observable inputs and market activity. The Company believes that any probable changes during future periods to these assumptions will not have a material effect on the contingent considerations.
Liabilities measured at fair value on a recurring basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016 (in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
Accrued acquisition payments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,750
|
|
|
$
|
1,750
|
|
Accrued acquisition payments, long-term portion
|
—
|
|
|
—
|
|
|
3,050
|
|
|
3,050
|
|
Total liabilities carried at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,800
|
|
|
$
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 (in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
Accrued acquisition payments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,720
|
|
|
$
|
1,720
|
|
Accrued acquisition payments, long-term portion
|
—
|
|
|
—
|
|
|
2,200
|
|
|
2,200
|
|
Total liabilities carried at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,920
|
|
|
$
|
3,920
|
|
Changes in the fair value of the Company’s Level 3 acquisition related liabilities during the
nine
months ended
September 30, 2016
were as follows:
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
Fair value at the beginning of the period
|
$
|
3,920
|
|
Changes in the fair value of acquisition consideration obligations
|
1,150
|
|
Payments of contingent consideration obligations
|
(270
|
)
|
Fair value at the end of the period
|
$
|
4,800
|
|
|
|
11.
|
Employee Benefit Plans
|
With the acquisition of CLS in 2015, the Company has continued the pension plan ("Pension Benefits") for Swiss employees, which is administered by an independent pension fund, similar to a defined contribution plan under Swiss law. Since participants of the plan are entitled to a defined rate of interest on contributions made, the plan meets the criteria for a defined benefit plan under U.S. GAAP. The independent pension fund is a multi-employer plan with unrestricted joint liability for all participating companies, the economic interest in the Swiss pension plan’s overfunding or underfunding is allocated to each participating company based on an allocation key determined by the plan. U.S. GAAP requires an employer to recognize the funded status of the defined benefit plan on the balance sheet, which the Company has presented in other long-term liabilities on the Company's consolidated balance sheet at
September 30, 2016
. The funded status may vary from year to year due to changes in the fair value of plan assets and variations on the underlying assumptions in the plan. At
September 30, 2016
, the Company believes that it will not be required to pay future obligations based on the overall plan’s current funded status under Swiss law.
The components of net period pension expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
478
|
|
|
$
|
514
|
|
|
$
|
1,487
|
|
|
$
|
1,542
|
|
Interest cost
|
127
|
|
|
154
|
|
|
395
|
|
|
462
|
|
Expected return on assets
|
(291
|
)
|
|
(317
|
)
|
|
(903
|
)
|
|
(951
|
)
|
Net periodic benefit cost
|
$
|
314
|
|
|
$
|
351
|
|
|
$
|
979
|
|
|
$
|
1,053
|
|
Long-term pension liabilities were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Other assets
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
—
|
|
|
29
|
|
Other long-term liabilities
|
8,273
|
|
|
7,688
|
|
Net amount recognized on the balance sheet
|
$
|
8,273
|
|
|
$
|
7,717
|
|
Lionbridge made the following contributions to the CLS pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Employer contributions
|
$
|
308
|
|
|
$
|
359
|
|
|
$
|
928
|
|
|
$
|
1,077
|
|
In addition, the Company maintained defined benefit pension plans for employees in The Netherlands, Poland, France and Norway, a defined contribution plan for employees in Ireland, the United Kingdom, Canada, Slovakia, Denmark, Finland, Sweden, Germany and India, and defined contribution postretirement plans in Italy, Belgium, China, Korea, Japan, Singapore, Thailand and Taiwan. The Company has not provided the disclosures required under ASC 715, “Compensation—Retirement Benefits” (“ASC 715”), for these defined benefit pension plans as the amounts involved are not material to the years presented.
|
|
12.
|
Recent Accounting Pronouncements
|
In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are evaluating the impact the adoption will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which relates to the accounting of leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the impact the adoption will have on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this accounting guidance retrospectively in the first quarter of 2016, which resulted in a
$0.4 million
reclassification in other assets and long-term debt, net of current portion in the Company's consolidated balance sheet at December 31, 2015.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This guidance supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition”. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after December 31, 2016. Additional ASUs have been issued to amend or clarify this ASU as follows:
|
|
•
|
ASU No. 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.
|
|
|
•
|
ASU No. 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition (TRG).
|
|
|
•
|
ASU No. 2016-08
Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.
|
This guidance in these ASUs for revenue recognition is applicable to the Company's fiscal year beginning January 1, 2018. We have not yet selected a transition method. We are currently evaluating the potential changes from this ASU to our future financial reporting and disclosures.
Other new pronouncements issued but not effective until after
September 30, 2016
are not expected to have a material impact on our financial position, results of operations or liquidity.
|
|
13.
|
Other Current Assets, Accrued Expenses and Other Current Liabilities and Other Long-Term Liabilities
|
The following table presents the components of selected balance sheet items as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Other current assets:
|
|
|
|
Deferred project costs
|
$
|
2,840
|
|
|
$
|
2,807
|
|
Prepaid income tax
|
4,583
|
|
|
4,765
|
|
Other prepaid expenses
|
5,554
|
|
|
4,454
|
|
Other current assets
|
1,668
|
|
|
1,280
|
|
Total other current assets
|
$
|
14,645
|
|
|
$
|
13,306
|
|
Accrued expenses and other current liabilities:
|
|
|
|
Accrued acquisition payments, current portion
|
$
|
1,750
|
|
|
$
|
1,720
|
|
Accrued professional fees
|
32
|
|
|
472
|
|
Accrued customer volume discounts
|
448
|
|
|
786
|
|
Accrued rent
|
787
|
|
|
930
|
|
Other accrued expenses
|
3,162
|
|
|
4,186
|
|
Other current liabilities
|
1,209
|
|
|
1,783
|
|
Total accrued expenses and other current liabilities
|
$
|
7,388
|
|
|
$
|
9,877
|
|
Other long-term liabilities:
|
|
|
|
Pension and post retirement obligations, net of current portion
|
$
|
10,456
|
|
|
$
|
10,435
|
|
Accrued acquisition payments, net of current portion
|
3,050
|
|
|
2,200
|
|
Accrued income tax uncertainties
|
3,016
|
|
|
2,913
|
|
Accrued restructuring, net of current portion
|
351
|
|
|
1,699
|
|
Deferred rent
|
2,820
|
|
|
2,680
|
|
Other
|
1,692
|
|
|
1,738
|
|
Total other long-term liabilities
|
$
|
21,385
|
|
|
$
|
21,665
|
|
|
|
14.
|
Accumulated Other Comprehensive Income
|
Accumulated other comprehensive income consisted of the following at
September 30, 2016
and
December 31, 2015
, respectively:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30,
2016
|
|
December 31,
2015
|
Cumulative foreign currency translation adjustments
|
$
|
10,614
|
|
|
$
|
10,862
|
|
Unfunded projected benefit obligation
|
1,073
|
|
|
1,073
|
|
Accumulative other comprehensive income
|
$
|
11,687
|
|
|
$
|
11,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total revenue
|
$
|
135,182
|
|
|
$
|
138,604
|
|
|
$
|
415,837
|
|
|
$
|
419,172
|
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Revenue
decrease
d
$3.4 million
, or
2.5%
, to
$135.2 million
for the
three
months ended
September 30, 2016
from
$138.6 million
for the
three
months ended
September 30, 2015
. Included in total revenue is $5.1 million of incremental revenue from the Company's acquisition of Geotext. This was offset by a decrease in revenue from a U.S. Government customer of $3.6 million due to an expiring contract and a $4.9 million decrease in translation and testing project volumes from customers in the technology sector.
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Revenue for the
nine
months ended
September 30, 2016
was relatively consistent with the
nine
months ended
September 30, 2015
. Included in total revenue is $16.7 million of incremental revenue from the Company's acquisition of Geotext. This was offset by a decrease in revenue from a U.S. Government customer of $10.4 million due to an expired contract and an $8.0 million decrease in translation and testing project volumes from customers in the technology sector.
In the first half of 2015, Lionbridge experienced a decline in year-over-year revenue from its largest client, Microsoft. This decline was attributable to lower revenue volumes associated with the maintenance of an existing program for Microsoft as well as reduced demand for Lionbridge’s services while Microsoft implemented a reorganization and cost containment plan. Since the second half of 2015, revenue from this client has been approximately $17-22 million per quarter. Microsoft revenue and Microsoft revenue as a percentage of total revenue in the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Revenue attributable to Microsoft
|
$
|
17,000
|
|
|
$
|
19,264
|
|
|
$
|
58,587
|
|
|
$
|
62,330
|
|
Revenue attributable to Microsoft as a percentage of total revenue
|
12.6
|
%
|
|
13.9
|
%
|
|
14.1
|
%
|
|
14.9
|
%
|
Cost of Revenue and Gross Margin.
Gross margin is revenue less cost of revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation and testing services provided by third parties as well as salaries and associated employer taxes and employee benefits for personnel related to client engagements. A significant portion of the Company's cost of revenue is denominated in foreign currencies, which can have a favorable or unfavorable impact based on how the U.S. Dollar responds to foreign currencies throughout the year.
Cost of revenue, cost of revenue as a percentage of revenue, gross margin and gross margin as a percentage of revenue for
three
months ended
September 30, 2016
and
2015
were, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Cost of revenue (exclusive of depreciation and amortization)
|
$
|
89,595
|
|
|
$
|
92,977
|
|
|
66.3
|
%
|
|
67.1
|
%
|
Gross margin (exclusive of depreciation and amortization)
|
$
|
45,587
|
|
|
$
|
45,627
|
|
|
33.7
|
%
|
|
32.9
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Total gross margin for the
three
months ended
September 30, 2016
was relatively consistent with the
three
months ended
September 30, 2015
. Total gross margin percentage increased to
33.7%
for the
three
months ended
September 30, 2016
compared to
32.9%
for the
three
months ended
September 30, 2015
. The Company's gross margin and gross margin percentage by segment is described in further detail below in Segment Results.
Cost of revenue, cost of revenue as a percentage of revenue, gross margin and gross margin as a percentage of revenue for
nine
months ended
September 30, 2016
and
2015
were, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Cost of revenue (exclusive of depreciation and amortization)
|
$
|
276,426
|
|
|
$
|
277,825
|
|
|
66.5
|
%
|
|
66.3
|
%
|
Gross margin (exclusive of depreciation and amortization)
|
$
|
139,411
|
|
|
$
|
141,347
|
|
|
33.5
|
%
|
|
33.7
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
For the
nine
months ended
September 30, 2016
, total gross margin
decrease
d
$1.9 million
, or
1.4%
, to
$139.4 million
as compared to
$141.3 million
for the
nine
months ended
September 30, 2015
. Total gross margin percentage decreased to
33.5%
for the
nine
months ended
September 30, 2016
from
33.7%
for the
nine
months ended
September 30, 2015
. The decrease in total gross margin was primarily driven by the Company's GES segments as described below in Segment Results, partially offset by an increase by the Company's GLC and Interpretation segments as described below in Segment Results.
Sales and Marketing.
Sales and marketing expenses consist primarily of salaries, commissions and associated employer taxes and employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total sales and marketing expenses
|
$
|
10,788
|
|
|
$
|
11,083
|
|
|
8.0
|
%
|
|
8.0
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Sales and marketing expenses
decreased
$0.3 million
, or
2.7%
, for the
three
months ended
September 30, 2016
as compared to the
three
months ended
September 30, 2015
primarily due to a $0.6 million decrease in employee-related compensation costs, partially offset by incremental employee-related costs of $0.3 million from Geotext. As a percentage of revenue, sales and marketing expenses remained relatively consistent for the
three
months ended
September 30, 2016
compared to the
three months ended September 30, 2015
.
The following table shows sales and marketing expenses in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total sales and marketing expenses
|
$
|
34,511
|
|
|
$
|
35,163
|
|
|
8.3
|
%
|
|
8.4
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Sales and marketing expenses
decreased
$0.7 million
, or
1.9%
, for the
nine
months ended
September 30, 2016
as compared to the
nine
months ended
September 30, 2015
primarily due to a $2.1 million decrease in employee-related compensation costs, partially offset by incremental employee-related costs of $0.8 million from Geotext. The decrease in employee-related costs in sales and marketing is principally driven by a reduction in sales and marketing expense as the Company aligned its sales force with the Company's targeted vertical markets and geographies. This reduction in sales and marketing employee-related costs was partially offset by an increase of $0.8 million in other costs, including lead generation and trade shows. As a percentage of revenue, sales and marketing expenses the
nine
months ended
September 30, 2016
were relatively consistent with the
nine
months ended
September 30, 2015
.
General and Administrative.
General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employer taxes and employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total general and administrative expenses
|
$
|
21,280
|
|
|
$
|
21,888
|
|
|
15.7
|
%
|
|
15.8
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
General and administrative expenses
decreased
$0.6 million
, or
2.8%
, for the
three
months ended
September 30, 2016
as compared to the
three
months ended
September 30, 2015
primarily due to a $0.5 million decrease in employee-related costs and a decrease in rent expense of $0.6 million principally driven by the benefit of cost reduction initiatives which were implemented over the past several quarters, partially offset by the impact of incremental employee-related costs of $0.5 million from Geotext. As a percentage of revenue, general and administrative expenses in the
nine
months ended
September 30, 2016
were relatively consistent with the
nine
months ended
September 30, 2015
.
The following table shows general and administrative expenses in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total general and administrative expenses
|
$
|
66,546
|
|
|
$
|
69,024
|
|
|
16.0
|
%
|
|
16.5
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
General and administrative expenses
decreased
$2.5 million
, or
3.6%
, for the
nine
months ended
September 30, 2016
as compared to the
nine
months ended
September 30, 2015
primarily due to a $3.3 million decrease in employee-related costs, partially offset by the impact of incremental employee-related costs of $1.3 million from Geotext. The decrease in employee-related costs in general and administrative expenses reflect the benefit of cost reduction initiatives which were implemented over the past several quarters. As a percentage of revenue, general and administrative expenses decreased to
16.0%
for the
nine
months ended
September 30, 2016
as compared to
16.5%
for the
nine
months ended
September 30, 2015
.
Research and Development.
Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform, its Translation Workspace
®
cloud-based offering and its customizable real-time automated machine translation technology known as GeoFluent
®
. The cost consists primarily of salaries and associated employer taxes and employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total research and development expense
|
$
|
2,332
|
|
|
$
|
1,903
|
|
|
1.7
|
%
|
|
1.4
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Research and development expenses
increased
$0.4 million
, or
22.5%
, for the
three months ended September 30, 2016
compared to the
three
months ended
September 30, 2015
primarily due to $0.3 million in employee-related costs. As a percentage of revenue, research and development expenses increased to
1.7%
for the
nine
months ended
September 30, 2016
as compared to
1.4%
for the
nine
months ended
September 30, 2015
.
The following table shows research and development expenses in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total research and development expense
|
$
|
6,628
|
|
|
$
|
6,060
|
|
|
1.6
|
%
|
|
1.4
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Research and development expenses
increased
$0.6 million
, or
9.4%
, for the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
primarily due to $0.7 million in employee-related costs. As a percentage of revenue, research and development expenses increased to
1.6%
for the
nine
months ended
September 30, 2016
as compared to
1.4%
for the
nine
months ended
September 30, 2015
.
Depreciation and Amortization.
Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars and as a percentage of revenue for the
three
months of the prior year and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total depreciation and amortization expense
|
$
|
2,493
|
|
|
$
|
2,340
|
|
|
1.8
|
%
|
|
1.7
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Depreciation and amortization expense as an amount and as a percentage of revenue was relatively consistent for the
three
months ended
September 30, 2016
as compared to the
three
months ended
September 30, 2015
.
The following table shows depreciation and amortization expenses in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total depreciation and amortization expense
|
$
|
7,001
|
|
|
$
|
6,922
|
|
|
1.7
|
%
|
|
1.7
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Depreciation and amortization expense as an amount and as a percentage of revenue was relatively consistent for the
nine
months ended
September 30, 2016
as compared to the
nine
months ended
September 30, 2015
.
Amortization of Acquisition-related Intangible Assets.
Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets from acquired businesses. The following table shows amortization of acquisition-related intangible assets in dollars and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Amortization of acquisition-related intangible assets
|
$
|
1,293
|
|
|
$
|
993
|
|
|
1.0
|
%
|
|
0.7
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Amortization of acquisition-related intangible assets
increased
$0.3 million
to
$1.3 million
for the
three
months ended
September 30, 2016
compared to
$1.0 million
for
three
months ended
September 30, 2015
. The increase in amortization of acquisition-related intangible assets is primarily due to the amortization of intangibles assets from the acquisition of Geotext in the fourth quarter of 2015.
The following table shows amortization of acquisition-related intangible assets in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Amortization of acquisition-related intangible assets
|
$
|
3,943
|
|
|
$
|
2,979
|
|
|
0.9
|
%
|
|
0.7
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Amortization of acquisition-related intangible assets
increased
$1.0 million
to
$3.9 million
for the
nine
months ended
September 30, 2016
compared to
$3.0 million
for
nine
months ended
September 30, 2015
. The increase in amortization of acquisition-related intangible assets is primarily due to the amortization of intangibles assets from the acquisition of Geotext in the fourth quarter of 2015.
Restructuring and Other Charges.
The following table shows restructuring and other charges in dollars and as a percentage of revenue for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Restructuring and other charges
|
$
|
1,869
|
|
|
$
|
2,957
|
|
|
1.4
|
%
|
|
2.1
|
%
|
The following table shows restructuring charges primarily for workforce reductions and incurred additional costs for previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions and acquisition-related costs for the
three
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Restructuring charges recorded for reduction in workforce and other
|
$
|
866
|
|
|
$
|
1,833
|
|
Changes in estimated liabilities and restructuring charges recorded for vacated facility/lease termination
|
178
|
|
|
534
|
|
Total restructuring charges recorded
|
1,044
|
|
|
2,367
|
|
Acquisition-related costs
|
825
|
|
|
590
|
|
Restructuring and other charges
|
$
|
1,869
|
|
|
$
|
2,957
|
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Restructuring and other charges
decrease
d
$1.1 million
, to
$1.9 million
for the
three
months ended
September 30, 2016
from
$3.0 million
for the
three
months ended
September 30, 2015
. This decrease was primarily due to a decrease in workforce reduction charges of
$1.0 million
as the Company substantially completed the workforce integration of CLS operations at the end of the first quarter of 2016.
The following table shows restructuring and other charges in dollars and as a percentage of revenue for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Restructuring and other charges
|
$
|
5,283
|
|
|
$
|
9,359
|
|
|
1.3
|
%
|
|
2.2
|
%
|
The following table shows restructuring charges primarily for workforce reductions and incurred additional costs for previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions and acquisition-related costs for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Restructuring charges recorded for reduction in workforce and other
|
$
|
2,850
|
|
|
$
|
6,435
|
|
Changes in estimated liabilities and restructuring charges recorded for vacated facility/lease termination
|
642
|
|
|
682
|
|
Total restructuring charges recorded
|
3,492
|
|
|
7,117
|
|
Acquisition-related costs
|
1,791
|
|
|
2,242
|
|
Restructuring and other charges
|
$
|
5,283
|
|
|
$
|
9,359
|
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Restructuring and other charges
decreased
$4.1 million
, to
$5.3 million
for the
nine
months ended
September 30, 2016
from
$9.4 million
for the
nine
months ended
September 30, 2015
. This decrease was primarily due to a
decrease
in workforce reduction charges of
$3.6 million
as the Company substantially completed the workforce integration of CLS operations at the end of the first quarter of 2016 and a
decrease
of
$0.5 million
primarily due to costs incurred in the
nine
months ended
September 30, 2015
associated with the acquisition of CLS.
Interest Expense, Interest Income and Other Expense (Income), Net.
Interest expense represents interest paid or payable on debt and the amortization of deferred financing costs. Other income, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The following table shows interest expense and other (income) expense, net for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Total interest expense
|
$
|
636
|
|
|
$
|
576
|
|
|
$
|
1,863
|
|
|
$
|
1,718
|
|
Interest income
|
(10
|
)
|
|
(13
|
)
|
|
(32
|
)
|
|
(50
|
)
|
Other expense (income), net
|
614
|
|
|
417
|
|
|
2,704
|
|
|
(2,335
|
)
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Interest expense for the three months ended
September 30, 2016
increased
approximately less than $0.1 million compared to the three months ended
September 30, 2015
primarily due to an increase in the amount of outstanding debt at
September 30, 2016
compared to
September 30, 2015
. Interest income for the three months ended
September 30, 2016
was relatively consistent compared to the three months ended
September 30, 2015
. Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in other expense (income), net. Inter-company balances denominated in foreign currencies for which settlement is not planned or anticipated in the foreseeable future are excluded from net income and translation of these balances flow through other comprehensive income. The Company incurred remeasurement losses in other expense (income), net for the three months ended
September 30, 2016
principally driven by foreign currency remeasurement losses on Euro and British Pound Sterling assets and liabilities compared to foreign currency remeasurement gains in the three months ended
September 30, 2015
principally driven by Swiss Franc and Euro assets and liabilities. Foreign currency impact on the Company's results is described in further detail in "Item 3. Quantitative and Qualitative Disclosures About Market Risk".
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Interest expense for the
nine
months ended
September 30, 2016
increased
less than
$0.1 million
compared to the
nine
months ended
September 30, 2015
primarily due to an increase in the amount of outstanding debt at
September 30, 2016
compared to
September 30, 2015
. Interest income for the
nine
months ended
September 30, 2016
was relatively consistent compared to the
nine
months ended
September 30, 2015
. Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in other expense (income), net. Inter-company balances denominated in foreign currencies for which settlement is not planned or anticipated in the foreseeable future are excluded from net income and translation of these balances flow through other comprehensive income. The Company incurred remeasurement losses in other expense (income), net for the
nine
months ended
September 30, 2016
principally driven by foreign currency remeasurement losses on Euro and British Pound Sterling assets and liabilities compared to foreign currency remeasurement gains in the
nine
months ended
September 30, 2015
principally driven by Swiss Franc and Euro assets and liabilities. Foreign currency impact on the Company's results is described in further detail in "Item 3. Quantitative and Qualitative Disclosures About Market Risk".
Income Before Income Taxes.
The components of income before income taxes were as follows for the three and
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
United States
|
$
|
(816
|
)
|
|
$
|
(1,083
|
)
|
|
$
|
(1,156
|
)
|
|
$
|
(636
|
)
|
Foreign
|
5,108
|
|
|
4,566
|
|
|
12,120
|
|
|
13,143
|
|
Income before income taxes
|
$
|
4,292
|
|
|
$
|
3,483
|
|
|
$
|
10,964
|
|
|
$
|
12,507
|
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
During the
three
months ended
September 30, 2016
, the Company’s United States operations generated
a loss
before income taxes of
$0.8 million
as compared to
a loss
before income taxes of
$1.1 million
for the
three
months ended
September 30, 2015
as a result of a higher percentage of contracts being entered into by foreign customers than in the United States. The Company’s foreign operations generated
income
before income taxes of
$5.1 million
for the
three
months ended
September 30, 2016
as compared to
income
before income taxes of
$4.6 million
during the
three
months ended
September 30, 2015
. A significant portion of our operating costs are incurred outside the United States and a majority of our foreign affiliates are subject to cost-plus based transfer pricing agreements which generally results in a certain level of foreign operating profits based on the performance of routine functions for customer contracts. The changes in trends experienced in the Company’s foreign operations in the
three
months ended
September 30, 2016
compared to the
three
months ended
September 30, 2015
is due to jurisdictional mix of foreign profits in the
three
months ended
September 30, 2016
compared to the
three
months ended
September 30, 2015
.
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
During the
nine
months ended
September 30, 2016
, the Company’s United States operations generated
a loss
before income taxes of
$1.2 million
as compared to
a loss
before income taxes of
$0.6 million
for the
nine
months ended
September 30, 2015
as a result of a higher percentage of contracts being entered into by foreign customers than in the United States. The Company’s foreign operations generated
income
before income taxes of
$12.1 million
for the
nine
months ended
September 30, 2016
as compared to
income
before income taxes of
$13.1 million
during the
nine
months ended
September 30, 2015
. A significant portion of our operating costs are incurred outside the United States and a majority of our foreign affiliates are subject to cost-plus based transfer pricing agreements which generally results in a certain level of foreign operating profits based on the performance of routine functions for customer contracts. The changes in trends experienced in the Company’s foreign operations in the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
is due to unfavorable jurisdictional mix of foreign profits in the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
.
Provision for Income Taxes.
The provision for income taxes consists primarily of taxes resulting from profits in foreign jurisdictions, and interest and penalties associated with uncertain tax positions. The tax provision
increased
from a provision of
$0.8 million
in
three
months ended
September 30, 2015
to a provision of
$1.6 million
for the
three
months ended
September 30, 2016
. The change in the tax provision for the
three
months ended
September 30, 2016
compared to the
three
months ended
September 30, 2015
is primarily due to change in jurisdictional mix of foreign profits, which are subject to tax by the foreign jurisdictions due to the treatment of the foreign subsidiaries as service providers that earn a profit based on a
cost-plus model and a discrete benefit recognized in the quarter of approximately $1.4 million related to the release of certain existing reserves for uncertain tax positions, primarily due to a favorable tax ruling in India. The tax provision
increased
from
$1.2 million
in the
nine
months ended
September 30, 2015
to a provision of
$4.0 million
for the
nine
months ended
September 30, 2016
. The change in the tax provision for the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
is primarily due to a discrete benefit recognized in the second quarter of 2015 and changes in jurisdictional mix of foreign profits, which are subject to tax by the foreign jurisdictions due to the treatment of the foreign subsidiaries as service providers that earn a profit based on a cost-plus model and a discrete benefit recognized in the quarter of approximately $1.4 million related to the release of certain existing reserves for uncertain tax positions, primarily due to a favorable tax ruling in India.
Non-GAAP Financial Measures
We measure our performance using non-GAAP measurements of adjusted earnings and adjusted earnings per share. We define adjusted earnings and adjusted earnings per share as GAAP net income excluding amortization of acquisition-related intangible assets, stock-based compensation, restructuring and other charges. We also measure our performance using the non-GAAP measurement of Adjusted EBITDA, which we define as net income excluding depreciation and amortization, amortization of acquisition-related intangible assets, stock-based compensation, restructuring and other charges, net interest expense, non-operating other expense (income) and provision for income taxes. Adjusted earnings, adjusted earnings per share and adjusted EBITDA are supplemental financial measures used by the Company and by external users of its financial statements. The Company considers these metrics to be an indicator of the operational strength and performance of its business. Such measurements allow the Company to assess its performance without regard to financing methods and capital structure and without the impact of other matters that the Company does not consider indicative of the operating performance of its business. We believe these non-GAAP measures are useful to management and investors in evaluating our operating performance for the periods presented. We are providing Adjusted EPS because management uses it for the purpose of evaluating and forecasting our financial performance and believes that it provides additional insight into our underlying business performance. We believe it allows investors to benefit from being able to assess our operating performance to others in the industry. These non-GAAP financial measures should not be viewed as alternatives to GAAP measures of performance. Management believes the most directly comparable GAAP financial measures for adjusted EBITDA is net income less non-cash charges and restructuring and other charges. Management believes the most directly comparable GAAP financial measures for adjusted earnings and adjusted earnings per share are net income and diluted net income per share, respectively. The following table reconciles net income to adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Net income
|
$
|
2,662
|
|
|
$
|
2,728
|
|
|
$
|
6,950
|
|
|
$
|
11,326
|
|
Depreciation and amortization
|
2,493
|
|
|
2,340
|
|
|
7,001
|
|
|
6,922
|
|
Amortization of acquisition-related intangible assets
|
1,293
|
|
|
993
|
|
|
3,943
|
|
|
2,979
|
|
Stock-based compensation
|
1,867
|
|
|
2,007
|
|
|
5,350
|
|
|
5,663
|
|
Restructuring and other charges
|
1,869
|
|
|
2,957
|
|
|
5,283
|
|
|
9,359
|
|
Interest expense, net
|
626
|
|
|
563
|
|
|
1,831
|
|
|
1,668
|
|
Other expense (income), net
|
614
|
|
|
417
|
|
|
2,704
|
|
|
(2,335
|
)
|
Provision for income taxes
|
1,630
|
|
|
755
|
|
|
4,014
|
|
|
1,181
|
|
Adjusted EBITDA
|
$
|
13,054
|
|
|
$
|
12,760
|
|
|
$
|
37,076
|
|
|
$
|
36,763
|
|
The following table reconciles net income to adjusted earnings and presents adjusted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands, except per share amounts)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Net income
|
$
|
2,662
|
|
|
$
|
2,728
|
|
|
$
|
6,950
|
|
|
$
|
11,326
|
|
Amortization of acquisition-related intangible assets
|
1,293
|
|
|
993
|
|
|
3,943
|
|
|
2,979
|
|
Stock-based compensation
|
1,867
|
|
|
2,007
|
|
|
5,350
|
|
|
5,663
|
|
Restructuring and other charges
|
1,869
|
|
|
2,957
|
|
|
5,283
|
|
|
9,359
|
|
Impact on provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted earnings
|
$
|
7,691
|
|
|
$
|
8,685
|
|
|
$
|
21,526
|
|
|
$
|
29,327
|
|
Fully diluted weighted-average number of common shares outstanding
|
58,960
|
|
|
62,623
|
|
|
59,532
|
|
|
62,528
|
|
Adjusted earnings per share
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
The following table reconciles diluted earnings per share to adjusted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Diluted earnings per share
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
Amortization of acquisition-related intangible assets
|
0.02
|
|
|
0.02
|
|
|
0.07
|
|
|
0.05
|
|
Stock-based compensation
|
0.03
|
|
|
0.03
|
|
|
0.09
|
|
|
0.09
|
|
Restructuring and other charges
|
0.03
|
|
|
0.05
|
|
|
0.09
|
|
|
0.15
|
|
Impact on provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted earnings per share
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
Segment Results
Lionbridge operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer.
The Company identifies such segments primarily based on the nature of services delivered. The Company considered qualitative factors, including the economic characteristics of each operating segment to determine if any qualified for aggregation. More specifically, the Company evaluated the economic characteristics, the nature of products and services, the methods used to provide services, the types of customers, and the nature of the corresponding regulatory environment of its operating segments. As a result, the Company identified the following
three
reportable segments:
GLC—this segment
translates, localizes and adapts clients’ content and products to meet the language, cultural, technical and industry-specific requirements of users in local markets throughout the world. As part of its GLC solutions, Lionbridge also provides global marketing services, and creates and translates technical documentation for clients who market to and support customers in global markets. Lionbridge GLC solutions utilize the Company’s cloud-based technology platforms and applications, its crowd based translation resources and its global service delivery model, which make the translation, localization and content management processes more efficient for Lionbridge and its clients.
GES—this segment
tests applications and online search results to help clients deliver high-quality, relevant applications and content in global markets. The Company’s GES solutions ensure the quality, usability, relevance and performance of clients’ web applications, content, software, search engines, online games, and technology products content globally. As part of its GES offering, Lionbridge also provides specialized professional crowdsourcing services including search relevance testing, in-country testing for mobile devices, and data management solutions.
Interpretation—this segment
provides interpretation services for government, business and healthcare organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than
360
languages and dialects, including over-the-phone and onsite interpretation services.
The Company’s internal reporting does not include the allocation of certain expenses to the operating segments but instead includes those other expenses in unallocated corporate and other expense. Unallocated expenses primarily include corporate expenses, such as interest expense, restructuring and other charges, foreign exchange gains and losses and governance expenses, as well as finance, information technology, human resources, legal, treasury and marketing expenses. The Company determines whether a cost is charged to a particular business segment or is retained as an unallocated cost based on whether the cost relates to a corporate function or to a direct expense associated with the particular business segment. For example, corporate finance, corporate information technology and corporate human resource expenses are unallocated, whereas operating segment finance, information technology and human resource expenses are charged to the applicable operating segment. The Company is currently in the process of realigning its strategic business units in order to streamline operations, increase productivity and achieve stronger alignment with its customers' priorities. The Company expects this process to be completed in 2017.
Revenue.
The following table shows GLC, GES and Interpretation revenues in dollars and as a percentage of total revenue for the three months ended
September 30, 2016
and 2015, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of Total Revenue
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
GLC
|
$
|
99,460
|
|
|
$
|
98,762
|
|
|
73.5
|
%
|
|
71.3
|
%
|
GES
|
32,805
|
|
|
33,919
|
|
|
24.3
|
%
|
|
24.4
|
%
|
Interpretation
|
2,917
|
|
|
5,923
|
|
|
2.2
|
%
|
|
4.3
|
%
|
Total revenue
|
$
|
135,182
|
|
|
$
|
138,604
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Revenue from the Company’s GLC segment was relatively consistent for the
three
months ended
September 30, 2016
as compared to the
three
months ended
September 30, 2015
. Revenue in the Company's GLC segment increased by $5.1 million from the acquisition of Geotext and increased $3.2 million from organic growth initiatives including the Company's onDemand offerings as well increased revenue with several enterprise clients. This was partially offset by a decrease of $6.1 million due to a decline in product translation project volumes from a few technology and manufacturing clients and a decrease of $1.5 million resulting from an unfavorable currency translation impact principally driven by the strengthening of the U.S. Dollar against foreign currencies, primarily the British Pound Sterling.
Revenue from the Company’s GES segment
decrease
d
$1.1 million
, or
3.3%
, to
$32.8 million
for the
three
months ended
September 30, 2016
from
$33.9 million
for the
three
months ended
September 30, 2015
. The decrease is primarily due to decrease in volume from an existing technology client.
Revenue from the Company’s Interpretation segment
decrease
d
$3.0 million
, or
50.8%
, to
$2.9 million
for the
three
months ended
September 30, 2016
from
$5.9 million
for the
three
months ended
September 30, 2015
. The decrease in revenue from the Company's Interpretation segment was due to a decrease of $3.6 million driven by the expiration of the multi-year on-site interpretation contract with U.S. Department of Justice Executive Office for Immigration Review (EOIR), which concluded on November 30, 2015. This was partially offset by an increase in $0.6 million due to increased demand for over-the-phone ("OPI") interpretation services from several customers.
The following table shows GLC, GES and Interpretation revenues in dollars and as a percentage of total revenue for the
nine
months ended
September 30, 2016
and 2015, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
% of Total Revenue
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
GLC
|
$
|
306,094
|
|
|
$
|
299,643
|
|
|
73.7
|
%
|
|
71.5
|
%
|
GES
|
100,819
|
|
|
102,280
|
|
|
24.2
|
%
|
|
24.4
|
%
|
Interpretation
|
8,924
|
|
|
17,249
|
|
|
2.1
|
%
|
|
4.1
|
%
|
Total revenue
|
$
|
415,837
|
|
|
$
|
419,172
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Revenue from the Company’s GLC segment
increase
d
$6.5 million
, or
2.2%
, to
$306.1 million
for the
nine
months ended
September 30, 2016
from
$299.6 million
for the
nine
months ended
September 30, 2015
. The
increase
in revenue from the
Company's GLC segment was primarily due to incremental revenue of $16.7 million from the acquisition of Geotext and associated legal translation revenue and an increase of $5.1 million in organic revenue related to the Company's onDemand offerings and growth with several large enterprise accounts. This increase was partially offset by a decrease of $11.1 million in revenue primarily due to a decrease in project volumes from a few clients in the technology, manufacturing and financial sectors and a decrease of $4.6 million due to an unfavorable currency translation impact principally driven by the strengthening of the U.S. Dollar against foreign currencies, primarily the British Pound Sterling, Canadian Dollar and Swiss Franc.
Revenue from the Company’s GES segment
decrease
d
$1.5 million
, or
1.4%
, to
$100.8 million
for the
nine
months ended
September 30, 2016
from
$102.3 million
for the
nine
months ended
September 30, 2015
. The decrease is primarily due to decrease in volume from an existing technology customer.
Revenue from the Company’s Interpretation segment
decrease
d
$8.3 million
, or
48.3%
, to
$8.9 million
for the
nine
months ended
September 30, 2016
from
$17.2 million
for the
nine
months ended
September 30, 2015
. The decrease in revenue from the Company's Interpretation segment was primarily due to a $10.5 million decrease principally driven by the expiration of the multi-year on-site contract with U.S. Department of Justice Executive Office for Immigration Review (EOIR), which expired on November 30, 2015, following a two-month extension. This was partially offset by an increase in $2.0 million due to increased demand for OPI interpretation services from several customers.
Cost of Revenue and Gross Margin.
The following table shows GLC, GES and Interpretation cost of revenues, cost of revenues as a percentage of revenue, gross margin and gross margin as a percentage of revenue for the three and
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands, except percentages)
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Cost of revenue:
|
|
|
|
|
|
|
|
GLC
|
$
|
63,820
|
|
|
$
|
63,510
|
|
|
$
|
197,828
|
|
|
$
|
190,802
|
|
GES
|
23,838
|
|
|
24,163
|
|
|
72,617
|
|
|
71,604
|
|
Interpretation
|
1,937
|
|
|
5,304
|
|
|
5,981
|
|
|
15,419
|
|
Total cost of revenue
|
$
|
89,595
|
|
|
$
|
92,977
|
|
|
$
|
276,426
|
|
|
$
|
277,825
|
|
Cost of revenue as a percentage of revenue:
|
|
|
|
|
|
|
|
GLC
|
64.2
|
%
|
|
64.3
|
%
|
|
64.6
|
%
|
|
63.7
|
%
|
GES
|
72.7
|
%
|
|
71.2
|
%
|
|
72.0
|
%
|
|
70.0
|
%
|
Interpretation
|
66.4
|
%
|
|
89.5
|
%
|
|
67.0
|
%
|
|
89.4
|
%
|
Total cost of revenue as a percentage of revenue
|
66.3
|
%
|
|
67.1
|
%
|
|
66.5
|
%
|
|
66.3
|
%
|
Gross margin:
|
|
|
|
|
|
|
|
GLC
|
$
|
35,640
|
|
|
$
|
35,252
|
|
|
$
|
108,266
|
|
|
$
|
108,841
|
|
GES
|
8,967
|
|
|
9,756
|
|
|
28,202
|
|
|
30,676
|
|
Interpretation
|
980
|
|
|
619
|
|
|
2,943
|
|
|
1,830
|
|
Total gross margin
|
$
|
45,587
|
|
|
$
|
45,627
|
|
|
$
|
139,411
|
|
|
$
|
141,347
|
|
Gross margin percentage:
|
|
|
|
|
|
|
|
GLC
|
35.8
|
%
|
|
35.7
|
%
|
|
35.4
|
%
|
|
36.3
|
%
|
GES
|
27.3
|
%
|
|
28.8
|
%
|
|
28.0
|
%
|
|
30.0
|
%
|
Interpretation
|
33.6
|
%
|
|
10.5
|
%
|
|
33.0
|
%
|
|
10.6
|
%
|
Total gross margin percentage
|
33.7
|
%
|
|
32.9
|
%
|
|
33.5
|
%
|
|
33.7
|
%
|
Three Months Ended September 30, 2016
versus
Three Months Ended September 30, 2015
Gross margin for the Company’s GLC segment may be affected by many factors related to work mix, including but not limited to: volume fluctuations in higher margin customized localization services, particularly services for regulated industries, involving hard to procure languages, or for complex content formats; the magnitude of new engagements with initial ramp-up costs relative to continuing engagements for existing customers; and the geographies, languages and payment currencies associated with the location and production of the services. The magnitude of impact of any of these factors varies quarterly and annually. Total gross margin and gross margin percentage for the Company's GLC segment was relatively consistent for
three
months ended
September 30, 2016
compared to the
three
months ended
September 30, 2015
.
Gross margin for the Company’s GES segment may be affected by many factors related to work mix, including but not limited to: cost of production or procurement of services based on the customer’s industry, geography or complexity of requirements; volume fluctuations in higher margin customized or complex testing services, including geographical scope or technical complexity of such services; the magnitude of new engagements with initial ramp-up costs relative to continuing engagements for existing customers; and fluctuations in foreign currency exchange rates. The magnitude of impact of any of these factors varies quarterly and annually. For the
three
months ended
September 30, 2016
GES gross margin
decrease
d
$0.8 million
, or
8.1%
, to
$9.0 million
as compared to
$9.8 million
for the
three
months ended
September 30, 2015
. GES gross margin percentage decreased to
27.3%
for the
three
months ended
September 30, 2016
from
28.8%
for the
three
months ended
September 30, 2015
. The decrease in gross margin and gross margin percentage was primarily due to lower margins associated with a greater number of projects for new clients with higher initial ramp-up costs and a decrease in volumes from certain existing clients for more complex and technical testing services with higher margins.
For the
three
months ended
September 30, 2016
Interpretation gross margin
increase
d
$0.4 million
, or
58.3%
, to
$1.0 million
as compared to
$0.6 million
for the
three
months ended
September 30, 2015
. Total gross margin percentage increased to
33.6%
for the
three
months ended
September 30, 2016
from
10.5%
for the
three
months ended
September 30, 2015
. The increases in gross margin and gross margin percentage were primarily due to higher margins on OPI interpretation customers and the expiration of the EOIR contract with the U.S. Department of Justice. The Company expects to maintain this level of gross margin and gross margin percentage for this segment in 2016 and beyond primarily due to the expiration of the contract with the U.S. Department of Justice in 2015, which had gross margins below other interpretation customers.
Nine Months Ended September 30, 2016
versus
Nine Months Ended September 30, 2015
Total gross margin for the Company's GLC segment was relatively consistent for the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
. GLC gross margin percentage decreased to
35.4%
for the
nine
months ended
September 30, 2016
from
36.3%
for the
nine
months ended
September 30, 2015
. The
decrease
in gross margin percentage was primarily due to lower margins associated with ramp-up costs for projects for new customers, a decrease in volumes and demand for higher margin work in the Company’s more complex customized localization offerings from certain existing clients in certain regulated industries.
For the
nine
months ended
September 30, 2016
GES gross margin
decrease
d
$2.5 million
, or
8.1%
, to
$28.2 million
as compared to
$30.7 million
the
nine
months ended
September 30, 2015
. GES gross margin percentage decreased to
28.0%
for the
nine
months ended
September 30, 2016
from
30.0%
for the
nine
months ended
September 30, 2015
. The decrease in gross margin and gross margin percentage was primarily due to lower margins associated with a greater number of projects for new clients with higher initial ramp-up costs and a decrease in volumes from certain existing clients for more complex and technical testing services with higher margins.
For the
nine
months ended
September 30, 2016
Interpretation gross margin
increased
$1.1 million
, or
60.8%
, to
$2.9 million
as compared to
$1.8 million
for the
nine
months ended
September 30, 2015
. Total gross margin percentage increased to
33.0%
for the
nine
months ended
September 30, 2016
from
10.6%
for the
nine
months ended
September 30, 2015
. The increases in gross margin and gross margin percentage were primarily due to higher margins on OPI interpretation customers and the expiration of the EOIR contract with the U.S. Department of Justice. The Company expects to maintain this level of gross margin and gross margin percentage for this segment in 2016 and beyond primarily due to the expiration of the contract with the U.S. Department of Justice in 2015, which had gross margins below other interpretation customers.
Financial Condition and Liquidity
The following tables shows cash and cash equivalents and working capital, including cash and cash equivalents at
September 30, 2016
and
December 31, 2015
and net cash used in operating activities, net cash used in investing activities, and net cash provided by financing activities for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Cash and cash equivalents
|
$
|
23,881
|
|
|
$
|
27,831
|
|
Working capital, including cash and cash equivalents
|
69,528
|
|
|
61,492
|
|
The Company follows a capital deployment strategy that balances funding for growing the business, including working capital, capital expenditures, acquisitions and research and development; and prudently managing the Company's balance sheet, including debt repayments and share repurchases, as outlined below. The Company's need for, cost of and access to funds are dependent on future operating results, as well as other external conditions. The Company currently expects that cash and cash equivalents, cash flow from operations and other available financing resources will be sufficient to meet anticipated operating,
capital expenditure, investment, debt service and other financing requirements during the next twelve months and for the foreseeable future.
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Net cash provided by operating activities
|
$
|
8,940
|
|
|
$
|
7,407
|
|
The change of
$1.5 million
in net cash provided by operating activities in the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
was primarily due to an improvement in accounts receivable management. The decrease in accounts receivable caused a decrease in days sales outstanding (“DSO”), which is calculated by dividing period end accounts receivable by average daily sales for the period. DSO was 55 days at
September 30, 2016
compared with 55 days at December 31, 2015 and was 56 days at
September 30, 2015
compared with 50 days at December 31, 2014. The changes in operating assets and liabilities are primarily due to the timing of cash inflows and outflows as the Company utilizes a variety of financing strategies to ensure that the Company's worldwide cash is available in the locations in which it is needed. The Company's business is subject to seasonal fluctuations and historically the Company's cash flows from operations in the first quarter result in a use of operating cash whereas the subsequent quarters historically result in cash provided by operations. For these reasons, cash flows from operating activities for the second quarter are more indicative of the results that the Company expects for the full year.
DSO can be affected by factors such as changes in the volume of revenue in a period, changes in contractual terms with existing customers, contractual payment terms with new customers that are significantly different from the Company’s existing customer base, changes in customer payment behaviors or patterns or timing of when invoices are presented to the customer. Compared to
September 30, 2015
, Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue volume.
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Net cash used in investing activities
|
$
|
(8,272
|
)
|
|
$
|
(71,986
|
)
|
The change of
$63.7 million
in net cash used in investing activities in
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
was primarily due to lower cash payments for acquisitions, net of cash acquired as described below.
Purchases of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Purchases of property and equipment
|
$
|
(7,874
|
)
|
|
$
|
(7,685
|
)
|
The Company expects our property and equipment expenditures to be between approximately $10
–
$11 million in
2016
, consistent with the anticipated needs of the Company's business and for specific investments including capital assets.
In pursuing the Company's business strategies, the Company acquires and invests in certain businesses that meet strategic and financial criteria. The cash paid for acquisitions, net of cash acquired was as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Cash paid for acquisitions, net of cash acquired
|
$
|
(398
|
)
|
|
$
|
(64,301
|
)
|
The $0.4 million for cash paid for acquisitions, net of cash acquired in the first
nine
months of 2016 was an additional payment to the former owners of Geotext due to changes in working capital based on new information obtained by the Company since the acquisition date. The Company acquired CLS Communication Language Services Holding AG ("CLS") for
$64.3 million
, net of cash acquired in the first quarter of 2015.
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(In thousands)
|
September 30, 2016
|
|
September 30, 2015
|
Net cash (used in) provided by financing activities
|
$
|
(5,231
|
)
|
|
$
|
61,407
|
|
The Company uses cash provided by operating activities and proceeds from the Company's credit facility as the Company's primary source for the repayment of debt, the repurchase of the Company's common stock and acquisitions. The change of
$66.6 million
in net cash provided by financing activities in
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
was primarily due to net borrowings on the Company's credit facility in order to fund various acquisitions in 2015, primarily CLS, partially offset by an increase in the shares repurchased under the Company's share repurchase programs as described below.
On October 30, 2012, Lionbridge’s Board of Directors authorized a share repurchasing program for up to
$18 million
over
three years
, which expired on October 30, 2015. On October 29, 2015, Lionbridge’s Board of Directors authorized a new share repurchasing program for up to
$50 million
during the period commencing in the fourth quarter of 2015 through December 31, 2018. Under the 2015 program, the Company is authorized to repurchase Lionbridge common shares subject to certain market rate conditions. At
September 30, 2016
, the Company had approximately
$29.4 million
remaining under this repurchase program. All previous repurchase programs were completed as of December 31, 2015. The Company made the following share repurchases at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(In thousands)
|
$
|
|
Shares
|
|
$
|
|
Shares
|
Shares repurchased under our 2012 share repurchase program
|
$
|
—
|
|
|
—
|
|
|
$
|
1,459
|
|
|
265
|
|
Shares repurchased under our 2015 share repurchase program
|
15,054
|
|
|
3,332
|
|
|
—
|
|
|
—
|
|
Shares repurchased under our share repurchase programs
|
$
|
15,054
|
|
|
3,332
|
|
|
$
|
1,459
|
|
|
265
|
|
The Company expects, subject to market conditions and other uncertainties, to continue making opportunistic repurchases of our stock. However, the Company's stock repurchase programs may be limited or terminated at any time without prior notice. The timing and actual number of shares repurchased will depend on a variety of factors including corporate and regulatory requirements, price and other market conditions and management’s determination as to the appropriate use of the Company's cash.
Capital Resources
Total debt was
$103.3 million
and
$91.5 million
at
September 30, 2016
and December 31, 2015, respectively. The interest rates are in the range of Prime Rate plus
0.25%
—
1.00%
or LIBOR plus
1.25%
—
2.00%
(at the Company’s discretion), depending on certain conditions. Both facilities expire after
five years
from the date of entering into the agreement, after which time the Company may need to secure new financing.
Cash and Cash Equivalents.
Cash and cash equivalents were
$23.9 million
and
$27.8 million
at
September 30, 2016
and
2015
, respectively. In general, cash and net assets held outside of the United States are not legally restricted from being transferred to the United States in order to assist with debt repayment, domestic capital expenditures and other working capital requirements of the U.S. parent company, Lionbridge Technologies, Inc. However, the Company does not intend to transfer any such funds to the U.S. as its domestic sources of cash from operations are sufficient to fund its operations, debt servicing and other liquidity needs. In the event that a transfer did occur, such funds would be subject to applicable local withholding taxes and U.S. taxes in certain circumstances. Cash and cash equivalents held at our foreign subsidiaries were approximately $19.6 million and $23.8 million at
September 30, 2016
and December 31,
2015
, respectively. Determination of the potential deferred income tax liability on unrepatriated cash and cash equivalents is not practicable due to uncertainty regarding the remittance structure and the overall complexity of the calculation. Lionbridge continuously evaluates its liquidity needs and ability to meet global cash requirements as a part of its overall capital deployment strategy. Factors that affect the Company's global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax efficient manner, funding requirements for operations and investment activities, acquisitions and capital market conditions.
Credit Facilities.
In January 2015, the Company entered into an amended and restated Credit Agreement with HSBC Bank, as Administrative Agent and a lender, and a syndicate of other lenders (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement includes (a) a
$100 million
senior secured revolving credit facility, which
includes a
$10 million
sublimit for the issuance of standby letters of credit and (b) a
$10 million
sublimit for swing-line loans and a senior secured term loan facility in an aggregate amount of
$35 million
. The Company may request, at any time and from time to time, that the revolving credit facility be increased by an amount not to exceed
$65 million
, dependent upon certain conditions. At
September 30, 2016
the Company had
$103.3 million
borrowings outstanding under this credit facility. The Company cannot assure that it will be able to secure new financing, or financing on terms that are acceptable. Lionbridge anticipates that its present cash and cash equivalents position and available financing under its current Credit Agreement should provide adequate cash to fund its currently anticipated cash needs for the at least the next twelve months.
The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in the Amended and Restated Credit Agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other covenants as of
September 30, 2016
.
Contractual Obligations
As of
September 30, 2016
, there were no material changes in Lionbridge’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
. The total amount of net unrecognized tax benefits for uncertain tax positions, excluding related interest and penalties, has increased by
$0.1 million
during the
nine
months ended
September 30, 2016
, and is equal to
$2.9 million
.
Off-Balance Sheet Arrangements
The Company does not have any special purpose entities or off-balance sheet financing arrangements.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are evaluating the impact the adoption will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which relates to the accounting of leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the impact the adoption will have on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this accounting guidance retrospectively in the first quarter of 2016, which resulted in a
$0.4 million
reclassification in other assets and long-term debt, net of current portion in the Company's consolidated balance sheet at December 31, 2015.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This guidance supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition”. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after December 31, 2016. Additional ASUs have been issued to amend or clarify this ASU as follows:
|
|
•
|
ASU No. 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.
|
|
|
•
|
ASU No. 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition (TRG).
|
|
|
•
|
ASU No. 2016-08
Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.
|
This guidance in these ASUs for revenue recognition is applicable to the Company's fiscal year beginning January 1, 2018. We have not yet selected a transition method. We are currently evaluating the potential changes from this ASU to our future financial reporting and disclosures.
Other new pronouncements issued but not effective until after
September 30, 2016
are not expected to have a material impact on our financial position, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. The Company manages its risk to foreign currency transaction exposure and interest rates through risk management programs that include the use of derivative financial instruments. Lionbridge operates these programs pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures.
Interest Rate Risk.
Lionbridge is exposed to market risk from changes in interest rates with respect to its term loan and revolving credit facilities which bears interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of
September 30, 2016
,
$103.3 million
was outstanding under the Company’s credit facility. A hypothetical 10% increase or decrease in interest rates would have less than a $0.2 million impact on the Company’s interest expense based on the
$103.3 million
outstanding at
September 30, 2016
with a blended interest rate of
2.22%
. Lionbridge is also exposed to market risk through its investing activities. The Company’s portfolio consists of short-term time deposits with investment grade banks and maturities less than 90 days. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity.
Foreign Currency Exchange Rate Risk
. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. Dollars, approximately
35%
of the Company's revenue for the
three and nine
months ended
September 30, 2016
was denominated in foreign currencies, primarily the Euro and, to a lesser extent the Swiss Franc and the British Pound Sterling as compared to approximately
35%
and
36%
for the
three and nine
months ended
September 30, 2015
, respectively. In addition, the Company has certain U.S. Dollar denominated contracts that, because they are serviced using resources that are paid in foreign currencies, contain currency clauses that adjust the Company's U.S. Dollar billing rates when the fluctuation in exchange rates between the U.S. Dollar and foreign currencies exceeds a certain threshold to lessen the impact of significant change in the exchange rate to both the Company and the customer. Approximately
60%
and
58%
of the Company's costs and expenses for the three months ended
September 30, 2016
and
2015
, respectively, and approximately
60%
and
61%
for the
nine
months ended
September 30, 2016
and
2015
, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition,
8%
of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of
September 30, 2016
and December 31,
2015
, while
10%
of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of
September 30, 2016
and December 31,
2015
. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately
$82.3 million
and
$69.2 million
as of
September 30, 2016
and December 31,
2015
, respectively. The principal foreign currency applicable to the Company’s business is the Euro. Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions for which settlement is expected in the foreseeable future in nonfunctional currencies are recognized in other expense (income), net. In addition,
$74.0 million
was outstanding on the senior secured revolving credit facility, which is primarily denominated in the Euro.
The Company has implemented a risk management program that partially mitigates its exposure to assets or liabilities (primarily cash, accounts receivable, accounts payable, debt and inter-company balances) denominated in currencies other than the functional currency of the respective entity which includes the use of derivative financial instruments principally foreign exchange forward contracts. These foreign exchange forward contracts generally have less than 90-day terms and do not qualify for hedge accounting under the ASC 815 guidance. The Company had no foreign exchange forward contracts outstanding at
September 30, 2016
.