Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2018 and 2017
(Unaudited)
Note 1. Overview and Basis of
Presentation
Business
Sykes Enterprises, Incorporated and consolidated subsidiaries (SYKES or
the Company) is a leading provider of multichannel demand generation and global customer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end
customers primarily within the communications, financial services, technology, transportation and leisure, healthcare, retail and other industries. SYKES primarily provides customer engagement solutions and services with an emphasis on inbound
multichannel demand generation, customer service and technical support to its clients customers. Utilizing SYKES integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels
including phone,
e-mail,
social media, text messaging, chat and digital self-service. SYKES also provides various enterprise support services in the United States that include services for its clients
internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services, which includes order processing, payment processing, inventory control, product delivery
and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily
companies in the United States that are using the Companys services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.
2017 Tax Reform Act
In
December 2017, the President of the United States (U.S.) signed into law the Tax Cuts and Jobs Act (the 2017 Tax Reform Act). In general, the 2017 Tax Reform Act reduces the U.S. federal corporate tax rate
from 35% to 21%, effective in 2018. The 2017 Tax Reform Act moves from a worldwide business taxation approach to a participation exemption regime. The 2017 Tax Reform Act also imposes base-erosion prevention measures on
non-U.S.
earnings of U.S. entities, as well as a
one-time
mandatory deemed repatriation tax on accumulated
non-U.S.
earnings which was
recorded in the fourth quarter of 2017. The impact of the 2017 Tax Reform Act on the consolidated financial results began with the fourth quarter of 2017, the period of enactment. This impact, along with the transitional taxes discussed in
Note 11, Income Taxes, is reflected in the Other segment.
Acquisition
On April 24, 2017, the Company entered into a definitive Asset Purchase Agreement (the Purchase Agreement) to acquire certain
assets from a Global 2000 telecommunications services provider. The aggregate purchase price of $7.5 million was paid on May 31, 2017, using cash on hand, resulting in $6.0 million of property and equipment and $1.5 million of
customer relationship intangibles (the Telecommunications Asset acquisition). The Purchase Agreement contains customary representations and warranties, indemnification obligations and covenants. The Telecommunications Asset acquisition
was completed to strengthen and create new partnerships for the Company and expand its geographic footprint in North America. The results of the Telecommunications Assets operations have been included in the Companys consolidated
financial statements in the Americas segment since its acquisition on May 31, 2017.
The Company accounted for the
Telecommunications Asset acquisition in accordance with ASC 805,
Business Combinations,
whereby the fair value of the purchase price was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair
values as of the closing date. The Company completed its analysis of the purchase price allocation during the second quarter of 2017.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles or U.S. GAAP) for interim financial information, the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018
are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2018. For further information, refer to the
9
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K
for the year ended December 31, 2017, as
filed with the Securities and Exchange Commission (SEC) on March 1, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the
Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Subsequent Events
Subsequent events or transactions have been evaluated through the date and time of issuance of
the condensed consolidated financial statements. On July 9, 2018, the Company entered into and closed a definitive Share Sale Agreement (Sale Agreement) to acquire all the outstanding shares of WhistleOut Pty Ltd and WhistleOut Inc.
(together, known as WhistleOut) for AUD 30.2 million ($22.4 million). See Note 19, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying
condensed consolidated financial statements.
Cash, Cash Equivalents and Restricted cash
Cash and cash equivalents
consist of cash and highly liquid short-term investments, primarily held in
non-interest-bearing
investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the
Companys ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance
Sheets that sum to the amounts reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
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|
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|
|
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|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Cash and cash equivalents
|
|
$
|
162,422
|
|
|
$
|
343,734
|
|
|
$
|
301,451
|
|
|
$
|
266,675
|
|
Restricted cash included in Other current assets
|
|
|
153
|
|
|
|
154
|
|
|
|
158
|
|
|
|
160
|
|
Restricted cash included in Deferred charges and other assets
|
|
|
868
|
|
|
|
917
|
|
|
|
823
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,443
|
|
|
$
|
344,805
|
|
|
$
|
302,432
|
|
|
$
|
267,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Equity Method Investees
The Company uses the equity method to account for
investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Companys proportionate share of the net income or loss of an equity
method investment is included in consolidated net income. Judgment regarding the level of influence over an equity method investment includes considering key factors such as the Companys ownership interest, representation on the board of
directors, participation in policy-making decisions and material intercompany transactions.
The Company evaluates an equity method
investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include
the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investees financial condition and near-term prospects, and the intent and ability to hold the
investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. As of June 30, 2018 and December 31, 2017, the Company did not identify any
instances where the carrying values of its equity method investments were not recoverable.
In July 2017, the Company made a strategic
investment of $10.0 million in XSell Technologies, Inc. (XSell) for 32.8% of XSells preferred stock. The Company plans to incorporate XSells machine learning and artificial intelligence algorithms into its business. The
Company believes this will increase the sales performance of its agents to drive revenue for its clients, improve the experience of the Companys clients end customers and enhance brand
10
loyalty, reduce the cost of customer care and leverage analytics and machine learning to source the best agents and improve their performance.
The Companys net investment in XSell of $9.6 million and $9.8 million was included in Deferred charges and other
assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, respectively. The Company paid $5.0 million in July 2017 with the remaining $5.0 million included in Other
accrued expenses and current liabilities in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017. The Companys proportionate share of XSells income (loss) of $(0.1) million and
$(0.3) million was included in Other income (expense), net in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018, respectively (none in 2017).
Customer-Acquisition Advertising Costs
The Companys advertising costs are expensed as incurred. Total advertising
costs included in Direct salaries and related costs in the accompanying Condensed Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017 were $12.0 million and $8.6 million, respectively,
and $22.0 million and $18.4 million for the six months ended June 30, 2018 and 2017, respectively. Total advertising costs included in General and administrative in the accompanying Condensed Consolidated Statements of
Operations for the three months ended June 30, 2018 and 2017 were less than $0.1 million and $0.1 million, respectively, and less than $0.1 million and $0.1 million for the six months ended June 30, 2018 and 2017,
respectively.
Reclassifications
Certain balances in the prior period have been reclassified to conform to current
period presentation.
New Accounting Standards Not Yet Adopted
Leases
In February 2016, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-02,
Leases (Topic 842)
(ASU
2016-02)
and subsequent amendments (together, ASC 842). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840,
Leases
. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early application is permitted. Entities have the option to either apply the amendments (1) at the beginning of the earliest period presented using a modified retrospective approach for leases that exist or are entered into after the
beginning of the earliest comparative period in the financial statements or (2) at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. There are also certain
optional practical expedients that an entity may elect to apply.
The Companys implementation team has compiled a detailed inventory
of leases and a preliminary analysis of the impact to the financial statements. The Company continues to evaluate the critical factors of ASC 842. Based on an assessment of the Companys business and system requirements, the implementation
team has selected a lease accounting software solution to assist the Company in complying with ASC 842. The Company expects the adoption of ASC 842 to result in a material increase in the assets and liabilities on the consolidated balance
sheets as a result of recognizing
right-of-use
assets and lease liabilities for existing operating leases based on the amount of the Companys current lease
commitments. The Company believes that the majority of its leases will maintain their current lease classification under ASC 842. The Company does not expect these amendments to have a material effect on its expense recognition timing or cash
flows and, as a result, the Company expects the adoption of ASC 842 will result in an insignificant impact on the Companys consolidated statements of income and on the consolidated statements of cash flows. The Company is continuing to
evaluate the magnitude of the impact and related disclosures, as well as the timing and method of adoption, with respect to the transition method and optional practical expedients. The Company is also continuing to evaluate the full impact of
ASC 842, as well as its impacts on its business processes, systems, and internal controls.
11
Derivatives and Hedging
In August 2017, the FASB issued ASU
2017-12,
Derivatives and Hedging (Topic 815) Targeted
Improvements to Accounting for Hedge Activities
(ASU
2017-12).
These amendments help simplify certain aspects of hedge accounting and better align an entitys risk management activities
and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. For cash flow and net investment hedges as of the
adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. These amendments are effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update. The Company does not expect the adoption of ASU
2017-12
to materially
impact its financial condition, results of operations, cash flows and disclosures.
Financial Instruments Credit Losses
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments Credit Losses (Topic 326)
Measurement of Credit Losses on Financial Instruments
(ASU
2016-13).
These amendments require measurement and recognition of expected versus incurred credit losses for financial assets
held. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on
its financial condition, results of operations and cash flows.
New Accounting Standards Recently Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU
2014-09)
and subsequent amendments (together, ASC 606). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and indicates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. To achieve this, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the
contract and recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. See Note 2, Revenues, for further
details.
Financial Instruments
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments - Overall (Subtopic
825-10)
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU
2016-01).
These amendments modify how entities measure equity
investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and
recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception applies to those equity investments that do not have a readily determinable fair value and do not qualify
for the practical expedient to estimate fair value under ASC 820,
Fair Value Measurements
, and as such, these investments may be measured at cost. These amendments are effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The adoption of ASU
2016-01
on January 1, 2018 did not have a material impact on the Companys consolidated financial statements.
Statement of Cash Flows
In
August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
(ASU
2016-15).
These amendments clarify the presentation of cash receipts and payments in eight specific situations. These amendments are effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. These amendments have been applied using a retrospective transition method to each period presented. The adoption of ASU
2016-15
on January 1, 2018 did not
have a material impact on the Companys cash flows.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows (Topic 230) Restricted Cash (A Consensus of the FASB Emerging Issues Task Force
(ASU
2016-18).
These
amendments clarify how entities should
12
present restricted cash and restricted cash equivalents in the statement of cash flows, requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and
restricted cash equivalents. These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments have been applied using a retrospective transition method to
each period presented. The inclusion of restricted cash increased the beginning balance of cash in the Condensed Consolidated Statements of Cash Flows by $1.1 million for the six months ended June 30, 2018 and increased the beginning and
ending balances of cash by $0.9 million and $1.0 million, respectively, for the six months ended June 30, 2017. Other than the change in presentation within the accompanying Condensed Consolidated Statements of Cash Flows, the
retrospective adoption of ASU
2016-18
on January 1, 2018 did not have a material impact on the Companys consolidated financial statements.
Income Taxes
In October 2016,
the FASB issued ASU
2016-16,
Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other than Inventory
(ASU
2016-16).
These amendments
require recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. These amendments are effective for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within those annual reporting periods. The adoption of ASU
2016-16
on January 1, 2018 did not have a material impact on the Companys consolidated financial
statements and no cumulative-effect adjustment to retained earnings was required.
In January 2018, the FASB released guidance on the
accounting for tax on the global intangible
low-taxed
income (GILTI) provisions of the 2017 Tax Reform Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on
tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting
policy election. The Company evaluated the accounting treatment options related to the GILTI provisions and elected to treat any potential GILTI inclusions as a current period cost. The election did not have a material impact on the Companys
consolidated financial statements.
In March 2018, the FASB issued ASU
2018-05,
Income
Taxes (Topic 740): Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No.
118
(ASU
2018-05).
These amendments add various SEC paragraphs pursuant to the
issuance of SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(SAB 118). SAB 118, issued in December 2017, directs taxpayers to consider the implications of the 2017 Tax
Reform Act as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. As described in Note 11, Income Taxes, and in accordance with
SAB 118, the Company recorded amounts that were considered provisional.
Other Comprehensive Income
In February 2018, the FASB issued ASU
2018-02,
Income Statement Reporting Comprehensive
Income (Topic 220)
(ASU
2018-02).
These amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax
Reform Act. These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendment in this update is permitted, including adoption in any interim period.
These amendments can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the 2017 Tax Reform Act is recognized. The early adoption of
ASU
2018-02
on June 30, 2018 had no impact on the Companys consolidated financial statements or disclosures.
Business Combinations
In January
2017, the FASB issued ASU
2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
(ASU
2017-01).
These amendments
clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. These amendments are effective for annual periods beginning after
December 15, 2017, including interim periods within those periods. These amendments were applied prospectively. The adoption of ASU
2017-01
on January 1, 2018 did not have a material impact on
the Companys consolidated financial statements.
Retirement Benefits
In March 2017, the FASB issued ASU
2017-07,
Compensation Retirement Benefits (Topic 715)
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU
2017-07).
These amendments require that an employer report the service cost
component in the same line item or items as other
13
compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income
statement separately from the service cost component outside of a subtotal of income from operations. If a separate line item is not used, the line items used in the income statement to present other components of net benefit cost must be disclosed.
These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. These amendments were applied retrospectively for the presentation of the service cost component
and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic
pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative
periods as the estimation basis for applying the retrospective presentation requirements.
The Company adopted the income statement
presentation aspects of ASU
2017-07
on a retrospective basis effective January 1, 2018. The following is a reconciliation of the effect of the reclassification of the interest cost and amortization of
actuarial gain (loss) from operating expenses to other income (expense) in the Companys Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 (in thousands):
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|
|
|
|
|
|
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
Due to the
Adoption of
ASU 2017-07
|
|
|
As Revised
|
|
Three Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs
|
|
$
|
248,643
|
|
|
$
|
(28
|
)
|
|
$
|
248,615
|
|
General and administrative
|
|
|
92,246
|
|
|
|
(10
|
)
|
|
|
92,236
|
|
Income from operations
|
|
|
11,290
|
|
|
|
38
|
|
|
|
11,328
|
|
Other income (expense), net
|
|
|
831
|
|
|
|
(38
|
)
|
|
|
793
|
|
|
|
|
|
Six Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs
|
|
$
|
495,808
|
|
|
$
|
(57
|
)
|
|
$
|
495,751
|
|
General and administrative
|
|
|
184,300
|
|
|
|
(20
|
)
|
|
|
184,280
|
|
Income from operations
|
|
|
37,304
|
|
|
|
77
|
|
|
|
37,381
|
|
Other income (expense), net
|
|
|
1,683
|
|
|
|
(77
|
)
|
|
|
1,606
|
|
Note 2. Revenues
Adoption of ASC 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC 606, which includes ASU
2014-09
and all related
amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period
amounts were not adjusted and continue to be reported in accordance with the Companys historic accounting for revenues under ASC 605,
Revenue Recognition
(ASC 605).
The Company recorded an increase to opening retained earnings of $3.0 million as of January 1, 2018 due to the cumulative impact of
adopting ASC 606. The impact, all in the Americas segment, primarily related to the change in timing of revenue recognition associated with certain customer contracts that provide fees upon renewal, as well as changes in estimating variable
consideration with respect to penalties and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies. Revenues recognized under ASC 606 are expected to be slightly higher during 2018 than
revenues would have been under ASC 605. This is primarily attributable to the change in the timing of revenue recognition, as discussed above. The impact on revenues recognized for the three and six months ended June 30, 2018 is reported below.
14
The cumulative effect of the adjustments made to the Companys Condensed Consolidated
Balance Sheet as of December 31, 2017 for the line items impacted by the adoption of ASC 606 was as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
Adjustments
Due to the
Adoption of
ASC 606
|
|
|
January 1, 2018
|
|
Receivables, net
|
|
$
|
341,958
|
|
|
$
|
825
|
|
|
$
|
342,783
|
|
Deferred charges and other assets
|
|
|
29,193
|
|
|
|
2,045
|
|
|
|
31,238
|
|
Income taxes payable
|
|
|
2,606
|
|
|
|
697
|
|
|
|
3,303
|
|
Deferred revenue and customer liabilities
|
|
|
34,717
|
|
|
|
(1,048
|
)
|
|
|
33,669
|
|
Other long-term liabilities
|
|
|
22,039
|
|
|
|
202
|
|
|
|
22,241
|
|
Retained earnings
|
|
|
546,843
|
|
|
|
3,019
|
|
|
|
549,862
|
|
The financial statement line items impacted by the adoption of ASC 606 in the Companys Condensed
Consolidated Balance Sheet as of June 30, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Balances
Without the
Impact of the
ASC 606
Adoption
|
|
|
Effect of
Adoption
Increase
(Decrease)
|
|
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
347,885
|
|
|
$
|
345,932
|
|
|
$
|
1,953
|
|
Deferred charges and other assets
|
|
|
32,698
|
|
|
|
28,280
|
|
|
|
4,418
|
|
Income taxes payable
|
|
|
843
|
|
|
|
(733
|
)
|
|
|
1,576
|
|
Deferred revenue and customer liabilities
|
|
|
32,503
|
|
|
|
34,585
|
|
|
|
(2,082
|
)
|
Other long-term liabilities
|
|
|
25,250
|
|
|
|
25,524
|
|
|
|
(274
|
)
|
Retained earnings
|
|
|
567,988
|
|
|
|
560,837
|
|
|
|
7,151
|
|
The financial statement line items impacted by the adoption of ASC 606 in the Companys Condensed
Consolidated Statement of Operations for the three months ended June 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Balances
Without the
Impact of
the ASC 606
Adoption
|
|
|
Effect of
Adoption
Increase
(Decrease)
|
|
Three Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
396,785
|
|
|
$
|
394,483
|
|
|
$
|
2,302
|
|
Income from operations
|
|
|
6,460
|
|
|
|
4,158
|
|
|
|
2,302
|
|
Income before income taxes
|
|
|
4,949
|
|
|
|
2,647
|
|
|
|
2,302
|
|
Income taxes
|
|
|
(2,229
|
)
|
|
|
(2,804
|
)
|
|
|
575
|
|
Net income
|
|
|
7,178
|
|
|
|
5,451
|
|
|
|
1,727
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The financial statement line items impacted by the adoption of ASC 606 in the Companys
Condensed Consolidated Statement of Operations for the six months ended June 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Balances
Without the
Impact of
the ASC 606
Adoption
|
|
|
Effect of
Adoption
Increase
(Decrease)
|
|
Six Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
811,156
|
|
|
$
|
805,759
|
|
|
$
|
5,397
|
|
Income from operations
|
|
|
20,744
|
|
|
|
15,347
|
|
|
|
5,397
|
|
Income before income taxes
|
|
|
18,353
|
|
|
|
12,956
|
|
|
|
5,397
|
|
Income taxes
|
|
|
227
|
|
|
|
(1,038
|
)
|
|
|
1,265
|
|
Net income
|
|
|
18,126
|
|
|
|
13,994
|
|
|
|
4,132
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.33
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.43
|
|
|
$
|
0.33
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net cash provided by operating activities for the six months ended June 30, 2018 did
not change due to the adoption of ASC 606.
Practical Expedients
The Company utilized the practical expedient that allows for the application of ASC 606 to a portfolio of contracts (or performance
obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts
(or performance obligations) within that portfolio.
Costs of Obtaining Customer Contracts
ASC 606 requires an entity to recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to
recover those costs. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (e.g., a sales commission). Because
the Companys sales commissions are not directly incremental to obtaining customer contracts, they are expensed as incurred.
Recognition of
Revenues Accounting Policy
The Companys Recognition of Revenues accounting policy under ASC 606 is outlined
below. For the Companys accounting policy under ASC 605, see Note 1, Overview and Summary of Significant Accounting Policies, of the Companys Annual Report on Form
10-K
for the year ended
December 31, 2017.
The Company recognizes revenues in accordance with ASC 606, whereby revenues are recognized when control of the
promised goods or services is transferred to the Companys customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.
Customer Engagement Solutions and Services
Under ASC 606, the Company accounts for a contract with a client when it has approval, the contract is committed, the rights of the parties,
including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. The Companys customer engagement solutions and services are classified as stand-ready performance obligations. Because
the Companys customers simultaneously receive and consume the benefits of its services as they are delivered, the performance obligations are satisfied over time. The Company recognizes revenues over time using output methods such as a per
minute, per hour, per call, per transaction or per time and materials basis. These output methods faithfully depict the satisfaction of the Companys obligation to deliver the services as requested and represent a direct measurement of value to
the customer. The Companys contracts have a single performance obligation as the promise to transfer the customer solutions and services are not separately identifiable from other promises in the contract, and therefore not distinct.
16
The stated term of the Companys contracts with customers range from 30 days to six years.
The majority of these contracts include termination for convenience or without cause provisions allowing either party to cancel the contract without substantial cost or penalty within a defined notification period (termination rights),
typically varying periods up to 180 days. Because of the termination rights, only the noncancelable portion qualifies as a legally enforceable contract under Step 1, Identify the Contract with a Customer, of ASC 606 (Step 1) and is
accounted for as such, even if the customer is unlikely to exercise its termination right. Furthermore, the amounts excluded from assessment under Step 1 are, in effect, optional customer purchases of additional services.
If the termination right is only provided to the customer, the unsatisfied performance obligations will be evaluated as a customer option. The
Company typically does not include options that would result in a material right. If options to purchase additional services or options to renew are included in customer contracts, the Company evaluates the option in order to determine if the
arrangement includes promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer.
The Companys primary billing terms are that payment is due upon receipt of the invoice, payable usually within 30 or 60
days. Invoices are generally issued on a monthly basis as control transfers and/or as services are rendered. Revenue recognition is limited to the established transaction price, the amount to which the Company expects to be entitled to under
the contract, including the amount of expected fees for those contracts with renewal provisions, and the amount that is not contingent upon delivery of any future product or service or meeting other specified performance obligations. The transaction
price, once determined, is allocated to the single performance obligation on a contract by contract basis.
The Companys contracts
include penalties and holdbacks provisions for failure to meet specified minimum service levels and other performance-based contingencies, as well as the right of certain of the Companys clients to chargeback accounts that do not meet certain
requirements for specified periods after a sale has occurred. Certain customers also receive cash discounts for early payment. These provisions are accounted for as variable consideration and are estimated using historical service and pricing
trends, the individual contract provisions, and the Companys best judgment at the time. None of these variable consideration components are subject to constraint due to the short time period to resolution, the Companys extensive history
with similar transactions, and the limited number of possible outcomes and third-party influence. The portion of the consideration received under the contract that the Company expects to ultimately refund to the customer is excluded from the
transaction price and is recorded as a refund liability.
Other Revenues
In the Americas, the Company provides a range of enterprise support services including technical staffing services and outsourced corporate
help desk services, primarily in the U.S. Revenues for enterprise support services are recognized over time using output methods such as number of positions filled similar to the Companys outsourced customer engagement services and solutions.
In EMEA, the Company offers fulfillment services that are integrated with its customer care and technical support services. The
Companys fulfillment solutions include order processing, payment processing, inventory control, product delivery and product returns handling. Sales are recognized upon shipment to the customer and satisfaction of all obligations.
The Company also has miscellaneous other revenues in the Other segment.
In total, other revenues are immaterial, representing 0.6% and 0.5% of the Companys consolidated total revenues for the three months
ended June 30, 2018 and 2017, respectively, and 0.6% and 0.6% of the Companys consolidated total revenues for the six months ended June 30, 2018 and 2017, respectively.
Disaggregated Revenues
The
Company disaggregates its revenues from contracts with customers by service type and geographic location (see Note 16, Segments and Geographic Information), for each of its reportable segments, as the Company believes it best depicts how the nature,
amount, timing and uncertainty of its revenues and cash flows are affected by economic factors.
17
The following table represents revenues from contracts with customers disaggregated by service
type for the three and six months ended June 30, 2018 and 2017, by the reportable segment for each category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services
|
|
$
|
326,766
|
|
|
$
|
314,603
|
|
|
$
|
667,188
|
|
|
$
|
635,265
|
|
Other revenues
|
|
|
275
|
|
|
|
268
|
|
|
|
574
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
327,041
|
|
|
|
314,871
|
|
|
|
667,762
|
|
|
|
635,802
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services
|
|
|
67,772
|
|
|
|
58,836
|
|
|
|
139,443
|
|
|
|
119,905
|
|
Other revenues
|
|
|
1,948
|
|
|
|
1,704
|
|
|
|
3,904
|
|
|
|
3,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EMEA
|
|
|
69,720
|
|
|
|
60,540
|
|
|
|
143,347
|
|
|
|
123,607
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
24
|
|
|
|
27
|
|
|
|
47
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
|
|
|
24
|
|
|
|
27
|
|
|
|
47
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
396,785
|
|
|
$
|
375,438
|
|
|
$
|
811,156
|
|
|
$
|
759,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Accounts Receivable
The Companys trade accounts receivable, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
January 1, 2018
|
|
Trade accounts receivable, net, current
(1)
|
|
$
|
334,818
|
|
|
$
|
332,014
|
|
Trade accounts receivable, net, noncurrent
(2)
|
|
|
4,614
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
339,432
|
|
|
$
|
334,092
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in Receivables, net in the
accompanying Condensed Consolidated Balance Sheets. The January 1, 2018 balance includes the $0.8 million adjustment recorded upon adoption of ASC 606.
(2)
Included in Deferred charges and other assets in the accompanying
Condensed Consolidated Balance Sheets. The January 1, 2018 balance includes a $2.1 million adjustment recorded upon adoption of ASC 606.
The Companys noncurrent trade accounts receivable result from contracts with customers that include renewal provisions that take effect
subsequent to the satisfaction of the associated performance obligations. Payment is expected upon renewal, which occurs in
bi-annual
and annual increments over the associated expected contract term, the
majority of which range from two to five years.
Deferred Revenue and Customer Liabilities
Deferred revenue and customer liabilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
January 1, 2018
|
|
Deferred revenue
|
|
$
|
4,900
|
|
|
$
|
4,598
|
|
Customer arrangements with termination rights
|
|
|
18,498
|
|
|
|
21,755
|
|
Estimated refund liabilities
(1)
|
|
|
9,105
|
|
|
|
7,316
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,503
|
|
|
$
|
33,669
|
|
|
|
|
|
|
|
|
|
|
(1)
The January 1, 2018 balance includes the
$1.0 million adjustment recorded upon adoption of ASC 606.
Deferred Revenue
The Company receives
up-front
fees in connection with certain contracts. In accordance with ASC 606,
the
up-front
fees are recorded as a contract liability only to the extent a legally enforceable contract exists, typically varying periods up to 180 days. Accordingly, the
up-front
fees allocated to the notification period are recorded as deferred revenue, while the fees that extend beyond the notification period are classified as a customer arrangement with termination rights.
18
Revenues of $0.3 million and $4.2 million were recognized during the three and six
months ended June 30, 2018, respectively, from amounts included in deferred revenue as of January 1, 2018.
The Company expects
to recognize its deferred revenue as of June 30, 2018 over the next 180 days.
Customer Liabilities Customer Arrangements with
Termination Rights
Customer arrangements with termination rights represent the amount of
up-front
fees received for unsatisfied performance obligations for periods that extend beyond the legally enforceable contract period. All customer arrangements with termination rights are classified as
current as the customer can terminate the contracts and demand
pro-rata
refunds of the
up-front
fees over varying periods, typically up to 180 days. The Company
expects to recognize the majority of the customer arrangements with termination rights into revenue as the Company has not historically experienced a high rate of contract terminations.
Customer Liabilities Refund Liabilities
Refund liabilities represent consideration received under the contract that the Company expects to ultimately refund to the customer and
primarily relates to estimated penalties, holdbacks and chargebacks. Penalties and holdbacks result from the failure to meet specified minimum service levels in certain contracts and other performance-based contingencies. Chargebacks reflect the
right of certain of the Companys clients to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred.
Refund liabilities are generally resolved in 180 days, once it is determined whether the requisite service levels and client requirements
were achieved to settle the contingency.
Note 3. Costs Associated with Exit or Disposal Activities
During the second quarter of 2018, the Company initiated a restructuring plan to streamline excess capacity through targeted seat reductions
(the Americas 2018 Exit Plan) in an
on-going
effort to manage and optimize capacity utilization. The Americas 2018 Exit Plan includes, but is not limited to, closing customer contact management
centers and consolidating leased space in various locations in the U.S. and Canada. The Company anticipates finalizing the remainder of the site closures under the Americas 2018 Exit Plan by December 2018.
The Companys actions will result in a reduction in seats as well as anticipated general and administrative cost savings, including lower
depreciation expense, resulting from the 2018 site closures.
The cumulative costs expected and incurred as a result of the Americas 2018
Exit Plan are outlined below as of June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Expected
To Be Incurred
|
|
|
Cumulative
Costs Incurred
To Date
|
|
|
Expected
Remaining
Costs
|
|
Lease obligations and facility exit costs
(1)
|
|
$
|
6,692
|
|
|
$
|
3,028
|
|
|
$
|
3,664
|
|
Severance and related costs
(2)
|
|
|
3,701
|
|
|
|
402
|
|
|
|
3,299
|
|
Severance and related costs
(1)
|
|
|
488
|
|
|
|
219
|
|
|
|
269
|
|
Non-cash
impairment charges
|
|
|
5,175
|
|
|
|
5,175
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,056
|
|
|
$
|
8,824
|
|
|
$
|
7,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Relates to General and administrative
costs.
(2)
Relates to Direct salaries and related costs.
19
The expected remaining severance charges are anticipated to be incurred during the third quarter
of 2018. The expected remaining lease obligations and facility exit costs are anticipated to be incurred primarily during the third quarter of 2018 with the balance during the fourth quarter of 2018.
The following table summarizes the accrued liability and related charges for the three and six months ended June 30, 2018 (none in 2017)
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
Balance at the beginning of the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Charges included in Direct salaries and related costs
|
|
|
-
|
|
|
|
402
|
|
|
|
402
|
|
Charges included in General and administrative
|
|
|
3,028
|
|
|
|
219
|
|
|
|
3,247
|
|
Cash payments
|
|
|
(429
|
)
|
|
|
(131
|
)
|
|
|
(560
|
)
|
Balance sheet reclassifications
(1)
|
|
|
216
|
|
|
|
-
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
2,815
|
|
|
$
|
490
|
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Consists of the reclassification of deferred rent
balances for locations subject to closure to the restructuring liability.
Restructuring Liability Classification
The following table summarizes the Companys short-term and long-term accrued liabilities associated with the Americas 2018 Exit Plan as
of June 30, 2018 (none in 2017) (in thousands):
|
|
|
|
|
|
|
Americas 2018
Exit Plan
|
|
Short-term accrued restructuring liability
(1)
|
|
$
|
2,726
|
|
Short-term accrued restructuring liability
(2)
|
|
|
490
|
|
Long-term accrued restructuring liability
(3)
|
|
|
89
|
|
|
|
|
|
|
Ending accrual at June 30, 2018
|
|
$
|
3,305
|
|
|
|
|
|
|
(1)
Included in Other accrued expenses and current
liabilities in the accompanying Condensed Consolidated Balance Sheet.
(2)
Included in Accrued employee compensation and benefits in the accompanying Condensed Consolidated Balance Sheet.
(3)
Included in Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.
The long-term accrued restructuring liability relates to future rent obligations to be paid through the remainder of the lease terms, the last
of which ends in September 2019.
20
Note 4. Fair Value
ASC 820,
Fair Value Measurements and Disclosures
(ASC 820) requires disclosure about how fair value is determined for
assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Companys market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:
|
●
|
|
Level 1
Quoted prices for identical
instruments in active markets.
|
|
●
|
|
Level 2
Quoted prices for similar
instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
●
|
|
Level 3
Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable
.
|
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
|
●
|
|
Cash, short-term and other investments, investments held in rabbi trust and accounts payable
The
carrying values for cash, short-term and other investments, investments held in rabbi trust and accounts payable approximate their fair values.
|
|
●
|
|
Foreign currency forward contracts and options
Foreign currency forward contracts and options,
including premiums paid on options, are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for
credit risk.
|
|
●
|
|
Embedded derivatives
Embedded derivatives within certain hybrid lease agreements are bifurcated
from the host contract and recognized at fair value based on pricing models or formulas using significant unobservable inputs, including adjustments for credit risk.
|
|
●
|
|
Long-term debt
The carrying value of long-term debt approximates its estimated fair value as the
debt bears interest based on variable market rates, as outlined in the debt agreement.
|
|
●
|
|
Contingent consideration
The contingent consideration is recognized at fair value based on the
discounted cash flow method.
|
Fair Value Measurements
ASC 820 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC
820-10-20
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.
ASC 825
Financial Instruments
(ASC 825) permits an entity to measure certain
financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to use the fair value option permitted under ASC 825 for any of its financial assets and financial
liabilities that are not already recorded at fair value.
Determination of Fair Value
The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value and classifies such items in Level 1. Fair values
determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active
markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is
little, if any, market activity for the asset or liability.
If quoted market prices are not available, fair value is based upon
internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency exchange rates, etc. Assets or liabilities valued using such internally generated
valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily
observable.
21
The following section describes the valuation methodologies used by the Company to measure assets
and liabilities at fair value on a recurring basis, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.
Foreign Currency Forward Contracts and Options
The Company enters into foreign currency forward contracts and
options over the counter and values such contracts using quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk. The
key inputs include forward or option foreign currency exchange rates and interest rates. These items are classified in Level 2 of the fair value hierarchy.
Embedded Derivatives
The Company uses significant unobservable inputs to determine the fair value of embedded
derivatives, which are classified in Level 3 of the fair value hierarchy. These unobservable inputs include expected cash flows associated with the lease, currency exchange rates on the day of commencement, as well as forward currency exchange
rates, the results of which are adjusted for credit risk. These items are classified in Level 3 of the fair value hierarchy. See Note 6, Financial Derivatives, for further information.
Investments Held in Rabbi Trust
The investment assets of the rabbi trust are valued using quoted market prices in
active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 7, Investments Held in Rabbi Trust, and Note 15, Stock-Based Compensation.
Contingent Consideration
The Company uses significant unobservable inputs to determine the fair value of
contingent consideration, which is classified in Level 3 of the fair value hierarchy. The contingent consideration recorded related to the acquisition of Qelp B.V. and its subsidiary (together, known as Qelp) and liabilities assumed
as part of the Clear Link Holdings, LLC (Clearlink) acquisition was recognized at fair value using a discounted cash flow methodology and a discount rate of approximately 14.0% and 10.0%, respectively.
The Companys assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the
following as of June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Balance at
|
|
|
Quoted
Prices in
Active
Markets
For
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
June 30,
2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option
contracts
(1)
|
|
$
|
1,354
|
|
|
$
|
-
|
|
|
$
|
1,354
|
|
|
$
|
-
|
|
Equity investments held in rabbi trust for the Deferred Compensation Plan
(2)
|
|
|
8,557
|
|
|
|
8,557
|
|
|
|
-
|
|
|
|
-
|
|
Debt investments held in rabbi trust for the Deferred Compensation
Plan
(2)
|
|
|
3,307
|
|
|
|
3,307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,218
|
|
|
$
|
11,864
|
|
|
$
|
1,354
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option
contracts
(1)
|
|
$
|
1,903
|
|
|
$
|
-
|
|
|
$
|
1,903
|
|
|
$
|
-
|
|
Embedded derivatives
(1)
|
|
|
598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,501
|
|
|
$
|
-
|
|
|
$
|
1,903
|
|
|
$
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The Companys assets and liabilities measured at fair value on a recurring basis subject to
the requirements of ASC 820 consist of the following as of December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Balance at
|
|
|
Quoted
Prices in
Active Markets
For Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
December 31,
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option
contracts
(1)
|
|
$
|
3,848
|
|
|
$
|
-
|
|
|
$
|
3,848
|
|
|
$
|
-
|
|
Embedded derivatives
(1)
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
Equity investments held in rabbi trust for the Deferred Compensation Plan
(2)
|
|
|
8,094
|
|
|
|
8,094
|
|
|
|
-
|
|
|
|
-
|
|
Debt investments held in rabbi trust for the Deferred Compensation Plan
(2)
|
|
|
3,533
|
|
|
|
3,533
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,527
|
|
|
$
|
11,627
|
|
|
$
|
3,848
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option
contracts
(1)
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
256
|
|
|
$
|
-
|
|
Embedded derivatives
(1)
|
|
|
579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
835
|
|
|
$
|
-
|
|
|
$
|
256
|
|
|
$
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
See Note 6, Financial Derivatives, for the
classification in the accompanying Condensed Consolidated Balance Sheets.
(2)
Included
in Other current assets in the accompanying Condensed Consolidated Balance Sheets. See Note 7, Investments Held in Rabbi Trust.
Reconciliations of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy
Embedded Derivatives in Lease Agreements
A rollforward of the net asset (liability) activity in the Companys fair value of the embedded derivatives is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of the period
|
|
$
|
(409
|
)
|
|
$
|
(375
|
)
|
|
$
|
(527
|
)
|
|
$
|
(555
|
)
|
Gains (losses) recognized in Other income (expense), net
|
|
|
(252
|
)
|
|
|
176
|
|
|
|
(165
|
)
|
|
|
315
|
|
Settlements
|
|
|
38
|
|
|
|
25
|
|
|
|
80
|
|
|
|
70
|
|
Effect of foreign currency
|
|
|
25
|
|
|
|
3
|
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(598
|
)
|
|
$
|
(171
|
)
|
|
$
|
(598
|
)
|
|
$
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) included in Other income (expense), net related to
embedded derivatives held at the end of the period
|
|
$
|
(253
|
)
|
|
$
|
48
|
|
|
$
|
(171
|
)
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Contingent Consideration
A rollforward of the activity in the Companys fair value of the contingent consideration (liability) is as follows (none in 2018) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
2017
|
|
|
Six Months
Ended June 30,
2017
|
|
Balance at the beginning of the period
|
|
$
|
(5,633
|
)
|
|
$
|
(6,100
|
)
|
Imputed interest
|
|
|
(34
|
)
|
|
|
(68
|
)
|
Fair value gain (loss) adjustments
(1)
|
|
|
268
|
|
|
|
701
|
|
Settlements
|
|
|
4,402
|
|
|
|
4,528
|
|
Effect of foreign currency
|
|
|
(130
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
(1,127
|
)
|
|
$
|
(1,127
|
)
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) included in General and administrative related to
contingent consideration outstanding at the end of the period
|
|
$
|
268
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in General and administrative
costs in the accompanying Condensed Consolidated Statements of Operations.
The Company recorded a fair value gain of $0.3 million
and $0.7 million in General and administrative during the three and six months ended June 30, 2017, respectively, related to the Clearlink contingent consideration. All outstanding Clearlink contingent consideration liabilities
remaining as of June 30, 2017 were paid prior to December 31, 2017.
The Company paid $4.4 million in May 2017 to settle
the outstanding Qelp contingent consideration obligation.
The Company accreted interest expense each period using the effective interest
method until the contingent consideration reached the estimated future value. Interest expense related to the contingent consideration was included in Interest (expense) in the accompanying Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2017.
Non-Recurring
Fair Value
Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, including
goodwill, other intangible assets, other long-lived assets and equity method investments. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be
impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at June 30, 2018 and December 31, 2017.
The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities)
subject to the requirements of ASC 820 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Impairment (Loss)
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
(5,175)
|
|
|
$
|
(4,189)
|
|
|
$
|
(8,701)
|
|
|
$
|
(4,391)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the closure of certain under-utilized customer contact management centers in the U.S. and
Canada, the Company recorded impairment charges of $5.2 million and $8.7 million related to leasehold improvements, equipment, furniture and fixtures which were not recoverable during the three and six months ended June 30, 2018,
respectively. See Note 3, Costs Associated with Exit or Disposal Activities, for further information.
In connection with the closure of
an under-utilized customer contact management center in the U.S., the Company recorded an impairment charge of $4.2 million during the three and six months ended June 30, 2017 related to leasehold improvements which were not recoverable
and equipment, furniture and fixtures that could not be redeployed to other locations.
24
The Company recorded an impairment charge of $0.2 million related to the write-down of a
vacant and unused parcel of land in the U.S. to its estimated fair value during the six months ended June 30, 2017.
Note 5. Goodwill and
Intangible Assets
Intangible Assets
The following table presents the Companys purchased intangible assets as of June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Intangibles
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangibles
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
169,749
|
|
|
$
|
(100,859
|
)
|
|
$
|
68,890
|
|
|
|
10
|
|
Trade names and trademarks
|
|
|
14,135
|
|
|
|
(9,651
|
)
|
|
|
4,484
|
|
|
|
7
|
|
Non-compete
agreements
|
|
|
1,820
|
|
|
|
(1,356
|
)
|
|
|
464
|
|
|
|
3
|
|
Content library
|
|
|
526
|
|
|
|
(526
|
)
|
|
|
-
|
|
|
|
2
|
|
Proprietary software
|
|
|
1,040
|
|
|
|
(655
|
)
|
|
|
385
|
|
|
|
4
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
|
|
65,606
|
|
|
|
-
|
|
|
|
65,606
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
252,876
|
|
|
$
|
(113,047)
|
|
|
$
|
139,829
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys purchased intangible assets as of December 31, 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Intangibles
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangibles
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
170,853
|
|
|
$
|
(95,175
|
)
|
|
$
|
75,678
|
|
|
|
10
|
|
Trade names and trademarks
|
|
|
14,138
|
|
|
|
(8,797
|
)
|
|
|
5,341
|
|
|
|
7
|
|
Non-compete
agreements
|
|
|
1,820
|
|
|
|
(1,052
|
)
|
|
|
768
|
|
|
|
3
|
|
Content library
|
|
|
542
|
|
|
|
(542
|
)
|
|
|
-
|
|
|
|
2
|
|
Proprietary software
|
|
|
1,040
|
|
|
|
(585
|
)
|
|
|
455
|
|
|
|
4
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
|
|
58,035
|
|
|
|
-
|
|
|
|
58,035
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,428
|
|
|
$
|
(106,151)
|
|
|
$
|
140,277
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys estimated future amortization expense for the succeeding years relating to the purchased
intangible assets resulting from acquisitions completed prior to June 30, 2018 is as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
2018 (remaining six months)
|
|
|
7,230
|
|
2019
|
|
|
14,022
|
|
2020
|
|
|
11,348
|
|
2021
|
|
|
6,799
|
|
2022
|
|
|
5,714
|
|
2023
|
|
|
4,882
|
|
2024 and thereafter
|
|
|
24,228
|
|
Goodwill
Changes in goodwill for the six months ended June 30, 2018 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2018
|
|
|
Acquisition
|
|
|
Effect of
Foreign
Currency
|
|
|
June 30,
2018
|
|
Americas
|
|
$
|
258,496
|
|
|
$
|
-
|
|
|
$
|
(2,872
|
)
|
|
$
|
255,624
|
|
EMEA
|
|
|
10,769
|
|
|
|
-
|
|
|
|
(402
|
)
|
|
|
10,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
269,265
|
|
|
$
|
-
|
|
|
$
|
(3,274
|
)
|
|
$
|
265,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Changes in goodwill for the year ended December 31, 2017 consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
|
Acquisition
|
|
|
Effect of
Foreign
Currency
|
|
|
December 31,
2017
|
|
Americas
|
|
$
|
255,842
|
|
|
$
|
390
|
|
|
$
|
2,264
|
|
|
$
|
258,496
|
|
EMEA
|
|
|
9,562
|
|
|
|
-
|
|
|
|
1,207
|
|
|
|
10,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265,404
|
|
|
$
|
390
|
|
|
$
|
3,471
|
|
|
$
|
269,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performs its annual goodwill impairment test during the third quarter, or more frequently if
indicators of impairment exist.
For the annual goodwill impairment test, the Company elected to forgo the option to first assess
qualitative factors and performed its annual quantitative goodwill impairment test as of July 31, 2017. Under ASC 350, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes
comparing a reporting units calculated fair value to its carrying value. The calculation of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth, the useful life over which cash flows will occur and determination of the Companys weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value
and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying
value exceeds the reporting units fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The
process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. The Company considered the income and
market approaches to determine its best estimates of fair value, which incorporated the following significant assumptions:
|
●
|
|
Revenue projections, including revenue growth during the forecast periods;
|
|
●
|
|
EBITDA margin projections over the forecast periods;
|
|
●
|
|
Estimated income tax rates;
|
|
●
|
|
Estimated capital expenditures; and
|
|
●
|
|
Discount rates based on various inputs, including the risks associated with the specific reporting units as
well as their revenue growth and EBITDA margin assumptions.
|
As of July 31, 2017, the Company concluded that
goodwill was not impaired for all six of its reporting units with goodwill, based on generally accepted valuation techniques and the significant assumptions outlined above. While the fair values of four of the six reporting units were substantially
in excess of their carrying value, the Qelp and Clearlink reporting units fair value exceeded the respective carrying value, although not substantially.
The Qelp and Clearlink reporting units are at risk of future impairment if projected operating results are not met or other inputs into the
fair value measurement change. However, as of June 30, 2018, the Company believes there were no indicators of impairment related to Qelps $10.4 million of goodwill or Clearlinks $71.0 million of goodwill.
26
Note 6. Financial Derivatives
Cash Flow Hedges
The Company has derivative assets and liabilities relating to outstanding forward contracts and options,
designated as cash flow hedges, as defined under ASC 815
Derivatives and Hedging
(ASC 815), consisting of Philippine Peso, Costa Rican Colon, Hungarian Forint and Romanian Leu contracts. These contracts are entered into to
hedge the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction that is attributable to changes in exchange rates.
The deferred gains (losses) and related taxes on the Companys cash flow hedges recorded in Accumulated other comprehensive income
(loss) (AOCI) in the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Deferred gains (losses) in AOCI
|
|
$
|
(999
|
)
|
|
$
|
2,550
|
|
Tax on deferred gains (losses) in AOCI
|
|
|
96
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) in AOCI, net of taxes
|
|
$
|
(903
|
)
|
|
$
|
2,471
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) expected to be reclassified to Revenues from AOCI during the
next twelve months
|
|
$
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the
underlying market price of the forward contracts and options.
Non-Designated
Hedges
Foreign Currency Forward Contracts
The Company also periodically enters into foreign currency
hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Companys interests against adverse foreign currency moves relating primarily to intercompany receivables
and payables, and other assets and liabilities that are denominated in currencies other than the Companys subsidiaries functional currencies. These contracts generally do not exceed 180 days in duration.
Embedded Derivatives
The Company enters into certain lease agreements which require payments not denominated in the
functional currency of any substantial party to the agreements. The foreign currency component of these contracts meets the criteria under ASC 815 as embedded derivatives. The Company has determined that the embedded derivatives are not clearly and
closely related to the economic characteristics and risks of the host contracts (lease agreements), and separate, stand-alone instruments with the same terms as the embedded derivative instruments would otherwise qualify as derivative instruments,
thereby requiring separation from the lease agreements and recognition at fair value. Such instruments do not qualify for hedge accounting under ASC 815.
The Company had the following outstanding foreign currency forward contracts and options, and embedded derivatives (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Contract Type
|
|
Notional
Amount in
USD
|
|
|
Settle
Through
Date
|
|
|
Notional
Amount
in USD
|
|
|
Settle
Through
Date
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars/Philippine Pesos
|
|
$
|
61,750
|
|
|
|
September 2019
|
|
|
$
|
78,000
|
|
|
|
December 2018
|
|
Forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars/Philippine Pesos
|
|
|
53,400
|
|
|
|
September 2019
|
|
|
|
3,000
|
|
|
|
June 2018
|
|
US Dollars/Costa Rican Colones
|
|
|
82,500
|
|
|
|
August 2019
|
|
|
|
70,000
|
|
|
|
March 2019
|
|
Euros/Hungarian Forints
|
|
|
1,726
|
|
|
|
December 2018
|
|
|
|
3,554
|
|
|
|
December 2018
|
|
Euros/Romanian Leis
|
|
|
6,894
|
|
|
|
December 2018
|
|
|
|
13,977
|
|
|
|
December 2018
|
|
Non-designated
hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards
|
|
|
6,153
|
|
|
|
September 2018
|
|
|
|
9,253
|
|
|
|
March 2018
|
|
Embedded derivatives
|
|
|
12,676
|
|
|
|
April 2030
|
|
|
|
13,519
|
|
|
|
April 2030
|
|
27
Master netting agreements exist with each respective counterparty to reduce credit risk by
permitting net settlement of derivative positions. In the event of default by the Company or one of its counterparties, these agreements include a
set-off
clause that provides the
non-defaulting
party the right to net settle all derivative transactions, regardless of the currency and settlement date. The maximum amount of loss due to credit risk that, based on gross fair value, the Company
would incur if parties to the derivative transactions that make up the concentration failed to perform according to the terms of the contracts was $1.4 million and $3.8 million as of June 30, 2018 and December 31, 2017,
respectively. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions are asset positions of $0.9 million and $3.6 million as of
June 30, 2018 and December 31, 2017, respectively, and liability positions of $1.4 million and $0 as of June 30, 2018 and December 31, 2017, respectively.
Although legally enforceable master netting arrangements exist between the Company and each counterparty, the Company has elected to present
the derivative assets and derivative liabilities on a gross basis in the accompanying Condensed Consolidated Balance Sheets. Additionally, the Company is not required to pledge, nor is it entitled to receive, cash collateral related to these
derivative transactions.
The following tables present the fair value of the Companys derivative instruments included in the
accompanying Condensed Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Derivatives designated as cash flow hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
(1)
|
|
$
|
1,343
|
|
|
$
|
3,604
|
|
Foreign currency forward and option contracts
(2)
|
|
|
11
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,354
|
|
|
|
3,604
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
(1)
|
|
|
-
|
|
|
|
244
|
|
Embedded derivatives
(1)
|
|
|
-
|
|
|
|
9
|
|
Embedded derivatives
(2)
|
|
|
-
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
|
$
|
1,354
|
|
|
$
|
3,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Derivatives designated as cash flow hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
(3)
|
|
$
|
1,595
|
|
|
$
|
175
|
|
Foreign currency forward and option contracts
(4)
|
|
|
129
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,724
|
|
|
|
256
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
(3)
|
|
|
179
|
|
|
|
-
|
|
Embedded derivatives
(3)
|
|
|
108
|
|
|
|
189
|
|
Embedded derivatives
(4)
|
|
|
490
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
2,501
|
|
|
$
|
835
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in Other current assets in the
accompanying Condensed Consolidated Balance Sheets.
(2)
Included in Deferred
charges and other assets in the accompanying Condensed Consolidated Balance Sheets.
(3)
Included in Other accrued expenses and current liabilities in the
accompanying Condensed Consolidated Balance Sheets.
(4)
Included in Other
long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.
28
The following table presents the effect of the Companys derivative instruments included in
the accompanying Condensed Consolidated Financial Statements for the three months ended June 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in AOCI
on Derivatives
(Effective Portion)
|
|
|
Gain (Loss)
Reclassified From
AOCI Into
Revenues
(Effective Portion)
|
|
|
Gain (Loss)
Recognized in
Revenues on
Derivatives
(Ineffective Portion
and
Amount
Excluded from
Effectiveness Testing)
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Derivatives designated as cash flow hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
|
|
$
|
(305
|
)
|
|
$
|
(1,232
|
)
|
|
$
|
191
|
|
|
$
|
(820
|
)
|
|
$
|
2
|
|
|
$
|
-
|
|
Derivatives designated as net investment hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
-
|
|
|
|
(4,774
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(305)
|
|
|
$
|
(6,006)
|
|
|
$
|
191
|
|
|
$
|
(820)
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the gains (losses) recognized in Other income (expense), net of the
Companys derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended June 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(93)
|
|
|
$
|
921
|
|
Embedded derivatives
|
|
|
(252
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(345
|
)
|
|
$
|
1,097
|
|
|
|
|
|
|
|
|
|
|
The following table presents the effect of the Companys derivative instruments included in the
accompanying Condensed Consolidated Financial Statements for the six months ended June 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in AOCI
on Derivatives
(Effective Portion)
|
|
|
Gain (Loss)
Reclassified From
AOCI Into
Revenues
(Effective Portion)
|
|
|
Gain (Loss)
Recognized in
Revenues on
Derivatives
(Ineffective Portion
and
Amount
Excluded from
Effectiveness Testing)
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Derivatives designated as cash flow hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
|
|
$
|
(3,001
|
)
|
|
$
|
(1,466
|
)
|
|
$
|
428
|
|
|
$
|
(1,580
|
)
|
|
$
|
8
|
|
|
$
|
-
|
|
Derivatives designated as net investment hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
-
|
|
|
|
(5,373
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,001)
|
|
|
$
|
(6,839)
|
|
|
$
|
428
|
|
|
$
|
(1,580)
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The following table presents the gains (losses) recognized in Other income (expense),
net of the Companys derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the six months ended June 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(1,262
|
)
|
|
$
|
82
|
|
Embedded derivatives
|
|
|
(165
|
)
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,427
|
)
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
Note 7. Investments Held in Rabbi Trust
The Companys investments held in rabbi trust, classified as trading securities and included in Other current assets in the
accompanying Condensed Consolidated Balance Sheets, at fair value, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Mutual funds
|
|
$
|
8,252
|
|
|
$
|
11,864
|
|
|
$
|
8,096
|
|
|
$
|
11,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mutual funds held in rabbi trust were 72% equity-based and 28% debt-based as of June 30, 2018. Net
investment income (losses), included in Other income (expense), net in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net realized gains (losses) from sale of trading securities
|
|
$
|
27
|
|
|
$
|
149
|
|
|
$
|
32
|
|
|
$
|
149
|
|
Dividend and interest income
|
|
|
43
|
|
|
|
25
|
|
|
|
68
|
|
|
|
39
|
|
Net unrealized holding gains (losses)
|
|
|
72
|
|
|
|
149
|
|
|
|
17
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (losses)
|
|
$
|
142
|
|
|
$
|
323
|
|
|
$
|
117
|
|
|
$
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Deferred Grants
Deferred grants, net of accumulated amortization, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Property grants
|
|
$
|
2,587
|
|
|
$
|
2,843
|
|
Lease grants
|
|
|
441
|
|
|
|
507
|
|
Employment grants
|
|
|
68
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total deferred grants
|
|
|
3,096
|
|
|
|
3,411
|
|
Less: Lease grants - short-term
(1)
|
|
|
(115
|
)
|
|
|
(117
|
)
|
Less: Employment grants - short-term
(1)
|
|
|
(68
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term deferred grants
|
|
$
|
2,913
|
|
|
$
|
3,233
|
|
|
|
|
|
|
|
|
|
|
(1)
Included in Other accrued expenses and current
liabilities in the accompanying Condensed Consolidated Balance Sheets.
Note 9. Borrowings
On May 12, 2015, the Company entered into a $440 million revolving credit facility (the Credit Agreement) with a group
of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender (KeyBank). The Credit Agreement is subject to certain borrowing limitations and includes certain
customary financial and restrictive covenants.
The Credit Agreement includes a $200 million alternate-currency
sub-facility,
a $10 million swingline
sub-facility
and a $35 million letter of credit
sub-facility,
and may be used for
general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. The Company is not currently aware of any inability of its lenders to provide access to the full
commitment of funds that exist under the
30
revolving credit facility, if necessary. However, there can be no assurance that such facility will be available to the Company, even though it is a binding commitment of the financial
institutions.
The Credit Agreement matures on May 12, 2020, and had outstanding borrowings of $90.0 million and
$275.0 million at June 30, 2018 and December 31, 2017, respectively, included in Long-term debt in the accompanying Condensed Consolidated Balance Sheets.
Borrowings under the Credit Agreement bear interest at the rates set forth in the Credit Agreement. In addition, the Company is required to
pay certain customary fees, including a commitment fee determined quarterly based on the Companys leverage ratio and due quarterly in arrears as calculated on the average unused amount of the Credit Agreement.
The Credit Agreement is guaranteed by all the Companys existing and future direct and indirect material U.S. subsidiaries and secured by
a pledge of 100% of the
non-voting
and 65% of the voting capital stock of all the direct foreign subsidiaries of the Company and those of the guarantors.
In May 2015, the Company paid an underwriting fee of $0.9 million for the Credit Agreement, which is deferred and amortized over the term
of the loan, along with the deferred loan fees of $0.4 million related to the previous credit agreement.
The following table
presents information related to our credit agreements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Average daily utilization
|
|
$
|
100,110
|
|
|
$
|
267,000
|
|
|
$
|
110,691
|
|
|
$
|
267,000
|
|
Interest expense
(1), (2)
|
|
$
|
915
|
|
|
$
|
1,600
|
|
|
$
|
1,916
|
|
|
$
|
3,043
|
|
Weighted average interest rate
(2)
|
|
|
3.7
|
%
|
|
|
2.4
|
%
|
|
|
3.5
|
%
|
|
|
2.3
|
%
|
(1)
Excludes the amortization of deferred loan fees.
(2)
Includes the commitment fee.
In January 2018, the Company repaid $175.0 million of long-term debt outstanding under its Credit Agreement, primarily using funds
repatriated from its foreign subsidiaries.
Note 10. Accumulated Other Comprehensive Income (Loss)
The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders Equity in accordance with ASC 220,
Comprehensive Income
(ASC 220). ASC 220 establishes rules for the reporting of comprehensive income (loss) and its components. The components of accumulated other comprehensive income (loss) consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain
(Loss) on
Net
Investment
Hedge
|
|
|
Unrealized
Gain (Loss)
on
Cash Flow
Hedging
Instruments
|
|
|
Unrealized
Actuarial
Gain
(Loss)
Related
to Pension
Liability
|
|
|
Unrealized
Gain
(Loss) on
Post
Retirement
Obligation
|
|
|
Total
|
|
Balance at January 1, 2017
|
|
$
|
(72,393
|
)
|
|
$
|
6,266
|
|
|
$
|
(2,225
|
)
|
|
$
|
1,125
|
|
|
$
|
200
|
|
|
$
|
(67,027
|
)
|
Pre-tax
amount
|
|
|
36,101
|
|
|
|
(8,352
|
)
|
|
|
2,276
|
|
|
|
527
|
|
|
|
(30
|
)
|
|
|
30,522
|
|
Tax (provision) benefit
|
|
|
-
|
|
|
|
3,132
|
|
|
|
(54
|
)
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
3,060
|
|
Reclassification of (gain) loss to net income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,444
|
|
|
|
(53
|
)
|
|
|
(50
|
)
|
|
|
2,341
|
|
Foreign currency translation
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
30
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
(36,315
|
)
|
|
|
1,046
|
|
|
|
2,471
|
|
|
|
1,574
|
|
|
|
120
|
|
|
|
(31,104
|
)
|
Pre-tax
amount
|
|
|
(13,522
|
)
|
|
|
-
|
|
|
|
(2,993
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,515
|
)
|
Tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
|
|
7
|
|
|
|
-
|
|
|
|
201
|
|
Reclassification of (gain) loss to net income
|
|
|
-
|
|
|
|
-
|
|
|
|
(460
|
)
|
|
|
(35
|
)
|
|
|
(20
|
)
|
|
|
(515
|
)
|
Foreign currency translation
|
|
|
216
|
|
|
|
-
|
|
|
|
(115
|
)
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
(49,621
|
)
|
|
$
|
1,046
|
|
|
$
|
(903
|
)
|
|
$
|
1,445
|
|
|
$
|
100
|
|
|
$
|
(47,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The following table summarizes the amounts reclassified to net income from accumulated other
comprehensive income (loss) and the associated line item in the accompanying Condensed Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Statements of
Operations
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Location
|
|
Gain (Loss) on Cash Flow Hedging Instruments:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
amount
|
|
$
|
193
|
|
|
$
|
(820
|
)
|
|
$
|
436
|
|
|
$
|
(1,580
|
)
|
|
|
Revenues
|
|
Tax (provision) benefit
|
|
|
17
|
|
|
|
17
|
|
|
|
24
|
|
|
|
58
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income
|
|
|
210
|
|
|
|
(803
|
)
|
|
|
460
|
|
|
|
(1,522
|
)
|
|
|
|
|
Actuarial Gain (Loss) Related to Pension Liability:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
amount
|
|
|
14
|
|
|
|
11
|
|
|
|
29
|
|
|
|
21
|
|
|
|
Other income
(expense), net
|
|
Tax (provision) benefit
|
|
|
3
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income
|
|
|
17
|
|
|
|
11
|
|
|
|
35
|
|
|
|
21
|
|
|
|
|
|
Gain (Loss) on Post Retirement Obligation:
(2),(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income
|
|
|
10
|
|
|
|
13
|
|
|
|
20
|
|
|
|
25
|
|
|
|
Other income
(expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassification of gain (loss) to net income
|
|
$
|
237
|
|
|
$
|
(779
|
)
|
|
$
|
515
|
|
|
$
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
See Note 6, Financial Derivatives, for further
information.
(2)
See Note 14, Defined Benefit Pension Plan and Postretirement
Benefits, for further information.
(3)
No related tax (provision) benefit.
As discussed in Note 11, Income Taxes, for periods prior to December 31, 2017, any remaining outside basis differences associated with
the Companys investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments has been provided.
Note 11. Income Taxes
The
Companys effective tax rates were (45.0)% and 15.0% for the three months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate in 2018 compared to 2017 was primarily due to a $2.0 million increase in
benefit associated with the settlement of tax audits and ancillary issues. In addition, the Company recognized a benefit of $0.5 million from the reduction in the U.S. federal corporate tax rate from 35% to 21% as a result of the 2017 Tax
Reform Act. The decrease in the effective tax rate was also significantly affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which are individually material, also
impacted the rate. The difference between the Companys effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the aforementioned factors as well as the recognition of tax benefits resulting from
foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits, partially offset by the tax impact of permanent differences, state income and foreign withholding.
The Companys effective tax rates were 1.2% and 22.9% for the six months ended June 30, 2018 and 2017, respectively. The decrease in
the effective tax rate was primarily due to the aforementioned $2.0 million increase in discrete benefit. In addition, the Company recognized a benefit of $1.1 million from the reduction in the U.S. federal corporate tax rate from 35% to
21% as a result of the 2017 Tax Reform Act. This was partially offset by a $0.6 million decrease in the amount of excess tax benefits from stock-based compensation recognized in the six months ended June 30, 2018 as compared to
June 30, 2017. The decrease in the effective tax rate was also significantly affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which are individually material, also
impacted the rate. The difference between the Companys effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the aforementioned factors as well as the recognition of tax benefits resulting from
foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits, partially offset by the tax impact of permanent differences, state income and foreign withholding.
The 2017 Tax Reform Act made significant changes to the Internal Revenue Code, including, but not limited to, a federal corporate tax rate
decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a participation exemption regime, and a
one-time
transition tax on the mandatory deemed repatriation of foreign earnings. The Company estimated its provision for income taxes in accordance with the 2017 Tax Reform Act and guidance available upon enactment
and as a result
32
recorded $32.7 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was signed into law. The $32.7 million estimate
includes the provisional amount related to the
one-time
transition tax on the mandatory deemed repatriation of foreign earnings of $32.7 million based on cumulative foreign earnings of $531.8 million
and $1.0 million of foreign withholding taxes on certain anticipated distributions. The provisional tax expense was partially offset by a provisional benefit of $1.0 million related to the remeasurement of certain deferred tax assets and
liabilities, based on the rates at which they are expected to reverse in the future. The Company has not determined the need for nor recorded any adjustments to this provisional amount as of June 30, 2018. The Company anticipates finalizing
these provisional amounts no later than the fourth quarter of 2018.
Prior to December 31, 2017, no additional income taxes have been
provided for any remaining outside basis differences inherent in the Companys investments in its foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized
deferred tax liability related to any remaining outside basis difference in these entities is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.
On December 22, 2017, the SEC issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have the
necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Reform Act. In accordance with SAB 118, the Company has determined that
the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings
was a provisional amount and a reasonable estimate at June 30, 2018 and December 31, 2017. Additional work is necessary for a more detailed analysis of the Companys deferred tax assets and liabilities and its historical foreign
earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of identification, but no later than one year from the enactment date.
The 2017 Tax Reform Act instituted a number of new provisions effective January 1, 2018, including GILTI, Foreign Derived Intangible
Income (FDII) and Base Erosion and Anti-Abuse Tax (BEAT). The Company made a reasonable estimate of the impact of each of these provisions of the 2017 Tax Reform Act on its effective tax rate for the three and
six months ended June 30, 2018 and determined that the resulting impact was not material. The Company will continue to refine its provisional estimates related to the GILTI, FDII and BEAT rules as additional information is made available.
The Company received assessments for the Canadian 2003-2009 audit. Requests for Competent Authority Assistance were filed with both the
Canadian Revenue Agency and the U.S. Internal Revenue Service and the Company paid mandatory security deposits to Canada as part of this process. As of June 30, 2017, the Company determined that all material aspects of the Canadian audit were
effectively settled pursuant to ASC 740. As a result, the Company recognized an income tax benefit of $1.2 million, net of the U.S. tax impact, at that time and the deposits were applied against the anticipated liability. During the three
months ended June 30, 2018, the Company finalized procedures ancillary to the Canadian audit and recognized an additional $2.7 million income tax benefit due to the elimination of certain assessed penalties, interest and withholding taxes.
With the effective settlement of the Canadian audit, the Company has no significant tax jurisdictions under audit; however, the Company
is currently under audit in several tax jurisdictions. The Company believes it is adequately reserved for the remaining audits and their resolution is not expected to have a material impact on its financial conditions and results of operations.
33
Note 12. Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share
includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust using
the treasury stock method.
The numbers of shares used in the earnings per share computation are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
42,125
|
|
|
|
41,854
|
|
|
|
42,035
|
|
|
|
41,756
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock appreciation rights, restricted stock, restricted stock units and shares
held in rabbi trust
|
|
|
35
|
|
|
|
80
|
|
|
|
162
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted shares outstanding
|
|
|
42,160
|
|
|
|
41,934
|
|
|
|
42,197
|
|
|
|
41,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from the diluted earnings per share calculation
|
|
|
31
|
|
|
|
46
|
|
|
|
6
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 18, 2011, the Companys Board of Directors (the Board) authorized the Company
to purchase up to 5.0 million shares of its outstanding common stock (the 2011 Share Repurchase Program). On March 16, 2016, the Board authorized an increase of 5.0 million shares to the 2011 Share Repurchase Program for a
total of 10.0 million shares. A total of 5.3 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private
transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.
There were no shares repurchased under the Companys share repurchase program during the three and six months ended June 30, 2018
and 2017.
Note 13. Commitments and Loss Contingency
Commitments
During the six
months ended June 30, 2018, the Company entered into several leases in the ordinary course of business. The following is a schedule of future minimum rental payments required under operating leases that have noncancelable lease terms as of
June 30, 2018 (in thousands):
|
|
|
|
|
|
|
Amount
|
|
2018 (remaining six months)
|
|
$
|
630
|
|
2019
|
|
|
8,118
|
|
2020
|
|
|
8,520
|
|
2021
|
|
|
8,643
|
|
2022
|
|
|
7,959
|
|
2023
|
|
|
3,343
|
|
2024 and thereafter
|
|
|
8,211
|
|
|
|
|
|
|
|
|
$
|
45,424
|
|
|
|
|
|
|
34
During the six months ended June 30, 2018, the Company entered into agreements with
third-party vendors in the ordinary course of business whereby the Company committed to purchase goods and services used in its normal operations. These agreements generally are not cancelable, range from one to five-year periods and may contain
fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments. The following is a schedule of the future minimum purchases remaining under the agreements as of June 30, 2018 (in
thousands):
|
|
|
|
|
|
|
Amount
|
|
2018 (remaining six months)
|
|
$
|
10,237
|
|
2019
|
|
|
6,346
|
|
2020
|
|
|
1,699
|
|
2021
|
|
|
193
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
2024 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
18,475
|
|
|
|
|
|
|
Loss Contingency
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of
the loss is reasonably estimable, or otherwise disclosed, in accordance with ASC 450,
Contingencies
(ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is
reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include
disclosures related to such matter as appropriate and in compliance with ASC 450.
The Company received a state audit assessment and is
currently rebutting the position. The Company has determined that the likelihood of a liability is reasonably possible and developed a range of possible loss up to $1.0 million, net of federal benefit.
The Company, from time to time, is involved in legal actions arising in the ordinary course of business. With respect to these matters,
management believes that the Company has adequate legal defenses and/or, when possible and appropriate, has provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on the
Companys financial position or results of operations.
Note 14. Defined Benefit Pension Plan and Postretirement Benefits
Defined Benefit Pension Plans
The following table provides information about the net periodic benefit cost for the Companys pension plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
109
|
|
|
$
|
128
|
|
|
$
|
223
|
|
|
$
|
253
|
|
Interest cost
|
|
|
48
|
|
|
|
49
|
|
|
|
98
|
|
|
|
98
|
|
Recognized actuarial (gains)
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
(29
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
143
|
|
|
$
|
166
|
|
|
$
|
292
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys service cost for its qualified pension plans was included in Direct salaries and
related costs and General and administrative costs in its Condensed Consolidated Statements of Operations for the three and six months ended June 30, 3018 and 2017. The remaining components of net periodic benefit cost were
included in Other income (expense), net in the Companys Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017. See Note 1, Overview and Basis of Presentation, for further
information related to the adoption of ASU
2016-18.
35
Employee Retirement Savings Plans
The Company maintains a 401(k) plan covering defined employees who meet established eligibility requirements. Under the plan provisions, the
Company matches 50% of participant contributions to a maximum matching amount of 2% of participant compensation. The Companys contributions included in the accompanying Condensed Consolidated Statements of Operations were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
401(k) plan contributions
|
|
$
|
344
|
|
|
$
|
309
|
|
|
$
|
803
|
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Split-Dollar Life Insurance Arrangement
In 1996, the Company entered into a split-dollar life insurance arrangement to benefit the former Chairman and Chief Executive Officer of the
Company. Under the terms of the arrangement, the Company retained a collateral interest in the policy to the extent of the premiums paid by the Company. The postretirement benefit obligation included in Other long-term liabilities and
the unrealized gains (losses) included in Accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Postretirement benefit obligation
|
|
$
|
12
|
|
|
$
|
15
|
|
Unrealized gains (losses) in AOCI
(1)
|
|
|
100
|
|
|
|
120
|
|
(1)
Unrealized gains (losses) are due to changes in
discount rates related to the postretirement obligation.
Note 15. Stock-Based Compensation
The Companys stock-based compensation plans include the 2011 Equity Incentive Plan, the
Non-Employee
Director Fee Plan and the Deferred Compensation Plan. The following table summarizes the stock-based compensation expense (primarily in the Americas) and income tax benefits related to the
stock-based compensation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation (expense)
(1)
|
|
$
|
(1,673
|
)
|
|
$
|
(2,261
|
)
|
|
$
|
(3,750
|
)
|
|
$
|
(4,732
|
)
|
Income tax benefit
(2)
|
|
|
402
|
|
|
|
871
|
|
|
|
900
|
|
|
|
1,822
|
|
(1)
Included in General and administrative
costs in the accompanying Condensed Consolidated Statements of Operations.
(2)
Included in Income taxes in the accompanying Condensed Consolidated Statements of Operations.
There were no capitalized
stock-based compensation costs as of June 30, 2018 and December 31, 2017.
Beginning January 1, 2017, as a result of the
adoption of ASU
2016-09,
Compensation Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
(ASU
2016-09),
the Company began accounting for forfeitures as they occur, rather than estimating expected forfeitures. The net cumulative effect of this change was recognized as a $0.2 million reduction
to retained earnings as of January 1, 2017. Additionally, excess tax benefits (deficiencies) from stock compensation are included in Income taxes in the accompanying Condensed Consolidated Statements of Operations subsequent to the
adoption of ASU
2016-09.
2011
Equity Incentive Plan
The
Companys Board of Directors (the Board) adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the 2011 Plan) on March 23, 2011, as amended on May 11, 2011 to reduce the number of shares of
common stock available to 4.0 million shares. The 2011 Plan was approved by the shareholders at the May 2011 Annual Shareholders Meeting. The 2011 Plan replaced and superseded the Companys 2001 Equity Incentive Plan (the 2001
Plan), which expired on March 14, 2011. The outstanding awards granted under the 2001 Plan will remain in effect until their exercise, expiration or termination. The 2011 Plan permits the grant of restricted stock, stock appreciation
rights, stock options and other stock-based awards to certain employees of the Company, members of the Companys Board and certain
non-employees
who provide services to the Company in order to encourage
them to remain in the employment of, or to faithfully provide services to, the Company and to increase their interest in the Companys success.
36
Stock Appreciation Rights
The Board, at
the recommendation of the Compensation and Human Resources Development Committee (the Compensation Committee), has approved in the past, and may approve in the future, awards of stock-settled stock appreciation rights (SARs)
for eligible participants. SARs represent the right to receive, without payment to the Company, a certain number of shares of common stock, as determined by the Compensation Committee, equal to the amount by which the fair market value of a share of
common stock at the time of exercise exceeds the grant price. The SARs are granted at the fair market value of the Companys common stock on the date of the grant and vest
one-third
on each of the first
three anniversaries of the date of grant, provided the participant is employed by the Company on such date. The SARs have a term of 10 years from the date of grant. The fair value of each SAR is estimated on the date of grant using the Black-Scholes
valuation model that uses various assumptions.
The following table summarizes the assumptions used to estimate the fair value of SARS
granted:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
21.4
|
%
|
|
|
19.3
|
%
|
Weighted-average volatility
|
|
|
21.4
|
%
|
|
|
19.3
|
%
|
Expected dividend rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free rate
|
|
|
2.5
|
%
|
|
|
1.9
|
%
|
The following table summarizes SARs activity as of June 30, 2018 and for the six months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights
|
|
Shares (000s)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value (000s)
|
|
Outstanding at January 1, 2018
|
|
|
734
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
333
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(43
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
1,024
|
|
|
$
|
-
|
|
|
|
8.6
|
|
|
$
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at June 30, 2018
|
|
|
1,024
|
|
|
$
|
-
|
|
|
|
8.6
|
|
|
$
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
363
|
|
|
$
|
-
|
|
|
|
7.6
|
|
|
$
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding SARs granted and exercised (in thousands, except per SAR
amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Number of SARs granted
|
|
|
333
|
|
|
|
396
|
|
Weighted average grant-date fair value per SAR
|
|
$
|
6.84
|
|
|
$
|
6.24
|
|
Intrinsic value of SARs exercised
|
|
$
|
305
|
|
|
$
|
1,678
|
|
Fair value of SARs vested
|
|
$
|
1,950
|
|
|
$
|
1,846
|
|
The following table summarizes nonvested SARs activity as of June 30, 2018 and for the six months then
ended:
|
|
|
|
|
|
|
|
|
Nonvested Stock Appreciation Rights
|
|
Shares (000s)
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2018
|
|
|
600
|
|
|
$
|
6.88
|
|
Granted
|
|
|
333
|
|
|
$
|
6.84
|
|
Vested
|
|
|
(272
|
)
|
|
$
|
7.16
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2018
|
|
|
661
|
|
|
$
|
6.74
|
|
|
|
|
|
|
|
|
|
|
37
As of June 30, 2018, there was $4.0 million of total unrecognized compensation cost,
net of actual forfeitures, related to nonvested SARs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 1.5 years.
Restricted Shares
The Board, at the recommendation of the Compensation Committee, has approved in the past,
and may approve in the future, awards of performance and employment-based restricted shares (restricted shares) for eligible participants. In some instances, where the issuance of restricted shares has adverse tax consequences to the
recipient, the Board may instead issue restricted stock units (RSUs). The restricted shares are shares of the Companys common stock (or in the case of RSUs, represent an equivalent number of shares of the Companys common
stock) which are issued to the participant subject to (a) restrictions on transfer for a period of time and (b) forfeiture under certain conditions. The performance goals, including revenue growth and income from operations targets,
provide a range of vesting possibilities from 0% to 100% and will be measured at the end of the performance period. If the performance conditions are met for the performance period, the shares will vest and all restrictions on the transfer of the
restricted shares will lapse (or in the case of RSUs, an equivalent number of shares of the Companys common stock will be issued to the recipient). The Company recognizes compensation cost, net of actual forfeitures, based on the fair value
(which approximates the current market price) of the restricted shares (and RSUs) on the date of grant ratably over the requisite service period based on the probability of achieving the performance goals.
Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation
expense. The employment-based restricted shares currently outstanding vest
one-third
on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such
date.
The following table summarizes nonvested restricted shares/RSUs activity as of June 30, 2018 and for the six months then
ended:
|
|
|
|
|
|
|
|
|
Nonvested Restricted Shares and RSUs
|
|
Shares (000s)
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2018
|
|
|
1,109
|
|
|
$
|
28.50
|
|
Granted
|
|
|
488
|
|
|
$
|
28.15
|
|
Vested
|
|
|
(323
|
)
|
|
$
|
25.78
|
|
Forfeited or expired
|
|
|
(59
|
)
|
|
$
|
27.00
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2018
|
|
|
1,215
|
|
|
$
|
29.15
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding restricted shares/RSUs granted and vested (in thousands,
except per restricted share/RSU amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Number of restricted shares/RSUs granted
|
|
|
488
|
|
|
|
480
|
|
Weighted average grant-date fair value per restricted share/RSU
|
|
$
|
28.15
|
|
|
$
|
29.42
|
|
Fair value of restricted shares/RSUs vested
|
|
$
|
8,342
|
|
|
$
|
6,868
|
|
As of June 30, 2018, there was $32.3 million of total unrecognized compensation cost, net of actual
forfeitures, related to nonvested restricted shares/RSUs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 1.8 years.
Non-Employee
Director Fee Plan
The Companys 2004
Non-Employee
Director Fee Plan (the 2004 Fee Plan), as amended on May 17, 2012, provided that all new
non-employee
directors joining the Board would receive
an initial grant of shares of common stock on the date the new director is elected or appointed, the number of which will be determined by dividing $60,000 by the closing price of the Companys common stock on the trading day immediately
preceding the date a new director is elected or appointed, rounded to the nearest whole number of shares. The initial grant of shares vested in twelve equal quarterly installments,
one-twelfth
on the date of
grant and an additional
one-twelfth
on each successive third monthly anniversary of the date of grant. The award lapses with respect to all unvested shares in the event the
non-employee
director ceases to be a director of the Company, and any unvested shares are forfeited.
38
The 2004 Fee Plan also provided that each
non-employee
director would receive, on the day after the annual shareholders meeting, an annual retainer for service as a
non-employee
director (the Annual Retainer). Prior to May 17, 2012, the
Annual Retainer was $95,000, of which $50,000 was payable in cash, and the remainder was paid in stock. The annual grant of cash vested in four equal quarterly installments,
one-fourth
on the day following the
annual meeting of shareholders, and an additional
one-fourth
on each successive third monthly anniversary of the date of grant. The annual grant of shares paid to
non-employee
directors prior to May 17, 2012 vests in eight equal quarterly installments,
one-eighth
on the day following the annual meeting of shareholders, and an
additional
one-eighth
on each successive third monthly anniversary of the date of grant. On May 17, 2012, upon the recommendation of the Compensation Committee, the Board adopted the Fifth Amended and
Restated
Non-Employee
Director Fee Plan (the Amendment), which increased the common stock component of the Annual Retainer by $30,000, resulting in a total Annual Retainer of $125,000, of which
$50,000 was payable in cash and the remainder paid in stock. In addition, the Amendment also changed the vesting period for the annual equity award, from a
two-year
vesting period, to a
one-year
vesting period (consisting of four equal quarterly installments,
one-fourth
on the date of grant and an additional
one-fourth
on each successive third monthly anniversary of the date of grant). The award lapses with respect to all unpaid cash and unvested shares in the event the
non-employee
director ceases to be a director of the
Company, and any unvested shares and unpaid cash are forfeited.
In addition to the Annual Retainer award, the 2004 Fee Plan also provided
for any
non-employee
Chairman of the Board to receive an additional annual cash award of $100,000, and each
non-employee
director serving on a committee of the Board to
receive an additional annual cash award. The additional annual cash award for the Chairperson of the Audit Committee is $20,000 and Audit Committee members are entitled to an annual cash award of $10,000. The annual cash awards for the Chairpersons
of the Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee are $15,000, $12,500 and $12,500, respectively, and all other members of such committees are entitled to an annual cash award of $7,500.
The 2004 Fee Plan expired in May 2014, prior to the 2014 annual shareholders meeting. In March 2014, upon the recommendation of the
Compensation Committee, the Board determined that, following the expiration of the 2004 Fee Plan, the compensation of
non-employee
Directors should continue on the same terms as provided in the Fifth Amended
and Restated
Non-Employee
Director Fee Plan, except the amounts of cash and equity grants shall be determined annually by the Board and that the stock portion of such compensation would be issued under the
2011 Plan.
At the Boards regularly scheduled meeting on December 10, 2014, upon the recommendation of the Compensation
Committee, the Board determined that the amount of the cash and equity compensation payable to
non-employee
directors beginning on the date of the 2015 annual shareholders meeting would be increased as
follows: cash compensation would be increased by $5,000 per year to a total of $55,000 and equity compensation would be increased by $25,000 per year to a total of $100,000. No change would be made in the additional amounts payable to the Chairman
of the Board or the Chairs or members of the various Board committees for their service on such committees, and no changes would be made in the payment terms described above for such cash and equity compensation.
At the Boards regularly scheduled meeting on December 6, 2016, upon the recommendation of the Compensation Committee, the Board
determined that the amount of the cash compensation payable to
non-employee
directors beginning on the date of the 2017 annual shareholders meeting would be increased by $15,000 per year to a total of
$70,000.
The Board may pay additional cash compensation to any
non-employee
director for services
on behalf of the Board over and above those typically expected of directors, including but not limited to service on a special committee of the Board. Directors who are executive officers of the Company receive no compensation for service as members
of either the Board of Directors or any committees of the Board.
39
The following table summarizes nonvested common stock share award activity as of June 30,
2018 and for the six months then ended:
|
|
|
|
|
|
|
|
|
Nonvested Common Stock Share Awards
|
|
Shares (000s)
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2018
|
|
|
8
|
|
|
$
|
32.21
|
|
Granted
|
|
|
34
|
|
|
$
|
27.68
|
|
Vested
|
|
|
(15
|
)
|
|
$
|
29.87
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2018
|
|
|
27
|
|
|
$
|
27.73
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding common stock share awards granted and vested (in
thousands, except per share award amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Number of share awards granted
|
|
|
34
|
|
|
|
24
|
|
Weighted average grant-date fair value per share award
|
|
$
|
27.68
|
|
|
$
|
32.93
|
|
Fair value of share awards vested
|
|
$
|
450
|
|
|
$
|
430
|
|
As of June 30, 2018, there was $0.7 million of total unrecognized compensation cost, net of actual
forfeitures, related to nonvested common stock share awards granted under the Fee Plan. This cost is expected to be recognized over a weighted average period of less than one year.
Deferred Compensation Plan
The Companys
non-qualified
Deferred
Compensation Plan (the Deferred Compensation Plan), which is not shareholder-approved, was adopted by the Board effective December 17, 1998. It was last amended and restated on August 15, 2017, effective January 1, 2018.
Eligibility is limited to a select group of key management and employees who are expected to receive an annualized base salary (which will not take into account bonuses or commissions) that exceeds the amount taken into account for purposes of
determining highly compensated employees under Section 414(q) of the Internal Revenue Code of 1986 based on the current years base salary and applicable dollar amounts. The Deferred Compensation Plan provides participants with the ability
to defer between 1% and 80% of their compensation (between 1% and 100% prior to June 30, 2016, the effective date of the first amendment) until the participants retirement, termination, disability or death, or a change in control of the
Company. Using the Companys common stock, the Company matches 50% of the amounts deferred by participants on a quarterly basis up to a total of $12,000 per year for the president, chief executive officer and executive vice presidents, $7,500
per year for senior vice presidents, global vice presidents and vice presidents, and, effective January 1, 2017, $5,000 per year for all other participants (there was no match for other participants prior to January 1, 2017, the effective
date of the second amendment). Matching contributions and the associated earnings vest over a seven-year service period. Vesting will be accelerated in the event of the participants death or disability, a change in control or retirement
(defined as separate from service after age 65). In the event of a distribution of benefits as a result of a change in control of the Company, the Company will increase the benefit by an amount sufficient to offset the income tax obligations created
by the distribution of benefits. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Companys common stock (see Note 7, Investments Held in Rabbi
Trust).
As of June 30, 2018 and December 31, 2017, liabilities of $11.8 million and $11.6 million, respectively, of
the Deferred Compensation Plan were recorded in Accrued employee compensation and benefits in the accompanying Condensed Consolidated Balance Sheets. Additionally, the Companys common stock match associated with the Deferred
Compensation Plan, with a carrying value of approximately $2.2 million and $2.1 million as of June 30, 2018 and December 31, 2017, respectively, is included in Treasury stock in the accompanying Condensed Consolidated
Balance Sheets.
40
The following table summarizes nonvested common stock activity as of June 30, 2018 and for
the six months then ended:
|
|
|
|
|
|
|
|
|
Nonvested Common Stock
|
|
Shares (000s)
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2018
|
|
|
3
|
|
|
$
|
29.56
|
|
Granted
|
|
|
10
|
|
|
$
|
28.86
|
|
Vested
|
|
|
(7
|
)
|
|
$
|
28.89
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2018
|
|
|
6
|
|
|
$
|
29.19
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding shares of common stock granted and vested (in thousands,
except per common stock amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Number of shares of common stock granted
|
|
|
10
|
|
|
|
10
|
|
Weighted average grant-date fair value per common stock
|
|
$
|
28.86
|
|
|
$
|
30.66
|
|
Fair value of common stock vested
|
|
$
|
213
|
|
|
$
|
240
|
|
Cash used to settle the obligation
|
|
$
|
644
|
|
|
$
|
422
|
|
As of June 30, 2018, there was $0.1 million of total unrecognized compensation cost, net of actual
forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 3.7 years.
Note 16. Segments and Geographic Information
The Company operates within two regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional
operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the
Companys global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada,
Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer engagement solutions (with an emphasis on inbound technical support, digital support and demand generation, and customer service) and technical staffing and
(2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer engagement solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia
and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Companys services in these locations to support their
customer engagement needs.
41
Information about the Companys reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
Other
(1)
|
|
|
Consolidated
|
|
Three Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
327,041
|
|
|
$
|
69,720
|
|
|
$
|
24
|
|
|
$
|
396,785
|
|
Percentage of revenues
|
|
|
82.4
|
%
|
|
|
17.6
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
Depreciation, net
|
|
$
|
12,335
|
|
|
$
|
1,476
|
|
|
$
|
749
|
|
|
$
|
14,560
|
|
Amortization of intangibles
|
|
$
|
3,415
|
|
|
$
|
214
|
|
|
$
|
-
|
|
|
$
|
3,629
|
|
Income (loss) from operations
|
|
$
|
19,824
|
|
|
$
|
2,220
|
|
|
$
|
(15,584
|
)
|
|
$
|
6,460
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(1,511
|
)
|
|
|
(1,511
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
2,229
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
314,871
|
|
|
$
|
60,540
|
|
|
$
|
27
|
|
|
$
|
375,438
|
|
Percentage of revenues
|
|
|
83.9
|
%
|
|
|
16.1
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
Depreciation, net
|
|
$
|
11,842
|
|
|
$
|
1,254
|
|
|
$
|
724
|
|
|
$
|
13,820
|
|
Amortization of intangibles
|
|
$
|
4,989
|
|
|
$
|
261
|
|
|
$
|
-
|
|
|
$
|
5,250
|
|
Income (loss) from operations
|
|
$
|
26,127
|
|
|
$
|
2,163
|
|
|
$
|
(16,962)
|
|
|
$
|
11,328
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(928
|
)
|
|
|
(928
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
(1,555
|
)
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
667,762
|
|
|
$
|
143,347
|
|
|
$
|
47
|
|
|
$
|
811,156
|
|
Percentage of revenues
|
|
|
82.3
|
%
|
|
|
17.7
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
Depreciation, net
|
|
$
|
25,018
|
|
|
$
|
2,887
|
|
|
$
|
1,491
|
|
|
$
|
29,396
|
|
Amortization of intangibles
|
|
$
|
7,407
|
|
|
$
|
435
|
|
|
$
|
-
|
|
|
$
|
7,842
|
|
Income (loss) from operations
|
|
$
|
45,688
|
|
|
$
|
6,859
|
|
|
$
|
(31,803)
|
|
|
$
|
20,744
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(2,391
|
)
|
|
|
(2,391
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
635,802
|
|
|
$
|
123,607
|
|
|
$
|
43
|
|
|
$
|
759,452
|
|
Percentage of revenues
|
|
|
83.7
|
%
|
|
|
16.3
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
Depreciation, net
|
|
$
|
23,310
|
|
|
$
|
2,440
|
|
|
$
|
1,418
|
|
|
$
|
27,168
|
|
Amortization of intangibles
|
|
$
|
9,967
|
|
|
$
|
514
|
|
|
$
|
|
|
|
$
|
10,481
|
|
Income (loss) from operations
|
|
$
|
64,099
|
|
|
$
|
7,743
|
|
|
$
|
(34,461)
|
|
|
$
|
37,381
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(1,659
|
)
|
|
|
(1,659
|
)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
(8,165
|
)
|
|
|
(8,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Other items (including corporate and other costs,
other income and expense, and income taxes) are included for purposes of reconciling to the Companys consolidated totals as shown in the tables above for the periods shown. Inter-segment revenues are not material to the Americas and EMEA
segment results.
The Companys reportable segments are evaluated regularly by its chief operating decision maker to decide how to
allocate resources and assess performance. The chief operating decision maker evaluates performance based upon reportable segment revenue and income (loss) from operations. Because assets by segment are not reported to or used by the Companys
chief operating decision maker to allocate resources, or to assess performance, total assets by segment are not disclosed.
42
The following table represents a disaggregation of revenue from contracts with customers by
geographic location for the three and six months ended June 30, 2018 and 2017, by the reportable segment for each category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
165,648
|
|
|
$
|
151,654
|
|
|
$
|
337,094
|
|
|
$
|
305,298
|
|
The Philippines
|
|
|
56,571
|
|
|
|
56,779
|
|
|
|
116,657
|
|
|
|
115,319
|
|
Costa Rica
|
|
|
30,973
|
|
|
|
32,924
|
|
|
|
63,048
|
|
|
|
66,249
|
|
Canada
|
|
|
24,828
|
|
|
|
27,020
|
|
|
|
52,017
|
|
|
|
56,742
|
|
El Salvador
|
|
|
20,584
|
|
|
|
18,369
|
|
|
|
40,595
|
|
|
|
36,714
|
|
Peoples Republic of China
|
|
|
8,149
|
|
|
|
9,282
|
|
|
|
17,497
|
|
|
|
18,542
|
|
Australia
|
|
|
7,700
|
|
|
|
6,440
|
|
|
|
15,402
|
|
|
|
13,090
|
|
Mexico
|
|
|
5,632
|
|
|
|
5,832
|
|
|
|
11,950
|
|
|
|
11,441
|
|
Other
|
|
|
6,956
|
|
|
|
6,571
|
|
|
|
13,502
|
|
|
|
12,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
327,041
|
|
|
|
314,871
|
|
|
|
667,762
|
|
|
|
635,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
22,404
|
|
|
|
18,457
|
|
|
|
46,579
|
|
|
|
38,894
|
|
Sweden
|
|
|
13,674
|
|
|
|
14,043
|
|
|
|
27,804
|
|
|
|
28,344
|
|
United Kingdom
|
|
|
11,960
|
|
|
|
9,407
|
|
|
|
25,307
|
|
|
|
19,140
|
|
Romania
|
|
|
8,191
|
|
|
|
6,685
|
|
|
|
16,327
|
|
|
|
13,078
|
|
Other
|
|
|
13,491
|
|
|
|
11,948
|
|
|
|
27,330
|
|
|
|
24,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EMEA
|
|
|
69,720
|
|
|
|
60,540
|
|
|
|
143,347
|
|
|
|
123,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
|
|
|
24
|
|
|
|
27
|
|
|
|
47
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
396,785
|
|
|
$
|
375,438
|
|
|
$
|
811,156
|
|
|
$
|
759,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on location of customer, except for revenues for The Philippines,
Costa Rica, the Peoples Republic of China and India which are primarily comprised of customers located in the U.S., but serviced by centers in those respective geographic locations.
Note 17. Other Income (Expense)
Other
income (expense), net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Foreign currency transaction gains (losses)
|
|
$
|
641
|
|
|
$
|
(535
|
)
|
|
$
|
2,089
|
|
|
$
|
644
|
|
Gains (losses) on derivative instruments not designated as hedges
|
|
|
(345
|
)
|
|
|
1,097
|
|
|
|
(1,427
|
)
|
|
|
397
|
|
Other miscellaneous income (expense)
|
|
|
(833
|
)
|
|
|
231
|
|
|
|
(1,044
|
)
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(537
|
)
|
|
$
|
793
|
|
|
$
|
(382
|
)
|
|
$
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18. Related Party Transactions
In January 2008, the Company entered into a lease for a customer engagement center located in Kingstree, South Carolina. The landlord,
Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and former Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease
payments on the
20-year
lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. The Company paid $0.1 million to the landlord during both the three
months ended June 30, 2018 and 2017 and $0.2 million during both the six months ended June 30, 2018 and 2017 under the terms of the lease.
During the three and six months ended June 30, 2018, the Company contracted to receive services from XSell, an equity method investee,
for $0.1 million. There were no such transactions in 2017. These related party transactions occurred in the normal course of business on terms and conditions that are similar to those of transactions with unrelated parties and, therefore, were
measured at the exchange amount.
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Note 19. Subsequent Event
On July 9, 2018, the Company as guarantor and its wholly-owned subsidiaries, Sykes Australia Pty Ltd, an Australian company, and Clear
Link Technologies, LLC, a Delaware limited liability company, entered into a Sale Agreement with WhistleOut Nominees Pty Ltd as trustee for the WhistleOut Holdings Unit Trust, CPC Investments USA Pty Ltd, JJZL Pty Ltd, Kenneth Wong as trustee for
Wong Family Trust and C41 Pty Ltd as trustee for the Ottery Family Trust (together, the Sellers) to acquire all of the outstanding shares of WhistleOut.
The aggregate purchase price of AUD 30.2 million ($22.4 million), paid at the closing of the transaction on July 9, 2018, is subject
to certain post-closing adjustments related to WhistleOuts working capital. The purchase price was funded through $22.0 million of additional borrowings under the Companys Credit Agreement. The Sale Agreement provides for a
three-year, retention based earnout of AUD 14.0 million.
The Sale Agreement contains customary representations and warranties,
indemnification obligations and covenants.
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