Quarterly Report (10-q)

Date : 11/06/2018 @ 4:07PM
Source : Edgar (US Regulatory)
Stock : Sykes Enterprises, Incorporated (SYKE)
Quote : 28.24  0.05 (0.18%) @ 3:32PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2018

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ____________ to ____________

 

Commission File No.           0-28274

 

 

 

Sykes Enterprises, Incorporated

 

(Exact name of Registrant as specified in its charter)

 

Florida

 

56-1383460

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

400 North Ashley Drive, Suite 2800, Tampa, FL     33602

(Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code:  (813) 274-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Smaller reporting company

Accelerated filer

 

 

Emerging growth company

Non-accelerated filer

 

 

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No

As of October 18, 2018, there were 42,781,399 outstanding shares of common stock.

 

 

 

 

 


Sykes Enterprises, Incorporated and Subsidiaries

 

Form 10-Q

 

INDEX

 

PART I.  FINANCIAL INFORMATION

 

3

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets – September 30, 2018 and December 31, 2017 (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

5

 

 

Condensed Consolidated Statement of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2018 (Unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

Item 2.

 

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

 

47

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

Item 4.

 

Controls and Procedures

 

61

 

 

 

Part II.  OTHER INFORMATION

 

62

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

62

Item 1A.

 

Risk Factors

 

62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 3.

 

Defaults Upon Senior Securities

 

62

Item 4.

 

Mine Safety Disclosures

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

63

 

 

SIGNATURE

 

64

 

 

 

2


 

PART I.  FINANCI AL INFORMATION

 

Item 1.  Financial Statements

 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)

September 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

157,268

 

 

$

343,734

 

Receivables, net

 

353,909

 

 

 

341,958

 

Prepaid expenses

 

23,047

 

 

 

22,132

 

Other current assets

 

17,792

 

 

 

19,743

 

Assets held for sale

 

1,173

 

 

 

-

 

Total current assets

 

553,189

 

 

 

727,567

 

Property and equipment, net

 

138,812

 

 

 

160,790

 

Goodwill, net

 

268,075

 

 

 

269,265

 

Intangibles, net

 

152,310

 

 

 

140,277

 

Deferred charges and other assets

 

33,946

 

 

 

29,193

 

 

$

1,146,332

 

 

$

1,327,092

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

26,709

 

 

$

32,133

 

Accrued employee compensation and benefits

 

104,979

 

 

 

102,899

 

Income taxes payable

 

355

 

 

 

2,606

 

Deferred revenue and customer liabilities

 

31,322

 

 

 

34,717

 

Other accrued expenses and current liabilities

 

38,175

 

 

 

30,888

 

Total current liabilities

 

201,540

 

 

 

203,243

 

Deferred grants

 

2,353

 

 

 

3,233

 

Long-term debt

 

82,000

 

 

 

275,000

 

Long-term income tax liabilities

 

23,771

 

 

 

27,098

 

Other long-term liabilities

 

24,832

 

 

 

22,039

 

Total liabilities

 

334,496

 

 

 

530,613

 

 

 

 

 

 

 

 

 

Commitments and loss contingency (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 10,000 shares authorized;

   no shares issued and outstanding

 

-

 

 

 

-

 

Common stock, $0.01 par value per share, 200,000 shares authorized;

   42,781 and 42,899 shares issued, respectively

 

428

 

 

 

429

 

Additional paid-in capital

 

284,275

 

 

 

282,385

 

Retained earnings

 

581,740

 

 

 

546,843

 

Accumulated other comprehensive income (loss)

 

(52,275

)

 

 

(31,104

)

Treasury stock at cost: 125 and 117 shares, respectively

 

(2,332

)

 

 

(2,074

)

Total shareholders' equity

 

811,836

 

 

 

796,479

 

 

$

1,146,332

 

 

$

1,327,092

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except per share data)

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

$

399,333

 

 

$

407,309

 

 

$

1,210,489

 

 

$

1,166,761

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

 

261,474

 

 

 

267,489

 

 

 

801,470

 

 

 

763,240

 

General and administrative

 

105,148

 

 

 

93,355

 

 

 

309,625

 

 

 

277,635

 

Depreciation, net

 

14,072

 

 

 

14,227

 

 

 

43,468

 

 

 

41,395

 

Amortization of intangibles

 

3,638

 

 

 

5,293

 

 

 

11,480

 

 

 

15,774

 

Impairment of long-lived assets

 

555

 

 

 

680

 

 

 

9,256

 

 

 

5,071

 

Total operating expenses

 

384,887

 

 

 

381,044

 

 

 

1,175,299

 

 

 

1,103,115

 

Income from operations

 

14,446

 

 

 

26,265

 

 

 

35,190

 

 

 

63,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

183

 

 

 

169

 

 

 

529

 

 

 

468

 

Interest (expense)

 

(1,168

)

 

 

(2,021

)

 

 

(3,523

)

 

 

(5,585

)

Other income (expense), net

 

919

 

 

 

28

 

 

 

537

 

 

 

1,634

 

Total other income (expense), net

 

(66

)

 

 

(1,824

)

 

 

(2,457

)

 

 

(3,483

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

14,380

 

 

 

24,441

 

 

 

32,733

 

 

 

60,163

 

Income taxes

 

628

 

 

 

2,746

 

 

 

855

 

 

 

10,911

 

Net income

$

13,752

 

 

$

21,695

 

 

$

31,878

 

 

$

49,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.33

 

 

$

0.52

 

 

$

0.76

 

 

$

1.18

 

Diluted

$

0.33

 

 

$

0.52

 

 

$

0.76

 

 

$

1.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

42,136

 

 

 

41,879

 

 

 

42,070

 

 

 

41,800

 

Diluted

 

42,204

 

 

 

42,033

 

 

 

42,201

 

 

 

42,006

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

$

13,752

 

 

$

21,695

 

 

$

31,878

 

 

$

49,252

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes

 

(2,177

)

 

 

11,502

 

 

 

(15,483

)

 

 

31,884

 

Unrealized gain (loss) on net investment hedges, net

   of taxes

 

-

 

 

 

(1,916

)

 

 

-

 

 

 

(5,220

)

Unrealized gain (loss) on cash flow hedging

   instruments, net of taxes

 

(2,097

)

 

 

1,326

 

 

 

(5,471

)

 

 

1,462

 

Unrealized actuarial gain (loss) related to pension

   liability, net of taxes

 

16

 

 

 

(19

)

 

 

(113

)

 

 

(58

)

Unrealized gain (loss) on postretirement obligation, net

   of taxes

 

(84

)

 

 

(13

)

 

 

(104

)

 

 

(38

)

Other comprehensive income (loss), net of taxes

 

(4,342

)

 

 

10,880

 

 

 

(21,171

)

 

 

28,030

 

Comprehensive income (loss)

$

9,410

 

 

$

32,575

 

 

$

10,707

 

 

$

77,282

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statement of Changes in Shareholders’ Equity

Nine Months Ended September 30, 2018

(Unaudited)

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

(in thousands)

Shares

Issued

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

Balance at December 31, 2017

 

42,899

 

 

$

429

 

 

$

282,385

 

 

$

546,843

 

 

$

(31,104

)

 

$

(2,074

)

 

$

796,479

 

Cumulative effect of accounting change

 

-

 

 

 

-

 

 

 

-

 

 

 

3,019

 

 

 

-

 

 

 

-

 

 

 

3,019

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

5,317

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,317

 

Issuance of common stock under equity award

   plans, net of forfeitures

 

-

 

 

 

-

 

 

 

258

 

 

 

-

 

 

 

-

 

 

 

(258

)

 

 

-

 

Shares repurchased for tax withholding on

   equity awards

 

(118

)

 

 

(1

)

 

 

(3,685

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,686

)

Comprehensive income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

31,878

 

 

 

(21,171

)

 

 

-

 

 

 

10,707

 

Balance at September 30, 2018

 

42,781

 

 

$

428

 

 

$

284,275

 

 

$

581,740

 

 

$

(52,275

)

 

$

(2,332

)

 

$

811,836

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

Nine Months Ended September 30,

 

(in thousands)

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

31,878

 

 

$

49,252

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

Depreciation

 

43,852

 

 

 

41,778

 

Amortization of intangibles

 

11,480

 

 

 

15,774

 

Amortization of deferred grants

 

(533

)

 

 

(550

)

Impairment losses

 

9,256

 

 

 

5,071

 

Unrealized foreign currency transaction (gains) losses, net

 

(686

)

 

 

(1,714

)

Stock-based compensation expense

 

5,317

 

 

 

4,429

 

Deferred income tax provision (benefit)

 

229

 

 

 

7,395

 

Unrealized (gains) losses and premiums on financial instruments, net

 

661

 

 

 

126

 

Amortization of deferred loan fees

 

201

 

 

 

201

 

Imputed interest expense and fair value adjustments to contingent

   consideration

 

-

 

 

 

(529

)

Other

 

375

 

 

 

173

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Receivables, net

 

(12,756

)

 

 

(3,844

)

Prepaid expenses

 

(1,164

)

 

 

1,048

 

Other current assets

 

(1,101

)

 

 

(4,523

)

Deferred charges and other assets

 

(3,731

)

 

 

(667

)

Accounts payable

 

(1,490

)

 

 

2,937

 

Income taxes receivable / payable

 

(6,429

)

 

 

(7,285

)

Accrued employee compensation and benefits

 

3,426

 

 

 

12,038

 

Other accrued expenses and current liabilities

 

10,447

 

 

 

(697

)

Deferred revenue and customer liabilities

 

(1,612

)

 

 

2,476

 

Other long-term liabilities

 

1,830

 

 

 

(4,515

)

Net cash provided by operating activities

 

89,450

 

 

 

118,374

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(36,853

)

 

 

(48,430

)

Cash paid for business acquisitions, net of cash acquired

 

(21,845

)

 

 

(9,075

)

Net investment hedge settlement

 

-

 

 

 

(5,122

)

Purchase of intangible assets

 

(8,106

)

 

 

(4,825

)

Investment in equity method investees

 

(5,000

)

 

 

(5,012

)

Other

 

698

 

 

 

49

 

Net cash (used for) investing activities

 

(71,106

)

 

 

(72,415

)

 

7


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Continued)

 

 

Nine Months Ended September 30,

 

(in thousands)

2018

 

 

2017

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of long-term debt

 

(220,000

)

 

 

-

 

Proceeds from issuance of long-term debt

 

27,000

 

 

 

-

 

Shares repurchased for tax withholding on equity awards

 

(3,686

)

 

 

(3,859

)

Payments of contingent consideration related to acquisitions

 

-

 

 

 

(4,760

)

Other

 

42

 

 

 

139

 

Net cash (used for) financing activities

 

(196,644

)

 

 

(8,480

)

Effects of exchange rates on cash, cash equivalents and restricted cash

 

(8,186

)

 

 

24,133

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(186,486

)

 

 

61,612

 

Cash, cash equivalents and restricted cash – beginning

 

344,805

 

 

 

267,594

 

Cash, cash equivalents and restricted cash – ending

$

158,319

 

 

$

329,206

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for interest

$

2,893

 

 

$

4,852

 

Cash paid during period for income taxes

$

15,423

 

 

$

21,169

 

Non-cash transactions:

 

 

 

 

 

 

 

Property and equipment additions in accounts payable

$

2,450

 

 

$

5,165

 

Unrealized gain (loss) on postretirement obligation, net of taxes in

   accumulated other comprehensive income (loss)

$

(104

)

 

$

(38

)

Shares repurchased for tax withholding on equity awards included in

   current liabilities

$

-

 

 

$

123

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

8


 

Sykes Enterprises, Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 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, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim; 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.

Telecommunications Asset Acquisition

In April 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 contained customary representations and warranties, indemnification obligations and covenants. The results of the Telecommunications Assets’ operations have been included in the Company’s 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 purchase price paid 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.

WhistleOut Acquisition

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 and closed a definitive Share Sale Agreement (the “WhistleOut 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 “WhistleOut Sellers”) to acquire all of the outstanding shares of WhistleOut Pty Ltd and WhistleOut Inc. (together, known as “WhistleOut”).  

The aggregate purchase price of AUD 30.2 million ($22.4 million), was paid at the closing of the transaction on July 9, 2018, resulting in $16.5 million of intangible assets, primarily indefinite-lived domain names, $2.4 million of fixed

9


 

assets and $2.2 million of goodwill.   The aggregate purchase price is subject to certain post-closing adjustments related to Whistle Out’s working capital. The purchase price was funded through $22.0 million of additional borrowings under the Company’s Credit Agreement. The WhistleOut Sale Agreement provides for a three-year, retention based earnout of AUD 14.0 million.

The WhistleOut Sale Agreement contains customary representations and warranties, indemnification obligations and covenants.

The Company accounted for the WhistleOut acquisition in accordance with ASC 805 , whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the finalization of the working capital adjustment, tax analysis of the assets acquired and liabilities assumed and goodwill.  The Company expects to complete its analysis of the purchase price allocation during the second quarter of 2019 and any resulting adjustments will be recorded in accordance with ASU 2015-16, Business Combination (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments .

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 nine months ended September 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 consolidated financial statements and notes thereto included in the Company’s 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 October 17, 2018, the Company entered into a verbal agreement to settle an outstanding legal action for $1.2 million.  See Note 13, Commitments and Loss Contingency, for further information.  On October 18, 2018, the Company entered into a definitive Share Purchase Agreement (the “Symphony Purchase Agreement”) to acquire all the outstanding shares of Symphony Ventures Ltd (“Symphony”) for GBP 52.6 million ($67.9 million). The transaction closed on November 1, 2018.  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 Company’s 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.  

10


 

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):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

September 30, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

$

157,268

 

 

$

343,734

 

 

$

328,166

 

 

$

266,675

 

Restricted cash included in "Other current assets"

 

158

 

 

 

154

 

 

 

107

 

 

 

160

 

Restricted cash included in "Deferred charges and

   other assets"

 

893

 

 

 

917

 

 

 

933

 

 

 

759

 

 

$

158,319

 

 

$

344,805

 

 

$

329,206

 

 

$

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 Company’s 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 Company’s 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 investee’s 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 September 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 XSell’s preferred stock. The Company is incorporating XSell’s 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 Company’s clients’ end customers and enhance brand loyalty, reduce the cost of customer care and leverage analytics and machine learning to source the best agents and improve their performance.

The Company’s net investment in XSell of $9.4 million and $9.8 million was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.  The Company paid $5.0 million in July 2017 and the remaining $5.0 million in August 2018. The Company’s proportionate share of XSell’s income (loss) of $(0.2) million and less than $(0.1) million for the three months ended September 30, 2018 and 2017, respectively, and $(0.4) million and less than $(0.1) million for the nine months ended September 30, 2018 and 2017, respectively, was included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations.

Customer-Acquisition Advertising Costs — The Company’s advertising costs are expensed as incurred. Total advertising costs included in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Customer-acquisition advertising costs included

   in "Direct salaries and related costs"

$

13,907

 

 

$

9,188

 

 

$

35,835

 

 

$

27,599

 

Customer-acquisition advertising costs included

   in "General and administrative"

 

24

 

 

 

18

 

 

 

35

 

 

 

79

 

 

Reclassifications — Certain balances in the prior period have been reclassified to conform to current period presentation.  

11


 

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 Company’s 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 Company’s business and system requirements, the implementation team is implementing a lease accounting software solution to assist the Company in complying with ASC. The Company expects the adoption of ASC 842 on January 1, 2019 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 Company’s 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 Company’s consolidated statements of income and on the consolidated statements of cash flows. The Company is continuing to evaluate the magnitude of the impact on financial statement presentation and related disclosures, as well as the 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.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). These amendments remove, modify or add certain disclosure requirements for fair value measurements.  These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Certain of the amendments will be applied prospectively in the initial year of adoption while the remainder are required to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company is evaluating the timing of its adoption of ASU 2018-13 but does not expect a material impact on its disclosures.

Retirement Benefits

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20) – Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). These amendments remove, modify or add certain disclosure requirements for defined benefit plans.  These amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted.  The Company is evaluating the timing of its adoption of ASU 2018-14 but does not expect a material impact on its disclosures.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update.  The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company is evaluating the timing of its adoption of

12


 

ASU 201 8 -1 5 but does not expect a material impact on its financial condition, results of operations, cash flows and disclosures .

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 entity’s 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 Company’s 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 Company’s cash flows.

13


 

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 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 restri cted 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. T he inclusion of restricted cash increased the beginning balance of cash in the Condensed Consolidated Statements of Cash Flows by $1.1 million for the nine months ended September 30, 2018 and increased the beginning and ending balances of cash by $0.9 mill ion and $1.0 million , respectively, for the nine months ended September 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 d id not have a material impact on the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s consolidated financial statements.

14


 

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 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 Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 (in thousands):

 

 

As Previously

Reported

 

 

Adjustments

Due to the

Adoption of

ASU 2017-07

 

 

As Revised

 

Three Months Ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

$

267,516

 

 

$

(27

)

 

$

267,489

 

General and administrative

 

93,364

 

 

 

(9

)

 

 

93,355

 

Income from operations

 

26,229

 

 

 

36

 

 

 

26,265

 

Other income (expense), net

 

64

 

 

 

(36

)

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

$

763,324

 

 

$

(84

)

 

$

763,240

 

General and administrative

 

277,664

 

 

 

(29

)

 

 

277,635

 

Income from operations

 

63,533

 

 

 

113

 

 

 

63,646

 

Other income (expense), net

 

1,747

 

 

 

(113

)

 

 

1,634

 

 

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 Company’s 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 nine months ended September 30, 2018 is reported below.

15


 

The cumulative effect of the adjustments made to the Company’s Condensed Consolidated Balance Sheet as of December 31, 2017 for the line items impacted by the adopt ion of ASC 606 was as follows (in thousands):

 

 

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 Company’s Condensed Consolidated Balance Sheet as of September 30, 2018 were as follows (in thousands):

 

 

As Reported

 

 

Balances

Without the

Impact of

the ASC 606

Adoption

 

 

Effect of

Adoption

Increase

(Decrease)

 

Receivables, net

$

353,909

 

 

$

351,299

 

 

$

2,610

 

Deferred charges and other assets

 

33,946

 

 

 

28,025

 

 

 

5,921

 

Income taxes payable

 

355

 

 

 

(1,727

)

 

 

2,082

 

Deferred revenue and customer liabilities

 

31,322

 

 

 

33,984

 

 

 

(2,662

)

Other long-term liabilities

 

24,832

 

 

 

24,415

 

 

 

417

 

Retained earnings

 

581,740

 

 

 

573,046

 

 

 

8,694

 

 

The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the three months ended September 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)

 

Revenues

$

399,333

 

 

$

397,343

 

 

$

1,990

 

Income from operations

 

14,446

 

 

 

12,456

 

 

 

1,990

 

Income before income taxes

 

14,380

 

 

 

12,390

 

 

 

1,990

 

Income taxes

 

628

 

 

 

181

 

 

 

447

 

Net income

 

13,752

 

 

 

12,209

 

 

 

1,543

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.33

 

 

$

0.29

 

 

$

0.04

 

Diluted

$

0.33

 

 

$

0.29

 

 

$

0.04

 

 

16


 

The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 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)

 

Revenues

$

1,210,489

 

 

$

1,203,102

 

 

$

7,387

 

Income from operations

 

35,190

 

 

 

27,803

 

 

 

7,387

 

Income before income taxes

 

32,733