Quarterly Report (10-q)

Date : 08/07/2018 @ 8:16PM
Source : Edgar (US Regulatory)
Stock : Sykes Enterprises, Incorporated (SYKE)
Quote : 25.74  0.12 (0.47%) @ 4:19PM

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 June 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

 

LOGO

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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   

   (Do not check if a smaller reporting company)    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 July 19, 2018, there were 42,821,212 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 – June  30, 2018 and December 31, 2017 (Unaudited)

     3  
 

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

     4  
 

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

     5  
 

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

     6  
 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 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

     46  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     58  

Item 4.

 

Controls and Procedures

     59  

Part II. OTHER INFORMATION

     60  

Item 1.

 

Legal Proceedings

     60  

Item 1A.

 

Risk Factors

     60  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     60  

Item 3.

 

Defaults Upon Senior Securities

     60  

Item 4.

 

Mine Safety Disclosures

     60  

Item 5.

 

Other Information

     60  

Item 6.

 

Exhibits

     61  
 

SIGNATURE

     62  

 

2


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)    June 30, 2018     December 31, 2017  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 162,422     $ 343,734  

Receivables, net

     347,885       341,958  

Prepaid expenses

     23,516       22,132  

Other current assets

     19,140       19,743  
  

 

 

   

 

 

 

Total current assets

     552,963       727,567  

Property and equipment, net

     142,920       160,790  

Goodwill, net

     265,991       269,265  

Intangibles, net

     139,829       140,277  

Deferred charges and other assets

     32,698       29,193  
  

 

 

   

 

 

 
   $         1,134,401     $         1,327,092  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 22,236     $ 32,133  

Accrued employee compensation and benefits

     98,557       102,899  

Income taxes payable

     843       2,606  

Deferred revenue and customer liabilities

     32,503       34,717  

Other accrued expenses and current liabilities

     36,765       30,888  
  

 

 

   

 

 

 

Total current liabilities

     190,904       203,243  

Deferred grants

     2,913       3,233  

Long-term debt

     90,000       275,000  

Long-term income tax liabilities

     24,471       27,098  

Other long-term liabilities

     25,250       22,039  
  

 

 

   

 

 

 

Total liabilities

     333,538       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; 42,821 and 42,899 shares issued,

respectively

     428       429  

Additional paid-in capital

     282,622       282,385  

Retained earnings

     567,988       546,843  

Accumulated other comprehensive income (loss)

     (47,933     (31,104

Treasury stock at cost: 122 and 117 shares, respectively

     (2,242     (2,074
  

 

 

   

 

 

 

Total shareholders’ equity

     800,863       796,479  
  

 

 

   

 

 

 
   $ 1,134,401     $ 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 June 30,     Six Months Ended June 30,  
(in thousands, except per share data)    2018     2017     2018     2017  

Revenues

   $     396,785     $     375,438     $     811,156     $     759,452  

Operating expenses:

        

Direct salaries and related costs

     264,924       248,615       539,996       495,751  

General and administrative

     102,037       92,236       204,477       184,280  

Depreciation, net

     14,560       13,820       29,396       27,168  

Amortization of intangibles

     3,629       5,250       7,842       10,481  

Impairment of long-lived assets

     5,175       4,189       8,701       4,391  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     390,325       364,110       790,412       722,071  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,460       11,328       20,744       37,381  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     175       144       346       299  

Interest (expense)

     (1,149     (1,865     (2,355     (3,564

Other income (expense), net

     (537     793       (382     1,606  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (1,511     (928     (2,391     (1,659
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,949       10,400       18,353       35,722  

Income taxes

     (2,229     1,555       227       8,165  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,178     $ 8,845     $ 18,126     $ 27,557  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.17     $ 0.21     $ 0.43     $ 0.66  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.17     $ 0.21     $ 0.43     $ 0.66  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     42,125       41,854       42,035       41,756  

Diluted

     42,160       41,934       42,197       41,919  

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 June 30,     Six Months Ended June 30,  
(in thousands)    2018     2017     2018     2017  

Net income

   $       7,178     $       8,845     $       18,126     $       27,557  

Other comprehensive income (loss), net of taxes:

        

Foreign currency translation adjustments, net of taxes

     (13,597     16,484       (13,306     20,382  

Unrealized gain (loss) on net investment hedges, net of taxes

     -       (2,936     -       (3,304

Unrealized gain (loss) on cash flow hedging instruments, net of taxes

     (481     (396     (3,374     136  

Unrealized actuarial gain (loss) related to pension liability, net of taxes

     (46     (16     (129     (39

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

     (10     (12     (20     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes

     (14,134     13,124       (16,829     17,150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (6,956   $ 21,969     $ 1,297     $ 44,707  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statement of Changes in Shareholders’ Equity

Six Months Ended June 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

    -       -       3,750       -       -       -       3,750  

Issuance of common stock under equity award plans, net of forfeitures

    40       -       168       -       -       (168     -  

Shares repurchased for tax withholding on equity awards

    (118     (1     (3,681     -       -       -       (3,682

Comprehensive income (loss)

    -       -       -       18,126       (16,829     -       1,297  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

    42,821     $ 428     $ 282,622     $ 567,988     $ (47,933   $ (2,242   $ 800,863  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
(in thousands)    2018     2017  

Cash flows from operating activities:

    

Net income

   $               18,126     $               27,557  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     29,651       27,423  

Amortization of intangibles

     7,842       10,481  

Amortization of deferred grants

     (344     (374

Impairment losses

     8,701       4,391  

Unrealized foreign currency transaction (gains) losses, net

     (370     (611

Stock-based compensation expense

     3,750       4,732  

Deferred income tax provision (benefit)

     1,070       9,785  

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

     625       42  

Amortization of deferred loan fees

     134       134  

Imputed interest expense and fair value adjustments to contingent consideration

     -       (633

Other

     (90     144  

Changes in assets and liabilities, net of acquisitions:

    

Receivables, net

     (8,370     9,059  

Prepaid expenses

     (1,611     78  

Other current assets

     (2,016     (1,855

Deferred charges and other assets

     (2,186     (1,008

Accounts payable

     (5,499     2,420  

Income taxes receivable / payable

     (6,526     (14,086

Accrued employee compensation and benefits

     (2,349     (1,779

Other accrued expenses and current liabilities

     5,079       (2,916

Deferred revenue and customer liabilities

     (155     2,398  

Other long-term liabilities

     1,922       (3,813
  

 

 

   

 

 

 

Net cash provided by operating activities

     47,384       71,569  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (26,232     (35,859

Cash paid for business acquisitions, net of cash acquired

     -       (7,500

Purchase of intangible assets

     (7,606     (275

Other

     484       25  
  

 

 

   

 

 

 

Net cash (used for) investing activities

     (33,354     (43,609
  

 

 

   

 

 

 

 

7


Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Continued)

 

     Six Months Ended June 30,  
(in thousands)    2018     2017  

Cash flows from financing activities:

    

Payments of long-term debt

     (190,000     -  

Proceeds from issuance of long-term debt

     5,000       -  

Shares repurchased for tax withholding on equity awards

     (3,682     (3,860

Payments of contingent consideration related to acquisitions

     -       (4,528

Other

     38       107  
  

 

 

   

 

 

 

Net cash (used for) financing activities

     (188,644     (8,281
  

 

 

   

 

 

 

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

     (6,748     15,159  
  

 

 

   

 

 

 

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

     (181,362     34,838  

Cash, cash equivalents and restricted cash – beginning

     344,805       267,594  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash – ending

   $             163,443     $             302,432  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during period for interest

   $ 1,975     $ 3,066  

Cash paid during period for income taxes

   $ 12,084     $ 17,032  

Non-cash transactions:

    

Property and equipment additions in accounts payable

   $ 2,637     $ 3,742  

Unrealized gain (loss) on postretirement obligation, net of taxes in accumulated other comprehensive income (loss)

   $ (20   $ (25

Shares repurchased for tax withholding on equity awards included in current liabilities

   $ -     $ 119  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

8


Sykes Enterprises, Incorporated and Subsidiaries

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 Company’s 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 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 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 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 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 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.

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):

 

    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 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 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 XSell’s preferred stock. The Company plans to incorporate 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

 

10


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 $9.6 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 Company’s proportionate share of XSell’s 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 Company’s 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 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 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 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 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 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.

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 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.

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

 

    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 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 six months ended June 30, 2018 is reported below.

 

14


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 adoption 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 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 Company’s 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 Company’s 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 Company’s 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 Company’s sales commissions are not directly incremental to obtaining customer contracts, they are expensed as incurred.

Recognition of Revenues Accounting Policy

The Company’s “Recognition of Revenues” accounting policy under ASC 606 is outlined below. For the Company’s accounting policy under ASC 605, see Note 1, Overview and Summary of Significant Accounting Policies, of the Company’s 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 Company’s 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 Company’s customer engagement solutions and services are classified as stand-ready performance obligations. Because the Company’s 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 Company’s obligation to deliver the services as requested and represent a direct measurement of value to the customer. The Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s best judgment at the time. None of these variable consideration components are subject to constraint due to the short time period to resolution, the Company’s 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 Company’s 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 Company’s 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 Company’s consolidated total revenues for the three months ended June 30, 2018 and 2017, respectively, and 0.6% and 0.6% of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 unit’s 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 Company’s 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 unit’s 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 Qelp’s $10.4 million of goodwill or Clearlink’s $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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s common stock (or in the case of RSUs, represent an equivalent number of shares of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Board’s 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 Board’s 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 Company’s 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 year’s 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 participant’s retirement, termination, disability or death, or a change in control of the Company. Using the Company’s 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 participant’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s services in these locations to support their customer engagement needs.

 

41


Information about the Company’s 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 Company’s 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 Company’s 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 Company’s 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  

People’s 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 People’s 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.

 

43


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 WhistleOut’s working capital. The purchase price was funded through $22.0 million of additional borrowings under the Company’s 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.

 

44


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sykes Enterprises, Incorporated

Tampa, Florida

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Sykes Enterprises, Incorporated and subsidiaries (the “Company”) as of June 30, 2018, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2018 and 2017, changes in shareholders’ equity for the six-month period ended June 30, 2018, and of cash flows for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP

Tampa, Florida

August 7, 2018

 

45


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the Sykes Enterprises, Incorporated (“SYKES,” “our,” “we” or “us”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”).

Our discussion and analysis may contain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, and projections about SYKES, our beliefs, and assumptions made by us. In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time. Words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plan,” “seek,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives, or goals also are forward-looking statements. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this report. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any such forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the impact of economic recessions in the U.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (iv) the timing of significant orders for our products and services, (v) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (vi) changes in applicable accounting principles or interpretations of such principles, (vii) difficulties or delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing and other objectives, (ix) construction delays of new or expansion of existing customer engagement centers, (x) delays in our ability to develop new products and services and market acceptance of new products and services, (xi) rapid technological change, (xii) loss or addition of significant clients, (xiii) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel, (xv) our ability to continue the growth of our support service revenues through additional technical and customer engagement centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on the demand for outsourcing, (xxii) risk of interruption of technical and customer engagement center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with acquisitions not being realized, or not being realized within the anticipated time period, (xxvii) risks related to the integration of the acquisitions and the impairment of any related goodwill, and (xxviii) other risk factors that are identified in our most recent Annual Report on Form 10-K, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Summary

We are a leading provider of multichannel demand generation and global comprehensive customer engagement services. We provide differentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end customers primarily in the communications, financial services, technology, transportation and leisure, healthcare, retail and other industries. Our differentiated full lifecycle management services platform effectively engages customers at every touchpoint within the customer journey, including digital marketing and acquisition, sales expertise, customer service, technical support and retention. We serve our clients through two geographic operating regions: the Americas (United States, Canada, Latin America, Australia and the Asia Pacific Rim) and EMEA (Europe, the Middle East and Africa). Our Americas and EMEA regions primarily provide customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to our clients’ customers. These services, which represented 99.4% and 99.5% of consolidated revenues during the three months ended June 30, 2018 and 2017, respectively, and 99.4% and 99.4% of consolidated

 

46


revenues during the six months ended June 30, 2018 and 2017, respectively, are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. We also provide various enterprise support services in the United States (“U.S.”) that include services for our clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment services, which includes order processing, payment processing, inventory control, product delivery and product returns handling. Our complete service offering helps our clients acquire, retain and increase the lifetime value of their customer relationships. We have developed an extensive global reach with customer engagement centers across six continents, including North America, South America, Europe, Asia, Australia and Africa. We deliver cost-effective solutions that generate demand, enhance the customer service experience, promote stronger brand loyalty, and bring about high levels of performance and profitability.

Recent Developments

Americas 2018 Exit Plan

During the second quarter of 2018, we 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. We anticipate finalizing the remainder of the site closures under the Americas 2018 Exit Plan by December 2018.

The actions are expected to impact approximately 4,500 seats, of which 2,200 seats have been rationalized as of June 30, 2018. We anticipate annualized gross general and administrative cost savings, including lower depreciation expense, of approximately $24.6 million as a result of the 2018 site closures.

See Note 3, Costs Associated with Exit and Disposal Activities, of the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

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 our 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, of the accompanying “Notes to Condensed Consolidated Financial Statements” is reflected in the Other segment.

Acquisition of Telecommunications Assets

In May 2017, we completed the acquisition of certain assets of a Global 2000 telecommunications service provider (the “Telecommunications Asset acquisition”) to strengthen and create new partnerships and expand our geographic footprint in North America. The total purchase price of $7.5 million was funded through cash on hand. The results of operations of the Telecommunications Asset acquisition have been reflected in our consolidated financial statements since May 31, 2017.

 

47


Results of Operations

The following table sets forth, for the periods indicated, the amounts presented in the accompanying Condensed Consolidated Statements of Operations as well as the change between the respective periods:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(in thousands)    2018     2017     $ Change     2018     2017     $ Change  

Revenues

   $     396,785     $   375,438     $     21,347     $     811,156     $     759,452     $       51,704  

Operating expenses:

            

Direct salaries and related costs

     264,924       248,615       16,309       539,996       495,751       44,245  

General and administrative

     102,037       92,236       9,801       204,477       184,280       20,197  

Depreciation, net

     14,560       13,820       740       29,396       27,168       2,228  

Amortization of intangibles

     3,629       5,250       (1,621     7,842       10,481       (2,639

Impairment of long-lived assets

     5,175       4,189       986       8,701       4,391       4,310  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     390,325       364,110       26,215       790,412       722,071       68,341  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,460       11,328       (4,868     20,744       37,381       (16,637
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

            

Interest income

     175       144       31       346       299       47  

Interest (expense)

     (1,149     (1,865     716       (2,355     (3,564     1,209  

Other income (expense), net

     (537     793       (1,330     (382     1,606       (1,988
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (1,511     (928     (583     (2,391     (1,659     (732
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,949       10,400       (5,451     18,353       35,722       (17,369

Income taxes

     (2,229     1,555       (3,784     227       8,165       (7,938
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,178     $ 8,845     $ (1,667   $ 18,126     $ 27,557     $ (9,431
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

Revenues

 

    Three Months Ended June 30,      
    2018   2017      
(in thousands)   Amount     % of Revenues   Amount     % of Revenues   $ Change  

Americas

  $ 327,041     82.4%   $ 314,871     83.9%   $ 12,170  

EMEA

    69,720     17.6%     60,540     16.1%     9,180  

Other

    24     0.0%     27     0.0%     (3
 

 

 

   

 

 

 

 

   

 

 

 

 

 

Consolidated

  $       396,785     100.0%   $       375,438     100.0%   $       21,347  
 

 

 

   

 

 

 

 

   

 

 

 

 

 

Consolidated revenues increased $21.3 million, or 5.7%, for the three months ended June 30, 2018 from the comparable period in 2017.

The increase in Americas’ revenues was due to higher volumes from existing clients of $17.7 million, new clients of $8.8 million and a positive foreign currency impact of $2.7 million, partially offset by end-of-life client programs of $17.0 million. Revenues from our offshore operations represented 39.4% of Americas’ revenues in 2018, compared to 41.2% for the comparable period in 2017.

The increase in EMEA’s revenues was due to higher volumes from existing clients of $3.9 million, new clients of $1.1 million and a positive foreign currency impact of $4.7 million, partially offset by end-of-life client programs of $0.5 million.

We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent amendments (together, “ASC 606”) on January 1, 2018. See Note 2, Revenues, of the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

On a consolidated basis, we had 51,200 brick-and-mortar seats as of June 30, 2018, a decrease of 200 seats from the comparable period in 2017. The capacity utilization rate on a combined basis was 70% compared to 72% in the comparable period in 2017.

 

48


On a segment basis, 43,900 seats were located in the Americas, a decrease of 500 seats from the comparable period in 2017, and 7,300 seats were located in EMEA, an increase of 300 seats from the comparable period in 2017. Capacity utilization rates as of June 30, 2018 were 68% for the Americas and 77% for EMEA, compared to 71% and 80%, respectively, in the comparable period in 2017. The decrease in utilization in the Americas was primarily due to operational inefficiencies, capacity additions in certain geographies to address demand opportunities and also in part by the short-term inefficiencies created by the progress in implementing initiatives to rationalize underutilized capacity. We are executing on initiatives to rationalize up to 10% of our total seat capacity on a gross basis by the end of 2018. We strive to attain a capacity utilization rate of 85% at each of our locations.

Direct Salaries and Related Costs

 

    Three Months Ended June 30,          
    2018   2017          
(in thousands)     Amount       % of
  Revenues  
    Amount       % of
  Revenues  
    $ Change       Change in % of
Revenues

Americas

  $ 214,502     65.6%   $ 205,000     65.1%   $ 9,502     0.5%

EMEA

    50,422     72.3%     43,615     72.0%     6,807     0.3%
 

 

 

     

 

 

     

 

 

   

Consolidated

  $     264,924     66.8%   $     248,615     66.2%   $     16,309     0.6%
 

 

 

     

 

 

     

 

 

   

The increase of $16.3 million in direct salaries and related costs included a positive foreign currency impact of $0.2 million in the Americas and a negative foreign currency impact of $3.1 million in EMEA.

The increase in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher customer-acquisition advertising costs of 0.9% and higher severance costs of 0.2%, partially offset by lower auto tow claim costs of 0.4% and lower other costs of 0.2%.

The increase in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher communications costs of 0.2%, higher fulfillment materials costs of 0.1%, higher recruiting costs of 0.1%, higher travel costs of 0.1%, higher facility and office supplies of 0.1% and higher other costs of 0.4%, partially offset by lower compensation costs of 0.7%.

General and Administrative

 

     Three Months Ended June 30,          
     2018   2017          
(in thousands)      Amount        % of
  Revenues  
    Amount        % of
  Revenues  
    $ Change       Change in % of
Revenues

Americas

   $ 71,790      22.0%   $ 62,724      19.9%   $ 9,066     2.1%

EMEA

     15,388      22.1%     13,247      21.9%     2,141     0.2%

Other

     14,859      -     16,265      -     (1,406   -
  

 

 

      

 

 

      

 

 

   

Consolidated

   $     102,037      25.7%   $     92,236      24.6%   $       9,801     1.1%
  

 

 

      

 

 

      

 

 

   

The increase of $9.8 million in general and administrative expenses included a positive foreign currency impact of $0.2 million in the Americas and a negative foreign currency impact of $0.9 million in EMEA.

The increase in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to higher facility-related costs of 0.8% resulting from the Americas 2018 Exit Plan (see Note 3, Costs Associated with Exit and Disposal Activities, of the accompanying “Notes to Condensed Consolidated Financial Statements” for further information), higher compensations costs of 0.7%, higher software and maintenance costs of 0.3% and higher legal and professional fees of 0.3%.

The increase in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to higher recruiting costs of 0.3%, higher software and maintenance costs of 0.2% and higher other costs of 0.3%, partially offset by lower advertising and marketing costs of 0.3% and lower legal and professional costs of 0.3%.

The decrease of $1.4 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to lower compensation costs of $0.7 million, lower legal and professional fees of $0.6 million, lower merger and integration costs of $0.1 million and lower other costs of $0.2 million, partially offset by higher software and maintenance costs of $0.2 million.

 

49


Depreciation, Amortization and Impairment of Long-Lived Assets

 

     Three Months Ended June 30,              
     2018     2017              
(in thousands)      Amount        % of
  Revenues  
    Amount      % of
  Revenues  
      $ Change       Change in % of
Revenues
 

Depreciation, net:

              

Americas

   $ 12,335        3.8%     $     11,842        3.8%     $ 493       0.0%  

EMEA

     1,476        2.1%       1,254        2.1%       222       0.0%  

Other

     749        -       724        -       25       -  
  

 

 

      

 

 

      

 

 

   

Consolidated

   $ 14,560        3.7%     $ 13,820        3.7%     $ 740       0.0%  
  

 

 

      

 

 

      

 

 

   

Amortization of intangibles:

              

Americas

   $ 3,415        1.0%     $ 4,989        1.6%     $ (1,574     -0.6%  

EMEA

     214        0.3%       261        0.4%       (47     -0.1%  

Other

     -        -       -        -       -       -  
  

 

 

      

 

 

      

 

 

   

Consolidated

   $ 3,629        0.9%     $ 5,250        1.4%     $ (1,621     -0.5%  
  

 

 

      

 

 

      

 

 

   

Impairment of long-lived assets:

              

Americas

   $ 5,175        1.6%     $ 4,189        1.3%     $ 986       0.3%  

EMEA

     -        0.0%       -        0.0%       -       0.0%  

Other

     -        -       -        -       -       -  
  

 

 

      

 

 

      

 

 

   

Consolidated

   $       5,175        1.3%     $ 4,189        1.1%     $ 986       0.2%  
  

 

 

      

 

 

      

 

 

   

The increase in depreciation was primarily due to new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades, partially offset by certain fully depreciated fixed assets.

The decrease in amortization was primarily due to certain fully amortized intangible assets.

See Note 3, Costs Associated with Exit and Disposal Activities, and Note 4, Fair Value, of the accompanying “Notes to Condensed Consolidated Financial Statements” for further information regarding the impairment of long-lived assets.

Other Income (Expense)

 

           Three Months Ended June 30,               
(in thousands)    2018      2017      $ Change  

Interest income

   $             175      $             144      $               31  
  

 

 

    

 

 

    

 

 

 

Interest (expense)

   $ (1,149    $ (1,865    $ 716  
  

 

 

    

 

 

    

 

 

 

Other income (expense), net:

        

Foreign currency transaction gains (losses)

   $ 641      $ (535    $ 1,176  

Gains (losses) on derivative instruments not designated as hedges

     (345      1,097        (1,442

Other miscellaneous income (expense)

     (833      231        (1,064
  

 

 

    

 

 

    

 

 

 

Total other income (expense), net

   $ (537    $ 793      $ (1,330
  

 

 

    

 

 

    

 

 

 

Interest income remained relatively consistent with the comparable period.

The decrease in interest (expense) was primarily due to a decrease in the outstanding borrowings under the Credit Agreement as a result of a $175.0 million repayment in January 2018, partially offset by an increase in weighted average interest rates on outstanding borrowings.

The change in other miscellaneous income (expense) was primarily due to payroll tax compliance costs, the net investment income (losses) related to the investments held in a rabbi trust and losses from our equity method investee, XSell. See Note 7, Investments Held in Rabbi Trust, of the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

 

50


Income Taxes

 

     Three Months Ended June 30,        
(in thousands)    2018     2017         $ Change      

Income before income taxes

   $               4,949     $             10,400     $ (5,451

Income taxes

     (2,229     1,555     $ (3,784
                 % Change  

Effective tax rate

     -45.0