UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 20172018
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____________ to ____________
Commission File No. 0-28274
Sykes Enterprises, Incorporated
(Exact name of Registrant as specified in its charter)
Florida | 56-1383460 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
400 North Ashley Drive, Suite 2800, Tampa, FL 33602
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (813)274-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-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, anon-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 Rule12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Large accelerated filer | ☒ | Smaller reporting company | ☐ | ||
Accelerated filer | ☐ | Emerging growth company | ☐ | ||
Non-accelerated filer | ☐ |
Smaller reporting company ☐ Emerging growth company ☐
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 Rule12b-2 of the Exchange Act).
Yes ☐ No ☒
As of October 19, 2017,18, 2018, there were 42,897,52642,781,399 outstanding shares of common stock.
Sykes Enterprises, Incorporated and Subsidiaries
Form10-Q
Form 10-Q
INDEX
3 | ||||||
Item 1. | 3 | |||||
Condensed Consolidated Balance Sheets – September 30, | 3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 9 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
47 | ||||||
59 | ||||||
61 | ||||||
62 | ||||||
Item 1. | ||||||
62 | ||||||
62 | ||||||
62 | ||||||
62 | ||||||
62 | ||||||
62 | ||||||
63 | ||||||
64 |
PART I. FINANCIALFINANCIAL INFORMATION
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) | September 30, 2017 | December 31, 2016 | September 30, 2018 |
|
| December 31, 2017 |
| ||||||||
Assets |
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 328,166 | $ | 266,675 | $ | 157,268 |
|
| $ | 343,734 |
| ||||
Receivables, net | 342,640 | 318,558 |
| 353,909 |
|
|
| 341,958 |
| ||||||
Prepaid expenses | 20,848 | 21,973 |
| 23,047 |
|
|
| 22,132 |
| ||||||
Other current assets | 16,930 | 16,030 |
| 17,792 |
|
|
| 19,743 |
| ||||||
|
| ||||||||||||||
Assets held for sale |
| 1,173 |
|
|
| - |
| ||||||||
Total current assets | 708,584 | 623,236 |
| 553,189 |
|
|
| 727,567 |
| ||||||
Property and equipment, net | 159,959 | 156,214 |
| 138,812 |
|
|
| 160,790 |
| ||||||
Goodwill, net | 269,028 | 265,404 |
| 268,075 |
|
|
| 269,265 |
| ||||||
Intangibles, net | 145,543 | 153,055 |
| 152,310 |
|
|
| 140,277 |
| ||||||
Deferred charges and other assets | 29,566 | 38,494 |
| 33,946 |
|
|
| 29,193 |
| ||||||
|
| $ | 1,146,332 |
|
| $ | 1,327,092 |
| |||||||
$ | 1,312,680 | $ | 1,236,403 | ||||||||||||
|
| ||||||||||||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
| ||||||||
Accounts payable | $ | 26,851 | $ | 29,163 | $ | 26,709 |
|
| $ | 32,133 |
| ||||
Accrued employee compensation and benefits | 106,681 | 92,552 |
| 104,979 |
|
|
| 102,899 |
| ||||||
Income taxes payable | 1,252 | 4,487 |
| 355 |
|
|
| 2,606 |
| ||||||
Deferred revenue | 43,330 | 38,736 | |||||||||||||
Deferred revenue and customer liabilities |
| 31,322 |
|
|
| 34,717 |
| ||||||||
Other accrued expenses and current liabilities | 37,330 | 37,919 |
| 38,175 |
|
|
| 30,888 |
| ||||||
|
| ||||||||||||||
Total current liabilities | 215,444 | 202,857 |
| 201,540 |
|
|
| 203,243 |
| ||||||
Deferred grants | 3,381 | 3,761 |
| 2,353 |
|
|
| 3,233 |
| ||||||
Long-term debt | 267,000 | 267,000 |
| 82,000 |
|
|
| 275,000 |
| ||||||
Long-term income tax liabilities | 2,578 | 19,326 |
| 23,771 |
|
|
| 27,098 |
| ||||||
Other long-term liabilities | 21,824 | 18,937 |
| 24,832 |
|
|
| 22,039 |
| ||||||
|
| ||||||||||||||
Total liabilities | 510,227 | 511,881 |
| 334,496 |
|
|
| 530,613 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||
Commitments and loss contingency (Note 13) |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
| |||||||||
Commitments and loss contingency (Note 14) | |||||||||||||||
Shareholders’ equity: | |||||||||||||||
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; 42,895 and 42,895 shares issued, respectively | 429 | 429 | |||||||||||||
Common stock, $0.01 par value per share, 200,000 shares authorized; 42,781 and 42,899 shares issued, respectively |
| 428 |
|
|
| 429 |
| ||||||||
Additionalpaid-in capital | 279,271 | 281,357 |
| 284,275 |
|
|
| 282,385 |
| ||||||
Retained earnings | 563,879 | 518,611 |
| 581,740 |
|
|
| 546,843 |
| ||||||
Accumulated other comprehensive income (loss) | (38,997 | ) | (67,027 | ) |
| (52,275 | ) |
|
| (31,104 | ) | ||||
Treasury stock at cost: 121 and 362 shares, respectively | (2,129 | ) | (8,848 | ) | |||||||||||
Treasury stock at cost: 125 and 117 shares, respectively |
| (2,332 | ) |
|
| (2,074 | ) | ||||||||
Total shareholders' equity |
| 811,836 |
|
|
| 796,479 |
| ||||||||
|
| $ | 1,146,332 |
|
| $ | 1,327,092 |
| |||||||
Total shareholders’ equity | 802,453 | 724,522 | |||||||||||||
|
| ||||||||||||||
$ | 1,312,680 | $ | 1,236,403 | ||||||||||||
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
(in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||||||||||||||
Revenues | $ | 407,309 | $ | 385,743 | $ | 1,166,761 | $ | 1,070,891 | $ | 399,333 |
|
| $ | 407,309 |
|
| $ | 1,210,489 |
|
| $ | 1,166,761 |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Direct salaries and related costs | 267,516 | 249,859 | 763,324 | 694,856 |
| 261,474 |
|
|
| 267,489 |
|
|
| 801,470 |
|
|
| 763,240 |
| ||||||||||||
General and administrative | 93,364 | 87,955 | 277,664 | 262,800 |
| 105,148 |
|
|
| 93,355 |
|
|
| 309,625 |
|
|
| 277,635 |
| ||||||||||||
Depreciation, net | 14,227 | 13,004 | 41,395 | 35,748 |
| 14,072 |
|
|
| 14,227 |
|
|
| 43,468 |
|
|
| 41,395 |
| ||||||||||||
Amortization of intangibles | 5,293 | 5,254 | 15,774 | 14,144 |
| 3,638 |
|
|
| 5,293 |
|
|
| 11,480 |
|
|
| 15,774 |
| ||||||||||||
Impairment of long-lived assets | 680 | - | 5,071 | - |
| 555 |
|
|
| 680 |
|
|
| 9,256 |
|
|
| 5,071 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Total operating expenses | 381,080 | 356,072 | 1,103,228 | 1,007,548 |
| 384,887 |
|
|
| 381,044 |
|
|
| 1,175,299 |
|
|
| 1,103,115 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Income from operations | 26,229 | 29,671 | 63,533 | 63,343 |
| 14,446 |
|
|
| 26,265 |
|
|
| 35,190 |
|
|
| 63,646 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Interest income | 169 | 135 | 468 | 429 |
| 183 |
|
|
| 169 |
|
|
| 529 |
|
|
| 468 |
| ||||||||||||
Interest (expense) | (2,021 | ) | (1,578 | ) | (5,585 | ) | (3,967 | ) |
| (1,168 | ) |
|
| (2,021 | ) |
|
| (3,523 | ) |
|
| (5,585 | ) | ||||||||
Other income (expense), net | 64 | 981 | 1,747 | 2,601 |
| 919 |
|
|
| 28 |
|
|
| 537 |
|
|
| 1,634 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Total other income (expense), net | (1,788 | ) | (462 | ) | (3,370 | ) | (937 | ) |
| (66 | ) |
|
| (1,824 | ) |
|
| (2,457 | ) |
|
| (3,483 | ) | ||||||||
|
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Income before income taxes | 24,441 | 29,209 | 60,163 | 62,406 |
| 14,380 |
|
|
| 24,441 |
|
|
| 32,733 |
|
|
| 60,163 |
| ||||||||||||
Income taxes | 2,746 | 7,939 | 10,911 | 18,044 |
| 628 |
|
|
| 2,746 |
|
|
| 855 |
|
|
| 10,911 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Net income | $ | 21,695 | $ | 21,270 | $ | 49,252 | $ | 44,362 | $ | 13,752 |
|
| $ | 21,695 |
|
| $ | 31,878 |
|
| $ | 49,252 |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic | $ | 0.52 | $ | 0.51 | $ | 1.18 | $ | 1.06 | $ | 0.33 |
|
| $ | 0.52 |
|
| $ | 0.76 |
|
| $ | 1.18 |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||||
Diluted | $ | 0.52 | $ | 0.50 | $ | 1.17 | $ | 1.05 | $ | 0.33 |
|
| $ | 0.52 |
|
| $ | 0.76 |
|
| $ | 1.17 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic | 41,879 | 41,938 | 41,800 | 41,873 |
| 42,136 |
|
|
| 41,879 |
|
|
| 42,070 |
|
|
| 41,800 |
| ||||||||||||
Diluted | 42,033 | 42,224 | 42,006 | 42,233 |
| 42,204 |
|
|
| 42,033 |
|
|
| 42,201 |
|
|
| 42,006 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||||||||||||||
Net income | $ | 21,695 | $ | 21,270 | $ | 49,252 | $ | 44,362 | $ | 13,752 |
|
| $ | 21,695 |
|
| $ | 31,878 |
|
| $ | 49,252 |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency translation gain (loss), net of taxes | 11,502 | (163 | ) | 31,884 | 4,137 | ||||||||||||||||||||||||||
Foreign currency translation adjustments, net of taxes |
| (2,177 | ) |
|
| 11,502 |
|
|
| (15,483 | ) |
|
| 31,884 |
| ||||||||||||||||
Unrealized gain (loss) on net investment hedges, net of taxes | (1,916 | ) | (607 | ) | (5,220 | ) | (1,040 | ) |
| - |
|
|
| (1,916 | ) |
|
| - |
|
|
| (5,220 | ) | ||||||||
Unrealized gain (loss) on cash flow hedging instruments, net of taxes |
| (2,097 | ) |
|
| 1,326 |
|
|
| (5,471 | ) |
|
| 1,462 |
| ||||||||||||||||
Unrealized actuarial gain (loss) related to pension liability, net of taxes | (19 | ) | (33 | ) | (58 | ) | (59 | ) |
| 16 |
|
|
| (19 | ) |
|
| (113 | ) |
|
| (58 | ) | ||||||||
Unrealized gain (loss) on cash flow hedging instruments, net of taxes | 1,326 | (1,322 | ) | 1,462 | (888 | ) | |||||||||||||||||||||||||
Unrealized gain (loss) on postretirement obligation, net of taxes | (13 | ) | 61 | (38 | ) | 34 |
| (84 | ) |
|
| (13 | ) |
|
| (104 | ) |
|
| (38 | ) | ||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes | 10,880 | (2,064 | ) | 28,030 | 2,184 |
| (4,342 | ) |
|
| 10,880 |
|
|
| (21,171 | ) |
|
| 28,030 |
| |||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Comprehensive income (loss) | $ | 32,575 | $ | 19,206 | $ | 77,282 | $ | 46,546 | $ | 9,410 |
|
| $ | 32,575 |
|
| $ | 10,707 |
|
| $ | 77,282 |
| ||||||||
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders’ Equity
Nine Months Ended September 30, 20172018
(Unaudited)
Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Additional | Retained | Comprehensive | Treasury | Common Stock |
|
| Additional |
|
|
|
|
|
| Accumulated Other |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
(in thousands) | Issued | Amount | Paid-in Capital | Earnings | Income (Loss) | Stock | Total | Shares Issued |
|
| Amount |
|
| Paid-in Capital |
|
| Retained Earnings |
|
| Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Total |
| ||||||||||||||||||||||||||||
Balance at December 31, 2016 | 42,895 | $ | 429 | $ | 281,357 | $ | 518,611 | $ | (67,027 | ) | $ | (8,848 | ) | $ | 724,522 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
| 42,899 |
|
| $ | 429 |
|
| $ | 282,385 |
|
| $ | 546,843 |
|
| $ | (31,104 | ) |
| $ | (2,074 | ) |
| $ | 796,479 |
| ||||||||||||||||||||||||||||
Cumulative effect of accounting change | - | - | 232 | (153 | ) | - | - | 79 |
| - |
|
|
| - |
|
|
| - |
|
|
| 3,019 |
|
|
| - |
|
|
| - |
|
|
| 3,019 |
| ||||||||||||||||||||
Stock-based compensation expense | - | - | 4,429 | - | - | - | 4,429 |
| - |
|
|
| - |
|
|
| 5,317 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,317 |
| |||||||||||||||||||||
Issuance of common stock under equity award plans, net of shares withheld for employee taxes | 250 | 3 | (3,553 | ) | - | - | (309 | ) | (3,859 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Retirement of treasury stock | (250 | ) | (3 | ) | (3,194 | ) | (3,831 | ) | - | 7,028 | - | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under equity award plans, net of forfeitures |
| - |
|
|
| - |
|
|
| 258 |
|
|
| - |
|
|
| - |
|
|
| (258 | ) |
|
| - |
| ||||||||||||||||||||||||||||
Shares repurchased for tax withholding on equity awards |
| (118 | ) |
|
| (1 | ) |
|
| (3,685 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,686 | ) | ||||||||||||||||||||||||||||
Comprehensive income (loss) | - | - | - | 49,252 | 28,030 | - | 77,282 |
| - |
|
|
| - |
|
|
| - |
|
|
| 31,878 |
|
|
| (21,171 | ) |
|
| - |
|
|
| 10,707 |
| |||||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 42,895 | $ | 429 | $ | 279,271 | $ | 563,879 | $ | (38,997 | ) | $ | (2,129 | ) | $ | 802,453 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 |
| 42,781 |
|
| $ | 428 |
|
| $ | 284,275 |
|
| $ | 581,740 |
|
| $ | (52,275 | ) |
| $ | (2,332 | ) |
| $ | 811,836 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | Nine Months Ended September 30, |
| |||||||||||||
(in thousands) | 2017 | 2016 | 2018 |
|
| 2017 |
| ||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
| ||||||||
Net income | $ | 49,252 | $ | 44,362 | $ | 31,878 |
|
| $ | 49,252 |
| ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| ||||||||
Depreciation | 41,778 | 36,208 |
| 43,852 |
|
|
| 41,778 |
| ||||||
Amortization of intangibles | 15,774 | 14,144 |
| 11,480 |
|
|
| 15,774 |
| ||||||
Amortization of deferred grants | (550 | ) | (659 | ) |
| (533 | ) |
|
| (550 | ) | ||||
Impairment losses | 5,071 | - |
| 9,256 |
|
|
| 5,071 |
| ||||||
Unrealized foreign currency transaction (gains) losses, net | (1,714 | ) | (2,359 | ) |
| (686 | ) |
|
| (1,714 | ) | ||||
Stock-based compensation expense | 4,429 | 7,836 |
| 5,317 |
|
|
| 4,429 |
| ||||||
Deferred income tax provision (benefit) | 7,395 | (2,697 | ) |
| 229 |
|
|
| 7,395 |
| |||||
Unrealized (gains) losses on financial instruments, net | 126 | 547 | |||||||||||||
Unrealized (gains) losses and premiums on financial instruments, net |
| 661 |
|
|
| 126 |
| ||||||||
Amortization of deferred loan fees | 201 | 201 |
| 201 |
|
|
| 201 |
| ||||||
Imputed interest expense and fair value adjustments to contingent consideration | (529 | ) | (2,082 | ) |
| - |
|
|
| (529 | ) | ||||
Other | 173 | (50 | ) |
| 375 |
|
|
| 173 |
| |||||
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
| ||||||||
Receivables | (3,844 | ) | (21,717 | ) | |||||||||||
Receivables, net |
| (12,756 | ) |
|
| (3,844 | ) | ||||||||
Prepaid expenses | 1,048 | (1,049 | ) |
| (1,164 | ) |
|
| 1,048 |
| |||||
Other current assets | (4,523 | ) | (2,562 | ) |
| (1,101 | ) |
|
| (4,523 | ) | ||||
Deferred charges and other assets | (667 | ) | (919 | ) |
| (3,731 | ) |
|
| (667 | ) | ||||
Accounts payable | 2,937 | (391 | ) |
| (1,490 | ) |
|
| 2,937 |
| |||||
Income taxes receivable / payable | (7,285 | ) | 5,356 |
| (6,429 | ) |
|
| (7,285 | ) | |||||
Accrued employee compensation and benefits | 12,038 | 17,538 |
| 3,426 |
|
|
| 12,038 |
| ||||||
Other accrued expenses and current liabilities | (697 | ) | 7,304 |
| 10,447 |
|
|
| (697 | ) | |||||
Deferred revenue | 2,476 | 5,231 | |||||||||||||
Deferred revenue and customer liabilities |
| (1,612 | ) |
|
| 2,476 |
| ||||||||
Other long-term liabilities | (4,515 | ) | 1,127 |
| 1,830 |
|
|
| (4,515 | ) | |||||
|
| ||||||||||||||
Net cash provided by operating activities | 118,374 | 105,369 |
| 89,450 |
|
|
| 118,374 |
| ||||||
|
| ||||||||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
| ||||||||
Capital expenditures | (48,430 | ) | (59,348 | ) |
| (36,853 | ) |
|
| (48,430 | ) | ||||
Cash paid for business acquisitions, net of cash acquired | (9,075 | ) | (205,324 | ) |
| (21,845 | ) |
|
| (9,075 | ) | ||||
Net investment hedge settlement | (5,122 | ) | 10,339 |
| - |
|
|
| (5,122 | ) | |||||
Purchase of intangible assets | (4,825 | ) | (10 | ) |
| (8,106 | ) |
|
| (4,825 | ) | ||||
Investment in equity method investees | (5,012 | ) | - |
| (5,000 | ) |
|
| (5,012 | ) | |||||
Other | 6 | (43 | ) |
| 698 |
|
|
| 49 |
| |||||
|
| ||||||||||||||
Net cash (used for) investing activities | (72,458 | ) | (254,386 | ) |
| (71,106 | ) |
|
| (72,415 | ) | ||||
|
|
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
Nine Months Ended September 30, | Nine Months Ended September 30, |
| |||||||||||||
(in thousands) | 2017 | 2016 | 2018 |
|
| 2017 |
| ||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
| ||||||||
Payments of long-term debt | - | (14,000 | ) |
| (220,000 | ) |
|
| - |
| |||||
Proceeds from issuance of long-term debt | - | 216,000 |
| 27,000 |
|
|
| - |
| ||||||
Cash paid for repurchase of common stock | - | (4,117 | ) | ||||||||||||
Proceeds from grants | 139 | 151 | |||||||||||||
Shares repurchased for tax withholding on equity awards | (3,859 | ) | (4,916 | ) |
| (3,686 | ) |
|
| (3,859 | ) | ||||
Payments of contingent consideration related to acquisitions | (4,760 | ) | - |
| - |
|
|
| (4,760 | ) | |||||
|
| ||||||||||||||
Net cash provided by (used for) financing activities | (8,480 | ) | 193,118 | ||||||||||||
|
| ||||||||||||||
Effects of exchange rates on cash and cash equivalents | 24,055 | 3,864 | |||||||||||||
|
| ||||||||||||||
Net increase in cash and cash equivalents | 61,491 | 47,965 | |||||||||||||
Cash and cash equivalents – beginning | 266,675 | 235,358 | |||||||||||||
|
| ||||||||||||||
Cash and cash equivalents – ending | $ | 328,166 | $ | 283,323 | |||||||||||
|
| ||||||||||||||
Other |
| 42 |
|
|
| 139 |
| ||||||||
Net cash (used for) financing activities |
| (196,644 | ) |
|
| (8,480 | ) | ||||||||
Effects of exchange rates on cash, cash equivalents and restricted cash |
| (8,186 | ) |
|
| 24,133 |
| ||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| (186,486 | ) |
|
| 61,612 |
| ||||||||
Cash, cash equivalents and restricted cash – beginning |
| 344,805 |
|
|
| 267,594 |
| ||||||||
Cash, cash equivalents and restricted cash – ending | $ | 158,319 |
|
| $ | 329,206 |
| ||||||||
|
|
|
|
|
|
| |||||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
| ||||||||
Cash paid during period for interest | $ | 4,852 | $ | 2,680 | $ | 2,893 |
|
| $ | 4,852 |
| ||||
Cash paid during period for income taxes | $ | 21,169 | $ | 14,050 | $ | 15,423 |
|
| $ | 21,169 |
| ||||
Non-cash transactions: |
|
|
|
|
|
|
| ||||||||
Property and equipment additions in accounts payable | $ | 5,165 | $ | 7,070 | $ | 2,450 |
|
| $ | 5,165 |
| ||||
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss) | $ | (38 | ) | $ | 34 | ||||||||||
Unrealized gain (loss) on postretirement obligation, net of taxes in accumulated other comprehensive income (loss) | $ | (104 | ) |
| $ | (38 | ) | ||||||||
Shares repurchased for tax withholding on equity awards included in current liabilities | $ | 123 | $ | - | $ | - |
|
| $ | 123 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended September 30, 20172018 and 20162017
(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 business processing outsourcing leader in providing comprehensive inboundcustomer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end customers primarily inwithin the communications, financial services, healthcare, technology, transportation and leisure, healthcare, retail and other industries. SYKES’ differentiatedend-to-endSYKES primarily provides customer engagement solutions and service platform effectively engages consumers at every touch point in their customer lifecycle, starting from digital marketing and acquisition to customer support,up-sell/cross-sell and retention. The Company serves its 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 services (withwith an emphasis on inbound technical support, digital marketing andmultichannel demand generation, and customer service), which includes customer assistance, healthcareservice and roadside assistance, technical support and product and service sales to its clients’ customers. TheseUtilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services are delivered through multiple communication channels including phone,e-mail, social media, text messaging, chat and digital self-service. The CompanySYKES 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. SYKESThe Company has developed an extensive global reach withoperations in two reportable segments entitled (1) the Americas, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer engagement centers across six continents, including Northmanagement needs, which includes the United States, Canada, Latin America, South America, Europe, Asia, Australia and the Asia Pacific Rim; and (2) EMEA, which includes Europe, the Middle East and Africa.
2017 Tax Reform Act
In December 2017, the President of the United States (“U.S.”) signed into law the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”). In general, the 2017 Tax Reform Act reduces the U.S. federal corporate tax rate from 35% to 21%, effective in 2018. The Company delivers cost-effective solutions that enhance2017 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 customer service experience, promote stronger brand loyalty, and bring out high levelsfourth quarter of performance and profitability.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.
AcquisitionsTelecommunications Asset Acquisition
On May 31,In April 2017, the Company completed the acquisition of certain assets of a Global 2000 telecommunications services provider, pursuant toentered into a definitive Asset Purchase Agreement (the “Purchase Agreement”) entered intoto acquire certain assets from a Global 2000 telecommunications services provider. The aggregate purchase price of $7.5 million was paid on April 24,May 31, 2017, using cash on hand, resulting in $6.0 million of property and equipment and $1.5 million of customer relationship intangibles (the “Telecommunications Asset acquisition”). The Purchase Agreement contained customary representations and warranties, indemnification obligations and covenants. The results of the Telecommunications Assets’ operations have been included in the Company’s consolidated financial statements in the Americas segment since its acquisition on May 31, 2017.
The Company has reflectedaccounted for the Telecommunications Asset acquisition’s resultsacquisition in accordance with ASC 805, Business Combinations, whereby the Condensed Consolidated Financial Statements since May 31,purchase price paid was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values as of the closing date. The Company completed its analysis of the purchase price allocation during the second quarter of 2017. See Note 2, Acquisitions, for additional information on the acquisition.
WhistleOut Acquisition
On April 1, 2016,July 9, 2018, the Company, completed the acquisition ofas guarantor, and its wholly-owned subsidiaries, Sykes Australia Pty Ltd, an Australian company, and Clear Link HoldingsTechnologies, LLC, (“Clearlink”), pursuant toa Delaware limited liability company, entered into and closed a definitive Share Sale Agreement (the “WhistleOut Sale Agreement”) with WhistleOut Nominees Pty Ltd as trustee for the WhistleOut Holdings Unit Trust, CPC Investments USA Pty Ltd, JJZL Pty Ltd, Kenneth Wong as trustee for Wong Family Trust and PlanC41 Pty Ltd as trustee for the Ottery Family Trust (together, the “WhistleOut Sellers”) to acquire all of Merger (the “Merger Agreement”the outstanding shares of WhistleOut Pty Ltd and WhistleOut Inc. (together, known as “WhistleOut”).
The aggregate purchase price of AUD 30.2 million ($22.4 million), dated March 6, 2016. was paid at the closing of the transaction on July 9, 2018, resulting in $16.5 million of intangible assets, primarily indefinite-lived domain names, $2.4 million of fixed
assets and $2.2 million of goodwill. The aggregate purchase price 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 WhistleOut Sale Agreement provides for a three-year, retention based earnout of AUD 14.0 million.
The WhistleOut Sale Agreement contains customary representations and warranties, indemnification obligations and covenants.
The Company has reflected Clearlink’s resultsaccounted for the WhistleOut acquisition in accordance with ASC 805, whereby the Condensed Consolidated Financial Statements since April 1, 2016. See Note 2, Acquisitions,purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the finalization of the working capital adjustment, tax analysis of the assets acquired and liabilities assumed and goodwill. The Company expects to complete its analysis of the purchase price allocation during the second quarter of 2019 and any resulting adjustments will be recorded in accordance with ASU 2015-16, Business Combination (Topic 805) Simplifying the Accounting for additional information on the acquisition.Measurement-Period Adjustments.
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2017.2018. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2017, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.2018.
Principles of Consolidation—The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Subsequent Events—Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On October 17, 2018, the Company entered into a verbal agreement to settle an outstanding legal action for $1.2 million. See Note 13, Commitments and Loss Contingency, for further information. On October 18, 2018, the Company entered into a definitive Share Purchase Agreement (the “Symphony Purchase Agreement”) to acquire all the outstanding shares of Symphony Ventures Ltd (“Symphony”) for GBP 52.6 million ($67.9 million). The transaction closed on November 1, 2018. See Note 19, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.
Cash, Cash Equivalents and Restricted cash — Cash and cash equivalents consist of cash and highly liquid short-term investments, primarily held in non-interest-bearing investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheets that sum to the amounts reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||
Cash and cash equivalents | $ | 157,268 |
|
| $ | 343,734 |
|
| $ | 328,166 |
|
| $ | 266,675 |
|
Restricted cash included in "Other current assets" |
| 158 |
|
|
| 154 |
|
|
| 107 |
|
|
| 160 |
|
Restricted cash included in "Deferred charges and other assets" |
| 893 |
|
|
| 917 |
|
|
| 933 |
|
|
| 759 |
|
| $ | 158,319 |
|
| $ | 344,805 |
|
| $ | 329,206 |
|
| $ | 267,594 |
|
Investments in Equity Method Investees— The Company uses the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of an equity method investment is included in consolidated net income. Judgment regarding the level of influence over an equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The Company evaluates an equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. As of September 30, 2018 and December 31, 2017, the Company did not identify any instances where the carrying values of its equity method investments were not recoverable.
In July 2017, the Company made a strategic investment of $10.0 million in XSell Technologies, Inc. (“XSell”) for 32.8% of XSell’s preferred stock. The Company plans to incorporateis incorporating XSell’s machine learning and artificial intelligence algorithms into its business. The Company believes this will increase the sales performance of its agents to drive revenue for its clients, improve the experience of the Company’s clients’ end customers and enhance brand loyalty, reduce the cost of customer care and leverage analytics and machine learning to source the best agents and improve their performance.
The Company’s net investment in XSell of $10.0$9.4 million and $9.8 million was included in “Other“Deferred charges and other assets” in the accompanying Condensed Consolidated Balance SheetSheets as of September 30, 2017.2018 and December 31, 2017, respectively. The Company paid $5.0 million in July 2017 withand the remaining $5.0 million included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2017.August 2018. The Company’s proportionate share of XSell’s income (loss) of $(0.2) million and less than $(0.1) million for the three months ended September 30, 2018 and 2017, respectively, and $(0.4) million and less than $(0.1) million for the nine months ended September 30, 2018 and 2017, respectively, was included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017.Operations.
Customer-Acquisition Advertising Costs — The Company utilizes direct-response advertising, the primary purpose of which is to elicit purchases from its clients’ customers. These costs are capitalized when they are expected to result in probable future benefits and are amortized over the period during which future benefits are expected to be received, which is generally less than one month. All otherCompany’s advertising costs are expensed as incurred. As of September 30, 2017 and December 31, 2016, the Company had $0.1 million and less than $0.1 million of capitalized direct-responseTotal advertising costs included in “Prepaid expenses” in the accompanying Condensed Consolidated Balance Sheets, respectively. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Income Statements for the three months ended September 30, 2017 and 2016of Operations were $9.2 million and $9.8 million, respectively, and $27.6 million and $17.8 million for the nine months ended September 30, 2017 and 2016, respectively. Total advertising costs included in “General and administrative” in the accompanying Condensed Consolidated Income Statements for the three and nine months ended September 30, 2017 were less than $0.1 million and $0.1 million, respectively (none in 2016).as follows (in thousands):
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Customer-acquisition advertising costs included in "Direct salaries and related costs" | $ | 13,907 |
|
| $ | 9,188 |
|
| $ | 35,835 |
|
| $ | 27,599 |
|
Customer-acquisition advertising costs included in "General and administrative" |
| 24 |
|
|
| 18 |
|
|
| 35 |
|
|
| 79 |
|
Reclassifications — Certain balances in the prior period have been reclassified to conform to current period presentation.
New Accounting Standards Not Yet Adopted
Revenue from Contracts with CustomersLeases
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”) and subsequent amendments (together, “ASC 842”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840, Leases. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities have the option to either apply the amendments (1) at the beginning of the earliest period presented using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or (2) at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. There are also certain optional practical expedients that an entity may elect to apply.
The Company’s implementation team has compiled a detailed inventory of leases and a preliminary analysis of the impact to the financial statements. The Company continues to evaluate the critical factors of ASC 842. Based on an assessment of the Company’s business and system requirements, the implementation team is implementing a lease accounting software solution to assist the Company in complying with ASC. The Company expects the adoption of ASC 842 on January 1, 2019 to result in a material increase in the assets and liabilities on the consolidated balance sheets as a result of recognizing right-of-use assets and lease liabilities for existing operating leases based on the amount of the Company’s current lease commitments. The Company believes that the majority of its leases will maintain their current lease classification under ASC 842. The Company does not expect these amendments to have a material effect on its expense recognition timing or cash flows and, as a result, the Company expects the adoption of ASC 842 will result in an insignificant impact on the Company’s consolidated statements of income and on the consolidated statements of cash flows. The Company is continuing to evaluate the magnitude of the impact on financial statement presentation and related disclosures, as well as the optional practical expedients. The Company is also continuing to evaluate the full impact of ASC 842, as well as its impacts on its business processes, systems, and internal controls.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). These amendments remove, modify or add certain disclosure requirements for fair value measurements. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain of the amendments will be applied prospectively in the initial year of adoption while the remainder are required to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company is evaluating the timing of its adoption of ASU 2018-13 but does not expect a material impact on its disclosures.
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20) – Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). These amendments remove, modify or add certain disclosure requirements for defined benefit plans. These amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is evaluating the timing of its adoption of ASU 2018-14 but does not expect a material impact on its disclosures.
Cloud Computing
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the timing of its adoption of
ASU 2018-15 but does not expect a material impact on its financial condition, results of operations, cash flows and disclosures.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedge Activities (“ASU 2017-12”). These amendments help simplify certain aspects of hedge accounting and better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update. The Company does not expect the adoption of ASU 2017-12 to materially impact its financial condition, results of operations, cash flows and disclosures.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). These amendments require measurement and recognition of expected versus incurred credit losses for financial assets held. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its financial condition, results of operations and cash flows.
New Accounting Standards Recently Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606)(“ASU2014-09”). The and subsequent amendments in ASU2014-09 outline(together, “ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and indicateindicates 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. In August 2015, the FASB issued ASU2015-14,Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date(“ASU2015-14”). In 2016, the FASB issued additional ASUs that are also part of the overall new revenue guidance included in Accounting Standards Codification (“ASC”) Topic 606. ASU2014-09 and the related subsequent amendments are referred to herein as “ASC 606.” The amendments in ASU2015-14 defer the effective date of ASU2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. An entity should apply the amendments using either the full retrospective approach or retrospectively with a cumulative effect of initially applying the amendments recognized at the date of initial application.
The Company’s implementation team has completed its evaluation of the Company’s revenue streams, analyzed the Company’s contracts to identify key provisions impacted byCompany adopted ASC 606 assessed the applicable accounting, and reviewed existing accounting policies and internal controls. The Company is in the process of implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under ASC 606. The Company will adopt ASC 606 using the modified retrospective approach applied to those contracts which were not completed as of January 1, 2018. The adoption will result in a cumulative effect adjustment to opening retained earnings as of January 1, 2018 primarily related to deferred revenue associated withusing the Company’s customer engagement solutions and services. The adoption of these amendments will require expanded qualitative and quantitative disclosures about the Company’s contracts with its customers. Based on the results of its assessment, the Company does not expect the adoption of ASC 606 on January 1, 2018 to have a material impact on its timing of recognition of revenue, financial condition, results of operations and cash flows.modified retrospective transition method. See Note 2, Revenues, for further details.
The impact to the Company’s results is not expected to be material because the analysis of its contracts under ASC 606 supports the recognition of revenue over time under the output method for the majority of its contracts, which is
consistent with the Company’s current revenue recognition model. Revenue from the majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer. In addition, the number of the Company’s performance obligations, which are classified as stand-ready performance obligations under ASC 606, is not materially different from those under the existing standard. Lastly, the accounting for the estimate of variable consideration is not expected to be materially different compared to the Company’s current practice. The immaterial changes as a result of the Company’s adoption of ASC 606 relate to changes in estimating variable consideration with respect to penalty and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies, as well as the change in timing of revenue recognition associated with certain customer contracts that provide additional fees upon renewal.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, 2016-01,Financial Instruments - Overall (Subtopic825-10) Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU2016-01”). These amendments modify how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to 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 will applyapplies 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 Company does not expect the adoption of ASU2016-01 to materially impact its financial condition, results of operations and cash flows.
Leases
In February 2016, the FASB issued ASU2016-02,Leases (Topic 842) (“ASU2016-02”). 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,January 1, 2018 including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented usingdid not have a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and there are certain optional practical expedients that an entity may elect to apply. The Company expects the adoption of ASU2016-02 to result in a material increase in the assets and liabilities on the consolidated balance sheets due to the amount of the Company’s lease commitments. However, the amendments will likely have an insignificant impact on the Company’s consolidated statements of income. 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 optional practical expedients.financial statements.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU2016-13,Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU2016-13”). 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.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, 2016-15,Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU2016-15”). 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 will behave been applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU2016-15 to materially on January 1, 2018 did not have a material impact itson the Company’s cash flows.
In November 2016, the FASB issued ASU 2016-18, 2016-18,Statement of Cash Flows (Topic 230) – Restricted Cash (A Consensus of the FASB Emerging Issues Task Force (“ASU2016-18”). These amendments clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments will behave been applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoptionThe inclusion of restricted cash increased the beginning balance of cash in an interim period. The Company does not expect the Condensed Consolidated Statements of Cash Flows by $1.1 million for the nine months ended September 30, 2018 and increased the beginning and ending balances of cash by $0.9 million and $1.0 million, respectively, for the nine months ended September 30, 2017. Other than the change in presentation within the accompanying Condensed Consolidated Statements of Cash Flows, the retrospective adoption of ASU2016-18 to materially on January 1, 2018 did not have a material impact its cash flows.on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, 2016-16,Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory (“ASU2016-16”). 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. These amendments will be applied usingThe adoption of ASU 2016-16 on January 1, 2018 did not have a modified retrospective basis through amaterial impact on the Company’s consolidated financial statements and no cumulative-effect adjustment directly to retained earnings aswas 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. Early adoption is permitted asor retrospectively to each period (or periods) in which the effect of the beginningchange in the U.S. federal corporate tax rate in the 2017 Tax Reform Act is recognized. The early adoption of an annual reporting period for whichASU 2018-02 on June 30, 2018 had no impact on the Company’s consolidated financial statements (interim or annual) have not been issued. The Company does not expect the adoption of ASU2016-16disclosures. to materially impact its financial condition, results of operations and cash flows.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, 2017-01,Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU2017-01”). 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 will bewere applied prospectively. Early adoption is permitted in certain circumstances. The Company does not expect the adoption of ASU2017-01 to materially on January 1, 2018 did not have a material impact itson the Company’s consolidated financial condition, results of operations and cash flows.statements.
In March 2017, the FASB issued ASU 2017-07, 2017-07,Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU2017-07”). These amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component outside of a subtotal of income from operations. If a separate line item is not used, the line items used in the income statement to present other components of net benefit cost must be disclosed. These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements, interim or annual, have not been issued or made available for issuance. These amendments will bewere 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 does not expect the adoption of ASU2017-07 to materially impact its financial condition, results of operations and cash flows.
Derivatives and Hedging
In August 2017, the FASB issued ASU2017-12,Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedge Activities (“ASU2017-12”). 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 is currently evaluating the accounting, transition and disclosure requirements to determine the impact ASU2017-12 may have on its financial condition, results of operations, cash flows and disclosures.
New Accounting Standards Recently Adopted
Goodwill
In January 2017, the FASB issued ASU2017-04,Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU2017-04”). These amendments simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. These amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. These amendments will be applied on a prospective basis, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The early adoption of ASU2017-04 on July 31, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.
Stock Compensation
In May 2017, the FASB issued ASU2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting (“ASU2017-09”). These amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. These amendments should be applied prospectively to changes in terms and conditions of awards occurring on or after the adoption date. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The early adoption of ASU2017-09 on June 30, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.
In March 2016, the FASB issued ASU2016-09,Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (“ASU2016-09”). These amendments are intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU2016-09 on January 1, 2017 resulted in stock-based compensation excess tax benefits or deficiencies reflected in the consolidated statements of operations on a prospective basis as a component of the provision for income taxes. Prior to the adoption, these benefits or deficiencies were recognized in equity. Additionally, the Company’s consolidated statements of cash flows now include excess tax benefits as an operating activity, with prior periods adjusted accordingly. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on the Company’s consolidated cash flows statements since such cash flows have historically been presented as a financing activity. Finally, the Company has elected to account for forfeitures as they occur, rather than estimating expected forfeitures.
As a result of the adoption of ASU2016-09, the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 was adjusted as follows: a $2.1 million increase to net cash provided by operating activities and a $2.1 million decrease to net cash provided by financing activities. Additionally, the Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 reflects a cumulative effect of accounting change of $0.2 million to “Additionalpaid-in capital” and $(0.2) million to “Retained earnings” related to the change in accounting for forfeitures.
Derivatives and Hedging
In March 2016, the FASB issued ASU2016-05,Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU2016-05”). These amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under
Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU2016-05 on January 1, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.
Note 2. Acquisitions
Telecommunications Asset Acquisition
On April 24, 2017, the Company entered into a 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 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 since its acquisition on May 31, 2017.
The Company accounted foradopted the Telecommunications Asset acquisition in accordance with ASC 805,Business Combinations, whereby the fair valueincome statement presentation aspects of ASU 2017-07 on a retrospective basis effective January 1, 2018. The following is a reconciliation of the purchase price was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values aseffect of the closing date. The Company completed its analysisreclassification of the purchase price allocation during the second quarterinterest cost and amortization of 2017.
Clearlink
On April 1, 2016, the Company acquired 100% of the outstanding membership units of Clearlink through a merger of Clearlink with and into a subsidiary of the Company (the “Merger”). Clearlink, with its operations located in the United States, is an inbound demand generation and sales conversion platform serving numerous Fortune 500business-to-consumer andbusiness-to-business clients across various industries and subsectors, including telecommunications, satellite television, home security and insurance. The results of Clearlink’s operations have been included in the Company’s consolidated financial statements since April 1, 2016 (the “Clearlink acquisition date”). The strategic acquisition of Clearlink expands the Company’s suite of service offerings while creating differentiation in the marketplace, broadening its addressable market opportunity and extending executive level reach within the Company’s existing clients’ organizations. This resulted in the Company paying a substantial premium for Clearlink resulting in the recognition of goodwill. Pursuantactuarial gain (loss) from operating expenses to Federalother income tax laws, intangible assets and goodwill from the Clearlink acquisition are deductible over a15-year amortization period.
The Clearlink purchase price totaled $207.9 million, consisting of the following (in thousands):
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(1)Funded through borrowings under the Company’s credit agreement. See Note 10, Borrowings, for more information.
Approximately $2.6 million of the purchase price was placed in an escrow account as security for the indemnification obligations of Clearlink’s members under the merger agreement. The escrow was released pursuant to the terms of the escrow agreement, but the Company subsequently asserted a claim of approximately $0.4 million against the Clearlink members. This claim has been resolved by the parties for $0.2 million, which is due to the Company prior to December 31, 2017.
The following table summarizes the final purchase price allocation of the fair values of the assets acquired and liabilities assumed, all included in the Americas segment (in thousands):
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(1)The fair value equals the gross contractual value of the receivables.
The Company accounted for the Clearlink acquisition in accordance with ASC 805,Business Combinations (“ASC 805”), whereby the purchase price paid was allocated to the tangible and identifiable intangibles acquired and liabilities assumed from Clearlink based on their estimated fair values as of the closing date. The Company completed its analysis of the purchase price allocation during the fourth quarter of 2016 and the resulting adjustments were recorded in accordance with ASU2015-16,Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments.
Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.
The following table presents the Company’s purchased intangible assets as of April 1, 2016, the Clearlink acquisition date (in thousands):
Amount Assigned | Weighted Average Amortization Period (years) | |||||||
Customer relationships | $ | 63,800 | 13 | |||||
Trade name | 2,400 | 7 | ||||||
Non-compete agreements | 1,800 | 3 | ||||||
Proprietary software | 700 | 5 | ||||||
Indefinite-lived domain names | 52,700 | N/A | ||||||
|
|
| ||||||
$ | 121,400 | 7 | ||||||
|
|
|
The amount of Clearlink’s revenues and net income since the April 1, 2016 acquisition date, included(expense) in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016,2017 (in thousands):
| As Previously Reported |
|
| Adjustments Due to the Adoption of ASU 2017-07 |
|
| As Revised |
| |||
Three Months Ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs | $ | 267,516 |
|
| $ | (27 | ) |
| $ | 267,489 |
|
General and administrative |
| 93,364 |
|
|
| (9 | ) |
|
| 93,355 |
|
Income from operations |
| 26,229 |
|
|
| 36 |
|
|
| 26,265 |
|
Other income (expense), net |
| 64 |
|
|
| (36 | ) |
|
| 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs | $ | 763,324 |
|
| $ | (84 | ) |
| $ | 763,240 |
|
General and administrative |
| 277,664 |
|
|
| (29 | ) |
|
| 277,635 |
|
Income from operations |
| 63,533 |
|
|
| 113 |
|
|
| 63,646 |
|
Other income (expense), net |
| 1,747 |
|
|
| (113 | ) |
|
| 1,634 |
|
Note 2. Revenues
Adoption of ASC 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC 606, which includes ASU 2014-09 and all related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting for revenues under ASC 605, Revenue Recognition (“ASC 605”).
The Company recorded an increase to opening retained earnings of $3.0 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact, all in the Americas segment, primarily related to the change in timing of revenue recognition associated with certain customer contracts that provide fees upon renewal, as well as changes in estimating variable consideration with respect to penalties and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies. Revenues recognized under ASC 606 are expected to be slightly higher during 2018 than revenues would have been under ASC 605. This is primarily attributable to the change in the timing of revenue recognition, as discussed above. The impact on revenues recognized for the three and nine months ended September 30, 2018 is reported below.
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 September 30, 2018 were as follows (in thousands):
For the Three Months Ended September 30, 2016 | From April 1, 2016 Through September 30, 2016 | |||||||
Revenues | $ | 45,494 | $ | 81,856 | ||||
Net income | $ | 3,942 | $ | 4,733 |
| As Reported |
|
| Balances Without the Impact of the ASC 606 Adoption |
|
| Effect of Adoption Increase (Decrease) |
| |||
Receivables, net | $ | 353,909 |
|
| $ | 351,299 |
|
| $ | 2,610 |
|
Deferred charges and other assets |
| 33,946 |
|
|
| 28,025 |
|
|
| 5,921 |
|
Income taxes payable |
| 355 |
|
|
| (1,727 | ) |
|
| 2,082 |
|
Deferred revenue and customer liabilities |
| 31,322 |
|
|
| 33,984 |
|
|
| (2,662 | ) |
Other long-term liabilities |
| 24,832 |
|
|
| 24,415 |
|
|
| 417 |
|
Retained earnings |
| 581,740 |
|
|
| 573,046 |
|
|
| 8,694 |
|
The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the three months ended September 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):
| As Reported |
|
| Balances Without the Impact of the ASC 606 Adoption |
|
| Effect of Adoption Increase (Decrease) |
| |||
$ | 399,333 |
|
| $ | 397,343 |
|
| $ | 1,990 |
| |
Income from operations |
| 14,446 |
|
|
| 12,456 |
|
|
| 1,990 |
|
Income before income taxes |
| 14,380 |
|
|
| 12,390 |
|
|
| 1,990 |
|
Income taxes |
| 628 |
|
|
| 181 |
|
|
| 447 |
|
Net income |
| 13,752 |
|
|
| 12,209 |
|
|
| 1,543 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.33 |
|
| $ | 0.29 |
|
| $ | 0.04 |
|
Diluted | $ | 0.33 |
|
| $ | 0.29 |
|
| $ | 0.04 |
|
The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):
| As Reported |
|
| Balances Without the Impact of the ASC 606 Adoption |
|
| Effect of Adoption Increase (Decrease) |
| |||
Revenues | $ | 1,210,489 |
|
| $ | 1,203,102 |
|
| $ | 7,387 |
|
Income from operations |
| 35,190 |
|
|
| 27,803 |
|
|
| 7,387 |
|
Income before income taxes |
| 32,733 |
|
|
| 25,346 |
|
|
| 7,387 |
|
Income taxes |
| 855 |
|
|
| (857 | ) |
|
| 1,712 |
|
Net income |
| 31,878 |
|
|
| 26,203 |
|
|
| 5,675 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.76 |
|
| $ | 0.62 |
|
| $ | 0.14 |
|
Diluted | $ | 0.76 |
|
| $ | 0.62 |
|
| $ | 0.14 |
|
The Company’s net cash provided by operating activities for the nine months ended September 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.
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”), varying periods typically 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 in customer contracts 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 within 30 or 60 days of the invoice date. 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 customer 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 the expected value method based on 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.
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 0.5% and 0.5% of the Company’s consolidated total revenues for the three months ended September 30, 2018 and 2017, respectively, and 0.5% and 0.5% of the Company’s consolidated total revenues for the nine months ended September 30, 2018 and 2017, respectively.
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.
The following table presentsrepresents revenues from contracts with customers disaggregated by service type and by the unaudited pro forma combined revenues and net earnings as if Clearlink had been included in the consolidated results of the Companyreportable segment for the entire three and nine month periods ended September 30, 2016. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2016each category (in thousands):
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||
Revenues | $ | 385,743 | $ | 1,104,720 | ||||
Net income | $ | 21,277 | $ | 47,172 | ||||
Net income per common share: | ||||||||
Basic | $ | 0.51 | $ | 1.13 | ||||
Diluted | $ | 0.50 | $ | 1.12 |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services | $ | 328,535 |
|
| $ | 341,077 |
|
| $ | 995,723 |
|
| $ | 976,342 |
|
Other revenues |
| 227 |
|
|
| 257 |
|
|
| 801 |
|
|
| 794 |
|
Total Americas |
| 328,762 |
|
|
| 341,334 |
|
|
| 996,524 |
|
|
| 977,136 |
|
EMEA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services |
| 68,859 |
|
|
| 64,230 |
|
|
| 208,302 |
|
|
| 184,135 |
|
Other revenues |
| 1,684 |
|
|
| 1,727 |
|
|
| 5,588 |
|
|
| 5,429 |
|
Total EMEA |
| 70,543 |
|
|
| 65,957 |
|
|
| 213,890 |
|
|
| 189,564 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues |
| 28 |
|
|
| 18 |
|
|
| 75 |
|
|
| 61 |
|
Total Other |
| 28 |
|
|
| 18 |
|
|
| 75 |
|
|
| 61 |
|
| $ | 399,333 |
|
| $ | 407,309 |
|
| $ | 1,210,489 |
|
| $ | 1,166,761 |
|
These amounts were calculated to reflect
Trade Accounts Receivable
The Company’s trade accounts receivable, net, consists of the additional depreciation, amortization, interest expense and rent expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2016, together with the consequential tax effects. In addition, these amounts exclude costs incurred which were directly attributable to the acquisition, and which did not have a continuing impact on the combined companies’ operating results.following (in thousands):
| September 30, 2018 |
|
| January 1, 2018 |
| ||
Trade accounts receivable, net, current (1) | $ | 340,391 |
|
| $ | 332,014 |
|
Trade accounts receivable, net, noncurrent (2) |
| 6,066 |
|
|
| 2,078 |
|
| $ | 346,457 |
|
| $ | 334,092 |
|
(1) Included in these costs are advisory and legal costs, net of the tax effects.
Merger and integration costs associated with Clearlink included in “General and administrative” costs“Receivables, net” in the accompanying Condensed Consolidated StatementBalance Sheets. The January 1, 2018 balance includes the $0.8 million adjustment recorded upon adoption of Operations were as follows (noneASC 606.
(2) Included in 2017)“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):
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||
Severance costs: | ||||||||
Americas | $ | 162 | $ | 162 | ||||
Transaction and integration costs: | ||||||||
Americas | - | 29 | ||||||
Other | 39 | 4,415 | ||||||
|
|
|
|
|
| |||
39 | 4,444 | |||||||
|
|
|
|
|
| |||
$ | 201 | $ | 4,606 | |||||
|
|
|
|
|
|
| September 30, 2018 |
|
| January 1, 2018 |
| ||
Deferred revenue | $ | 4,507 |
|
| $ | 4,598 |
|
Customer arrangements with termination rights |
| 17,789 |
|
|
| 21,755 |
|
Estimated refund liabilities (1) |
| 9,026 |
|
|
| 7,316 |
|
| $ | 31,322 |
|
| $ | 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. These up-front fees do not represent a significant financing component since they were structured primarily to reduce the administrative burden in managing the operations of certain contracts, to provide the customer with un-interrupted service, and to assist in managing the overall risk and profitability of providing the services.
Revenues of $0.1 million and $4.3 million were recognized during the three and nine months ended September 30, 2018, respectively, from amounts included in deferred revenue at January 1, 2018. The Company expects to recognize the majority of its deferred revenue as of September 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 2011 and 2010,the second quarter of 2018, the Company announced several initiativesinitiated a restructuring plan to streamline excess capacity through targeted seat reductions in the Americas (“(the “Americas 2018 Exit Plans”Plan”) in anon-going effort to manage and optimize capacity utilization. These Americas’The Americas 2018 Exit Plans included,Plan includes, but wereis not limited to, closing customer engagementcontact management centers in the Philippines 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, and lower depreciation expense resulting from the 2018 site closures.
The cumulative costs expected and incurred to date related to cash and non-cash expenditures as a result of the Americas 2018 Exit Plan are outlined below as of September 30, 2018 (in thousands):
| Costs Expected To Be Incurred |
|
| Cumulative Costs Incurred To Date |
|
| Expected Remaining Costs |
| |||
Lease obligations and facility exit costs (1) | $ | 7,344 |
|
| $ | 6,860 |
|
| $ | 484 |
|
Severance and related costs (2) |
| 3,434 |
|
|
| 3,417 |
|
|
| 17 |
|
Severance and related costs (1) |
| 665 |
|
|
| 550 |
|
|
| 115 |
|
Non-cash impairment charges |
| 5,730 |
|
|
| 5,730 |
|
|
| - |
|
| $ | 17,173 |
|
| $ | 16,557 |
|
| $ | 616 |
|
(1) Related to “General and administrative” costs.
(2) Related to “Direct salaries and related costs.”
The total costs expected to be incurred under the Americas 2018 Exit Plan increased $1.1 million during the three months ended September 30, 2018 as the Company progressed with its plan and actual costs became known. The expected remaining lease obligations, facility exit costs and severance charges are anticipated to be incurred during the fourth quarter of 2018. The Company has paid $8.1$5.2 million in cash through December 31, 2016 under these Exit PlansSeptember 30, 2018.
The following table summarizes the accrued liability and related charges for lease obligations and facility exit costs. Asthe three months ended September 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 | $ | 2,815 |
|
| $ | 490 |
|
| $ | 3,305 |
|
Charges included in "Direct salaries and related costs" |
| - |
|
|
| 3,015 |
|
|
| 3,015 |
|
Charges included in "General and administrative" |
| 3,832 |
|
|
| 331 |
|
|
| 4,163 |
|
Cash payments |
| (1,440 | ) |
|
| (3,209 | ) |
|
| (4,649 | ) |
Balance sheet reclassifications (1) |
| 119 |
|
|
| - |
|
|
| 119 |
|
Balance at the end of the period | $ | 5,326 |
|
| $ | 627 |
|
| $ | 5,953 |
|
(1) Consists of December 31, 2016, there were no remaining outstanding liabilities relatedthe reclassification of deferred rent balances to the Exit Plans.restructuring liability for locations subject to closure.
The following table summarizes the accrued liability associated with the Exit Plans’ exit and disposal activities and related charges for the three and nine months ended September 30, 20162018 (none in 2017) (in thousands):
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||
Beginning accrual | $ | 319 | $ | 733 | ||||
Cash payments | (211 | ) | (625 | ) | ||||
|
|
|
|
|
| |||
Ending accrual | $ | 108 | $ | 108 | ||||
|
|
|
|
|
|
| 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" |
| - |
|
|
| 3,417 |
|
|
| 3,417 |
|
Charges included in "General and administrative" |
| 6,860 |
|
|
| 550 |
|
|
| 7,410 |
|
Cash payments |
| (1,869 | ) |
|
| (3,340 | ) |
|
| (5,209 | ) |
Balance sheet reclassifications (1) |
| 335 |
|
|
| - |
|
|
| 335 |
|
Balance at the end of the period | $ | 5,326 |
|
| $ | 627 |
|
| $ | 5,953 |
|
(1) Consists of the reclassification of deferred rent balances to the restructuring liability for locations subject to closure.
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 September 30, 2018 (none in 2017) (in thousands):
| Americas 2018 Exit Plan |
| |
Short-term accrued restructuring liability (1) | $ | 4,491 |
|
Short-term accrued restructuring liability (2) |
| 627 |
|
Long-term accrued restructuring liability (3) |
| 835 |
|
Ending accrual at September 30, 2018 | $ | 5,953 |
|
(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 June 2021.
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 identicalinstruments in active markets. Level 2 — Quoted prices for similarinstruments 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 820-10-20 820-10-20clarifies 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.
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 16,15, 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,(together, known as “Qelp”) on July 2, 2015 and liabilities assumed as part of the ClearlinkClear 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 discount rates vary dependent on the specific risks of each acquisition including the country of operation, the nature of services and complexity of the acquired business, and other similar factors, all of which are significant inputs not observable in the market. Significant increases or decreases in any of the inputs in isolation would result in a significantly higher or lower fair value measurement.
The Company’sCompany'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 September 30, 20172018 (in thousands):
Fair Value Measurements at September 30, 2017 Using: | ||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||
in Active | Other | Significant | ||||||||||||||||
Markets For | Observable | Unobservable | ||||||||||||||||
Balance at | Identical Assets | Inputs | Inputs | |||||||||||||||
September 30, 2017 | Level (1) | Level (2) | Level (3) | |||||||||||||||
Assets: | ||||||||||||||||||
Foreign currency forward and option contracts | (1) | $ | 815 | $ | - | $ | 815 | $ | - | |||||||||
Embedded derivatives | (1) | 41 | - | - | 41 | |||||||||||||
Equity investments held in rabbi trust for the Deferred Compensation Plan | (2) | 7,849 | 7,849 | - | - | |||||||||||||
Debt investments held in rabbi trust for the Deferred Compensation Plan | (2) | 3,427 | 3,427 | - | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ | 12,132 | $ | 11,276 | $ | 815 | $ | 41 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities: | ||||||||||||||||||
Foreign currency forward and option contracts | (1) | $ | 916 | $ | - | $ | 916 | $ | - | |||||||||
Embedded derivatives | (1) | 341 | - | - | 341 | |||||||||||||
Contingent consideration | (3) |
| 1,000 |
| - | - | 1,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ | 2,257 | $ | - | $ | 916 | $ | 1,341 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
| Balance at |
|
| Quoted Prices in Active Markets For Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||
| September 30, 2018 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts (1) | $ | 307 |
|
| $ | - |
|
| $ | 307 |
|
| $ | - |
|
Embedded derivatives (1) |
| 2 |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
Equity investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 9,116 |
|
|
| 9,116 |
|
|
| - |
|
|
| - |
|
Debt investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 3,453 |
|
|
| 3,453 |
|
|
| - |
|
|
| - |
|
| $ | 12,878 |
|
| $ | 12,569 |
|
| $ | 307 |
|
| $ | 2 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts (1) | $ | 3,185 |
|
| $ | - |
|
| $ | 3,185 |
|
| $ | - |
|
Embedded derivatives (1) |
| 404 |
|
|
| - |
|
|
| - |
|
|
| 404 |
|
| $ | 3,589 |
|
| $ | - |
|
| $ | 3,185 |
|
| $ | 404 |
|
The Company’sCompany'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, 20162017 (in thousands):
Fair Value Measurements at December 31, 2016 Using: | ||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||
in Active | Other | Significant | ||||||||||||||||
Markets For | Observable | Unobservable | ||||||||||||||||
Balance at | Identical Assets | Inputs | Inputs | |||||||||||||||
December 31, 2016 | Level (1) | Level (2) | Level (3) | |||||||||||||||
Assets: | ||||||||||||||||||
Foreign currency forward and option contracts | (1) | $ | 3,921 | $ | - | $ | 3,921 | $ | - | |||||||||
Embedded derivatives | (1) | 12 | - | - | 12 | |||||||||||||
Equity investments held in rabbi trust for the Deferred Compensation Plan | (2) | 7,470 | 7,470 | - | - | |||||||||||||
Debt investments held in rabbi trust for the Deferred Compensation Plan | (2) | 1,944 | 1,944 | - | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ | 13,347 | $ | 9,414 | $ | 3,921 | $ | 12 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities: | ||||||||||||||||||
Foreign currency forward and option contracts | (1) | $ | 1,912 | $ | - | $ | 1,912 | $ | - | |||||||||
Embedded derivatives | (1) | 567 | - | - | 567 | |||||||||||||
Contingent consideration | (3) | 6,100 | - | - | 6,100 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ | 8,579 | $ | - | $ | 1,912 | $ | 6,667 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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.
(3) Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||
|
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Balance at the beginning of the period | $ | (171 | ) | $ | 43 | $ | (555 | ) | $ | - | $ | (598 | ) |
| $ | (171 | ) |
| $ | (527 | ) |
| $ | (555 | ) | ||||||
Gains (losses) recognized in “Other income (expense), net” | (193 | ) | 131 | 122 | 176 | ||||||||||||||||||||||||||
Gains (losses) recognized in "Other income (expense), net" |
| 159 |
|
|
| (193 | ) |
|
| (6 | ) |
|
| 122 |
| ||||||||||||||||
Settlements | 66 | (2 | ) | 134 | (5 | ) |
| 38 |
|
|
| 66 |
|
|
| 118 |
|
|
| 134 |
| ||||||||||
Effect of foreign currency | (2 | ) | 4 | (1 | ) | 5 |
| (1 | ) |
|
| (2 | ) |
|
| 13 |
|
|
| (1 | ) | ||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Balance at the end of the period | $ | (300 | ) | $ | 176 | $ | (300 | ) | $ | 176 | $ | (402 | ) |
| $ | (300 | ) |
| $ | (402 | ) |
| $ | (300 | ) | ||||||
|
|
|
| ||||||||||||||||||||||||||||
Change in unrealized gains (losses) included in “Other income (expense), net” related to embedded derivatives held at the end of the period | $ | (193 | ) | $ | 131 | $ | 122 | $ | 176 | ||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Change in unrealized gains (losses) included in "Other income (expense), net" related to embedded derivatives held at the end of the period | $ | 153 |
|
| $ | (193 | ) |
| $ | (19 | ) |
| $ | 122 |
|
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
|
|
|
| Three Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2017 |
| |||||||||||||||
Balance at the beginning of the period | $ | (1,127 | ) | $ | (9,696 | ) | $ | (6,100 | ) | $ | (6,280 | ) | $ | (1,127 | ) |
| $ | (6,100 | ) | ||||
Acquisition(1) | - | - | - | (2,779 | ) | ||||||||||||||||||
Imputed interest | (8 | ) | (207 | ) | (76 | ) | (716 | ) |
| (8 | ) |
|
| (76 | ) | ||||||||
Fair value gain (loss) adjustments(2) | (96 | ) | 2,798 | 605 | 2,798 | ||||||||||||||||||
Fair value gain (loss) adjustments (1) |
| (96 | ) |
|
| 605 |
| ||||||||||||||||
Settlements | 232 | - | 4,760 | - |
| 232 |
|
|
| 4,760 |
| ||||||||||||
Effect of foreign currency | (1 | ) | (87 | ) | (189 | ) | (215 | ) |
| (1 | ) |
|
| (189 | ) | ||||||||
|
|
|
| ||||||||||||||||||||
Balance at the end of the period | $ | (1,000 | ) | $ | (7,192 | ) | $ | (1,000 | ) | $ | (7,192 | ) | $ | (1,000 | ) |
| $ | (1,000 | ) | ||||
|
|
|
| ||||||||||||||||||||
Change in unrealized gains (losses) included in “General and administrative” related to contingent consideration outstanding at the end of the period | $ | - | $ | 2,755 | $ | - | $ | 2,755 | |||||||||||||||
|
|
|
| ||||||||||||||||||||
Change in unrealized gains (losses) included in "General and administrative" related to contingent consideration outstanding at the end of the period | $ | - |
|
| $ | - |
|
(1) Liability acquired as part of the Clearlink acquisition on April 1, 2016. See Note 2, Acquisitions.
(2) Included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.
The Company recorded a fair value loss of $0.1 million and a net fair value gain of $0.6 million in “General and administrative” during the three and nine months ended September 30, 2017, respectively, related to the Clearlink contingent consideration related to settlements and changes in the probability of achievement of certain revenue targets.
The Company recorded a fair value gain of $2.6 million to the Qelpconsideration. All outstanding Clearlink contingent consideration in “General and administrative” during the three and nine months endedliabilities remaining as of September 30, 2016 due2017 were paid prior to the execution of an addendum to the Qelp purchase agreement, subject to which the Company agreed to pay the sellers EUR 4.0 million by June 30,December 31, 2017.
The Company paid $4.4 million in May 2017 to settle the outstanding Qelp contingent consideration obligation. During the three and nine months ended September 30, 2016, the Company recorded a fair value gain of $0.2 million in “General and administrative” to the Clearlink contingent consideration due to changes in the probability of achievement of certain revenue targets.
The Company accretesaccreted interest expense each period using the effective interest method until the contingent consideration reachesreached the estimated remaining future value of $1.0 million.value. Interest expense related to the contingent consideration iswas included in “Interest (expense)” in the accompanying Condensed Consolidated Statements of Operations.
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 September 30, 20172018 and December 31, 2016.2017.
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) (none in 2016):
Total Impairment (Loss) | Total Impairment (Loss) |
| |||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||
2017 | 2017 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||
Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Property and equipment, net | $ | (680 | ) | $ | (5,071 | ) | $ | (555 | ) |
| $ | (680 | ) |
| $ | (9,256 | ) |
| $ | (5,071 | ) | ||
|
|
As a result
In connection with the closure of certain under-utilized customer contact management centers and the consolidation of leased space in the U.S., and Canada, the Company recorded an impairment chargecharges of $0.6 million and $0.7 million during the three and nine months ended September 30, 2018 and 2017, related to leasehold improvements which were not recoverablerespectively, and equipment, furniture$9.3 million and fixtures that could not be redeployed to other locations.
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$4.9 million during the nine months ended September 30,2018 and 2017, respectively, related to leasehold improvements, which were not recoverable and equipment, furniture and fixtures that couldwhich were not be redeployed to other locations. recoverable. See Note 3, Costs Associated with Exit or Disposal Activities, for further information.
The Company also 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 nine months ended September 30, 2017.
Note 5. Goodwill and Intangible Assets
Intangible Assets
The following table presents the Company’s purchased intangible assets as of September 30, 20172018 (in thousands):
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | Gross Intangibles |
|
| Accumulated Amortization |
|
| Net Intangibles |
|
| Weighted Average Amortization Period (years) |
| |||||||||||||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Customer relationships | $ | 170,925 | $ | (90,596 | ) | $ | 80,329 | 10 | $ | 170,449 |
|
| $ | (104,144 | ) |
| $ | 66,305 |
|
|
| 10 |
| ||||||||
Trade names and trademarks | 14,137 | (8,367 | ) | 5,770 | 7 |
| 14,135 |
|
|
| (10,070 | ) |
|
| 4,065 |
|
|
| 7 |
| |||||||||||
Non-compete agreements | 1,820 | (901 | ) | 919 | 3 |
| 2,037 |
|
|
| (1,520 | ) |
|
| 517 |
|
|
| 3 |
| |||||||||||
Content library | 533 | (533 | ) | - | 2 |
| 524 |
|
|
| (524 | ) |
|
| - |
|
|
| 2 |
| |||||||||||
Proprietary software | 1,550 | (1,060 | ) | 490 | 3 |
| 1,040 |
|
|
| (690 | ) |
|
| 350 |
|
|
| 4 |
| |||||||||||
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domain names | 58,035 | - | 58,035 | N/A |
| 81,073 |
|
|
| - |
|
|
| 81,073 |
|
| N/A |
| |||||||||||||
|
|
| $ | 269,258 |
|
| $ | (116,948 | ) |
| $ | 152,310 |
|
|
| 4 |
| ||||||||||||||
$ | 247,000 | $ | (101,457 | ) | $ | 145,543 | 6 | ||||||||||||||||||||||||
|
|
|
The following table presents the Company’s purchased intangible assets as of December 31, 20162017 (in thousands):
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | Gross Intangibles |
|
| Accumulated Amortization |
|
| Net Intangibles |
|
| Weighted Average Amortization Period (years) |
| |||||||||||||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Customer relationships | $ | 166,634 | $ | (75,364 | ) | $ | 91,270 | 10 | $ | 170,853 |
|
| $ | (95,175 | ) |
| $ | 75,678 |
|
|
| 10 |
| ||||||||
Trade names and trademarks | 14,095 | (7,083 | ) | 7,012 | 7 |
| 14,138 |
|
|
| (8,797 | ) |
|
| 5,341 |
|
|
| 7 |
| |||||||||||
Non-compete agreements | 2,993 | (1,643 | ) | 1,350 | 2 |
| 1,820 |
|
|
| (1,052 | ) |
|
| 768 |
|
|
| 3 |
| |||||||||||
Content library | 475 | (357 | ) | 118 | 2 |
| 542 |
|
|
| (542 | ) |
|
| - |
|
|
| 2 |
| |||||||||||
Proprietary software | 1,550 | (955 | ) | 595 | 3 |
| 1,040 |
|
|
| (585 | ) |
|
| 455 |
|
|
| 4 |
| |||||||||||
Favorable lease agreement | 449 | (449 | ) | - | 2 | ||||||||||||||||||||||||||
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domain names | 52,710 | - | 52,710 | N/A |
| 58,035 |
|
|
| - |
|
|
| 58,035 |
|
| N/A |
| |||||||||||||
|
|
| $ | 246,428 |
|
| $ | (106,151 | ) |
| $ | 140,277 |
|
|
| 6 |
| ||||||||||||||
$ | 238,906 | $ | (85,851 | ) | $ | 153,055 | 6 | ||||||||||||||||||||||||
|
|
|
The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to September 30, 2017,2018 is as follows (in thousands):
Years Ending December 31, | Amount |
|
| Amount |
| ||||
2017 (remaining three months) | $ | 5,464 | |||||||
2018 | 15,126 | ||||||||
2018 (remaining three months) |
|
|
| 3,662 |
| ||||
2019 | 14,067 |
|
|
| 14,153 |
| |||
2020 | 11,380 |
|
|
| 11,475 |
| |||
2021 | 6,816 |
|
|
| 6,921 |
| |||
2022 | 5,723 |
|
|
| 5,811 |
| |||
2023 and thereafter | 28,932 | ||||||||
2023 |
|
|
| 4,955 |
| ||||
2024 and thereafter |
|
|
| 24,260 |
|
Goodwill
Changes in goodwill for the nine months ended September 30, 2017 consist2018 consisted of the following (in thousands):
January 1, 2017 | Acquisition | Effect of Foreign Currency | September 30, 2017 | January 1, 2018 |
|
| Acquisition |
|
| Effect of Foreign Currency |
|
| September 30, 2018 |
| |||||||||||||||||
Americas | $ | 255,842 | $ | 410 | $ | 2,132 | $ | 258,384 | $ | 258,496 |
|
| $ | 2,162 |
|
| $ | (2,874 | ) |
| $ | 257,784 |
| ||||||||
EMEA | 9,562 | - | 1,082 | 10,644 |
| 10,769 |
|
|
| - |
|
|
| (478 | ) |
|
| 10,291 |
| ||||||||||||
|
|
|
| $ | 269,265 |
|
| $ | 2,162 |
|
| $ | (3,352 | ) |
| $ | 268,075 |
| |||||||||||||
$ | 265,404 | $ | 410 | $ | 3,214 | $ | 269,028 | ||||||||||||||||||||||||
|
|
|
|
Changes in goodwill for the year ended December 31, 2016 consist2017 consisted of the following (in thousands):
January 1, 2016 | Acquisition (1) | Effect of Foreign Currency | December 31, 2016 | January 1, 2017 |
|
| Acquisition |
|
| Effect of Foreign Currency |
|
| December 31, 2017 |
| |||||||||||||||||
Americas | $ | 186,049 | $ | 70,563 | $ | (770 | ) | $ | 255,842 | $ | 255,842 |
|
| $ | 390 |
|
| $ | 2,264 |
|
| $ | 258,496 |
| |||||||
EMEA | 9,684 | - | (122 | ) | 9,562 |
| 9,562 |
|
|
| - |
|
|
| 1,207 |
|
|
| 10,769 |
| |||||||||||
|
|
|
| $ | 265,404 |
|
| $ | 390 |
|
| $ | 3,471 |
|
| $ | 269,265 |
| |||||||||||||
$ | 195,733 | $ | 70,563 | $ | (892 | ) | $ | 265,404 | |||||||||||||||||||||||
|
|
|
|
(1)See Note 2, Acquisitions, for further information.
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, 2017.2018. 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, 2018, 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.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 valuevalues exceeded the respective carrying value,values, although not substantially.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 September 30, 2017,2018, the Company believes there were no indicators of impairment related to Qelp’s $10.6$10.3 million of goodwill orand Clearlink’s $71.0$71.2 million of goodwill.
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 815Derivatives and Hedging (“ASC 815”), consisting of Philippine Peso, Costa Rican Colon, Hungarian Forint and Romanian Leu contracts. These contracts are entered into to protect againsthedge the risk thatexposure to variability in the eventual cash flows resulting from such transactions will be adversely affected byof 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):
September 30, 2017 | December 31, 2016 | September 30, 2018 |
|
| December 31, 2017 |
| |||||||||
Deferred gains (losses) in AOCI | $ | (761 | ) | $ | (2,295 | ) | $ | (3,086 | ) |
| $ | 2,550 |
| ||
Tax on deferred gains (losses) in AOCI | (2 | ) | 69 |
| 86 |
|
|
| (79 | ) | |||||
|
| ||||||||||||||
Deferred gains (losses) in AOCI, net of taxes | $ | (763 | ) | $ | (2,226 | ) | $ | (3,000 | ) |
| $ | 2,471 |
| ||
|
| ||||||||||||||
Deferred gains (losses) expected to be reclassified to “Revenues” from AOCI during the next twelve months | $ | (757 | ) | ||||||||||||
| |||||||||||||||
Deferred gains (losses) expected to be reclassified to "Revenues" from AOCI during the next twelve months | $ | (2,906 | ) |
|
|
|
|
Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts and options.options as well as the related settlement of forecasted transactions.
Net Investment Hedge – The Company enters into foreign exchange forward contracts to hedge its net investment in certain foreign operations, as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to the Company’s foreign currency-based investments in these subsidiaries.
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 certaincertain 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):
As of September 30, 2017 | As of December 31, 2016 | September 30, 2018 |
| December 31, 2017 | |||||||||||||||||||||||
Contract Type | Notional Amount in USD | Settle Through Date | Notional Amount in USD | Settle Through Date | Notional Amount in USD |
|
| Settle Through Date |
| Notional Amount in USD |
|
| Settle Through Date | ||||||||||||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Options: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
US Dollars/Philippine Pesos | $ | 39,000 | September 2018 | $ | 51,000 | December 2017 | $ | 50,500 |
|
| December 2019 |
| $ | 78,000 |
|
| December 2018 | ||||||||||
Forwards: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
US Dollars/Philippine Pesos | 3,000 | June 2018 | - | - |
| 48,900 |
|
| September 2019 |
|
| 3,000 |
|
| June 2018 | ||||||||||||
US Dollars/Costa Rican Colones | 64,000 | December 2018 | 45,500 | December 2017 |
| 81,500 |
|
| December 2019 |
|
| 70,000 |
|
| March 2019 | ||||||||||||
Euros/Hungarian Forints | 709 | December 2017 | - | - |
| 859 |
|
| December 2018 |
|
| 3,554 |
|
| December 2018 | ||||||||||||
Euros/Romanian Leis | 1,981 | December 2017 | - | - |
| 3,471 |
|
| December 2018 |
|
| 13,977 |
|
| December 2018 | ||||||||||||
Net investment hedges: | |||||||||||||||||||||||||||
Forwards: | |||||||||||||||||||||||||||
Euros/US Dollar | - | - | 76,933 | September 2017 | |||||||||||||||||||||||
Non-designated hedges: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Forwards | 27,468 | December 2017 | 55,614 | March 2017 |
| 5,894 |
|
| December 2018 |
|
| 9,253 |
|
| March 2018 | ||||||||||||
Embedded derivatives | 13,752 | April 2030 | 13,234 | April 2030 |
| 12,050 |
|
| April 2030 |
|
| 13,519 |
|
| April 2030 |
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 aset-off clause that provides thenon-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 $0.8$0.3 million and $3.9$3.8 million as of September 30, 20172018 and December 31, 2016,2017, 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 $0.7 million$0 and $3.6 million as of September 30, 20172018 and December 31, 2016,2017, respectively, and liability positions of $0.8$2.9 million and $1.6 million $0 as of September 30, 20172018 and December 31, 2016,2017, 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 | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Fair Value | Fair Value | |||||||
Derivatives designated as cash flow hedging instruments under ASC 815: | ||||||||
Foreign currency forward and option contracts(1) | $ | 538 | $ | - | ||||
Foreign currency forward and option contracts(2) | 4 | - | ||||||
|
|
|
|
|
| |||
542 | - | |||||||
Derivatives designated as net investment hedging instruments under ASC 815: | ||||||||
Foreign currency forward contracts(1) | - | 3,230 | ||||||
|
|
|
|
|
| |||
542 | 3,230 | |||||||
Derivatives not designated as hedging instruments under ASC 815: | ||||||||
Foreign currency forward contracts(1) | 273 | 691 | ||||||
Embedded derivatives(1) | 8 | 8 | ||||||
Embedded derivatives(2) | 33 | 4 | ||||||
|
|
|
|
|
| |||
Total derivative assets | $ | 856 | $ | 3,933 | ||||
|
|
|
|
|
| |||
Derivative Liabilities | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Fair Value | Fair Value | |||||||
Derivatives designated as cash flow hedging instruments under ASC 815: | ||||||||
Foreign currency forward and option contracts(3) | $ | 908 | $ | 1,806 | ||||
Foreign currency forward and option contracts(4) | 8 | - | ||||||
|
|
|
|
|
| |||
916 | 1,806 | |||||||
Derivatives not designated as hedging instruments under ASC 815: | ||||||||
Foreign currency forward contracts(3) | - | 106 | ||||||
Embedded derivatives(3) | 167 | 174 | ||||||
Embedded derivatives(4) |
| 174
|
|
| 393
|
| ||
|
|
|
|
|
| |||
Total derivative liabilities | $ | 1,257 | $ | 2,479 | ||||
|
|
|
|
|
|
| Derivative Assets |
| |||||
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Derivatives designated as cash flow hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward and option contracts (1) | $ | 306 |
|
| $ | 3,604 |
|
Foreign currency forward and option contracts (2) |
| 1 |
|
|
| - |
|
|
| 307 |
|
|
| 3,604 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward contracts (1) |
| - |
|
|
| 244 |
|
Embedded derivatives (1) |
| 2 |
|
|
| 9 |
|
Embedded derivatives (2) |
| - |
|
|
| 43 |
|
Total derivative assets | $ | 309 |
|
| $ | 3,900 |
|
|
|
|
|
|
|
|
|
| Derivative Liabilities |
| |||||
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Derivatives designated as cash flow hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward and option contracts (3) | $ | 2,716 |
|
| $ | 175 |
|
Foreign currency forward and option contracts (4) |
| 181 |
|
|
| 81 |
|
|
| 2,897 |
|
|
| 256 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward contracts (3) |
| 288 |
|
|
| - |
|
Embedded derivatives (3) |
| 46 |
|
|
| 189 |
|
Embedded derivatives (4) |
| 358 |
|
|
| 390 |
|
Total derivative liabilities | $ | 3,589 |
|
| $ | 835 |
|
(1)Included in “Other"Other current assets”assets" in the accompanying Condensed Consolidated Balance Sheets.
(2)Included in “Deferred"Deferred charges and other assets”assets" in the accompanying Condensed Consolidated Balance Sheets.
(3)Included in “Other"Other accrued expenses and current liabilities”liabilities" in the accompanying Condensed Consolidated Balance Sheets.
(4)Included in “Other"Other long-term liabilities”liabilities" in the accompanying Condensed Consolidated Balance Sheets.
The following tables presenttable presents the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended September 30, 20172018 and 20162017 (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) |
| |||||||||||||||
| September 30, |
|
| September 30, |
|
| September 30, |
| |||||||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||||
Derivatives designated as cash flow hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts | $ | (1,839 | ) |
| $ | 585 |
|
| $ | 206 |
|
| $ | (766 | ) |
| $ | (23 | ) |
| $ | - |
|
Derivatives designated as net investment hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
| - |
|
|
| (2,979 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | (1,839 | ) |
| $ | (2,394 | ) |
| $ | 206 |
|
| $ | (766 | ) |
| $ | (23 | ) |
| $ | - |
|
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 September 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) | ||||||||||||||||||||||
September 30, | September 30, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Derivatives designated as cash flow hedging instruments under ASC 815: | ||||||||||||||||||||||||
Foreign currency forward and option contracts | $ | 585 | $ | (1,274 | ) | $ | (766 | ) | $ | 127 | $ | - | $ | - | ||||||||||
Derivatives designated as net investment hedging instruments under ASC 815: | ||||||||||||||||||||||||
Foreign currency forward contracts | (2,979 | ) | (979 | ) | - | - | - | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
$ | (2,394 | ) | $ | (2,253 | ) | $ | (766 | ) | $ | 127 | $ | - | $ | - | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| |||||
| 2018 |
|
| 2017 |
| ||
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward contracts | $ | (539 | ) |
| $ | (252 | ) |
Embedded derivatives |
| 159 |
|
|
| (193 | ) |
| $ | (380 | ) |
| $ | (445 | ) |
Gain (Loss) Recognized in “Other income (expense), net” on Derivatives | ||||||||
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Derivatives not designated as hedging instruments under ASC 815: | ||||||||
Foreign currency forward contracts | $ | (252 | ) | $ | 240 | |||
Embedded derivatives | (193 | ) | (130 | ) | ||||
|
|
|
|
|
| |||
$ | (445 | ) | $ | 110 | ||||
|
|
|
|
|
|
The following tables presenttable presents the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the nine months ended September 30, 20172018 and 20162017 (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) | 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) |
| |||||||||||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, |
|
| September 30, |
|
| September 30, |
| |||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Foreign currency forward and option contracts | $ | (881 | ) | $ | (843 | ) | $ | (2,346 | ) | $ | 77 | $ | - | $ | - | $ | (4,840 | ) |
| $ | (881 | ) |
| $ | 634 |
|
| $ | (2,346 | ) |
| $ | (15 | ) |
| $ | - |
| |||||||||
Derivatives designated as net investment hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Foreign currency forward contracts | (8,352 | ) | (1,677 | ) | - | - | - | - |
| - |
|
|
| (8,352 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||
|
|
|
|
|
| $ | (4,840 | ) |
| $ | (9,233 | ) |
| $ | 634 |
|
| $ | (2,346 | ) |
| $ | (15 | ) |
| $ | - |
| |||||||||||||||||||
$ | (9,233 | ) | $ | (2,520 | ) | $ | (2,346 | ) | $ | 77 | $ | - | $ | - | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
Gain (Loss) Recognized in “Other income (expense), net” on Derivatives | ||||||||
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Derivatives not designated as hedging instruments under ASC 815: | ||||||||
Foreign currency forward contracts | $ | (170 | ) | $ | 1,610 | |||
Embedded derivatives | 122 | (176 | ) | |||||
|
|
|
|
|
| |||
$ | (48 | ) | $ | 1,434 | ||||
|
|
|
|
|
|
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 nine months ended September 30, 2018 and 2017 (in thousands):
| Nine Months Ended September 30, |
| |||||
| 2018 |
|
| 2017 |
| ||
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign currency forward contracts | $ | (1,801 | ) |
| $ | (170 | ) |
Embedded derivatives |
| (6 | ) |
|
| 122 |
|
| $ | (1,807 | ) |
| $ | (48 | ) |
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):
September 30, 2017 | December 31, 2016 | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
Mutual funds | $ | 8,017 | $ | 11,276 | $ | 7,257 | $ | 9,414 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||||||||||
| Cost |
|
| Fair Value |
|
| Cost |
|
| Fair Value |
| ||||
Mutual funds | $ | 8,588 |
|
| $ | 12,569 |
|
| $ | 8,096 |
|
| $ | 11,627 |
|
The mutual funds held in rabbi trust were 70%73% equity-based and 30%27% debt-based as of September 30, 2017.2018. 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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Net realized gains (losses) from sale of trading securities | $ | 13 | $ | - | $ | 162 | $ | - | $ | 10 |
|
| $ | 13 |
|
| $ | 42 |
|
| $ | 162 |
| ||||||||
Dividend and interest income | 28 | 7 | 67 | 26 |
| 31 |
|
|
| 28 |
|
|
| 99 |
|
|
| 67 |
| ||||||||||||
Net unrealized holding gains (losses) | 401 | 317 | 943 | 471 |
| 366 |
|
|
| 401 |
|
|
| 383 |
|
|
| 943 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Net investment income (losses) | $ | 442 | $ | 324 | $ | 1,172 | $ | 497 | $ | 407 |
|
| $ | 442 |
|
| $ | 524 |
|
| $ | 1,172 |
| ||||||||
|
|
|
|
Note 8. Deferred Revenue
Deferred revenue consists of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Future service | $ | 30,949 | $ | 27,116 | ||||
Estimated potential penalties and holdbacks | 6,879 | 6,593 | ||||||
Estimated chargebacks | 5,502 | 5,027 | ||||||
|
|
|
|
|
| |||
$ | 43,330 | $ | 38,736 | |||||
|
|
|
|
|
|
Note 9. Deferred Grants
Deferred grants, net of accumulated amortization, consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | September 30, 2018 |
|
| December 31, 2017 |
| |||||||||
Property grants | $ | 2,970 | $ | 3,353 | $ | 2,460 |
|
| $ | 2,843 |
| ||||
Lease grants | 525 | 502 |
| 397 |
|
|
| 507 |
| ||||||
Employment grants | 45 | 67 |
| 39 |
|
|
| 61 |
| ||||||
|
| ||||||||||||||
Total deferred grants | 3,540 | 3,922 |
| 2,896 |
|
|
| 3,411 |
| ||||||
Less: Property grants - short-term (1),(2) |
| (393 | ) |
|
| - |
| ||||||||
Less: Lease grants - short-term(1) | (114 | ) | (94 | ) |
| (111 | ) |
|
| (117 | ) | ||||
Less: Employment grants - short-term(1) | (45 | ) | (67 | ) |
| (39 | ) |
|
| (61 | ) | ||||
|
| ||||||||||||||
Total long-term deferred grants | $ | 3,381 | $ | 3,761 | $ | 2,353 |
|
| $ | 3,233 |
| ||||
|
|
(1)Included in “Other"Other accrued expenses and current liabilities”liabilities" in the accompanying Condensed Consolidated Balance Sheets.
(2)Represents deferred grants related to property included in “Assets held-for-sale” that met the held-for-sale criteria as of September 30, 2018.
Note 10.9. Borrowings
On May 12, 2015, the Company entered into a $440 million revolving credit facility (the “2015 Credit“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 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.
The 2015 Credit Agreement includes a $200 million alternate-currencysub-facility, a $10 million swinglinesub-facility and a $35 million letter of creditsub-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 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 2015 Credit Agreement matures on May 12, 2020, and had outstanding borrowings of $267.0$82.0 million and $275.0 million at both September 30, 20172018 and December 31, 2016,2017, respectively, included in “Long-term debt” in the accompanying Condensed Consolidated Balance Sheets.
On April 1, 2016, the Company borrowed $216.0 million under its 2015 Credit Agreement in connection with the acquisition of Clearlink.
Borrowings under the 2015 Credit Agreement bear interest at the rates set forth in the 2015 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 2015 Credit Agreement.
The 2015 Credit Agreement is guaranteed by all of the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of thenon-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 2015 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Average daily utilization | $ | 267,000 | $ | 272,000 | $ | 267,000 | $ | 207,161 | ||||||||
Interest expense, including commitment fee(1) | $ | 1,772 | $ | 1,171 | $ | 4,815 | $ | 2,625 | ||||||||
Weighted average interest rate(2) | 2.6% | 1.7% | 2.4% | 1.8% |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Average daily utilization | $ | 101,087 |
|
| $ | 267,000 |
|
| $ | 107,454 |
|
| $ | 267,000 |
|
Interest expense (1), (2) | $ | 923 |
|
| $ | 1,772 |
|
| $ | 2,839 |
|
| $ | 4,815 |
|
Weighted average interest rate (2) |
| 3.6 | % |
|
| 2.6 | % |
|
| 3.6 | % |
|
| 2.4 | % |
(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 11.10. 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 Postretirement Obligation |
|
| Total |
| |||||||||||||||||||||||||||||||
Foreign Currency Translation Gain (Loss) | Unrealized Gain (Loss) on Net Investment Hedge | Unrealized Actuarial Gain (Loss) Related to Pension Liability | Unrealized Gain (Loss) on Cash Flow Hedging Instruments | Unrealized Gain (Loss) on Post Retirement Obligation | Total | ||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2016 | $ | (58,601 | ) | $ | 4,170 | $ | 1,029 | $ | (527 | ) | $ | 267 | $ | (53,662 | ) | ||||||||||||||||||||||||||||||||
Balance at January 1, 2017 | $ | (72,393 | ) |
| $ | 6,266 |
|
| $ | (2,225 | ) |
| $ | 1,125 |
|
| $ | 200 |
|
| $ | (67,027 | ) | ||||||||||||||||||||||||
Pre-tax amount | (13,832 | ) | 3,409 | 212 | (2,313 | ) | (9 | ) | (12,533 | ) |
| 36,101 |
|
|
| (8,352 | ) |
|
| 2,276 |
|
|
| 527 |
|
|
| (30 | ) |
|
| 30,522 |
| ||||||||||||||
Tax (provision) benefit | - | (1,313 | ) | (8 | ) | 72 | - | (1,249 | ) |
| - |
|
|
| 3,132 |
|
|
| (54 | ) |
|
| (18 | ) |
|
| - |
|
|
| 3,060 |
| |||||||||||||||
Reclassification of (gain) loss to net income | - | - | (52 | ) | 527 | (58 | ) | 417 |
| - |
|
|
| - |
|
|
| 2,444 |
|
|
| (53 | ) |
|
| (50 | ) |
|
| 2,341 |
| ||||||||||||||||
Foreign currency translation | 40 | - | (56 | ) | 16 | - | - |
| (23 | ) |
|
| - |
|
|
| 30 |
|
|
| (7 | ) |
|
| - |
|
|
| - |
| |||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | (72,393 | ) | 6,266 | 1,125 | (2,225 | ) | 200 | (67,027 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
| (36,315 | ) |
|
| 1,046 |
|
|
| 2,471 |
|
|
| 1,574 |
|
|
| 120 |
|
|
| (31,104 | ) | ||||||||||||||||||||||||
Pre-tax amount | 31,922 | (8,352 | ) | - | (881 | ) | (1 | ) | 22,688 |
| (15,757 | ) |
|
| - |
|
|
| (4,855 | ) |
|
| - |
|
|
| - |
|
|
| (20,612 | ) | |||||||||||||||
Tax (provision) benefit | - | 3,132 | - | 15 | - | 3,147 |
| - |
|
|
| - |
|
|
| 201 |
|
|
| 57 |
|
|
| - |
|
|
| 258 |
| ||||||||||||||||||
Reclassification of (gain) loss to net income | - | - | (31 | ) | 2,263 | (37 | ) | 2,195 |
| - |
|
|
| - |
|
|
| (662 | ) |
|
| (51 | ) |
|
| (104 | ) |
|
| (817 | ) | ||||||||||||||||
Foreign currency translation | (38 | ) | - | (27 | ) | 65 | - | - |
| 274 |
|
|
| - |
|
|
| (155 | ) |
|
| (119 | ) |
|
| - |
|
|
| - |
| ||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | (40,509 | ) | $ | 1,046 | $ | 1,067 | $ | (763 | ) | $ | 162 | $ | (38,997 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | (51,798 | ) |
| $ | 1,046 |
|
| $ | (3,000 | ) |
| $ | 1,461 |
|
| $ | 16 |
|
| $ | (52,275 | ) |
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 September 30, |
|
| Nine Months Ended September 30, |
|
| Statements of Operations | |||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Statements of Operations Location | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| Location | ||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||||
Actuarial Gain (Loss) Related to Pension Liability:(1) | |||||||||||||||||||||||||||||||||||
Gain (loss) on cash flow hedging instruments: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Pre-tax amount | $ | 10 | $ | 10 | $ | 31 | $ | 32 | Direct salaries and related costs | $ | 183 |
|
| $ | (766 | ) |
| $ | 619 |
|
| $ | (2,346 | ) |
| Revenues | |||||||||
Tax (provision) benefit | - | - | - | - | Income taxes |
| 19 |
|
|
| 25 |
|
|
| 43 |
|
|
| 83 |
|
| Income taxes | |||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||||
Reclassification to net income | 10 | 10 | 31 | 32 |
| 202 |
|
|
| (741 | ) |
|
| 662 |
|
|
| (2,263 | ) |
|
| ||||||||||||||
Gain (Loss) on Cash Flow Hedging Instruments:(2) | |||||||||||||||||||||||||||||||||||
Actuarial gain (loss) related to pension liability: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Pre-tax amount | (766 | ) | 127 | (2,346 | ) | 77 | Revenues |
| 13 |
|
|
| 10 |
|
|
| 42 |
|
|
| 31 |
|
| Other income (expense), net | |||||||||||
Tax (provision) benefit | 25 | (17 | ) | 83 | 5 | Income taxes |
| 3 |
|
|
| - |
|
|
| 9 |
|
|
| - |
|
| Income taxes | ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||||
Reclassification to net income | (741 | ) | 110 | (2,263 | ) | 82 |
| 16 |
|
|
| 10 |
|
|
| 51 |
|
|
| 31 |
|
|
| ||||||||||||
Gain (Loss) on Post Retirement Obligation:(1),(3) | |||||||||||||||||||||||||||||||||||
Gain (loss) on postretirement obligation: (2),(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Reclassification to net income | 12 | 13 | 37 | 40 | General and administrative |
| 84 |
|
|
| 12 |
|
|
| 104 |
|
|
| 37 |
|
| Other income (expense), net | |||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||||
Total reclassification of gain (loss) to net income | $ | (719 | ) | $ | 133 | $ | (2,195 | ) | $ | 154 | $ | 302 |
|
| $ | (719 | ) |
| $ | 817 |
|
| $ | (2,195 | ) |
|
| ||||||||
|
|
|
|
(1)See Note 15,6, Financial Derivatives, for further information.
(2) See Note 14, Defined Benefit Pension Plan and Postretirement Benefits, for further information.
(2)See Note 6, Financial Derivatives, for further information.
(3)No related tax (provision) benefit.
As discussed in Note 12,11, Income Taxes, earningsfor 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 havehas been provided.
Note 12.11. Income Taxes
The Company’s effective tax rate wasrates were 4.4% and 11.2% and 27.2% for the three months ended September 30, 20172018 and 2016,2017, respectively. The decrease in the effective tax rates israte in 2018 compared to 2017 was primarily due to several significant factors, includinga $0.9 million increase in benefit associated with the resolution of uncertain tax positions and ancillary issues as well as a $0.5 million benefit related to the decrease in the provisional estimate recorded at December 31, 2017 as a result of the 2017 Tax Reform Act. The effective rate impact of these benefits was partially offset by the 2017 recognition of a $0.8 million previously unrecognized tax benefit, inclusive of penalties and interest, arising from a favorable tax audit settlement and statute of limitation expirations. Additionally, the Company recognized a $0.8 million benefit related to the increase in anticipated tax credits and reductions in estimatednon-deferred foreign income, as well as a $0.3 million benefit for the release of a valuation allowance where it is more likely than not thatallowance. In addition, the Company recognized a benefit will be realized.of $0.3 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 income tax rate of 35.0%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 taxes.withholding.
The Company’s effective tax rate wasrates were 2.6% and 18.1% and 28.9% for the nine months ended September 30, 20172018 and 2016,2017, respectively. The decrease in the effective tax rates israte was primarily due to several significant factors, includinga net $3.1 million increase in benefit associated with the resolution of uncertain tax positions as well as the aforementioned $0.5 million decrease in the provisional estimate. This increase in benefit was partially offset by the recognition in 2017 of $2.0$1.1 million of previously unrecognized tax benefits, inclusive of penalties and interest, of which $1.2 million arose from the effective settlement of the Canadian Revenue Agency audit and $0.8 million arose from other favorable audit settlements and statute of limitation expirations. Additionally,discrete items mentioned above. In addition, the Company recognized a $0.8benefit of $1.4 million benefit relatedfrom the reduction in the U.S. federal corporate tax rate from 35% to the increase in anticipated tax credits and reductions in estimatednon-deferred foreign income, as well21% as a $0.3result of the 2017 Tax Reform Act. These net benefits were partially offset by a $0.6 million benefit fordecrease in the releaseamount of a valuation allowance where it is more likely than not thatexcess tax benefits from stock-based compensation recognized in the benefit will be realized. The Company also recognized a $0.9 million tax benefit resulting from the adoption of ASU2016-09 on January 1,nine months ended September 30, 2018 as compared to September 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 income tax rate of 35.0%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 taxes.withholding.
Earnings associatedThe 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 investments2017 Tax Reform Act and guidance available upon enactment and as a result 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 recorded a $0.5 million adjustment to the provisional amounts as of September 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 are consideredas these amounts continue to be indefinitely reinvested outsidein foreign operations. Determining the amount of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740,Income Taxes(“ASC 740”). Determination of any unrecognized deferred tax liability related to investmentsany remaining outside basis difference in foreign subsidiariesthese 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 September 30, 2018 and December 31, 2017. The Company recorded a $0.5 million adjustment to the provisional amount as of September 30, 2018. 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 nine months ended September 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. The total amount of the deposits was $13.8 million as of December 31, 2016 (none at September 30, 2017) and was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet. 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 a netan 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 nine months ended September 30, 2018, the Company finalized procedures ancillary to the Canadian audit and recognized an additional $2.8 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 conditionconditions and results of operations.
Note 13.12. 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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average common shares outstanding | 41,879 | 41,938 | 41,800 | 41,873 |
| 42,136 |
|
|
| 41,879 |
|
|
| 42,070 |
|
|
| 41,800 |
| ||||||||||||
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dilutive effect of stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust | 154 | 286 | 206 | 360 |
| 68 |
|
|
| 154 |
|
|
| 131 |
|
|
| 206 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Total weighted average diluted shares outstanding | 42,033 | 42,224 | 42,006 | 42,233 |
| 42,204 |
|
|
| 42,033 |
|
|
| 42,201 |
|
|
| 42,006 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Anti-dilutive shares excluded from the diluted earnings per share calculation | 14 | 23 | 16 | 22 |
| 23 |
|
|
| 14 |
|
|
| 11 |
|
|
| 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.
TheThere were no shares repurchased under the Company’s share repurchase program were as follows (in thousands, except per share amounts) (none in 2017):2011 Share Repurchase Program during the three and nine months ended September 30, 2018 and 2017.
Total Number of Shares Repurchased | Range of Prices Paid Per Share | Total Cost of Shares Repurchased | ||||||||||||||
Low | High | |||||||||||||||
Three Months Ended: | ||||||||||||||||
September 30, 2016 | 140 | $ | 29.27 | $ | 30.00 | $ | 4,117 | |||||||||
Nine Months Ended: | ||||||||||||||||
September 30, 2016 | 140 | $ | 29.27 | $ | 30.00 | $ | 4,117 |
Note 14.13. Commitments and Loss Contingency
Commitments
During the nine months ended September 30, 2017,2018, 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 September 30, 2017,2018, including the impact of the leases assumed in connection with the Telecommunications Asset acquisition of WhistleOut (in thousands):
| Amount |
| ||||||
Amount | ||||||||
2017 (remaining three months) | $ | 1,560 | ||||||
2018 | 7,645 | |||||||
2018 (remaining three months) |
| $ | 579 |
| ||||
2019 | 7,271 |
|
| 8,777 |
| |||
2020 | 7,474 |
|
| 9,319 |
| |||
2021 | 7,631 |
|
| 9,425 |
| |||
2022 | 6,940 |
|
| 8,621 |
| |||
2023 and thereafter | 18,437 | |||||||
2023 |
|
| 3,698 |
| ||||
2024 and thereafter |
|
| 8,321 |
| ||||
|
| $ | 48,740 |
| ||||
Total minimum payments required | $ | 56,958 | ||||||
|
During the nine months ended September 30, 2017,2018, 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 yearfive-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 September 30, 20172018, including the impact of purchase commitments assumed in connection with the acquisition of WhistleOut (in thousands):
| Amount |
| ||||||
Amount | ||||||||
2017 (remaining three months) | $ | 6,646 | ||||||
2018 | 20,021 | |||||||
2018 (remaining three months) |
| $ | 7,856 |
| ||||
2019 | 12,994 |
|
| 9,434 |
| |||
2020 | 5,727 |
|
| 3,730 |
| |||
2021 | - |
|
| 193 |
| |||
2022 | - |
|
| - |
| |||
2023 and thereafter | - | |||||||
2023 |
|
| - |
| ||||
2024 and thereafter |
|
| - |
| ||||
|
| $ | 21,213 |
| ||||
Total minimum payments required | $ | 45,388 | ||||||
|
The July 2015 Qelp acquisition included contingent consideration
Loss Contingency
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of $6.0 million, based on achieving targets tiedthe 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 revenues and EBITDA forwhether a loss is reasonably estimable. In the years ended December 31, 2016, 2017 and 2018. On September 26, 2016,event the Company entered into an addendumdetermines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Qelp purchase agreement with the sellers to settle the outstanding contingent consideration for EUR 4.0 millionCompany believes to be paid by June 30, 2017. 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 paid $4.4received 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 $1.1 million, in May 2017 to settle the outstanding contingent consideration obligation.
As partnet of the April 2016 Clearlink acquisition, the Company assumed contingent consideration liabilities related to four separate acquisitions made by Clearlink in 2015 and 2016, prior to the Merger. The fair value of the contingent consideration related to these previous acquisitions was $2.8 million as of April 1, 2016 and was based on achieving targets primarily tied to revenues for varying periods of time during 2016 and 2017. As of September 30, 2017, the fair value of the remaining contingent consideration was $1.0 million, which was paid in October 2017.
Loss Contingencyfederal benefit.
The Company, from time to time, is involved in legal actions arising in the ordinary course of business.
On August 24, 2017, a collective action lawsuit was filed against the Company in the United States District Court for the District of Colorado (the “Court”), Slaughter v. Sykes Enterprises, Inc., Case No. 17 Civ. 2038. The lawsuit claimed that the Company failed to pay certain employees overtime compensation for the hours they worked over forty in a workweek, as required by the Fair Labor Standards Act. On October 17, 2018, the parties entered into a verbal agreement to fully resolve all claims and the fees for the plaintiffs’ attorneys for a total payment of $1.2 million. The settlement agreement must still be approved by the Court. A charge of $1.2 million was included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018. As of September 30, 2018, the settlement had not been paid, and the $1.2 million has been included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2018.
With respect to theseany such other currently pending 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.operations or cash flows.
Note 15.14. 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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Service cost | $ | 118 | $ | 112 | $ | 371 | $ | 350 | $ | 106 |
|
| $ | 118 |
|
| $ | 329 |
|
| $ | 371 |
| ||||||||
Interest cost | 46 | 42 | 144 | 131 |
| 46 |
|
|
| 46 |
|
|
| 144 |
|
|
| 144 |
| ||||||||||||
Recognized actuarial (gains) | (10 | ) | (10 | ) | (31 | ) | (32 | ) |
| (13 | ) |
|
| (10 | ) |
|
| (42 | ) |
|
| (31 | ) | ||||||||
|
|
|
| $ | 139 |
|
| $ | 154 |
|
| $ | 431 |
|
| $ | 484 |
| |||||||||||||
Net periodic benefit cost | $ | 154 | $ | 144 | $ | 484 | $ | 449 | |||||||||||||||||||||||
|
|
|
|
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 nine months ended September 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 nine months ended September 30, 2018 and 2017. See Note 1, Overview and Basis of Presentation, for further information related to the adoption of ASU 2016-18.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
401(k) plan contributions | $ | 484 | $ | 260 | $ | 1,104 | $ | 879 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
401(k) plan contributions | $ | 392 |
|
| $ | 484 |
|
| $ | 1,195 |
|
| $ | 1,104 |
|
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):
September 30, 2017 | December 31, 2016 | September 30, 2018 |
|
| December 31, 2017 |
| |||||||||
Postretirement benefit obligation | $ | 19 | $ | 27 | $ | 15 |
|
| $ | 15 |
| ||||
Unrealized gains (losses) in AOCI(1) | 162 | 200 |
| 16 |
|
|
| 120 |
|
(1)Unrealized gains (losses) are impacted bydue to changes in discount rates related to the postretirement obligation.
Note 16.15. Stock-Based Compensation
The Company’s stock-based compensation plans include the 2011 Equity Incentive Plan, theNon-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 and excess tax benefits (deficiencies) (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Stock-based compensation reversal (expense)(1) | $ | 303 | $ | (2,107 | ) | $ | (4,429 | ) | $ | (7,836 | ) | |||||
Income tax benefit (expense)(2) | (161 | ) | 840 | 1,661 | 3,017 | |||||||||||
Excess tax benefit (deficiency) from stock-based compensation(3) | - | 5 | - | 2,065 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Stock-based compensation reversal (expense) (1) |
| $ | (1,567 | ) |
| $ | 303 |
|
| $ | (5,317 | ) |
| $ | (4,429 | ) |
Income tax benefit (2) |
|
| 376 |
|
|
| (161 | ) |
|
| 1,276 |
|
|
| 1,661 |
|
(1)Included in “General"General and administrative”administrative" costs in the accompanying Condensed Consolidated Statements of Operations.
(2)Included in “Income taxes”"Income taxes" in the accompanying Condensed Consolidated Statements of Operations.
(3)Included in “Additionalpaid-in capital” in the accompanying Condensed Consolidated Statements of Changes in Shareholders’ Equity.
There were no capitalized stock-based compensation costs as of September 30, 20172018 and December 31, 2016.2017.
Beginning January 1, 2017, as a result of the adoption of ASU 2016-09,2016-09, 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 IncomeOperations subsequent to the adoption of ASU2016-09.
2011Equity Incentive Plan—The Company’s Board of Directors (the “Board”) adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the “2011"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 certainnon-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.
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 vestone-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:
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Expected volatility | 19.3 | % | 25.3 | % |
|
| 21.4 | % |
|
| 19.3 | % | ||||
Weighted-average volatility | 19.3 | % | 25.3 | % |
|
| 21.4 | % |
|
| 19.3 | % | ||||
Expected dividend rate | 0.0 | % | 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % | ||||
Expected term (in years) | 5.0 | 5.0 |
|
| 5.0 |
|
|
| 5.0 |
| ||||||
Risk-free rate | 1.9 | % | 1.5 | % |
|
| 2.5 | % |
|
| 1.9 | % |
The following table summarizes SARs activity as of September 30, 20172018 and for the nine months then ended:
Stock Appreciation Rights | Shares (000s) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (000s) |
| Shares (000s) |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (in years) |
|
| Aggregate Intrinsic Value (000s) |
| ||||||||||||||||
Outstanding at January 1, 2017 | 633 | $ | - | |||||||||||||||||||||||||||||
Outstanding at January 1, 2018 |
|
| 734 |
|
| $ | - |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Granted | 396 | $ | - |
|
| 333 |
|
| $ | - |
|
|
|
|
|
|
|
|
| |||||||||||||
Exercised | (196 | ) | $ | - |
|
| (50 | ) |
| $ | - |
|
|
|
|
|
|
|
|
| ||||||||||||
Forfeited or expired | (70 | ) | $ | - |
|
| (43 | ) |
| $ | - |
|
|
|
|
|
|
|
|
| ||||||||||||
| ||||||||||||||||||||||||||||||||
Outstanding at September 30, 2017 | 763 | $ | - | 8.6 | $ | 915 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Vested or expected to vest at September 30, 2017 | 763 | $ | - | 8.6 | $ | 915 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Exercisable at September 30, 2017 | 163 | $ | - | 7.0 | $ | 658 | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Outstanding at September 30, 2018 |
|
| 974 |
|
| $ | - |
|
|
| 8.4 |
|
| $ | 1,909 |
| ||||||||||||||||
Vested or expected to vest at September 30, 2018 |
|
| 974 |
|
| $ | - |
|
|
| 8.4 |
|
| $ | 1,909 |
| ||||||||||||||||
Exercisable at September 30, 2018 |
|
| 356 |
|
| $ | - |
|
|
| 7.3 |
|
| $ | 914 |
|
The following table summarizes information regarding SARs granted and exercised (in thousands, except per SAR amounts):
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Number of SARs granted | 396 | 323 |
|
| 333 |
|
|
| 396 |
| ||||||
Weighted average grant-date fair value per SAR | $ | 6.24 | $ | 7.68 |
| $ | 6.84 |
|
| $ | 6.24 |
| ||||
Intrinsic value of SARs exercised | $ | 1,678 | $ | 1,691 |
| $ | 316 |
|
| $ | 1,678 |
| ||||
Fair value of SARs vested | $ | 1,846 | $ | 1,520 |
| $ | 1,950 |
|
| $ | 1,846 |
|
The following table summarizes nonvested SARs activity as of September 30, 20172018 and for the nine months then ended:
Nonvested Stock Appreciation Rights | Shares (000s) | Weighted Average Grant- Date Fair Value |
| Shares (000s) |
|
| Weighted Average Grant-Date Fair Value |
| ||||||||
Nonvested at January 1, 2017 | 515 | $ | 7.76 | |||||||||||||
Nonvested at January 1, 2018 |
|
| 600 |
|
| $ | 6.88 |
| ||||||||
Granted | 396 | $ | 6.24 |
|
| 333 |
|
| $ | 6.84 |
| |||||
Vested | (241 | ) | $ | 7.69 |
|
| (272 | ) |
| $ | 7.16 |
| ||||
Forfeited or expired | (70 | ) | $ | 6.93 |
|
| (43 | ) |
| $ | 6.75 |
| ||||
| ||||||||||||||||
Nonvested at September 30, 2017 | 600 | $ | 6.88 | |||||||||||||
| ||||||||||||||||
Nonvested at September 30, 2018 |
|
| 618 |
|
| $ | 6.74 |
|
As of September 30, 2017,2018, there was $3.1 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 1.4 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 vestone-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 September 30, 20172018 and for the nine months then ended:
Nonvested Restricted Shares and RSUs | Shares (000s) | Weighted Average Grant- Date Fair Value |
| Shares (000s) |
|
| Weighted Average Grant-Date Fair Value |
| ||||||||
Nonvested at January 1, 2017 | 1,136 | $ | 25.47 | |||||||||||||
Nonvested at January 1, 2018 |
|
| 1,109 |
|
| $ | 28.50 |
| ||||||||
Granted | 480 | $ | 29.42 |
|
| 492 |
|
| $ | 28.16 |
| |||||
Vested | (328 | ) | $ | 20.95 |
|
| (323 | ) |
| $ | 25.78 |
| ||||
Forfeited or expired | (179 | ) | $ | 25.62 |
|
| (123 | ) |
| $ | 28.15 |
| ||||
| ||||||||||||||||
Nonvested at September 30, 2017 | 1,109 | $ | 28.50 | |||||||||||||
| ||||||||||||||||
Nonvested at September 30, 2018 |
|
| 1,155 |
|
| $ | 29.15 |
|
The following table summarizes information regarding restricted shares/RSUs granted and vested (in thousands, except per restricted share/RSU amounts):
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Number of restricted shares/RSUs granted | 480 | 451 |
|
| 492 |
|
|
| 480 |
| ||||||
Weighted average grant-date fair value per restricted share/RSU | $ | 29.42 | $ | 30.32 |
| $ | 28.16 |
|
| $ | 29.42 |
| ||||
Fair value of restricted shares/RSUs vested | $ | 6,868 | $ | 6,785 |
| $ | 8,342 |
|
| $ | 6,868 |
|
As of September 30, 2017,2018, there was $25.0$29.8 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 1.81.6 years.
Non-Employee Director Fee Plan—The Company’s 2004Non-Employee Director Fee Plan (the “2004 Fee Plan”), as amended on May 17, 2012, provided that all newnon-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 additionalone-twelfth on each successive third monthly anniversary of the date of grant. The award lapses with respect to all unvested shares in the event thenon-employee director ceases to be a director of the Company, and any unvested shares are forfeited.
The 2004 Fee Plan also provided that eachnon-employee director would receive, on the day after the annual shareholders’ meeting, an annual retainer for service as anon-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 additionalone-fourth on each successive third monthly anniversary of the date of grant. The annual grant of shares paid tonon-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 additionalone-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 RestatedNon-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 atwo-year vesting period, to aone-year vesting period (consisting of four equal quarterly installments,one-fourth on the date of grant and an additionalone-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 thenon-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 anynon-employee Chairman of the Board to receive an additional annual cash award of $100,000, and eachnon-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’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 ofnon-employee Directors should continue on the same terms as provided in the Fifth Amended and RestatedNon-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 tonon-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 tonon-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 anynon-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.
The following table summarizes nonvested common stock share award activity as of September 30, 20172018 and for the nine months then ended:
Nonvested Common Stock Share Awards | Shares (000s) | Weighted Average Grant- Date Fair Value |
| Shares (000s) |
|
| Weighted Average Grant-Date Fair Value |
| ||||||||
Nonvested at January 1, 2017 | 10 | $ | 28.69 | |||||||||||||
Nonvested at January 1, 2018 |
|
| 8 |
|
| $ | 32.21 |
| ||||||||
Granted | 24 | $ | 32.93 |
|
| 34 |
|
| $ | 27.68 |
| |||||
Vested | (20 | ) | $ | 31.14 |
|
| (23 | ) |
| $ | 29.15 |
| ||||
Forfeited or expired | - | $ | - |
|
| (2 | ) |
| $ | 27.68 |
| |||||
| ||||||||||||||||
Nonvested at September 30, 2017 | 14 | $ | 32.45 | |||||||||||||
| ||||||||||||||||
Nonvested at September 30, 2018 |
|
| 17 |
|
| $ | 27.73 |
|
The following table summarizes information regarding common stock share awards granted and vested (in thousands, except per share award amounts):
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Number of share awards granted | 24 | 32 |
|
| 34 |
|
|
| 24 |
| ||||||
Weighted average grant-date fair value per share award | $ | 32.93 | $ | 29.04 |
| $ | 27.68 |
|
| $ | 32.93 |
| ||||
Fair value of share awards vested | $ | 640 | $ | 630 |
| $ | 665 |
|
| $ | 640 |
|
As of September 30, 2017,2018, there was $0.4 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’snon-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 December 9, 2015, effective as of January 1, 2016, and was subsequently amended on May 18, 2016, effective as of June 30, 2016, August 17, 2016, effective as of January 1, 2017, May 25, 2017, effective as of July 1, 2017 and 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 September 30, 20172018 and December 31, 2016,2017, liabilities of $11.3$12.5 million and $9.4$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 $2.1$2.3 million and $1.8$2.1 million as of September 30, 20172018 and December 31, 2016,2017, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.
The following table summarizes nonvested common stock activity as of September 30, 20172018 and for the nine months then ended:
Nonvested Common Stock | Shares (000s) | Weighted Average Grant- Date Fair Value |
| Shares (000s) |
|
| Weighted Average Grant-Date Fair Value |
| ||||||||
Nonvested at January 1, 2017 | 2 | $ | 22.77 | |||||||||||||
Nonvested at January 1, 2018 |
|
| 3 |
|
| $ | 29.56 |
| ||||||||
Granted | 12 | $ | 30.39 |
|
| 13 |
|
| $ | 29.23 |
| |||||
Vested | (10 | ) | $ | 29.42 |
|
| (9 | ) |
| $ | 28.92 |
| ||||
Forfeited or expired | (1 | ) | $ | 29.81 |
|
| - |
|
| $ | - |
| ||||
| ||||||||||||||||
Nonvested at September 30, 2017 | 3 | $ | 29.18 | |||||||||||||
| ||||||||||||||||
Nonvested at September 30, 2018 |
|
| 7 |
|
| $ | 29.85 |
|
The following table summarizes information regarding shares of common stock granted and vested (in thousands, except per common stock amounts):
Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||
2017 | 2016 |
| 2018 |
|
| 2017 |
| |||||||||
Number of shares of common stock granted | 12 | 8 |
|
| 13 |
|
|
| 12 |
| ||||||
Weighted average grant-date fair value per common stock | $ | 30.39 | $ | 29.39 |
| $ | 29.23 |
|
| $ | 30.39 |
| ||||
Fair value of common stock vested | $ | 310 | $ | 241 |
| $ | 281 |
|
| $ | 310 |
| ||||
Cash used to settle the obligation | $ | 590 | $ | 359 |
| $ | 672 |
|
| $ | 590 |
|
As of September 30, 2017,2018, 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 3.73.6 years.
Note 17.16. 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.
Information about the Company’s reportable segments is as follows (in thousands):
Americas |
|
| EMEA |
|
| Other (1) |
|
| Consolidated |
| |||||||||||||||||||||
Americas | EMEA | Other(1) | Consolidated | ||||||||||||||||||||||||||||
Three Months Ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Revenues | $ | 328,762 |
|
| $ | 70,543 |
|
| $ | 28 |
|
| $ | 399,333 |
| ||||||||||||||||
Percentage of revenues |
| 82.3 | % |
|
| 17.7 | % |
|
| 0.0 | % |
|
| 100.0 | % | ||||||||||||||||
Depreciation, net | $ | 11,838 |
|
| $ | 1,473 |
|
| $ | 761 |
|
| $ | 14,072 |
| ||||||||||||||||
Amortization of intangibles | $ | 3,439 |
|
| $ | 199 |
|
| $ | - |
|
| $ | 3,638 |
| ||||||||||||||||
Income (loss) from operations | $ | 25,666 |
|
| $ | 5,098 |
|
| $ | (16,318 | ) |
| $ | 14,446 |
| ||||||||||||||||
Total other income (expense), net |
|
|
|
|
|
|
|
|
| (66 | ) |
|
| (66 | ) | ||||||||||||||||
Income taxes |
|
|
|
|
|
|
|
|
| (628 | ) |
|
| (628 | ) | ||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
| $ | 13,752 |
| ||||||||||||||||
Three Months Ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Revenues | $ | 341,334 | $ | 65,957 | $ | 18 | $ | 407,309 | $ | 341,334 |
|
| $ | 65,957 |
|
| $ | 18 |
|
| $ | 407,309 |
| ||||||||
Percentage of revenues | 83.8% | 16.2% | 0.0% | 100.0% |
| 83.8 | % |
|
| 16.2 | % |
|
| 0.0 | % |
|
| 100.0 | % | ||||||||||||
Depreciation, net | $ | 12,064 | $ | 1,375 | $ | 788 | $ | 14,227 | $ | 12,064 |
|
| $ | 1,375 |
|
| $ | 788 |
|
| $ | 14,227 |
| ||||||||
Amortization of intangibles | $ | 5,081 | $ | 212 | $ | - | $ | 5,293 | $ | 5,081 |
|
| $ | 212 |
|
| $ | - |
|
| $ | 5,293 |
| ||||||||
Income (loss) from operations | $ | 35,896 | $ | 4,523 | $ | (14,190 | ) | $ | 26,229 | $ | 35,932 |
|
| $ | 4,523 |
|
| $ | (14,190 | ) |
| $ | 26,265 |
| |||||||
Total other income (expense), net | (1,788 | ) | (1,788 | ) |
|
|
|
|
|
|
|
|
| (1,824 | ) |
|
| (1,824 | ) | ||||||||||||
Income taxes | (2,746 | ) | (2,746 | ) |
|
|
|
|
|
|
|
|
| (2,746 | ) |
|
| (2,746 | ) | ||||||||||||
| |||||||||||||||||||||||||||||||
Net income | $ | 21,695 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 21,695 |
| ||||||||||||||
| |||||||||||||||||||||||||||||||
Three Months Ended September 30, 2016: | |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Revenues | $ | 326,013 | $ | 59,711 | $ | 19 | $ | 385,743 | $ | 996,524 |
|
| $ | 213,890 |
|
| $ | 75 |
|
| $ | 1,210,489 |
| ||||||||
Percentage of revenues | 84.5% | 15.5% | 0.0% | 100.0% |
| 82.3 | % |
|
| 17.7 | % |
|
| 0.0 | % |
|
| 100.0 | % | ||||||||||||
Depreciation, net | $ | 11,364 | $ | 1,124 | $ | 516 | $ | 13,004 | $ | 36,856 |
|
| $ | 4,360 |
|
| $ | 2,252 |
|
| $ | 43,468 |
| ||||||||
Amortization of intangibles | $ | 4,990 | $ | 264 | $ | - | $ | 5,254 | $ | 10,846 |
|
| $ | 634 |
|
| $ | - |
|
| $ | 11,480 |
| ||||||||
Income (loss) from operations | $ | 36,946 | $ | 7,391 | $ | (14,666 | ) | $ | 29,671 | $ | 71,354 |
|
| $ | 11,957 |
|
| $ | (48,121 | ) |
| $ | 35,190 |
| |||||||
Total other income (expense), net | (462 | ) | (462 | ) |
|
|
|
|
|
|
|
|
| (2,457 | ) |
|
| (2,457 | ) | ||||||||||||
Income taxes | (7,939 | ) | (7,939 | ) |
|
|
|
|
|
|
|
|
| (855 | ) |
|
| (855 | ) | ||||||||||||
| |||||||||||||||||||||||||||||||
Net income | $ | 21,270 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 31,878 |
| ||||||||||||||
| |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Revenues | $ | 977,136 | $ | 189,564 | $ | 61 | $ | 1,166,761 | $ | 977,136 |
|
| $ | 189,564 |
|
| $ | 61 |
|
| $ | 1,166,761 |
| ||||||||
Percentage of revenues | 83.8% | 16.2% | 0.0% | 100.0% |
| 83.8 | % |
|
| 16.2 | % |
|
| 0.0 | % |
|
| 100.0 | % | ||||||||||||
Depreciation, net | $ | 35,374 | $ | 3,815 | $ | 2,206 | $ | 41,395 | $ | 35,374 |
|
| $ | 3,815 |
|
| $ | 2,206 |
|
| $ | 41,395 |
| ||||||||
Amortization of intangibles | $ | 15,048 | $ | 726 | $ | - | $ | 15,774 | $ | 15,048 |
|
| $ | 726 |
|
| $ | - |
|
| $ | 15,774 |
| ||||||||
Income (loss) from operations | $ | 99,918 | $ | 12,266 | $ | (48,651 | ) | $ | 63,533 | $ | 100,031 |
|
| $ | 12,266 |
|
| $ | (48,651 | ) |
| $ | 63,646 |
| |||||||
Total other income (expense), net | (3,370 | ) | (3,370 | ) |
|
|
|
|
|
|
|
|
| (3,483 | ) |
|
| (3,483 | ) | ||||||||||||
Income taxes | (10,911 | ) | (10,911 | ) |
|
|
|
|
|
|
|
|
| (10,911 | ) |
|
| (10,911 | ) | ||||||||||||
| |||||||||||||||||||||||||||||||
Net income | $ | 49,252 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 49,252 |
| ||||||||||||||
| |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2016: | |||||||||||||||||||||||||||||||
Revenues | $ | 893,300 | $ | 177,488 | $ | 103 | $ | 1,070,891 | |||||||||||||||||||||||
Percentage of revenues | 83.4% | 16.6% | 0.0% | 100.0% | |||||||||||||||||||||||||||
Depreciation, net | $ | 30,856 | $ | 3,450 | $ | 1,442 | $ | 35,748 | |||||||||||||||||||||||
Amortization of intangibles | $ | 13,353 | $ | 791 | $ | - | $ | 14,144 | |||||||||||||||||||||||
Income (loss) from operations | $ | 100,658 | $ | 13,697 | $ | (51,012 | ) | $ | 63,343 | ||||||||||||||||||||||
Total other income (expense), net | (937 | ) | (937 | ) | |||||||||||||||||||||||||||
Income taxes | (18,044 | ) | (18,044 | ) | |||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||
Net income | $ | 44,362 | |||||||||||||||||||||||||||||
|
(1)Other items (including corporate and other costs, impairment costs, other income and expense, and income taxes) are shownincluded for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the three and nine months ended September 30, 2017 and 2016.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.
The following table represents a disaggregation of revenue from contracts with customers by geographic location and by the reportable segment for each category (in thousands):
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 161,429 |
|
| $ | 166,527 |
|
| $ | 498,523 |
|
| $ | 471,825 |
|
The Philippines |
| 57,953 |
|
|
| 62,958 |
|
|
| 174,610 |
|
|
| 178,277 |
|
Costa Rica |
| 33,120 |
|
|
| 32,882 |
|
|
| 96,168 |
|
|
| 99,131 |
|
Canada |
| 25,549 |
|
|
| 28,423 |
|
|
| 77,566 |
|
|
| 85,165 |
|
El Salvador |
| 20,732 |
|
|
| 19,792 |
|
|
| 61,327 |
|
|
| 56,506 |
|
People's Republic of China |
| 8,337 |
|
|
| 9,659 |
|
|
| 25,834 |
|
|
| 28,201 |
|
Australia |
| 8,619 |
|
|
| 7,634 |
|
|
| 24,021 |
|
|
| 20,724 |
|
Mexico |
| 6,221 |
|
|
| 6,540 |
|
|
| 18,171 |
|
|
| 17,981 |
|
Other |
| 6,802 |
|
|
| 6,919 |
|
|
| 20,304 |
|
|
| 19,326 |
|
Total Americas |
| 328,762 |
|
|
| 341,334 |
|
|
| 996,524 |
|
|
| 977,136 |
|
EMEA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
| 22,448 |
|
|
| 20,396 |
|
|
| 69,027 |
|
|
| 59,290 |
|
Sweden |
| 13,422 |
|
|
| 14,639 |
|
|
| 41,226 |
|
|
| 42,983 |
|
United Kingdom |
| 12,333 |
|
|
| 10,166 |
|
|
| 37,640 |
|
|
| 29,306 |
|
Romania |
| 8,704 |
|
|
| 7,157 |
|
|
| 25,031 |
|
|
| 20,235 |
|
Other |
| 13,636 |
|
|
| 13,599 |
|
|
| 40,966 |
|
|
| 37,750 |
|
Total EMEA |
| 70,543 |
|
|
| 65,957 |
|
|
| 213,890 |
|
|
| 189,564 |
|
Total Other |
| 28 |
|
|
| 18 |
|
|
| 75 |
|
|
| 61 |
|
| $ | 399,333 |
|
| $ | 407,309 |
|
| $ | 1,210,489 |
|
| $ | 1,166,761 |
|
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 18.17. Other Income (Expense)
Other income (expense), net consists of the following (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||
Foreign currency transaction gains (losses) | $ | (77 | ) | $ | 778 | $ | 567 | $ | 3,534 | $ | 1,066 |
|
| $ | (77 | ) |
| $ | 3,155 |
|
| $ | 567 |
| |||||||
Gains (losses) on derivative instruments not designated as hedges | (445 | ) | (110 | ) | (48 | ) | (1,434 | ) |
| (380 | ) |
|
| (445 | ) |
|
| (1,807 | ) |
|
| (48 | ) | ||||||||
Other miscellaneous income (expense) | 586 | 313 | 1,228 | 501 |
| 233 |
|
|
| 550 |
|
|
| (811 | ) |
|
| 1,115 |
| ||||||||||||
|
|
|
| $ | 919 |
|
| $ | 28 |
|
| $ | 537 |
|
| $ | 1,634 |
| |||||||||||||
$ | 64 | $ | 981 | $ | 1,747 | $ | 2,601 | ||||||||||||||||||||||||
|
|
|
|
Note 19.18. 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 the20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. There are penalties for early cancellation which decrease over time. The Company paid $0.1 million to the landlord during both the three months ended September 30, 20172018 and 2016,2017 and $0.3 million during both the nine months ended September 30, 20172018 and 20162017 under the terms of the lease.
During the three and nine months ended September 30, 2018, the Company contracted to receive services from XSell, an equity method investee, for $0.1 million and $0.1 million, respectively. 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.
On October 18, 2018, the Company as guarantor and its wholly-owned subsidiary, SEI International Services S.a.r.l, a Luxembourg company, entered into the Symphony Purchase Agreement with Pascal Baker, Ian Barkin, David Brain, David Poole, FIS Nominee Limited, Baronsmead Venture Trust plc and Baronsmead Second Venture Trust plc (together, the “Symphony Sellers”) to acquire all of the outstanding shares of Symphony Ventures Ltd.
Symphony, headquartered in London, England, provides robotic process automation (“RPA”) services, offering RPA consulting, implementation, hosting and managed services for front, middle and back-office processes. Symphony serves numerous industries globally, including financial services, healthcare, business services, manufacturing, consumer products, communications, media and entertainment.
The aggregate purchase price of GBP 52.6 million ($67.9 million) is subject to certain post-closing adjustments related to Symphony’s working capital. The Company paid GBP 44.6 million ($57.6 million) at the closing of the transaction on November 1, 2018 using cash on hand as well as $31.0 million of additional borrowings under the Company’s Credit Agreement. The remaining GBP 8.0 million ($10.3 million) of purchase price has been deferred and will be paid in equal installments over the next three years. The Symphony Purchase Agreement also provides for a three-year, retention based earnout payable in RSUs with a value of GBP 3.0 million.
The Symphony Purchase Agreement contains customary representations and warranties, indemnification obligations and covenants.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated
400 North Ashley Drive
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”"Company") as of September 30, 2017, and2018, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 20172018 and 2016, of2017, changes in shareholders’ equity for the nine-month period ended September 30, 2017,2018, and of cash flows for the nine-month periods ended September 30, 2018 and 2017, and 2016. Thesethe 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 statements areinformation for it to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.America.
We conducted our reviewshave 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 Public Company Accounting Oversight Board (United States),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.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting 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), the consolidated balance sheet of Sykes Enterprises, Incorporated and subsidiaries as of December 31, 2016, 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, 2017, 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, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Tampa, Florida
November 9, 20176, 2018
Item 2. Management’s DiscussionDiscussion and Analysis ofof 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 Form10-K for the year ended December 31, 2016,2017, 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,”"believe," "estimate," "project," "expect," “intend,” “may,” “anticipate,” “plan,” “seek,”" "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 trend towarddemand 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 whichthat are identified in our most recent Annual Report on Form10-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 comprehensive inbounddifferentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end customers primarily in the communications, financial services, healthcare, 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 (withwith an emphasis on inbound technical support, digital marketing andmultichannel demand generation, and customer service), which includes customer assistance, healthcareservice and roadside assistance, technical support and product and service sales to our clients’ customers. These services, which represented 99.5% and 99.1%99.5% of consolidated revenues during the three months ended September 30, 20172018 and 2016,2017, respectively, and 99.5% and 99.1%99.5% of consolidated revenues during the nine months ended September 30, 20172018 and 2016,2017, 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.
AcquisitionRecent 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 5,000 seats, of which 4,200 seats have been rationalized as of September 30, 2018. We anticipate annualized gross general and administrative cost savings, and lower depreciation expense of approximately $26.0 million as a result of the 2018 site closures.
See Note 3, Costs Associated with Exit and Disposal Activities, in 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, in the accompanying “Notes to Condensed Consolidated Financial Statements” is reflected in the Other segment.
Telecommunications Assets Acquisition
OnIn May 31, 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 the accompanying Condensed Consolidated Statements of Operationsour consolidated financial statements since May 31, 2017.
WhistleOut Acquisition of Clearlink
In April 2016,On July 9, 2018, we completed the acquisition of Clear Link Holdings LLC (“Clearlink”WhistleOut Pty Ltd and WhistleOut Inc. (together, “WhistleOut”), to expand. WhistleOut is a consumer comparison platform focused on mobile, broadband and pay TV services, principally across Australia and the U.S. The acquisition broadens our suite of service offerings while creating differentiation in the marketplace, broadeningdigital marketing capabilities geographically and extends our addressable market opportunity and extending executive level reach within our existing clients’ organizations. We refer to such acquisition herein as the “Clearlink acquisition.”home services product portfolio. The total purchase price of $207.9AUD 30.2 million ($22.4 million) was funded by borrowings under our existing credit facility.agreement. The results of WhistleOut’s operations of Clearlink have been reflected in the accompanying Condensed Consolidated Statements of Operationsour consolidated financial statements since April 1, 2016.July 9, 2018.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2017 | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | $ Change | 2017 | 2016 | $ Change | 2018 |
|
| 2017 |
|
| $ Change |
|
| 2018 |
|
| 2017 |
|
| $ Change |
| ||||||||||||||||||||||||
Revenues | $ | 407,309 | $ | 385,743 | $ | 21,566 | $ | 1,166,761 | $ | 1,070,891 | $ | 95,870 | $ | 399,333 |
|
| $ | 407,309 |
|
| $ | (7,976 | ) |
| $ | 1,210,489 |
|
| $ | 1,166,761 |
|
| $ | 43,728 |
| ||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Direct salaries and related costs | 267,516 | 249,859 | 17,657 | 763,324 | 694,856 | 68,468 |
| 261,474 |
|
|
| 267,489 |
|
|
| (6,015 | ) |
|
| 801,470 |
|
|
| 763,240 |
|
|
| 38,230 |
| ||||||||||||||||||
General and administrative | 93,364 | 87,955 | 5,409 | 277,664 | 262,800 | 14,864 |
| 105,148 |
|
|
| 93,355 |
|
|
| 11,793 |
|
|
| 309,625 |
|
|
| 277,635 |
|
|
| 31,990 |
| ||||||||||||||||||
Depreciation, net | 14,227 | 13,004 | 1,223 | 41,395 | 35,748 | 5,647 |
| 14,072 |
|
|
| 14,227 |
|
|
| (155 | ) |
|
| 43,468 |
|
|
| 41,395 |
|
|
| 2,073 |
| ||||||||||||||||||
Amortization of intangibles | 5,293 | 5,254 | 39 | 15,774 | 14,144 | 1,630 |
| 3,638 |
|
|
| 5,293 |
|
|
| (1,655 | ) |
|
| 11,480 |
|
|
| 15,774 |
|
|
| (4,294 | ) | ||||||||||||||||||
Impairment of long-lived assets | 680 | - | 680 | 5,071 | - | 5,071 |
| 555 |
|
|
| 680 |
|
|
| (125 | ) |
|
| 9,256 |
|
|
| 5,071 |
|
|
| 4,185 |
| ||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 381,080 | 356,072 | 25,008 | 1,103,228 | 1,007,548 | 95,680 |
| 384,887 |
|
|
| 381,044 |
|
|
| 3,843 |
|
|
| 1,175,299 |
|
|
| 1,103,115 |
|
|
| 72,184 |
| ||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Income from operations | 26,229 | 29,671 | (3,442 | ) | 63,533 | 63,343 | 190 |
| 14,446 |
|
|
| 26,265 |
|
|
| (11,819 | ) |
|
| 35,190 |
|
|
| 63,646 |
|
|
| (28,456 | ) | |||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Interest income | 169 | 135 | 34 | 468 | 429 | 39 |
| 183 |
|
|
| 169 |
|
|
| 14 |
|
|
| 529 |
|
|
| 468 |
|
|
| 61 |
| ||||||||||||||||||
Interest (expense) | (2,021 | ) | (1,578 | ) | (443 | ) | (5,585 | ) | (3,967 | ) | (1,618 | ) |
| (1,168 | ) |
|
| (2,021 | ) |
|
| 853 |
|
|
| (3,523 | ) |
|
| (5,585 | ) |
|
| 2,062 |
| ||||||||||||
Other income (expense), net | 64 | 981 | (917 | ) | 1,747 | 2,601 | (854 | ) |
| 919 |
|
|
| 28 |
|
|
| 891 |
|
|
| 537 |
|
|
| 1,634 |
|
|
| (1,097 | ) | ||||||||||||||||
Total other income (expense), net | (1,788 | ) | (462 | ) | (1,326 | ) | (3,370 | ) | (937 | ) | (2,433 | ) |
| (66 | ) |
|
| (1,824 | ) |
|
| 1,758 |
|
|
| (2,457 | ) |
|
| (3,483 | ) |
|
| 1,026 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Income before income taxes | 24,441 | 29,209 | (4,768 | ) | 60,163 | 62,406 | (2,243 | ) |
| 14,380 |
|
|
| 24,441 |
|
|
| (10,061 | ) |
|
| 32,733 |
|
|
| 60,163 |
|
|
| (27,430 | ) | ||||||||||||||||
Income taxes | 2,746 | 7,939 | (5,193 | ) | 10,911 | 18,044 | (7,133 | ) |
| 628 |
|
|
| 2,746 |
|
|
| (2,118 | ) |
|
| 855 |
|
|
| 10,911 |
|
|
| (10,056 | ) | ||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Net income | $ | 21,695 | $ | 21,270 | $ | 425 | $ | 49,252 | $ | 44,362 | $ | 4,890 | $ | 13,752 |
|
| $ | 21,695 |
|
| $ | (7,943 | ) |
| $ | 31,878 |
|
| $ | 49,252 |
|
| $ | (17,374 | ) | ||||||||||||
|
|
|
|
|
|
Three Months Ended September 30, 20172018 Compared to Three Months Ended September 30, 20162017
Revenues
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
2017 | 2016 | Three Months Ended September 30, |
|
|
|
|
| ||||||||||||||||||||||||||
% of | % of | 2018 |
|
| 2017 |
|
|
|
|
| |||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
| ||||||||||||||
Americas | $ | 341,334 | 83.8% | $ | 326,013 | 84.5% | $ | 15,321 | $ | 328,762 |
|
| 82.3% |
|
| $ | 341,334 |
|
| 83.8% |
|
| $ | (12,572 | ) | ||||||||
EMEA | 65,957 | 16.2% | 59,711 | 15.5% | 6,246 |
| 70,543 |
|
| 17.7% |
|
|
| 65,957 |
|
| 16.2% |
|
|
| 4,586 |
| |||||||||||
Other | 18 | 0.0% | 19 | 0.0% | (1 | ) |
| 28 |
|
| 0.0% |
|
|
| 18 |
|
| 0.0% |
|
|
| 10 |
| ||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||
Consolidated | $ | 407,309 | 100.0% | $ | 385,743 | 100.0% | $ | 21,566 | $ | 399,333 |
|
| 100.0% |
|
| $ | 407,309 |
|
| 100.0% |
|
| $ | (7,976 | ) | ||||||||
|
|
|
|
|
Consolidated revenues increased $21.6decreased $8.0 million, or 5.6%2.0%, for the three months ended September 30, 20172018 from the comparable period in 2016.2017.
The increasedecrease in Americas’ revenues was due to new clientsend-of-life client programs of $23.4$19.1 million, and higherlower volumes from existing clients of $0.2$2.3 million and a negative foreign currency impact of $1.9 million, partially offset byend-of-life client programs new clients of $8.3$10.7 million. Revenues from our offshore operations represented 40.6%40.5% of Americas’ revenues in 2018, compared to 40.0%40.6% for the comparable period in 2016.2017.
The increase in EMEA’s revenues was due to higher volumes from existing clients of $2.8$6.7 million and new clients of $2.7$1.0 million, partially offset by end-of-life client programs of $1.3 million and a positivenegative foreign currency impact of $1.6 million, partially offset by$1.8 million.
We adopted ASU 2014-09, end-of-lifeRevenue from Contracts with Customers (Topic 606), client programs of $0.9 million.and subsequent amendments (together, “ASC 606”) on January 1, 2018. See Note 2, Revenues, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.
On a consolidated basis, we had 52,40049,600 brick-and-mortar seats as of September 30, 2017, an increase2018, a decrease of 5,0002,800 seats from the comparable period in 2016. Included2017. We rationalized 4,200 seats in this seat count are 2,900 seats associated with the Telecommunications Asset acquisition. This increase in seats, netAmericas as part of the Telecommunications Asset acquisition additions, reflect2018 Americas Exit Plan, which was partially offset by seat additions to support higher projectedinternationally for demand. The capacity utilization rate on a combined basis was 71%70% compared to 75%71% in the comparable period in 2016. This decrease was primarily due to capacity additions related to the Telecommunications Asset acquisition with its seasonally low utilization rate, as well as capacity additions owing to higher projected demand and certain operational inefficiencies.2017.
On a geographic segment basis, 45,20042,100 seats were located in the Americas, an increasea decrease of 4,3003,100 seats from the comparable period in 2016,2017, and 7,2007,500 seats were located in EMEA, an increase of 700300 seats from the comparable period in 2016.2017. Capacity utilization rates as of September 30, 20172018 were 70%69% for the Americas and 80%76% for EMEA, compared to 75%70% and 78%80%, respectively, in the comparable period in 2016, with the2017. The decrease in utilization in the Americas primarily due toutilization was driven by lower demand and operational inefficiencies, while the aforementioned factors. As a result of the Telecommunications Asset acquisition, we expect to take further actionsreduction in streamlining our capacity footprintEMEA was driven by lower demand in the U.S.communications vertical. We strive to attain a capacity utilization rate of 85% at each of our locations.
Direct Salaries and Related Costs
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||
Americas | $ | 221,392 | 64.9% | $ | 208,664 | 64.0% | $ | 12,728 | 0.9% | $ | 212,457 |
|
| 64.6% |
|
| $ | 221,365 |
|
| 64.9% |
|
| $ | (8,908 | ) |
| -0.3% |
| ||||||||||
EMEA | 46,124 | 69.9% | 41,195 | 69.0% | 4,929 | 0.9% |
| 49,017 |
|
| 69.5% |
|
|
| 46,124 |
|
| 69.9% |
|
|
| 2,893 |
|
| -0.4% |
| |||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||
Consolidated | $ | 267,516 | 65.7% | $ | 249,859 | 64.8% | $ | 17,657 | 0.9% | $ | 261,474 |
|
| 65.5% |
|
| $ | 267,489 |
|
| 65.7% |
|
| $ | (6,015 | ) |
| -0.2% |
| ||||||||||
|
|
|
The increasedecrease of $17.7$6.0 million in direct salaries and related costs included a positive foreign currency impact of $2.3$2.9 million in the Americas and a negativepositive foreign currency impact of $1.4$1.5 million in EMEA.
The increasedecrease in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to higherlower compensation costs of 1.7%2.8% driven by a decreasean increase in agent productivity principally within the communications and financial services and communications verticals in the current period partially offset by, lower communications costs of 0.3%0.2% and lower auto tow claim costs of 0.2%, lowerpartially offset by higher customer-acquisition advertising costs of 0.3%1.8%, higher severance costs related to the Americas 2018 Exit Plan of 0.9% and lower otherhigher dues and subscription costs of 0.2%.
The increasedecrease in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to
higherlower compensation costs of 1.7% driven by a decrease1.2% primarily due to an increase in agent productivity principally within the communications and technology verticalsfinancial services vertical in the current period, partially offset by higher rebillablecommunications costs of 0.3%, higher recruiting costs of 0.2% 0.5% and higher other costs of 0.3%, partially offset by lower fulfillment materials costs of 1.6%.
General and Administrative
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||
Americas | $ | 66,221 | 19.4% | $ | 64,049 | 19.6% | $ | 2,172 | -0.2% | $ | 74,807 |
|
| 22.8% |
|
| $ | 66,212 |
|
| 19.4% |
|
| $ | 8,595 |
|
| 3.4% |
| ||||||||||
EMEA | 13,723 | 20.8% | 9,737 | 16.3% | 3,986 | 4.5% |
| 14,756 |
|
| 20.9% |
|
|
| 13,723 |
|
| 20.8% |
|
|
| 1,033 |
|
| 0.1% |
| |||||||||||||
Other | 13,420 | - | 14,169 | - | (749 | ) | - |
| 15,585 |
|
| - |
|
|
| 13,420 |
|
| - |
|
|
| 2,165 |
|
| - |
| ||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||
Consolidated | $ | 93,364 | 22.9% | $ | 87,955 | 22.8% | $ | 5,409 | 0.1% | $ | 105,148 |
|
| 26.3% |
|
| $ | 93,355 |
|
| 22.9% |
|
| $ | 11,793 |
|
| 3.4% |
| ||||||||||
|
|
|
The increase of $5.4$11.8 million in general and administrative expenses included a positive foreign currency impact of $0.7$1.0 million in the Americas and a negativepositive foreign currency impact of $0.2$0.5 million in EMEA.
The decreaseincrease in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to higher facility-related costs of 1.3% resulting from the Americas 2018 Exit Plan (see Note 3, Costs Associated with Exit and Disposal Activities, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information), higher legal and professional fees of 0.7%, higher merger and integration costs of 0.6%, higher compensations costs of 0.6% and higher other costs of 0.5%, partially offset by lower technology equipmentsoftware and maintenance costs of 0.3% and a reduction in technology costs of 0.2% allocated from corporate, partially offset by higher software and maintenance costs of 0.2% and higher other costs of 0.1%.
The increase in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to a gain on settlement of Qelp’s contingent consideration of 4.3% in the prior period and higher facility-relatedcompensation costs of 0.2%0.7%, partially offset by lower advertising and marketing costs of 0.3% and lower other costs of 0.3%.
The decreaseincrease of $0.7$2.2 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to lowerhigher compensation costs of $2.6$2.7 million and higher merger and integration costs of $0.8 million, partially offset by higherlower severance costs of $0.8$0.9 million, a reduction in technology costs of $0.5 million allocated to the Americas, higherlower legal and professional fees of $0.4$0.3 million and higher charitable contributionslower other costs of $0.2$0.1 million.
Depreciation, Amortization and Impairment of Long-Lived Assets
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||||||||||
Depreciation, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 12,064 | 3.5% | $ | 11,364 | 3.5% | $ | 700 | 0.0% | $ | 11,838 |
|
| 3.6% |
|
| $ | 12,064 |
|
| 3.5% |
|
| $ | (226 | ) |
| 0.1% |
| ||||||||||||||||||
EMEA | 1,375 | 2.1% | 1,124 | 1.9% | 251 | 0.2% |
| 1,473 |
|
| 2.1% |
|
|
| 1,375 |
|
| 2.1% |
|
|
| 98 |
|
| 0.0% |
| |||||||||||||||||||||
Other | 788 | - | 516 | - | 272 | - |
| 761 |
|
| - |
|
|
| 788 |
|
| - |
|
|
| (27 | ) |
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 14,227 | 3.5% | $ | 13,004 | 3.4% | $ | 1,223 | 0.1% | $ | 14,072 |
|
| 3.5% |
|
| $ | 14,227 |
|
| 3.5% |
|
| $ | (155 | ) |
| 0.0% |
| ||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Amortization of intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 5,081 | 1.5% | $ | 4,990 | 1.5% | $ | 91 | 0.0% | $ | 3,439 |
|
| 1.0% |
|
| $ | 5,081 |
|
| 1.5% |
|
| $ | (1,642 | ) |
| -0.5% |
| ||||||||||||||||||
EMEA | 212 | 0.3% | 264 | 0.4% | (52 | ) | -0.1% |
| 199 |
|
| 0.3% |
|
|
| 212 |
|
| 0.3% |
|
|
| (13 | ) |
| 0.0% |
| ||||||||||||||||||||
Other | - | - | - | - | - | - |
| - |
|
| - |
|
|
| - |
|
| - |
|
|
| - |
|
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 5,293 | 1.3% | $ | 5,254 | 1.4% | $ | 39 | -0.1% | $ | 3,638 |
|
| 0.9% |
|
| $ | 5,293 |
|
| 1.3% |
|
| $ | (1,655 | ) |
| -0.4% |
| ||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Impairment of long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 680 | 0.2% | $ | - | 0.0% | $ | 680 | 0.2% | $ | 555 |
|
| 0.2% |
|
| $ | 680 |
|
| 0.2% |
|
| $ | (125 | ) |
| 0.0% |
| ||||||||||||||||||
EMEA | - | 0.0% | - | 0.0% | - | 0.0% |
| - |
|
| 0.0% |
|
|
| - |
|
| 0.0% |
|
|
| - |
|
| 0.0% |
| |||||||||||||||||||||
Other | - | - | - | - | - | - |
| - |
|
| - |
|
|
| - |
|
| - |
|
|
| - |
|
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 680 | 0.2% | $ | - | 0.0% | $ | 680 | 0.2% | $ | 555 |
|
| 0.1% |
|
| $ | 680 |
|
| 0.2% |
|
| $ | (125 | ) |
| -0.1% |
| ||||||||||||||||||
|
|
|
The increasedecrease in depreciation was primarily due to the impact since the prior period of certain fully depreciated fixed assets and fixed assets that were impaired and disposed of as part of the Americas 2018 Exit Plan, partially offset by new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades, partially offset byupgrades.
The decrease in amortization was primarily due to certain fully depreciated fixedamortized intangible assets.
The amortization remained consistentSee Note 3, Costs Associated with the comparable period.
SeeExit and Disposal Activities, and Note 4, Fair Value, ofin the accompanying “Notes to Condensed Consolidated Financial Statements” for further information regarding the
impairment of long-lived assets.
Other Income (Expense)
Three Months Ended September 30, | Three Months Ended September 30, |
|
|
|
|
| |||||||||||||||||
(in thousands) | 2017 | 2016 | $ Change | 2018 |
|
| 2017 |
|
| $ Change |
| ||||||||||||
Interest income | $ | 169 | $ | 135 | $ | 34 | $ | 183 |
|
| $ | 169 |
|
| $ | 14 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest (expense) | $ | (2,021 | ) | $ | (1,578 | ) | $ | (443 | ) | $ | (1,168 | ) |
| $ | (2,021 | ) |
| $ | 853 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign currency transaction gains (losses) | $ | (77 | ) | $ | 778 | $ | (855 | ) | $ | 1,066 |
|
| $ | (77 | ) |
| $ | 1,143 |
| ||||
Gains (losses) on foreign currency derivative instruments not designated as hedges | (445 | ) | (110 | ) | (335 | ) | |||||||||||||||||
Gains (losses) on derivative instruments not designated as hedges |
| (380 | ) |
|
| (445 | ) |
|
| 65 |
| ||||||||||||
Other miscellaneous income (expense) | 586 | 313 | 273 |
| 233 |
|
|
| 550 |
|
|
| (317 | ) | |||||||||
|
|
| |||||||||||||||||||||
Total other income (expense), net | $ | 64 | $ | 981 | $ | (917 | ) | $ | 919 |
|
| $ | 28 |
|
| $ | 891 |
| |||||
|
|
|
Interest income remained relatively consistent with the comparable period.period.
The increasedecrease in interest (expense) was primarily due to a decrease in the outstanding borrowings under the Credit Agreement as a result of $193.0 million of repayments, net, in 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 the Patient Protection and Affordable Care Act (“Affordable Care Act”) compliance costs, and losses from our equity method investee, XSell, partially offset by a decrease in the interest accretion on contingent consideration.reversal of certain payroll tax compliance costs.
Three Months Ended September 30, | Three Months Ended September 30, |
|
|
|
|
| |||||||||||||||||
(in thousands) | 2017 | 2016 | $ Change | 2018 |
|
| 2017 |
|
| $ Change |
| ||||||||||||
Income before income taxes | $ | 24,441 | $ | 29,209 | $ | (4,768 | ) | $ | 14,380 |
|
| $ | 24,441 |
|
| $ | (10,061 | ) | |||||
Income taxes | 2,746 | 7,939 | $ | (5,193 | ) |
| 628 |
|
|
| 2,746 |
|
|
| (2,118 | ) | |||||||
|
|
|
|
|
|
|
| % Change |
| ||||||||||||||
% Change | |||||||||||||||||||||||
Effective tax rate | 11.2% | 27.2% | -16.0% |
| 4.4 | % |
|
| 11.2 | % |
|
| -6.8 | % |
The decrease in the effective tax rate in 20172018 compared to 2016 is2017 was primarily due to several significant factors, includinga $0.9 million increase in benefit associated with the resolution of uncertain tax positions and ancillary issues as well as a $0.5 million benefit related to the decrease in the provisional estimates recorded at December 31, 2017 as a result of the 2017 Tax Reform Act. The effective rate impact of these benefits is partially offset by the 2017 recognition of a $0.8 million previously unrecognized tax benefit, inclusive of penalties and interest, arising from a favorable tax audit settlement and statute of limitation expirations. Additionally, we recognized a $0.8 million benefit related to the increase in anticipated tax credits and reductions in estimatednon-deferred foreign income, as well as a $0.3 million benefit for the release of a valuation allowance where it is more likely than not thatallowance. In addition, we recognized a benefit of $0.3 million from the benefit will be realized.reduction in the U.S. federal corporate tax rate from 35% to 21% as a result of the 2017 Tax Reform Act. The decreaseincrease in the effective tax rate was also significantly affected by shifts in earnings among the various jurisdictions in which we operate. Several additional factors, none of which are individually material, also impacted the rate.
Nine Months Ended September 30, 20172018 Compared to Nine Months Ended September 30, 20162017
Revenues
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||
2017 | 2016 | Nine Months Ended September 30, |
|
|
|
|
| ||||||||||||||||||||||||||
% of | % of | 2018 |
|
| 2017 |
|
|
|
|
| |||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
| ||||||||||||||
Americas | $ | 977,136 | 83.8% | $ | 893,300 | 83.4% | $ | 83,836 | $ | 996,524 |
|
| 82.3% |
|
| $ | 977,136 |
|
| 83.8% |
|
| $ | 19,388 |
| ||||||||
EMEA | 189,564 | 16.2% | 177,488 | 16.6% | 12,076 |
| 213,890 |
|
| 17.7% |
|
|
| 189,564 |
|
| 16.2% |
|
|
| 24,326 |
| |||||||||||
Other | 61 | 0.0% | 103 | 0.0% | (42 | ) |
| 75 |
|
| 0.0% |
|
|
| 61 |
|
| 0.0% |
|
|
| 14 |
| ||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||
Consolidated | $ | 1,166,761 | 100.0% | $ | 1,070,891 | 100.0% | $ | 95,870 | $ | 1,210,489 |
|
| 100.0% |
|
| $ | 1,166,761 |
|
| 100.0% |
|
| $ | 43,728 |
| ||||||||
|
|
|
|
|
Consolidated revenues increased $95.9$43.7 million, or 9.0%3.7%, for the nine months ended September 30, 20172018 from the comparable period in 2016.2017.
The increase in Americas’ revenues was due to an increase in Clearlink acquisition revenues of $43.1 million, higher volumes from existing clients of $39.1 million and new clients of $37.7 million, partially offset byend-of-life client programs of $33.0 million and a negative foreign currency impact of $3.1 million. Revenues from our offshore operations represented 40.9% of Americas’ revenues, compared to 41.8% for the comparable period in 2016.
The increase in EMEA’s revenues was due to higher volumes from existing clients of $16.8$50.7 million, new clients of $21.6 million and new clients
a positive foreign currency impact of $5.7$4.6 million, partially offset by end-of-life client programs of $57.5 million. Revenues from our offshore operations represented 39.8% of Americas’ revenues in 2018, compared to 40.9% for the comparable period in 2017.
The increase in EMEA’s revenues was due to higher volumes from existing clients of $15.1 million, new clients of $1.9 million and a negativepositive foreign currency impact of $7.4$11.4 million, andpartially offset by end-of-life client programs of $3.0$4.1 million.
See Note 2, Revenues, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information regarding the adoption of ASC 606.
Direct Salaries and Related Costs
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||
Americas | $ | 630,151 | 64.5% | $ | 569,388 | 63.7% | $ | 60,763 | 0.8% | $ | 650,112 |
|
| 65.2% |
|
| $ | 630,067 |
|
| 64.5% |
|
| $ | 20,045 |
|
| 0.7% |
| ||||||||||
EMEA | 133,173 | 70.3% | 125,468 | 70.7% | 7,705 | -0.4% |
| 151,358 |
|
| 70.8% |
|
|
| 133,173 |
|
| 70.3% |
|
|
| 18,185 |
|
| 0.5% |
| |||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||
Consolidated | $ | 763,324 | 65.4% | $ | 694,856 | 64.9% | $ | 68,468 | 0.5% | $ | 801,470 |
|
| 66.2% |
|
| $ | 763,240 |
|
| 65.4% |
|
| $ | 38,230 |
|
| 0.8% |
| ||||||||||
|
|
|
The increase of $68.5$38.2 million in direct salaries and related costs included a positive foreign currency impact of $8.4$2.4 million in the Americas and a positivenegative foreign currency impact of $4.4$7.5 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 0.8%, higher severance costs related to the Americas 2018 Exit Plan
of 0.3% and higher other costs of 0.3%, partially offset by lower auto tow claim costs of 0.3%, lower compensation costs of 0.2%, partially offset by and lower communications costs of 0.2%.
The decreaseincrease in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to lower fulfillment materialshigher communications costs of 1.1%, partially offset by higher compensation costs of 0.3%, higher rebillable costs of 0.1% and higher other costs of 0.3%0.4%, partially offset by lower compensation costs of 0.2%.
General and Administrative
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||
Americas | $ | 191,574 | 19.6% | $ | 179,045 | 20.0% | $ | 12,529 | -0.4% | $ | 218,100 |
|
| 21.9% |
|
| $ | 191,545 |
|
| 19.6% |
|
| $ | 26,555 |
|
| 2.3% |
| ||||||||||
EMEA | 39,584 | 20.9% | 34,082 | 19.2% | 5,502 | 1.7% |
| 45,581 |
|
| 21.3% |
|
|
| 39,584 |
|
| 20.9% |
|
|
| 5,997 |
|
| 0.4% |
| |||||||||||||
Other | 46,506 | - | 49,673 | - | (3,167 | ) | - |
| 45,944 |
|
| - |
|
|
| 46,506 |
|
| - |
|
|
| (562 | ) |
| - |
| ||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||
Consolidated | $ | 277,664 | 23.8% | $ | 262,800 | 24.5% | $ | 14,864 | -0.7% | $ | 309,625 |
|
| 25.6% |
|
| $ | 277,635 |
|
| 23.8% |
|
| $ | 31,990 |
|
| 1.8% |
| ||||||||||
|
|
|
The increase of $14.9$32.0 million in general and administrative expenses included a positive foreign currency impact of $2.5$1.1 million in the Americas and a positivenegative foreign currency impact of $1.9$2.3 million in EMEA.
The decreaseincrease in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to a reduction in technologyhigher compensations costs of 0.7%, higher facility-related costs of 0.7% resulting from the Americas 2018 Exit Plan, higher legal and professional fees of 0.4%, higher merger and integration costs of 0.3% allocated from corporate, lower technology equipment and maintenance costs of 0.2% and lowerhigher other costs of 0.1%, partially offset by higher software and maintenance costs of 0.2%.
The increase in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to a gain on settlement of Qelp’s contingent consideration of 1.5% in the prior period and higher compensation costs of 0.7%0.4%, higher recruiting costs of 0.3% and higher other costs of 0.2%, partially offset by lower facility-relatedadvertising and marketing costs of 0.1%, lower communication costs of 0.1%0.3% and lower other costslegal and professional fees of 0.3%0.2%.
The decrease of $3.2$0.6 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to lower mergerlegal and integrationprofessional fees of $1.2 million, lower severance costs of $3.8$0.6 million, lower compensationtravel costs of $3.5$0.2 million and lower other costs of $0.1$0.2 million, partially offset by a reduction in technologyhigher compensation costs of $2.3 million allocated to the Americas, higher severance costs of $0.8 million, higher legal and professional fees of $0.7 million, higher merger and integration costs of $0.6 million, higher charitable contributionssoftware and maintenance costs of $0.4$0.3 million.
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
% of | % of | Change in % of | 2018 |
|
| 2017 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
(in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| $ Change |
|
| Change in % of Revenues |
| ||||||||||||||||||||||||
Depreciation, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 35,374 | 3.6% | $ | 30,856 | 3.5% | $ | 4,518 | 0.1% | $ | 36,856 |
|
| 3.7% |
|
| $ | 35,374 |
|
| 3.6% |
|
| $ | 1,482 |
|
| 0.1% |
| ||||||||||||||||||
EMEA | 3,815 | 2.0% | 3,450 | 1.9% | 365 | 0.1% |
| 4,360 |
|
| 2.0% |
|
|
| 3,815 |
|
| 2.0% |
|
|
| 545 |
|
| 0.0% |
| |||||||||||||||||||||
Other | 2,206 | - | 1,442 | - | 764 | - |
| 2,252 |
|
| - |
|
|
| 2,206 |
|
| - |
|
|
| 46 |
|
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 41,395 | 3.5% | $ | 35,748 | 3.3% | $ | 5,647 | 0.2% | $ | 43,468 |
|
| 3.6% |
|
| $ | 41,395 |
|
| 3.5% |
|
| $ | 2,073 |
|
| 0.1% |
| ||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Amortization of intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 15,048 | 1.5% | $ | 13,353 | 1.5% | $ | 1,695 | 0.0% | $ | 10,846 |
|
| 1.1% |
|
| $ | 15,048 |
|
| 1.5% |
|
| $ | (4,202 | ) |
| -0.4% |
| ||||||||||||||||||
EMEA | 726 | 0.4% | 791 | 0.4% | (65) | 0.0% |
| 634 |
|
| 0.3% |
|
|
| 726 |
|
| 0.4% |
|
|
| (92 | ) |
| -0.1% |
| |||||||||||||||||||||
Other | - | - | - | - | - | - |
| - |
|
| - |
|
|
| - |
|
| - |
|
|
| - |
|
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 15,774 | 1.4% | $ | 14,144 | 1.3% | $ | 1,630 | 0.1% | $ | 11,480 |
|
| 0.9% |
|
| $ | 15,774 |
|
| 1.4% |
|
| $ | (4,294 | ) |
| -0.5% |
| ||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Impairment of long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Americas | $ | 5,071 | 0.5% | $ | - | 0.0% | $ | 5,071 | 0.5% | $ | 9,256 |
|
| 0.9% |
|
| $ | 5,071 |
|
| 0.5% |
|
| $ | 4,185 |
|
| 0.4% |
| ||||||||||||||||||
EMEA | - | 0.0% | - | 0.0% | - | 0.0% |
| - |
|
| 0.0% |
|
|
| - |
|
| 0.0% |
|
|
| - |
|
| 0.0% |
| |||||||||||||||||||||
Other | - | - | - | - | - | - |
| - |
|
| - |
|
|
| - |
|
| - |
|
|
| - |
|
| - |
| |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 5,071 | 0.4% | $ | - | 0.0% | $ | 5,071 | 0.4% | $ | 9,256 |
|
| 0.8% |
|
| $ | 5,071 |
|
| 0.4% |
|
| $ | 4,185 |
|
| 0.4% |
| ||||||||||||||||||
|
|
|
The increase in depreciation was primarily due to new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades, as well as the addition of depreciable fixed assets acquired in conjunction with the April 2016 Clearlink acquisition, partially offset by the impact since the prior period of certain fully depreciated fixed assets.assets and fixed assets that were impaired and disposed of as part of the Americas 2018 Exit Plan.
The increasedecrease in amortization was primarily due to the addition of intangible assets acquired in conjunction with the April 2016 Clearlink acquisition, partially offset by certain fully amortized intangible assets.
See Note 3, Costs Associated with Exit and Disposal Activities, and Note 4, Fair Value, ofin the accompanying “Notes to Condensed Consolidated Financial Statements” for further information regarding the impairment of long-lived assets.
Other Income (Expense)
Nine Months Ended September 30, | Nine Months Ended September 30, |
|
|
|
|
| |||||||||||||||||
(in thousands) | 2017 | 2016 | $ Change | 2018 |
|
| 2017 |
|
| $ Change |
| ||||||||||||
Interest income | $ | 468 | $ | 429 | $ | 39 | $ | 529 |
|
| $ | 468 |
|
| $ | 61 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest (expense) | $ | (5,585 | ) | $ | (3,967 | ) | $ | (1,618 | ) | $ | (3,523 | ) |
| $ | (5,585 | ) |
| $ | 2,062 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Foreign currency transaction gains (losses) | $ | 567 | $ | 3,534 | $ | (2,967 | ) | $ | 3,155 |
|
| $ | 567 |
|
| $ | 2,588 |
| |||||
Gains (losses) on foreign currency derivative instruments not designated as hedges | (48 | ) | (1,434 | ) | 1,386 | ||||||||||||||||||
Gains (losses) on derivative instruments not designated as hedges |
| (1,807 | ) |
|
| (48 | ) |
|
| (1,759 | ) | ||||||||||||
Other miscellaneous income (expense) | 1,228 | 501 | 727 |
| (811 | ) |
|
| 1,115 |
|
|
| (1,926 | ) | |||||||||
|
|
| |||||||||||||||||||||
Total other income (expense), net | $ | 1,747 | $ | 2,601 | $ | (854 | ) | $ | 537 |
|
| $ | 1,634 |
|
| $ | (1,097 | ) | |||||
|
|
|
Interest income remained relatively consistent with the comparable period.period.
The increasedecrease in interest (expense) was primarily due to $216.0a decrease in the outstanding borrowings under the Credit Agreement as a result of $193.0 million of repayments, net, in borrowings used to acquire Clearlink in April 2016 as well as2018, partially offset by an increase in weighted average interest rates on outstanding borrowings partially offset by a decrease in the interest accretion on contingent consideration..
The increasechange in other miscellaneous income (expense) was primarily due to the net investment income (losses) related to the investments held in a rabbi trust.trust, Affordable Care Act compliance costs, losses from our equity method investee, XSell, and payroll tax compliance costs. See Note 7, Investments Held in Rabbi Trust, ofin the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.
Income Taxes
Nine Months Ended September 30, | Nine Months Ended September 30, |
|
|
|
|
| |||||||||||||||||
(in thousands) | 2017 | 2016 | $Change | 2018 |
|
| 2017 |
|
| $ Change |
| ||||||||||||
Income before income taxes | $ | 60,163 | $ | 62,406 | $ | (2,243 | ) | $ | 32,733 |
|
| $ | 60,163 |
|
| $ | (27,430 | ) | |||||
Income taxes | 10,911 | 18,044 | $ | (7,133 | ) |
| 855 |
|
|
| 10,911 |
|
|
| (10,056 | ) | |||||||
|
|
|
|
|
|
|
| % Change |
| ||||||||||||||
% Change | |||||||||||||||||||||||
Effective tax rate | 18.1% | 28.9% | -10.8% |
| 2.6 | % |
|
| 18.1 | % |
|
| -15.5 | % |
The decrease in the effective tax rate in 20172018 compared to 2016 is2017 was primarily due to several significant factors, including the recognition of $2.0a net $3.1 million of previously unrecognized tax benefits, inclusive of penalties and interest, of which $1.2 million arose from the effective settlement of the Canadian Revenue Agency audit and $0.8 million arose from other favorable audit settlements and statute of limitation expirations. Additionally, we recognized a $0.8 millionincrease in benefit related to the increase in anticipatedresolution of uncertain tax credits and reductions in estimatednon-deferred foreign income,positions as well as a $0.3the aforementioned $0.5 million decrease in the provisional estimate related to the 2017 Tax Reform Act. This increase in benefit forwas partially offset by the releaserecognition in 2017 of a valuation allowance where it is more likely than not that the benefit will be realized. We also$1.1 million 2017 discrete items previously mentioned. In addition, we recognized a $0.9benefit of $1.4 million tax benefit resulting from the adoptionreduction in the U.S. federal corporate tax rate from 35% to 21% as a result of ASU2016-09 on January 1,the 2017 Tax Reform Act. These net benefits were partially offset by a $0.6 million decrease in the amount of excess tax benefits from stock-based compensation recognized in 2018 as compared to 2017. The decrease in the effective tax rate was also significantly affected by shifts in earnings among the various jurisdictions in which we operate. Several additional factors, none of which are individually material, also impacted the rate.
Our top ten clients accounted for approximately 47.6%44.3% and 50.1%47.6% of our consolidated revenues in the three months ended September 30, 20172018 and 2016,2017, respectively, and 48.1%approximately 45.3% and 49.1%48.1% of our consolidated revenues in the nine months ended September 30, 20172018 and 2016,2017, respectively.
Total revenues by segment from AT&T Corporation (“AT&T”), a major provider of communication services for which we provide various customer support services over several distinct lines of AT&T businesses, were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Revenues | Amount | Revenues | Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
| |||||||||||||||||||||
Americas | $ | 56,448 | 16.5% | $ | 65,847 | 20.2% | $ | 173,609 | 17.8% | $ | 176,701 | 19.8% | $ | 43,923 |
|
| 13.4% |
|
| $ | 56,448 |
|
| 16.5% |
|
| $ | 126,858 |
|
| 12.7% |
|
| $ | 173,609 |
|
| 17.8% |
| ||||||||||||
EMEA | - | 0.0% | - | 0.0% | - | 0.0% | - | 0.0% |
| 89 |
|
| 0.1% |
|
|
| - |
|
| 0.0% |
|
|
| 89 |
|
| 0.0% |
|
|
| - |
|
| 0.0% |
| ||||||||||||||||
|
|
|
| $ | 44,012 |
|
| 11.0% |
|
| $ | 56,448 |
|
| 13.9% |
|
| $ | 126,947 |
|
| 10.5% |
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| $ | 173,609 |
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| 14.9% |
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$ | 56,448 | 13.9% | $ | 65,847 | 17.1% | $ | 173,609 | 14.9% | $ | 176,701 | 16.5% | ||||||||||||||||||||||||||||||||||||||||
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We have multiple distinct contracts with AT&T spread across multiple lines of businesses, which expire at varying dates between 20172018 and 2019.2020. We have historically renewed most of these contracts. However, there is no assurance that these contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts. Each line of business is governed by separate business terms, conditions and metrics. Each line of business also has a separate decision maker such that a loss of one line of business would not necessarily impact our relationship with the client and decision makers on other lines of business. The loss of (or the failure to retain a significant amount of business with) any of our key clients, including AT&T, could have a material adverse effect on our performance. Many of our contracts contain penalty provisions for failure to meet minimum service levels and are cancelable by the client at any time or on short notice. Also, clients may unilaterally reduce their use of our services under our contracts without penalty.
Total revenues by segment from our next largest client, which was in the financial services vertical in each of the periods, were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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% of | % of | % of | % of | 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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Amount | Revenues | Amount | Revenues | Amount | Revenues | Amount | Revenues | Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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Americas | $ | 28,644 | 8.4% | $ | 22,930 | 7.0% | $ | 76,388 | 7.8% | $ | 67,479 | 7.6% | $ | 23,172 |
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| 7.0% |
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| $ | 28,644 |
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| 8.4% |
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| $ | 83,703 |
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| 8.4% |
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| $ | 76,388 |
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| 7.8% |
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EMEA | - | 0.0% | - | 0.0% | - | 0.0% | - | 0.0% |
| - |
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| 0.0% |
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| - |
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| 0.0% |
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| - |
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| 0.0% |
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| - |
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| 0.0% |
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| $ | 23,172 |
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| 5.8% |
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| $ | 28,644 |
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| 7.0% |
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| $ | 83,703 |
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| 6.9% |
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| $ | 76,388 |
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| 6.5% |
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$ | 28,644 | 7.0% | $ | 22,930 | 5.9% | $ | 76,388 | 6.5% | $ | 67,479 | 6.3% | ||||||||||||||||||||||||||||||||||||||||
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Other than AT&T, total revenues by segment of our clients that each individually represents 10% or greater of that segment’s revenues in each of the periods were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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2017 | 2016 | 2017 | 2016 | 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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| Amount |
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| % of Revenues |
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Americas | $ | - | 0.0% | $ | - | 0.0% | $ | - | 0.0% | $ | - | 0.0% | $ | - |
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| 0.0% |
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| $ | - |
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| 0.0% |
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| $ | - |
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| 0.0% |
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| $ | - |
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| 0.0% |
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EMEA | 20,684 | 31.4% | 24,112 | 40.4% | 58,813 | 31.0% | 70,298 | 39.6% |
| 18,402 |
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| 26.1% |
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| 20,684 |
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| 31.4% |
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| 79,007 |
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| 36.9% |
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| 58,813 |
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| 31.0% |
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| $ | 18,402 |
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| 4.6% |
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| $ | 20,684 |
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| 5.1% |
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| $ | 79,007 |
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| 6.5% |
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| $ | 58,813 |
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| 5.0% |
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$ | 20,684 | 5.1% | $ | 24,112 | 6.3% | $ | 58,813 | 5.0% | $ | 70,298 | 6.6% | ||||||||||||||||||||||||||||||||||||||||
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Business Outlook
For the three months ended December 31, 2017,2018, we anticipate the following financial results:
Revenues in the range of $415.0 million to $420.0 million;
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Effective tax rate of approximately 17%;
Fully diluted share count of approximately 42.3 million;
Diluted earnings per share in the range of $0.53 to $0.57; and
Capital expenditures in the range of $8.0 million to $10.0 million.
For the twelve months ended December 31, 2017,2018, we anticipate the following financial results:
Revenues in the range of $1,625.0 million to $1,630.0 million;
Effective tax rate of approximately 8%;
Fully diluted share count of approximately 42.2 million;
Diluted earnings per share in the range of $1.28 to $1.32; and
Capital expenditures in the range of $45.0 million to $47.0 million.
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We are revising our full-year 2018 revenue outlook downward by approximately $7.0 million relative to the outlook provided in August 2018. Roughly $4.0 million of the revenue revision is related to foreign exchange rate flux, with the remaining $3.0 million being driven principally by the communications vertical, which being driven primarily by staffing inefficiencies. Although the communications vertical remains soft, we recently won some potentially significant long-term opportunities that could drive growth in that vertical in the latter half of 2019. Additionally, we are raising our full-year 2017 revenue and2018 diluted earnings per share outlook reflectingrelative to the above-expectationsoutlook provided in August 2018 due to a lower than expected tax rate as well as lower other expenses. We expect the benefits of the capacity rationalization initiatives to continue flowing through the fourth quarter of 2018, which should yield significant improvement in year-over-year operating resultsmargins relative to the fourth quarter of 2017.
On November 1, 2018, we consummated the acquisition of Symphony Ventures Ltd (“Symphony”), which is expected to contribute approximately $4.0 million (the remaining two-months of revenues) to fourth quarter 2018 revenues and is reflected in the thirdfull-year revenue revision. However, we still anticipate the impact of the acquisition to full year 2018 diluted earnings per share to be dilutive.
Our fourth quarter 2018 business outlook anticipates a pre-tax charge of 2017. Meanwhile, we continueapproximately $0.7 million, or $0.01 on an after-tax basis, related to implement various action planscapacity rationalization. The pre-tax charge is expected to address the operational inefficiencies around staffing, attritionbe in cash. The full-year outlook reflects a pre-tax charge of approximately $22.0 million, or $0.40 on an after-tax basis, split roughly evenly between non-cash and capacity utilization, and believe the associated drag on our underlying operating results is beginning to moderate.cash.
Our revenues and earnings per share assumptions for the fourth quarter and full-year 2017full year 2018 are based on foreign exchange rates as of October 2017.2018. Therefore, the continued volatility in foreign exchange rates between the U.S. Dollar and the functional currencies of the markets we serve could have a further impact, positive or negative, on revenues and earnings per share relative to the business outlook for the fourth quarter and full-year as discussed above.
We anticipate total other interest income (expense), net of approximately $(1.8)$(1.2) million for the fourth quarter and $(5.3)$(3.7) million for the full-year 2017. Thesefull year 2018. The amounts includein the accretion on the Clearlink contingent consideration, which is expected to be a total of $(0.1) million for the year. The amounts,other interest income (expense), net, however, exclude the potential impact of any future foreign exchange gains or losses in other income (expense).losses.
We expect a slightfurther reduction in our full-year 20172018 effective tax rate relativecompared to the business outlookwhat was provided in our August 2017, with the decline2018 outlook due largely to various discrete items, including the settlement of uncertain tax positions and an increase in tax credits, coupled with a release of a valuation allowance and a shiftbenefits in the geographic mixthird quarter of earnings to lower tax rate jurisdictions.2018.
Not included in this guidance is the impact of any future acquisitions, share repurchase activities or a potential sale of previously exited customer engagement centers.
Liquidity and Capital Resources
Our primary sources of liquidity are generally cash flows generated by operating activities and from available borrowings under our revolving credit facility. We utilize these capital resources to make capital expenditures associated primarily with our customer engagement services, invest in technology applications and tools to further develop our service offerings and for working capital and other general corporate purposes, including repurchase of our common stock in the open market and to fund acquisitions. In future periods, we intendanticipate similar uses of these funds.
On August 18, 2011, theOur Board of Directors authorized us to purchase up to 5.010.0 million shares of our outstanding common stock (the “2011 Share Repurchase Program”). On on August 18, 2011, as amended 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.2016. 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.
During the nine months ended September 30, 2017,2018, cash increased $118.4$89.5 million from operating activities, and $0.1$27.0 million offrom proceeds from grants, whichissuance of long-term debt and $0.7 million from other investing and financing activities. This increase was partially offset by $48.4$220.0 million used to repay long-term debt, $36.9 million used for capital expenditures, $9.1 $21.8 million of cash paid for acquisitions, a $5.1an $8.1 million settlementpurchase of the net investment hedge,intangible assets, a $5.0 million investment in equity method investees a $4.8 million purchase of intangible assets, a $4.8 million payment of contingent consideration and $3.9$3.7 million to repurchase common stock for tax withholding on equity awards, resulting in a $61.5$186.5 million increasedecrease in available cash, cash equivalents and restricted cash (including the favorableunfavorable effects of foreign currency exchange
rates on cash, and cash equivalents and restricted cash of $24.1$8.2 million).
Net cash flows provided by operating activities for the nine months ended September 30, 20172018 were $118.4$89.5 million, compared to $105.4$118.4 million for the comparable period in 2016.2017. The $13.0$28.9 million increasedecrease in net cash flows from operating activities was due to a $4.9$17.4 million increasedecrease in net income, and a $21.1 million increase innon-cash reconciling items such as depreciation, amortization, unrealized foreign currency transaction (gains) losses and deferred income taxes, partially offset by a net decrease of $13.0$9.5 million in cash flows from assets and liabilities. The $13.0liabilities and a $2.0 million decrease in 2017non-cash reconciling items such as depreciation, amortization, impairment and deferred income tax provision (benefit). The $9.5 million decrease in 2018 from 20162017 in cash flows from assets and liabilities was principally a result of a $15.8 million decrease in other liabilities, a $12.6an $8.9 million increase in taxesaccounts receivable, net and a $2.8$4.1 million decrease in deferred revenue and a $1.9 million increase in other assets, partially offset by a $17.9$4.5 million increase in other liabilities and a $0.9 million decrease in accountstaxes receivable, and a $0.3net. The $8.9 million decrease in other assets. The $15.8 million decreaseincrease in the change in other liabilities was primarily due to $8.0 million related to other accrued expenses and current liabilities principally due to a decrease of $4.8 million related to the timing of payments associated with site expansions and infrastructure upgrades, a $2.1 million decrease resulting from the settlement of the net investment hedge and a $1.5 million decrease driven by a reduction in cash flow hedge liabilities as well as a $5.5 million decrease related to the timing of accrued employee compensation and benefitsaccounts receivable in the nine months ended September 30, 20172018 over the comparable period in 2016. The $12.6 million increase in taxes receivable, net was primarily due to the effective settlement of the Canadian Revenue Agency audit and a reduction in estimated tax liabilities in the nine months ended September 30, 2017 over the comparable period in 2016. The $17.9 million decrease in the change in accounts receivable was primarily due to the timing of billings and collections in the nine months ended September 30, 2017 over the comparable period in 2016.collections.
Capital expenditures, which are generally funded by cash generated from operating activities, available cash balances and borrowings available under our credit facilities, were $48.4$36.9 million for the nine months ended September 30, 2017,2018, compared to $59.3$48.4 million for the comparable period in 2016,2017, a decrease of $10.9$11.5 million. In 2017,2018, we anticipate capital expenditures in the range of $62.0$45.0 million to $65.0$47.0 million, primarily for maintenance, new seat additions, Enterprise Resource Planning upgrades, facility upgrades maintenance and systems infrastructure.
On May 12, 2015, we entered into a $440 million revolving credit facility (the “2015 Credit“Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”). The 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. At September 30, 2017,2018, we were in compliance with all loan requirements of the 2015 Credit Agreement and had $267.0$82.0 million of outstanding borrowings under this facility. On April 1, 2016, we borrowed $216.0 million under our 2015
Our Credit Agreement in connection with the acquisition of Clearlink. See Note 2, Acquisitions, of “Notes to Condensed Consolidated Financial Statements” for further information.
Our credit agreement had an average daily utilization of $267.0$101.1 million and $272.0$267.0 million during the three months ended September 30, 20172018 and 2016,2017, respectively, and $267.0$107.5 million and $207.2$267.0 million during the nine months ended September 30, 20172018 and 2016,2017, respectively. During the three months ended September 30, 20172018 and 2016,2017, the related interest expense, including the commitment fee and excluding the amortization of deferred loan fees, was $1.8$0.9 million and $1.2$1.8 million, respectively, which represented weighted average interest rates of 2.6%3.6% and 1.7%2.6%, respectively. During the nine months ended September 30, 20172018 and 2016,2017, the related interest expense, including the commitment fee and excluding the amortization of deferred loan fees, was $4.8$2.8 million and $2.6$4.8 million, respectively, which represented weighted average interest rates of 2.4%3.6% and 1.8%2.4%, respectively.
The 2015 Credit Agreement includes a $200 million alternate-currencysub-facility, a $10 million swinglinesub-facility and a $35 million letter of creditsub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. We are not currently aware of any inability of our lenders to provide access to the full commitment of funds that exist under the 2015 Credit Agreement, if necessary. However, there can be no assurance that such facility will be available to us, even though it is a binding commitment of the financial institutions. The 2015 Credit Agreement will mature on May 12, 2020.
Borrowings under the 2015 Credit Agreement bear interest at the rates set forth in the 2015 Credit Agreement. In addition, we are required to pay certain customary fees, including a commitment fee determined quarterly based on our leverage ratio and due quarterly in arrears as calculated on the average unused amount of the 2015 Credit Agreement.
The 2015 Credit Agreement is guaranteed by all of our existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of thenon-voting and 65% of the voting capital stock of all of our direct foreign subsidiaries and those of the guarantors.
We 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 we paid mandatory security deposits to Canada as part of this process. The total amountprocess of deposits wereapproximately $13.8 million as of December 31, 2016 (none at September 30, 2017) and were included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet.million. As of June 30, 2017, we determined that all material aspects of the Canadian audit were effectively settled pursuant to ASC 740,Income Taxes. As a result, we recognized a net income tax benefit of $1.2 million and the deposits were netted against the anticipated liability.liability at that
time. During the nine months ended September 30, 2018, we finalized procedures ancillary to the Canadian audit and recognized an additional $2.8 million income tax benefit due to the elimination of certain penalties, interest and assessed withholding taxes.
With the effective settlement of the Canadian audit, we have no significant tax jurisdictions under audit; however, we are currently under audit in several tax jurisdictions. We believe we are adequately reserved for the remaining audits and their resolution is not expected to have a material impact on our financial condition and results of operations.
On April 24,The 2017 we entered intoTax Reform Act provides for a definitive Asset Purchase Agreement to purchase certain assets of a Global 2000 telecommunications services provider. The aggregate purchase price of $7.5 million was paid on May 31, 2017, using cash on hand.
As part of the April 2016 Clearlink acquisition, we assumed contingent consideration liabilities related to four separate acquisitions made by Clearlink in 2015 and 2016, prior to the Merger. The fair value of the contingent consideration related to these previous acquisitions was $2.8 million as of April 1, 2016 and wasone-time transition tax based on achieving targets primarily tied to revenuesour undistributed foreign earnings on which we previously had deferred U.S. income taxes. We recorded a $28.3 million provisional liability, which is net of $5.0 million of available tax credits, for varying periods of time during 2016 and 2017.our one-time transition tax. As of September 30, 2017, the fair value2018, $2.0 million of the remaining contingent considerationprovisional liability was $1.0 million, which was paidnetted in October 2017.
In July 2015, we completed the acquisition of Qelp B.V.“Income taxes receivable” and its subsidiary (together, known as “Qelp”) pursuant to the definitive share sale and purchase agreement, dated July 2, 2015. The purchase price of $15.8$3.8 million was funded through cash on handincluded in “Income taxes payable” as of $9.8 million and contingent consideration of $6.0 million. On September 26, 2016, we entered into an addendum toDecember 31, 2017 in the Qelp purchase agreement with the sellers to settle the outstanding contingent consideration for EUR 4.0 million to be paid by June 30, 2017. We paid $4.4 million in May 2017 to settle the outstanding contingent consideration obligation.
accompanying Condensed Consolidated Balance Sheets. As of September 30, 2018 and December 31, 2017, $20.4 million and $24.5 million, respectively, of the long-term provisional liability were included in “Long-term income tax liabilities” in the accompanying Condensed Consolidated Balance Sheets. This transition tax liability will be paid over the next eight years. As of December 31, 2017, no additional income taxes have been provided for any remaining outside basis difference inherent in our investments in our foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations.
On November 1, 2018, we closed a definitive Share Purchase Agreement to acquire all the outstanding shares of Symphony for GBP 52.6 million ($67.9 million). The Company paid GBP 44.6 million ($57.6 million) at the closing of the transaction on November 1, 2018 using cash on hand as well as $31.0 million of additional borrowings under our Credit Agreement. The remaining GBP 8.0 million ($10.3 million) of purchase price has been deferred and will be paid in equal installments over the next three years. Symphony, headquartered in London, England, is a leading global pure-play and best-of-breed provider of robotic process automation (“RPA”) services. Symphony is a premier provider to blue chip clients, offering RPA consulting, implementation, hosting and managed services. Approximately 200 people strong, Symphony has one of the largest independent global teams of Intelligent Automation experts. With a proven track record of success in automating thousands of front, middle and back-office processes at marquee brands, Symphony serves numerous industries globally, including financial services, healthcare, business services, manufacturing, consumer products, communications, media and entertainment.
As of September 30, 2018, we had $328.2$157.3 million in cash and cash equivalents, of which approximately 90.0%86.4%, or $295.5$135.9 million, was held in international operations and is deemed to be indefinitely reinvested offshore. Theseoperations. As a result of the 2017 Tax Reform Act, most of these funds maywill not be subject to additional taxes if repatriated to the United States, including withholding tax applied by the country of origin and an incremental U.S. income tax, net of allowable foreign tax credits.States. There are circumstances where we may be unable to repatriate some of the cash and cash equivalents held by our international operations due to country restrictions. We do not intend nor currently foresee a need to repatriate these funds.
We expect our current domestic cash levels and cash flows from operations to be adequate to meet our domestic anticipated working capital needs, including investment activities such as capital expenditures and debt repayment for the next twelve months and the foreseeable future. However, from time to time, we may borrow funds under our 2015 Credit Agreement as a result of the timing of our working capital needs, including capital expenditures. Additionally, we expect our current foreign cash levels and cash flows from foreign operations to be adequate to meet our foreign anticipated working capital needs, including investment activities such as capital expenditures for the next twelve months and the foreseeable future.
If we should require more cash in the U.S. than is provided by our domestic operations for significant discretionary unforeseen activities such as acquisitions of businesses and share repurchases, we could elect to repatriate future foreign earnings and/or raise capital in the U.S through additional borrowings or debt/equity issuances. These alternatives could result in higher effective tax rates, interest expense and/or dilution of earnings. We have borrowed funds domestically and continue to have the ability to borrow additional funds domestically at reasonable interest rates.
Our cash resources could also be affected by various risks and uncertainties, including but not limited to, the risks described in our Annual Report on Form10-K for the year ended December 31, 2016.
��
53
Off-Balance Sheet Arrangements and Other
As of September 30, 2017,2018, we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limited purposes.
From time to time, during the normal course of business, we may make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include, but are not limited to: (i) indemnities to clients, vendors and service providers pertaining to claims based on negligence or willful misconduct and (ii) indemnities involving breach of contract, the accuracy of representations and warranties, or other liabilities assumed by us in certain contracts. In addition, we have agreements whereby we will indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the applicable insurance coverage is generally adequate to cover any estimated potential liability under these indemnification agreements. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and other guarantees in the accompanying Condensed Consolidated Balance Sheets. In addition, we have some client contracts that do not contain contractual provisions for the limitation of liability and other client contracts that contain agreed upon exceptions to limitation of liability. We have not recorded any liability in the accompanying Condensed Consolidated Balance Sheets with respect to any client contracts under which we have or may have unlimited liability.
Contractual Obligations
The following table summarizesDuring the material changes to our contractual obligations as ofnine months ended September 30, 2017, and the effect these obligations are expected to have on liquidity and cash flow in future periods (in thousands):
Payments Due By Period | ||||||||||||||||||||||||
Less Than | After 5 | |||||||||||||||||||||||
Total | 1 Year | 1 -3 Years | 3 -5 Years | Years | Other | |||||||||||||||||||
Operating leases(1) | $ | 56,958 | $ | 1,560 | $ | 14,916 | $ | 15,105 | $ | 25,377 | $ | - | ||||||||||||
Purchase obligations(2) | 45,388 | 6,646 | 33,015 | 5,727 | - | - | ||||||||||||||||||
Other accrued expenses and current liabilities(3) | 5,000 | - | 5,000 | - | - | - | ||||||||||||||||||
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$ | 107,346 | $ | 8,206 | $ | 52,931 | $ | 20,832 | $ | 25,377 | $ | - | |||||||||||||
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(1) Amounts represent the change in expected cash payments2018, we repaid $193.0 million, net, of long-term debt outstanding under our operating leases, including amounts that were assumedCredit Agreement, primarily using funds repatriated from our foreign subsidiaries, resulting in conjunction with the Telecommunications Asset acquisition in May 2017. a remaining outstanding debt balance of $82.0 million.
See Note 14,1, Overview and Basis of Presentation, in the accompanying “Notes to Condensed Consolidated Financial Statements” for information related to the WhistleOut acquisition completed on July 9, 2018.
See Note 13, Commitments and Loss Contingency, in the accompanying “Notes to Condensed Consolidated Financial Statements” for operating leases and purchase obligations entered into in the normal course of business during the nine months ended September 30, 2018.
See Note 19, Subsequent Event, to the accompanying “Notes to Condensed Consolidated Financial Statements.
(2) Amounts represent the change in expected cash payments under our purchase obligations, which include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. See Note 14, Commitments and Loss Contingency,Statements” for information related to the accompanying Condensed Consolidated Financial Statements.
(3) Amount represents the final payment related to an equity method investment entered into in July 2017.Symphony acquisition completed on November 1, 2018.
Except for the contractual obligations mentioned above, there have not been any material changes to the outstanding contractual obligations from the disclosure in our Annual Report on Form10-K as of and for the year ended December 31, 2016.2017.
Critical Accounting Estimates
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report onForm 10-K for the year ended December 31, 20162017 for a discussion of our critical accounting estimates.
There have been noThe adoption of ASC 606 did not result in a material changeschange to our “Recognition of Revenues” critical accounting estimatesestimate. See Note 2, Revenues, in 2017.the accompanying “Notes to Condensed Consolidated Financial Statements” for further information on the adoption of ASC 606.
New Accounting Standards Not Yet Adopted
See Note 1, Overview and Basis of Presentation, ofin the accompanying “Notes to Condensed Consolidated Financial Statements” for information related to recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Our earnings and cash flows are subject to fluctuations due to changes in currency exchange rates. We are exposed to foreign currency exchange rate fluctuations when subsidiaries with functional currencies other than the U.S. Dollar (“USD”) are translated into our USD consolidated financial statements. As exchange rates vary, those results, when translated, may vary from expectations and adversely impact profitability. The cumulative translation effects for subsidiaries using functional currencies other than USD are included in “Accumulated other comprehensive income (loss)” in shareholders’ equity. Movements innon-USD currency exchange rates may negatively or positively affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies ofnon-U.S. based competitors.
We employ a foreign currency risk management program that periodically utilizes derivative instruments to protect against unanticipated fluctuations in certain earnings and cash flows caused by volatility in foreign currency exchange
(“FX”) rates. We also utilize derivative contracts to hedge intercompany receivables and payables that are denominated in a foreign currency and to hedge net investments in foreign operations.
We serve a number of U.S.-based clients using customer engagement center capacity in The Philippines and Costa Rica, which are within our Americas segment. Although a substantial portion of the costs incurred to render services under these contracts are denominated in Philippine Pesos (“PHP”) and Costa Rican Colones (“CRC”), the contracts with these clients are priced in USDs, which represent FX exposures. Additionally, our EMEA segment services clients in Hungary and Romania with a substantial portion of the costs incurred to render services under these contracts denominated in Hungarian Forints (“HUF”) and Romanian Leis (“RON”), where the contracts are priced in Euros (“EUR”).
In order to hedge a portion of our anticipated revenues denominated in USD and EUR, we had outstanding forward contracts and options as of September 30, 20172018 with counterparties through December 20182019 with notional amounts totaling $108.7$185.2 million. As of September 30, 2017,2018, we had net total derivative liabilities associated with these contracts with a fair value of $0.4 million, which will settle within the next 15 months.$2.6 million. If the USD was to weaken against the PHP and CRC and the EUR was to weaken against the HUF and RON by 10% from currentperiod-end levels, we would incur a loss of approximately $9.1$16.2 million on the underlying exposures of the derivative instruments. However, this loss would be mitigated by corresponding gains on the underlying exposures.
We had outstanding forward exchange contracts as of September 30, 2018 with notional amounts totaling $27.5$5.9 million that are not designated as hedges. The purpose of these derivative instruments is to protect against FX volatility pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies. As of September 30, 2017, the fair value of these derivatives was a net asset of $0.3 million. The potential loss in fair value at September 30, 2017, for these contracts resulting from a hypothetical 10% adverse change in the foreign currency exchange rates is approximately $5.0 million. However, this loss would be mitigated by corresponding gains on the underlying exposures.
We had embedded derivative contracts with notional amounts totaling $13.8 million that are not designated as hedges. As of September 30, 2017,2018, the fair value of these derivatives was a net liability of $0.3 million. The potential loss in fair value at September 30, 2017,2018, for these contracts resulting from a hypothetical 10% adverse change in the foreign currency exchange rates is approximately $2.3$1.3 million. However, this loss would be mitigated
by corresponding gains on the underlying exposures.
We had embedded derivative contracts with notional amounts totaling $12.1 million that are not designated as hedges. As of September 30, 2018, the fair value of these derivatives was a net liability of $0.4 million. The potential loss in fair value at September 30, 2018, for these contracts resulting from a hypothetical 10% adverse change in the foreign currency exchange rates is approximately $1.9 million. However, this loss would be mitigated by corresponding gains on the underlying exposures.
We evaluate the credit quality of potential counterparties to derivative transactions and only enterenter into contracts with those considered to have minimal credit risk. We periodically monitor changes to counterparty credit quality as well as our concentration of credit exposure to individual counterparties.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue from the local currency services substantially offsets the local currency denominated operating expenses.
Interest Rate Risk
Our exposure to interest rate risk results from variable rate debt outstanding under our revolving credit facility. We pay interest on outstanding borrowings at interest rates that fluctuate based upon changes in various base rates. As of September 30, 2017,2018, we had $267.0$82.0 million in borrowings outstanding under the revolving credit facility. Based on our level of variable rate debt outstanding during the three and nine months ended September 30, 2017,2018, a 1.0% increase in the weighted average interest rate, which generally equals the LIBOR rate plus an applicable margin, would have had an impact of $0.7$0.3 million and $2.0$0.8 million, respectively, on our results of operations.
We have not historically used derivative instruments to manage exposure to changes in interest rates.
Fluctuations in Quarterly Results
For the year ended December 31, 2016,2017, quarterly revenues as a percentage of total consolidated annual revenues were approximately 22%24%, 25%24%, 26% and 27%26%, respectively, for each of the respective quarters of the year. We have experienced and anticipate that in the future we will experience variations in quarterly revenues. The variations are due to the timing of new contracts and renewal of existing contracts, the timing and frequency of client spending for customer engagement services,non-U.S. currency fluctuations, and the seasonal pattern of customer engagement support and fulfillment services.
Item 4. Controls and Procedures
As of September 30, 2017,2018, under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We concluded that, as of September 30, 2017,2018, our disclosure controls and procedures were effective at the reasonable assurance level.
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II. OTHEROTHER INFORMATION
From time to time, we are involved in legal actions arising in the ordinary course of business. With respect to theseany such currently pending matters, we believe that we have adequate legal defenses and/or, when possible and appropriate, has provided adequate accruals for related coststo those matters such that the ultimate outcome will not have a material adverse effect on our future financial position or results of operations.
For risk factors, see Item 1A, “Risk Factors,” of our Annual Report on Form10-K for the year ended December 31, 2016.2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Below is a summary of stock repurchases for the three months ended September 30, 20172018 (in thousands, except average price per share). See Note 13,12, Earnings Per Share, of “Notes to Condensed Consolidated Financial Statements” for information regarding our stock repurchase program.
Period | |||||||||||||||||
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs (1) | ||||||||||||||
July 1, | |||||||||||||||||
| |||||||||||||||||
| - | $ | - | ||||||||||||||
|
|
| - |
|
|
| 4,748 | ||||||||||
August 1, 2018 - August 31, 2018 |
|
| |||||||||||||||
| $ | - | |||||||||||||||
|
|
| - |
|
|
| 4,748 | ||||||||||
September 1, 2018 - September 30, 2018 | - | $ | - |
|
|
| - | 4,748 | |||||||||
Total | - | - | 4,748 |
(1) The total number of shares approved for repurchase under the 2011 Share Repurchase PlanProgram dated August 18, 2011, as amended on March 16, 2017,2016, is 10.0 million. The 2011 Share Repurchase PlanProgram has no expiration date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
The following documents are filed as an exhibit to this Report:
No. | Description | |
15* | ||
31.1* | Certification of Chief Executive Officer, pursuant to Rule13a-14(a). | |
31.2* | Certification of Chief Financial Officer, pursuant to Rule13a-14(a). | |
32.1** | Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. | |
32.2** | Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. | |
101.INS*+ | XBRL Instance Document | |
101.SCH*+ | XBRL Taxonomy Extension Schema Document | |
101.CAL*+ | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB*+ | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE*+ | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF*+ | XBRL Taxonomy Extension Definition Linkbase Document | |
* | Filed herewith as an Exhibit. | |
** | Furnished herewith as an Exhibit. | |
+ | Submitted electronically with this Quarterly Report. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SYKES ENTERPRISES, INCORPORATED | |||
(Registrant) | |||
Date: November | By: | /s/ John Chapman | |
John Chapman | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
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