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 June 30, 2018March 31, 2019
☐ | 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 (§ 229.405232.405 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 ☐
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 | ☐ | Smaller reporting | ☐ | ||||||||
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 ☒
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value | SYKE | NASDAQ Stock Market, LLC |
As of July 19, 2018,April 18, 2019, there were 42,821,21242,564,853 outstanding shares of common stock.
Sykes Enterprises, Incorporated and Subsidiaries
Form10-Q
INDEX
3 | ||||||
Item 1. | 3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 9 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36 | ||||
Item 3. | 45 | |||||
Item 4. | 46 | |||||
47 | ||||||
Item 1. | 47 | |||||
Item 1A. | 47 | |||||
Item 2. | 47 | |||||
Item 3. | 47 | |||||
Item 4. | 47 | |||||
Item 5. | 47 | |||||
Item 6. | 48 | |||||
49 |
2
Item 1. Financial Statements
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) | June 30, 2018 | December 31, 2017 | March 31, 2019 |
|
| December 31, 2018 |
| ||||||||
Assets |
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents | $ | 162,422 | $ | 343,734 | $ | 148,242 |
|
| $ | 128,697 |
| ||||
Receivables, net | 347,885 | 341,958 |
| 349,400 |
|
|
| 347,425 |
| ||||||
Prepaid expenses | 23,516 | 22,132 |
| 19,339 |
|
|
| 23,754 |
| ||||||
Other current assets | 19,140 | 19,743 |
| 18,591 |
|
|
| 16,761 |
| ||||||
|
| ||||||||||||||
Total current assets | 552,963 | 727,567 |
| 535,572 |
|
|
| 516,637 |
| ||||||
Property and equipment, net | 142,920 | 160,790 |
| 128,775 |
|
|
| 135,418 |
| ||||||
Operating lease right-of-use assets |
| 218,057 |
|
|
| — |
| ||||||||
Goodwill, net | 265,991 | 269,265 |
| 303,920 |
|
|
| 302,517 |
| ||||||
Intangibles, net | 139,829 | 140,277 |
| 170,277 |
|
|
| 174,031 |
| ||||||
Deferred charges and other assets | 32,698 | 29,193 |
| 46,505 |
|
|
| 43,364 |
| ||||||
|
| $ | 1,403,106 |
|
| $ | 1,171,967 |
| |||||||
$ | 1,134,401 | $ | 1,327,092 | ||||||||||||
|
| ||||||||||||||
Liabilities and Shareholders’ Equity | |||||||||||||||
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
| ||||||||
Accounts payable | $ | 22,236 | $ | 32,133 | $ | 28,809 |
|
| $ | 26,923 |
| ||||
Accrued employee compensation and benefits | 98,557 | 102,899 |
| 103,751 |
|
|
| 95,813 |
| ||||||
Income taxes payable | 843 | 2,606 |
| 2,794 |
|
|
| 1,433 |
| ||||||
Deferred revenue and customer liabilities | 32,503 | 34,717 |
| 27,077 |
|
|
| 30,176 |
| ||||||
Operating lease liabilities |
| 45,636 |
|
|
| — |
| ||||||||
Other accrued expenses and current liabilities | 36,765 | 30,888 |
| 27,359 |
|
|
| 31,235 |
| ||||||
|
| ||||||||||||||
Total current liabilities | 190,904 | 203,243 |
| 235,426 |
|
|
| 185,580 |
| ||||||
Deferred grants | 2,913 | 3,233 | |||||||||||||
Long-term debt | 90,000 | 275,000 |
| 93,000 |
|
|
| 102,000 |
| ||||||
Long-term income tax liabilities | 24,471 | 27,098 |
| 23,975 |
|
|
| 23,787 |
| ||||||
Long-term operating lease liabilities |
| 186,079 |
|
|
| — |
| ||||||||
Other long-term liabilities | 25,250 | 22,039 |
| 22,585 |
|
|
| 33,991 |
| ||||||
|
| ||||||||||||||
Total liabilities | 333,538 | 530,613 |
| 561,065 |
|
|
| 345,358 |
| ||||||
|
| ||||||||||||||
|
|
|
|
|
|
|
| ||||||||
Commitments and loss contingency (Note 13) |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
| |||||||||
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; 42,821 and 42,899 shares issued, respectively | 428 | 429 | |||||||||||||
Common stock, $0.01 par value per share, 200,000 shares authorized; 42,565 and 42,778 shares issued, respectively |
| 426 |
|
|
| 428 |
| ||||||||
Additionalpaid-in capital | 282,622 | 282,385 |
| 287,347 |
|
|
| 286,544 |
| ||||||
Retained earnings | 567,988 | 546,843 |
| 610,585 |
|
|
| 598,788 |
| ||||||
Accumulated other comprehensive income (loss) | (47,933 | ) | (31,104 | ) |
| (53,761 | ) |
|
| (56,775 | ) | ||||
Treasury stock at cost: 122 and 117 shares, respectively | (2,242 | ) | (2,074 | ) | |||||||||||
Treasury stock at cost: 133 and 126 shares, respectively |
| (2,556 | ) |
|
| (2,376 | ) | ||||||||
Total shareholders' equity |
| 842,041 |
|
|
| 826,609 |
| ||||||||
|
| $ | 1,403,106 |
|
| $ | 1,171,967 |
| |||||||
Total shareholders’ equity | 800,863 | 796,479 | |||||||||||||
|
| ||||||||||||||
$ | 1,134,401 | $ | 1,327,092 | ||||||||||||
|
|
See accompanying Notes to CondensedConsolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, |
| |||||
(in thousands, except per share data) | 2019 |
|
| 2018 |
| ||
Revenues | $ | 402,925 |
|
| $ | 414,371 |
|
Operating expenses: |
|
|
|
|
|
|
|
Direct salaries and related costs |
| 261,728 |
|
|
| 275,072 |
|
General and administrative |
| 104,680 |
|
|
| 102,440 |
|
Depreciation, net |
| 13,897 |
|
|
| 14,836 |
|
Amortization of intangibles |
| 4,286 |
|
|
| 4,213 |
|
Impairment of long-lived assets |
| 1,582 |
|
|
| 3,526 |
|
Total operating expenses |
| 386,173 |
|
|
| 400,087 |
|
Income from operations |
| 16,752 |
|
|
| 14,284 |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
Interest income |
| 185 |
|
|
| 171 |
|
Interest (expense) |
| (1,178 | ) |
|
| (1,206 | ) |
Other income (expense), net |
| 610 |
|
|
| 155 |
|
Total other income (expense), net |
| (383 | ) |
|
| (880 | ) |
|
|
|
|
|
|
|
|
Income before income taxes |
| 16,369 |
|
|
| 13,404 |
|
Income taxes |
| 4,682 |
|
|
| 2,456 |
|
Net income | $ | 11,687 |
|
| $ | 10,948 |
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
Basic | $ | 0.28 |
|
| $ | 0.26 |
|
Diluted | $ | 0.28 |
|
| $ | 0.26 |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
Basic |
| 42,169 |
|
|
| 41,939 |
|
Diluted |
| 42,299 |
|
|
| 42,232 |
|
See accompanying Notes to CondensedConsolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended March 31, |
| |||||
(in thousands) | 2019 |
|
| 2018 |
| ||
Net income | $ | 11,687 |
|
| $ | 10,948 |
|
Other comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of taxes |
| 1,362 |
|
|
| 291 |
|
Unrealized gain (loss) on cash flow hedging instruments, net of taxes |
| 1,672 |
|
|
| (2,893 | ) |
Unrealized actuarial gain (loss) related to pension liability, net of taxes |
| (15 | ) |
|
| (83 | ) |
Unrealized gain (loss) on postretirement obligation, net of taxes |
| (5 | ) |
|
| (10 | ) |
Other comprehensive income (loss), net of taxes |
| 3,014 |
|
|
| (2,695 | ) |
Comprehensive income (loss) | $ | 14,701 |
|
| $ | 8,253 |
|
See accompanying Notes to CondensedConsolidated Financial Statements.
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended March 31, 2019 and 2018
(Unaudited)
| Common Stock |
|
| Additional |
|
|
|
|
|
| Accumulated Other |
|
|
|
|
|
|
|
|
| |||||||
(in thousands) | Shares Issued |
|
| Amount |
|
| Paid-in Capital |
|
| Retained Earnings |
|
| Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Total |
| |||||||
Balance at December 31, 2018 |
| 42,778 |
|
| $ | 428 |
|
| $ | 286,544 |
|
| $ | 598,788 |
|
| $ | (56,775 | ) |
| $ | (2,376 | ) |
| $ | 826,609 |
|
Cumulative effect of accounting change – adoption of ASC 842, Leases (Note 3) |
| — |
|
|
| — |
|
|
| — |
|
|
| 110 |
|
|
| — |
|
|
| — |
|
|
| 110 |
|
Stock-based compensation expense |
| — |
|
|
| — |
|
|
| 1,890 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,890 |
|
Issuance of common stock under equity award plans, net of forfeitures |
| (168 | ) |
|
| (2 | ) |
|
| 182 |
|
|
| — |
|
|
| — |
|
|
| (180 | ) |
|
| — |
|
Shares repurchased for tax withholding on equity awards |
| (45 | ) |
|
| — |
|
|
| (1,269 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,269 | ) |
Comprehensive income (loss) |
| — |
|
|
| — |
|
|
| — |
|
|
| 11,687 |
|
|
| 3,014 |
|
|
| — |
|
|
| 14,701 |
|
Balance at March 31, 2019 |
| 42,565 |
|
| $ | 426 |
|
| $ | 287,347 |
|
| $ | 610,585 |
|
| $ | (53,761 | ) |
| $ | (2,556 | ) |
| $ | 842,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
| 42,899 |
|
| $ | 429 |
|
| $ | 282,385 |
|
| $ | 546,843 |
|
| $ | (31,104 | ) |
| $ | (2,074 | ) |
| $ | 796,479 |
|
Cumulative effect of accounting change – adoption of ASC 606, Revenues (Note 2) |
| — |
|
|
| — |
|
|
| — |
|
|
| 3,019 |
|
|
| — |
|
|
| — |
|
|
| 3,019 |
|
Stock-based compensation expense |
| — |
|
|
| — |
|
|
| 2,077 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,077 |
|
Issuance of common stock under equity award plans, net of forfeitures |
| 18 |
|
|
| — |
|
|
| 59 |
|
|
| — |
|
|
| — |
|
|
| (59 | ) |
|
| — |
|
Shares repurchased for tax withholding on equity awards |
| (118 | ) |
|
| (1 | ) |
|
| (3,681 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,682 | ) |
Comprehensive income (loss) |
| — |
|
|
| — |
|
|
| — |
|
|
| 10,948 |
|
|
| (2,695 | ) |
|
| — |
|
|
| 8,253 |
|
Balance at March 31, 2018 |
| 42,799 |
|
| $ | 428 |
|
| $ | 280,840 |
|
| $ | 560,810 |
|
| $ | (33,799 | ) |
| $ | (2,133 | ) |
| $ | 806,146 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | $ | 396,785 | $ | 375,438 | $ | 811,156 | $ | 759,452 | ||||||||
Operating expenses: | ||||||||||||||||
Direct salaries and related costs | 264,924 | 248,615 | 539,996 | 495,751 | ||||||||||||
General and administrative | 102,037 | 92,236 | 204,477 | 184,280 | ||||||||||||
Depreciation, net | 14,560 | 13,820 | 29,396 | 27,168 | ||||||||||||
Amortization of intangibles | 3,629 | 5,250 | 7,842 | 10,481 | ||||||||||||
Impairment of long-lived assets | 5,175 | 4,189 | 8,701 | 4,391 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 390,325 | 364,110 | 790,412 | 722,071 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from operations | 6,460 | 11,328 | 20,744 | 37,381 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense): | ||||||||||||||||
Interest income | 175 | 144 | 346 | 299 | ||||||||||||
Interest (expense) | (1,149 | ) | (1,865 | ) | (2,355 | ) | (3,564 | ) | ||||||||
Other income (expense), net | (537 | ) | 793 | (382 | ) | 1,606 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense), net | (1,511 | ) | (928 | ) | (2,391 | ) | (1,659 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | 4,949 | 10,400 | 18,353 | 35,722 | ||||||||||||
Income taxes | (2,229 | ) | 1,555 | 227 | 8,165 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | $ | 7,178 | $ | 8,845 | $ | 18,126 | $ | 27,557 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.17 | $ | 0.21 | $ | 0.43 | $ | 0.66 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | $ | 0.17 | $ | 0.21 | $ | 0.43 | $ | 0.66 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 42,125 | 41,854 | 42,035 | 41,756 | ||||||||||||
Diluted | 42,160 | 41,934 | 42,197 | 41,919 |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 7,178 | $ | 8,845 | $ | 18,126 | $ | 27,557 | ||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||
Foreign currency translation adjustments, net of taxes | (13,597 | ) | 16,484 | (13,306 | ) | 20,382 | ||||||||||
Unrealized gain (loss) on net investment hedges, net of taxes | - | (2,936 | ) | - | (3,304 | ) | ||||||||||
Unrealized gain (loss) on cash flow hedging instruments, net of taxes | (481 | ) | (396 | ) | (3,374 | ) | 136 | |||||||||
Unrealized actuarial gain (loss) related to pension liability, net of taxes | (46 | ) | (16 | ) | (129 | ) | (39 | ) | ||||||||
Unrealized gain (loss) on postretirement obligation, net of taxes | (10 | ) | (12 | ) | (20 | ) | (25 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss), net of taxes | (14,134 | ) | 13,124 | (16,829 | ) | 17,150 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income (loss) | $ | (6,956 | ) | $ | 21,969 | $ | 1,297 | $ | 44,707 | |||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders’ Equity
Six Months Ended June 30, 2018
(Unaudited)
Common Stock | Additional | Accumulated Other | ||||||||||||||||||||||||||
(in thousands) | Shares Issued | Amount | Paid-in Capital | Retained Earnings | Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||
Balance at December 31, 2017 | 42,899 | $ | 429 | $ | 282,385 | $ | 546,843 | $ | (31,104 | ) | $ | (2,074 | ) | $ | 796,479 | |||||||||||||
Cumulative effect of accounting change | - | - | - | 3,019 | - | - | 3,019 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 3,750 | - | - | - | 3,750 | |||||||||||||||||||||
Issuance of common stock under equity award plans, net of forfeitures | 40 | - | 168 | - | - | (168 | ) | - | ||||||||||||||||||||
Shares repurchased for tax withholding on equity awards | (118 | ) | (1 | ) | (3,681 | ) | - | - | - | (3,682 | ) | |||||||||||||||||
Comprehensive income (loss) | - | - | - | 18,126 | (16,829 | ) | - | 1,297 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at June 30, 2018 | 42,821 | $ | 428 | $ | 282,622 | $ | 567,988 | $ | (47,933 | ) | $ | (2,242 | ) | $ | 800,863 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 18,126 | $ | 27,557 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 29,651 | 27,423 | ||||||
Amortization of intangibles | 7,842 | 10,481 | ||||||
Amortization of deferred grants | (344 | ) | (374 | ) | ||||
Impairment losses | 8,701 | 4,391 | ||||||
Unrealized foreign currency transaction (gains) losses, net | (370 | ) | (611 | ) | ||||
Stock-based compensation expense | 3,750 | 4,732 | ||||||
Deferred income tax provision (benefit) | 1,070 | 9,785 | ||||||
Unrealized (gains) losses and premiums on financial instruments, net | 625 | 42 | ||||||
Amortization of deferred loan fees | 134 | 134 | ||||||
Imputed interest expense and fair value adjustments to contingent consideration | - | (633 | ) | |||||
Other | (90 | ) | 144 | |||||
Changes in assets and liabilities, net of acquisitions: | ||||||||
Receivables, net | (8,370 | ) | 9,059 | |||||
Prepaid expenses | (1,611 | ) | 78 | |||||
Other current assets | (2,016 | ) | (1,855 | ) | ||||
Deferred charges and other assets | (2,186 | ) | (1,008 | ) | ||||
Accounts payable | (5,499 | ) | 2,420 | |||||
Income taxes receivable / payable | (6,526 | ) | (14,086 | ) | ||||
Accrued employee compensation and benefits | (2,349 | ) | (1,779 | ) | ||||
Other accrued expenses and current liabilities | 5,079 | (2,916 | ) | |||||
Deferred revenue and customer liabilities | (155 | ) | 2,398 | |||||
Other long-term liabilities | 1,922 | (3,813 | ) | |||||
|
|
|
| |||||
Net cash provided by operating activities | 47,384 | 71,569 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (26,232 | ) | (35,859 | ) | ||||
Cash paid for business acquisitions, net of cash acquired | - | (7,500 | ) | |||||
Purchase of intangible assets | (7,606 | ) | (275 | ) | ||||
Other | 484 | 25 | ||||||
|
|
|
| |||||
Net cash (used for) investing activities | (33,354 | ) | (43,609 | ) | ||||
|
|
|
|
7
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, |
| |||||
(in thousands) | 2019 |
|
| 2018 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income | $ | 11,687 |
|
| $ | 10,948 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
| 13,957 |
|
|
| 14,964 |
|
Amortization of intangibles |
| 4,286 |
|
|
| 4,213 |
|
Amortization of deferred grants |
| (95 | ) |
|
| (181 | ) |
Impairment losses |
| 1,582 |
|
|
| 3,526 |
|
Unrealized foreign currency transaction (gains) losses, net |
| 573 |
|
|
| 194 |
|
Stock-based compensation expense |
| 1,890 |
|
|
| 2,077 |
|
Deferred income tax provision (benefit) |
| 530 |
|
|
| 584 |
|
Unrealized (gains) losses and premiums on financial instruments, net |
| (494 | ) |
|
| 168 |
|
Amortization of deferred loan fees |
| 69 |
|
|
| 67 |
|
Other |
| 263 |
|
|
| 150 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
Receivables, net |
| (2,320 | ) |
|
| (2,120 | ) |
Prepaid expenses |
| 1,103 |
|
|
| (134 | ) |
Other current assets |
| (359 | ) |
|
| 665 |
|
Deferred charges and other assets |
| (1,961 | ) |
|
| (1,496 | ) |
Accounts payable |
| (15 | ) |
|
| (4,413 | ) |
Income taxes receivable / payable |
| 1,664 |
|
|
| (1,622 | ) |
Accrued employee compensation and benefits |
| 6,866 |
|
|
| (1,832 | ) |
Other accrued expenses and current liabilities |
| 2,179 |
|
|
| 3,766 |
|
Deferred revenue and customer liabilities |
| (3,507 | ) |
|
| (2,976 | ) |
Other long-term liabilities |
| 198 |
|
|
| 2,071 |
|
Operating lease assets and liabilities |
| 1,207 |
|
|
| — |
|
Net cash provided by operating activities |
| 39,303 |
|
|
| 28,619 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
| (5,696 | ) |
|
| (13,258 | ) |
Cash paid for business acquisitions, net of cash acquired |
| (61 | ) |
|
| — |
|
Purchase of intangible assets |
| — |
|
|
| (7,505 | ) |
Other |
| 26 |
|
|
| 2 |
|
Net cash (used for) investing activities |
| (5,731 | ) |
|
| (20,761 | ) |
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
Six Months Ended June 30, | Three Months Ended March 31, |
| |||||||||||||
(in thousands) | 2018 | 2017 | 2019 |
|
| 2018 |
| ||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
| ||||||||
Payments of long-term debt | (190,000 | ) | - |
| (9,000 | ) |
|
| (175,000 | ) | |||||
Proceeds from issuance of long-term debt | 5,000 | - | |||||||||||||
Shares repurchased for tax withholding on equity awards | (3,682 | ) | (3,860 | ) |
| (1,269 | ) |
|
| (3,682 | ) | ||||
Payments of contingent consideration related to acquisitions | - | (4,528 | ) | ||||||||||||
Cash paid for loan fees related to long-term debt |
| (1,091 | ) |
|
| — |
| ||||||||
Other | 38 | 107 |
| (6 | ) |
|
| 20 |
| ||||||
|
| ||||||||||||||
Net cash (used for) financing activities | (188,644 | ) | (8,281 | ) |
| (11,366 | ) |
|
| (178,662 | ) | ||||
|
| ||||||||||||||
Effects of exchange rates on cash, cash equivalents and restricted cash | (6,748 | ) | 15,159 |
| (862 | ) |
|
| (332 | ) | |||||
|
| ||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (181,362 | ) | 34,838 |
| 21,344 |
|
|
| (171,136 | ) | |||||
Cash, cash equivalents and restricted cash – beginning | 344,805 | 267,594 |
| 130,231 |
|
|
| 344,805 |
| ||||||
|
| ||||||||||||||
Cash, cash equivalents and restricted cash – ending | $ | 163,443 | $ | 302,432 | $ | 151,575 |
|
| $ | 173,669 |
| ||||
|
| ||||||||||||||
|
|
|
|
|
|
| |||||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
| ||||||||
Cash paid during period for interest | $ | 1,975 | $ | 3,066 | $ | 946 |
|
| $ | 1,042 |
| ||||
Cash paid during period for income taxes | $ | 12,084 | $ | 17,032 | $ | 2,862 |
|
| $ | 4,754 |
| ||||
Non-cash transactions: |
|
|
|
|
|
|
| ||||||||
Property and equipment additions in accounts payable | $ | 2,637 | $ | 3,742 | $ | 3,669 |
|
| $ | 4,430 |
| ||||
Unrealized gain (loss) on postretirement obligation, net of taxes in accumulated other comprehensive income (loss) | $ | (20 | ) | $ | (25 | ) | |||||||||
Unrealized gain (loss) on postretirement obligation, net of taxes, in accumulated other comprehensive income (loss) | $ | (5 | ) |
| $ | (10 | ) | ||||||||
Shares repurchased for tax withholding on equity awards included in current liabilities | $ | - | $ | 119 | $ | 102 |
|
| $ | 357 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
8
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
SixThree Months Ended June 30,March 31, 2019 and 2018 and 2017
(Unaudited)
Note 1. Overview and Basis of Presentation
Business—Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a leading provider of multichannel demand generation and global customer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services primarily to Global 2000 companies and their end customers, primarilyprincipally within the communications, financial services, communications, technology, transportation and& leisure, healthcare retail and other industries. SYKES primarily provides customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels including phone,e-mail, social media, text messaging, chat and digital self-service. SYKES also provides various enterprise support services in the United States that include services for its clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services, which includesinclude order processing, payment processing, inventory control, product delivery and product returns handling. Additionally, through the Company’s acquisition of robotic processing automation (“RPA”) provider Symphony Ventures Ltd (“Symphony”) coupled with our investment in artificial intelligence (“AI”) through XSell Technologies, Inc. (“XSell”), the Company also provides a suite of solutions such as consulting, implementation, hosting and managed services that optimizes its differentiated full lifecycle management services platform. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs;needs, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim; and (2) EMEA, which includes Europe, the Middle East and Africa.
U.S. 2017 Tax Reform Act
InOn December 20, 2017, the President of the United States (“U.S.”) signed into law the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”). was approved by Congress and received presidential approval on December 22, 2017. In general, the 2017 Tax Reform Act reducesreduced the U.S. federal corporate tax rate from 35% to 21%, effective in 2018. The 2017 Tax Reform Act movesmoved from a worldwide business taxation approach to a participation exemption regime. The 2017 Tax Reform Act also imposesimposed base-erosion prevention measures onnon-U.S. earnings of U.S. entities, as well as aone-time mandatory deemed repatriation tax on accumulatednon-U.S. earnings which was recorded in the fourth quarter of 2017. earnings. The impact of the 2017 Tax Reform Act on the Company’s consolidated financial results began with the fourth quarter of 2017, the period of enactment. This impact, along with the transitional taxes discussed inSee Note 11, Income Taxes, is reflected in the Other segment.for further information.
Acquisitions
Symphony Acquisition
On April 24, 2017,October 18, 2018, the Company, as guarantor, and its wholly-owned subsidiary, SEI International Services S.a.r.l, a Luxembourg company, entered into a definitive Assetthe Symphony Purchase Agreement (the “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 certain assets from a Global 2000 telecommunicationsall of the outstanding shares of Symphony.
Symphony, headquartered in London, England, provides RPA services, provider. 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 was GBP 52.5 million ($67.6 million), of $7.5which the Company paid GBP 44.6 million was paid($57.6 million) at the closing of the transaction on May 31, 2017,November 1, 2018 using cash on hand resulting in $6.0as well as $31.0 million of propertyadditional borrowings under the Company’s credit agreement. The acquisition date present value of the remaining GBP 7.9 million ($10.0 million) of purchase price has been deferred and equipmentwill be paid in equal installments over three years, on or around November 1, 2019, 2020 and $1.52021. The Symphony Purchase Agreement also provides for a three-year, retention based earnout payable in restricted stock units (“RSUs”) with a value of GBP 3.0 million.
Subsequent to the finalization of the working capital adjustments during the three months ended March 31, 2019, the purchase price was adjusted to GBP 52.4 million ($67.5 million). The acquisition resulted in $26.1 million of intangible assets, primarily customer relationship intangibles (the “Telecommunications Asset acquisition”). relationships and trade names, $2.2 million of fixed assets and $36.2 million of goodwill.
The Symphony Purchase Agreement contains customary representations and warranties, indemnification obligations and covenants. The Telecommunications Asset acquisition was completed to strengthen and create new partnerships for the Company and expand its geographic footprint in North America. The results of the Telecommunications Assets’ operations have been included in the Company’s consolidated financial statements in the Americas segment since its acquisition on May 31, 2017.
The Company accounted for the Telecommunications AssetSymphony acquisition in accordance with ASCAccounting Standards Codification (“ASC”) 805,Business Combinations (“ASC 805”), whereby the fair value of the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the tax analysis of the assets acquired and liabilities assumed and goodwill. The Company completedexpects to complete its analysis of the purchase price allocation during the fourth quarter of 2019 and any resulting adjustments will be recorded in accordance with ASC 805.
WhistleOut Acquisition
On July 9, 2018, the Company, as guarantor, and its wholly-owned subsidiaries, Sykes Australia Pty Ltd, an Australian company, and Clear Link Technologies, LLC, a Delaware limited liability company, entered into and closed the WhistleOut Sale Agreement with WhistleOut Nominees Pty Ltd as trustee for the WhistleOut Holdings Unit Trust, CPC Investments USA Pty Ltd, JJZL Pty Ltd, Kenneth Wong as trustee for Wong Family Trust and C41 Pty Ltd as trustee for the Ottery Family Trust (together, the “WhistleOut Sellers”) to acquire all of the outstanding shares of WhistleOut.
The aggregate purchase price of AUD 30.2 million ($22.4 million) was paid at the closing of the transaction on July 9, 2018. Subsequent to the finalization of the working capital adjustments during the three months ended March 31, 2019, the purchase price was adjusted to AUD 30.3 million ($22.5 million). The acquisition resulted in $16.5 million of intangible assets, primarily indefinite-lived domain names, $2.4 million of fixed assets and $2.5 million of goodwill. 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 contained customary representations and warranties, indemnification obligations and covenants.
The Company accounted for the WhistleOut acquisition in accordance with ASC 805, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the 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 2017.2019 and any resulting adjustments will be recorded in accordance with ASC 805.
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 six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2018.2019. For further information, refer to the
9
consolidated financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.February 26, 2019.
Principles of Consolidation—The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Subsequent Events—Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On July 9, 2018, the Company entered into and closed a definitive Share Sale Agreement (“Sale Agreement”) to acquire all the outstanding shares of WhistleOut Pty Ltd and WhistleOut Inc. (together, known as “WhistleOut”) for AUD 30.2 million ($22.4 million). See Note 19, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.
Cash, Cash Equivalents and Restricted cash — Cash and cash equivalents consist of cash and highly liquid short-term investments, primarily held innon-interest-bearing investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheets that sum to the amounts reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
June 30, 2018 | December 31, 2017 | June 30, 2017 | December 31, 2016 | |||||||||||||
Cash and cash equivalents | $ | 162,422 | $ | 343,734 | $ | 301,451 | $ | 266,675 | ||||||||
Restricted cash included in “Other current assets” | 153 | 154 | 158 | 160 | ||||||||||||
Restricted cash included in “Deferred charges and other assets” | 868 | 917 | 823 | 759 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 163,443 | $ | 344,805 | $ | 302,432 | $ | 267,594 | |||||||||
|
|
|
|
|
|
|
|
| March 31, 2019 |
|
| December 31, 2018 |
|
| March 31, 2018 |
|
| December 31, 2017 |
| ||||
Cash and cash equivalents | $ | 148,242 |
|
| $ | 128,697 |
|
| $ | 172,590 |
|
| $ | 343,734 |
|
Restricted cash included in "Other current assets" |
| 1,960 |
|
|
| 149 |
|
|
| 154 |
|
|
| 154 |
|
Restricted cash included in "Deferred charges and other assets" |
| 1,373 |
|
|
| 1,385 |
|
|
| 925 |
|
|
| 917 |
|
| $ | 151,575 |
|
| $ | 130,231 |
|
| $ | 173,669 |
|
| $ | 344,805 |
|
Investments in Equity Method Investees — The Company uses the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of an equity method investment is included in consolidated net income. Judgment regarding the level of influence over an equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The Company evaluates an equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. As of June 30, 2018 and December 31, 2017, the Company did not identify any instances where the carrying values of its equity method investments were not recoverable.
In July 2017, the Company made a strategic investment of $10.0 million in XSell Technologies, Inc. (“XSell”) for 32.8% of XSell’s preferred stock. The Company plans to incorporateis incorporating XSell’s machine learning and artificial intelligenceAI algorithms into its business. The Company believes this will increase the sales performance of its agents to drive revenue for its clients, improve the experience of the Company’s clients’ end customers and enhance brand
10
loyalty, reduce the cost of customer care and leverage analytics and machine learning to source the best agents and improve their performance.
The Company’s net investment in XSell of $9.6$9.0 million and $9.8$9.2 million was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The CompanyCompany’s investment was paid in two installments of $5.0 million, one in July 2017 with the remaining $5.0 million includedand one in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017.August 2018. The Company’s proportionate share of XSell’s incomenet (loss) of $(0.2) million and $(0.1) million for the three months ended March 31, 2019 and $(0.3) million2018, respectively, was included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations forOperations.
As of March 31, 2019 and December 31, 2018, the three and six months ended June 30, 2018, respectively (none in 2017).Company did not identify any instances where the carrying values of its equity method investments were not recoverable.
Customer-Acquisition Advertising Costs — The Company’s advertising costs are expensed as incurred. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017 were $12.0 million and $8.6 million, respectively, and $22.0 million and $18.4 million for the six months ended June 30, 2018 and 2017, respectively. Total advertising costs included in “General and administrative” in the accompanying Condensed Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017 were less than $0.1 million and $0.1 million, respectively, and less than $0.1 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively.as follows (in thousands):
| Three Months Ended March 31, |
| |||||
| 2019 |
|
| 2018 |
| ||
Customer-acquisition advertising costs included in "Direct salaries and related costs" | $ | 12,104 |
|
| $ | 9,967 |
|
Customer-acquisition advertising costs included in "General and administrative" |
| 18 |
|
|
| 27 |
|
Reclassifications — Certain balances in the prior period have been reclassified to conform to current period presentation.
New Accounting Standards Not Yet Adopted
LeasesFair Value Measurements
In February 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 does not expect its adoption of ASU 2018-13 to have a material impact on its disclosures and does not expect to early adopt the standard.
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 does not expect its adoption of ASU 2018-14 to have a material impact on its financial condition, results of operations, cash flows or disclosures and does not expect to early adopt the standard.
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 does not expect its adoption of ASU 2018-15 to have a material impact on its financial condition, results of operations, cash flows or disclosures and does not expect to early adopt the standard.
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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2018-19”). These amendments clarify that receivables arising from operating leases are accounted for using the lease guidance in ASC 842, Leases, and not as financial instruments. 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 expects ASU 2016-13 to apply to its trade receivables but does not expect the adoption of the amendments to have a material impact on its financial condition, results of operations or cash flows because credit losses associated from trade receivables have historically been insignificant. Additionally, the Company does not anticipate early adopting ASU 2016-13.
Codification Improvements – Financial Instruments – Credit Losses, Derivatives and Hedging, and Financial Instruments
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). These amendments clarify new standards on credit losses, hedging and recognizing and measuring financial instruments and address implementation issues stakeholders have raised. The credit losses and hedging amendments have the same effective dates as the respective standards, unless an entity has already adopted the standards. The amendments related to recognizing and measuring financial instruments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is
evaluating the timing of its adoption of ASU 2019-04 but does not expect a material impact on its financial condition, results of operations, cash flows or disclosures.
New Accounting Standards Recently Adopted
Leases
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842) (“ASU2016-02”) 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(“ASC 840”). 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.adoption without the need to restate prior periods. There are also certain optional practical expedients that an entity may elect to apply.
The Company’s implementation team has compiledCompany adopted ASC 842 as of January 1, 2019 using a detailed inventorymodified retrospective transition, with the cumulative-effect adjustment to the opening balance of leases and a preliminary analysisretained earnings as of the impacteffective date. Periods prior to the financial statements. The Company continues to evaluate the critical factors of ASC 842. Based on an assessment of the Company’s business and system requirements, the implementation team has selected a lease accounting software solution to assist the Company in complying with ASC 842. The Company expects the adoption of ASC 842 to result in a material increase in the assets and liabilities on the consolidated balance sheets as a result of recognizingright-of-use assets and lease liabilitiesJanuary 1, 2019 have not been restated.
See Note 3, Leases, for existing operating leases based on the amount of the Company’s current lease commitments. The Company believes that the majority of its leases will maintain their current lease classification under ASC 842. The Company does not expect these amendments to have a material effect on its expense recognition timing or cash flows and, as a result, the Company expects the adoption of ASC 842 will result in an insignificant impact on the Company’s consolidated statements of income and on the consolidated statements of cash flows. The Company is continuing to evaluate the magnitude of the impact and related disclosures,further details as well as the timing and method of adoption, with respect to the transition method and optional practical expedients. The Company is also continuing to evaluate the full impact of ASC 842, as well as its impacts on its business processes, systems, and internal controls.
11
Derivatives and Hedging
In August 2017, the FASB issued 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 does not expect the adoption of ASU2017-12 to materially impact its financial condition, results of operations, cash flows and disclosures.
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.
New Accounting Standards Recently Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers (Topic 606)(“ASU2014-09”) and subsequent amendments (together, “ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and indicates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. See Note 2, Revenues, for further details.
Financial Instruments
In January 2016, the FASB issued ASU2016-01,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 measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception applies to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such, these investments may be measured at cost. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU2016-01 on January 1, 20182019 did not have a material impact on the Company’sfinancial condition, results of operations, cash flows or disclosures of the Company. No cumulative-effect adjustment was recorded to opening retained earnings on the date of adoption as there was no ineffectiveness previously recorded in retained earnings that would have been included in other comprehensive income if the new guidance had been applied since hedge inception. Upon adoption of ASU 2017-12, the Company elected the spot method for assessing the effectiveness of net investment hedges and will record the amortization of excluded components of net investment hedges in “Other income (expense), net” in its consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU2016-15,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 have been applied using a retrospective transition method to each period presented. The adoption of ASU2016-15 on January 1, 2018 did not have a material impact on the Company’s cash flows.
In November 2016, the FASB issued ASU2016-18,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
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present restricted cash and restricted cash equivalents in the statement of cash flows, requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments have been applied using a retrospective transition method to each period presented. The inclusion of restricted cash increased the beginning balance of cash in the Condensed Consolidated Statements of Cash Flows by $1.1 million for the six months ended June 30, 2018 and increased the beginning and ending balances of cash by $0.9 million and $1.0 million, respectively, for the six months ended June 30, 2017. Other than the change in presentation within the accompanying Condensed Consolidated Statements of Cash Flows, the retrospective adoption of ASU2016-18 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU2016-16,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. The adoption of ASU2016-16 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements and no cumulative-effect adjustment to retained earnings was required.
In January 2018, the FASB released guidance on the accounting for tax on the global intangiblelow-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 ASU2018-05, Income Taxes (Topic 740): Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU2018-05”). 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 ASU2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)(“ASU2018-02”). These amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Reform Act. These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendment in this update is permitted, including adoption in any interim period. These amendments can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the 2017 Tax Reform Act is recognized. The early adoption of ASU2018-02 on June 30, 2018 had no impact on the Company’s consolidated financial statements or disclosures.
Business Combinations
In January 2017, the FASB issued ASU2017-01,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 were applied prospectively. The adoption of ASU2017-01 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.
Retirement Benefits
In March 2017, the FASB issued ASU2017-07,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
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compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component outside of a subtotal of income from operations. If a separate line item is not used, the line items used in the income statement to present other components of net benefit cost must be disclosed. These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. These amendments were applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.
The Company adopted the income statement presentation aspects of ASU2017-07 on a retrospective basis effective January 1, 2018. The following is a reconciliation of the effect of the reclassification of the interest cost and amortization of actuarial gain (loss) from operating expenses to other income (expense) in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 (in thousands):
As Previously Reported | Adjustments Due to the Adoption of ASU 2017-07 | As Revised | ||||||||||
Three Months Ended June 30, 2017: | ||||||||||||
Direct salaries and related costs | $ | 248,643 | $ | (28 | ) | $ | 248,615 | |||||
General and administrative | 92,246 | (10 | ) | 92,236 | ||||||||
Income from operations | 11,290 | 38 | 11,328 | |||||||||
Other income (expense), net | 831 | (38 | ) | 793 | ||||||||
Six Months Ended June 30, 2017: | ||||||||||||
Direct salaries and related costs | $ | 495,808 | $ | (57 | ) | $ | 495,751 | |||||
General and administrative | 184,300 | (20 | ) | 184,280 | ||||||||
Income from operations | 37,304 | 77 | 37,381 | |||||||||
Other income (expense), net | 1,683 | (77 | ) | 1,606 |
Note 2. Revenues
Adoption of ASC 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) which includesincluded ASU2014-09 and all related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting for revenues under ASC 605,Revenue Recognition(“ASC 605”).
The Company recorded an increase to opening retained earnings of $3.0 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact, all in the Americas segment, primarily related to the change in timing of revenue recognition associated with certain customer contracts that provide fees upon renewal, as well as changes in estimating variable consideration with respect to penalties and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies. Revenues recognized under ASC 606 are expected to be slightly higher during 2018 than revenues would have been under ASC 605. This is primarily attributable to the change in the timing of revenue recognition, as discussed above. The impact on revenues recognized for the three and six months ended June 30, 2018 is reported below.
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The cumulative effect of the adjustments made to the Company’s Condensed Consolidated Balance Sheet as of December 31, 2017 for the line items impacted by the adoption of ASC 606 was as follows (in thousands):
December 31, 2017 | Adjustments Due to the Adoption of ASC 606 | January 1, 2018 | ||||||||||
Receivables, net | $ | 341,958 | $ | 825 | $ | 342,783 | ||||||
Deferred charges and other assets | 29,193 | 2,045 | 31,238 | |||||||||
Income taxes payable | 2,606 | 697 | 3,303 | |||||||||
Deferred revenue and customer liabilities | 34,717 | (1,048 | ) | 33,669 | ||||||||
Other long-term liabilities | 22,039 | 202 | 22,241 | |||||||||
Retained earnings | 546,843 | 3,019 | 549,862 |
The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2018 were as follows (in thousands):
As Reported | Balances Without the Impact of the ASC 606 Adoption | Effect of Adoption Increase (Decrease) | ||||||||||
June 30, 2018: | ||||||||||||
Receivables, net | $ | 347,885 | $ | 345,932 | $ | 1,953 | ||||||
Deferred charges and other assets | 32,698 | 28,280 | 4,418 | |||||||||
Income taxes payable | 843 | (733 | ) | 1,576 | ||||||||
Deferred revenue and customer liabilities | 32,503 | 34,585 | (2,082 | ) | ||||||||
Other long-term liabilities | 25,250 | 25,524 | (274 | ) | ||||||||
Retained earnings | 567,988 | 560,837 | 7,151 |
The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the three months ended June 30, 2018 were as follows, alongRevenue from Contracts with the impact per share (in thousands, except per share data):
As Reported | Balances Without the Impact of the ASC 606 Adoption | Effect of Adoption Increase (Decrease) | ||||||||||
Three Months Ended June 30, 2018: | ||||||||||||
Revenues | $ | 396,785 | $ | 394,483 | $ | 2,302 | ||||||
Income from operations | 6,460 | 4,158 | 2,302 | |||||||||
Income before income taxes | 4,949 | 2,647 | 2,302 | |||||||||
Income taxes | (2,229 | ) | (2,804 | ) | 575 | |||||||
Net income | 7,178 | 5,451 | 1,727 | |||||||||
Net income per common share: | ||||||||||||
Basic | $ | 0.17 | $ | 0.13 | $ | 0.04 | ||||||
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Diluted | $ | 0.17 | $ | 0.13 | $ | 0.04 | ||||||
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The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the six months ended June 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):
As Reported | Balances Without the Impact of the ASC 606 Adoption | Effect of Adoption Increase (Decrease) | ||||||||||
Six Months Ended June 30, 2018: | ||||||||||||
Revenues | $ | 811,156 | $ | 805,759 | $ | 5,397 | ||||||
Income from operations | 20,744 | 15,347 | 5,397 | |||||||||
Income before income taxes | 18,353 | 12,956 | 5,397 | |||||||||
Income taxes | 227 | (1,038 | ) | 1,265 | ||||||||
Net income | 18,126 | 13,994 | 4,132 | |||||||||
Net income per common share: | ||||||||||||
Basic | $ | 0.43 | $ | 0.33 | $ | 0.10 | ||||||
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Diluted | $ | 0.43 | $ | 0.33 | $ | 0.10 | ||||||
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The Company’s net cash provided by operating activities for the six months ended June 30, 2018 did not change due to the adoption of ASC 606.
Practical Expedients
The Company utilized the practical expedient that allows for the application of ASC 606 to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.
Costs of Obtaining Customer Contracts
ASC 606 requires an entity to recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (e.g., a sales commission). Because the Company’s sales commissions are not directly incremental to obtaining customer contracts, they are expensed as incurred.
Recognition of Revenues Accounting Policy
The Company’s “Recognition of Revenues” accounting policy under ASC 606 is outlined below. For the Company’s accounting policy under ASC 605, see Note 1, Overview and Summary of Significant Accounting Policies, of the Company’s Annual Report on Form10-K for the year ended December 31, 2017.Customers
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, theThe Company accountsprovides customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to its clients’ customers. These services are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. Revenues 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 revenuesrecognized 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.
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The stated term of the Company’s contracts with customers range from 30 days to six years. The majority of these contracts include termination for convenience or without cause provisions allowing either party to cancel the contract without substantial cost or penalty within a defined notification period (“termination rights”), typically varying periods up to 180 days. Because of the termination rights, only the noncancelable portion qualifies as a legally enforceable contract under Step 1, Identify the Contract with a Customer, of ASC 606 (“Step 1”) and is accounted for as such, even if the customer is unlikely to exercise its termination right. Furthermore, the amounts excluded from assessment under Step 1 are, in effect, optional customer purchases of additional services.
If the termination right is only provided to the customer, the unsatisfied performance obligations will be evaluated as a customer option. The Company typically does not include options that would result in a material right. If options to purchase additional services or options to renew are included in customer contracts, the Company evaluates the option in order to determine if the arrangement includes promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer.
The Company’s primary billing terms are that payment is due upon receipt of the invoice, payable usually within 30 or 60 days. Invoices are generally issued on a monthly basis as control transfers and/or as services are rendered. Revenue recognition is limited to the established transaction price, the amount to which the Company expects to be entitled to under the contract, including the amount of expected fees for those contracts with renewal provisions, and the amount that is not contingent upon delivery of any future product or service or meeting other specified performance obligations. The transaction price, once determined, is allocated to the single performance obligation on a contract by contract basis.
The Company’s contracts include penalties and holdbacks provisions for failure to meet specified minimum service levels and other performance-based contingencies, as well as the right of certain of the Company’s clients to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred. Certain customers also receive cash discounts for early payment. These provisions are accounted for as variable consideration and are estimated using historical service and pricing trends, the individual contract provisions, and the Company’s best judgment at the time. None of these variable consideration components are subject to constraint due to the short time period to resolution, the Company’s extensive history with similar transactions, and the limited number of possible outcomes and third-party influence. The portion of the consideration received under the contract that the Company expects to ultimately refund to the customer is excluded from the transaction price and is recorded as a refund liability.
Other Revenues
In the Americas, the Company provides a range of enterprise support services including technical staffing services and outsourced corporate help desk services, primarily in the U.S. Revenues for enterprise support services are recognized over time using output methods such as number of positions filled similar to the Company’s outsourced customer engagement services and solutions.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 0.6%1.8% and 0.5% of the Company’s consolidated total revenues for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and 0.6% and 0.6% of the Company’s consolidated total revenues for the six months ended June 30, 2018 and 2017, respectively.
Disaggregated Revenues
The Company disaggregates its revenues from contracts with customers by service type and geographic location (see Note 16, Segments and Geographic Information), for each of its reportable segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by economic factors.
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The following table represents revenues from contracts with customers disaggregated by service type for the three and six months ended June 30, 2018 and 2017, by the reportable segment for each category (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, |
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2018 | 2017 | 2018 | 2017 | 2019 |
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Americas: |
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Customer engagement solutions and services | $ | 326,766 | $ | 314,603 | $ | 667,188 | $ | 635,265 | $ | 324,562 |
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| $ | 340,422 |
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Other revenues | 275 | 268 | 574 | 537 |
| 215 |
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| 299 |
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Total Americas | 327,041 | 314,871 | 667,762 | 635,802 |
| 324,777 |
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| 340,721 |
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EMEA: |
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Customer engagement solutions and services | 67,772 | 58,836 | 139,443 | 119,905 |
| 70,997 |
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| 71,671 |
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Other revenues | 1,948 | 1,704 | 3,904 | 3,702 |
| 7,131 |
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| 1,956 |
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Total EMEA | 69,720 | 60,540 | 143,347 | 123,607 |
| 78,128 |
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| 73,627 |
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Other: |
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Other revenues | 24 | 27 | 47 | 43 |
| 20 |
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Total Other | 24 | 27 | 47 | 43 |
| 20 |
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| $ | 402,925 |
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$ | 396,785 | $ | 375,438 | $ | 811,156 | $ | 759,452 | ||||||||||||||||
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Trade Accounts Receivable
The Company’s trade accounts receivable, net, consists of the following (in thousands):
June 30, 2018 | January 1, 2018 | |||||||
Trade accounts receivable, net, current(1) | $ | 334,818 | $ | 332,014 | ||||
Trade accounts receivable, net, noncurrent(2) | 4,614 | 2,078 | ||||||
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$ | 339,432 | $ | 334,092 | |||||
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Trade accounts receivable, net, current (1) | $ | 337,502 |
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| $ | 335,377 |
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Trade accounts receivable, net, noncurrent (2) |
| 18,270 |
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| 15,948 |
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| $ | 355,772 |
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| $ | 351,325 |
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(1) Included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets. The January 1, 2018 balance includes the $0.8 million adjustment recorded upon adoption of ASC 606.
(2) Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets. The January 1, 2018 balance includes a $2.1 million adjustment recorded upon adoption of ASC 606.
The Company’s noncurrent trade accounts receivable result from contracts with customers that include renewal provisions, that take effect subsequent to the satisfaction of the associated performance obligations. Payment is expected upon renewal, which occurs inbi-annual and annual increments over the associated expectedas well as a contract term, the majority of which range from two to five years.with a customer under a multi-year arrangement.
Deferred Revenue and Customer Liabilities
Deferred revenue and customer liabilities consists of the following (in thousands):
June 30, 2018 | January 1, 2018 | March 31, 2019 |
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Deferred revenue | $ | 4,900 | $ | 4,598 | $ | 3,381 |
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Customer arrangements with termination rights | 18,498 | 21,755 |
| 15,992 |
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| 16,404 |
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Estimated refund liabilities(1) | 9,105 | 7,316 | |||||||||||||
Estimated refund liabilities |
| 7,704 |
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| 10,117 |
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| $ | 27,077 |
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$ | 32,503 | $ | 33,669 | ||||||||||||
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(1) The January 1, 2018 balance includes the $1.0 million adjustment recorded upon adoption of ASC 606.
Deferred Revenue
The Company receivesup-front fees in connection with certain contracts. In accordance with ASC 606, theup-front fees are recorded as a contract liability only to the extent a legally enforceable contract exists,exists. Accordingly, the up-front fees allocated to the notification period, typically varying periods up to 180 days. Accordingly, theup-front fees allocated to the notification perioddays, are recorded as deferred revenue, while the fees that extend beyond the notification period are classified as a customer arrangement with termination rights.
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Revenues of $0.3$3.1 million and $4.2$3.9 million were recognized during the three and six months ended June 30,March 31, 2019 and 2018, respectively, from amounts included in deferred revenue as ofat December 31, 2018 and January 1, 2018.
2018, respectively. The Company expects to recognize the majority of its deferred revenue as of June 30, 2018March 31, 2019 over the next 180 days.
Customer Liabilities – Customer Arrangements with Termination Rights
The majority of the Company’s 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”). Customer arrangements with termination rights represent the amount ofup-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 demandpro-rata refunds of theup-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 – Estimated Refund Liabilities
Refund
Estimated 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 Estimated 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. Leases
Adoption of ASC 842, Leases
On January 1, 2019, the Company adopted ASC 842, which includes ASU 2016-02 and all related amendments, using the modified retrospective method and recognized a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting for leases under ASC 840.
The adoption of ASC 842 on January 1, 2019 had a material impact on the Company’s Condensed Consolidated Balance Sheet, resulting in the recognition of $225.3 million of right-of-use ("ROU") assets, $239.3 million of operating lease liabilities, a $0.1 million increase to opening retained earnings, as well as $14.1 million primarily
related to the derecognition of net straight-line lease liabilities. The retained earnings adjustment was due to the cumulative impact of adopting ASC 842, primarily resulting from the derecognition of embedded lease derivatives, the difference between deferred rent balances and the net of ROU assets and lease liabilities and the deferred tax impact.
The impact of the adoption of ASC 842 to the Company’s Condensed Consolidated Statement of Operations for the three months ended March 31, 2019 was not material. The Company’s net cash provided by operating activities for the three months ended March 31, 2019 did not change due to the adoption of ASC 842.
Practical Expedients
The Company elected the following practical expedients:
• | The package of transitional practical expedients, consistently applied to all leases, that permits the Company to not reassess whether any expired or existing contracts are or contain leases, the historical lease classification for any expired or existing leases and initial direct costs for any expired or existing leases; and |
• | The practical expedient that permits the Company to make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all leases entered into or modified after the January 1, 2019 adoption date. |
Accounting Policy
In determining whether a contract contains a lease, the Company assesses whether the arrangement meets all three of the following criteria: 1) there is an identified asset; 2) the Company has the right to obtain substantially all the economic benefits from use of the identified asset; and 3) the Company has the right to direct the use of the identified asset. This involves evaluating whether the Company has the right to operate the asset or to direct others to operate the asset in a manner that it determines without the supplier having the right to change those operating instructions, as well as evaluating the Company’s involvement in the design of the asset.
The Company capitalizes operating lease obligations with terms in excess of twelve months as ROU assets with corresponding lease liabilities on its balance sheet. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Additionally, the ROU asset is adjusted for lease incentives, prepaid lease payments and initial direct costs. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, such as real estate taxes, insurance, common area maintenance and other operating costs. Lease and non-lease components are generally accounted for as a single component to the extent that the costs are fixed per the arrangement. The Company has applied this accounting policy to all asset classes. To the extent that the non-lease components are not fixed per the arrangement, these costs are treated as variable lease costs and expensed as incurred.
Certain of the Company’s lease agreements include rental payments that adjust periodically based on an index or rate, generally the applicable Consumer Price Index (“CPI”). The operating lease liability is measured using the prevailing index or rate at the measurement date (i.e., the commencement date); however, the most recent CPI in effect as of January 1, 2019 was used to effectuate the adoption of ASC 842. Incremental payments due to changes to the index- and rate-based lease payments are treated as variable lease costs and expensed as incurred.
For purposes of calculating operating lease liabilities, the lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The primary factors used to estimate whether an option to extend a lease term will be exercised or not generally include the extent of the Company’s capital investment, employee recruitment potential and operational cost and flexibility.
In determining the present value of lease payments, the Company typically uses incremental borrowing rates based on information available at the lease commencement date. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company’s incremental borrowing rate is estimated using a synthetic credit rating model and forward currency exchange rates, as applicable.
Payments on leases with an initial term of 12 months or less are recognized in the accompanying Condensed Consolidated Statements of Operations on a straight-line basis over the lease term.
The ROU asset is evaluated for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. A loss is recognized when the ROU asset is impaired in connection with the impairment of a site’s assets due to economic or other factors. When the ROU asset is impaired, it is typically amortized on a straight-line basis over the shorter of the remaining lease term or its useful life, and the related operating lease would no longer qualify for straight-line treatment of total lease expense.
Leases
The Company primarily leases facilities for its corporate headquarters, many of its customer engagement centers, several regional support offices and data centers. These leases are classified as operating leases and are included in “Operating lease right-of-use assets,” “Operating lease liabilities” and “Long-term operating lease liabilities” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2019. The Company has no finance leases.
Lease terms for the Company’s leases are generally three to 20 years with renewal options typically ranging from one month to five years and largely require the Company to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs in addition to a base or fixed rent. The Company's operating leases have remaining lease terms of one month to 13 years as of March 31, 2019.
The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases certain of its facilities that have been abandoned before the expiration of the lease term. Operating lease costs on abandoned facilities is reduced by sublease income and included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations. The Company’s sublease arrangements do not contain renewal options or restrictive covenants. The Company’s subleases have varying remaining lease terms extending through 2025, and future contractual sublease income is expected to be $10.6 million over the remaining lease terms.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense were as follows (in thousands):
|
| Statement of Operations Location |
| Three Months Ended March 31, 2019 |
| |
Operating lease cost |
| Direct salaries and related costs |
| $ | 75 |
|
Operating lease cost |
| General and administrative |
|
| 14,807 |
|
Short-term lease cost |
| General and administrative |
|
| 423 |
|
Variable lease cost |
| Direct salaries and related costs |
|
| 2 |
|
Variable lease cost |
| General and administrative |
|
| 1,037 |
|
Sublease income |
| General and administrative |
|
| (428 | ) |
|
|
|
| $ | 15,916 |
|
Supplemental cash flow information related to leases was as follows (in thousands):
| Three Months Ended March 31, 2019 |
| |
Cash paid for amounts included in the measurement of operating lease liabilities - operating cash flows | $ | 13,146 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
| 6,581 |
|
Additional supplemental information related to leases was as follows:
March 31, 2019 | |||
Weighted average remaining lease term of operating leases | 5.6 years | ||
Weighted average discount rate of operating leases | 3.8 | % |
Maturities of operating lease liabilities as of March 31, 2019 were as follows (in thousands):
|
| Amount |
| |
2019 (remaining nine months) |
| $ | 39,922 |
|
2020 |
|
| 54,912 |
|
2021 |
|
| 48,369 |
|
2022 |
|
| 37,324 |
|
2023 |
|
| 24,170 |
|
2024 and thereafter |
|
| 54,043 |
|
Total future lease payments |
|
| 258,740 |
|
Less: Imputed interest |
|
| 27,025 |
|
Present value of future lease payments |
|
| 231,715 |
|
Less: Operating lease liabilities |
|
| 45,636 |
|
Long-term operating lease liabilities |
| $ | 186,079 |
|
As of March 31, 2019, the Company had additional operating leases for customer engagement centers that had not yet commenced with future lease payments of $2.0 million. These operating leases will commence during the second quarter of 2019 with lease terms between 2 and 5 years.
Disclosures related to periods prior to adoption of ASC 842
Rental expense under operating leases, primarily included in “General and administrative” in the accompanying Condensed Consolidated Statement of Operations, for the three months ended March 31, 2018 was $16.0 million.
The following is a schedule of future minimum rental payments required under operating leases that had noncancelable lease terms as of December 31, 2018 under ASC 840 (in thousands):
| Amount |
| |
2019 | $ | 53,071 |
|
2020 |
| 48,770 |
|
2021 |
| 43,324 |
|
2022 |
| 34,063 |
|
2023 |
| 22,583 |
|
2024 and thereafter |
| 51,456 |
|
| $ | 253,267 |
|
Note 3.4. Costs Associated with Exit or Disposal Activities
During the first quarter of 2019, the Company initiated a restructuring plan to simplify and refine its operating model in the U.S. (the “Americas 2019 Exit Plan”), in part to improve agent attrition and absenteeism. The Americas 2019 Exit Plan includes, but is not limited to, closing customer contact management centers, consolidating leased space in various locations in the U.S. and management reorganization. The Company anticipates finalizing these actions by December 31, 2019.
During the second quarter of 2018, the Company initiated a restructuring plan to streamline excess capacity through targeted seat reductions (the “Americas 2018 Exit Plan”) in anon-going effort to manage and optimize capacity utilization. The Americas 2018 Exit Plan includes, but is not limited to,utilization, which included closing customer contact management centers and consolidating leased space in various locations in the U.S. and Canada.Canada (the “Americas 2018 Exit Plan”). The Company anticipates finalizingfinalized the remainder of the site closures under the Americas 2018 Exit Plan byas of December 2018.2018, resulting in a reduction of 5,000 seats.
The Company’s actions willunder both the Americas 2018 and 2019 Exit Plans are anticipated to result in a reduction in seats as well as anticipated general and administrative cost savings, includingand lower depreciation expense, resulting from the 2018 site closures.expense.
The cumulative costs expected and incurred as a result ofto date related to cash and non-cash expenditures resulting from the Americas 2018 Exit Plan and the Americas 2019 Exit Plan are outlined below as of June 30, 2018March 31, 2019 (in thousands):
Costs Expected To Be Incurred | Cumulative Costs Incurred To Date | Expected Remaining Costs | ||||||||||
Lease obligations and facility exit costs(1) | $ | 6,692 | $ | 3,028 | $ | 3,664 | ||||||
Severance and related costs(2) | 3,701 | 402 | 3,299 | |||||||||
Severance and related costs(1) | 488 | 219 | 269 | |||||||||
Non-cash impairment charges | 5,175 | 5,175 | - | |||||||||
|
|
|
|
|
| |||||||
$ | 16,056 | $ | 8,824 | $ | 7,232 | |||||||
|
|
|
|
|
|
| Americas 2018 Exit Plan |
|
| Americas 2019 Exit Plan |
| ||||||||||
| Cumulative Costs Incurred To Date |
|
| Costs Expected To Be Incurred |
|
| Cumulative Costs Incurred To Date |
|
| Expected Remaining Costs |
| ||||
Lease obligations and facility exit costs (1) | $ | 7,073 |
|
| $ | 85 |
|
| $ | — |
|
| $ | 85 |
|
Severance and related costs (2) |
| 3,429 |
|
|
| 213 |
|
|
| 7 |
|
|
| 206 |
|
Severance and related costs (1) |
| 1,054 |
|
|
| 1,744 |
|
|
| 1,090 |
|
|
| 654 |
|
Non-cash impairment charges |
| 5,875 |
|
|
| 1,582 |
|
|
| 1,582 |
|
|
| — |
|
Other non-cash charges |
| — |
|
|
| 80 |
|
|
| — |
|
|
| 80 |
|
| $ | 17,431 |
|
| $ | 3,704 |
|
| $ | 2,679 |
|
| $ | 1,025 |
|
(1) Relates to Included in “General and administrative” costs.
(2) Relates to “Direct Included in “Direct salaries and related costs.”
19
The expected remaining severance charges are anticipatedCompany has paid a total of $10.0 million in cash through March 31, 2019, of which $9.9 million related to be incurred during the third quarter of 2018. The expected remaining lease obligationsAmericas 2018 Exit Plan and facility exit costs are anticipated$0.1 million related to be incurred primarily during the third quarter of 2018 with the balance during the fourth quarter of 2018.Americas 2019 Exit Plan.
The following table summarizes the accrued liability and related charges for the three and six months ended June 30, 2018March 31, 2019 (none in 2017)2018) (in thousands):
| Americas 2018 Exit Plan |
|
| Americas 2019 Exit Plan |
| ||||||||||
| Lease Obligations and Facility Exit Costs |
|
| Severance and Related Costs |
|
| Total |
|
| Severance and Related Costs |
| ||||
Balance at the beginning of the period | $ | 1,769 |
|
| $ | 817 |
|
| $ | 2,586 |
|
| $ | — |
|
Charges included in "Direct salaries and related costs" |
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
Charges (reversals) included in "General and administrative" |
| (4 | ) |
|
| 19 |
|
|
| 15 |
|
|
| 1,090 |
|
Cash payments |
| (265 | ) |
|
| (341 | ) |
|
| (606 | ) |
|
| (57 | ) |
Balance sheet reclassifications (1) |
| (1,338 | ) |
|
| — |
|
|
| (1,338 | ) |
|
| — |
|
Balance at the end of the period | $ | 162 |
|
| $ | 495 |
|
| $ | 657 |
|
| $ | 1,040 |
|
Lease Obligations and Facility Exit Costs | Severance and Related Costs | Total | ||||||||||
Balance at the beginning of the period | $ | - | $ | - | $ | - | ||||||
Charges included in “Direct salaries and related costs” | - | 402 | 402 | |||||||||
Charges included in “General and administrative” | 3,028 | 219 | 3,247 | |||||||||
Cash payments | (429 | ) | (131 | ) | (560 | ) | ||||||
Balance sheet reclassifications(1) | 216 | - | 216 | |||||||||
|
|
|
|
|
| |||||||
Balance at the end of the period | $ | 2,815 | $ | 490 | $ | 3,305 | ||||||
|
|
|
|
|
|
(1) Consists of the reclassification of deferred rent balances for locations subject to closure tofrom the restructuring liability.liability to “Operating lease liabilities” and “Long-term operating lease liabilities” upon adoption of ASC 842 on January 1, 2019.
Restructuring Liability Classification
The following table summarizes the Company’s short-term and long-term accrued liabilities associated with the Americas 2018 Exit Plan as of June 30, 2018 (none in 2017) (in thousands):
Americas 2018 Exit Plan | ||||
Short-term accrued restructuring liability(1) | $ | 2,726 | ||
Short-term accrued restructuring liability(2) | 490 | |||
Long-term accrued restructuring liability(3) | 89 | |||
|
| |||
Ending accrual at June 30, 2018 | $ | 3,305 | ||
|
|
| Americas 2018 Exit Plan |
|
| Americas 2019 Exit Plan |
| ||||||
| March 31, 2019 |
|
| December 31, 2018 |
|
| March 31, 2019 |
| |||
Lease obligations and facility exit costs: |
|
|
|
|
|
|
|
|
|
|
|
Included in "Accounts payable" | $ | — |
|
| $ | 100 |
|
| $ | — |
|
Included in "Other accrued expenses and current liabilities" |
| 93 |
|
|
| 952 |
|
|
| — |
|
Included in "Other long-term liabilities" |
| 69 |
|
|
| 717 |
|
|
| — |
|
|
| 162 |
|
|
| 1,769 |
|
|
| — |
|
Severance and related costs: |
|
|
|
|
|
|
|
|
|
|
|
Included in "Accrued employee compensation and benefits" |
| 489 |
|
|
| 793 |
|
|
| 1,038 |
|
Included in "Other accrued expenses and current liabilities" |
| 6 |
|
|
| 24 |
|
|
| 2 |
|
|
| 495 |
|
|
| 817 |
|
|
| 1,040 |
|
| $ | 657 |
|
| $ | 2,586 |
|
| $ | 1,040 |
|
(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 variable costs associated with future rent obligations to be paid through the remainder of the lease terms, the last of which ends in September 2019.
20
Note 4.5. Fair Value
ASC 820,Fair Value Measurements and Disclosures (“(“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additionally, ASC 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for whichhow 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 |
• | Level 2— Quoted prices for |
• | 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:
|
|
|
|
|
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. ASC820-10-20 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
ASC 825Financial Instruments (“ASC 825”) permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to use the fair value option permitted under ASC 825 for any of its financial assets and financial liabilities that are not already recorded at fair value.
Determination of Fair Value—The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency exchange rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
21
The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value on a recurring basis, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.classified, if applicable.
Cash, Short-Term and Other Investments and Accounts Payable— The carrying values for cash, short-term and other investments and accounts payable approximate their fair values.
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.
Foreign Currency Forward Contracts and Options—The Company enters into foreign currency forward contracts and options over the counter and values such contracts, including premiums paid on options, at fair value 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—ThePrior to the adoption of ASC 842, the Company useshad embedded derivatives within certain hybrid lease agreements that were bifurcated from the host contract and valued such contracts at fair value using 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 includeincluded 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 arewere adjusted for credit risk. These items arewere classified in Level 3 of the fair value hierarchy. See Note 6,3, Leases, and Note 7, 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 7,8, Investments Held in Rabbi Trust, and Note 15, Stock-Based Compensation.Trust.
Contingent Consideration— The Company uses significant unobservable inputs to determine the fair value of contingent consideration, which is classified in Level 3 of the fair value hierarchy. The contingent consideration recorded related to the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”) and liabilities assumed as part of the Clear Link Holdings, LLC (“Clearlink”) acquisition was recognized at fair value using a discounted cash flow methodology and a discount rate of approximately 14.0% and 10.0%, respectively.
The Company’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 June 30, 2018 (in thousands):
Fair Value Measurements Using: | ||||||||||||||||
Balance at | Quoted Prices in Active Markets For Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
June 30, 2018 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Foreign currency forward and option contracts(1) | $ | 1,354 | $ | - | $ | 1,354 | $ | - | ||||||||
Equity investments held in rabbi trust for the Deferred Compensation Plan(2) | 8,557 | 8,557 | - | - | ||||||||||||
Debt investments held in rabbi trust for the Deferred Compensation Plan(2) | 3,307 | 3,307 | - | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 13,218 | $ | 11,864 | $ | 1,354 | $ | - | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Foreign currency forward and option contracts(1) | $ | 1,903 | $ | - | $ | 1,903 | $ | - | ||||||||
Embedded derivatives(1) | 598 | - | - | 598 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 2,501 | $ | - | $ | 1,903 | $ | 598 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
| Balance at |
|
| Quoted Prices in Active Markets For Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||
| March 31, 2019 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1) | $ | 1,320 |
|
| $ | — |
|
| $ | 1,320 |
|
| $ | — |
|
Equity investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 8,580 |
|
|
| 8,580 |
|
|
| — |
|
|
| — |
|
Debt investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 4,495 |
|
|
| 4,495 |
|
|
| — |
|
|
| — |
|
| $ | 14,395 |
|
| $ | 13,075 |
|
| $ | 1,320 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1) | $ | 938 |
|
| $ | — |
|
| $ | 938 |
|
| $ | — |
|
| $ | 938 |
|
| $ | — |
|
| $ | 938 |
|
| $ | — |
|
|
|
|
|
| Fair Value Measurements Using: |
| |||||||||
| Balance at |
|
| Quoted Prices in Active Markets For Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||
| December 31, 2018 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1) | $ | 1,068 |
|
| $ | — |
|
| $ | 1,068 |
|
| $ | — |
|
Embedded derivatives (1) |
| 10 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
Equity investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 8,075 |
|
|
| 8,075 |
|
|
| — |
|
|
| — |
|
Debt investments held in rabbi trust for the Deferred Compensation Plan (2) |
| 3,367 |
|
|
| 3,367 |
|
|
| — |
|
|
| — |
|
| $ | 12,520 |
|
| $ | 11,442 |
|
| $ | 1,068 |
|
| $ | 10 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1) | $ | 2,895 |
|
| $ | — |
|
| $ | 2,895 |
|
| $ | — |
|
Embedded derivatives (1) |
| 369 |
|
|
| — |
|
|
| — |
|
|
| 369 |
|
| $ | 3,264 |
|
| $ | — |
|
| $ | 2,895 |
|
| $ | 369 |
|
22
The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of December 31, 2017 (in thousands):
Fair Value Measurements Using: | ||||||||||||||||
Balance at | Quoted Prices in Active Markets For Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
December 31, 2017 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Foreign currency forward and option contracts(1) | $ | 3,848 | $ | - | $ | 3,848 | $ | - | ||||||||
Embedded derivatives(1) | 52 | - | - | 52 | ||||||||||||
Equity investments held in rabbi trust for the Deferred Compensation Plan(2) | 8,094 | 8,094 | - | - | ||||||||||||
Debt investments held in rabbi trust for the Deferred Compensation Plan(2) | 3,533 | 3,533 | - | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 15,527 | $ | 11,627 | $ | 3,848 | $ | 52 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Foreign currency forward and option contracts(1) | $ | 256 | $ | - | $ | 256 | $ | - | ||||||||
Embedded derivatives(1) | 579 | - | - | 579 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 835 | $ | - | $ | 256 | $ | 579 | |||||||||
|
|
|
|
|
|
|
|
(1) See Note 6,7, 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 7,8, Investments Held in Rabbi Trust.
Reconciliations of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy
Embedded Derivatives in Lease Agreements
A rollforward of the net asset (liability) activity in the Company’s fair value of the embedded derivatives is as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, |
| ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 |
|
| 2018 |
| |||||||||||||||
Balance at the beginning of the period | $ | (409 | ) | $ | (375 | ) | $ | (527 | ) | $ | (555 | ) | $ | (359 | ) |
| $ | (527 | ) | ||||
Gains (losses) recognized in “Other income (expense), net” | (252 | ) | 176 | (165 | ) | 315 | |||||||||||||||||
Derecognition of embedded derivatives (1) |
| 359 |
|
|
| — |
| ||||||||||||||||
Gains (losses) recognized in "Other income (expense), net" |
| — |
|
|
| 87 |
| ||||||||||||||||
Settlements | 38 | 25 | 80 | 70 |
| — |
|
|
| 42 |
| ||||||||||||
Effect of foreign currency | 25 | 3 | 14 | (1 | ) |
| — |
|
|
| (11 | ) | |||||||||||
|
|
|
| ||||||||||||||||||||
Balance at the end of the period | $ | (598 | ) | $ | (171 | ) | $ | (598 | ) | $ | (171 | ) | $ | — |
|
| $ | (409 | ) | ||||
|
|
|
| ||||||||||||||||||||
Change in unrealized gains (losses) included in “Other income (expense), net” related to embedded derivatives held at the end of the period | $ | (253 | ) | $ | 48 | $ | (171 | ) | $ | 183 | |||||||||||||
|
|
|
| ||||||||||||||||||||
Change in unrealized gains (losses) included in "Other income (expense), net" related to embedded derivatives held at the end of the period | $ | — |
|
| $ | 87 |
|
(1) Decrecognition upon adoption of ASC 842 on January 1, 2019. See Note 3, Leases, for more information.
23
Contingent Consideration
A rollforward of the activity in the Company’s fair value of the contingent consideration (liability) is as follows (none in 2018) (in thousands):Non-Recurring Fair Value
Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 | |||||||
Balance at the beginning of the period | $ | (5,633 | ) | $ | (6,100 | ) | ||
Imputed interest | (34 | ) | (68 | ) | ||||
Fair value gain (loss) adjustments(1) | 268 | 701 | ||||||
Settlements | 4,402 | 4,528 | ||||||
Effect of foreign currency | (130 | ) | (188 | ) | ||||
|
|
|
| |||||
Balance at the end of the period | $ | (1,127 | ) | $ | (1,127 | ) | ||
|
|
|
| |||||
Change in unrealized gains (losses) included in “General and administrative” related to contingent consideration outstanding at the end of the period | $ | 268 | $ | 268 | ||||
|
|
|
|
(1) Included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.
The Company recorded a fair value gain of $0.3 million and $0.7 million in “General and administrative” during the three and six months ended June 30, 2017, respectively, related to the Clearlink contingent consideration. All outstanding Clearlink contingent consideration liabilities remaining as of June 30, 2017 were paid prior to December 31, 2017.
The Company paid $4.4 million in May 2017 to settle the outstanding Qelp contingent consideration obligation.
The Company accreted interest expense each period using the effective interest method until the contingent consideration reached the estimated future value. Interest expense related to the contingent consideration was included in “Interest (expense)” in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017.
Non-Recurring Fair Value
Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, including goodwill, other intangible assets, other long-lived assets, ROU assets and equity method investments. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at June 30, 2018March 31, 2019 and December 31, 2017.2018.
The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities) subject to the requirements of ASC 820 (in thousands):
Total Impairment (Loss) | |||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, |
| ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 |
|
| 2018 |
| |||||||||||||||
Americas: |
|
|
|
|
|
|
| ||||||||||||||||
Property and equipment, net | $ | (5,175) | $ | (4,189) | $ | (8,701) | $ | (4,391) | $ | (343 | ) |
| $ | (3,526 | ) | ||||||||
Operating lease right-of-use assets |
| (1,239 | ) |
|
| — |
| ||||||||||||||||
|
|
|
| $ | (1,582 | ) |
| $ | (3,526 | ) |
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 impairment charges of $5.2$1.6 million and $8.7$3.5 million during the three months ended March 31, 2019 and 2018, respectively, related to the exit of leased facilities as well as leasehold improvements, equipment, furniture and fixtures which were not recoverable during the three and six months ended June 30, 2018, respectively. See Note 3, Costs Associated with Exit or Disposal Activities, for further information.
In connection with the closure of an under-utilized customer contact management center in the U.S., the Company recorded an impairment charge of $4.2 million during the three and six months ended June 30, 2017 related to leasehold improvements which were not recoverable and equipment, furniture and fixtures that could not be redeployed to other locations.
24
The Company recorded an impairment charge of $0.2 million related to the write-down of a vacant and unused parcel of land in the U.S. to its estimated fair value during the six months ended June 30, 2017.
Note 5.6. Goodwill and Intangible Assets
Intangible Assets
The following table presents the Company’s purchased intangible assets as of June 30, 2018March 31, 2019 (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 | $ | 169,749 | $ | (100,859 | ) | $ | 68,890 | 10 | $ | 190,343 |
|
| $ | (110,232 | ) |
| $ | 80,111 |
|
|
| 10 |
| ||||||||
Trade names and trademarks | 14,135 | (9,651 | ) | 4,484 | 7 |
| 19,313 |
|
|
| (11,175 | ) |
|
| 8,138 |
|
|
| 8 |
| |||||||||||
Non-compete agreements | 1,820 | (1,356 | ) | 464 | 3 |
| 2,760 |
|
|
| (1,950 | ) |
|
| 810 |
|
|
| 3 |
| |||||||||||
Content library | 526 | (526 | ) | - | 2 |
| 506 |
|
|
| (506 | ) |
|
| — |
|
|
| 2 |
| |||||||||||
Proprietary software | 1,040 | (655 | ) | 385 | 4 |
| 1,040 |
|
|
| (760 | ) |
|
| 280 |
|
|
| 4 |
| |||||||||||
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domain names | 65,606 | - | 65,606 | N/A |
| 80,938 |
|
|
| — |
|
|
| 80,938 |
|
| N/A |
| |||||||||||||
|
|
| $ | 294,900 |
|
| $ | (124,623 | ) |
| $ | 170,277 |
|
|
| 5 |
| ||||||||||||||
$ | 252,876 | $ | (113,047) | $ | 139,829 | 5 | |||||||||||||||||||||||||
|
|
|
The following table presents the Company’s purchased intangible assets as of December 31, 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 | $ | 170,853 | $ | (95,175 | ) | $ | 75,678 | 10 | $ | 189,697 |
|
| $ | (106,502 | ) |
| $ | 83,195 |
|
|
| 10 |
| ||||||||
Trade names and trademarks | 14,138 | (8,797 | ) | 5,341 | 7 |
| 19,236 |
|
|
| (10,594 | ) |
|
| 8,642 |
|
|
| 8 |
| |||||||||||
Non-compete agreements | 1,820 | (1,052 | ) | 768 | 3 |
| 2,746 |
|
|
| (1,724 | ) |
|
| 1,022 |
|
|
| 3 |
| |||||||||||
Content library | 542 | (542 | ) | - | 2 |
| 517 |
|
|
| (517 | ) |
|
| — |
|
|
| 2 |
| |||||||||||
Proprietary software | 1,040 | (585 | ) | 455 | 4 |
| 1,040 |
|
|
| (725 | ) |
|
| 315 |
|
|
| 4 |
| |||||||||||
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domain names | 58,035 | - | 58,035 | N/A |
| 80,857 |
|
|
| — |
|
|
| 80,857 |
|
| N/A |
| |||||||||||||
|
|
| $ | 294,093 |
|
| $ | (120,062 | ) |
| $ | 174,031 |
|
|
| 5 |
| ||||||||||||||
$ | 246,428 | $ | (106,151) | $ | 140,277 | 6 | |||||||||||||||||||||||||
|
|
|
The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to June 30, 2018March 31, 2019 is as follows (in thousands):
Years Ending December 31, | Amount |
|
| Amount |
| ||||
2018 (remaining six months) | 7,230 | ||||||||
2019 | 14,022 | ||||||||
2019 (remaining nine months) |
|
|
| 12,436 |
| ||||
2020 | 11,348 |
|
|
| 14,052 |
| |||
2021 | 6,799 |
|
|
| 9,468 |
| |||
2022 | 5,714 |
|
|
| 8,169 |
| |||
2023 | 4,882 |
|
|
| 7,325 |
| |||
2024 and thereafter | 24,228 | ||||||||
2024 |
|
|
| 7,080 |
| ||||
2025 and thereafter |
|
|
| 30,809 |
|
Goodwill
Changes in goodwill for the sixthree months ended June 30, 2018 consistMarch 31, 2019 consisted of the following (in thousands):
January 1, 2018 | Acquisition | Effect of Foreign Currency | June 30, 2018 | |||||||||||||
Americas | $ | 258,496 | $ | - | $ | (2,872 | ) | $ | 255,624 | |||||||
EMEA | 10,769 | - | (402 | ) | 10,367 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 269,265 | $ | - | $ | (3,274 | ) | $ | 265,991 | ||||||||
|
|
|
|
|
|
|
|
| January 1, 2019 |
|
| Acquisition- Related (1) |
|
| Effect of Foreign Currency |
|
| March 31, 2019 |
| ||||
Americas | $ | 255,436 |
|
| $ | 291 |
|
| $ | 953 |
|
| $ | 256,680 |
|
EMEA |
| 47,081 |
|
|
| (124 | ) |
|
| 283 |
|
|
| 47,240 |
|
| $ | 302,517 |
|
| $ | 167 |
|
| $ | 1,236 |
|
| $ | 303,920 |
|
25
Changes in goodwill for the year ended December 31, 2017 consist2018 consisted of the following (in thousands):
January 1, 2017 | Acquisition | Effect of Foreign Currency | December 31, 2017 | January 1, 2018 |
|
| Acquisition- Related (1) |
|
| Effect of Foreign Currency |
|
| December 31, 2018 |
| |||||||||||||||||
Americas | $ | 255,842 | $ | 390 | $ | 2,264 | $ | 258,496 | $ | 258,496 |
|
| $ | 2,175 |
|
| $ | (5,235 | ) |
| $ | 255,436 |
| ||||||||
EMEA | 9,562 | - | 1,207 | 10,769 |
| 10,769 |
|
|
| 36,361 |
|
|
| (49 | ) |
|
| 47,081 |
| ||||||||||||
|
|
|
| $ | 269,265 |
|
| $ | 38,536 |
|
| $ | (5,284 | ) |
| $ | 302,517 |
| |||||||||||||
$ | 265,404 | $ | 390 | $ | 3,471 | $ | 269,265 | ||||||||||||||||||||||||
|
|
|
|
(1) See Note 1, Overview and Basis of Presentation, for further information. The year ended December 31, 2018 includes the goodwill recorded upon acquisition, while the three months ended March 31, 2019 includes the impact of adjustments to acquired goodwill upon finalization of working capital adjustments.
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,Intangibles – Goodwill and Other, 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:
As of July 31, 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
Note Cash Flow Hedges – The Company has derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815,Derivatives and Hedging (“ASC 815”), consisting of Philippine Peso and Costa Rican Colon hedge the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction that is attributable to changes in exchange rates. The deferred gains (losses) and related taxes on the Company’s cash flow hedges recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) in the accompanying Condensed Consolidated Balance Sheets
Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts and 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. Embedded Derivatives – The Company enters into The Company had the following outstanding foreign currency forward contracts and options, and embedded derivatives (in thousands):
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 total net settlement amount as it relates to these positions are asset positions of 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):
The following table presents the effect of the Company’s derivative instruments included in the accompanying
Note 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):
The mutual funds held in rabbi trust were
Note 9. Borrowings On The 2019 Credit Agreement includes a $200 million alternate-currencysub-facility, a
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 2019 Credit Agreement matures on Borrowings under the 2019 Credit Agreement bear interest at the rates set forth in the 2019 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 2019 Credit Agreement. The 2019 Credit Agreement is guaranteed by all the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of thenon-voting and 65% of the voting capital stock of all the direct foreign subsidiaries of the Company and those of the guarantors. In The following table presents information related to our credit agreements (dollars in thousands):
(1)Excludes the amortization of deferred loan
In January 2018, the Company repaid $175.0 million of long-term debt outstanding under its 2015 Credit Agreement, primarily using funds repatriated from its foreign subsidiaries. Note 10. Accumulated Other Comprehensive Income (Loss) The
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):
(1) See Note (2) See Note 14, Defined Benefit Pension Plan and Postretirement Benefits, for further information. (3) No related tax (provision) benefit. As discussed in Note 11, Income Taxes, for periods prior to December 31, 2017, any remaining outside basis differences associated with the Company’s investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments has been provided. Note 11. Income Taxes The Company’s effective tax rates were
The 2017 Tax Reform Act made significant changes to the Internal Revenue Code, including, but not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a participation exemption regime, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company estimated its provision for income taxes in accordance with the 2017 Tax Reform Act and guidance available upon enactment, and as a result
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 Prior to December 31, 2017, no additional income taxes have been provided for any remaining outside basis differences inherent in the Company’s investments in its foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining outside basis difference in these entities is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.
The
Note 12. Earnings Per Share Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust using the treasury stock method. The numbers of shares used in the earnings per share computation
On August 18, 2011, the Company’s Board of Directors (the “Board”) authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). On March 16, 2016, the Board authorized an increase of 5.0 million shares to the 2011 Share Repurchase Program for a total of 10.0 million shares. A total of 5.3 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date. There were no shares repurchased under the Company’s Note 13. Commitments and Loss Contingency Purchase Commitments
Loss Contingency Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with ASC 450,Contingencies(“ASC 450”). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. The Company received a state audit assessment and is currently rebutting the position. The Company has determined that the likelihood of a liability is reasonably possible and developed a range of possible loss up to The Company, from time to time, is involved in legal actions arising in the ordinary course of business. With respect to ultimate outcome will not have a material adverse effect on the Company’s financial position, Note 14. Defined Benefit Pension Plan and Postretirement Benefits Defined Benefit Pension Plans The following table provides information about the net periodic benefit cost for the Company’s pension plans (in thousands):
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
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):
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):
(1)Unrealized gains (losses) are due to changes in discount rates related to the postretirement obligation. Note 15. Stock-Based Compensation The Company’s stock-based compensation plans include the 2011 Equity Incentive Plan (the “2011 Plan”) for employees and certain non-employees, theNon-Employee Director Fee Plan for non-employee directors and the Deferred Compensation The following table summarizes the stock-based compensation expense (primarily in the Americas) and income tax benefits related to the stock-based compensation, both plan and non-plan related (in thousands):
(1) Included in (2) Included in
Note 16. Segments and Geographic Information The Company operates within two regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers. The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer engagement solutions (with an emphasis on inbound technical support, digital support and demand generation, and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer engagement solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Company’s services in these locations to support their customer engagement needs.
Information about the Company’s reportable segments is as follows (in thousands):
(1) Other items (including corporate and other costs, other income and expense, and income taxes) are included for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the periods shown. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company’s reportable segments are evaluated regularly by its chief operating decision maker to decide how to allocate resources and assess performance. The chief operating decision maker evaluates performance based upon reportable segment revenue and income (loss) from operations. Because assets by segment are not reported to or used by the Company’s chief operating decision maker to allocate resources, or to assess performance, total assets by segment are not disclosed.
The following table represents a disaggregation of revenue from contracts with customers by geographic location
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. Note 17. Other Income (Expense) Other income (expense), net consists of the following (in thousands):
Note 18. Related Party Transactions In January 2008, the Company entered into a lease for a customer engagement center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and former Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. The Company paid $0.1 million to the landlord during both the three months ended During the three
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors 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 We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, Basis for Review Results This interim financial information is the responsibility of the We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. /s/ Deloitte & Touche LLP Tampa, Florida
May 7,
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the Sykes Enterprises, Incorporated (“SYKES,” “our,” “we” or “us”) Annual Report on Form10-K for the year ended December 31, 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 Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the impact of economic recessions in the U.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (iv) the timing of significant orders for our products and services, (v) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (vi) changes in applicable accounting principles or interpretations of such principles, (vii) difficulties or delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing and other objectives, (ix) construction delays of new or expansion of existing customer engagement centers, (x) delays in our ability to develop new products and services and market acceptance of new products and services, (xi) rapid technological change, (xii) loss or addition of significant clients, (xiii) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel, (xv) our ability to continue the growth of our support service revenues through additional technical and customer engagement centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on the demand for outsourcing, (xxii) risk of interruption of technical and customer engagement center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with acquisitions not being realized, or not being realized within the anticipated time period, (xxvii) risks related to the integration of the acquisitions and the impairment of any related goodwill, and (xxviii) other risk factors that are identified in our most recent Annual Report on 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 differentiated full lifecycle customer engagement solutions and services primarily to Global 2000 companies and their end customers,
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 Recent Developments Exit Plans Americas 2019 Exit Plan During the first quarter of 2019, we initiated a restructuring plan to simplify and refine our operating model in the U.S. (the “Americas 2019 Exit Plan”), in part to improve agent attrition and absenteeism. The Americas 2019 Exit Plan includes, but is not limited to, closing customer contact management centers, consolidating leased space in various locations in the U.S. and management reorganization. We expect to finalize the actions under the Americas 2019 Exit Plan by December 2019. Annualized savings of $6.2 million are expected as a result of these actions, primarily related to reduced general and administrative costs and lower depreciation. Americas 2018 Exit Plan During the second quarter of 2018, we initiated a restructuring plan to
See Note U.S. 2017 Tax Reform Act
On July 9, 2018, we completed the acquisition of WhistleOut Pty Ltd and WhistleOut Inc. (together, “WhistleOut”). WhistleOut is a consumer comparison platform focused on mobile, broadband and pay TV services, principally
Results of Operations The following table sets forth, for the periods indicated, the amounts presented in the accompanying Condensed Consolidated Statements of Operations as well as the change between the respective periods:
Three Months Ended Revenues
Consolidated revenues The The increase in EMEA’s revenues was due to new clients of $6.5 million and higher volumes from existing clients of
On a consolidated basis, we had for demand. The capacity utilization rate on a combined basis was
On a segment basis, Direct Salaries and Related Costs
The The The General and Administrative
The increase of The increase in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to higher The increase in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to higher The decrease of $1.4 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to lower
Depreciation, Amortization and Impairment of Long-Lived Assets
The The See Note Other Income (Expense)
Interest income and interest (expense) remained
Income Taxes
The
Client Concentration Our top ten clients accounted for approximately 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):
We have multiple distinct contracts with AT&T spread across multiple lines of businesses, which expire at varying dates between 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):
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):
Business Outlook For the three months ended
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