SYKES ENTERPRISES INC, 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 6, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
SYKE 
 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
 
Entity Central Index Key
0001010612 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
42,898,831 
 
Entity Public Float
 
 
$ 1,386,511,134 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 343,734 
$ 266,675 
Receivables, net
341,958 
318,558 
Prepaid expenses
22,132 
21,973 
Other current assets
19,743 
16,030 
Total current assets
727,567 
623,236 
Property and equipment, net
160,790 
156,214 
Goodwill, net
269,265 
265,404 
Intangibles, net
140,277 
153,055 
Deferred charges and other assets
29,193 
38,494 
Total assets
1,327,092 
1,236,403 
Current liabilities:
 
 
Accounts payable
32,133 
29,163 
Accrued employee compensation and benefits
102,899 
92,552 
Income taxes payable
2,606 
4,487 
Deferred revenue
34,717 
38,736 
Other accrued expenses and current liabilities
30,888 
37,919 
Total current liabilities
203,243 
202,857 
Deferred grants
3,233 
3,761 
Long-term debt
275,000 
267,000 
Long-term income tax liabilities
27,098 
19,326 
Other long-term liabilities
22,039 
18,937 
Total liabilities
530,613 
511,881 
Commitments and loss contingency (Note 22)
   
   
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; 42,899 and 42,895 shares issued, respectively
429 
429 
Additional paid-in capital
282,385 
281,357 
Retained earnings
546,843 
518,611 
Accumulated other comprehensive income (loss)
(31,104)
(67,027)
Treasury stock at cost: 117 and 362 shares, respectively
(2,074)
(8,848)
Total shareholders' equity
796,479 
724,522 
Total liabilities and shareholders' equity
$ 1,327,092 
$ 1,236,403 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
42,899,000 
42,895,000 
Treasury stock, shares
117,000 
362,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenues
$ 1,586,008 
$ 1,460,037 
$ 1,286,340 
Operating expenses:
 
 
 
Direct salaries and related costs
1,039,790 
947,677 
836,516 
General and administrative
376,863 
351,722 
297,638 
Depreciation, net
55,972 
49,013 
43,752 
Amortization of intangibles
21,082 
19,377 
14,170 
Impairment of long-lived assets
5,410 
 
 
Total operating expenses
1,499,117 
1,367,789 
1,192,076 
Income from operations
86,891 
92,248 
94,264 
Other income (expense):
 
 
 
Interest income
696 
607 
668 
Interest (expense)
(7,689)
(5,570)
(2,465)
Other income (expense), net
1,409 
1,599 
(2,484)
Total other income (expense), net
(5,584)
(3,364)
(4,281)
Income before income taxes
81,307 
88,884 
89,983 
Income taxes
49,091 
26,494 
21,386 
Net income
$ 32,216 
$ 62,390 
$ 68,597 
Net income per common share:
 
 
 
Basic
$ 0.77 
$ 1.49 
$ 1.64 
Diluted
$ 0.76 
$ 1.48 
$ 1.62 
Weighted average common shares outstanding:
 
 
 
Basic
41,822 
41,847 
41,899 
Diluted
42,141 
42,239 
42,447 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 32,216 
$ 62,390 
$ 68,597 
Other comprehensive income (loss), net of taxes:
 
 
 
Foreign currency translation gain (loss), net of taxes
36,078 
(13,792)
(36,525)
Unrealized gain (loss) on net investment hedges, net of taxes
(5,220)
2,096 
3,894 
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
4,696 
(1,698)
(416)
Unrealized actuarial gain (loss) related to pension liability, net of taxes
449 
96 
21 
Unrealized gain (loss) on postretirement obligation, net of taxes
(80)
(67)
(75)
Other comprehensive income (loss), net of taxes
35,923 
(13,365)
(33,101)
Comprehensive income (loss)
$ 68,139 
$ 49,025 
$ 35,496 
Consolidated Statements of Changes in Shareholders' Equity (USD $)
Share data in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2015
$ 678,680,000 
$ 428,000 
$ 275,380,000 
$ 458,325,000 
$ (53,662,000)
$ (1,791,000)
Beginning Balance, shares at Dec. 31, 2015
 
42,785 
 
 
 
 
Stock-based compensation expense
10,779,000 
 
10,779,000 
 
 
 
Excess tax benefit from stock-based compensation
2,098,000 
 
2,098,000 
 
 
 
Issuance of common stock under equity award plans, net of forfeitures
 
4,000 
190,000 
 
 
(194,000)
Issuance of common stock under equity award plans, net of forfeitures, Share
 
425 
 
 
 
 
Shares repurchased for tax withholding on equity awards
(4,916,000)
(2,000)
(4,914,000)
 
 
 
Shares repurchased for tax withholding on equity awards, Share
 
(169)
 
 
 
 
Repurchase of common stock
(11,144,000)
 
 
 
 
(11,144,000)
Retirement of treasury stock
 
(1,000)
(2,176,000)
(2,104,000)
 
4,281,000 
Retirement of treasury stock, shares
 
(146)
 
 
 
 
Comprehensive income (loss)
49,025,000 
 
 
62,390,000 
(13,365,000)
 
Ending Balance at Dec. 31, 2016
724,522,000 
429,000 
281,357,000 
518,611,000 
(67,027,000)
(8,848,000)
Ending Balance, shares at Dec. 31, 2016
 
42,895 
 
 
 
 
Beginning Balance at Dec. 31, 2014
658,218,000 
433,000 
279,288,000 
400,514,000 
(20,561,000)
(1,456,000)
Beginning Balance, shares at Dec. 31, 2014
 
43,291 
 
 
 
 
Stock-based compensation expense
8,749,000 
 
8,749,000 
 
 
 
Excess tax benefit from stock-based compensation
422,000 
 
422,000 
 
 
 
Issuance of common stock under equity award plans, net of forfeitures
 
5,000 
166,000 
 
 
(171,000)
Issuance of common stock under equity award plans, net of forfeitures, Share
 
477 
 
 
 
 
Shares repurchased for tax withholding on equity awards
(3,326,000)
(1,000)
(3,325,000)
 
 
 
Shares repurchased for tax withholding on equity awards, Share
 
(129)
 
 
 
 
Repurchase of common stock
(20,879,000)
 
 
 
 
(20,879,000)
Retirement of treasury stock
 
(9,000)
(9,920,000)
(10,786,000)
 
20,715,000 
Retirement of treasury stock, shares
 
(854)
 
 
 
 
Comprehensive income (loss)
35,496,000 
 
 
68,597,000 
(33,101,000)
 
Ending Balance at Dec. 31, 2015
678,680,000 
428,000 
275,380,000 
458,325,000 
(53,662,000)
(1,791,000)
Ending Balance, shares at Dec. 31, 2015
 
42,785 
 
 
 
 
Beginning Balance at Dec. 31, 2016
724,522,000 
429,000 
281,357,000 
518,611,000 
(67,027,000)
(8,848,000)
Beginning Balance, shares at Dec. 31, 2016
 
42,895 
 
 
 
 
Cumulative effect of accounting change (Accounting Standards Update 2016-09 [Member])
79,000 
 
232,000 
(153,000)
 
 
Stock-based compensation expense
7,621,000 
 
7,621,000 
 
 
 
Issuance of common stock under equity award plans, net of forfeitures
 
4,000 
250,000 
 
 
(254,000)
Issuance of common stock under equity award plans, net of forfeitures, Share
 
386 
 
 
 
 
Shares repurchased for tax withholding on equity awards
(3,882,000)
(1,000)
(3,881,000)
 
 
 
Shares repurchased for tax withholding on equity awards, Share
 
(132)
 
 
 
 
Retirement of treasury stock
 
(3,000)
(3,194,000)
(3,831,000)
 
7,028,000 
Retirement of treasury stock, shares
 
(250)
 
 
 
 
Comprehensive income (loss)
68,139,000 
 
 
32,216,000 
35,923,000 
 
Ending Balance at Dec. 31, 2017
$ 796,479,000 
$ 429,000 
$ 282,385,000 
$ 546,843,000 
$ (31,104,000)
$ (2,074,000)
Ending Balance, shares at Dec. 31, 2017
 
42,899 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net income
$ 32,216 
$ 62,390 
$ 68,597 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
56,482 
49,600 
44,515 
Amortization of intangibles
21,082 
19,377 
14,170 
Amortization of deferred grants
(716)
(845)
(973)
Impairment losses
5,410 
 
 
Unrealized foreign currency transaction (gains) losses, net
(4,671)
(1,104)
318 
Stock-based compensation expense
7,621 
10,779 
8,749 
Deferred income tax provision (benefit)
7,908 
2,339 
2,515 
Net (gain) loss on disposal of property and equipment
474 
314 
381 
Write-downs (recoveries) of value added tax receivables
 
(148)
 
Unrealized (gains) losses and premiums on financial instruments, net
(98)
521 
1,028 
Foreign exchange (gain) loss on liquidation of foreign entities
(80)
(25)
720 
Amortization of deferred loan fees
269 
269 
403 
Net (gain) on insurance settlement
 
 
(919)
Proceeds from business interruption insurance settlement
 
 
156 
Imputed interest expense and fair value adjustments to contingent consideration
(529)
(1,496)
408 
Other
46 
(12)
172 
Changes in assets and liabilities, net of acquisitions:
 
 
 
Receivables
(10,154)
(32,905)
2,499 
Prepaid expenses
(221)
(3,587)
(3,040)
Other current assets
(1,433)
(3,398)
(6,972)
Deferred charges and other assets
(930)
(1,286)
1,951 
Accounts payable
7,286 
(2,938)
(124)
Income taxes receivable / payable
1,137 
4,999 
(5,666)
Accrued employee compensation and benefits
5,101 
15,699 
(1,481)
Other accrued expenses and current liabilities
(5,548)
5,090 
(1,564)
Deferred revenue
(5,866)
6,343 
(2,559)
Other long-term liabilities
20,003 
2,850 
(2,398)
Net cash provided by operating activities
134,789 
132,826 
120,886 
Cash flows from investing activities:
 
 
 
Capital expenditures
(63,344)
(78,342)
(49,662)
Cash paid for business acquisitions, net of cash acquired
(9,075)
(205,324)
(9,370)
Proceeds from property and equipment insurance settlement
 
 
1,490 
Net investment hedge settlement
(5,122)
10,339 
 
Purchase of intangible assets
(4,825)
(10)
 
Investment in equity method investees
(5,012)
 
 
Other
19 
488 
584 
Net cash (used for) investing activities
(87,359)
(272,849)
(56,958)
Cash flows from financing activities:
 
 
 
Payments of long-term debt
 
(19,000)
(10,000)
Proceeds from issuance of long-term debt
8,000 
216,000 
5,000 
Cash paid for repurchase of common stock
 
(11,144)
(20,879)
Proceeds from grants
163 
202 
670 
Payments of short-term debt
 
 
(323)
Shares repurchased for tax withholding on equity awards
(3,882)
(4,916)
(3,326)
Cash paid for loan fees related to long-term debt
 
 
(962)
Payments of contingent consideration related to acquisitions
(5,760)
(1,396)
 
Net cash provided by (used for) financing activities
(1,479)
179,746 
(29,820)
Effects of exchange rates on cash and cash equivalents
31,108 
(8,406)
(13,887)
Net increase in cash and cash equivalents
77,059 
31,317 
20,221 
Cash and cash equivalents - beginning
266,675 
235,358 
215,137 
Cash and cash equivalents - ending
343,734 
266,675 
235,358 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during period for interest
6,680 
4,003 
1,476 
Cash paid during period for income taxes
24,342 
18,764 
30,467 
Non-cash transactions:
 
 
 
Property and equipment additions in accounts payable
6,056 
10,692 
4,941 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
$ (80)
$ (67)
$ (75)
Overview and Summary of Significant Accounting Policies
Overview and Summary of Significant Accounting Policies

Note 1. Overview and Summary of Significant Accounting Policies

Business — Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a leading provider of multichannel demand generation and global customer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end customers primarily within the communications, financial services, technology, transportation and leisure, healthcare, retail and other industries. SYKES primarily provides customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. SYKES also provides various enterprise support services in the United States that include services for its clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services, which includes order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

U.S. 2017 Tax Reform Act

On December 20, 2017, 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 reduces the United States (“U.S.”) corporate income tax rate from 35% to 21%, effective in 2018. The 2017 Tax Reform Act moves from a worldwide business taxation approach to a participation exemption regime. The 2017 Tax Reform Act also imposes base-erosion prevention measures on non-U.S. earnings of U.S. entities, as well as a one-time mandatory deemed repatriation tax on accumulated non-U.S. earnings. The 2017 Tax Reform Act will have an impact on the consolidated financial results beginning with the fourth quarter of 2017, the period of enactment. This impact, along with the transitional taxes discussed in Note 20, Income Taxes, is reflected in the Other segment.

Acquisitions

On May 31, 2017, the Company completed the acquisition of certain assets of a Global 2000 telecommunications services provider, pursuant to a definitive Asset Purchase Agreement (the “Purchase Agreement”) entered into on April 24, 2017 (the “Telecommunications Asset acquisition”). The Company has reflected the Telecommunications Asset acquisition’s results in the Consolidated Financial Statements since May 31, 2017. See Note 2, Acquisitions, for additional information on the acquisition.

In April 2016, the Company completed the acquisition of Clear Link Holdings, LLC (“Clearlink”), pursuant to a definitive Agreement and Plan of Merger (the “Merger Agreement”), dated March 6, 2016. The Company has reflected Clearlink’s results in the Consolidated Financial Statements since April 1, 2016. See Note 2, Acquisitions, for additional information on the acquisition.

In July 2015, the Company completed the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”), pursuant to a definitive Share Sale and Purchase Agreement, dated July 2, 2015. The Company has reflected Qelp’s results in the Consolidated Financial Statements since July 2, 2015. See Note 2, Acquisitions, for additional information on the acquisition.

Principles of Consolidation — The 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) 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 consolidated financial statements. On January 12, 2018, the Company repaid $175.0 million of long-term debt outstanding under its 2015 Credit Agreement. See Note 28, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying consolidated financial statements.

Recognition of Revenue — The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). The Company primarily recognizes revenues from services as the services are performed, which is based on either a per minute, per call, per transaction or per time and material basis, under a fully executed contractual agreement and record reductions to revenues for contractual penalties and holdbacks for failure to meet specified minimum service levels and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of any future product or service or meeting other specified performance conditions. Product sales, accounted for within our fulfillment services, are recognized upon shipment to the customer and satisfaction of all obligations.

Cash and Cash Equivalents — Cash and cash equivalents consist of cash and highly liquid short-term investments. Cash in the amount of $343.7 million and $266.7 million at December 31, 2017 and 2016, respectively, was primarily held in non-interest bearing investments, which have original maturities of less than 90 days. Cash and cash equivalents of $335.1 million and $243.8 million at December 31, 2017 and 2016, respectively, were held in international operations. Most of these funds will not be subject to additional taxes if repatriated to the United States. There are circumstances where the Company may be unable to repatriate some of the cash and cash equivalents held by its international operations due to country restrictions.

Restricted Cash  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. Restricted cash is included in “Other current assets” and “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets.

Allowance for Doubtful Accounts — The Company maintains allowances for doubtful accounts on trade account receivables for estimated losses arising from the inability of its customers to make required payments. The Company’s estimate is based on qualitative and quantitative analyses, including credit risk measurement tools and methodologies using the publicly available credit and capital market information, a review of the current status of the Company’s trade accounts receivable and historical collection experience of the Company’s clients. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change if the financial condition of the Company’s customers were to deteriorate, resulting in a reduced ability to make payments.

Property and Equipment — Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Improvements to leased premises are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Cost and related accumulated depreciation on assets retired or disposed of are removed from the accounts and any resulting gains or losses are credited or charged to income. The Company capitalizes certain costs incurred, if any, to internally develop software upon the establishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility are expensed as incurred.

The carrying value of property and equipment to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. For purposes of recognition and measurement of an impairment loss, assets are grouped at the lowest levels for which there are identifiable cash flows (the “asset group”). An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets or independent third party offers. Occasionally, the Company redeploys property and equipment from under-utilized centers to other locations to improve capacity utilization if it is determined that the related undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the carrying amount of these assets. Other than what has been disclosed in Note 4, Fair Value, the Company determined that its property and equipment was not impaired as of December 31, 2017 and 2016.

 

Rent Expense — The Company has entered into operating lease agreements, some of which contain provisions for future rent increases, rent free periods, or periods in which rent payments are reduced. The total amount of the rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease in accordance with ASC 840, Leases.

Goodwill — The Company accounts for goodwill and other intangible assets under ASC 350, Intangibles — Goodwill and Other (“ASC 350”). The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. For goodwill and other intangible assets with indefinite lives not subject to amortization, the Company reviews goodwill and intangible assets for impairment at least annually in the third quarter, and more frequently in the presence of certain circumstances. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company may elect to forgo this option and proceed to the quantitative goodwill impairment test. If the Company elects to perform the qualitative assessment and it indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, or the Company elects to forgo this qualitative assessment, the Company will proceed to the quantitative goodwill impairment test where the fair value of a reporting unit is calculated based on discounted future probability-weighted cash flows. If the quantitative goodwill impairment test indicates that the carrying value of a reporting unit is in excess of its fair value, the Company will recognize an impairment loss 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.

Intangible Assets — Definite-lived intangible assets, primarily customer relationships, are amortized using the straight-line method over their estimated useful lives which approximate the pattern in which the economic benefits of the assets are consumed. The Company periodically evaluates the recoverability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Fair value for intangible assets is based on discounted cash flows, market multiples and/or appraised values, as appropriate.

Income Taxes — The Company accounts for income taxes under ASC 740, Income Taxes (“ASC 740”) which requires recognition of deferred tax assets and liabilities to reflect tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the accompanying consolidated financial statements. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that the deferred tax assets will not be realized in accordance with the criteria of ASC 740. Valuation allowances are established against deferred tax assets due to an uncertainty of realization. Valuation allowances are reviewed each period on a tax jurisdiction by tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence, in accordance with criteria of ASC 740, to support a change in judgment about the ability to realize the related deferred tax assets. Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions.

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions in accordance with ASC 740. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated financial statements.

Self-Insurance Programs — The Company self-insures for certain levels of workers’ compensation and self-funds the medical, prescription drug and dental benefit plans in the United States. Estimated costs are accrued at the projected settlements for known and anticipated claims. Amounts related to these self-insurance programs are included in “Accrued employee compensation and benefits” and “Other long-term liabilities” in the accompanying Consolidated Balance Sheets.

Deferred Grants — Recognition of income associated with grants for land and the acquisition of property, buildings and equipment (together, “property grants”) is deferred until after the completion and occupancy of the building and title has passed to the Company, and the funds have been released from escrow. The deferred amounts for both land and building are amortized and recognized as a reduction of depreciation expense over the corresponding useful lives of the related assets. Amounts received in excess of the cost of the building are allocated to the cost of equipment and, only after the grants are released from escrow, recognized as a reduction of depreciation expense over the weighted average useful life of the related equipment, which approximates five years. Upon sale of the related facilities, any deferred grant balance is recognized in full and is included in the gain on sale of property and equipment.

The Company receives government employment grants as an incentive to create and maintain permanent employment positions for a specified time period. These grants are repayable, under certain terms and conditions, if the Company’s relevant employment levels do not meet or exceed the employment levels set forth in the grant agreements. Accordingly, grant monies received are deferred and amortized primarily as a reduction to “Direct salaries and related costs” using the proportionate performance model over the required employment period.

The Company receives government lease grants as an incentive for leasing space at specific locations or locating engagement centers in a government’s jurisdiction. These grants are repayable, under certain terms and conditions, as set forth in the grant agreements. Accordingly, grant monies received are deferred and amortized primarily as a reduction to rent expense included in “General and administrative” over the required lease period.

Deferred Revenue — The Company receives up-front fees in connection with certain contracts. The deferred revenue is earned over the service periods of the respective contracts, which range from 30 days to seven years. Deferred revenue included in current liabilities in the accompanying Consolidated Balance Sheets includes the up-front fees associated with services to be provided over the ensuing twelve month period and the up-front fees associated with services to be provided over multiple years in connection with contracts that contain cancellation and refund provisions, whereby the manufacturers or customers can terminate the contracts and demand pro-rata refunds of the up-front fees with short notice. Deferred revenue from estimated penalties and holdbacks results from the failure to meet specified minimum service levels in certain contracts and other performance based contingencies. Deferred revenue from estimated chargebacks reflects 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.

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 December 31, 2017 and 2016, the Company did not identify any instances where the carrying values of its equity method investments were not recoverable.

In July 2017, the Company made a strategic investment of $10.0 million in XSell Technologies, Inc. (“XSell”) for 32.8% of XSell’s preferred stock. The Company plans to incorporate XSell’s machine learning and artificial intelligence algorithms into its business. The Company believes this will increase the sales performance of its agents to drive revenue for its clients, improve the experience of the Company’s clients’ end customers and enhance brand 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 $9.8 million was included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheet as of December 31, 2017. The Company paid $5.0 million in July 2017 with the remaining $5.0 million included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheet as of December 31, 2017. The Company’s proportionate share of XSell’s income (loss) of $(0.1) million was included in “Other income (expense), net” in the accompanying Consolidated Statement of Operations for the year ended December 31, 2017.

Customer-Acquisition Advertising Costs — The Company utilizes direct-response advertising the primary purpose of which is to elicit purchases from its clients’ customers. These costs are capitalized when they are expected to result in probable future benefits and are amortized over the period during which future benefits are expected to be received, which is generally less than one month. All other advertising costs are expensed as incurred. The Company had less than $0.1 million of capitalized direct-response advertising costs included in “Prepaid expenses” in the accompanying Consolidated Balance Sheets as of both December 31, 2017 and 2016. Total advertising costs included in “Direct salaries and related costs” in the accompanying Consolidated Statements of Operations for the years ended December 31, 2017 and 2016 was $36.7 million and $28.1 million, respectively (none in 2015). Total advertising costs included in “General and administrative” in the accompanying Consolidated Statement of Operations for the year ended December 31, 2017 were $0.1 million (none in 2016 or 2015).

Stock-Based Compensation — The Company has three stock-based compensation plans: the 2011 Equity Incentive Plan (for employees and certain non-employees), the Non-Employee Director Fee Plan (for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan (for certain eligible employees). All of these plans are discussed more fully in Note 24, Stock-Based Compensation. Stock-based awards under these plans may consist of common stock, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock and uses treasury stock to satisfy stock option exercises or vesting of stock awards.

In accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”), the Company recognizes in its accompanying Consolidated Statements of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Compensation expense for equity-based awards is recognized over the requisite service period, usually the vesting period, while compensation expense for liability-based awards (those usually settled in cash rather than stock) is re-measured to fair value at each balance sheet date until the awards are settled.

Fair Value of Financial Instruments — The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

   

Cash, short-term and other investments, investments held in rabbi trust and accounts payable  The carrying values for cash, short-term and other investments, investments held in rabbi trust and accounts payable approximate their fair values.

   

Foreign currency forward contracts and options  Foreign currency forward contracts and options, including premiums paid on options, are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk.

   

Embedded derivatives — Embedded derivatives within certain hybrid lease agreements are bifurcated from the host contract and recognized at fair value based on pricing models or formulas using significant unobservable inputs, including adjustments for credit risk.

   

Long-term debt  The carrying value of long-term debt approximates its estimated fair value.

   

Contingent consideration  Contingent consideration is recognized at fair value based on the discounted cash flow method.

Fair Value Measurements  ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10-20 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

ASC 825, Financial Instruments (“ASC 825”) permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to use the fair value option permitted under ASC 825 for any of its financial assets and financial liabilities that are not already recorded at fair value.

 

A description of the Company’s policies regarding fair value measurement is summarized below.

Fair Value Hierarchy  ASC 820-10-35 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:

 

   

Level 1  Quoted prices for identical instruments in active markets.

   

Level 2  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

   

Level 3  Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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 rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value on a recurring basis, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.

Money market and open-end mutual funds — The Company uses quoted market prices in active markets to determine the fair value. These items are classified in Level 1 of the fair value hierarchy.

Foreign currency forward contracts and options — The Company enters into foreign currency forward contracts and options over-the-counter and values such contracts using quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk. The key inputs include forward or option foreign currency exchange rates and interest rates. These items are classified in Level 2 of the fair value hierarchy.

Embedded Derivatives — The Company uses significant unobservable inputs to determine the fair value of embedded derivatives, which are classified in Level 3 of the fair value hierarchy. These unobservable inputs include expected cash flows associated with the lease, currency exchange rates on the day of commencement, as well as forward currency exchange rates; results of which are adjusted for credit risk. These items are classified in Level 3 of the fair value hierarchy. See Note 10, 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 11, Investments Held in Rabbi Trust, and Note 24, Stock-Based Compensation.

Contingent consideration  The Company uses significant unobservable inputs to determine the fair value of contingent consideration, which is classified in Level 3 of the fair value hierarchy. The contingent consideration recorded related to the Qelp acquisition and liabilities assumed as part of the Clearlink acquisition was recognized at fair value using a discounted cash flow methodology and a discount rate of approximately 14.0% and 10.0%, respectively. The discount rates vary dependent on the specific risks of each acquisition including the country of operation, the nature of services and complexity of the acquired business, and other similar factors, all of which are significant inputs not observable in the market. Significant increases or decreases in any of the inputs in isolation would result in a significantly higher or lower fair value measurement.

Foreign Currency Translation — The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income, but is included in “Accumulated other comprehensive income (loss)” (“AOCI”), which is reflected as a separate component of shareholders’ equity until the sale or until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign currency transactional gains and losses are included in “Other income (expense), net” in the accompanying Consolidated Statements of Operations.

Foreign Currency and Derivative Instruments  The Company accounts for financial derivative instruments under ASC 815, Derivatives and Hedging (“ASC 815”). The Company generally utilizes non-deliverable forward contracts and options expiring within one to 24 months to reduce its foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies and net investments in foreign operations. In using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to counterparty credit risk.

The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (2) a hedge of a net investment in a foreign operation; or (3) a derivative that does not qualify for hedge accounting. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge.

Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in AOCI, until the forecasted underlying transactions occur. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction within “Revenues”. Changes in the fair value of derivatives that are highly effective and designated as a net investment hedge are recorded in cumulative translation adjustment in AOCI, offsetting the change in cumulative translation adjustment attributable to the hedged portion of the Company’s net investment in the foreign operation. Any realized gains and losses from settlements of the net investment hedge remain in AOCI until partial or complete liquidation of the net investment. Ineffectiveness is measured based on the change in fair value of the forward contracts and options and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged. Hedge ineffectiveness is recognized within “Revenues” for cash flow hedges and within “Other income (expense), net” for net investment hedges. Cash flows from the derivative contracts are classified within the operating section in the accompanying Consolidated Statements of Cash Flows.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring, or if the Company de-designates a derivative as a hedge, the Company discontinues hedge accounting prospectively. At December 31, 2017 and 2016, all hedges were determined to be highly effective.

The Company also periodically enters into forward contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to reduce the effects from fluctuations caused by volatility in currency exchange rates on the Company’s operating results and cash flows. Changes in the fair value of the derivative instruments are included in “Revenues” or “Other income (expense), net”, depending on the underlying risk exposure. See Note 10, Financial Derivatives, for further information on financial derivative instruments.

Reclassifications — Certain balances in prior years have been reclassified to conform to current year presentation.

 

New Accounting Standards Not Yet Adopted

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The amendments in ASU 2014-09 outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and indicate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date (“ASU 2015-14”). In 2016 and 2017, the FASB issued additional ASUs that are also part of the overall new revenue guidance included in ASC Topic 606. ASU 2014-09 and the related subsequent amendments are referred to herein as “ASC 606.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. An entity should apply the amendments using either the full retrospective approach or retrospectively with a cumulative effect of initially applying the amendments recognized at the date of initial application.

The Company will adopt ASC 606 using the modified retrospective approach applied to those contracts which were not completed as of January 1, 2018. The adoption of these amendments will require expanded qualitative and quantitative disclosures about the Company’s contracts with its customers. The Company’s implementation team has completed its evaluation of the Company’s revenue streams, analyzed the Company’s contracts to identify key provisions impacted by ASC 606 and assessed the applicable accounting, and reviewed existing accounting policies and internal controls. Appropriate changes to the Company’s business processes, systems and controls to support recognition and disclosure under ASC 606 have been implemented. The Company expects the impact of ASC 606 to be immaterial to its net income on an ongoing basis.

The impact to the Company’s results is not expected to be material because the analysis of its contracts under ASC 606 supports the recognition of revenue over time under the output method for the majority of its contracts, which is consistent with the Company’s current revenue recognition model. Revenue from the majority of the Company’s contracts, approximately 99.5% of the Company’s consolidated revenues for the year ended December 31, 2017, will continue to be recognized over time because of the continuous transfer of control to the customer. In addition, the number of the Company’s performance obligations, which are classified as stand-ready performance obligations under ASC 606, is not materially different from those under the existing standard. Lastly, the accounting for the estimate of variable consideration is not expected to be materially different compared to the Company’s current practice. The immaterial changes as a result of the Company’s adoption of ASC 606 relate to changes in estimating variable consideration with respect to penalty and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies, as well as the change in timing of revenue recognition associated with certain customer contracts that provide additional fees upon renewal. The adoption is expected to result in the recognition of a cumulative effect adjustment increasing opening retained earnings as of January 1, 2018 by approximately $4.0 million to $5.0 million.

The Company also does not expect ASC 606 to have a material impact on its consolidated balance sheet and statement of cash flows because there are no changes in the manner for which the Company accounts for contract costs under the new standard compared with the existing standard. The costs associated with sales commissions are not directly incremental to obtaining customer contracts and instead require adherence to certain revenue and income targets over time. Thus, these costs are more analogous to a performance bonus and are expensed as incurred and no additional contract assets or liabilities will be established.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). These amendments modify how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such, these investments may be measured at cost. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to materially impact its financial condition, results of operations and cash flows.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840, Leases. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented 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, and there are certain optional practical expedients that an entity may elect to apply.

The Company expects the adoption of ASU 2016-02 to result in a material increase in the assets and liabilities on the consolidated balance sheets as a result of recognizing right-of-use assets and lease liabilities for existing operating leases based on the amount of the Company’s current lease commitments. The Company believes that the majority of its leases will maintain their current lease classification under ASU 2016-02. As a result, the Company does not expect these amendments to have a material effect on its expense recognition timing which will result in an insignificant impact on the Company’s consolidated statements of income. The Company is continuing to evaluate the magnitude of the impact and related disclosures, as well as the timing and method of adoption, with respect to the optional practical expedients. The Company is continuing to evaluate the full impact of ASU 2016-02, as well as its impacts on its business processes, systems, and internal controls.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). These amendments require measurement and recognition of expected versus incurred credit losses for financial assets held. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its financial condition, results of operations and cash flows.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). These amendments clarify the presentation of cash receipts and payments in eight specific situations. These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments will be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to materially impact its cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (A Consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”). These amendments clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments will be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-18 to materially impact its cash flows.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”). These amendments require recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. These amendments will be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. The Company does not expect the adoption of ASU 2016-16 to materially impact its financial condition, results of operations and cash flows.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Reform Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The Company is currently evaluating the accounting treatment options related to the GILTI provisions and will make an accounting policy election during the first quarter of 2018. The Company does not expect a material impact on its financial condition, results of operations and cash flows from any GILTI inclusions.

Business Combinations

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”). These amendments clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. These amendments will be applied prospectively. Early adoption is permitted in certain circumstances. The Company does not expect the adoption of ASU 2017-01 to materially impact its financial condition, results of operations and cash flows.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). These amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component outside of a subtotal of income from operations. If a separate line item is not used, the line items used in the income statement to present other components of net benefit cost must be disclosed. These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements, interim or annual, have not been issued or made available for issuance. These amendments will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company does not expect the adoption of ASU 2017-07 to materially impact its financial condition, results of operations and cash flows.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedge Activities (“ASU 2017-12”). These amendments help simplify certain aspects of hedge accounting and better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update. The Company is currently evaluating the accounting, transition and disclosure requirements to determine the impact ASU 2017-12 may have on its financial condition, results of operations, cash flows and disclosures.

 

New Accounting Standards Recently Adopted

Goodwill

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). These amendments simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. These amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. These amendments will be applied on a prospective basis, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The early adoption of ASU 2017-04 on July 31, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

Stock Compensation

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting (“ASU 2017-09”). These amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. These amendments should be applied prospectively to changes in terms and conditions of awards occurring on or after the adoption date. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The early adoption of ASU 2017-09 on June 30, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). These amendments are intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 on January 1, 2017 resulted in stock-based compensation excess tax benefits or deficiencies reflected in the consolidated statements of operations on a prospective basis as a component of the provision for income taxes. Prior to the adoption, these benefits or deficiencies were recognized in equity. Additionally, the Company’s consolidated statements of cash flows now include excess tax benefits as an operating activity, with prior periods adjusted accordingly. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on the Company’s consolidated cash flows statements since such cash flows have historically been presented as a financing activity. Finally, the Company has elected to account for forfeitures as they occur, rather than estimating expected forfeitures.

As a result of the adoption of ASU 2016-09, the Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 were adjusted as follows: a $2.1 million and $0.4 million increase, respectively, to net cash provided by operating activities and a $2.1 million decrease and $0.4 million increase, respectively, to net cash provided by (used for) financing activities. Additionally, the Consolidated Statement of Changes in Shareholders’ Equity for the year ended December 31, 2017 reflects a cumulative effect of accounting change of $0.2 million to “Additional paid-in capital” and $(0.2) million to “Retained earnings” related to the change in accounting for forfeitures.

Derivatives and Hedging

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”). These amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-05 on January 1, 2017 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

Acquisitions
Acquisitions

Note 2. Acquisitions

Telecommunications Asset Acquisition

On April 24, 2017, the Company entered into an Asset Purchase Agreement to acquire certain assets from a Global 2000 telecommunications services provider. The aggregate purchase price of $7.5 million was paid on May 31, 2017, using cash on hand, resulting in $6.0 million of property and equipment and $1.5 million of customer relationship intangibles. The Asset Purchase Agreement contains customary representations and warranties, indemnification obligations and covenants. The Telecommunications Asset acquisition was completed to strengthen and create new partnerships for the Company and expand its geographic footprint in North America. The results of the Telecommunications Assets’ operations have been included in the Company’s consolidated financial statements since its acquisition on May 31, 2017.

The Company accounted for the Telecommunications Asset acquisition in accordance with ASC 805, Business Combinations (“ASC 805”), whereby the fair value of the purchase price was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values as of the closing date. The Company completed its analysis of the purchase price allocation during the second quarter of 2017.

Clearlink

On April 1, 2016, the Company acquired 100% of the outstanding membership units of Clearlink through a merger of Clearlink with and into a subsidiary of the Company (the “Merger”). Clearlink, with its operations located in the United States, is an inbound demand generation and sales conversion platform serving numerous Fortune 500 business-to-consumer and business-to-business clients across various industries and subsectors, including telecommunications, satellite television, home security and insurance. The results of Clearlink’s operations have been included in the Company’s consolidated financial statements since April 1, 2016 (the “Clearlink acquisition date”). The strategic acquisition of Clearlink expanded the Company’s suite of service offerings while creating differentiation in the marketplace, broadened its addressable market opportunity and extended executive level reach within the Company’s existing clients’ organizations. This resulted in the Company paying a substantial premium for Clearlink, resulting in the recognition of goodwill. Pursuant to Federal income tax laws, intangibles and goodwill from the Clearlink acquisition are deductible over a 15-year amortization period.

The Clearlink purchase price totaled $207.9 million, consisting of the following:

 

     Total  

Cash (1)

    $ 209,186  

Working capital adjustment

     (1,278
  

 

 

 
    $       207,908  
  

 

 

 

(1) Funded through borrowings under the Company’s credit agreement. See

Note 18, Borrowings, for more information.

Approximately $2.6 million of the purchase price was placed in an escrow account as security for the indemnification obligations of Clearlink’s members under the merger agreement. The escrow was released pursuant to the terms of the escrow agreement, but the Company subsequently asserted a claim of approximately $0.4 million against the Clearlink members. This claim has been resolved by the parties for $0.2 million, with the outstanding amount received by the Company in December 2017.

The following table summarizes the estimated Clearlink acquisition date fair values of the assets acquired and liabilities assumed (all included in the Americas segment), the measurement period adjustments and the final purchase price allocation (in thousands):

 

     Initial
Purchase Price
Allocation
     Measurement
Period Adjustments
     Final
Purchase Price
Allocation
 

Cash and cash equivalents

   $ 2,584      $ -      $ 2,584  

Receivables (1)

     16,801        -        16,801  

Prepaid expenses

     1,553        -        1,553  
  

 

 

    

 

 

    

 

 

 

Total current assets

     20,938        -        20,938  

Property and equipment

     12,869        -        12,869  

Goodwill

     70,223        340        70,563  

Intangibles

     121,400        -        121,400  

Deferred charges and other assets

     229        -        229  

Accounts payable

     (3,564      -        (3,564

Accrued employee compensation and benefits

     (1,610      -        (1,610

Income taxes payable

     -        (340      (340

Deferred revenue

     (4,620      -        (4,620

Other accrued expenses and current liabilities

     (6,324      -        (6,324
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     (16,118      (340      (16,458

Other long-term liabilities

     (1,633      -        (1,633
  

 

 

    

 

 

    

 

 

 
   $ 207,908      $ -      $ 207,908  
  

 

 

    

 

 

    

 

 

 

 

(1) 

The fair value equals the gross contractual value of the receivables.

The Company accounted for the Clearlink acquisition in accordance with ASC 805, whereby the purchase price paid was allocated to the tangible and identifiable intangibles acquired and liabilities assumed from Clearlink based on their estimated fair values as of the closing date. The Company completed its analysis of the purchase price allocation during the fourth quarter of 2016 and the resulting adjustments of $0.3 million to income taxes payable and goodwill were recorded in accordance with ASU 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments.

Fair values were based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.

The following table presents the Company’s purchased intangibles assets as of April 1, 2016, the Clearlink acquisition date (in thousands):

 

     Amount Assigned      Weighted Average
Amortization Period
(years)
 

Customer relationships

   $ 63,800        13  

Trade name

     2,400        7  

Non-compete agreements

     1,800        3  

Proprietary software

     700        5  

Indefinite-lived domain names

     52,700        N/A  
  

 

 

    
   $ 121,400        7  
  

 

 

    

The amount of Clearlink’s revenues and net income since the April 1, 2016 acquisition date, included in the Company’s Consolidated Statement of Operations for the period indicated below, was as follows (in thousands):

 

     From April 1, 2016
Through
December 31, 2016
 

Revenues

   $ 123,289  

Net income

   $ 1,563  

The following table presents the unaudited pro forma combined revenues and net earnings as if Clearlink had been included in the consolidated results of the Company for the entire years ended December 31, 2016 and 2015. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2016 and 2015 (in thousands):

 

     Years Ended December 31,  
     2016      2015  

Revenues

   $ 1,493,866      $ 1,407,850  
     

Net income

   $ 65,662      $ 69,801  
     

Net income per common share:

     

Basic

   $ 1.57      $ 1.67  

Diluted

   $ 1.55      $ 1.64  

These amounts were calculated to reflect the additional depreciation, amortization, interest expense and rent expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2016 and January 1, 2015, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies’ operating results. Included in these costs are advisory and legal costs, net of the tax effects.

Merger and integration costs associated with Clearlink included in “General and administrative” costs in the accompanying Consolidated Statement of Operations for the year ended December 31, 2016 were as follows (none in 2017 and 2015) (in thousands):

 

     Year Ended
December 31, 2016
 

Severance costs:

  

Americas

   $ 135  
  

Transaction and integration costs:

  

Americas

     29  

Other

     4,470  
  

 

 

 
     4,499  
  
  

 

 

 

Total merger and integration costs

   $ 4,634  
  

 

 

 

Qelp

On July 2, 2015, the Company’s wholly-owned subsidiaries, Sykes Enterprises Incorporated B.V. and Sykes Enterprises Incorporated Holdings B.V., both Netherlands companies, entered into a definitive Share Sale and Purchase Agreement (the “Purchase Agreement”) with MobileTimes B.V., Yarra B.V., From The Mountain Consultancy B.V. and Sticting Administratiekantoor Qelp (the “Sellers”), all of which are Netherlands companies, to acquire all of the outstanding shares of Qelp B.V. and its wholly owned subsidiary (together, known as “Qelp”.) The strategic acquisition of Qelp (the “Qelp acquisition”) was to further broaden and strengthen the Company’s service portfolio around digital self-service customer support and extend its reach into adjacent, but complementary, markets. Pursuant to Federal income tax regulations, no amount of intangibles or goodwill from this acquisition will be deductible for tax purposes. The results of Qelp’s operations have been included in the Company’s consolidated financial statements since its acquisition on July 2, 2015 (the “Qelp acquisition date”).

As of the acquisition date, the total consideration paid or to be paid by the Company for the Qelp acquisition is summarized below (in thousands):

 

     Total  

Cash

   $ 9,885  

Contingent consideration

     6,000  

Working capital adjustment

     (65
  

 

 

 
   $ 15,820  
  

 

 

 

The consideration consisted of an initial purchase price and a contingent purchase price. The initial purchase price of $9.8 million, including certain post-closing adjustments relating to Qelp’s working capital, was funded through cash on hand upon the closing of the transaction on July 2, 2015. The contingent purchase price to be paid over a three-year period was based on achieving targets tied to revenues and earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the years ended December 31, 2016, 2017 and 2018, not to exceed EUR 10.0 million.

The fair value of the contingent consideration was estimated using the discounted cash flow method, and was included in “Other long-term liabilities” in the accompanying Consolidated Balance Sheet (see Note 4, Fair Value, for further information). As part of the discounted cash flow method, the Company calculated an adjusted weighted average cost of capital (“WACC”) specifically attributable to the future payments of the contingent consideration. Based on the forecasted revenue and profitability scenarios and their respective probabilities of occurrence, the Company estimated the present value of the probability-adjusted future payments utilizing an adjusted WACC for the potential future payments. The Company believes that its estimates and assumptions are reasonable, but there is significant judgment involved. Changes in the fair value of the contingent consideration liabilities subsequent to the acquisition were recorded in the Company’s Consolidated Statements of Operations.

On September 26, 2016, the Company entered into an addendum to the Qelp Purchase Agreement with the Sellers to settle the outstanding contingent consideration for EUR 4.0 million ($4.2 million as of December 31, 2016) to be paid by June 30, 2017. The Company paid $4.4 million in May 2017 to settle the outstanding contingent consideration obligation.

The Company accounted for the Qelp acquisition in accordance with ASC 805, whereby the fair value of the purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed from Qelp based on their estimated fair values as of the closing date. The Company completed its analysis of the purchase price allocation during the fourth quarter of 2015.

The following table summarizes the estimated acquisition date fair values of the assets acquired and liabilities assumed, all included in the EMEA segment (in thousands):

 

     July 2, 2015
(As Initially
Reported)
     Measurement
Period
Adjustments
     July 2, 2015
(As Adjusted)
 

Cash and cash equivalents

   $ 450      $ -      $ 450  

Receivables (1)

     1,541        (70      1,471  

Prepaid expenses

     24        -        24  
  

 

 

    

 

 

    

 

 

 

Total current assets

     2,015        (70      1,945  

Property and equipment

     2,168        -        2,168  

Goodwill

     9,574        480        10,054  

Intangibles

     6,000        -        6,000  

Deferred charges and other assets

     55        -        55  

Short-term debt

     (323      -        (323

Accrued employee compensation and benefits

     (207      -        (207

Income taxes payable

     (62      (32      (94

Deferred revenue

     (967      -        (967

Other accrued expenses and current liabilities

     (1,030      -        (1,030
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     (2,589      (32      (2,621

Other long-term liabilities (2)

     (1,403      (378      (1,781
  

 

 

    

 

 

    

 

 

 
   $ 15,820      $ -      $ 15,820  
  

 

 

    

 

 

    

 

 

 

 

(1) 

The fair value equals the gross contractual value of the receivables.

(2) 

Primarily includes long-term deferred tax liabilities.

Fair values were based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.

The following table presents the Company’s purchased intangibles assets as of July 2, 2015, the acquisition date (in thousands):

 

     Amount Assigned      Weighted Average
Amortization Period
(years)
 

Customer relationships

   $ 5,400        7  

Trade name and trademarks

     100        3  

Content library

     500        2  
  

 

 

    
   $ 6,000        7  
  

 

 

    

The amount of Qelp’s revenues and net (loss) since the July 2, 2015 acquisition date, included in the Company’s Consolidated Statement of Operations for the year ended December 31, 2015 were as follows (in thousands):

 

     From July 2, 2015
Through
December 31, 2015
 

Revenues

   $ 2,661  
  

Net (loss)

   $ (162

Merger and integration costs associated with Qelp included in “General and administrative” costs in the accompanying Consolidated Statement of Operations in the Other segment for the year ended December 31, 2015 were as follows (none in 2017 and 2016) (in thousands):

 

     Year Ended
December 31, 2015
 

Transaction costs

   $ 455  
  

 

 

 

Costs Associated with Exit or Disposal Activities
Costs Associated with Exit or Disposal Activities

Note 3. Costs Associated with Exit or Disposal Activities

During 2011 and 2010, the Company announced several initiatives to streamline excess capacity through targeted seat reductions in the Americas (the “Exit Plans”) in an on-going effort to manage and optimize capacity utilization. These Americas’ Exit Plans included, but were not limited to, closing customer engagement centers in The Philippines and consolidating leased space in various locations in the U.S.

The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of December 31, 2017 (in thousands):

 

     Americas
Fourth
Quarter 2011
Exit Plan
     Americas
Third
Quarter 2010
Exit Plan
     Total  

Lease obligations and facility exit costs

   $ 1,365      $ 6,729      $         8,094  

Non-cash impairment charges

     480        3,847        4,327  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,845      $ 10,576      $         12,421  
  

 

 

    

 

 

    

 

 

 

The Company paid $8.1 million in cash through December 31, 2016 under the Exit Plans. As of December 31, 2016, there were no remaining liabilities outstanding related to the Exit Plans.

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit and disposal activities and related charges for the years ended December 31, 2016 and 2015 (none in 2017) (in thousands):

 

     Lease Obligation
and Facility Exit
Costs
 

Balance at January 1, 2015

    $                             1,558  

Charges

     -  

Cash payments

     (825
  

 

 

 

Balance at December 31, 2015

     733  

Charges

     -  

Cash payments

     (733
  

 

 

 

Balance at December 31, 2016

     -  
  

 

 

 
Fair Value
Fair Value

Note 4. Fair Value

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 (in thousands):

 

              Fair Value Measurements at December 31, 2017 Using:  
        Balance at
December 31,
    Quoted Prices
in Active
Markets For
  Identical Assets  
    Significant Other
Observable Inputs
    Significant
  Unobservable  
Inputs
 
                         
        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  
   

 

 

   

 

 

   

 

 

   

 

 

 
              Fair Value Measurements at December 31, 2016 Using:  
       

Balance at

December 31,

    Quoted Prices
in Active
Markets For
Identical Assets
    Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
 
                         
        2016     Level 1     Level 2     Level 3  

Assets:

         

Foreign currency forward and option contracts

  (1)   $ 3,921     $ -     $ 3,921     $ -  

Embedded derivatives

  (1)     12       -       -       12  

Equity investments held in rabbi trust for the Deferred Compensation Plan

  (2)     7,470       7,470       -       -  

Debt investments held in rabbi trust for the Deferred Compensation Plan

  (2)     1,944       1,944       -       -  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $     13,347     $     9,414     $     3,921     $         12  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities:

         

Foreign currency forward and option contracts

  (1)   $ 1,912     $ -     $ 1,912     $ -  

Embedded derivatives

  (1)     567       -       -       567  

Contingent consideration

  (3)     6,100       -       -       6,100  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 8,579     $ -     $ 1,912     $ 6,667  
   

 

 

   

 

 

   

 

 

   

 

 

 

(1) See Note 10, Financial Derivatives, for the classification in the accompanying Consolidated Balance Sheets.

(2) Included in “Other current assets” in the accompanying Consolidated Balance Sheets. See Note 11, Investments Held in Rabbi Trust.

(3) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets.

 

Reconciliations of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy

Embedded Derivatives in Lease Agreements

A rollforward of the net asset (liability) activity in the Company’s fair value of the embedded derivatives is as follows (in thousands) (none in 2015):

 

             Years Ended December 31,          
             2017                     2016          

Balance at the beginning of the period

   $ (555   $ -  

Gains (losses) recognized in “Other income (expense), net”

     (139     (714

Settlements

     170       (7

Effect of foreign currency

     (3     166  
  

 

 

   

 

 

 

Balance at the end of the period

   $ (527   $ (555
  

 

 

   

 

 

 

Change in unrealized gains (losses) included in “Other income (expense), net” related to embedded derivatives held at the end of the period

   $ (325   $ 3  
  

 

 

   

 

 

 

Contingent Consideration

A rollforward of the activity in the Company’s fair value of the contingent consideration (liability) is as follows (in thousands):

 

     Years Ended December 31,  
             2017                     2016                     2015          

Balance at the beginning of the period

   $         (6,100)     $         (6,280)     $ -  

Acquisition (1)

     -       (2,779)               (6,000)  

Imputed interest

     (76)       (754)       (408)  

Fair value gain (loss) adjustments (2)

     605       2,250       -  

Settlements

     5,760       1,396       -  

Effect of foreign currency

     (189)       67       128  
  

 

 

   

 

 

   

 

 

 

Balance at the end of the period

   $ -     $ (6,100)     $ (6,280)  
  

 

 

   

 

 

   

 

 

 

Change in unrealized gains (losses) included in “General and
administrative” related to contingent consideration outstanding at the end of the period

   $ -     $ 2,268     $ -  
  

 

 

   

 

 

   

 

 

 

 

(1) Liabilities acquired as part of the Clearlink acquisition on April 1, 2016 and the Qelp acquisition on July 2, 2015. See Note 2, Acquisitions.
(2) Included in “General and administrative” costs in the accompanying Consolidated Statements of Operations.

The Company recorded a fair value gain of $2.6 million to the Qelp contingent consideration in “General and administrative” during the year ended December 31, 2016 due to the execution of an addendum to the Qelp Purchase Agreement with the Sellers dated September 26, 2016, subject to which the Company agreed to pay the Sellers EUR 4.0 million by June 30, 2017 ($4.2 million as of December 31, 2016). The Company paid $4.4 million in May 2017 to settle the outstanding contingent consideration obligation.

The Company recorded a net fair value gain of $0.6 million and fair value loss of $0.3 million to the Clearlink contingent consideration in “General and administrative” during the years ended December 31, 2017 and 2016, respectively, related to the settlements and changes in the probability of achievement of certain revenue targets.

The Company accretes interest expense each period using the effective interest method until the contingent consideration reaches its estimated future value. Interest expense related to the contingent consideration is included in “Interest (expense)” in the accompanying Consolidated Statements of Operations.

 

Non-Recurring Fair Value

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, as described in Note 1, Overview and Summary of Significant Accounting Policies, like those associated with acquired businesses, including goodwill, other intangible assets, other long-lived assets and equity method investments. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired.

The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at December 31, 2017 and 2016. The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities) (none in 2016 and 2015):

 

         Total Impairment    
(Loss)
 
     Year Ended
December 31, 2017
 

Americas:

  

Property and equipment, net

   $ (5,410
  

 

 

 

As a result of the consolidation of leased space in the U.S., the Company recorded an impairment charge of $0.7 million during the year ended December 31, 2017 related to leasehold improvements which were not recoverable, and equipment, furniture and fixtures that could not be redeployed to other locations.

In connection with the closure of certain under-utilized customer contact management centers in the U.S., the Company recorded an impairment charge of $4.5 million during the year ended December 31, 2017 related to leasehold improvements which were not recoverable, and equipment, furniture and fixtures that could not be redeployed to other locations.

The Company also recorded an impairment charge of $0.2 million related to the write-down of a vacant and unused parcel of land in the U.S. to its estimated fair value during the year ended December 31, 2017.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 5. Goodwill and Intangible Assets

Intangible Assets

The following table presents the Company’s purchased intangible assets as of December 31, 2017 (in thousands):

 

      Gross Intangibles           Accumulated    
Amortization
      Net Intangibles       Weighted
Average
  Amortization  
Period (years)
 

Intangible assets subject to amortization:

       

Customer relationships

  $ 170,853     $ (95,175   $ 75,678       10  

Trade names and trademarks

    14,138       (8,797     5,341       7  

Non-compete agreements

    1,820       (1,052     768       3  

Content library

    542       (542     -       2  

Proprietary software

    1,040       (585     455       4  

Intangible assets not subject to amortization:

       

Domain names

    58,035       -       58,035       N/A  
 

 

 

   

 

 

   

 

 

   
  $ 246,428     $ (106,151   $ 140,277       6  
 

 

 

   

 

 

   

 

 

   

 

The following table presents the Company’s purchased intangible assets as of December 31, 2016 (in thousands):

 

     Gross Intangibles          Accumulated    
Amortization
      Net Intangibles       Weighted
Average
Amortization
  Period (years)  
 

Intangible assets subject to amortization:

       

Customer relationships

  $ 166,634     $ (75,364   $ 91,270       10  

Trade names and trademarks

    14,095       (7,083     7,012       7  

Non-compete agreements

    2,993       (1,643     1,350       2  

Content library

    475       (357     118       2  

Proprietary software

    1,550       (955     595       3  

Favorable lease agreement

    449       (449     -       2  

Intangible assets not subject to amortization:

       

Domain names

    52,710       -       52,710       N/A  
 

 

 

   

 

 

   

 

 

   
  $ 238,906     $ (85,851   $ 153,055       6  
 

 

 

   

 

 

   

 

 

   

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to December 31, 2017, is as follows (in thousands):

 

Years Ending December 31,   Amount                  

2018

    15,137  

2019

    14,079  

2020

    11,394  

2021

    6,829  

2022

    5,729  

2023 and thereafter

    29,074  

Goodwill

Changes in goodwill for the year ended December 31, 2017 consist of the following (in thousands):

 

      January 1, 2017             Acquisition             Effect of Foreign  
Currency
      December 31,  
2017
 

Americas

  $ 255,842     $     390     $ 2,264     $ 258,496  

EMEA

    9,562       -       1,207       10,769  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 265,404     $     390     $ 3,471     $ 269,265  
 

 

 

   

 

 

   

 

 

   

 

 

 

Changes in goodwill for the year ended December 31, 2016 consist of the following (in thousands):

 

       January 1, 2016           Acquisition (1)           Effect of Foreign  
Currency
      December 31,  
2016
 

Americas

   $ 186,049     $ 70,563     $ (770   $ 255,842  

EMEA

     9,684       -       (122     9,562  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 195,733     $ 70,563     $ (892   $ 265,404  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) See Note 2, Acquisitions, for further information.

The Company performs its annual goodwill impairment test during the third quarter, or more frequently, if indicators of impairment exist.

For the annual goodwill impairment test, the Company elected to forgo the option to first assess qualitative factors and performed its annual quantitative goodwill impairment test as of July 31, 2017. Under ASC 350, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes comparing a reporting unit’s calculated fair value to its carrying value. The calculation of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

The process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. The Company considered the income and market approaches to determine its best estimates of fair value which incorporated the following significant assumptions:

 

   

Revenue projections, including revenue growth during the forecast periods;

   

EBITDA margin projections over the forecast periods;

   

Estimated income tax rates;

   

Estimated capital expenditures; and

   

Discount rates based on various inputs, including the risks associated with the specific reporting units as well as their revenue growth and EBITDA margin assumptions.

As of July 31, 2017, the Company concluded that goodwill was not impaired for all six of its reporting units with goodwill, based on generally accepted valuation techniques and the significant assumptions outlined above. While the fair values of four of the six reporting units were substantially in excess of their carrying value, the Qelp and Clearlink reporting units’ fair value exceeded the respective carrying value, although not substantially.

The Qelp and Clearlink reporting units are at risk of future impairment if projected operating results are not met or other inputs into the fair value measurement change. However, as of December 31, 2017, there were no indicators of impairment related to Qelp’s $10.8 million of goodwill or Clearlink’s $71.0 million of goodwill.

Concentrations of Credit Risk
Concentrations of Credit Risk

Note 6. Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company’s credit concentrations are limited due to the wide variety of customers and markets in which the Company’s services are sold. See Note 10, Financial Derivatives, for a discussion of the Company’s credit risk relating to financial derivative instruments, and Note 25, Segments and Geographic Information, for a discussion of the Company’s customer concentration.

Receivables, Net
Receivables, Net

Note 7. Receivables, Net

Receivables, net consist of the following (in thousands):

 

     December 31,  
               2017                         2016            

Trade accounts receivable

   $ 334,147     $ 316,311  

Income taxes receivable

     4,138       1,309  

Other

     6,631       3,863  
  

 

 

   

 

 

 
     344,916       321,483  

Less: Allowance for doubtful accounts

     2,958       2,925  
  

 

 

   

 

 

 
   $ 341,958     $ 318,558  
  

 

 

   

 

 

 
    
Allowance for doubtful accounts as a percent of trade accounts receivable      0.9     0.9
  

 

 

   

 

 

 

Prepaid Expenses
Prepaid Expenses

Note 8. Prepaid Expenses

Prepaid expenses consist of the following (in thousands):

 

     December 31,  
                 2017                              2016              

Prepaid maintenance

   $ 7,773        8,279  

Prepaid insurance

     4,380        4,161  

Prepaid rent

     3,767        2,920  

Prepaid other

     6,212        6,613  
  

 

 

    

 

 

 
   $ 22,132      $ 21,973  
  

 

 

    

 

 

 
Other Current Assets
Other Current Assets

Note 9. Other Current Assets

Other current assets consist of the following (in thousands):

 

     December 31,  
                 2017                              2016              

Investments held in rabbi trust (Note 11)

   $ 11,627      $ 9,414  

Financial derivatives (Note 10)

     3,857        3,929  

Other current assets

     4,259        2,687  
  

 

 

    

 

 

 
   $ 19,743      $ 16,030  
  

 

 

    

 

 

 
Financial Derivatives
Financial Derivatives

Note 10. Financial Derivatives

Cash Flow Hedges – The Company has derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815, Derivatives and Hedging (“ASC 815”), consisting of Philippine Peso, Costa Rican Colon, Hungarian Forint and Romanian Leu contracts. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by 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 Consolidated Balance Sheets are as follows (in thousands):

 

     December 31,  
                 2017                             2016              

Deferred gains (losses) in AOCI

   $ 2,550     $ (2,295

Tax on deferred gains (losses) in AOCI

     (79     69  
  

 

 

   

 

 

 

Deferred gains (losses) in AOCI, net of taxes

   $ 2,471     $ (2,226
  

 

 

   

 

 

 

Deferred gains (losses) expected to be reclassified to “Revenues” from AOCI during the next twelve months

   $ 2,631    
  

 

 

   

Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts and options.

Net Investment Hedge – From time to time, the Company enters into foreign exchange forward contracts to hedge its net investment in certain foreign operations, as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to the Company’s foreign currency-based investments in these subsidiaries.

Non-Designated Hedges

Foreign Currency Forward Contracts  The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against adverse foreign currency moves relating primarily to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 180 days in duration. See Note 1, Overview and Summary of Significant Accounting Policies, for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

Embedded Derivatives – The Company enters into certain lease agreements which require payments not denominated in the functional currency of any substantial party to the agreements. The foreign currency component of these contracts meets the criteria under ASC 815 as embedded derivatives. The Company has determined that the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contracts (lease agreements), and separate, stand-alone instruments with the same terms as the embedded derivative instruments would otherwise qualify as derivative instruments, thereby requiring separation from the lease agreements and recognition at fair value. Such instruments do not qualify for hedge accounting under ASC 815.

The Company had the following outstanding foreign currency forward contracts and options, and embedded derivatives (in thousands):

 

     December 31, 2017        December 31, 2016      
Contract Type    Notional
Amount in
USD
     Settle Through
Date
   Notional
Amount in
USD
     Settle Through
Date
 

 

    

 

  

 

 

    

 

 

 

Cash flow hedges:

           

Options:

           

US Dollars/Philippine Pesos

   $         78,000      December 2018    $         51,000        December 2017  
           

Forwards:

           

US Dollars/Philippine Pesos

     3,000      June 2018      -        -  

US Dollars/Costa Rican Colones

     70,000      March 2019      45,500        December 2017  

Euros/Hungarian Forints

     3,554      December 2018      -        -  

Euros/Romanian Leis

     13,977      December 2018      -        -  
           

Net investment hedges:

           

Forwards:

           

Euros/US Dollar

     -      -      76,933        September 2017  
           

Non-designated hedges:

           

Forwards

     9,253      March 2018      55,614        March 2017  

Embedded derivatives

     13,519      April 2030      13,234        April 2030  

Master netting agreements exist with each respective counterparty to reduce credit risk by permitting net settlement of derivative positions. In the event of default by the Company or one of its counterparties, these agreements include a set-off clause that provides the non-defaulting party the right to net settle all derivative transactions, regardless of the currency and settlement date. The maximum amount of loss due to credit risk that, based on gross fair value, the Company would incur if parties to the derivative transactions that make up the concentration failed to perform according to the terms of the contracts was $3.8 million and $3.9 million as of December 31, 2017 and 2016, respectively. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions are asset positions of $3.6 million and $3.6 million, and liability positions of $0 and $1.6 million as of December 31, 2017 and 2016, respectively.

Although legally enforceable master netting arrangements exist between the Company and each counterparty, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in the accompanying 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 Consolidated Balance Sheets (in thousands):

 

     Derivative Assets  
             December 31, 2017                      December 31, 2016          
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1)

 

   $

 

3,604

 

 

 

   $

 

-

 

 

 

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     -        3,230  
  

 

 

    

 

 

 
     3,604        3,230  

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     244        691  

Embedded derivatives (1)

     9        8  

Embedded derivatives (2)

     43        4  
  

 

 

    

 

 

 

Total derivative assets

   $                             3,900      $                             3,933  
  

 

 

    

 

 

 
     Derivative Liabilities  
     December 31, 2017      December 31, 2016  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (3)

   $ 175      $ 1,806  

Foreign currency forward and option contracts (4)

     81        -  
  

 

 

    

 

 

 
     256        1,806  

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (3)

     -        106  

Embedded derivatives (3)

     189        174  

Embedded derivatives (4)

     390        393  
  

 

 

    

 

 

 

Total derivative liabilities

   $ 835      $ 2,479  
  

 

 

    

 

 

 

 

(1) 

Included in “Other current assets” in the accompanying Consolidated Balance Sheets.

(2) 

Included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets.

(3) 

Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets.

(4) 

Included in “Other long-term liabilities” in the accompanying Consolidated Balance Sheets.

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015 (in thousands):

 

     Gain (Loss) Recognized in
AOCI on Derivatives

(Effective Portion)
     Gain (Loss) Reclassified
From AOCI Into
“Revenues”

(Effective Portion)
     Gain (Loss) Recognized
in “Revenues” on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
     December 31,      December 31,      December 31,  
     2017     2016     2015      2017     2016     2015      2017     2016     2015  

Derivatives designated as cash flow hedging instruments under ASC 815:

                    

Foreign currency forward and option contracts

   $ 2,277     $ (2,308   $ 1,696      $ (2,536   $ (553   $ 2,138      $ (1 )    $ (5   $ 12  

Derivatives designated as net investment hedging instruments under ASC 815:

                    

Foreign currency forward contracts

     (8,352     3,409       6,101        -       -       -        -       -       -  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Foreign currency forward and option contracts

   $  (6,075   $ 1,101     $ 7,797      $  (2,536   $ (553   $ 2,138      $ (1 )    $ (5   $ 12  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Gain (Loss) Recognized in “Other
income (expense), net” on Derivatives
 
     Years Ended December 31,  
     2017      2016      2015  

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign currency forward contracts

   $ 282      $ (1,556    $ 1,374  

Embedded derivatives

     (139      (714      -  
  

 

 

    

 

 

    

 

 

 
   $       143      $       (2,270    $       1,374  
  

 

 

    

 

 

    

 

 

 

Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 11. Investments Held in Rabbi Trust

The Company’s investments held in rabbi trust, classified as trading securities and included in “Other current assets” in the accompanying Consolidated Balance Sheets, at fair value, consist of the following (in thousands):

 

     December 31, 2017      December 31, 2016  
     Cost       Fair Value       Cost       Fair Value   

Mutual funds

   $       8,096      $     11,627      $       7,257      $     9,414  
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in the rabbi trust were 70% equity-based and 30% debt-based as of December 31, 2017. Net investment income (losses), included in “Other income (expense), net” in the accompanying Consolidated Statements of Operations consists of the following (in thousands):

 

     Years Ended December 31,  
     2017      2016      2015  

Net realized gains (losses) from sale of trading securities

   $ 195      $ 241      $ 355  

Dividend and interest income

     422        92        79  

Net unrealized holding gains (losses)

     1,002        249        (597
  

 

 

    

 

 

    

 

 

 

Net investment income (losses)

             1,619      $         582      $         (163
  

 

 

    

 

 

    

 

 

 

Property and Equipment
Property and Equipment

Note 12. Property and Equipment

Property and equipment consist of the following (in thousands):

 

     December 31,  
     2017      2016  

Land

   $ 3,217      $ 3,360  

Buildings and leasehold improvements

     135,100        126,323  

Equipment, furniture and fixtures

     312,636        306,443  

Capitalized internally developed software costs

     34,886        29,176  

Transportation equipment

     556        531  

Construction in progress

     7,462        10,693  
  

 

 

    

 

 

 
     493,857        476,526  

Less: Accumulated depreciation

     333,067        320,312  
  

 

 

    

 

 

 
   $           160,790      $           156,214  
  

 

 

    

 

 

 

Capitalized internally developed software, net of depreciation, included in “Property and equipment, net” in the accompanying Consolidated Balance Sheets was as follows (in thousands):

 

     December 31,  
     2017      2016  

Capitalized internally developed software costs, net

   $           15,876      $           15,156  
  

 

 

    

 

 

 

Sale of Fixed Assets, Land and Building Located in Morganfield, Kentucky

In December 2016, the Company sold the fixed assets, land and building located in Morganfield, Kentucky, with a net carrying value of $0.3 million, for cash of $0.5 million (net of selling costs of less than $0.1 million). This resulted in a net gain on disposal of property and equipment of $0.2 million, which is included in “General and administrative” in the accompanying Consolidated Statement of Operations for the year ended December 31, 2016.

Winter Storm Damage

In February 2015, customer engagement centers located in Perry County, Kentucky, Buchanan County, Virginia, and Wise, Virginia experienced damage as a result of winter storms. The Company filed an insurance claim with its property insurance company to recover losses of $1.6 million, which was received. The claim was finalized during 2015, resulting in a $0.9 million net gain on insurance settlement included in “General and administrative” in the accompanying Consolidated Statement of Operations for the year ended December 31, 2015.

Deferred Charges and Other Assets
Deferred Charges and Other Assets

Note 13. Deferred Charges and Other Assets

Deferred charges and other assets consist of the following (in thousands):

 

     December 31,  
     2017      2016  

Equity method investments (Note 1)

   $ 10,341      $ 449  

Non-current deferred tax assets (Note 20)

     6,657        12,983  

Rent and other deposits

     5,379        4,816  

Non-current value added tax receivables

     548        581  

Non-current mandatory tax security deposits (Note 20)

     -        13,810  

Other

     6,268        5,855  
  

 

 

    

 

 

 
   $           29,193      $           38,494  
  

 

 

    

 

 

 
Accrued Employee Compensation and Benefits
Accrued Employee Compensation and Benefits

Note 14. Accrued Employee Compensation and Benefits

Accrued employee compensation and benefits consist of the following (in thousands):

 

     December 31,  
     2017      2016  

Accrued compensation

   $ 42,505      $ 38,774  

Accrued bonus and commissions

     22,523        17,540  

Accrued vacation

     18,848        17,607  

Accrued employment taxes

     11,412        12,134  

Other

     7,611        6,497  
  

 

 

    

 

 

 
   $             102,899      $             92,552  
  

 

 

    

 

 

 
Deferred Revenue
Deferred Revenue

Note 15. Deferred Revenue

Deferred revenue consists of the following (in thousands):

 

     December 31,  
     2017      2016  

Future service

   $ 26,353      $ 27,116  

Estimated potential penalties and holdbacks

     4,339        6,593  

Estimated chargebacks

     4,025        5,027  
  

 

 

    

 

 

 
   $             34,717      $             38,736  
  

 

 

    

 

 

 
Other Accrued Expenses and Current Liabilities
Other Accrued Expenses and Current Liabilities

Note 16. Other Accrued Expenses and Current Liabilities

Other accrued expenses and current liabilities consist of the following (in thousands):

 

     December 31,  
     2017      2016  

Accrued legal and professional fees

   $ 3,417      $ 2,956  

Accrued rent

     2,983        2,911  

Accrued roadside assistance claim costs

     2,011        1,997  

Accrued utilities

     1,694        1,704  

Accrued telephone charges

     1,515        1,444  

Accrued equipment and software

     946        745  

Customer deposits

     813        2,291  

Financial derivatives (Note 10)

     364        2,086  

Contingent consideration (Note 4)

     -        6,100  

Other

     17,145        15,685  
  

 

 

    

 

 

 
   $             30,888      $             37,919  
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 17. Deferred Grants

Deferred grants, net of accumulated amortization, consist of the following (in thousands):

 

     December 31,  
     2017      2016  

Property grants

   $ 2,843      $ 3,353  

Lease grants

     507        502  

Employment grants

     61        67  
  

 

 

    

 

 

 

Total deferred grants

     3,411        3,922  

Less: Lease grants - short-term (1)

     (117      (94

Less: Employment grants - short-term (1)

     (61      (67
  

 

 

    

 

 

 

Total long-term deferred grants

   $             3,233      $             3,761  
  

 

 

    

 

 

 

 

(1) Included in “Other accrued expenses and current liabilities” in the accompanying Consolidated Balance Sheets.

Borrowings
Borrowings

Note 18. Borrowings

On May 12, 2015, the Company entered into a $440 million revolving credit facility (the “2015 Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”). The 2015 Credit Agreement replaced the Company’s previous $245 million revolving credit facility dated May 3, 2012 (the “2012 Credit Agreement”), as amended, which agreement was terminated simultaneous with entering into the 2015 Credit Agreement. The 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.

The 2015 Credit Agreement includes a $200 million alternate-currency sub-facility, a $10 million swingline sub-facility and a $35 million letter of credit sub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. The Company is not currently aware of any inability of its lenders to provide access to the full commitment of funds that exist under the revolving credit facility, if necessary. However, there can be no assurance that such facility will be available to the Company, even though it is a binding commitment of the financial institutions.

The 2015 Credit Agreement matures on May 12, 2020, and had outstanding borrowings of $275.0 million and $267.0 million as of December 31, 2017 and 2016, respectively, included in “Long-term debt” in the accompanying Consolidated Balance Sheets.

On April 1, 2016, the Company borrowed $216.0 million under its 2015 Credit Agreement in connection with the acquisition of Clearlink.

Borrowings under the 2015 Credit Agreement bear interest at the rates set forth in the 2015 Credit Agreement. In addition, the Company is required to pay certain customary fees, including a commitment fee determined quarterly based on the Company’s leverage ratio and due quarterly in arrears and calculated on the average unused amount of the 2015 Credit Agreement.

The 2015 Credit Agreement is guaranteed by all of the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of the non-voting and 65% of the voting capital stock of all the direct foreign subsidiaries of the Company and those of the guarantors.

In May 2015, the Company paid an underwriting fee of $0.9 million for the 2015 Credit Agreement, which is deferred and amortized over the term of the loan, along with the deferred loan fees of $0.4 million related to the 2012 Credit Agreement.

The following table presents information related to our credit agreements (dollars in thousands):

 

     Years Ended December 31,  
     2017     2016     2015  

Average daily utilization

   $             268,775     $             222,612     $             69,964  

Interest expense (1), (2)

   $ 6,668     $ 3,952     $ 1,307  

Weighted average interest rate (2)

     2.5     1.8     1.9

(1) Excludes the amortization of deferred loan fees.

  

 

(2) Includes the commitment fee.

  

 
Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)

Note 19. Accumulated Other Comprehensive Income (Loss)

The Company presents data in the Consolidated Statements of Changes in Shareholders’ Equity in accordance with ASC 220, Comprehensive Income (“ASC 220”). ASC 220 establishes rules for the reporting of comprehensive income (loss) and its components. The components of accumulated other comprehensive income (loss) consist of the following (in thousands):

 

     Foreign
Currency
Translation
Gain (Loss)
    Unrealized
Gain (Loss)
on Net
Investment
Hedges
    Unrealized
Gain (Loss)
on Cash
Flow
Hedging
Instruments
    Unrealized
Actuarial
Gain (Loss)
Related to
Pension
Liability
    Unrealized
Gain (Loss)
on Post
Retirement
Obligation
    Total  

Balance at January 1, 2015

   $ (22,076   $ 276     $ (111   $ 1,008     $ 342     $     (20,561

Pre-tax amount

     (37,178     6,101       1,708       121       (12     (29,260

Tax (provision) benefit

     -       (2,207     32       (2     -       (2,177

Reclassification of (gain) loss to net income

     647       -       (2,195     (53     (63     (1,664

Foreign currency translation

     6       -       39       (45     -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     (58,601     4,170       (527     1,029       267       (53,662

Pre-tax amount

     (13,832     3,409       (2,313     212       (9     (12,533

Tax (provision) benefit

     -       (1,313     72       (8     -       (1,249

Reclassification of (gain) loss to net income

     -       -       527       (52     (58     417  

Foreign currency translation

     40       -       16       (56     -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     (72,393     6,266       (2,225     1,125       200       (67,027

Pre-tax amount

     36,101       (8,352     2,276       527       (30     30,522  

Tax (provision) benefit

     -       3,132       (54     (18     -       3,060  

Reclassification of (gain) loss to net income

     -       -       2,444       (53     (50     2,341  

Foreign currency translation

     (23     -       30       (7     -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

   $ (36,315   $ 1,046     $ 2,471     $ 1,574     $ 120     $ (31,104
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the amounts reclassified to net income from accumulated other comprehensive income (loss) and the associated line item in the accompanying Consolidated Statements of Operations (in thousands):

 

           Years Ended December 31,            Statements of Operations 
Location
 
       2017         2016         2015          

Foreign Currency Translation Gain (Loss): (1)

        

Pre-tax amount

   $ -     $ -     $ (647    
Other income (expense),
net
 
 

Tax (provision) benefit

     -       -       -       Income taxes  
  

 

 

   

 

 

   

 

 

   

Reclassification to net income

     -       -       (647  

Gain (Loss) on Cash Flow Hedging Instruments: (2)

        

Pre-tax amount

     (2,537 )      (558     2,150       Revenues  

Tax (provision) benefit

     93       31       45       Income taxes  
  

 

 

   

 

 

   

 

 

   

Reclassification to net income

     (2,444 )      (527     2,195    

Actuarial Gain (Loss) Related to Pension Liability: (3)

        

Pre-tax amount

     43       40       41      
Direct salaries and related
costs
 
 

Tax (provision) benefit

     10       12       12       Income taxes  
  

 

 

   

 

 

   

 

 

   

Reclassification to net income

     53       52       53    

Gain (Loss) on Post Retirement Obligation: (3),(4)

        

Reclassification to net income

     50       58       63       General and administrative  
  

 

 

   

 

 

   

 

 

   

Total reclassification of gain (loss) to net income

   $     (2,341)     $     (417)     $     1,664    
  

 

 

   

 

 

   

 

 

   

(1) See Note 26, Other Income (Expense), for further information.

(2) See Note 10, Financial Derivatives, for further information.

(3) See Note 23, Defined Benefit Pension Plan and Postretirement Benefits, for further information.

(4) No related tax (provision) benefit.

As discussed in Note 20, Income Taxes, 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 have been provided.

Income Taxes
Income Taxes

Note 20. Income Taxes

The income before income taxes consists of the following (in thousands):

 

                     Years Ended December 31,                   
     2017      2016      2015  

Domestic (U.S., state and local)

   $ 9,662      $ 34,761      $ 41,178  

Foreign

     71,645        54,123        48,805  
  

 

 

    

 

 

    

 

 

 

Total income before income taxes

   $     81,307      $     88,884      $     89,983  
  

 

 

    

 

 

    

 

 

 

Significant components of the income tax provision are as follows (in thousands):

 

                     Years Ended December 31,                   
     2017      2016      2015  

Current:

        

U.S. federal

   $ 29,986      $ 9,514      $ 7,374  

State and local

     855        1,958        1,051  

Foreign

     10,342        12,683        10,446  
  

 

 

    

 

 

    

 

 

 

Total current provision for income taxes

     41,183        24,155        18,871  
  

 

 

    

 

 

    

 

 

 

Deferred:

        

U.S. federal

   $ 7,919        2,007        3,873  

State and local

     922        (526      (1,227

Foreign

     (933      858        (131
  

 

 

    

 

 

    

 

 

 

Total deferred provision (benefit) for income taxes

     7,908        2,339        2,515  
  

 

 

    

 

 

    

 

 

 

Total provision for income taxes

   $     49,091      $     26,494      $     21,386  
  

 

 

    

 

 

    

 

 

 

The temporary differences that give rise to significant portions of the deferred income tax provision (benefit) are as follows (in thousands):

 

     Years Ended December 31,  
     2017      2016      2015  

Net operating loss and tax credit carryforwards

   $ 1,231      $ 285      $ 3,564  

Accrued expenses/liabilities

     16,470        1,173        2,856  

Depreciation and amortization

     (10,571      1,286        (2,231

Valuation allowance

     (1,441      901        (1,958

Deferred statutory income

     2,479        (1,394      266  

Other

     (260      88        18  
  

 

 

    

 

 

    

 

 

 

Total deferred provision (benefit) for income taxes

   $             7,908      $             2,339      $             2,515  
  

 

 

    

 

 

    

 

 

 

The reconciliation of the income tax provision computed at the U.S. federal statutory tax rate to the Company’s effective income tax provision is as follows (in thousands):

 

     Years Ended December 31,  
     2017      2016      2015  

Tax at U.S. federal statutory tax rate

   $ 28,457      $ 31,109      $ 31,494  

State income taxes, net of federal tax benefit

     594        1,432        (177

Foreign rate differential

     (14,736      (15,837      (14,030

Tax holidays

     (2,951      (3,314      (4,031

Permanent differences

     8,749        12,768        11,737  

Tax credits

     (5,102      (4,396      (4,102

Foreign withholding and other taxes

     2,661        2,667        2,321  

Changes in valuation allowance

     (1,689      994        (631

Changes in uncertain tax positions

     (1,812      398        (1,858

Statutory tax rate changes

     2,536        242        (340

2017 Tax Reform Act

     32,705        -        -  

Other

     (321      431        1,003  
  

 

 

    

 

 

    

 

 

 

Total provision for income taxes

   $             49,091      $             26,494      $             21,386  
  

 

 

    

 

 

    

 

 

 

Withholding taxes on offshore cash movements assessed by certain foreign governments of $1.7 million, $2.0 million and $1.7 million were included in the provision for income taxes in the accompanying Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, respectively.

On December 22, 2017, the 2017 Tax Reform Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a participation exemption regime, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the 2017 Tax Reform Act and guidance available as of the date of this filing and as a result have recorded $32.7 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The $32.7 million estimate includes the provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings of $32.7 million based on cumulative foreign earnings of $531.8 million and $1.0 million of foreign withholding taxes on certain anticipated distributions. The provisional tax expense was partially offset by a provisional benefit of $1.0 million related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.

No additional income taxes have been provided for any remaining outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining outside basis difference in these entities is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Reform Act. In accordance with SAB 118, we have determined that the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of identification, but no later than one year from the enactment date.

The Company has been granted tax holidays in The Philippines, Colombia, Costa Rica and El Salvador. The tax holidays have various expiration dates ranging from 2019 through 2028. In some cases, the tax holidays expire without possibility of renewal. In other cases, the Company expects to renew these tax holidays, but there are no assurances from the respective foreign governments that they will renew them. This could potentially result in future adverse tax consequences in the local jurisdiction, the impact of which is not practicable to estimate due to the inherent complexity of estimating critical variables such as long-term future profitability, tax regulations and rates in the multi-national tax environment in which the Company operates. The Company’s tax holidays decreased the provision for income taxes by $3.0 million ($0.07 per diluted share), $3.3 million ($0.08 per diluted share) and $4.0 million ($0.09 per diluted share) for the years ended December 31, 2017, 2016 and 2015, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income taxes. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below (in thousands):

 

     December 31,  
     2017      2016  

Deferred tax assets:

     

Net operating loss and tax credit carryforwards

   $                 33,803      $                 31,297  

Valuation allowance

     (32,443      (30,221

Accrued expenses

     9,938        25,593  

Deferred revenue

     4,544        7,031  

Depreciation and amortization

     1,628        1,062  

Other

     229        15  
  

 

 

    

 

 

 
     17,699        34,777  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Depreciation and amortization

     (12,999      (23,177

Deferred statutory income

     (938      (986

Accrued liabilities

     (2,849      (1,604

Other

     (258      (104
  

 

 

    

 

 

 
     (17,044      (25,871
  

 

 

    

 

 

 

Net deferred tax assets

   $                 655      $                 8,906  
  

 

 

    

 

 

 
     December 31,  
     2017      2016  

Classified as follows:

     

Deferred charges and other assets (Note 13)

   $                 6,657      $                 12,983  

Other long-term liabilities

     (6,002      (4,077
  

 

 

    

 

 

 

Net deferred tax assets

   $                 655      $                 8,906  
  

 

 

    

 

 

 

There are approximately $158.8 million of income tax loss carryforwards as of December 31, 2017, with varying expiration dates, approximately $127.2 million relating to foreign operations and $31.6 million relating to U.S. state operations. With respect to foreign operations, $102.1 million of the net operating loss carryforwards have an indefinite expiration date and the remaining $25.1 million net operating loss carryforwards have varying expiration dates through December 2038. Regarding the foreign and U.S. state aforementioned tax loss carryforwards, no benefit has been recognized for $121.5 million and $23.8 million, respectively, as the Company does not anticipate that the losses will more likely than not be fully utilized.

The Company has accrued $1.3 million and $8.5 million as of December 31, 2017 and 2016, respectively, excluding penalties and interest, for the liability for unrecognized tax benefits. The decrease is primarily due to the effective settlement of the Canadian Revenue Agency audit. The $1.3 million and $8.5 million of the unrecognized tax benefits at December 31, 2017 and 2016, respectively, were recorded in “Long-term income tax liabilities” in the accompanying Consolidated Balance Sheets. Had the Company recognized these tax benefits, approximately $1.3 million and $8.5 million, and the related interest and penalties, would have favorably impacted the effective tax rate in 2017 and 2016, respectively. The Company anticipates that approximately $0.4 million of the unrecognized tax benefits will be recognized in the next twelve months due to a lapse in the applicable statute of limitations.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had $1.3 million and $10.8 million accrued for interest and penalties as of December 31, 2017 and 2016, respectively. Of the accrued interest and penalties at December 31, 2017 and 2016, $0.8 million and $3.5 million, respectively, relate to statutory penalties. The amount of interest and penalties, net, included in the provision for income taxes in the accompanying Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 was $(9.5) million, $0.4 million and $0.3 million, respectively.

The tabular reconciliation of the amounts of unrecognized net tax benefits is presented below (in thousands):

 

     Years Ended December 31,  
     2017      2016      2015  

Gross unrecognized tax benefits as of January 1,

   $                 8,531      $                 8,116      $                 13,285  

Decreases from settlements with tax authorities

     (10,865      -        -  

Decreases due to lapse in applicable statute of limitations

     (466      -        (2,206

Foreign currency translation increases (decreases)

     4,142        415        (2,963
  

 

 

    

 

 

    

 

 

 

Gross unrecognized tax benefits as of December 31,

   $                 1,342      $                 8,531      $                 8,116  
  

 

 

    

 

 

    

 

 

 

The Company received assessments for the Canadian 2003-2009 audit. Requests for Competent Authority Assistance were filed with both the Canadian Revenue Agency and the U.S. Internal Revenue Service and the Company paid mandatory security deposits to Canada as part of this process. The total amount of deposits was $13.8 million as of December 31, 2016 (none at December 31, 2017) and was included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets. As of June 30, 2017, the Company determined that all material aspects of the Canadian audit were effectively settled pursuant to ASC 740. As a result, the Company recognized an income tax benefit of $1.2 million, net of the U.S. tax impact, and the deposits were applied against the anticipated liability.

With the effective settlement of the Canadian audit, the Company has no significant tax jurisdictions under audit; however, the Company is currently under audit in several tax jurisdictions. The Company believes it is adequately reserved for the remaining audits and their resolution is not expected to have a material impact on its financial conditions and results of operations.

The Company and its subsidiaries file federal, state and local income tax returns as required in the U.S. and in various foreign tax jurisdictions. The major tax jurisdictions and tax years that are open and subject to examination by the respective tax authorities as of December 31, 2017 are tax years 2014 through 2017 for the U.S. The 2003 to 2013 tax years for the U.S. are open to the extent of the tax credit carryforward amounts.

Earnings Per Share
Earnings Per Share

Note 21. Earnings Per Share

Basic earnings per share is 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 a rabbi trust using the treasury stock method.

The numbers of shares used in the earnings per share computation are as follows (in thousands):

 

     Years Ended December 31,  
             2017                        2016                        2015          

Basic:

            

Weighted average common shares outstanding

     41,822          41,847          41,899  

Diluted:

            

Dilutive effect of stock appreciation rights, restricted
stock, restricted stock units and shares held
in rabbi trust

     319          392          548  
  

 

 

      

 

 

      

 

 

 

Total weighted average diluted shares outstanding

     42,141          42,239          42,447  
  

 

 

      

 

 

      

 

 

 

Anti-dilutive shares excluded from the diluted earnings per
share calculation

     46          20          20  
  

 

 

      

 

 

      

 

 

 

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.

The shares repurchased under the Company’s share repurchase programs were as follows (in thousands, except per share amounts):