SYKES ENTERPRISES INC, 10-Q filed on 8/9/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Jul. 20, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
SYKE 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
Entity Central Index Key
0001010612 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
43,009,233 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 301,451 
$ 266,675 
Receivables, net
332,501 
318,558 
Prepaid expenses
22,060 
21,973 
Other current assets
15,939 
16,030 
Total current assets
671,951 
623,236 
Property and equipment, net
160,104 
156,214 
Goodwill, net
266,934 
265,404 
Intangibles, net
144,751 
153,055 
Deferred charges and other assets
16,892 
38,494 
Total assets
1,260,632 
1,236,403 
Current liabilities:
 
 
Accounts payable
25,414 
29,163 
Accrued employee compensation and benefits
92,075 
92,552 
Income taxes payable
2,094 
4,487 
Deferred revenue
40,485 
38,736 
Other accrued expenses and current liabilities
35,244 
37,919 
Total current liabilities
195,312 
202,857 
Deferred grants
3,520 
3,761 
Long-term debt
267,000 
267,000 
Long-term income tax liabilities
3,399 
19,326 
Other long-term liabilities
21,221 
18,937 
Total liabilities
490,452 
511,881 
Commitments and loss contingency (Note 14)
   
   
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; 43,009 and 42,895 shares issued, respectively
430 
429 
Additional paid-in capital
279,523 
281,357 
Retained earnings
542,184 
518,611 
Accumulated other comprehensive income (loss)
(49,877)
(67,027)
Treasury stock at cost: 120 and 362 shares, respectively
(2,080)
(8,848)
Total shareholders' equity
770,180 
724,522 
Total liabilities and shareholders' equity
$ 1,260,632 
$ 1,236,403 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 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
43,009,000 
42,895,000 
Treasury stock, shares
120,000 
362,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Income Statement [Abstract]
 
 
 
 
Revenues
$ 375,438 
$ 364,402 
$ 759,452 
$ 685,148 
Operating expenses:
 
 
 
 
Direct salaries and related costs
248,643 
239,442 
495,808 
444,997 
General and administrative
92,246 
94,335 
184,300 
174,845 
Depreciation, net
13,820 
11,960 
27,168 
22,744 
Amortization of intangibles
5,250 
5,263 
10,481 
8,890 
Impairment of long-lived assets
4,189 
 
4,391 
 
Total operating expenses
364,148 
351,000 
722,148 
651,476 
Income from operations
11,290 
13,402 
37,304 
33,672 
Other income (expense):
 
 
 
 
Interest income
144 
141 
299 
294 
Interest (expense)
(1,865)
(1,581)
(3,564)
(2,389)
Other income (expense), net
831 
1,067 
1,683 
1,620 
Total other income (expense), net
(890)
(373)
(1,582)
(475)
Income before income taxes
10,400 
13,029 
35,722 
33,197 
Income taxes
1,555 
3,891 
8,165 
10,105 
Net income
$ 8,845 
$ 9,138 
$ 27,557 
$ 23,092 
Net income per common share:
 
 
 
 
Basic
$ 0.21 
$ 0.22 
$ 0.66 
$ 0.55 
Diluted
$ 0.21 
$ 0.22 
$ 0.66 
$ 0.55 
Weighted average common shares outstanding:
 
 
 
 
Basic
41,854 
41,970 
41,756 
41,838 
Diluted
41,934 
42,101 
41,919 
42,101 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 8,845 
$ 9,138 
$ 27,557 
$ 23,092 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Foreign currency translation gain (loss), net of taxes
16,484 
(9,599)
20,382 
4,300 
Unrealized gain (loss) on net investment hedges, net of taxes
(2,936)
1,497 
(3,304)
(433)
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(16)
(35)
(39)
(26)
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
(396)
(1,996)
136 
434 
Unrealized gain (loss) on postretirement obligation, net of taxes
(12)
(14)
(25)
(27)
Other comprehensive income (loss), net of taxes
13,124 
(10,147)
17,150 
4,248 
Comprehensive income (loss)
$ 21,969 
$ (1,009)
$ 44,707 
$ 27,340 
Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $)
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, 2016
$ 724,522 
$ 429 
$ 281,357 
$ 518,611 
$ (67,027)
$ (8,848)
Beginning Balance, shares at Dec. 31, 2016
 
42,895 
 
 
 
 
Cumulative effect of accounting change (Accounting Standards Update 2016-09 [Member])
79 
 
232 
(153)
 
 
Stock-based compensation expense
4,732 
 
4,732 
 
 
 
Issuance of common stock under equity award plans, net of shares withheld for employee taxes
(3,860)
(3,604)
 
 
(260)
Issuance of common stock under equity award plans, net of shares withheld for employee taxes, shares
 
364 
 
 
 
 
Retirement of treasury stock
 
(3)
(3,194)
(3,831)
 
7,028 
Retirement of treasury stock, shares
 
(250)
 
 
 
 
Comprehensive income (loss)
44,707 
 
 
27,557 
17,150 
 
Ending Balance at Jun. 30, 2017
$ 770,180 
$ 430 
$ 279,523 
$ 542,184 
$ (49,877)
$ (2,080)
Ending Balance, shares at Jun. 30, 2017
 
43,009 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
 
 
Net income
$ 27,557 
$ 23,092 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
27,423 
23,059 
Amortization of intangibles
10,481 
8,890 
Amortization of deferred grants
(374)
(444)
Impairment losses
4,391 
 
Unrealized foreign currency transaction (gains) losses, net
(611)
(2,316)
Stock-based compensation expense
4,732 
5,729 
Deferred income tax provision (benefit)
9,785 
(2,219)
Unrealized (gains) losses on financial instruments, net
42 
611 
Amortization of deferred loan fees
134 
134 
Imputed interest expense and fair value adjustments to contingent consideration
(633)
509 
Other
144 
(166)
Changes in assets and liabilities, net of acquisitions:
 
 
Receivables
9,059 
(1,581)
Prepaid expenses
78 
(2,952)
Other current assets
(1,855)
(2,316)
Deferred charges and other assets
(1,008)
(1,509)
Accounts payable
2,420 
(3,145)
Income taxes receivable / payable
(14,086)
273 
Accrued employee compensation and benefits
(1,779)
12,896 
Other accrued expenses and current liabilities
(2,916)
3,009 
Deferred revenue
2,398 
3,623 
Other long-term liabilities
(3,813)
1,501 
Net cash provided by operating activities
71,569 
66,678 
Cash flows from investing activities:
 
 
Capital expenditures
(35,859)
(34,409)
Cash paid for business acquisition, net of cash acquired
(7,500)
(205,324)
Proceeds from sale of property and equipment
25 
37 
Investment in restricted cash
(33)
(228)
Release of restricted cash
21 
77 
Net investment hedge settlement
 
10,339 
Purchase of intangible assets
(275)
 
Net cash (used for) investing activities
(43,621)
(229,508)
Cash flows from financing activities:
 
 
Payments of long-term debt
 
(14,000)
Proceeds from issuance of long-term debt
 
216,000 
Proceeds from grants
107 
89 
Shares repurchased for tax withholding on equity awards
(3,860)
(4,915)
Payments of contingent consideration related to acquisitions
(4,528)
 
Net cash provided by (used for) financing activities
(8,281)
197,174 
Effects of exchange rates on cash and cash equivalents
15,109 
3,512 
Net increase in cash and cash equivalents
34,776 
37,856 
Cash and cash equivalents - beginning
266,675 
235,358 
Cash and cash equivalents - ending
301,451 
273,214 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
3,066 
1,497 
Cash paid during period for income taxes
17,032 
11,229 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
3,742 
6,990 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
(25)
(27)
Shares repurchased for tax withholding on equity awards included in current liabilities
$ 119 
$ 51 
Overview and Basis of Presentation
Overview and Basis of Presentation

Note 1. Overview and Basis of Presentation

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a global business processing outsourcing leader in providing comprehensive inbound customer engagement solutions and services to Global 2000 companies, primarily in the communications, financial services, healthcare, technology, transportation and leisure, retail and other industries. SYKES’ differentiated end-to-end solutions and service platform effectively engages consumers at every touch point in their customer lifecycle, starting from digital marketing and acquisition to customer support, up-sell/cross-sell and retention. The Company serves its clients through two geographic operating regions: the Americas (United States, Canada, Latin America, Australia and the Asia Pacific Rim) and EMEA (Europe, the Middle East and Africa). Our Americas and EMEA regions primarily provide customer engagement services (with an emphasis on inbound technical support, digital marketing and demand generation, and customer service), which includes customer assistance, healthcare and roadside assistance, technical support, and product and service sales to its clients’ customers. These services are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. The Company 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. SYKES has developed an extensive global reach with customer engagement centers across six continents, including North America, South America, Europe, Asia, Australia and Africa. The Company delivers cost-effective solutions that enhance the customer service experience, promote stronger brand loyalty, and bring out high levels of performance and profitability.

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 Condensed Consolidated Financial Statements since May 31, 2017. See Note 2, Acquisitions, for additional information on the acquisition.

On April 1, 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 Condensed Consolidated Financial Statements since April 1, 2016. See Note 2, Acquisitions, for additional information on the acquisition.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2017. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

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. As of June 30, 2017 and December 31, 2016, the Company had less than $0.1 million of capitalized direct-response advertising costs included in “Prepaid expenses” in the accompanying Condensed Consolidated Balance Sheets. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Income Statements for the three months ended June 30, 2017 and 2016 were $8.6 million and $8.0 million, respectively, and $18.4 million and $8.0 million for the six months ended June 30, 2017 and 2016, respectively.

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

New Accounting Standards Not Yet Adopted

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”). 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. In 2016, the FASB issued additional ASUs that are part of the overall new revenue guidance including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, ASU 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients.

The Company is continuing to evaluate the impact of ASU 2014-09 and the related ASUs on its financial condition, results of operations and cash flows. The Company anticipates that it will apply the modified retrospective adoption alternative for these amendments, which will result in a cumulative effect adjustment to retained earnings 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 has established an implementation team tasked with evaluating provisions within its contracts as well as reviewing accounting policies and internal controls. Based on the preliminary results of its evaluation, the Company does not expect the adoption of these ASUs on January 1, 2018 to have a material impact on the timing of recognition of revenue; however, the Company is still assessing the requirement to estimate variable consideration, such as performance-related bonus and penalty provisions. The Company expects to complete its assessment by the end of the third quarter of 2017.

 

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 Accounting Standards Codification (“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.

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 due to the amount of the Company’s lease commitments. However, the amendments will likely have an insignificant impact on our 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.

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.

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 financial condition, results of operations and cash flows.

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 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 financial condition, results of operations and cash flows.

 

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.

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 Company does not expect the adoption of ASU 2017-04 to materially impact its financial condition, results of operations and cash flows.

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.

New Accounting Standards Recently Adopted

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 2016-05, 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.

 

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 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016 was adjusted as follows: a $2.1 million increase to net cash provided by operating activities and a $2.1 million decrease to net cash provided by financing activities. Additionally, the Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 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.

Acquisitions
Acquisitions

Note 2. Acquisitions

Telecommunications Asset Acquisition

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

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

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 expands the Company’s suite of service offerings while creating differentiation in the marketplace, broadening its addressable market opportunity and extending executive level reach within the Company’s existing clients’ organization. This resulted in the Company paying a substantial premium for Clearlink resulting in the recognition of goodwill. Pursuant to Federal income tax laws, intangible assets 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 (in thousands):

 

     Total

Cash (1)

    $ 209,186  

Working capital adjustment

     (1,278
  

 

 

 

    $                 207,908  
  

 

 

 

 

(1) Funded through borrowings under the Company’s credit agreement. See Note 10, Borrowings, for more information.

 

Approximately $2.6 million of the purchase price was placed in an escrow account as security for the indemnification obligations of Clearlink’s members under the merger agreement. The escrow was released pursuant to the terms of the escrow agreement, but the Company has subsequently asserted a claim of approximately $0.4 million against the Clearlink members, which claim remains under negotiation between the parties.

The following table summarizes the final purchase price allocation of the fair values of the assets acquired and liabilities assumed, all included in the Americas segment (in thousands):

 

     Amount

Cash and cash equivalents

    $ 2,584  

Receivables (1)

     16,801  

Prepaid expenses

     1,553  
  

 

 

 

Total current assets

     20,938  

Property and equipment

     12,869  

Goodwill

     70,563  

Intangibles

     121,400  

Deferred charges and other assets

     229  

Accounts payable

     (3,564

Accrued employee compensation and benefits

     (1,610

Income taxes payable

     (340

Deferred revenue

     (4,620

Other accrued expenses and current liabilities

     (6,324
  

 

 

 

Total current liabilities

     (16,458

Other long-term liabilities

     (1,633
  

 

 

 

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

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

 

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

 

          Weighted Average
           Amortization Period 
         Amount Assigned        (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 Condensed Consolidated Statements of Operations for both the three and six months ended June 30, 2016, were as follows (in thousands):

 

       From April 1, 2016  
     Through
     June 30, 2016

Revenues

    $ 36,362  

Net income

    $ 791  

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 three and six month periods ended June 30, 2016. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2016 (in thousands):

 

                                           
     Three Months Ended
June 30, 2016
     Six Months Ended  
June 30, 2016

Revenues

    $ 364,403       $ 718,977  

Net income

    $ 10,975       $ 25,895  

Net income per common share:

     

Basic

    $ 0.26       $ 0.62  

Diluted

    $ 0.26       $ 0.62  

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, together with the consequential tax effects. In addition, these amounts exclude costs incurred which were directly attributable to the acquisition, and which did not have a continuing impact on the combined companies’ operating results. 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 Condensed Consolidated Statement of Operations were as follows (none in 2017) (in thousands):

 

                                                       
     Three Months Ended      Six Months Ended  
     June 30, 2016    June 30, 2016

Americas

     $ 29        $ 29  

Other

     2,934        4,376  
  

 

 

 

  

 

 

 

     $ 2,963        $ 4,405  
  

 

 

 

  

 

 

 

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 (the “Exit Plans”) in an on-going effort to manage and optimize capacity utilization. These Exit Plans included, but were not limited to, closing customer engagement centers in the Philippines, the United Kingdom, Ireland and South Africa and consolidating leased space in various locations in the U.S. and the Netherlands. These Exit Plans impacted approximately 800 employees.

The Company paid $16.2 million in cash through December 31, 2016 under these Exit Plans for lease obligations and facility exit costs, severance and related costs and legal-related costs. As of December 31, 2016, there were no remaining outstanding liabilities related to the Exit Plans.

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three and six months ended June 30, 2016 (none in 2017) (in thousands):

 

                                                       
     Three Months Ended        Six Months Ended    
     June 30, 2016    June 30, 2016

Beginning accrual

     $ 527        $ 733  

Cash payments (1)

     (208      (414
  

 

 

 

  

 

 

 

Ending accrual

     $ 319        $ 319  
  

 

 

 

  

 

 

 

(1) Related to lease obligations and facility exit costs.

 

  
Fair Value
Fair Value

Note 4. Fair Value

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

 

   

Level 1 Quoted prices for identical instruments in active markets.

   

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

   

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

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

 

   

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

   

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

   

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

   

Long-term debt The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates.

   

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

 

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

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

Determination of Fair Value The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value, and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency exchange rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

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

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

Embedded Derivatives The Company uses significant unobservable inputs to determine the fair value of embedded derivatives, which are classified in Level 3 of the fair value hierarchy. These unobservable inputs include expected cash flows associated with the lease, currency exchange rates on the day of commencement, as well as forward currency exchange rates, the results of which are adjusted for credit risk. These items are classified in Level 3 of the fair value hierarchy. See Note 6, Financial Derivatives, for further information.

Investments Held in Rabbi Trust The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 7, Investments Held in Rabbi Trust, and Note 16, Stock-Based Compensation.

Contingent Consideration The Company uses significant unobservable inputs to determine the fair value of contingent consideration, which is classified in Level 3 of the fair value hierarchy. The contingent consideration recorded related to the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”) on July 2, 2015 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.

 

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of June 30, 2017 (in thousands):

 

                                                                                                                            
               Fair Value Measurements at June 30, 2017 Using:
               Quoted Prices    Significant     
               in Active    Other    Significant
               Markets For    Observable    Unobservable
          Balance at    Identical Assets    Inputs    Inputs
          June 30, 2017    Level (1)    Level (2)    Level (3)

Assets:

              

Foreign currency forward and option contracts

   (1)     $ 356       $ -           $ 356       $ -      

Embedded derivatives

   (1)      84        -            -            84  

Equity investments held in rabbi trust for the Deferred Compensation Plan

   (2)      7,446        7,446        -            -      

Debt investments held in rabbi trust for the Deferred Compensation Plan

   (2)      3,283        3,283        -            -      
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 11,169       $ 10,729       $ 356       $ 84  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities:

              

Long-term debt

   (3)     $ 267,000       $ -           $ 267,000       $ -      

Foreign currency forward and option contracts

   (1)      4,468        -            4,468        -      

Embedded derivatives

   (1)      255        -            -            255  

Contingent consideration

   (4)      1,127        -            -            1,127  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 272,850       $ -           $ 271,468       $ 1,382  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of December 31, 2016 (in thousands):

 

 

               Fair Value Measurements at December 31, 2016 Using:
               Quoted Prices    Significant     
               in Active    Other    Significant
               Markets For    Observable    Unobservable
          Balance at    Identical Assets    Inputs    Inputs
          December 31, 2016    Level (1)    Level (2)    Level (3)

Assets:

              

Foreign currency forward and option contracts

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

Embedded derivatives

   (1)      12        -            -            12  

Equity investments held in rabbi trust for the Deferred Compensation Plan

   (2)      7,470        7,470        -            -      

Debt investments held in rabbi trust for the Deferred Compensation Plan

   (2)      1,944        1,944        -            -      
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities:

              

Long-term debt

   (3)     $ 267,000       $ -           $ 267,000       $ -      

Foreign currency forward and option contracts

   (1)      1,912        -            1,912        -      

Embedded derivatives

   (1)      567        -            -            567  

Contingent consideration

   (4)      6,100        -            -            6,100  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 275,579       $ -           $ 268,912       $ 6,667  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

(1) See Note 6, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.

(2) Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 7, Investments Held in Rabbi Trust.

(3) The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 10, Borrowings.

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

 

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

Embedded Derivatives in Lease Agreements

A rollforward of the net asset (liability) activity in the Company’s fair value of the embedded derivatives is as follows (in thousands):

 

                              
     Fair Value

Balance at January 1, 2016

    $ -      

Gain (loss) recognized in “Other income (expense)” (1)

     (714

Effect of foreign currency

     159  
  

 

 

 

Balance at December 31, 2016

    $ (555

Gain (loss) recognized in “Other income (expense)” (1)

     315  

Effect of foreign currency

     69  
  

 

 

 

Balance at June 30, 2017

    $ (171
  

 

 

 

Unrealized gain (loss) for the three months ended June 30, 2016

    $ (12
  

 

 

 

Unrealized gain (loss) for the six months ended June 30, 2016

    $ 43  
  

 

 

 

Unrealized gain (loss) for the three months ended June 30, 2017

    $ 200  
  

 

 

 

Unrealized gain (loss) for the six months ended June 30, 2017

    $ 384  
  

 

 

 

(1) Includes realized and unrealized gain (loss).

  

Contingent Consideration

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

 

                              
     Fair Value

Balance at January 1, 2016

    $ 6,280  

Acquisition (1)

     2,779  

Payments

     (1,396

Imputed interest

     754  

Fair value (gain) loss adjustments

     (2,250

Effect of foreign currency

     (67
  

 

 

 

Balance at December 31, 2016

     6,100  

Payments

     (4,528

Imputed interest

     68  

Fair value (gain) loss adjustments

     (701

Effect of foreign currency

     188  
  

 

 

 

Balance at June 30, 2017

    $ 1,127  
  

 

 

 

(1) Liability acquired as part of the Clearlink acquisition on April 1, 2016. See Note 2, Acquisitions, for further information.

  

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, subject to which the Company agreed to pay the sellers EUR 4.0 million by June 30, 2017. The Company paid $4.4 million in May 2017 to settle the outstanding contingent consideration obligation.

The Company recorded a fair value gain of $0.3 million in “General and administrative” during the three and six months ended June 30, 2017 to the Clearlink contingent consideration due to changes in the probability of achievement of certain revenue targets. The Company recorded a fair value gain of $0.4 million in “General and administrative” during the six months ended June 30, 2017 to the Clearlink contingent consideration upon settlement of one of the contingent consideration liabilities for $0.1 million. The Company recorded a fair value loss of $0.3 million in “General and administrative” during the year ended December 31, 2016 to the Clearlink contingent consideration due to 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 the estimated remaining future value of $1.1 million. Interest expense related to the contingent consideration is included in “Interest (expense)” in the accompanying Condensed Consolidated Statements of Operations.

Non-Recurring Fair Value

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, like those associated with acquired businesses, including goodwill, other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at June 30, 2017 and December 31, 2016.

The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities) subject to the requirements of ASC 820 (in thousands) (none in 2016):

 

                                                                                 
     Total Impairment (Loss)
     Three Months Ended    Six Months Ended
     June 30, 2017    June 30, 2017

Americas:

     

Property and equipment, net

     $ (4,189      $ (4,391
  

 

 

 

  

 

 

 

In connection with the closure of an under-utilized customer contact management center in the U.S., the Company recorded an impairment charge of $4.2 million during the three and six months ended June 30, 2017 related to leasehold improvements which were not recoverable and equipment, furniture and fixtures that could not be redeployed to other locations.

During the six months ended June 30, 2017, the Company recorded an impairment charge of $0.2 million related to the write-down of a vacant and unused parcel of land in the U.S. to its estimated fair value.

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 June 30, 2017 (in thousands):

 

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

Intangible assets subject to amortization:

          

Customer relationships

    $ 169,278       $ (85,252    $ 84,026        10    

Trade names and trademarks

     14,103        (7,938     6,165        7    

Non-compete agreements

     2,996        (1,946     1,050        2    

Content library

     515        (515     -            2    

Proprietary software

     1,550        (1,025     525        3    

Favorable lease agreement

     449        (449     -            2    

Intangible assets not subject to amortization:

          

Domain names

     52,985        -           52,985        N/A    
  

 

 

 

  

 

 

 

 

 

 

 

  
    $ 241,876       $ (97,125    $ 144,751        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 June 30, 2017, is as follows (in thousands):

 

Years Ending December 31,            Amount        

2017 (remaining six months)

   $ 10,567  

2018

     14,868  

2019

     13,815  

2020

     11,155  

2021

     6,664  

2022

     5,709  

2023 and thereafter

     28,988  

Goodwill

Changes in goodwill for the six months ended June 30, 2017 consist of the following (in thousands):

 

                                                                                                                   
                 Effect of Foreign       
         January 1, 2017              Acquisition          Currency          June 30, 2017      

Americas

    $ 255,842       $ -           $ 811       $ 256,653  

EMEA

     9,562        -            719        10,281  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    $ 265,404       $ -           $ 1,530       $ 266,934  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

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

 

 

                 Effect of Foreign       
         January 1, 2016            Acquisition (1)        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 two-step goodwill impairment test as of July 31, 2016. 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 recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

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 used an average of 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, 2016, 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 reporting unit’s fair value exceeded its carrying value (although not substantially) and the newly acquired Clearlink reporting unit’s fair value approximated its carrying value due to the proximity to the acquisition date of April 1, 2016.

The Qelp and Clearlink reporting units are at risk of future impairment if projected operating results are not met or other inputs into the fair value measurement change. However, as of June 30, 2017, there were no indicators of impairment related to Qelp’s $10.3 million of goodwill or Clearlink’s $70.6 million of goodwill.

Financial Derivatives
Financial Derivatives

Note 6. Financial Derivatives

Cash Flow Hedges – The Company has derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815 Derivatives and Hedging (“ASC 815”), consisting of Philippine Peso, Costa Rican Colon, Hungarian Forint and Romanian Leu contracts. These contracts are entered into to 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 Condensed Consolidated Balance Sheets are as follows (in thousands):

 

           June 30, 2017              December 31, 2016    

Deferred gains (losses) in AOCI

    $ (2,126)        $ (2,295)   

Tax on deferred gains (losses) in AOCI

     37          69    
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ (2,089)        $ (2,226)   
  

 

 

    

 

 

 
Deferred gains (losses) expected to be reclassified to “Revenues” from AOCI during the next twelve months     $ (2,126)      
  

 

 

    

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

 

Non-Designated Hedges

Foreign Currency Forward Contracts – The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against adverse foreign currency moves relating primarily to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 180 days in duration.

Embedded Derivatives – The Company enters into 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):

 

     As of June 30, 2017    As of December 31, 2016
     Notional         Notional     
         Amount in            Settle Through            Amount in            Settle Through    

Contract Type

   USD    Date    USD    Date

Cash flow hedges:

           

Options:

           

Philippine Pesos

    $ 32,000        May 2018       $ 51,000        December 2017  

Forwards:

           

Philippine Pesos

     3,000        June 2018        -        -  

Costa Rican Colones

     58,750        June 2018        45,500        December 2017  

Hungarian Forints

     1,370        December 2017        -        -  

Romanian Leis

     3,850        December 2017        -        -  

Net investment hedges:

           

Forwards:

           

Euros

     76,933        September 2017        76,933        September 2017  

Non-designated hedges:

           

Forwards

     38,179        September 2017        55,614        March 2017  

Embedded derivatives

     13,808        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 $0.4 million and $3.9 million as of June 30, 2017 and December 31, 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 as of December 31, 2016 (none at June 30, 2017) and liability positions of $4.1 million and $1.6 million as of June 30, 2017 and December 31, 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 Condensed Consolidated Balance Sheets. Additionally, the Company is not required to pledge, nor is it entitled to receive, cash collateral related to these derivative transactions.

 

The following tables present the fair value of the Company’s derivative instruments included in the accompanying Condensed Consolidated Balance Sheets (in thousands):

 

                                                                               
     Derivative Assets
     June 30, 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)

    $ 48       $ -      

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     242        3,230  
  

 

 

 

  

 

 

 

     290        3,230  

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     66        691  

Embedded derivatives (1)

     17        8  

Embedded derivatives (2)

     67        4  
  

 

 

 

  

 

 

 

Total derivative assets

    $ 440       $ 3,933  
  

 

 

 

  

 

 

 

     Derivative Liabilities
     June 30, 2017    December 31, 2016
     Fair Value    Fair Value

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (3)

    $ 1,861       $ 1,806  

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (3)

     2,384        -      
  

 

 

 

  

 

 

 

     4,245        1,806  

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (3)

     223        106  

Embedded derivatives (3)

     166        174  

Embedded derivatives (4)

     89        393  
  

 

 

 

  

 

 

 

Total derivative liabilities

    $ 4,723       $ 2,479  
  

 

 

 

  

 

 

 

 

  (1)

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

 

  (2) 

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

 

  (3) 

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

 

  (4) 

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

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended June 30, 2017 and 2016 (in thousands):

 

     Gain (Loss) Recognized in
AOCI on Derivatives
(Effective Portion)
  Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues” (Effective
Portion)
  Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
     June 30,   June 30,   June 30,
     2017   2016   2017   2016   2017    2016
Derivatives designated as cash flow hedging instruments under ASC 815:              
Foreign currency forward and option contracts     $   (1,232)     $ (2,072    $ (820    $ 4      $ -       $ -  
Derivatives designated as net investment hedging instruments under ASC 815:              
Foreign currency forward contracts      (4,774)          2,414       -       -       -        -  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

    $    (6,006)     $ 342      $ (820    $     4      $ -       $ -  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

     Gain (Loss) Recognized
in “Other income
(expense)” on
Derivatives
     June 30,
     2017    2016
Derivatives not designated as hedging instruments under ASC 815:      
Foreign currency forward contracts     $ 921       $ 575  
Embedded derivatives      176        10  
  

 

 

 

  

 

 

 

    $       1,097       $         585  
  

 

 

 

  

 

 

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the six months ended June 30, 2017 and 2016 (in thousands):

 

     Gain (Loss) Recognized in
AOCI on Derivatives
(Effective Portion)
  Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues” (Effective

Portion)
  Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
     June 30,   June 30,   June 30,
     2017   2016   2017   2016   2017    2016
Derivatives designated as cash flow hedging instruments under ASC 815:              
Foreign currency forward and option contracts     $ (1,466 )     $ 431      $ (1,580 )     $ (50    $ -       $ -  
Derivatives designated as net investment hedging instruments under ASC 815:              
Foreign currency forward contracts      (5,373     (698     -       -       -        -  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

    $   (6,839 )     $         (267    $ (1,580 )     $         (50    $     -       $     -  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

     Gain (Loss) Recognized in
“Other income (expense)”
on Derivatives
     June 30,
     2017    2016
Derivatives not designated as hedging instruments under ASC 815:      
Foreign currency forward contracts     $ 82       $ 1,370  
Embedded derivatives      315        (46
  

 

 

 

  

 

 

 

    $             397       $         1,324  
  

 

 

 

  

 

 

 

Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 7. Investments Held in Rabbi Trust

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

 

                                                                                           
     June 30, 2017    December 31, 2016
     Cost    Fair Value    Cost    Fair Value

Mutual funds

    $ 7,871       $ 10,729       $ 7,257       $ 9,414  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

The mutual funds held in rabbi trust were 69% equity-based and 31% debt-based as of June 30, 2017. Net investment income (losses), included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):

 

                                                                                           
       Three Months Ended June 30,        Six Months Ended June 30,  
     2017   2016    2017   2016

Gross realized gains from sale of trading securities

    $ 151      $ -         $ 151      $ -    

Gross realized (losses) from sale of trading securities

     (2     -          (2     -    

Dividend and interest income

     25       10        39       19  

Net unrealized holding gains (losses)

     149       134        542       154  
  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Net investment income (losses)

    $ 323      $ 144       $ 730      $ 173  
  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Deferred Revenue
Deferred Revenue

Note 8. Deferred Revenue

Deferred revenue consists of the following (in thousands):

 

            June 30, 2017             December 31, 2016  

Future service

    $ 28,860       $ 27,116  

Estimated potential penalties and holdbacks

     6,206        6,593  

Estimated chargebacks

     5,419        5,027  
  

 

 

 

  

 

 

 

    $ 40,485       $ 38,736  
  

 

 

 

  

 

 

 

Deferred Grants
Deferred Grants

Note 9. Deferred Grants

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

 

            June 30, 2017             December 31, 2016    

Property grants

     $ 3,098        $ 3,353    

Lease grants

     532        502    

Employment grants

     43        67    
  

 

 

 

  

 

 

 

Total deferred grants

     3,673        3,922    

Less: Lease grants - short-term (1)

     (110      (94)   

Less: Employment grants - short-term (1)

     (43      (67)   
  

 

 

 

  

 

 

 

Total long-term deferred grants

     $ 3,520        $ 3,761    
  

 

 

 

  

 

 

 

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

Borrowings
Borrowings

Note 10. 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 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.

 

Borrowings consist of the following (in thousands):

 

            June 30, 2017             December 31, 2016  

Revolving credit facility

    $ 267,000       $ 267,000  

Less: Current portion

     -          -    
  

 

 

 

  

 

 

 

Total long-term debt

    $ 267,000       $ 267,000  
  

 

 

 

  

 

 

 

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

The 2015 Credit Agreement matures on May 12, 2020, and has no varying installments due.

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

The 2015 Credit Agreement is guaranteed by all of the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of 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 previous credit agreement.

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

 

                                                                                                                                   
     Three Months Ended June 30,    Six Months Ended June 30,
     2017    2016    2017    2016

Average daily utilization

    $ 267,000       $ 278,769       $ 267,000       $ 174,385  

Interest expense, including commitment fee (1)

    $ 1,600       $ 1,079       $ 3,043       $ 1,454  

Weighted average interest rate (2)

     2.4%        1.6%        2.3%        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 11. Accumulated Other Comprehensive Income (Loss)

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

 

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

Balance at January 1, 2016

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

Pre-tax amount

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

Tax (provision) benefit

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

Reclassification of (gain) loss to net income

     -         -         (52     527       (58     417  

Foreign currency translation

     40       -         (56     16       -         -    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

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

Pre-tax amount

     20,416       (5,373     -         (1,466     -         13,577  

Tax (provision) benefit

     -         2,069       -         28       -         2,097  

Reclassification of (gain) loss to net income

     -         -         (21     1,522       (25     1,476  

Foreign currency translation

     (34     -         (18     52       -         -    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

    $ (52,011    $ 2,962      $ 1,086      $ (2,089    $ 175      $     (49,877
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

     Three Months Ended June 30,   Six Months Ended June 30,   Statements of Operations
     2017   2016   2017   2016   Location
Actuarial Gain (Loss) Related to Pension Liability: (1)           

Pre-tax amount

     $ 11       $ 10       $ 21       $ 22       Direct salaries and related costs  

Tax (provision) benefit

     -       -       -       -       Income taxes  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to net income

     11       10       21       22    

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

          

Pre-tax amount

     (820     4       (1,580     (50     Revenues  

Tax (provision) benefit

     17       3       58       22       Income taxes  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to net income

     (803     7       (1,522     (28  

Gain (Loss) on Post Retirement Obligation: (1)

          

Pre-tax amount

     13       14       25       27       General and administrative  

Tax (provision) benefit

     -       -       -       -       Income taxes  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to net income

     13       14       25       27    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total reclassification of gain (loss) to net income      $ (779     $ 31       $ (1,476     $ 21    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

(1) See Note 15, Defined Benefit Pension Plan and Postretirement Benefits, for further information.    

(2) See Note 6, Financial Derivatives, for further information.    

As discussed in Note 12, Income Taxes, earnings 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 12. Income Taxes

The Company’s effective tax rate was 15.0% and 29.9% for the three months ended June 30, 2017 and 2016, respectively. The decrease in the effective tax rates is primarily due to the recognition of a $1.2 million previously unrecognized tax benefit arising from the effective settlement of the Canadian Revenue Agency audit. The decrease in the effective tax rate was also affected by several additional factors, including shifts in earnings among the various jurisdictions in which the Company operates, none of which are individually material. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the aforementioned factors as well as the recognition of tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions, changes in unrecognized tax benefits, adjustments of valuation allowances and tax credits, partially offset by the tax impact of permanent differences and foreign withholding taxes.

The Company’s effective tax rate was 22.9% and 30.4% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the effective tax rates is primarily due to the recognition of a $1.2 million previously unrecognized tax benefit arising from the effective settlement of the Canadian Revenue Agency audit and the recognition of a $0.9 million tax benefit resulting from the adoption of ASU 2016-09 on January 1, 2017. The decrease in the effective tax rate was also affected by several additional factors, including shifts in earnings among the various jurisdictions in which the Company operates, none of which are individually material. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the aforementioned factors as well as the recognition of tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions, changes in unrecognized tax benefits, adjustments of valuation allowances and tax credits, partially offset by the tax impact of permanent differences and foreign withholding taxes.

Earnings associated with the investments in the Company’s foreign subsidiaries are considered to be indefinitely reinvested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740, Income Taxes (“ASC 740”). Determination of any unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

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, net of the effects of foreign exchange rate adjustments, was $13.8 million as of December 31, 2016 (none at June 30, 2017) and was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet. As of June 30, 2017, the Company determined that all material aspects of the Canadian audit were effectively settled pursuant to ASC 740. As a result, the Company recognized a net income tax benefit of $1.2 million 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 condition and results of operations.

Earnings Per Share
Earnings Per Share

Note 13. Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust using the treasury stock method.

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

 

                                                                                                                                   
     Three Months Ended June 30,    Six Months Ended June 30,
     2017    2016    2017    2016

Basic:

           

Weighted average common shares outstanding

     41,854        41,970        41,756        41,838  

Diluted:

           

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

     80        131        163        263  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total weighted average diluted shares outstanding

     41,934        42,101        41,919        42,101  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Anti-dilutive shares excluded from the diluted earnings per share calculation      46        21        16        21  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

On August 18, 2011, the Company’s Board of Directors (the “Board”) authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). On March 16, 2016, the Board authorized an increase of 5.0 million shares to the 2011 Share Repurchase Program for a total of 10.0 million shares. A total of 5.3 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.

There were no shares repurchased under the Company’s share repurchase programs during the three and six months ended June 30, 2017 and 2016.

Commitments and Loss Contingency
Commitments and Loss Contingency

Note 14. Commitments and Loss Contingency

Commitments

During the six months ended June 30, 2017, the Company entered into several leases in the ordinary course of business. The following is a schedule of future minimum rental payments required under operating leases that have noncancelable lease terms as of June 30, 2017, including the impact of the leases assumed in connection with the Telecommunications Asset acquisition (in thousands):

 

           Amount      

 

 

2017 (remaining six months)

     $ 2,780  

2018

     7,272  

2019

     6,822  

2020

     7,506  

2021

     7,610  

2022

     6,926  

2023 and thereafter

     18,407  
  

 

 

 

Total minimum payments required

     $ 57,323  
  

 

 

 

 

During the six months ended June 30, 2017, the Company entered into agreements with third-party vendors in the ordinary course of business whereby the Company committed to purchase goods and services used in its normal operations. These agreements generally are not cancelable, range from one to five year periods and may contain fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments. The following is a schedule of the future minimum purchases remaining under the agreements as of June 30, 2017 (in thousands):

 

           Amount      

 

 

2017 (remaining six months)

     $ 5,560  

2018

     5,881  

2019

     5,176  

2020

     619  

2021

     -  

2022

     -  

2023 and thereafter

     -  
  

 

 

 

Total minimum payments required

     $ 17,236  
  

 

 

 

The July 2015 Qelp acquisition included contingent consideration of $6.0 million, based on achieving targets tied to revenues and EBITDA for the years ended December 31, 2016, 2017 and 2018. 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 to be paid by June 30, 2017. The Company paid $4.4 million in May 2017 to settle the outstanding contingent consideration obligation.

As part of the April 2016 Clearlink acquisition, the Company assumed contingent consideration liabilities related to four separate acquisitions made by Clearlink in 2015 and 2016, prior to the Merger. The fair value of the contingent consideration related to these previous acquisitions was $2.8 million as of April 1, 2016 and was based on achieving targets primarily tied to revenues for varying periods of time during 2016 and 2017. As of June 30, 2017, the fair value of the remaining contingent consideration was $1.1 million. The estimated future value of the contingent consideration is $1.1 million and is expected to be paid on varying dates through October 2017.

Loss Contingency

The Company, from time to time, is involved in legal actions arising in the ordinary course of business. With respect to these matters, management believes that the Company has adequate legal defenses and/or when possible and appropriate, provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on the Company’s financial position or results of operations.

Defined Benefit Pension Plan and Postretirement Benefits
Defined Benefit Pension Plan and Postretirement Benefits

Note 15. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

The following table provides information about the net periodic benefit cost for the Company’s pension plans (in thousands):

 

                                                                                                                                   
     Three Months Ended June 30,   Six Months Ended June 30,
     2017   2016   2017   2016

Service cost

     $ 128       $ 120       $ 253       $ 238  

Interest cost

     49       45       98       89  

Recognized actuarial (gains)

     (11     (10     (21     (22
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

     $ 166       $ 155       $ 330       $ 305  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Retirement Savings Plans

The Company maintains a 401(k) plan covering defined employees who meet established eligibility requirements. Under the plan provisions, the Company matches 50% of participant contributions to a maximum matching amount of 2% of participant compensation. The Company’s contributions included in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):

 

                                                                                                                                   
     Three Months Ended June 30,    Six Months Ended June 30,
     2017    2016    2017    2016

401(k) plan contributions

    $ 309       $ 334       $ 620       $ 619  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Split-Dollar Life Insurance Arrangement

In 1996, the Company entered into a split-dollar life insurance arrangement to benefit the former Chairman and Chief Executive Officer of the Company. Under the terms of the arrangement, the Company retained a collateral interest in the policy to the extent of the premiums paid by the Company. The postretirement benefit obligation included in “Other long-term liabilities” and the unrealized gains (losses) included in “Accumulated other comprehensive income” in the accompanying Condensed Consolidated Balance Sheets were as follows (in thousands):

 

           June 30, 2017            December 31, 2016    

Postretirement benefit obligation

    $ 21       $ 27    

Unrealized gains (losses) in AOCI (1)

    $ 175       $ 200    

(1)     Unrealized gains (losses) are impacted by changes in discount rates related to the postretirement obligation.    

      

Stock-Based Compensation
Stock-Based Compensation

Note 16. Stock-Based Compensation

The Company’s stock-based compensation plans include the 2011 Equity Incentive Plan, the Non-Employee Director Fee Plan and the Deferred Compensation Plan. The following table summarizes the stock-based compensation expense (primarily in the Americas), income tax benefits related to the stock-based compensation and excess tax benefits (deficiencies) (in thousands):

 

                                                                                                                           
     Three Months Ended June 30,   Six Months Ended June 30,
     2017   2016   2017   2016

Stock-based compensation (expense) (1)

    $ (2,261    $ (3,547    $ (4,732    $ (5,729

Income tax benefit (2)

     871       1,348       1,822       2,177  

Excess tax benefit (deficiency) from stock-based compensation (3)

     -       149       -       2,060  

(1)  Included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

(2)  Included in “Income taxes” in the accompanying Condensed Consolidated Statements of Operations.

(3)  Included in “Additional paid-in capital” in the accompanying Condensed Consolidated Statement of Changes in Shareholders’ Equity.

There were no capitalized stock-based compensation costs as of June 30, 2017 and December 31, 2016.

Beginning January 1, 2017, as a result of the adoption of ASU 2016-09, the Company began accounting for forfeitures as they occur, rather than estimating expected forfeitures. The net cumulative effect of this change was recognized as a $0.2 million reduction to retained earnings as of January 1, 2017. Additionally, excess tax benefits (deficiencies) from stock compensation are included in “Income taxes” in the accompanying Condensed Consolidated Statements of Income subsequent to the adoption of ASU 2016-09.

2011 Equity Incentive Plan The Company’s Board of Directors (the “Board”) adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the “2011 Plan”) on March 23, 2011, as amended on May 11, 2011 to reduce the number of shares of common stock available to 4.0 million shares. The 2011 Plan was approved by the shareholders at the May 2011 annual shareholders’ meeting. The 2011 Plan replaced and superseded the Company’s 2001 Equity Incentive Plan (the “2001 Plan”), which expired on March 14, 2011. The outstanding awards granted under the 2001 Plan will remain in effect until their exercise, expiration or termination. The 2011 Plan permits the grant of restricted stock, stock appreciation rights, stock options and other stock-based awards to certain employees of the Company, members of the Company’s Board and certain non-employees who provide services to the Company in order to encourage them to remain in the employment of, or to faithfully provide services to, the Company and to increase their interest in the Company’s success.

 

Stock Appreciation Rights The Board, at the recommendation of the Compensation and Human Resources Development Committee (the “Compensation Committee”), has approved in the past, and may approve in the future, awards of stock-settled stock appreciation rights (“SARs”) for eligible participants. SARs represent the right to receive, without payment to the Company, a certain number of shares of common stock, as determined by the Compensation Committee, equal to the amount by which the fair market value of a share of common stock at the time of exercise exceeds the grant price. The SARs are granted at the fair market value of the Company’s common stock on the date of the grant and vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date. The SARs have a term of 10 years from the date of grant. The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation model that uses various assumptions.

The following table summarizes the assumptions used to estimate the fair value of SARS granted:

 

                                                         
     Six Months Ended June 30,
     2017    2016

Expected volatility

     19.3%        25.3%  

Weighted-average volatility

     19.3%        25.3%  

Expected dividend rate

     0.0%        0.0%  

Expected term (in years)

     5.0        5.0  

Risk-free rate

     1.9%        1.5%  

The following table summarizes SARs activity as of June 30, 2017 and for the six months then ended:

 

Stock Appreciation Rights    Shares (000s)   Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Contractual
Term (in years)
   Aggregate
Intrinsic Value
(000s)

Outstanding at January 1, 2017

                             633      $                         -        

Granted

     396      $ -        

Exercised

     (196    $ -        

Forfeited or expired

     -      $ -        
  

 

 

 

       

Outstanding at June 30, 2017

     833      $ -                            8.9       $                 4,214  
  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Vested or expected to vest at June 30, 2017

     833      $ -        8.9       $ 4,214  
  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Exercisable at June 30, 2017

     163      $ -        7.2       $ 1,304  
  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

The following table summarizes information regarding SARs granted and exercised (in thousands, except per SAR amounts):

 

                                                         
     Six Months Ended June 30,
     2017    2016

Number of SARs granted

     396        323  

Weighted average grant-date fair value per SAR

    $ 6.24       $ 7.68  

Intrinsic value of SARs exercised

    $ 1,678       $ 1,691  

Fair value of SARs vested

    $ 1,846       $ 1,520  

 

The following table summarizes nonvested SARs activity as of June 30, 2017 and for the six months then ended:

 

Nonvested Stock Appreciation Rights    Shares (000s)   Weighted
Average Grant-
Date Fair Value

Nonvested at January 1, 2017

     515     $ 7.76  

Granted

     396     $ 6.24  

Vested

     (241   $ 7.69  

Forfeited or expired

     -       $ -  
  

 

 

 

 

Nonvested at June 30, 2017

                         670     $ 6.88  
  

 

 

 

 

As of June 30, 2017, there was $4.0 million of total unrecognized compensation cost, net of actual forfeitures, related to nonvested SARs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 1.5 years.

Restricted Shares The Board, at the recommendation of the Compensation Committee, has approved in the past, and may approve in the future, awards of performance and employment-based restricted shares (“restricted shares”) for eligible participants. In some instances, where the issuance of restricted shares has adverse tax consequences to the recipient, the Board may instead issue restricted stock units (“RSUs”). The restricted shares are shares of the Company’s common stock (or in the case of RSUs, represent an equivalent number of shares of the Company’s common stock) which are issued to the participant subject to (a) restrictions on transfer for a period of time and (b) forfeiture under certain conditions. The performance goals, including revenue growth and income from operations targets, provide a range of vesting possibilities from 0% to 100% and will be measured at the end of the performance period. If the performance conditions are met for the performance period, the shares will vest and all restrictions on the transfer of the restricted shares will lapse (or in the case of RSUs, an equivalent number of shares of the Company’s common stock will be issued to the recipient). The Company recognizes compensation cost, net of actual forfeitures, based on the fair value (which approximates the current market price) of the restricted shares (and RSUs) on the date of grant ratably over the requisite service period based on the probability of achieving the performance goals.

Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation expense. The employment-based restricted shares currently outstanding vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date.

The following table summarizes nonvested restricted shares/RSUs activity as of June 30, 2017 and for the six months then ended:

 

Nonvested Restricted Shares and RSUs    Shares (000s)   Weighted
Average Grant-
Date Fair Value

Nonvested at January 1, 2017

     1,136      $ 25.47  

Granted

     480      $ 29.42  

Vested

     (328    $ 20.95  

Forfeited or expired

     (63    $ 20.71  
  

 

 

 

 

Nonvested at June 30, 2017

                     1,225      $ 28.48  
  

 

 

 

 

The following table summarizes information regarding restricted shares/RSUs granted and vested (in thousands, except per restricted share/RSU amounts):

 

                                                         
     Six Months Ended June 30,
     2017    2016

Number of restricted shares/RSUs granted

     480        451  

Weighted average grant-date fair value per restricted share/RSU

    $ 29.42       $ 30.32  

Fair value of restricted shares/RSUs vested

    $ 6,868       $ 6,785  

 

As of June 30, 2017, there was $27.0 million of total unrecognized compensation cost, net of actual forfeitures, related to nonvested restricted shares/RSUs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 2.0 years.

Non-Employee Director Fee Plan The Company’s 2004 Non-Employee Director Fee Plan (the “2004 Fee Plan”), as amended on May 17, 2012, provided that all new non-employee directors joining the Board would receive an initial grant of shares of common stock on the date the new director is elected or appointed, the number of which will be determined by dividing $60,000 by the closing price of the Company’s common stock on the trading day immediately preceding the date a new director is elected or appointed, rounded to the nearest whole number of shares. The initial grant of shares vested in twelve equal quarterly installments, one-twelfth on the date of grant and an additional one-twelfth on each successive third monthly anniversary of the date of grant. The award lapses with respect to all unvested shares in the event the non-employee director ceases to be a director of the Company, and any unvested shares are forfeited.

The 2004 Fee Plan also provided that each non-employee director would receive, on the day after the annual shareholders’ meeting, an annual retainer for service as a non-employee director (the “Annual Retainer”). Prior to May 17, 2012, the Annual Retainer was $95,000, of which $50,000 was payable in cash, and the remainder was paid in stock. The annual grant of cash vested in four equal quarterly installments, one-fourth on the day following the annual meeting of shareholders, and an additional one-fourth on each successive third monthly anniversary of the date of grant. The annual grant of shares paid to non-employee directors prior to May 17, 2012 vests in eight equal quarterly installments, one-eighth on the day following the annual meeting of shareholders, and an additional one-eighth on each successive third monthly anniversary of the date of grant. On May 17, 2012, upon the recommendation of the Compensation Committee, the Board adopted the Fifth Amended and Restated Non-Employee Director Fee Plan (the “Amendment”), which increased the common stock component of the Annual Retainer by $30,000, resulting in a total Annual Retainer of $125,000, of which $50,000 was payable in cash and the remainder paid in stock. In addition, the Amendment also changed the vesting period for the annual equity award, from a two-year vesting period, to a one-year vesting period (consisting of four equal quarterly installments, one-fourth on the date of grant and an additional one-fourth on each successive third monthly anniversary of the date of grant). The award lapses with respect to all unpaid cash and unvested shares in the event the non-employee director ceases to be a director of the Company, and any unvested shares and unpaid cash are forfeited.

In addition to the Annual Retainer award, the 2004 Fee Plan also provided for any non-employee Chairman of the Board to receive an additional annual cash award of $100,000, and each non-employee director serving on a committee of the Board to receive an additional annual cash award. The additional annual cash award for the Chairperson of the Audit Committee is $20,000 and Audit Committee members’ are entitled to an annual cash award of $10,000. The annual cash awards for the Chairpersons of the Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee are $15,000, $12,500 and $12,500, respectively, and all other members of such committees are entitled to an annual cash award of $7,500.

The 2004 Fee Plan expired in May 2014, prior to the 2014 annual shareholders’ meeting. In March 2014, upon the recommendation of the Compensation Committee, the Board determined that, following the expiration of the 2004 Fee Plan, the compensation of non-employee Directors should continue on the same terms as provided in the Fifth Amended and Restated Non-Employee Director Fee Plan, except the amounts of cash and equity grants shall be determined annually by the Board, and that the stock portion of such compensation would be issued under the 2011 Plan.

At the Board’s regularly scheduled meeting on December 10, 2014, upon the recommendation of the Compensation Committee, the Board determined that the amount of the cash and equity compensation payable to non-employee directors beginning on the date of the 2015 annual shareholders’ meeting would be increased as follows: cash compensation would be increased by $5,000 per year to a total of $55,000 and equity compensation would be increased by $25,000 per year to a total of $100,000. No change would be made in the additional amounts payable to the Chairman of the Board or the Chairs or members of the various Board committees for their service on such committees, and no changes would be made in the payment terms described above for such cash and equity compensation.

At the Board’s regularly scheduled meeting on December 6, 2016, upon the recommendation of the Compensation Committee, the Board determined that the amount of the cash compensation payable to non-employee directors beginning on the date of the 2017 annual shareholders’ meeting would be increased by $15,000 per year to a total of $70,000.

 

The Board may pay additional cash compensation to any non-employee director for services on behalf of the Board over and above those typically expected of directors, including but not limited to service on a special committee of the Board. Directors who are executive officers of the Company receive no compensation for service as members of either the Board of Directors or any committees of the Board.

The following table summarizes nonvested common stock share award activity as of June 30, 2017 and for the six months then ended:

 

                                                 
Nonvested Common Stock Share Awards    Shares (000s)  

Weighted

Average Grant-

Date Fair Value

Nonvested at January 1, 2017

     10     $ 28.69  

Granted

     24     $ 32.93  

Vested

     (14   $ 30.41  

Forfeited or expired

     -       $ -  
  

 

 

 

 

Nonvested at June 30, 2017

     20     $ 32.54  
  

 

 

 

 

The following table summarizes information regarding common stock share awards granted and vested (in thousands, except per share award amounts):

 

                                                       
     Six Months Ended June 30,
     2017    2016

Number of share awards granted

     24        32  

Weighted average grant-date fair value per share award

    $ 32.93       $ 29.04  

Fair value of share awards vested

    $ 430       $ 410  

As of June 30, 2017, there was $0.6 million of total unrecognized compensation cost, net of actual forfeitures, related to nonvested common stock share awards granted under the Fee Plan. This cost is expected to be recognized over a weighted average period of less than one year.

Deferred Compensation Plan The Company’s non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is not shareholder-approved, was adopted by the Board effective December 17, 1998. It was last amended and restated on December 9, 2015, effective as of January 1, 2016, and was subsequently amended on May 18, 2016, effective as of June 30, 2016, August 17, 2016, effective as of January 1, 2017 and May 25, 2017, effective as of July 1, 2017. Eligibility is limited to a select group of key management and employees who are expected to receive an annualized base salary (which will not take into account bonuses or commissions) that exceeds the amount taken into account for purposes of determining highly compensated employees under Section 414(q) of the Internal Revenue Code of 1986 based on the current year’s base salary and applicable dollar amounts. The Deferred Compensation Plan provides participants with the ability to defer between 1% and 80% of their compensation (between 1% and 100% prior to June 30, 2016, the effective date of the first amendment) until the participant’s retirement, termination, disability or death, or a change in control of the Company. Using the Company’s common stock, the Company matches 50% of the amounts deferred by participants on a quarterly basis up to a total of $12,000 per year for the president, chief executive officer and executive vice presidents, $7,500 per year for senior vice presidents, global vice presidents and vice presidents, and, effective January 1, 2017, $5,000 per year for all other participants (there was no match for other participants prior to January 1, 2017, the effective date of the second amendment). Matching contributions and the associated earnings vest over a seven-year service period. Vesting will be accelerated in the event of the participant’s death or disability, a change in control or retirement (defined as separate from service after age 65). In the event of a distribution of benefits as a result of a change in control of the Company, the Company will increase the benefit by an amount sufficient to offset the income tax obligations created by the distribution of benefits. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Company’s common stock (see Note 7, Investments Held in Rabbi Trust). As of June 30, 2017 and December 31, 2016, liabilities of $10.8 million and $9.4 million, respectively, of the Deferred Compensation Plan were recorded in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.

 

Additionally, the Company’s common stock match associated with the Deferred Compensation Plan, with a carrying value of approximately $2.1 million and $1.8 million as of June 30, 2017 and December 31, 2016, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.

The following table summarizes nonvested common stock activity as of June 30, 2017 and for the six months then ended:

 

                                                 
Nonvested Common Stock    Shares (000s)   Weighted
Average Grant-
Date Fair Value

Nonvested at January 1, 2017

     2     $ 22.77  

Granted

     10     $ 30.66  

Vested

     (8   $ 30.62  

Forfeited or expired

     -       $ -  
  

 

 

 

 

Nonvested at June 30, 2017

     4     $ 27.08  
  

 

 

 

 

The following table summarizes information regarding shares of common stock granted and vested (in thousands, except per common stock amounts):

 

                                                       
     Six Months Ended June 30,
     2017    2016

Number of shares of common stock granted

     10        6  

Weighted average grant-date fair value per common stock

    $ 30.66       $ 29.76  

Fair value of common stock vested

    $ 240       $ 183  

Cash used to settle the obligation

    $ 422       $ 359  

As of June 30, 2017, there was $0.1 million of total unrecognized compensation cost, net of actual forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 3.7 years.

Segments and Geographic Information
Segments and Geographic Information

Note 17. Segments and Geographic Information

The Company operates within two regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers.

The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer engagement solutions (with an emphasis on inbound technical support, digital support and demand generation, and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer engagement solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Company’s services in these locations to support their customer engagement needs.

 

Information about the Company’s reportable segments is as follows (in thousands):

 

                                                                                                   
     Americas    EMEA    Other (1)   Consolidated

Three Months Ended June 30, 2017:

          

Revenues

    $ 314,871       $ 60,540       $ 27      $ 375,438  

Percentage of revenues

     83.9%        16.1%        0.0%       100.0%  

Depreciation, net

    $ 11,842       $ 1,254       $ 724      $ 13,820  

Amortization of intangibles

    $ 4,989       $ 261       $ -      $ 5,250  

Income (loss) from operations

    $ 26,089       $ 2,163       $ (16,962    $ 11,290  

Total other income (expense), net

           (890     (890

Income taxes

           (1,555     (1,555
          

 

 

 

Net income

            $ 8,845  
          

 

 

 

Three Months Ended June 30, 2016:

          

Revenues

    $ 305,211       $ 59,152       $ 39      $ 364,402  

Percentage of revenues

     83.8%        16.2%        0.0%       100.0%  

Depreciation, net

    $ 10,316       $ 1,162       $ 482      $ 11,960  

Amortization of intangibles

    $ 4,995       $ 268       $ -      $ 5,263  

Income (loss) from operations

    $ 30,725       $ 2,896       $ (20,219    $ 13,402  

Total other income (expense), net

           (373     (373

Income taxes

           (3,891     (3,891
          

 

 

 

Net income

            $ 9,138  
          

 

 

 

Six Months Ended June 30, 2017:

          

Revenues

    $ 635,802       $ 123,607       $ 43      $ 759,452  

Percentage of revenues

     83.7%        16.3%        0.0%       100.0%  

Depreciation, net

    $ 23,310       $ 2,440       $ 1,418      $ 27,168  

Amortization of intangibles

    $ 9,967       $ 514       $ -      $ 10,481  

Income (loss) from operations

    $ 64,022       $ 7,743       $ (34,461    $ 37,304  

Total other income (expense), net

           (1,582     (1,582

Income taxes

           (8,165     (8,165
          

 

 

 

Net income

            $ 27,557  
          

 

 

 

Six Months Ended June 30, 2016:

          

Revenues

    $ 567,287       $ 117,777       $ 84      $ 685,148  

Percentage of revenues

     82.8%        17.2%        0.0%       100.0%  

Depreciation, net

    $ 19,492       $ 2,326       $ 926      $ 22,744  

Amortization of intangibles

    $ 8,363       $ 527       $ -      $ 8,890  

Income (loss) from operations

    $ 63,712       $ 6,306       $ (36,346    $ 33,672  

Total other income (expense), net

           (475     (475

Income taxes

           (10,105     (10,105
          

 

 

 

Net income

            $ 23,092  
          

 

 

 

 

  (1) 

Other items (including corporate and other costs, impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the three and six months ended June 30, 2017 and 2016. Inter-segment revenues are not material to the Americas and EMEA segment results.

 

The Company’s reportable segments are evaluated regularly by its chief operating decision maker to decide how to allocate resources and assess performance. The chief operating decision maker evaluates performance based upon stand-alone segment revenue and income (loss) from operations. Because assets by segment are not reported to or used by the Company’s chief operating decision maker to allocate resources, or to assess performance, total assets by segment are not disclosed.

Other Income (Expense)
Other Income (Expense)

Note 18. Other Income (Expense)

Other income (expense), net consists of the following (in thousands):

 

                                                                                                                           
     Three Months Ended June 30,   Six Months Ended June 30,
     2017   2016   2017    2016

Foreign currency transaction gains (losses)

    $ (535    $ 1,410      $ 644       $ 2,756  

Gains (losses) on foreign currency derivative instruments not designated as hedges

     1,097       (585     397        (1,324

Other miscellaneous income (expense)

     269       242       642        188  
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

    $ 831      $ 1,067      $ 1,683       $ 1,620  
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Related Party Transactions
Related Party Transactions

Note 19. Related Party Transactions

In January 2008, the Company entered into a lease for a customer engagement center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the 20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. There are penalties for early cancellation which decrease over time. The Company paid  $0.1 million to the landlord during both the three months ended June 30, 2017 and 2016, and  $0.2 million during both the six months ended June 30, 2017 and 2016 under the terms of the lease.

Overview and Basis of Presentation (Policies)

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a global business processing outsourcing leader in providing comprehensive inbound customer engagement solutions and services to Global 2000 companies, primarily in the communications, financial services, healthcare, technology, transportation and leisure, retail and other industries. SYKES’ differentiated end-to-end solutions and service platform effectively engages consumers at every touch point in their customer lifecycle, starting from digital marketing and acquisition to customer support, up-sell/cross-sell and retention. The Company serves its clients through two geographic operating regions: the Americas (United States, Canada, Latin America, Australia and the Asia Pacific Rim) and EMEA (Europe, the Middle East and Africa). Our Americas and EMEA regions primarily provide customer engagement services (with an emphasis on inbound technical support, digital marketing and demand generation, and customer service), which includes customer assistance, healthcare and roadside assistance, technical support, and product and service sales to its clients’ customers. These services are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. The Company 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. SYKES has developed an extensive global reach with customer engagement centers across six continents, including North America, South America, Europe, Asia, Australia and Africa. The Company delivers cost-effective solutions that enhance the customer service experience, promote stronger brand loyalty, and bring out high levels of performance and profitability.

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 Condensed Consolidated Financial Statements since May 31, 2017. See Note 2, Acquisitions, for additional information on the acquisition.

On April 1, 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 Condensed Consolidated Financial Statements since April 1, 2016. See Note 2, Acquisitions, for additional information on the acquisition.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2017. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

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. As of June 30, 2017 and December 31, 2016, the Company had less than $0.1 million of capitalized direct-response advertising costs included in “Prepaid expenses” in the accompanying Condensed Consolidated Balance Sheets. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Income Statements for the three months ended June 30, 2017 and 2016 were $8.6 million and $8.0 million, respectively, and $18.4 million and $8.0 million for the six months ended June 30, 2017 and 2016, respectively.

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

New Accounting Standards Not Yet Adopted

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”). 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. In 2016, the FASB issued additional ASUs that are part of the overall new revenue guidance including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, ASU 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting (“EITF”) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients.

The Company is continuing to evaluate the impact of ASU 2014-09 and the related ASUs on its financial condition, results of operations and cash flows. The Company anticipates that it will apply the modified retrospective adoption alternative for these amendments, which will result in a cumulative effect adjustment to retained earnings 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 has established an implementation team tasked with evaluating provisions within its contracts as well as reviewing accounting policies and internal controls. Based on the preliminary results of its evaluation, the Company does not expect the adoption of these ASUs on January 1, 2018 to have a material impact on the timing of recognition of revenue; however, the Company is still assessing the requirement to estimate variable consideration, such as performance-related bonus and penalty provisions. The Company expects to complete its assessment by the end of the third quarter of 2017.

 

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 Accounting Standards Codification (“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.

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 due to the amount of the Company’s lease commitments. However, the amendments will likely have an insignificant impact on our 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.

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.

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 financial condition, results of operations and cash flows.

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 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 financial condition, results of operations and cash flows.

 

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.

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 Company does not expect the adoption of ASU 2017-04 to materially impact its financial condition, results of operations and cash flows.

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.

New Accounting Standards Recently Adopted

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 2016-05, 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.

 

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 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016 was adjusted as follows: a $2.1 million increase to net cash provided by operating activities and a $2.1 million decrease to net cash provided by financing activities. Additionally, the Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 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.

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

 

   

Level 1  Quoted prices for identical instruments in active markets.

   

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

   

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

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

 

   

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

   

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

   

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

   

Long-term debt  The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates.

   

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

 

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

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

Determination of Fair Value  The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value, and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency exchange rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

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

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

Embedded Derivatives — The Company uses significant unobservable inputs to determine the fair value of embedded derivatives, which are classified in Level 3 of the fair value hierarchy. These unobservable inputs include expected cash flows associated with the lease, currency exchange rates on the day of commencement, as well as forward currency exchange rates, the results of which are adjusted for credit risk. These items are classified in Level 3 of the fair value hierarchy. See Note 6, Financial Derivatives, for further information.

Investments Held in Rabbi Trust — The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 7, Investments Held in Rabbi Trust, and Note 16, Stock-Based Compensation.

Contingent Consideration  The Company uses significant unobservable inputs to determine the fair value of contingent consideration, which is classified in Level 3 of the fair value hierarchy. The contingent consideration recorded related to the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”) on July 2, 2015 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.

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.

Earnings associated with the investments in the Company’s foreign subsidiaries are considered to be indefinitely reinvested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740, Income Taxes (“ASC 740”). Determination of any unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust using the treasury stock method.

The Company operates within two regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers.

Costs Associated with Exit or Disposal Activities (Tables)
Summary of Accrued Liability Associated with Exit Plans' Exit or Disposal Activities and Related Charges (Reversals)

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three and six months ended June 30, 2016 (none in 2017) (in thousands):

 

                                                       
     Three Months Ended        Six Months Ended    
     June 30, 2016    June 30, 2016

Beginning accrual

     $ 527        $ 733  

Cash payments (1)

     (208      (414
  

 

 

 

  

 

 

 

Ending accrual

     $ 319        $ 319  
  

 

 

 

  

 

 

 

(1) Related to lease obligations and facility exit costs.

 

  
Fair Value (Tables)

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of June 30, 2017 (in thousands):

 

                                                                                                                            
               Fair Value Measurements at June 30, 2017 Using:
               Quoted Prices    Significant     
               in Active    Other    Significant
               Markets For    Observable    Unobservable
          Balance at    Identical Assets    Inputs    Inputs
          June 30, 2017    Level (1)    Level (2)    Level (3)

Assets:

              

Foreign currency forward and option contracts

   (1)     $ 356       $ -           $ 356       $ -      

Embedded derivatives

   (1)      84        -            -            84  

Equity investments held in rabbi trust for the Deferred Compensation Plan

   (2)      7,446        7,446        -            -      

Debt investments held in rabbi trust for the Deferred Compensation Plan

   (2)      3,283        3,283        -            -      
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 11,169       $ 10,729       $ 356       $ 84  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities:

              

Long-term debt

   (3)     $ 267,000       $ -           $ 267,000       $ -      

Foreign currency forward and option contracts

   (1)      4,468        -            4,468        -      

Embedded derivatives

   (1)      255        -            -            255  

Contingent consideration

   (4)      1,127        -            -            1,127  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 272,850       $ -           $ 271,468       $ 1,382  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of December 31, 2016 (in thousands):

 

 

               Fair Value Measurements at December 31, 2016 Using:
               Quoted Prices    Significant     
               in Active    Other    Significant
               Markets For    Observable    Unobservable
          Balance at    Identical Assets    Inputs    Inputs
          December 31, 2016    Level (1)    Level (2)    Level (3)

Assets:

              

Foreign currency forward and option contracts

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

Embedded derivatives

   (1)      12        -            -            12  

Equity investments held in rabbi trust for the Deferred Compensation Plan

   (2)      7,470        7,470        -            -      

Debt investments held in rabbi trust for the Deferred Compensation Plan

   (2)      1,944        1,944        -            -      
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities:

              

Long-term debt

   (3)     $ 267,000       $ -           $ 267,000       $ -      

Foreign currency forward and option contracts

   (1)      1,912        -            1,912        -      

Embedded derivatives

   (1)      567        -            -            567  

Contingent consideration

   (4)      6,100        -            -            6,100  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

       $ 275,579       $ -           $ 268,912       $ 6,667  
     

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

(1) See Note 6, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.

(2) Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 7, Investments Held in Rabbi Trust.

(3) The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 10, Borrowings.

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

A rollforward of the net asset (liability) activity in the Company’s fair value of the embedded derivatives is as follows (in thousands):

 

                              
     Fair Value

Balance at January 1, 2016

    $ -      

Gain (loss) recognized in “Other income (expense)” (1)

     (714

Effect of foreign currency

     159  
  

 

 

 

Balance at December 31, 2016

    $ (555

Gain (loss) recognized in “Other income (expense)” (1)

     315  

Effect of foreign currency

     69  
  

 

 

 

Balance at June 30, 2017

    $ (171
  

 

 

 

Unrealized gain (loss) for the three months ended June 30, 2016

    $ (12
  

 

 

 

Unrealized gain (loss) for the six months ended June 30, 2016

    $ 43  
  

 

 

 

Unrealized gain (loss) for the three months ended June 30, 2017

    $ 200  
  

 

 

 

Unrealized gain (loss) for the six months ended June 30, 2017

    $ 384  
  

 

 

 

(1) Includes realized and unrealized gain (loss).

  

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