SYKES ENTERPRISES INC, 10-Q filed on 11/6/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 18, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
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 Emerging Growth Company false  
Entity Small Business false  
Entity Common Stock, Shares Outstanding   42,781,399
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 157,268 $ 343,734
Receivables, net 353,909 341,958
Prepaid expenses 23,047 22,132
Other current assets 17,792 19,743
Assets held for sale 1,173  
Total current assets 553,189 727,567
Property and equipment, net 138,812 160,790
Goodwill, net 268,075 269,265
Intangibles, net 152,310 140,277
Deferred charges and other assets 33,946 29,193
Total assets 1,146,332 1,327,092
Current liabilities:    
Accounts payable 26,709 32,133
Accrued employee compensation and benefits 104,979 102,899
Income taxes payable 355 2,606
Deferred revenue and customer liabilities 31,322 34,717
Other accrued expenses and current liabilities 38,175 30,888
Total current liabilities 201,540 203,243
Deferred grants 2,353 3,233
Long-term debt 82,000 275,000
Long-term income tax liabilities 23,771 27,098
Other long-term liabilities 24,832 22,039
Total liabilities 334,496 530,613
Commitments and loss contingency (Note 13)
Shareholders' equity:    
Preferred stock, $0.01 par value per share, 10,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value per share, 200,000 shares authorized; 42,781 and 42,899 shares issued, respectively 428 429
Additional paid-in capital 284,275 282,385
Retained earnings 581,740 546,843
Accumulated other comprehensive income (loss) (52,275) (31,104)
Treasury stock at cost: 125 and 117 shares, respectively (2,332) (2,074)
Total shareholders' equity 811,836 796,479
Total liabilities and shareholders' equity $ 1,146,332 $ 1,327,092
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
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 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 42,781,000 42,899,000
Treasury stock, shares 125,000 117,000
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Revenues $ 399,333 $ 407,309 $ 1,210,489 $ 1,166,761
Operating expenses:        
Direct salaries and related costs 261,474 267,489 801,470 763,240
General and administrative 105,148 93,355 309,625 277,635
Depreciation, net 14,072 14,227 43,468 41,395
Amortization of intangibles 3,638 5,293 11,480 15,774
Impairment of long-lived assets 555 680 9,256 5,071
Total operating expenses 384,887 381,044 1,175,299 1,103,115
Income from operations 14,446 26,265 35,190 63,646
Other income (expense):        
Interest income 183 169 529 468
Interest (expense) (1,168) (2,021) (3,523) (5,585)
Other income (expense), net 919 28 537 1,634
Total other income (expense), net (66) (1,824) (2,457) (3,483)
Income before income taxes 14,380 24,441 32,733 60,163
Income taxes 628 2,746 855 10,911
Net income $ 13,752 $ 21,695 $ 31,878 $ 49,252
Net income per common share:        
Basic $ 0.33 $ 0.52 $ 0.76 $ 1.18
Diluted $ 0.33 $ 0.52 $ 0.76 $ 1.17
Weighted average common shares outstanding:        
Basic 42,136 41,879 42,070 41,800
Diluted 42,204 42,033 42,201 42,006
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement Of Income And Comprehensive Income [Abstract]        
Net income $ 13,752 $ 21,695 $ 31,878 $ 49,252
Other comprehensive income (loss), net of taxes:        
Foreign currency translation adjustments, net of taxes (2,177) 11,502 (15,483) 31,884
Unrealized gain (loss) on net investment hedges, net of taxes   (1,916)   (5,220)
Unrealized gain (loss) on cash flow hedging instruments, net of taxes (2,097) 1,326 (5,471) 1,462
Unrealized actuarial gain (loss) related to pension liability, net of taxes 16 (19) (113) (58)
Unrealized gain (loss) on postretirement obligation, net of taxes (84) (13) (104) (38)
Other comprehensive income (loss), net of taxes (4,342) 10,880 (21,171) 28,030
Comprehensive income (loss) $ 9,410 $ 32,575 $ 10,707 $ 77,282
v3.10.0.1
Condensed Consolidated Statements of Changes in Shareholders' Equity - 9 months ended Sep. 30, 2018 - USD ($)
shares in Thousands, $ 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, 2017 $ 796,479 $ 429 $ 282,385 $ 546,843 $ (31,104) $ (2,074)
Beginning Balance, shares at Dec. 31, 2017   42,899        
Stock-based compensation expense 5,317   5,317      
Issuance of common stock under equity award plans, net of forfeitures     258     (258)
Shares repurchased for tax withholding on equity awards (3,686) $ (1) (3,685)      
Shares repurchased for tax withholding on equity awards, Share   (118)        
Comprehensive income (loss) 10,707     31,878 (21,171)  
Ending Balance at Sep. 30, 2018 811,836 $ 428 $ 284,275 581,740 $ (52,275) $ (2,332)
Ending Balance, shares at Sep. 30, 2018   42,781        
Cumulative effect of accounting change | Accounting Standards Update 2014-09 [Member] $ 3,019     $ 3,019    
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net income $ 31,878 $ 49,252
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 43,852 41,778
Amortization of intangibles 11,480 15,774
Amortization of deferred grants (533) (550)
Impairment losses 9,256 5,071
Unrealized foreign currency transaction (gains) losses, net (686) (1,714)
Stock-based compensation expense 5,317 4,429
Deferred income tax provision (benefit) 229 7,395
Unrealized (gains) losses and premiums on financial instruments, net 661 126
Amortization of deferred loan fees 201 201
Imputed interest expense and fair value adjustments to contingent consideration   (529)
Other 375 173
Changes in assets and liabilities, net of acquisitions:    
Receivables, net (12,756) (3,844)
Prepaid expenses (1,164) 1,048
Other current assets (1,101) (4,523)
Deferred charges and other assets (3,731) (667)
Accounts payable (1,490) 2,937
Income taxes receivable / payable (6,429) (7,285)
Accrued employee compensation and benefits 3,426 12,038
Other accrued expenses and current liabilities 10,447 (697)
Deferred revenue and customer liabilities (1,612) 2,476
Other long-term liabilities 1,830 (4,515)
Net cash provided by operating activities 89,450 118,374
Cash flows from investing activities:    
Capital expenditures (36,853) (48,430)
Cash paid for business acquisitions, net of cash acquired (21,845) (9,075)
Net investment hedge settlement   (5,122)
Purchase of intangible assets (8,106) (4,825)
Investment in equity method investees (5,000) (5,012)
Other 698 49
Net cash (used for) investing activities (71,106) (72,415)
Cash flows from financing activities:    
Payments of long-term debt (220,000)  
Proceeds from issuance of long-term debt 27,000  
Shares repurchased for tax withholding on equity awards (3,686) (3,859)
Payments of contingent consideration related to acquisitions   (4,760)
Other 42 139
Net cash (used for) financing activities (196,644) (8,480)
Effects of exchange rates on cash, cash equivalents and restricted cash (8,186) 24,133
Net increase (decrease) in cash, cash equivalents and restricted cash (186,486) 61,612
Cash, cash equivalents and restricted cash – beginning 344,805 267,594
Cash, cash equivalents and restricted cash – ending 158,319 329,206
Supplemental disclosures of cash flow information:    
Cash paid during period for interest 2,893 4,852
Cash paid during period for income taxes 15,423 21,169
Non-cash transactions:    
Property and equipment additions in accounts payable 2,450 5,165
Unrealized gain (loss) on postretirement obligation, net of taxes in accumulated other comprehensive income (loss) $ (104) (38)
Shares repurchased for tax withholding on equity awards included in current liabilities   $ 123
v3.10.0.1
Overview and Basis of Presentation
9 Months Ended
Sep. 30, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
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 leading provider of multichannel demand generation and global customer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services to Global 2000 companies and their end customers primarily within the communications, financial services, technology, transportation and leisure, healthcare, retail and other industries. SYKES primarily provides customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. SYKES also provides various enterprise support services in the United States that include services for its clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services, which includes order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim; and (2) EMEA, which includes Europe, the Middle East and Africa.

2017 Tax Reform Act

In December 2017, the President of the United States (“U.S.”) signed into law the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”). In general, the 2017 Tax Reform Act reduces the U.S. federal corporate tax rate from 35% to 21%, effective in 2018. The 2017 Tax Reform Act moves from a worldwide business taxation approach to a participation exemption regime. The 2017 Tax Reform Act also imposes base-erosion prevention measures on non-U.S. earnings of U.S. entities, as well as a one-time mandatory deemed repatriation tax on accumulated non-U.S. earnings which was recorded in the fourth quarter of 2017. The impact of the 2017 Tax Reform Act on the consolidated financial results began with the fourth quarter of 2017, the period of enactment. This impact, along with the transitional taxes discussed in Note 11, Income Taxes, is reflected in the Other segment.

Telecommunications Asset Acquisition

In April 2017, the Company entered into a definitive Asset Purchase Agreement (the “Purchase Agreement”) to acquire certain assets from a Global 2000 telecommunications services provider. The aggregate purchase price of $7.5 million was paid on May 31, 2017, using cash on hand, resulting in $6.0 million of property and equipment and $1.5 million of customer relationship intangibles (the “Telecommunications Asset acquisition”). The Purchase Agreement contained customary representations and warranties, indemnification obligations and covenants. The results of the Telecommunications Assets’ operations have been included in the Company’s consolidated financial statements in the Americas segment since its acquisition on May 31, 2017.

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

WhistleOut Acquisition

On July 9, 2018, the Company, as guarantor, and its wholly-owned subsidiaries, Sykes Australia Pty Ltd, an Australian company, and Clear Link Technologies, LLC, a Delaware limited liability company, entered into and closed a definitive Share Sale Agreement (the “WhistleOut Sale Agreement”) with WhistleOut Nominees Pty Ltd as trustee for the WhistleOut Holdings Unit Trust, CPC Investments USA Pty Ltd, JJZL Pty Ltd, Kenneth Wong as trustee for Wong Family Trust and C41 Pty Ltd as trustee for the Ottery Family Trust (together, the “WhistleOut Sellers”) to acquire all of the outstanding shares of WhistleOut Pty Ltd and WhistleOut Inc. (together, known as “WhistleOut”).  

The aggregate purchase price of AUD 30.2 million ($22.4 million), was paid at the closing of the transaction on July 9, 2018, resulting in $16.5 million of intangible assets, primarily indefinite-lived domain names, $2.4 million of fixed assets and $2.2 million of goodwill.  The aggregate purchase price is subject to certain post-closing adjustments related to WhistleOut’s working capital. The purchase price was funded through $22.0 million of additional borrowings under the Company’s Credit Agreement. The WhistleOut Sale Agreement provides for a three-year, retention based earnout of AUD 14.0 million.

The WhistleOut Sale Agreement contains customary representations and warranties, indemnification obligations and covenants.

The Company accounted for the WhistleOut acquisition in accordance with ASC 805, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the finalization of the working capital adjustment, tax analysis of the assets acquired and liabilities assumed and goodwill.  The Company expects to complete its analysis of the purchase price allocation during the second quarter of 2019 and any resulting adjustments will be recorded in accordance with ASU 2015-16, Business Combination (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to 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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2018. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.  

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

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On October 17, 2018, the Company entered into a verbal agreement to settle an outstanding legal action for $1.2 million.  See Note 13, Commitments and Loss Contingency, for further information.  On October 18, 2018, the Company entered into a definitive Share Purchase Agreement (the “Symphony Purchase Agreement”) to acquire all the outstanding shares of Symphony Ventures Ltd (“Symphony”) for GBP 52.6 million ($67.9 million). The transaction closed on November 1, 2018.  See Note 19, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

Cash, Cash Equivalents and Restricted cash — Cash and cash equivalents consist of cash and highly liquid short-term investments, primarily held in non-interest-bearing investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.  

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheets that sum to the amounts reported in the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

September 30, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

$

157,268

 

 

$

343,734

 

 

$

328,166

 

 

$

266,675

 

Restricted cash included in "Other current assets"

 

158

 

 

 

154

 

 

 

107

 

 

 

160

 

Restricted cash included in "Deferred charges and

   other assets"

 

893

 

 

 

917

 

 

 

933

 

 

 

759

 

 

$

158,319

 

 

$

344,805

 

 

$

329,206

 

 

$

267,594

 

 

Investments in Equity Method InvesteesThe Company uses the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of an equity method investment is included in consolidated net income. Judgment regarding the level of influence over an equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.

The Company evaluates an equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.  As of September 30, 2018 and December 31, 2017, the Company did not identify any instances where the carrying values of its equity method investments were not recoverable.

In July 2017, the Company made a strategic investment of $10.0 million in XSell Technologies, Inc. (“XSell”) for 32.8% of XSell’s preferred stock. The Company is incorporating XSell’s machine learning and artificial intelligence algorithms into its business. The Company believes this will increase the sales performance of its agents to drive revenue for its clients, improve the experience of the Company’s clients’ end customers and enhance brand loyalty, reduce the cost of customer care and leverage analytics and machine learning to source the best agents and improve their performance.

The Company’s net investment in XSell of $9.4 million and $9.8 million was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.  The Company paid $5.0 million in July 2017 and the remaining $5.0 million in August 2018. The Company’s proportionate share of XSell’s income (loss) of $(0.2) million and less than $(0.1) million for the three months ended September 30, 2018 and 2017, respectively, and $(0.4) million and less than $(0.1) million for the nine months ended September 30, 2018 and 2017, respectively, was included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations.

Customer-Acquisition Advertising Costs — The Company’s advertising costs are expensed as incurred. Total advertising costs included in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Customer-acquisition advertising costs included

   in "Direct salaries and related costs"

$

13,907

 

 

$

9,188

 

 

$

35,835

 

 

$

27,599

 

Customer-acquisition advertising costs included

   in "General and administrative"

 

24

 

 

 

18

 

 

 

35

 

 

 

79

 

 

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

New Accounting Standards Not Yet Adopted

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”) and subsequent amendments (together, “ASC 842”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840, Leases. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early application is permitted.  Entities have the option to either apply the amendments (1) at the beginning of the earliest period presented using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or (2) at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. There are also certain optional practical expedients that an entity may elect to apply.

The Company’s implementation team has compiled a detailed inventory of leases and a preliminary analysis of the impact to the financial statements. The Company continues to evaluate the critical factors of ASC 842. Based on an assessment of the Company’s business and system requirements, the implementation team is implementing a lease accounting software solution to assist the Company in complying with ASC. The Company expects the adoption of ASC 842 on January 1, 2019 to result in a material increase in the assets and liabilities on the consolidated balance sheets as a result of recognizing right-of-use assets and lease liabilities for existing operating leases based on the amount of the Company’s current lease commitments. The Company believes that the majority of its leases will maintain their current lease classification under ASC 842.  The Company does not expect these amendments to have a material effect on its expense recognition timing or cash flows and, as a result, the Company expects the adoption of ASC 842 will result in an insignificant impact on the Company’s consolidated statements of income and on the consolidated statements of cash flows. The Company is continuing to evaluate the magnitude of the impact on financial statement presentation and related disclosures, as well as the optional practical expedients. The Company is also continuing to evaluate the full impact of ASC 842, as well as its impacts on its business processes, systems, and internal controls.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). These amendments remove, modify or add certain disclosure requirements for fair value measurements.  These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Certain of the amendments will be applied prospectively in the initial year of adoption while the remainder are required to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company is evaluating the timing of its adoption of ASU 2018-13 but does not expect a material impact on its disclosures.

Retirement Benefits

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20) – Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). These amendments remove, modify or add certain disclosure requirements for defined benefit plans.  These amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted.  The Company is evaluating the timing of its adoption of ASU 2018-14 but does not expect a material impact on its disclosures.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update.  The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company is evaluating the timing of its adoption of ASU 2018-15 but does not expect a material impact on its financial condition, results of operations, cash flows and disclosures.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedge Activities (“ASU 2017-12”). These amendments help simplify certain aspects of hedge accounting and better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively.  These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update.  The Company does not expect the adoption of ASU 2017-12 to materially impact its financial condition, results of operations, cash flows and disclosures.

Financial Instruments – Credit Losses

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

New Accounting Standards Recently Adopted

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) and subsequent amendments (together, “ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and indicates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve this, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.  The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. See Note 2, Revenues, for further details.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). These amendments modify how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception applies to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such, these investments may be measured at cost. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). These amendments clarify the presentation of cash receipts and payments in eight specific situations.  These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments have been applied using a retrospective transition method to each period presented. The adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on the Company’s cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash (A Consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”). These amendments clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, requiring entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents.  These amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. These amendments have been applied using a retrospective transition method to each period presented. The inclusion of restricted cash increased the beginning balance of cash in the Condensed Consolidated Statements of Cash Flows by $1.1 million for the nine months ended September 30, 2018 and increased the beginning and ending balances of cash by $0.9 million and $1.0 million, respectively, for the nine months ended September 30, 2017.  Other than the change in presentation within the accompanying Condensed Consolidated Statements of Cash Flows, the retrospective adoption of ASU 2016-18 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”). These amendments require recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.  The adoption of ASU 2016-16 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements and no cumulative-effect adjustment to retained earnings was required.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the 2017 Tax Reform Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The Company evaluated the accounting treatment options related to the GILTI provisions and elected to treat any potential GILTI inclusions as a current period cost.  The election did not have a material impact on the Company’s consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). These amendments add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). SAB 118, issued in December 2017, directs taxpayers to consider the implications of the 2017 Tax Reform Act as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. As described in Note 11, Income Taxes, and in accordance with SAB 118, the Company recorded amounts that were considered provisional.

Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”). These amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Reform Act. These amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendment in this update is permitted, including adoption in any interim period. These amendments can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the 2017 Tax Reform Act is recognized. The early adoption of ASU 2018-02 on June 30, 2018 had no impact on the Company’s consolidated financial statements or disclosures.

Business Combinations

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”). These amendments clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. These amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. These amendments were applied prospectively.  The adoption of ASU 2017-01 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

Retirement Benefits

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

The Company adopted the income statement presentation aspects of ASU 2017-07 on a retrospective basis effective January 1, 2018. The following is a reconciliation of the effect of the reclassification of the interest cost and amortization of actuarial gain (loss) from operating expenses to other income (expense) in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 (in thousands):

 

 

As Previously

Reported

 

 

Adjustments

Due to the

Adoption of

ASU 2017-07

 

 

As Revised

 

Three Months Ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

$

267,516

 

 

$

(27

)

 

$

267,489

 

General and administrative

 

93,364

 

 

 

(9

)

 

 

93,355

 

Income from operations

 

26,229

 

 

 

36

 

 

 

26,265

 

Other income (expense), net

 

64

 

 

 

(36

)

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

$

763,324

 

 

$

(84

)

 

$

763,240

 

General and administrative

 

277,664

 

 

 

(29

)

 

 

277,635

 

Income from operations

 

63,533

 

 

 

113

 

 

 

63,646

 

Other income (expense), net

 

1,747

 

 

 

(113

)

 

 

1,634

 

 

v3.10.0.1
Revenues
9 Months Ended
Sep. 30, 2018
Revenue From Contract With Customer [Abstract]  
Revenues

Note 2. Revenues

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606, which includes ASU 2014-09 and all related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting for revenues under ASC 605, Revenue Recognition (“ASC 605”).

The Company recorded an increase to opening retained earnings of $3.0 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.  The impact, all in the Americas segment, primarily related to the change in timing of revenue recognition associated with certain customer contracts that provide fees upon renewal, as well as changes in estimating variable consideration with respect to penalties and holdback provisions for failure to meet specified minimum service levels and other performance-based contingencies.  Revenues recognized under ASC 606 are expected to be slightly higher during 2018 than revenues would have been under ASC 605. This is primarily attributable to the change in the timing of revenue recognition, as discussed above. The impact on revenues recognized for the three and nine months ended September 30, 2018 is reported below.

The cumulative effect of the adjustments made to the Company’s Condensed Consolidated Balance Sheet as of December 31, 2017 for the line items impacted by the adoption of ASC 606 was as follows (in thousands):

 

 

December 31, 2017

 

 

Adjustments

Due to the

Adoption of

ASC 606

 

 

January 1, 2018

 

Receivables, net

$

341,958

 

 

$

825

 

 

$

342,783

 

Deferred charges and other assets

 

29,193

 

 

 

2,045

 

 

 

31,238

 

Income taxes payable

 

2,606

 

 

 

697

 

 

 

3,303

 

Deferred revenue and customer liabilities

 

34,717

 

 

 

(1,048

)

 

 

33,669

 

Other long-term liabilities

 

22,039

 

 

 

202

 

 

 

22,241

 

Retained earnings

 

546,843

 

 

 

3,019

 

 

 

549,862

 

 

The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2018 were as follows (in thousands):

 

 

As Reported

 

 

Balances

Without the

Impact of

the ASC 606

Adoption

 

 

Effect of

Adoption

Increase

(Decrease)

 

Receivables, net

$

353,909

 

 

$

351,299

 

 

$

2,610

 

Deferred charges and other assets

 

33,946

 

 

 

28,025

 

 

 

5,921

 

Income taxes payable

 

355

 

 

 

(1,727

)

 

 

2,082

 

Deferred revenue and customer liabilities

 

31,322

 

 

 

33,984

 

 

 

(2,662

)

Other long-term liabilities

 

24,832

 

 

 

24,415

 

 

 

417

 

Retained earnings

 

581,740

 

 

 

573,046

 

 

 

8,694

 

 

The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the three months ended September 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):

 

 

As Reported

 

 

Balances

Without the

Impact of

the ASC 606

Adoption

 

 

Effect of

Adoption

Increase

(Decrease)

 

Revenues

$

399,333

 

 

$

397,343

 

 

$

1,990

 

Income from operations

 

14,446

 

 

 

12,456

 

 

 

1,990

 

Income before income taxes

 

14,380

 

 

 

12,390

 

 

 

1,990

 

Income taxes

 

628

 

 

 

181

 

 

 

447

 

Net income

 

13,752

 

 

 

12,209

 

 

 

1,543

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.33

 

 

$

0.29

 

 

$

0.04

 

Diluted

$

0.33

 

 

$

0.29

 

 

$

0.04

 

 

The financial statement line items impacted by the adoption of ASC 606 in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018 were as follows, along with the impact per share (in thousands, except per share data):

 

 

As Reported

 

 

Balances

Without the

Impact of

the ASC 606

Adoption

 

 

Effect of

Adoption

Increase

(Decrease)

 

Revenues

$

1,210,489

 

 

$

1,203,102

 

 

$

7,387

 

Income from operations

 

35,190

 

 

 

27,803

 

 

 

7,387

 

Income before income taxes

 

32,733

 

 

 

25,346

 

 

 

7,387

 

Income taxes

 

855

 

 

 

(857

)

 

 

1,712

 

Net income

 

31,878

 

 

 

26,203

 

 

 

5,675

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.76

 

 

$

0.62

 

 

$

0.14

 

Diluted

$

0.76

 

 

$

0.62

 

 

$

0.14

 

 

The Company’s net cash provided by operating activities for the nine months ended September 30, 2018 did not change due to the adoption of ASC 606.

 

Practical Expedients

The Company utilized the practical expedient that allows for the application of ASC 606 to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

Costs of Obtaining Customer Contracts

ASC 606 requires an entity to recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.  The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (e.g., a sales commission).  Because the Company’s sales commissions are not directly incremental to obtaining customer contracts, they are expensed as incurred.

Recognition of Revenues Accounting Policy

The Company’s “Recognition of Revenues” accounting policy under ASC 606 is outlined below.  For the Company’s accounting policy under ASC 605, see Note 1, Overview and Summary of Significant Accounting Policies, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company recognizes revenues in accordance with ASC 606, whereby revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.

Customer Engagement Solutions and Services

Under ASC 606, the Company accounts for a contract with a client when it has approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.  The Company’s customer engagement solutions and services are classified as stand-ready performance obligations.  Because the Company’s customers simultaneously receive and consume the benefits of its services as they are delivered, the performance obligations are satisfied over time. The Company recognizes revenues over time using output methods such as a per minute, per hour, per call, per transaction or per time and materials basis.  These output methods faithfully depict the satisfaction of the Company’s obligation to deliver the services as requested and represent a direct measurement of value to the customer. The Company’s contracts have a single performance obligation as the promise to transfer the customer solutions and services are not separately identifiable from other promises in the contract, and therefore not distinct.  

The stated term of the Company’s contracts with customers range from 30 days to six years.  The majority of these contracts include termination for convenience or without cause provisions allowing either party to cancel the contract without substantial cost or penalty within a defined notification period (“termination rights”), varying periods typically up to 180 days.  Because of the termination rights, only the noncancelable portion qualifies as a legally enforceable contract under Step 1, Identify the Contract with a Customer, of ASC 606 (“Step 1”) and is accounted for as such, even if the customer is unlikely to exercise its termination right.  Furthermore, the amounts excluded from assessment under Step 1 are, in effect, optional customer purchases of additional services.  

If the termination right is only provided to the customer, the unsatisfied performance obligations will be evaluated as a customer option.  The Company typically does not include options in customer contracts that would result in a material right.  If options to purchase additional services or options to renew are included in customer contracts, the Company evaluates the option in order to determine if the arrangement includes promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer.

The Company’s primary billing terms are that payment is due within 30 or 60 days of the invoice date.  Invoices are generally issued on a monthly basis as control transfers and/or as services are rendered.  Revenue recognition is limited to the established transaction price, the amount to which the Company expects to be entitled to under the contract, including the amount of expected fees for those contracts with renewal provisions, and the amount that is not contingent upon delivery of any future product or service or meeting other specified performance obligations.  The transaction price, once determined, is allocated to the single performance obligation on a contract by contract basis.

The Company’s customer contracts include penalties and holdbacks provisions for failure to meet specified minimum service levels and other performance-based contingencies, as well as the right of certain of the Company’s clients to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred.  Certain customers also receive cash discounts for early payment. These provisions are accounted for as variable consideration and are estimated using the expected value method based on historical service and pricing trends, the individual contract provisions, and the Company’s best judgment at the time.  None of these variable consideration components are subject to constraint due to the short time period to resolution, the Company’s extensive history with similar transactions, and the limited number of possible outcomes and third-party influence. The portion of the consideration received under the contract that the Company expects to ultimately refund to the customer is excluded from the transaction price and is recorded as a refund liability.

Other Revenues

In the Americas, the Company provides a range of enterprise support services including technical staffing services and outsourced corporate help desk services, primarily in the U.S.  Revenues for enterprise support services are recognized over time using output methods such as number of positions filled.

In EMEA, the Company offers fulfillment services that are integrated with its customer care and technical support services. The Company’s fulfillment solutions include order processing, payment processing, inventory control, product delivery and product returns handling. Sales are recognized upon shipment to the customer and satisfaction of all obligations.

The Company also has miscellaneous other revenues in the Other segment.

In total, other revenues are immaterial, representing 0.5% and 0.5% of the Company’s consolidated total revenues for the three months ended September 30, 2018 and 2017, respectively, and 0.5% and 0.5% of the Company’s consolidated total revenues for the nine months ended September 30, 2018 and 2017, respectively.

Disaggregated Revenues

The Company disaggregates its revenues from contracts with customers by service type and geographic location (see Note 16, Segments and Geographic Information), for each of its reportable segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by economic factors.

The following table represents revenues from contracts with customers disaggregated by service type and by the reportable segment for each category (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer engagement solutions and services

$

328,535

 

 

$

341,077

 

 

$

995,723

 

 

$

976,342

 

Other revenues

 

227

 

 

 

257

 

 

 

801

 

 

 

794

 

Total Americas

 

328,762

 

 

 

341,334

 

 

 

996,524

 

 

 

977,136

 

EMEA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer engagement solutions and services

 

68,859

 

 

 

64,230

 

 

 

208,302

 

 

 

184,135

 

Other revenues

 

1,684

 

 

 

1,727

 

 

 

5,588

 

 

 

5,429

 

Total EMEA

 

70,543

 

 

 

65,957

 

 

 

213,890

 

 

 

189,564

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

28

 

 

 

18

 

 

 

75

 

 

 

61

 

Total Other

 

28

 

 

 

18

 

 

 

75

 

 

 

61

 

 

$

399,333

 

 

$

407,309

 

 

$

1,210,489

 

 

$

1,166,761

 

 

Trade Accounts Receivable

 

The Company’s trade accounts receivable, net, consists of the following (in thousands):

 

 

September 30, 2018

 

 

January 1, 2018

 

Trade accounts receivable, net, current (1)

$

340,391

 

 

$

332,014

 

Trade accounts receivable, net, noncurrent (2)

 

6,066

 

 

 

2,078

 

 

$

346,457

 

 

$

334,092

 

 

(1) Included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets.  The January 1, 2018 balance includes the $0.8 million adjustment recorded upon adoption of ASC 606.  

(2) Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets.  The January 1, 2018 balance includes a $2.1 million adjustment recorded upon adoption of ASC 606.  

 

The Company’s noncurrent trade accounts receivable result from contracts with customers that include renewal provisions that take effect subsequent to the satisfaction of the associated performance obligations. Payment is expected upon renewal, which occurs in bi-annual and annual increments over the associated expected contract term, the majority of which range from two to five years.

 

Deferred Revenue and Customer Liabilities

Deferred revenue and customer liabilities consists of the following (in thousands):

 

 

September 30, 2018

 

 

January 1, 2018

 

Deferred revenue

$

4,507

 

 

$

4,598

 

Customer arrangements with termination rights

 

17,789

 

 

 

21,755

 

Estimated refund liabilities (1)

 

9,026

 

 

 

7,316

 

 

$

31,322

 

 

$

33,669

 

 

(1) The January 1, 2018 balance includes the $1.0 million adjustment recorded upon adoption of ASC 606.

 

Deferred Revenue

 

The Company receives up-front fees in connection with certain contracts. In accordance with ASC 606, the up-front fees are recorded as a contract liability only to the extent a legally enforceable contract exists, typically varying periods up to 180 days.  Accordingly, the up-front fees allocated to the notification period are recorded as deferred revenue, while the fees that extend beyond the notification period are classified as a customer arrangement with termination rights. These up-front fees do not represent a significant financing component since they were structured primarily to reduce the administrative burden in managing the operations of certain contracts, to provide the customer with un-interrupted service, and to assist in managing the overall risk and profitability of providing the services.

 

Revenues of $0.1 million and $4.3 million were recognized during the three and nine months ended September 30, 2018, respectively, from amounts included in deferred revenue at January 1, 2018.  The Company expects to recognize the majority of its deferred revenue as of September 30, 2018 over the next 180 days.

 

Customer Liabilities – Customer Arrangements with Termination Rights

 

Customer arrangements with termination rights represent the amount of up-front fees received for unsatisfied performance obligations for periods that extend beyond the legally enforceable contract period. All customer arrangements with termination rights are classified as current as the customer can terminate the contracts and demand pro-rata refunds of the up-front fees over varying periods, typically up to 180 days.  The Company expects to recognize the majority of the customer arrangements with termination rights into revenue as the Company has not historically experienced a high rate of contract terminations.

 

Customer Liabilities – Refund Liabilities

 

Refund liabilities represent consideration received under the contract that the Company expects to ultimately refund to the customer and primarily relates to estimated penalties, holdbacks and chargebacks.  Penalties and holdbacks result from the failure to meet specified minimum service levels in certain contracts and other performance-based contingencies.  Chargebacks reflect the right of certain of the Company’s clients to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred.  

 

Refund liabilities are generally resolved in 180 days, once it is determined whether the requisite service levels and client requirements were achieved to settle the contingency.

v3.10.0.1
Costs Associated with Exit or Disposal Activities
9 Months Ended
Sep. 30, 2018
Restructuring And Related Activities [Abstract]  
Costs Associated with Exit or Disposal Activities

Note 3. Costs Associated with Exit or Disposal Activities

During the second quarter of 2018, the Company initiated a restructuring plan to streamline excess capacity through targeted seat reductions (the “Americas 2018 Exit Plan”) in an on-going effort to manage and optimize capacity utilization. The Americas 2018 Exit Plan includes, but is not limited to, closing customer contact management centers and consolidating leased space in various locations in the U.S. and Canada.  The Company anticipates finalizing the remainder of the site closures under the Americas 2018 Exit Plan by December 2018.

The Company’s actions will result in a reduction in seats as well as anticipated general and administrative cost savings, and lower depreciation expense resulting from the 2018 site closures.

The cumulative costs expected and incurred to date related to cash and non-cash expenditures as a result of the Americas 2018 Exit Plan are outlined below as of September 30, 2018 (in thousands):

 

 

Costs Expected To Be Incurred

 

 

Cumulative Costs Incurred To Date

 

 

Expected Remaining Costs

 

Lease obligations and facility exit costs (1)

$

7,344

 

 

$

6,860

 

 

$

484

 

Severance and related costs (2)

 

3,434

 

 

 

3,417

 

 

 

17

 

Severance and related costs (1)

 

665

 

 

 

550

 

 

 

115

 

Non-cash impairment charges

 

5,730

 

 

 

5,730

 

 

 

-

 

 

$

17,173

 

 

$

16,557

 

 

$

616

 

 

(1) Related to “General and administrative” costs.

(2) Related to “Direct salaries and related costs.

The total costs expected to be incurred under the Americas 2018 Exit Plan increased $1.1 million during the three months ended September 30, 2018 as the Company progressed with its plan and actual costs became known. The expected remaining lease obligations, facility exit costs and severance charges are anticipated to be incurred during the fourth quarter of 2018. The Company has paid $5.2 million in cash through September 30, 2018.  

The following table summarizes the accrued liability and related charges for the three months ended September 30, 2018 (none in 2017) (in thousands):

 

 

Lease Obligations

and Facility

Exit Costs

 

 

Severance and

Related Costs

 

 

Total

 

Balance at the beginning of the period

$

2,815

 

 

$

490

 

 

$

3,305

 

Charges included in "Direct salaries and related costs"

 

-

 

 

 

3,015

 

 

 

3,015

 

Charges included in "General and administrative"

 

3,832

 

 

 

331

 

 

 

4,163

 

Cash payments

 

(1,440

)

 

 

(3,209

)

 

 

(4,649

)

Balance sheet reclassifications (1)

 

119

 

 

 

-

 

 

 

119

 

Balance at the end of the period

$

5,326

 

 

$

627

 

 

$

5,953

 

 

(1) Consists of the reclassification of deferred rent balances to the restructuring liability for locations subject to closure.  

The following table summarizes the accrued liability and related charges for the nine months ended September 30, 2018 (none in 2017) (in thousands):

 

 

Lease Obligations

and Facility

Exit Costs

 

 

Severance and

Related Costs

 

 

Total

 

Balance at the beginning of the period

$

-

 

 

$

-

 

 

$

-

 

Charges included in "Direct salaries and related costs"

 

-

 

 

 

3,417

 

 

 

3,417

 

Charges included in "General and administrative"

 

6,860

 

 

 

550

 

 

 

7,410

 

Cash payments

 

(1,869

)

 

 

(3,340

)

 

 

(5,209

)

Balance sheet reclassifications (1)

 

335

 

 

 

-

 

 

 

335

 

Balance at the end of the period

$

5,326

 

 

$

627

 

 

$

5,953

 

 

(1) Consists of the reclassification of deferred rent balances to the restructuring liability for locations subject to closure.  

Restructuring Liability Classification

The following table summarizes the Company’s short-term and long-term accrued liabilities associated with the Americas 2018 Exit Plan as of September 30, 2018 (none in 2017) (in thousands):

 

 

Americas 2018

Exit Plan

 

Short-term accrued restructuring liability (1)

$

4,491

 

Short-term accrued restructuring liability (2)

 

627

 

Long-term accrued restructuring liability (3)

 

835

 

Ending accrual at September 30, 2018

$

5,953

 

 

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

(2) Included in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheet.

(3) Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet.

The long-term accrued restructuring liability relates to future rent obligations to be paid through the remainder of the lease terms, the last of which ends in June 2021.

v3.10.0.1
Fair Value
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
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 the debt bears interest based on variable market rates, as outlined in the debt agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Investments Held in Rabbi Trust The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 7, Investments Held in Rabbi Trust, and Note 15, Stock-Based Compensation.

 

Contingent Consideration The Company uses significant unobservable inputs to determine the fair value of contingent consideration, which is classified in Level 3 of the fair value hierarchy.  The contingent consideration recorded related to the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”) and liabilities assumed as part of the Clear Link Holdings, LLC (“Clearlink”) acquisition was recognized at fair value using a discounted cash flow methodology and a discount rate of approximately 14.0% and 10.0%, respectively.

 

The Company's assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of September 30, 2018 (in thousands):

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

Balance at

 

 

Quoted

Prices in

Active Markets

For Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

September 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward and option

   contracts (1)

$

307

 

 

$

-

 

 

$

307

 

 

$

-

 

Embedded derivatives (1)

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

Equity investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

9,116

 

 

 

9,116

 

 

 

-

 

 

 

-

 

Debt investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

3,453

 

 

 

3,453

 

 

 

-

 

 

 

-

 

 

$

12,878

 

 

$

12,569

 

 

$

307

 

 

$

2

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward and option

   contracts (1)

$

3,185

 

 

$

-

 

 

$

3,185

 

 

$

-

 

Embedded derivatives (1)

 

404

 

 

 

-

 

 

 

-

 

 

 

404

 

 

$

3,589

 

 

$

-

 

 

$

3,185

 

 

$

404

 

 

The Company's assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following as of December 31, 2017 (in thousands):