Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2019 and 2018
(Unaudited)
Note 1. Overview and Basis of Presentation
Business — Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a leading provider of multichannel demand generation and global customer engagement services. SYKES provides differentiated full lifecycle customer engagement solutions and services primarily to Global 2000 companies and their end customers, principally within the financial services, communications, technology, transportation & leisure, healthcare 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 include order processing, payment processing, inventory control, product delivery and product returns handling. Additionally, through the Company’s acquisition of robotic processing automation (“RPA”) provider Symphony Ventures Ltd (“Symphony”) coupled with its investment in artificial intelligence (“AI”) through XSell Technologies, Inc. (“XSell”), the Company also provides a suite of solutions such as consulting, implementation, hosting and managed services that optimizes its differentiated full lifecycle management services platform. The Company has operations in two reportable segments entitled (1) the Americas, 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.
U.S. 2017 Tax Reform Act
On December 20, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was approved by Congress and received presidential approval on December 22, 2017. In general, the 2017 Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%, effective in 2018. The 2017 Tax Reform Act moved from a worldwide business taxation approach to a participation exemption regime. The 2017 Tax Reform Act also imposed base-erosion prevention measures on non-U.S. earnings of U.S. entities, as well as a one-time mandatory deemed repatriation tax on accumulated non-U.S. earnings. The impact of the 2017 Tax Reform Act on the Company’s consolidated financial results began with the fourth quarter of 2017, the period of enactment. See Note 11, Income Taxes, for further information.
Acquisitions
Symphony Acquisition
On October 18, 2018, the Company, as guarantor, and its wholly-owned subsidiary, SEI International Services S.a.r.l, a Luxembourg company, entered into the Symphony Purchase Agreement with Pascal Baker, Ian Barkin, David Brain, David Poole, FIS Nominee Limited, Baronsmead Venture Trust plc and Baronsmead Second Venture Trust plc (together, the “Symphony Sellers”) to acquire all of the outstanding shares of Symphony.
Symphony, headquartered in London, England, provides RPA services, offering RPA consulting, implementation, hosting and managed services for front, middle and back-office processes. Symphony serves numerous industries globally, including financial services, healthcare, business services, manufacturing, consumer products, communications, media and entertainment.
The aggregate purchase price was GBP 52.5 million ($67.6 million), subject to a post-closing working capital adjustment, of which the Company paid GBP 44.6 million ($57.6 million) at the closing of the transaction on November 1, 2018 using cash on hand as well as $31.0 million of additional borrowings under the Company’s credit agreement. The acquisition date present value of the remaining GBP 7.9 million ($10.0 million) of purchase price has been deferred and is payable in equal installments over three years, on or around November 1, 2019, 2020 and 2021. The Symphony Purchase Agreement also provides for a three-year, retention based earnout payable in restricted stock units (“RSUs”) with a value of GBP 3.0 million. The Symphony Purchase Agreement contains customary representations and warranties, indemnification obligations and covenants.
9
Subsequent to the finalization of the working capital adjustments during the quarter ended March 31, 2019, the purchase price was adjusted to GBP 52.4 million ($67.5 million). The acquisition resulted in $26.1 million of intangible assets, primarily customer relationships and trade names, $2.2 million of fixed assets and $36.2 million of goodwill.
The Company accounted for the Symphony acquisition in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the tax analysis of the assets acquired and liabilities assumed and goodwill. The Company will complete its analysis of the purchase price allocation in the fourth quarter of 2019 and any resulting adjustments will be recorded in accordance with ASC 805.
WhistleOut Acquisition
On July 9, 2018, the Company, as guarantor, and its wholly-owned subsidiaries, Sykes Australia Pty Ltd, an Australian company, and Clear Link Technologies, LLC, a Delaware limited liability company, entered into and closed the WhistleOut Sale Agreement with WhistleOut Nominees Pty Ltd as trustee for the WhistleOut Holdings Unit Trust, CPC Investments USA Pty Ltd, JJZL Pty Ltd, Kenneth Wong as trustee for Wong Family Trust and C41 Pty Ltd as trustee for the Ottery Family Trust (together, the “WhistleOut Sellers”) to acquire all of the outstanding shares of WhistleOut. The WhistleOut Sale Agreement contained customary representations and warranties, indemnification obligations and covenants.
The aggregate purchase price of AUD 30.2 million ($22.4 million) was paid at the closing of the transaction on July 9, 2018. Subsequent to the finalization of the working capital adjustments during the quarter ended March 31, 2019, the purchase price was adjusted to AUD 30.3 million ($22.5 million). 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 payable in three installments on or about July 1, 2019, 2020 and 2021. The Company paid the first installment of the earn-out of AUD 6.0 million ($4.2 million) in July 2019.
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. The Company completed its tax analysis of the assets acquired and liabilities assumed during the second quarter of 2019, which resulted in deferred tax assets and liabilities in accordance with ASC 805. The final purchase price allocation resulted in $16.5 million of intangible assets, primarily indefinite-lived domain names, $2.4 million of fixed assets and $3.3 million of goodwill.
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, 2019 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2019. 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, 2018, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2019.
Principles of Consolidation — The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates — The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
10
Subsequent Events — Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On November 5, 2019, the Company settled an insurance claim related to damage to its customer engagement center located in Fort Smith, Arkansas. 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, 2019
|
|
|
December 31, 2018
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Cash and cash equivalents
|
$
|
142,572
|
|
|
$
|
128,697
|
|
|
$
|
157,268
|
|
|
$
|
343,734
|
|
|
Restricted cash included in "Other current assets"
|
|
563
|
|
|
|
149
|
|
|
|
158
|
|
|
|
154
|
|
|
Restricted cash included in "Deferred charges and
other assets"
|
|
1,432
|
|
|
|
1,385
|
|
|
|
893
|
|
|
|
917
|
|
|
|
$
|
144,567
|
|
|
$
|
130,231
|
|
|
$
|
158,319
|
|
|
$
|
344,805
|
|
Investments in Equity Method Investees — In July 2017, the Company made a strategic investment of $10.0 million in XSell for 32.8% of XSell’s preferred stock. The Company is incorporating XSell’s machine learning and AI 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 $8.8 million and $9.2 million was included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. The Company’s investment was paid in two installments of $5.0 million, one in July 2017 and one in August 2018. The Company’s proportionate share of XSell’s net (loss) of $(0.1) million and $(0.2) million for the three months ended September 30, 2019 and 2018, respectively, and $(0.3) million and $(0.4) million for the nine months ended September 30, 2019 and 2018, respectively, was included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations.
As of September 30, 2019 and December 31, 2018, the Company did not identify any instances where the carrying values of its equity method investments were not recoverable.
Customer-Acquisition Advertising Costs — The Company’s advertising costs are expensed as incurred. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Customer-acquisition advertising costs
|
$
|
11,188
|
|
|
$
|
13,907
|
|
|
$
|
33,328
|
|
|
$
|
35,835
|
|
Reclassifications — Certain balances in the prior period have been reclassified to conform to current period presentation.
New Accounting Standards Not Yet Adopted
Fair Value Measurements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). These amendments remove, modify or add certain disclosure requirements for fair value measurements. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain of the amendments will be applied
11
prospectively in the initial year of adoption while the remainder are required to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company does not expect its adoption of ASU 2018-13 to have a material impact on its disclosures and does not expect to early adopt the standard.
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20) – Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). These amendments remove, modify or add certain disclosure requirements for defined benefit plans. These amendments are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company does not expect its adoption of ASU 2018-14 to have a material impact on its financial condition, results of operations, cash flows or disclosures and does not expect to early adopt the standard.
Cloud Computing
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. These amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early application permitted in any interim period after issuance of this update. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect its adoption of ASU 2018-15 to have a material impact on its financial condition, results of operations, cash flows or disclosures and does not expect to early adopt the standard.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). These amendments require measurement and recognition of expected versus incurred credit losses for financial assets held. Entities are required to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses in November 2018 and ASU 2019-05, Financial Instruments – Credit Losses (Topic 326) Targeted Transition Relief in May 2019 (together, “subsequent amendments”). ASU 2016-13 and the subsequent amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.
The Company’s implementation team is substantially complete with the assessment of its data and the design of its financial models to estimate expected credit losses and continues to evaluate the critical factors of ASU 2016-13 to determine its impact on the Company’s business processes, systems, and internal controls. The Company expects ASU 2016-13 to apply to its trade receivables but does not expect the adoption of the amendments to have a material impact on its financial condition, results of operations or cash flows because credit losses associated with trade receivables have historically been insignificant. The adoption of ASU 2016-13 will require expanded quantitative and qualitative disclosures about the Company’s expected credit losses. Additionally, the Company does not anticipate early adopting ASU 2016-13.
Codification Improvements – Financial Instruments – Credit Losses, Derivatives and Hedging, and Financial Instruments
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). These amendments clarify new standards on credit losses, hedging and recognizing and measuring financial instruments and address implementation issues stakeholders have raised. The credit losses and hedging amendments have the same effective dates as the respective standards, unless an entity has already adopted the standards. The amendments related to recognizing and measuring financial instruments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2019-04 to have a material impact on its financial condition, results of operations, cash flows or disclosures.
12
New Accounting Standards Recently Adopted
Leases
In February 2016, the FASB issued 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 classified as operating leases under ASC 840, Leases (“ASC 840”). These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities have the option to either apply the amendments (1) at the beginning of the earliest period presented using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or (2) at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without the need to restate prior periods. There are also certain optional practical expedients that an entity may elect to apply. The Company adopted ASC 842 as of January 1, 2019 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date. Periods prior to January 1, 2019 have not been restated.
See Note 3, Leases, for further details as well as the Company’s significant accounting policy for leases.
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 adoption of ASU 2017-12 on January 1, 2019 did not have a material impact on the financial condition, results of operations, cash flows or disclosures of the Company. No cumulative-effect adjustment was recorded to opening retained earnings on the date of adoption as there was no ineffectiveness previously recorded in retained earnings that would have been included in other comprehensive income if the new guidance had been applied since hedge inception. Upon adoption of ASU 2017-12, the Company elected the spot method for assessing the effectiveness of net investment hedges and will record the amortization of excluded components of net investment hedges in “Other income (expense), net” in its consolidated financial statements.
Note 2. Revenues
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”), which included 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. 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.
Revenue from Contracts with Customers
The Company recognizes revenues in accordance with ASC 606, whereby revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.
Customer Engagement Solutions and Services
The Company provides customer engagement solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to its clients’ customers. These services are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital
13
self-service. Revenues for customer engagement solutions and services are recognized over time using output methods such as a per minute, per hour, per call, per transaction or per time and materials basis.
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 2.6% and 0.5% of the Company’s consolidated total revenues for the three months ended September 30, 2019 and 2018, respectively, and 2.4% and 0.5% for the nine months ended September 30, 2019 and 2018, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services
|
$
|
317,806
|
|
|
$
|
328,535
|
|
|
$
|
952,438
|
|
|
$
|
995,723
|
|
|
Other revenues
|
|
291
|
|
|
|
227
|
|
|
|
743
|
|
|
|
801
|
|
|
Total Americas
|
|
318,097
|
|
|
|
328,762
|
|
|
|
953,181
|
|
|
|
996,524
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer engagement solutions and services
|
|
69,329
|
|
|
|
68,859
|
|
|
|
208,969
|
|
|
|
208,302
|
|
|
Other revenues
|
|
10,098
|
|
|
|
1,684
|
|
|
|
27,262
|
|
|
|
5,588
|
|
|
Total EMEA
|
|
79,427
|
|
|
|
70,543
|
|
|
|
236,231
|
|
|
|
213,890
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
23
|
|
|
|
28
|
|
|
|
66
|
|
|
|
75
|
|
|
Total Other
|
|
23
|
|
|
|
28
|
|
|
|
66
|
|
|
|
75
|
|
|
|
$
|
397,547
|
|
|
$
|
399,333
|
|
|
$
|
1,189,478
|
|
|
$
|
1,210,489
|
|
Trade Accounts Receivable
The Company’s trade accounts receivable, net, consists of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Trade accounts receivable, net, current (1)
|
$
|
340,520
|
|
|
$
|
335,377
|
|
|
Trade accounts receivable, net, noncurrent (2)
|
|
19,457
|
|
|
|
15,948
|
|
|
|
$
|
359,977
|
|
|
$
|
351,325
|
|
(1) Included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets.
(2) Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets.
The Company’s noncurrent trade accounts receivable result from contracts with customers that include renewal provisions, as well as contracts with customers under multi-year arrangements.
14
Deferred Revenue and Customer Liabilities
Deferred revenue and customer liabilities consists of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Deferred revenue
|
$
|
3,691
|
|
|
$
|
3,655
|
|
|
Customer arrangements with termination rights
|
|
15,891
|
|
|
|
16,404
|
|
|
Estimated refund liabilities
|
|
9,324
|
|
|
|
10,117
|
|
|
|
$
|
28,906
|
|
|
$
|
30,176
|
|
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. Accordingly, the up-front fees allocated to a contract’s termination notification period, typically varying periods up to 180 days, are recorded as deferred revenue, while the fees that extend beyond the notification period are classified as customer arrangements with termination rights.
Revenues of $0.2 million and $0.1 million were recognized during the three months ended September 30, 2019 and 2018, respectively, and revenues of $3.6 million and $4.3 million were recognized during the nine months ended September 30, 2019 and 2018, respectively, from amounts included in deferred revenue at December 31, 2018 and January 1, 2018, respectively. The Company expects to recognize the majority of its deferred revenue as of September 30, 2019 over the next 180 days.
Customer Liabilities – Customer Arrangements with Termination Rights
The majority of the Company’s contracts include termination for convenience or without cause provisions allowing either party to cancel the contract without substantial cost or penalty within a defined notification period (“termination rights”). Customer arrangements with termination rights represent the amount 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 early contract terminations.
Customer Liabilities – Estimated Refund Liabilities
Estimated refund liabilities represent consideration received under the contract that the Company expects to ultimately refund to the customer and primarily relates to estimated penalties, holdbacks and chargebacks. Penalties and holdbacks result from the failure to meet specified minimum service levels in certain contracts and other performance-based contingencies. Chargebacks reflect the right of certain of the Company’s clients to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred. Estimated refund liabilities are generally resolved in 180 days, once it is determined whether the requisite service levels and client requirements were achieved to settle the contingency.
Note 3. Leases
Adoption of ASC 842, Leases
On January 1, 2019, the Company adopted ASC 842, which includes ASU 2016-02 and all related amendments, using the modified retrospective method and recognized a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting for leases under ASC 840.
The adoption of ASC 842 on January 1, 2019 had a material impact on the Company’s Condensed Consolidated Balance Sheet, resulting in the recognition of $225.3 million of right-of-use ("ROU") assets, $239.3 million of operating lease liabilities, a $0.1 million increase to opening retained earnings, as well as $14.1 million primarily related to the derecognition of net straight-line lease liabilities. The retained earnings adjustment was due to the
15
cumulative impact of adopting ASC 842, primarily resulting from the derecognition of embedded lease derivatives, the difference between deferred rent balances and the net of ROU assets and lease liabilities and the deferred tax impact.
The impact of the adoption of ASC 842 to the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 was not material. The Company’s net cash provided by operating activities for the nine months ended September 30, 2019 did not change due to the adoption of ASC 842.
Practical Expedients
The Company elected the following practical expedients:
|
•
|
The package of transitional practical expedients, consistently applied to all leases, that permits the Company to not reassess whether any expired or existing contracts are or contain leases, the historical lease classification for any expired or existing leases and initial direct costs for any expired or existing leases; and
|
|
•
|
The practical expedient that permits the Company to make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all leases entered into or modified after the January 1, 2019 adoption date.
|
Accounting Policy
In determining whether a contract contains a lease, the Company assesses whether the arrangement meets all three of the following criteria: 1) there is an identified asset; 2) the Company has the right to obtain substantially all the economic benefits from use of the identified asset; and 3) the Company has the right to direct the use of the identified asset. This involves evaluating whether the Company has the right to operate the asset or to direct others to operate the asset in a manner that it determines without the supplier having the right to change those operating instructions, as well as evaluating the Company’s involvement in the design of the asset.
The Company capitalizes operating lease obligations with initial terms in excess of 12 months as ROU assets with corresponding lease liabilities on its balance sheet. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Additionally, the ROU asset is adjusted for lease incentives, prepaid lease payments and initial direct costs. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, such as real estate taxes, insurance, common area maintenance and other operating costs. Lease and non-lease components are generally accounted for as a single component to the extent that the costs are fixed per the arrangement. The Company has applied this accounting policy to all asset classes. To the extent that the non-lease components are not fixed per the arrangement, these costs are treated as variable lease costs and expensed as incurred.
Certain of the Company’s lease agreements include rental payments that adjust periodically based on an index or rate, generally the applicable Consumer Price Index (“CPI”). The operating lease liability is measured using the prevailing index or rate at the measurement date (i.e., the commencement date); however, the most recent CPI in effect as of January 1, 2019 was used to effectuate the adoption of ASC 842. Incremental payments due to changes to the index- and rate-based lease payments are treated as variable lease costs and expensed as incurred.
For purposes of calculating operating lease liabilities, the lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The primary factors used to estimate whether an option to extend a lease term will be exercised or not generally include the extent of the Company’s capital investment, employee recruitment potential and operational cost and flexibility.
16
In determining the present value of lease payments, the Company typically uses incremental borrowing rates based on information available at the lease commencement date. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company’s incremental borrowing rate is estimated using a synthetic credit rating model and forward currency exchange rates, as applicable.
Payments on leases with an initial term of 12 months or less are recognized in the accompanying Condensed Consolidated Statements of Operations on a straight-line basis over the lease term.
The ROU asset is evaluated for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. A loss is recognized when the ROU asset is impaired in connection with the impairment of a site’s assets due to economic or other factors. When the ROU asset is impaired, it is typically amortized on a straight-line basis over the shorter of the remaining lease term or its useful life, and the related operating lease would no longer qualify for straight-line treatment of total lease expense.
Leases
The Company leases facilities for its corporate headquarters, many of its customer engagement centers, several regional support offices and data centers. These leases are classified as operating leases and are included in “Operating lease right-of-use assets,” “Operating lease liabilities” and “Long-term operating lease liabilities” in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2019. The Company has no finance leases.
Lease terms for the Company’s leases are generally three to 20 years with renewal options typically ranging from one month to five years and largely require the Company to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs in addition to a base or fixed rent. The Company's operating leases have remaining lease terms of one month to 13 years as of September 30, 2019.
The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases certain of its facilities that have been abandoned before the expiration of the lease term. Operating lease costs on abandoned facilities are reduced by sublease income and included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations. The Company’s sublease arrangements do not contain renewal options or restrictive covenants. The Company’s subleases have varying remaining lease terms extending through 2025, and future contractual sublease income is expected to be $13.2 million over the remaining lease terms.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense were as follows (in thousands):
|
|
Statement of Operations Location
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Operating lease cost
|
Direct salaries and related costs
|
|
$
|
37
|
|
|
$
|
170
|
|
|
Operating lease cost
|
General and administrative
|
|
|
14,645
|
|
|
|
44,460
|
|
|
Short-term lease cost
|
General and administrative
|
|
|
970
|
|
|
|
1,783
|
|
|
Variable lease cost
|
Direct salaries and related costs
|
|
|
—
|
|
|
|
(1
|
)
|
|
Variable lease cost
|
General and administrative
|
|
|
1,116
|
|
|
|
3,426
|
|
|
Sublease income
|
General and administrative
|
|
|
(870
|
)
|
|
|
(1,867
|
)
|
|
|
|
|
$
|
15,898
|
|
|
$
|
47,971
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
Nine Months Ended September 30, 2019
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities - operating
cash flows
|
$
|
43,387
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
18,447
|
|
17
Additional supplemental information related to leases was as follows:
|
|
September 30, 2019
|
|
|
Weighted average remaining lease term of operating leases
|
5.4 years
|
|
|
Weighted average discount rate of operating leases
|
|
3.7
|
%
|
Maturities of operating lease liabilities as of September 30, 2019 were as follows (in thousands):
|
|
Amount
|
|
|
2019 (remainder of the year)
|
$
|
10,767
|
|
|
2020
|
|
57,324
|
|
|
2021
|
|
51,118
|
|
|
2022
|
|
39,370
|
|
|
2023
|
|
25,829
|
|
|
2024 and thereafter
|
|
55,475
|
|
|
Total future lease payments
|
|
239,883
|
|
|
Less: Imputed interest
|
|
23,552
|
|
|
Present value of future lease payments
|
|
216,331
|
|
|
Less: Operating lease liabilities
|
|
48,323
|
|
|
Long-term operating lease liabilities
|
$
|
168,008
|
|
As of September 30, 2019, the Company had additional operating leases for customer engagement centers that had not yet commenced with future lease payments of $0.7 million. These operating leases will commence during the fourth quarter of 2019 with lease terms between 1 and 6 years.
Disclosures related to periods prior to adoption of ASC 842
Rental expense under operating leases, primarily included in “General and administrative” in the accompanying Condensed Consolidated Statement of Operations, for the three and nine months ended September 30, 2018 was $19.0 million and $53.6 million, respectively.
The following is a schedule of future minimum rental payments required under operating leases that had noncancelable lease terms as of December 31, 2018 under ASC 840 (in thousands):
|
|
Amount
|
|
|
2019
|
$
|
53,071
|
|
|
2020
|
|
48,770
|
|
|
2021
|
|
43,324
|
|
|
2022
|
|
34,063
|
|
|
2023
|
|
22,583
|
|
|
2024 and thereafter
|
|
51,456
|
|
|
|
$
|
253,267
|
|
Note 4. Costs Associated with Exit or Disposal Activities
During the first quarter of 2019, the Company initiated a restructuring plan to simplify and refine its operating model in the U.S. (the “Americas 2019 Exit Plan”), in part to improve agent attrition and absenteeism. The Americas 2019 Exit Plan includes, but is not limited to, closing customer contact management centers, consolidating leased space in various locations in the U.S. and management reorganization. The Company finalized these actions as of September 30, 2019.
During the second quarter of 2018, the Company initiated a restructuring plan to manage and optimize capacity utilization, which included closing customer contact management centers and consolidating leased space in various locations in the U.S. and Canada (the “Americas 2018 Exit Plan”). The Company finalized the remainder of the site closures under the Americas 2018 Exit Plan as of December 2018, resulting in a reduction of 5,000 seats.
The Company’s actions under both the Americas 2018 and 2019 Exit Plans are anticipated to result in general and administrative cost savings and lower depreciation expense.
18
The cumulative costs expected and incurred to date related to cash and non-cash expenditures resulting from the Americas 2018 Exit Plan and the Americas 2019 Exit Plan are outlined below as of September 30, 2019 (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
Americas
2019 Exit Plan
|
|
|
Lease obligations and facility exit costs (1)
|
$
|
7,073
|
|
|
$
|
54
|
|
|
Severance and related costs (2)
|
|
3,426
|
|
|
|
191
|
|
|
Severance and related costs (1)
|
|
1,053
|
|
|
|
2,161
|
|
|
Non-cash impairment charges
|
|
5,875
|
|
|
|
1,582
|
|
|
Other non-cash charges
|
|
—
|
|
|
|
244
|
|
|
|
$
|
17,427
|
|
|
$
|
4,232
|
|
(1) Included in “General and administrative” costs.
(2) Included in “Direct salaries and related costs.”
The Company has paid a total of $11.8 million in cash through September 30, 2019, of which $10.4 million related to the Americas 2018 Exit Plan and $1.4 million related to the Americas 2019 Exit Plan.
The following table summarizes the accrued liability and related charges for the three months ended September 30, 2019 (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
Americas
2019 Exit Plan
|
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
$
|
129
|
|
|
$
|
222
|
|
|
$
|
351
|
|
|
$
|
54
|
|
|
$
|
1,561
|
|
|
$
|
1,615
|
|
|
Charges (reversals) included in "General
and administrative"
|
|
—
|
|
|
|
8
|
|
|
|
8
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
Cash payments
|
|
(33
|
)
|
|
|
(129
|
)
|
|
|
(162
|
)
|
|
|
—
|
|
|
|
(649
|
)
|
|
|
(649
|
)
|
|
Balance at the end of the period
|
$
|
96
|
|
|
$
|
101
|
|
|
$
|
197
|
|
|
$
|
54
|
|
|
$
|
904
|
|
|
$
|
958
|
|
The following table summarizes the accrued liability and related charges for the three months ended September 30, 2018 (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
$
|
2,815
|
|
|
$
|
490
|
|
|
$
|
3,305
|
|
|
Charges (reversals) included in "Direct
salaries and related costs"
|
|
—
|
|
|
|
3,015
|
|
|
|
3,015
|
|
|
Charges (reversals) 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.
19
The following table summarizes the accrued liability and related charges for the nine months ended September 30, 2019 (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
Americas
2019 Exit Plan
|
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
$
|
1,769
|
|
|
$
|
817
|
|
|
$
|
2,586
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Charges (reversals) included in "Direct
salaries and related costs"
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
191
|
|
|
|
191
|
|
|
Charges (reversals) included in "General
and administrative"
|
|
(4
|
)
|
|
|
18
|
|
|
|
14
|
|
|
|
54
|
|
|
|
2,161
|
|
|
|
2,215
|
|
|
Cash payments
|
|
(331
|
)
|
|
|
(731
|
)
|
|
|
(1,062
|
)
|
|
|
—
|
|
|
|
(1,448
|
)
|
|
|
(1,448
|
)
|
|
Balance sheet reclassifications (1)
|
|
(1,338
|
)
|
|
|
—
|
|
|
|
(1,338
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance at the end of the period
|
$
|
96
|
|
|
$
|
101
|
|
|
$
|
197
|
|
|
$
|
54
|
|
|
$
|
904
|
|
|
$
|
958
|
|
(1) Consists of the reclassification from the restructuring liability to “Operating lease liabilities” and “Long-term operating lease liabilities” upon adoption of ASC 842 on January 1, 2019.
The following table summarizes the accrued liability and related charges for the nine months ended September 30, 2018 (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
|
Lease Obligations
and Facility
Exit Costs
|
|
|
Severance and
Related Costs
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Charges (reversals) included in "Direct
salaries and related costs"
|
|
—
|
|
|
|
3,417
|
|
|
|
3,417
|
|
|
Charges (reversals) 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 its Americas 2018 and 2019 Exit Plans (in thousands):
|
|
Americas
2018 Exit Plan
|
|
|
Americas
2019 Exit Plan
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
September 30, 2019
|
|
|
Lease obligations and facility exit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in "Accounts payable"
|
$
|
—
|
|
|
$
|
100
|
|
|
$
|
54
|
|
|
Included in "Other accrued expenses and current
liabilities"
|
|
55
|
|
|
|
952
|
|
|
|
—
|
|
|
Included in "Other long-term liabilities"
|
|
41
|
|
|
|
717
|
|
|
|
—
|
|
|
|
|
96
|
|
|
|
1,769
|
|
|
$
|
54
|
|
|
Severance and related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in "Accrued employee compensation and
benefits"
|
|
101
|
|
|
|
793
|
|
|
|
902
|
|
|
Included in "Other accrued expenses and current
liabilities"
|
|
—
|
|
|
|
24
|
|
|
|
2
|
|
|
|
|
101
|
|
|
|
817
|
|
|
|
904
|
|
|
|
$
|
197
|
|
|
$
|
2,586
|
|
|
$
|
958
|
|
20
The long-term accrued restructuring liability relates to variable costs associated with future rent obligations to be paid through the remainder of the lease terms, the last of which ends in June 2021.
Note 5. Fair Value
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additionally, ASC 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for how these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:
|
|
•
|
Level 1 — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
•
|
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Determination of Fair Value — The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency 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 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, if applicable.
Cash, Short-Term and Other Investments and Accounts Payable — The carrying values for cash, short-term and other investments and accounts payable approximate their fair values.
Long-Term Debt — The carrying value of long-term debt approximates its estimated fair value as the debt bears interest based on variable market rates, as outlined in the debt agreement.
Foreign Currency Contracts — The Company enters into foreign currency forward contracts and options over the counter and values such contracts, including premiums paid on options, at fair value using quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk. The key inputs include forward or option foreign currency exchange rates and interest rates. These items are classified in Level 2 of the fair value hierarchy.
Embedded Derivatives — Prior to the adoption of ASC 842, the Company had embedded derivatives within certain hybrid lease agreements that were bifurcated from the host contract and valued such contracts at fair value using significant unobservable inputs, which are classified in Level 3 of the fair value hierarchy. These unobservable inputs included 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 were adjusted for credit risk. These items were classified in Level 3 of the fair value hierarchy. See Note 3, Leases, and Note 7, Financial Derivatives, for further information.
21
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 8, Investments Held in Rabbi Trust.
The Company's assets and liabilities measured at fair value on a recurring basis subject to the requirements of ASC 820 consist of the following (in thousands):
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Balance at
|
|
|
Quoted
Prices in
Active Markets
For Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
September 30, 2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1)
|
$
|
2,576
|
|
|
$
|
—
|
|
|
$
|
2,576
|
|
|
$
|
—
|
|
|
Equity investments held in rabbi trust for the
Deferred Compensation Plan (2)
|
|
8,305
|
|
|
|
8,305
|
|
|
|
—
|
|
|
|
—
|
|
|
Debt investments held in rabbi trust for the
Deferred Compensation Plan (2)
|
|
4,712
|
|
|
|
4,712
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
15,593
|
|
|
$
|
13,017
|
|
|
$
|
2,576
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1)
|
$
|
425
|
|
|
$
|
—
|
|
|
$
|
425
|
|
|
$
|
—
|
|
|
|
$
|
425
|
|
|
$
|
—
|
|
|
$
|
425
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Balance at
|
|
|
Quoted
Prices in
Active Markets
For Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
December 31, 2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1)
|
$
|
1,068
|
|
|
$
|
—
|
|
|
$
|
1,068
|
|
|
$
|
—
|
|
|
Embedded derivatives (1)
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
Equity investments held in rabbi trust for the
Deferred Compensation Plan (2)
|
|
8,075
|
|
|
|
8,075
|
|
|
|
—
|
|
|
|
—
|
|
|
Debt investments held in rabbi trust for the
Deferred Compensation Plan (2)
|
|
3,367
|
|
|
|
3,367
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
12,520
|
|
|
$
|
11,442
|
|
|
$
|
1,068
|
|
|
$
|
10
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (1)
|
$
|
2,895
|
|
|
$
|
—
|
|
|
$
|
2,895
|
|
|
$
|
—
|
|
|
Embedded derivatives (1)
|
|
369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
369
|
|
|
|
$
|
3,264
|
|
|
$
|
—
|
|
|
$
|
2,895
|
|
|
$
|
369
|
|
(1) See Note 7, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.
(2) Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 8, Investments Held in Rabbi Trust.
22
Reconciliations of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy
Embedded Derivatives in Lease Agreements
A rollforward of the net asset (liability) activity in the Company’s fair value of the embedded derivatives is as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Balance at the beginning of the period
|
$
|
—
|
|
|
$
|
(598
|
)
|
|
$
|
(359
|
)
|
|
$
|
(527
|
)
|
|
Derecognition of embedded derivatives (1)
|
|
—
|
|
|
|
—
|
|
|
|
359
|
|
|
|
—
|
|
|
Gains (losses) recognized in "Other income
(expense), net"
|
|
—
|
|
|
|
159
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
Settlements
|
|
—
|
|
|
|
38
|
|
|
|
—
|
|
|
|
118
|
|
|
Effect of foreign currency
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
13
|
|
|
Balance at the end of the period
|
$
|
—
|
|
|
$
|
(402
|
)
|
|
$
|
—
|
|
|
$
|
(402
|
)
|
|
Change in unrealized gains (losses) included in "Other
income (expense), net" related to embedded
derivatives held at the end of the period
|
$
|
—
|
|
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
(1) Derecognition upon adoption of ASC 842 on January 1, 2019. See Note 3, Leases, for more information.
Non-Recurring Fair Value
Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, including goodwill, intangible assets, long-lived assets, ROU assets and equity method investments. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at September 30, 2019 and December 31, 2018.
The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities) subject to the requirements of ASC 820 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
—
|
|
|
$
|
(555
|
)
|
|
$
|
(343
|
)
|
|
$
|
(9,256
|
)
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
|
—
|
|
|
|
(1,368
|
)
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
(555
|
)
|
|
$
|
(1,711
|
)
|
|
$
|
(9,256
|
)
|
In connection with the closure of certain under-utilized customer contact management centers and the consolidation of leased space in the U.S. and Canada, the Company recorded impairment charges during the three and nine months ended September 30, 2019 and 2018 related to the exit of leased facilities as well as leasehold improvements, equipment, furniture and fixtures which were not recoverable. See Note 4, Costs Associated with Exit and Disposal Activities, for further information.
23
Note 6. Goodwill and Intangible Assets
Intangible Assets
The following table presents the Company’s purchased intangible assets as of September 30, 2019 (in thousands):
|
|
Gross
Intangibles
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangibles
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
189,177
|
|
|
$
|
(117,027
|
)
|
|
$
|
72,150
|
|
|
|
10
|
|
|
Trade names and trademarks
|
|
19,093
|
|
|
|
(12,310
|
)
|
|
|
6,783
|
|
|
|
8
|
|
|
Non-compete agreements
|
|
2,714
|
|
|
|
(2,088
|
)
|
|
|
626
|
|
|
|
3
|
|
|
Content library
|
|
492
|
|
|
|
(492
|
)
|
|
|
—
|
|
|
|
2
|
|
|
Proprietary software
|
|
870
|
|
|
|
(660
|
)
|
|
|
210
|
|
|
|
5
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
|
80,710
|
|
|
|
—
|
|
|
|
80,710
|
|
|
N/A
|
|
|
|
$
|
293,056
|
|
|
$
|
(132,577
|
)
|
|
$
|
160,479
|
|
|
|
5
|
|
The following table presents the Company’s purchased intangible assets as of December 31, 2018 (in thousands):
|
|
Gross
Intangibles
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangibles
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
189,697
|
|
|
$
|
(106,502
|
)
|
|
$
|
83,195
|
|
|
|
10
|
|
|
Trade names and trademarks
|
|
19,236
|
|
|
|
(10,594
|
)
|
|
|
8,642
|
|
|
|
8
|
|
|
Non-compete agreements
|
|
2,746
|
|
|
|
(1,724
|
)
|
|
|
1,022
|
|
|
|
3
|
|
|
Content library
|
|
517
|
|
|
|
(517
|
)
|
|
|
—
|
|
|
|
2
|
|
|
Proprietary software
|
|
1,040
|
|
|
|
(725
|
)
|
|
|
315
|
|
|
|
4
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain names
|
|
80,857
|
|
|
|
—
|
|
|
|
80,857
|
|
|
N/A
|
|
|
|
$
|
294,093
|
|
|
$
|
(120,062
|
)
|
|
$
|
174,031
|
|
|
|
5
|
|
The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to September 30, 2019 is as follows (in thousands):
|
|
Amount
|
|
|
2019 (remainder of the year)
|
$
|
4,054
|
|
|
2020
|
|
13,897
|
|
|
2021
|
|
9,312
|
|
|
2022
|
|
8,035
|
|
|
2023
|
|
7,205
|
|
|
2024
|
|
6,960
|
|
|
2025 and thereafter
|
|
30,306
|
|
Goodwill
Changes in goodwill for the nine months ended September 30, 2019 consisted of the following (in thousands):
|
|
January 1, 2019
|
|
|
Acquisition-
Related (1)
|
|
|
Effect of
Foreign
Currency
|
|
|
September 30, 2019
|
|
|
Americas
|
$
|
255,436
|
|
|
$
|
1,202
|
|
|
$
|
1,799
|
|
|
$
|
258,437
|
|
|
EMEA
|
|
47,081
|
|
|
|
(124
|
)
|
|
|
(1,594
|
)
|
|
|
45,363
|
|
|
|
$
|
302,517
|
|
|
$
|
1,078
|
|
|
$
|
205
|
|
|
$
|
303,800
|
|
24
Changes in goodwill for the year ended December 31, 2018 consisted of the following (in thousands):
|
|
January 1, 2018
|
|
|
Acquisition-
Related (1)
|
|
|
Effect of
Foreign
Currency
|
|
|
December 31, 2018
|
|
|
Americas
|
$
|
258,496
|
|
|
$
|
2,175
|
|
|
$
|
(5,235
|
)
|
|
$
|
255,436
|
|
|
EMEA
|
|
10,769
|
|
|
|
36,361
|
|
|
|
(49
|
)
|
|
|
47,081
|
|
|
|
$
|
269,265
|
|
|
$
|
38,536
|
|
|
$
|
(5,284
|
)
|
|
$
|
302,517
|
|
(1) See Note 1, Overview and Basis of Presentation, for further information. The year ended December 31, 2018 includes the goodwill recorded upon acquisition of WhistleOut and Symphony, while the nine months ended September 30, 2019 includes the impact of adjustments to acquired goodwill upon finalization of working capital adjustments and the tax analysis of WhistleOut’s assets acquired and liabilities assumed.
The Company performs its annual goodwill impairment test during the third quarter, or more frequently if indicators of impairment exist.
For the annual goodwill impairment test, the Company elected to forgo the option to first assess qualitative factors and performed its annual quantitative goodwill impairment test as of July 31, 2019. Under ASC 350, Intangibles – Goodwill and Other, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes comparing a reporting unit’s calculated fair value to its carrying value. The calculation of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the projected long-term growth rate and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. The Company considered the income and market approaches to determine its best estimates of fair value, which incorporated the following significant assumptions:
|
|
•
|
Revenue projections, including revenue growth during the forecast periods;
|
|
|
•
|
EBITDA margin projections over the forecast periods;
|
|
|
•
|
Estimated income tax rates;
|
|
|
•
|
Estimated capital expenditures; and
|
|
|
•
|
Discount rates based on various inputs, including the risks associated with the specific reporting units as well as their revenue growth and EBITDA margin assumptions.
|
As of July 31, 2019, the Company had eight reporting units, seven of which have goodwill. The Company concluded that goodwill was not impaired for all seven of its reporting units with goodwill, based on generally accepted valuation techniques and the significant assumptions outlined above. The fair values of three of the seven reporting units were substantially in excess of their carrying value. The Clearlink, Symphony, LATAM and Qelp reporting units’ fair values exceeded their respective carrying values, although the fair value cushion was not substantial. The decrease in the Clearlink reporting unit’s cushion from the prior year was primarily attributable to a decrease in the projected long-term growth rate of the U.S. Gross Domestic Product as well as a decline in projected revenue growth. The decrease in the cushion from the prior year for the LATAM and Qelp reporting units was primarily attributable to an increase in the country-specific risk premiums which increased the applied weighted average cost of capital. Symphony was acquired by the Company in November 2018.
The Clearlink, Symphony, LATAM and Qelp reporting units are at risk of future impairment if projected operating results are not met or other inputs into the fair value measurement model change. As of September 30, 2019, the Company believes there were no indicators of impairment related to Clearlink’s $74.1 million of goodwill, Symphony’s $35.7 million of goodwill, LATAM’s $19.2 million of goodwill and Qelp’s $9.7 million of goodwill.
25
Note 7. 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 foreign currency contracts are entered into to hedge the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction that is attributable to changes in exchange rates.
The deferred gains (losses) and related taxes on the Company’s cash flow hedges recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) in the accompanying Condensed Consolidated Balance Sheets were as follows (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Deferred gains (losses) in AOCI
|
$
|
1,553
|
|
|
$
|
(1,825
|
)
|
|
Tax on deferred gains (losses) in AOCI
|
|
(47
|
)
|
|
|
(39
|
)
|
|
Deferred gains (losses) in AOCI, net of taxes
|
$
|
1,506
|
|
|
$
|
(1,864
|
)
|
|
Deferred gains (losses) expected to be reclassified to "Revenues"
from AOCI during the next twelve months
|
$
|
1,553
|
|
|
|
|
|
Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts and options as well as the related settlement of forecasted transactions.
Non-Designated Hedges
Foreign Currency Forward Contracts – The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against adverse foreign currency moves relating primarily to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies.
Embedded Derivatives – The Company enters into certain lease agreements which require payments not denominated in the functional currency of any substantial party to the agreements. Prior to the adoption of ASC 842 on January 1, 2019, the foreign currency component of these contracts met the criteria under ASC 815 as embedded derivatives. The Company has determined that the embedded derivatives were 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 did not qualify for hedge accounting under ASC 815. The Company’s embedded derivatives were derecognized on January 1, 2019.
The Company had the following outstanding foreign currency forward contracts and options, and embedded derivatives (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Contract Type
|
Notional
Amount
in USD
|
|
|
Settle
Through
Date
|
|
|
Notional
Amount
in USD
|
|
|
Settle
Through
Date
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars/Philippine Pesos
|
$
|
77,000
|
|
|
September 2020
|
|
|
$
|
26,250
|
|
|
December 2019
|
|
|
Forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars/Philippine Pesos
|
|
—
|
|
|
|
—
|
|
|
|
39,000
|
|
|
September 2019
|
|
|
US Dollars/Costa Rican Colones
|
|
27,000
|
|
|
June 2020
|
|
|
|
67,000
|
|
|
December 2019
|
|
|
Euros/Hungarian Forints
|
|
752
|
|
|
December 2019
|
|
|
|
—
|
|
|
|
—
|
|
|
Euros/Romanian Leis
|
|
4,142
|
|
|
December 2019
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-designated hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards
|
|
25,161
|
|
|
November 2021
|
|
|
|
19,261
|
|
|
November 2021
|
|
|
Embedded derivatives
|
|
—
|
|
|
|
—
|
|
|
|
14,069
|
|
|
April 2030
|
|
26
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 $2.6 million and $1.1 million as of September 30, 2019 and December 31, 2018, 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 $2.4 million and $1.1 million as of September 30, 2019 and December 31, 2018, respectively, and liability positions of $0.2 million and $2.9 million as of September 30, 2019 and December 31, 2018, 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
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Derivatives designated as cash
flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
$
|
2,358
|
|
|
$
|
1,038
|
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
|
81
|
|
|
|
30
|
|
|
Foreign currency contracts
|
|
Deferred charges and other assets
|
|
|
137
|
|
|
|
—
|
|
|
Embedded derivatives
|
|
Other current assets
|
|
|
—
|
|
|
|
10
|
|
|
Total derivative assets
|
|
|
|
$
|
2,576
|
|
|
$
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Derivatives designated as cash
flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other accrued expenses and current liabilities
|
|
$
|
28
|
|
|
$
|
2,604
|
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other accrued expenses and current liabilities
|
|
|
397
|
|
|
|
247
|
|
|
Foreign currency contracts
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
44
|
|
|
Embedded derivatives
|
|
Other accrued expenses and current liabilities
|
|
|
—
|
|
|
|
8
|
|
|
Embedded derivatives
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
361
|
|
|
Total derivative liabilities
|
|
|
|
$
|
425
|
|
|
$
|
3,264
|
|
27
The following table presents the effect of the Company’s derivative instruments included in the accompanying condensed consolidated financial statements (in thousands):
|
|
|
Location of Gains
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
(Losses) in Net Income
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
|
|
$
|
397,547
|
|
|
$
|
399,333
|
|
|
$
|
1,189,478
|
|
|
$
|
1,210,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash
flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
|
|
|
(36
|
)
|
|
|
(1,839
|
)
|
|
|
4,733
|
|
|
|
(4,840
|
)
|
|
Gains (losses) reclassified from AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Revenues
|
|
|
1,134
|
|
|
|
183
|
|
|
|
1,264
|
|
|
|
619
|
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized from foreign
currency contracts
|
|
Other income (expense), net
|
|
$
|
(363
|
)
|
|
$
|
(539
|
)
|
|
$
|
(828
|
)
|
|
$
|
(1,801
|
)
|
|
Gains (losses) recognized from embedded
derivatives
|
|
Other income (expense), net
|
|
|
—
|
|
|
|
159
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
|
|
|
$
|
(363
|
)
|
|
$
|
(380
|
)
|
|
$
|
(828
|
)
|
|
$
|
(1,807
|
)
|
Note 8. Investments Held in Rabbi Trust
The Company’s investments held in rabbi trust, classified as trading securities and included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets, at fair value, consist of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Mutual funds
|
$
|
9,455
|
|
|
$
|
13,017
|
|
|
$
|
8,864
|
|
|
$
|
11,442
|
|
The mutual funds held in rabbi trust were 64% equity-based and 36% debt-based as of September 30, 2019. Net investment gains (losses) included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net realized gains (losses) from sale of trading securities
|
$
|
62
|
|
|
$
|
10
|
|
|
$
|
128
|
|
|
$
|
42
|
|
|
Dividend and interest income
|
|
35
|
|
|
|
31
|
|
|
|
117
|
|
|
|
99
|
|
|
Net unrealized holding gains (losses)
|
|
(56
|
)
|
|
|
366
|
|
|
|
1,402
|
|
|
|
383
|
|
|
|
$
|
41
|
|
|
$
|
407
|
|
|
$
|
1,647
|
|
|
$
|
524
|
|
Note 9. Borrowings
On February 14, 2019, the Company entered into a $500 million senior revolving credit facility (the “2019 Credit Agreement”) with a group of lenders, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”), the lenders named therein, and KeyBanc Capital Markets Inc. as Lead Arranger and Sole Book Runner. The 2019 Credit Agreement replaced the Company’s previous $440 million revolving credit facility dated May 12, 2015 (the “2015 Credit Agreement”), which agreement was terminated simultaneous with entering into the 2019 Credit Agreement. The 2019 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.
The 2019 Credit Agreement includes a $200 million alternate-currency sub-facility, a $15 million swingline sub-facility and a $15 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.
28
The 2019 Credit Agreement matures on February 14, 2024, and had outstanding borrowings of $77.0 million at September 30, 2019 and the 2015 Credit Agreement had outstanding borrowings of $102.0 million at December 31, 2018, included in “Long-term debt” in the accompanying Condensed Consolidated Balance Sheets.
Borrowings under the 2019 Credit Agreement bear interest at the rates set forth in the 2019 Credit Agreement. In addition, the Company is required to pay certain customary fees, including a commitment fee determined quarterly based on the Company’s leverage ratio and due quarterly in arrears as calculated on the average unused amount of the 2019 Credit Agreement.
The 2019 Credit Agreement is guaranteed by all the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of 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 February 2019, the Company paid debt issuance costs of $1.1 million for the 2019 Credit Agreement, which is deferred and amortized over the term of the loan, along with the debt issuance costs of $0.3 million related to the 2015 Credit Agreement.
The following table presents information related to our credit agreements (dollars in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Average daily utilization
|
$
|
91,935
|
|
|
$
|
101,087
|
|
|
$
|
92,495
|
|
|
$
|
107,454
|
|
|
Interest expense (1)
|
$
|
899
|
|
|
$
|
923
|
|
|
$
|
2,783
|
|
|
$
|
2,839
|
|
|
Weighted average interest rate (1)
|
|
3.9
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
3.6
|
%
|
(1) Excludes the amortization of deferred loan fees and includes the commitment fee.
In January 2018, the Company repaid $175.0 million of long-term debt outstanding under its 2015 Credit Agreement, primarily using funds repatriated from its foreign subsidiaries.
Note 10. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) consist of the following (in thousands):
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrealized
Gain
(Loss) on
Net
Investment
Hedge
|
|
|
Unrealized
Gain (Loss)
on
Cash Flow
Hedging
Instruments
|
|
|
Unrealized
Actuarial
Gain
(Loss)
Related
to Pension
Liability
|
|
|
Unrealized
Gain
(Loss) on
Postretirement
Obligation
|
|
|
Total
|
|
|
Balance at January 1, 2018
|
$
|
(36,315
|
)
|
|
$
|
1,046
|
|
|
$
|
2,471
|
|
|
$
|
1,574
|
|
|
$
|
120
|
|
|
$
|
(31,104
|
)
|
|
Pre-tax amount
|
|
(22,158
|
)
|
|
|
—
|
|
|
|
(4,287
|
)
|
|
|
783
|
|
|
|
—
|
|
|
|
(25,662
|
)
|
|
Tax (provision) benefit
|
|
—
|
|
|
|
—
|
|
|
|
84
|
|
|
|
47
|
|
|
|
—
|
|
|
|
131
|
|
|
Reclassification of (gain) loss to net income
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
(66
|
)
|
|
|
(80
|
)
|
|
|
(140
|
)
|
|
Foreign currency translation
|
|
220
|
|
|
|
—
|
|
|
|
(138
|
)
|
|
|
(82
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Balance at December 31, 2018
|
|
(58,253
|
)
|
|
|
1,046
|
|
|
|
(1,864
|
)
|
|
|
2,256
|
|
|
|
40
|
|
|
|
(56,775
|
)
|
|
Pre-tax amount
|
|
(7,048
|
)
|
|
|
—
|
|
|
|
4,733
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,315
|
)
|
|
Tax (provision) benefit
|
|
—
|
|
|
|
—
|
|
|
|
(85
|
)
|
|
|
10
|
|
|
|
—
|
|
|
|
(75
|
)
|
|
Reclassification of (gain) loss to net income
|
|
—
|
|
|
|
—
|
|
|
|
(1,186
|
)
|
|
|
(72
|
)
|
|
|
(15
|
)
|
|
|
(1,273
|
)
|
|
Foreign currency translation
|
|
56
|
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
36
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance at September 30, 2019
|
$
|
(65,245
|
)
|
|
$
|
1,046
|
|
|
$
|
1,506
|
|
|
$
|
2,230
|
|
|
$
|
25
|
|
|
$
|
(60,438
|
)
|
29
The following table summarizes the amounts reclassified to net income from accumulated other comprehensive income (loss) and the associated line item in the accompanying Condensed Consolidated Statements of Operations (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
Statements of
Operations
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Location
|
|
Gain (loss) on cash flow hedging
instruments: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amount
|
$
|
1,134
|
|
|
$
|
183
|
|
|
$
|
1,264
|
|
|
$
|
619
|
|
|
Revenues
|
|
Tax (provision) benefit
|
|
(33
|
)
|
|
|
19
|
|
|
|
(78
|
)
|
|
|
43
|
|
|
Income taxes
|
|
Reclassification to net income
|
|
1,101
|
|
|
|
202
|
|
|
|
1,186
|
|
|
|
662
|
|
|
|
|
Actuarial gain (loss) related to
pension liability: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amount
|
|
21
|
|
|
|
13
|
|
|
|
63
|
|
|
|
42
|
|
|
Other income (expense), net
|
|
Tax (provision) benefit
|
|
3
|
|
|
|
3
|
|
|
|
9
|
|
|
|
9
|
|
|
Income taxes
|
|
Reclassification to net income
|
|
24
|
|
|
|
16
|
|
|
|
72
|
|
|
|
51
|
|
|
|
|
Gain (loss) on postretirement
obligation: (2),(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income
|
|
5
|
|
|
|
84
|
|
|
|
15
|
|
|
|
104
|
|
|
Other income (expense), net
|
|
|
$
|
1,130
|
|
|
$
|
302
|
|
|
$
|
1,273
|
|
|
$
|
817
|
|
|
|
(1) See Note 7, Financial Derivatives, for further information.
(2) See Note 14, Defined Benefit Pension Plan and Postretirement Benefits, for further information.
(3) No related tax (provision) benefit.
As discussed in Note 11, Income Taxes, for periods prior to December 31, 2017, any remaining outside basis differences associated with the Company’s investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments has been provided.
Note 11. Income Taxes
The Company’s effective tax rates were as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Effective tax rate
|
|
23.9
|
%
|
|
|
4.4
|
%
|
|
|
23.8
|
%
|
|
|
2.6
|
%
|
The increase in the effective tax rate for the three months ended September 30, 2019 as compared to 2018 was primarily due to a $1.9 million reduction in discrete taxes related to the resolution of uncertain tax positions and ancillary issues in the prior period. The increase was also affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which were individually material, also impacted the rate. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the tax impact of permanent differences, state income and foreign withholding taxes, partially offset by the recognition of net tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits.
The increase in the effective tax rate for the nine months ended September 30, 2019 as compared to 2018 was primarily due to a $5.3 million reduction in discrete taxes from the aforementioned changes in uncertain tax positions, including the settlement of tax audits and ancillary issues in the prior period. The increase was also affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which were individually material, also impacted the rate. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the tax impact of permanent differences, state income and foreign withholding taxes, partially offset by the recognition of net tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits.
The 2017 Tax Reform Act made significant changes to the Internal Revenue Code, including, but not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a participation exemption regime, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company estimated its provision for income taxes in accordance with the 2017 Tax Reform Act and guidance available upon enactment, and as a result
30
recorded $32.7 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was signed into law. The $32.7 million estimate included the provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings of $32.7 million based on cumulative foreign earnings of $531.8 million and $1.0 million of foreign withholding taxes on certain anticipated distributions. The provisional tax expense was partially offset by a provisional benefit of $1.0 million related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The Company finalized the computation during the fourth quarter of 2018 and recorded a $0.2 million decrease during the year ended December 31, 2018 to the original provisional amount recorded.
Prior to December 31, 2017, no additional income taxes have been provided for any remaining outside basis differences inherent in the Company’s investments in its foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining outside basis difference in these entities is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.
The 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. As of June 30, 2017, the Company determined that all material aspects of the Canadian audit were effectively settled pursuant to ASC 740. During the nine months ended September 30, 2018, the Company finalized procedures ancillary to the Canadian audit and recognized an additional $2.8 million income tax benefit due to the elimination of certain assessed penalties, interest and withholding taxes.
The Company has no significant tax jurisdictions under audit; however, the Company is currently under audit in several tax jurisdictions. The Company believes it has adequate reserves related to all matters pertaining to the remaining audits. Should the Company experience unfavorable outcomes from these audits, such outcomes could have a significant impact on its financial condition, results of operations and cash flows.
Note 12. Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock appreciation rights, restricted stock, restricted stock units and shares held in rabbi trust using the treasury stock method.
The numbers of shares used in the earnings per share computation were as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
41,190
|
|
|
|
42,136
|
|
|
|
41,808
|
|
|
|
42,070
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock appreciation rights, restricted
stock, restricted stock units and shares held in
rabbi trust
|
|
117
|
|
|
|
68
|
|
|
|
100
|
|
|
|
131
|
|
|
Total weighted average diluted shares outstanding
|
|
41,307
|
|
|
|
42,204
|
|
|
|
41,908
|
|
|
|
42,201
|
|
|
Anti-dilutive shares excluded from the diluted earnings
per share calculation
|
|
52
|
|
|
|
23
|
|
|
|
174
|
|
|
|
11
|
|
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 6.4 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.
31
The shares repurchased under the Company’s 2011 Share Repurchase Program were as follows (none in 2018) (in thousands, except per share amounts):
|
|
|
Total Number of
|
|
|
|
|
|
Total Cost of
|
|
|
|
|
Shares
|
|
|
Range of Prices Paid Per Share
|
|
|
Shares
|
|
|
|
|
Repurchased
|
|
|
Low
|
|
|
High
|
|
|
Repurchased
|
|
|
Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
369
|
|
|
$
|
26.81
|
|
|
$
|
28.00
|
|
|
$
|
10,103
|
|
|
Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
1,140
|
|
|
$
|
24.72
|
|
|
$
|
28.00
|
|
|
$
|
30,281
|
|
Note 13. Commitments and Loss Contingency
Purchase Commitments
The Company enters into various purchase commitment agreements with third-party vendors in the ordinary course of business whereby the Company commits 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.
Loss Contingency
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with ASC 450, Contingencies (“ASC 450”). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450.
The Company received a state audit assessment and is currently rebutting the position. The Company has determined that the likelihood of a liability is reasonably possible and developed a range of possible loss up to $1.5 million, net of federal benefit.
The Company, from time to time, is involved in legal actions arising in the ordinary course of business.
With respect to any such other currently pending matters, management believes that the Company has adequate legal defenses and/or, when possible and appropriate, has provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 14. Defined Benefit Pension Plan and Postretirement Benefits
Defined Benefit Pension Plans
The following table provides information about the net periodic benefit cost for the Company’s pension plans (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Service cost
|
$
|
98
|
|
|
$
|
106
|
|
|
$
|
296
|
|
|
$
|
329
|
|
|
Interest cost
|
|
62
|
|
|
|
46
|
|
|
|
186
|
|
|
|
144
|
|
|
Recognized actuarial (gains)
|
|
(21
|
)
|
|
|
(13
|
)
|
|
|
(63
|
)
|
|
|
(42
|
)
|
|
|
$
|
139
|
|
|
$
|
139
|
|
|
$
|
419
|
|
|
$
|
431
|
|
The Company’s service cost for its qualified pension plans was included in “Direct salaries and related costs” and “General and administrative” costs in its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 3019 and 2018. The remaining components of net periodic benefit cost were included in “Other income (expense), net” in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018.
32
Employee Retirement Savings Plans
The Company maintains a 401(k) plan covering defined employees who meet established eligibility requirements. Under the plan provisions, the Company matches 50% of participant contributions to a maximum matching amount of 2% of participant compensation. The Company’s contributions included in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
401(k) plan contributions
|
$
|
410
|
|
|
$
|
392
|
|
|
$
|
1,295
|
|
|
$
|
1,195
|
|
Split-Dollar Life Insurance Arrangement
In 1996, the Company entered into a split-dollar life insurance arrangement to benefit the former Chairman and Chief Executive Officer of the Company. Under the terms of the arrangement, the Company retained a collateral interest in the policy to the extent of the premiums paid by the Company. The postretirement benefit obligation included in “Other long-term liabilities” and the unrealized gains (losses) included in “Accumulated other comprehensive income” in the accompanying Condensed Consolidated Balance Sheets were as follows (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Postretirement benefit obligation
|
$
|
6
|
|
|
$
|
12
|
|
|
Unrealized gains (losses) in AOCI (1)
|
|
25
|
|
|
|
40
|
|
(1) Unrealized gains (losses) are due to changes in discount rates related to the postretirement obligation.
Note 15. Stock-Based Compensation
The Company’s Board of Directors adopted the Sykes Enterprises, Incorporated 2019 Equity Incentive Plan (the “2019 Plan”) on March 12, 2019. The 2019 Plan was approved by the shareholders at the May 2019 annual shareholder meeting. The 2019 Plan replaced and superseded the Company’s 2011 Equity Incentive Plan (the “2011 Plan”). The outstanding awards granted under the 2011 Plan will remain in effect until their exercise, expiration or termination. The 2019 Plan permits the grant of restricted stock, stock appreciation rights, stock options and other stock-based awards to certain employees of, 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.
The Company’s stock-based compensation plans include the 2019 Plan for employees and certain non-employees, the Non-Employee Director Fee Plan for non-employee directors and the Deferred Compensation Plan for certain eligible employees. Stock-based awards under these plans may consist of common stock, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues stock and uses treasury stock to satisfy stock option exercises or vesting stock awards. The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The following table summarizes the stock-based compensation expense (primarily in the Americas) and income tax benefits related to the stock-based compensation, both plan and non-plan related (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock-based compensation (expense) (1)
|
$
|
(1,504
|
)
|
|
$
|
(1,567
|
)
|
|
$
|
(5,594
|
)
|
|
$
|
(5,317
|
)
|
|
Income tax benefit (2)
|
|
361
|
|
|
|
376
|
|
|
|
1,343
|
|
|
|
1,276
|
|
(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.
During the nine months ended September 30, 2019, the Company granted 338,732 performance-based restricted shares and 169,367 employment-based restricted stock units under the Company’s 2011 Plan, all at a weighted average grant-date fair value of $28.43 per share.
33
During the three and nine months ended September 30, 2019, the Company accelerated the vesting of 35,577 acquisition-related restricted stock units in conjunction with the departure of one of Symphony’s executives from the Company. The fair value of the vested restricted stock units was $1.1 million.
Note 16. Segments and Geographic Information
The Company operates within two regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer engagement solutions (with an emphasis on inbound technical support, digital support and demand generation, and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer engagement solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Company’s services in these locations to support their customer engagement needs.
34
Information about the Company’s reportable segments is as follows (in thousands):
|
|
Americas
|
|
|
EMEA
|
|
|
Other (1)
|
|
|
Consolidated
|
|
|
Three Months Ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
318,097
|
|
|
$
|
79,427
|
|
|
$
|
23
|
|
|
$
|
397,547
|
|
|
Percentage of revenues
|
|
80.0
|
%
|
|
|
20.0
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
|
Depreciation, net
|
$
|
10,086
|
|
|
$
|
1,611
|
|
|
$
|
752
|
|
|
$
|
12,449
|
|
|
Amortization of intangibles
|
$
|
3,289
|
|
|
$
|
814
|
|
|
$
|
—
|
|
|
$
|
4,103
|
|
|
Income (loss) from operations
|
$
|
34,516
|
|
|
$
|
5,688
|
|
|
$
|
(15,498
|
)
|
|
$
|
24,706
|
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
(912
|
)
|
|
|
(912
|
)
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(5,689
|
)
|
|
|
(5,689
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,105
|
|
|
Three Months Ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
328,762
|
|
|
$
|
70,543
|
|
|
$
|
28
|
|
|
$
|
399,333
|
|
|
Percentage of revenues
|
|
82.3
|
%
|
|
|
17.7
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
|
Depreciation, net
|
$
|
11,838
|
|
|
$
|
1,473
|
|
|
$
|
761
|
|
|
$
|
14,072
|
|
|
Amortization of intangibles
|
$
|
3,439
|
|
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
3,638
|
|
|
Income (loss) from operations
|
$
|
25,666
|
|
|
$
|
5,098
|
|
|
$
|
(16,318
|
)
|
|
$
|
14,446
|
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(628
|
)
|
|
|
(628
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,752
|
|
|
Nine Months Ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
953,181
|
|
|
$
|
236,231
|
|
|
$
|
66
|
|
|
$
|
1,189,478
|
|
|
Percentage of revenues
|
|
80.1
|
%
|
|
|
19.9
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
|
Depreciation, net
|
$
|
32,252
|
|
|
$
|
4,865
|
|
|
$
|
2,281
|
|
|
$
|
39,398
|
|
|
Amortization of intangibles
|
$
|
10,015
|
|
|
$
|
2,501
|
|
|
$
|
—
|
|
|
$
|
12,516
|
|
|
Income (loss) from operations
|
$
|
91,168
|
|
|
$
|
11,840
|
|
|
$
|
(46,295
|
)
|
|
$
|
56,713
|
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
(2,815
|
)
|
|
|
(2,815
|
)
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(12,837
|
)
|
|
|
(12,837
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,061
|
|
|
Nine Months Ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
996,524
|
|
|
$
|
213,890
|
|
|
$
|
75
|
|
|
$
|
1,210,489
|
|
|
Percentage of revenues
|
|
82.3
|
%
|
|
|
17.7
|
%
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
|
Depreciation, net
|
$
|
36,856
|
|
|
$
|
4,360
|
|
|
$
|
2,252
|
|
|
$
|
43,468
|
|
|
Amortization of intangibles
|
$
|
10,846
|
|
|
$
|
634
|
|
|
$
|
—
|
|
|
$
|
11,480
|
|
|
Income (loss) from operations
|
$
|
71,354
|
|
|
$
|
11,957
|
|
|
$
|
(48,121
|
)
|
|
$
|
35,190
|
|
|
Total other income (expense), net
|
|
|
|
|
|
|
|
|
|
(2,457
|
)
|
|
|
(2,457
|
)
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
(855
|
)
|
|
|
(855
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,878
|
|
(1) Other items (including corporate and other costs, other income and expense, and income taxes) are included for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the periods shown. Inter-segment revenues are not material to the Americas and EMEA segment results.
The Company’s reportable segments are evaluated regularly by its chief operating decision maker to decide how to allocate resources and assess performance. The chief operating decision maker evaluates performance based upon reportable segment revenue and income (loss) from operations. Because assets by segment are not reported to or used by the Company’s chief operating decision maker to allocate resources, or to assess performance, total assets by segment are not disclosed.
35
The following table represents a disaggregation of revenue from contracts with customers by geographic location and by the reportable segment for each category (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
144,698
|
|
|
$
|
161,429
|
|
|
$
|
451,466
|
|
|
$
|
498,523
|
|
|
The Philippines
|
|
65,560
|
|
|
|
57,953
|
|
|
|
180,431
|
|
|
|
174,610
|
|
|
Costa Rica
|
|
31,228
|
|
|
|
33,120
|
|
|
|
93,524
|
|
|
|
96,168
|
|
|
Canada
|
|
24,815
|
|
|
|
25,549
|
|
|
|
74,885
|
|
|
|
77,566
|
|
|
El Salvador
|
|
20,904
|
|
|
|
20,732
|
|
|
|
61,447
|
|
|
|
61,327
|
|
|
People's Republic of China
|
|
8,681
|
|
|
|
8,337
|
|
|
|
26,489
|
|
|
|
25,834
|
|
|
Australia
|
|
7,425
|
|
|
|
8,619
|
|
|
|
22,382
|
|
|
|
24,021
|
|
|
Mexico
|
|
7,016
|
|
|
|
6,221
|
|
|
|
20,648
|
|
|
|
18,171
|
|
|
Colombia
|
|
4,513
|
|
|
|
4,704
|
|
|
|
13,957
|
|
|
|
13,395
|
|
|
Other
|
|
3,257
|
|
|
|
2,098
|
|
|
|
7,952
|
|
|
|
6,909
|
|
|
Total Americas
|
|
318,097
|
|
|
|
328,762
|
|
|
|
953,181
|
|
|
|
996,524
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
23,471
|
|
|
|
22,448
|
|
|
|
70,148
|
|
|
|
69,027
|
|
|
United Kingdom
|
|
18,141
|
|
|
|
12,333
|
|
|
|
52,759
|
|
|
|
37,640
|
|
|
Sweden
|
|
12,850
|
|
|
|
13,422
|
|
|
|
39,891
|
|
|
|
41,226
|
|
|
Romania
|
|
8,457
|
|
|
|
8,704
|
|
|
|
24,850
|
|
|
|
25,031
|
|
|
Other
|
|
16,508
|
|
|
|
13,636
|
|
|
|
48,583
|
|
|
|
40,966
|
|
|
Total EMEA
|
|
79,427
|
|
|
|
70,543
|
|
|
|
236,231
|
|
|
|
213,890
|
|
|
Total Other
|
|
23
|
|
|
|
28
|
|
|
|
66
|
|
|
|
75
|
|
|
|
$
|
397,547
|
|
|
$
|
399,333
|
|
|
$
|
1,189,478
|
|
|
$
|
1,210,489
|
|
Revenues are attributed to countries based on location of customer, except for revenues for The Philippines, Costa Rica, the People’s Republic of China and India, which are primarily comprised of customers located in the U.S. but serviced by centers in those respective geographic locations.
Note 17. Other Income (Expense)
Other income (expense), net consists of the following (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Foreign currency transaction gains (losses)
|
$
|
430
|
|
|
$
|
1,066
|
|
|
$
|
(107
|
)
|
|
$
|
3,155
|
|
|
Gains (losses) on derivative instruments not designated as hedges
|
|
(363
|
)
|
|
|
(380
|
)
|
|
|
(828
|
)
|
|
|
(1,807
|
)
|
|
Net investment gains (losses) on investments held in rabbi trust
|
|
41
|
|
|
|
407
|
|
|
|
1,647
|
|
|
|
524
|
|
|
Other miscellaneous income (expense)
|
|
(163
|
)
|
|
|
(174
|
)
|
|
|
(690
|
)
|
|
|
(1,335
|
)
|
|
|
$
|
(55
|
)
|
|
$
|
919
|
|
|
$
|
22
|
|
|
$
|
537
|
|
36
Note 18. Related Party Transactions
In January 2008, the Company entered into a lease for a customer engagement center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and former Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the 20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. The Company paid $0.1 million to the landlord during both the three months ended September 30, 2019 and 2018 under the terms of the lease. The Company paid $0.4 million and $0.3 million during the nine months ended September 30, 2019 and 2018, respectively.
The Company contracted to receive services from XSell, an equity method investee, for $0.1 million during the three months ended September 30, 2018 (none in 2019), and less than $0.1 million and $0.1 million during the nine months ended September 30, 2019 and 2018, respectively. These related party transactions occurred in the normal course of business on terms and conditions that are similar to those of transactions with unrelated parties and, therefore, were measured at the exchange amount.
Note 19. Subsequent Event
In May 2019, the building that houses the Company’s customer engagement center located in Fort Smith, Arkansas experienced significant damage as a result of a tornado, primarily impacting its leasehold improvements and other fixed assets, and causing an interruption in its business operations. The Company filed an insurance claim of $2.9 million with its property insurance company. The Company settled the claim with its insurance company on November 5, 2019. The Company expects to recognize a gain on settlement of the insurance claim in the range of $0.8 million to $1.3 million during the fourth quarter of 2019. This gain was offset by costs recognized in previous quarters not covered by the insurance claim.
37