SYKES ENTERPRISES INC, 10-K filed on 2/19/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 6, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
SYKE 
 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
 
Entity Central Index Key
0001010612 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
43,291,264 
 
Entity Public Float
 
 
$ 920,160,566 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 215,137 
$ 211,985 
Receivables, net
290,397 
264,916 
Prepaid expenses
14,896 
15,710 
Other current assets
29,656 
20,672 
Total current assets
550,086 
513,283 
Property and equipment, net
109,880 
117,549 
Goodwill, net
193,831 
199,802 
Intangibles, net
60,620 
76,055 
Deferred charges and other assets
30,083 
43,572 
Total assets
944,500 
950,261 
Current liabilities:
 
 
Accounts payable
25,523 
25,540 
Accrued employee compensation and benefits
82,072 
81,064 
Current deferred income tax liabilities
144 
84 
Income taxes payable
3,662 
1,274 
Deferred revenue
34,245 
35,025 
Other accrued expenses and current liabilities
22,216 
30,393 
Total current liabilities
167,862 
173,380 
Deferred grants
5,110 
6,637 
Long-term debt
75,000 
98,000 
Long-term income tax liabilities
20,630 
24,647 
Other long-term liabilities
17,680 
11,893 
Total liabilities
286,282 
314,557 
Commitments and loss contingency (Note 24)
   
   
Shareholders' equity:
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value, 200,000 shares authorized; 43,291 and 43,997 shares issued, respectively
433 
440 
Additional paid-in capital
279,288 
279,513 
Retained earnings
400,514 
349,366 
Accumulated other comprehensive income (loss)
(20,561)
7,997 
Treasury stock at cost: 132 and 122 shares, respectively
(1,456)
(1,612)
Total shareholders' equity
658,218 
635,704 
Total liabilities and shareholders' equity
$ 944,500 
$ 950,261 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
43,291,000 
43,997,000 
Treasury stock, shares
132,000 
122,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Revenues
$ 1,327,523 
$ 1,263,460 
$ 1,127,698 
Operating expenses:
 
 
 
Direct salaries and related costs
892,110 
855,266 
737,952 
General and administrative
298,040 
297,519 
290,373 
Depreciation, net
45,363 
42,084 
40,369 
Amortization of intangibles
14,396 
14,863 
10,479 
Net (gain) loss on disposal of property and equipment
(2,030)
201 
391 
Impairment of long-lived assets
89 
 
355 
Total operating expenses
1,247,968 
1,209,933 
1,079,919 
Income from continuing operations
79,555 
53,527 
47,779 
Other income (expense):
 
 
 
Interest income
958 
866 
1,458 
Interest (expense)
(2,011)
(2,307)
(1,547)
Other income (expense)
(1,343)
(761)
(2,533)
Total other income (expense)
(2,396)
(2,202)
(2,622)
Income from continuing operations before income taxes
77,159 
51,325 
45,157 
Income taxes
19,368 
14,065 
5,207 
Income from continuing operations, net of taxes
57,791 
37,260 
39,950 
(Loss) from discontinued operations, net of taxes
 
 
(820)
(Loss) on sale of discontinued operations, net of taxes
 
 
(10,707)
Net income
$ 57,791 
$ 37,260 
$ 28,423 
Basic:
 
 
 
Continuing operations
$ 1.36 
$ 0.87 
$ 0.93 
Discontinued operations
 
 
$ (0.27)
Net income (loss) per common share
$ 1.36 
$ 0.87 
$ 0.66 
Diluted:
 
 
 
Continuing operations
$ 1.35 
$ 0.87 
$ 0.93 
Discontinued operations
 
 
$ (0.27)
Net income (loss) per common share
$ 1.35 
$ 0.87 
$ 0.66 
Weighted average common shares outstanding:
 
 
 
Basic
42,609 
42,877 
43,105 
Diluted
42,814 
42,925 
43,148 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 57,791 
$ 37,260 
$ 28,423 
Other comprehensive income (loss), net of taxes:
 
 
 
Foreign currency translation gain (loss), net of taxes
(34,827)
(3,332)
10,088 
Unrealized gain (loss) on net investment hedges, net of taxes
3,959 
(1,118)
 
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(142)
(263)
428 
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
2,424 
(1,965)
(132)
Unrealized gain (loss) on postretirement obligation, net of taxes
28 
(181)
36 
Other comprehensive income (loss), net of taxes
(28,558)
(6,859)
10,420 
Comprehensive income (loss)
$ 29,233 
$ 30,401 
$ 38,843 
Consolidated Statements of Changes in Shareholders Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2011
$ 573,566 
$ 443 
$ 281,157 
$ 291,803 
$ 4,436 
$ (4,273)
Beginning Balance, shares at Dec. 31, 2011
 
44,306 
 
 
 
 
Stock-based compensation expense
3,467 
 
3,467 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(292)
 
(292)
 
 
 
Net vesting (forfeitures) of common stock and restricted stock under equity award plans
(1,412)
(1,195)
 
 
(220)
Net vesting (forfeitures) of common stock and restricted stock under equity award plans, shares
 
229 
 
 
 
 
Repurchase of common stock
(7,908)
 
 
 
 
(7,908)
Retirement of treasury stock
 
(8)
(5,945)
(5,039)
 
10,992 
Retirement of treasury stock, shares
 
(745)
 
 
 
 
Comprehensive income (loss)
38,843 
 
 
28,423 
10,420 
 
Ending Balance at Dec. 31, 2012
606,264 
438 
277,192 
315,187 
14,856 
(1,409)
Ending Balance, shares at Dec. 31, 2012
 
43,790 
 
 
 
 
Issuance of common stock
59 
 
59 
 
 
 
Issuance of common stock, shares
 
10 
 
 
 
 
Stock-based compensation expense
4,873 
 
4,873 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(187)
 
(187)
 
 
 
Net vesting (forfeitures) of common stock and restricted stock under equity award plans
(227)
(29)
 
 
(203)
Net vesting (forfeitures) of common stock and restricted stock under equity award plans, shares
 
538 
 
 
 
 
Repurchase of common stock
(5,479)
 
 
 
 
(5,479)
Retirement of treasury stock
 
(3)
(2,395)
(3,081)
 
5,479 
Retirement of treasury stock, shares
 
(341)
 
 
 
 
Comprehensive income (loss)
30,401 
 
 
37,260 
(6,859)
 
Ending Balance at Dec. 31, 2013
635,704 
440 
279,513 
349,366 
7,997 
(1,612)
Ending Balance, shares at Dec. 31, 2013
 
43,997 
 
 
 
 
Stock-based compensation expense
6,381 
 
6,381 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(82)
 
(82)
 
 
 
Net vesting (forfeitures) of common stock and restricted stock under equity award plans
(437)
(1)
(592)
 
 
156 
Net vesting (forfeitures) of common stock and restricted stock under equity award plans, shares
 
(76)
 
 
 
 
Repurchase of common stock
(12,581)
 
 
 
 
(12,581)
Retirement of treasury stock
 
(6)
(5,932)
(6,643)
 
12,581 
Retirement of treasury stock, shares
 
(630)
 
 
 
 
Comprehensive income (loss)
29,233 
 
 
57,791 
(28,558)
 
Ending Balance at Dec. 31, 2014
$ 658,218 
$ 433 
$ 279,288 
$ 400,514 
$ (20,561)
$ (1,456)
Ending Balance, shares at Dec. 31, 2014
 
43,291 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities :
 
 
 
Net income
$ 57,791 
$ 37,260 
$ 28,423 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
46,255 
43,094 
41,570 
Amortization of intangibles
14,396 
14,863 
10,479 
Amortization of deferred grants
(1,348)
(1,148)
(1,201)
Impairment losses
89 
 
355 
Unrealized foreign currency transaction (gains) losses, net
119 
6,302 
2,131 
Stock-based compensation expense
6,381 
4,873 
3,467 
Deferred income tax provision (benefit)
4,865 
(362)
(4,867)
Net (gain) loss on disposal of property and equipment
(2,030)
201 
391 
Bad debt expense (reversals)
(181)
483 
1,115 
Unrealized (gains) losses on financial instruments, net
2,352 
(15)
(1,361)
Amortization of deferred loan fees
259 
259 
368 
Loss on sale of discontinued operations
 
 
10,707 
Other
(624)
(56)
294 
Changes in assets and liabilities, net of acquisition:
 
 
 
Receivables
(40,276)
(22,062)
(6,771)
Prepaid expenses
336 
(3,931)
694 
Other current assets
(6,673)
(1,177)
1,705 
Deferred charges and other assets
3,545 
(2,754)
(18,388)
Accounts payable
2,029 
(1,282)
(1,589)
Income taxes receivable / payable
2,609 
804 
1,555 
Accrued employee compensation and benefits
5,179 
9,140 
4,872 
Other accrued expenses and current liabilities
(5,026)
(2,025)
11,476 
Deferred revenue
2,147 
2,826 
(163)
Other long-term liabilities
2,070 
925 
1,252 
Net cash provided by operating activities
94,264 
86,218 
86,514 
Cash flows from investing activities:
 
 
 
Capital expenditures
(44,683)
(59,193)
(38,647)
Cash paid for business acquisition, net of cash acquired
 
 
(147,094)
Proceeds from sale of property and equipment
3,639 
388 
240 
Investment in restricted cash
(7)
(562)
(67)
Release of restricted cash
160 
 
356 
Cash divested on sale of discontinued operations
 
 
(9,100)
Proceeds from insurance settlement
 
 
228 
Net cash (used for) investing activities
(40,891)
(59,367)
(194,084)
Cash flows from financing activities:
 
 
 
Payments of long-term debt
(23,000)
(25,000)
(22,000)
Proceeds from issuance of long-term debt
 
32,000 
113,000 
Proceeds from issuance of common stock
 
59 
 
Cash paid for repurchase of common stock
(12,581)
(5,479)
(7,908)
Proceeds from grants
256 
201 
88 
Shares repurchased for minimum tax withholding on equity awards
(437)
(227)
(1,412)
Cash paid for loan fees related to long-term debt
 
 
(857)
Net cash provided by (used for) financing activities
(35,762)
1,554 
80,911 
Effects of exchange rates on cash and cash equivalents
(14,459)
(3,742)
2,859 
Net increase (decrease) in cash and cash equivalents
3,152 
24,663 
(23,800)
Cash and cash equivalents - beginning
211,985 
187,322 
211,122 
Cash and cash equivalents - ending
215,137 
211,985 
187,322 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during period for interest
1,716 
2,149 
2,239 
Cash paid during period for income taxes
16,560 
16,889 
28,822 
Non-cash transactions:
 
 
 
Property and equipment additions in accounts payable
5,512 
6,002 
3,782 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
$ 28 
$ (181)
$ 36 
Overview and Summary of Significant Accounting Policies
Overview and Summary of Significant Accounting Policies

Note 1. Overview and Summary of Significant Accounting Policies

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) provides comprehensive outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, financial services, technology/consumer, transportation and leisure, and healthcare industries. SYKES provides flexible, high-quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels encompassing phone, e-mail, social media, text messaging and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Acquisition In August 2012, the Company completed the acquisition of Alpine Access, Inc. (“Alpine”), a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated July 27, 2012. The Company has reflected the operating results in the Consolidated Statements of Operations since August 20, 2012. See Note 2, Acquisition of Alpine Access, Inc., for additional information on the acquisition of this business.

Discontinued Operations In March 2012, the Company sold its operations in Spain (the “Spanish operations”), pursuant to an asset purchase agreement dated March 29, 2012 and a stock purchase agreement dated March 30, 2012. The Company reflected the operating results related to the Spanish operations as discontinued operations in the Consolidated Statement of Operations for the year ended December 31, 2012. Cash flows from discontinued operations are included in the Consolidated Statement of Cash Flows for the year ended December 31, 2012. See Note 3, Discontinued Operations, for additional information on the sale of the Spanish operations.

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

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

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

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

 

Revenues from fulfillment services account for 1.4%, 1.3% and 1.5% of total consolidated revenues for the years ended December 31, 2014, 2013 and 2012, respectively, some of which contain multiple-deliverables. The service offerings for these fulfillment service contracts typically include pick-pack-and-ship, warehousing, process management, finished goods assembly and pass-through costs. In accordance with ASC 605-25 “Revenue Recognition — Multiple-Element Arrangements” (“ASC 605-25”) [as amended by Accounting Standards Update (“ASU”) 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”)], the Company determines if the services provided under these contracts with multiple-deliverables represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenues from these services are recognized as the services are performed under a fully executed contractual agreement. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into a single unit of accounting and recognized on the proportional performance method using the straight-line basis over the contract period, or the actual number of operational seats used to serve the client, as appropriate.

The Company allocates revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on the Company’s best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once the Company allocates revenue to each deliverable, the Company recognizes revenue when all revenue recognition criteria are met. As of December 31, 2014, the Company’s fulfillment contracts with multiple-deliverables met the separation criteria as outlined in ASC 605-25 and the revenue was accounted for accordingly. Other than these fulfillment contracts, the Company had no other contracts that contain multiple-deliverables as of December 31, 2014.

Cash and Cash Equivalents — Cash and cash equivalents consist of cash and highly liquid short-term investments. Cash in the amount of $215.1 million and $212.0 million at December 31, 2014 and 2013, respectively, was primarily held in interest bearing investments, which have original maturities of less than 90 days. Cash and cash equivalents of $194.4 million and $195.0 million at December 31, 2014 and 2013, respectively, were held in international operations and may be subject to additional taxes if repatriated to the United States (“U.S.”).

Restricted Cash Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations. Restricted cash is included in “Other current assets” and “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets.

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

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

The carrying value of property and equipment to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360 “Property, Plant and Equipment.” For purposes of recognition and measurement of an impairment loss, assets are grouped at the lowest levels for which there are identifiable cash flows (the “reporting unit”). An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets or independent third party offers. Occasionally, the Company redeploys property and equipment from under-utilized centers to other locations to improve capacity utilization if it is determined that the related undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the carrying amount of these assets. Except as discussed in Note 5, Fair Value, the Company determined that its property and equipment were not impaired as of December 31, 2014.

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

Goodwill The Company accounts for goodwill and other intangible assets under ASC 350 “Intangibles — Goodwill and Other” (“ASC 350”). The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. For goodwill and other intangible assets with indefinite lives not subject to amortization, the Company reviews goodwill and intangible assets for impairment at least annually in the third quarter, and more frequently in the presence of certain circumstances. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the Company is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any.

The Company elected to forgo the option to first assess qualitative factors and completed its annual two-step goodwill impairment test during the three months ended September 30, 2014. Under ASC 350, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes comparing a reporting unit’s calculated fair value to its carrying value. The calculation of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. As of July 31, 2014, the Company concluded that the fair value of each reporting unit was substantially in excess of its carrying value and goodwill was not impaired.

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

Value Added Tax Receivables — The Philippine operations are subject to value added tax (“VAT”) which is usually applied to all goods and services purchased throughout The Philippines. Upon validation and certification of the VAT receivables by the Philippine government, the resulting value added tax certificates (“certificates”) can be either used to offset current tax obligations or offered for sale to the Philippine government. The VAT receivables balance is recorded at its net realizable value.

 

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

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

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

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

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

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

 

Stock-Based Compensation — The Company has three stock-based compensation plans: the 2011 Equity Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan (for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan (for certain eligible employees). All of these plans are discussed more fully in Note 26, Stock-Based Compensation. Stock-based awards under these plans may consist of common stock, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock and uses treasury stock to satisfy stock option exercises or vesting of stock awards.

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

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

 

   

Cash, Short-Term and Other Investments, Investments Held in Rabbi Trust and Accounts Payable The carrying values for cash, short-term and other investments, investments held in rabbi trust and accounts payable approximate their fair values.

 

   

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

 

   

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

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

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

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

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

 

   

Level 1 Quoted prices for identical instruments in active markets.

 

   

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

 

   

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

 

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

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

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

Money Market and Open-End Mutual Funds The Company uses quoted market prices in active markets to determine the fair value of money market and open-end mutual funds, which are classified in Level 1 of the fair value hierarchy.

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

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 13, Investments Held in Rabbi Trust, and Note 26, Stock-Based Compensation.

Guaranteed Investment Certificates Guaranteed investment certificates, with variable interest rates linked to the prime rate, approximate fair value due to the automatic ability to re-price with changes in the market; such items are classified in Level 2 of the fair value hierarchy.

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

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

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

 

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

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring, or if the Company de-designates a derivative as a hedge, the Company discontinues hedge accounting prospectively. At December 31, 2014 and 2013, all hedges were determined to be highly effective.

The Company also periodically enters into forward contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to reduce the effects from fluctuations caused by volatility in currency exchange rates on the Company’s operating results and cash flows. All changes in the fair value of the derivative instruments are included in “Other income (expense)”. See Note 12, Financial Derivatives, for further information on financial derivative instruments.

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

New Accounting Standards Not Yet Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The amendments in ASU 2014-08 indicate that only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations presentation. The amendments should be applied to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of ASU 2014-08 on January 1, 2015 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The amendments in ASU 2014-09 outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and indicate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact that the adoption of ASU 2014-09 may have on its financial condition, results of operations and cash flows.

 

In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic 718, “Compensation — Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2014-12 to materially impact its financial condition, results of operations and cash flows.

In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). This amendment eliminates from U.S. GAAP the concept of extraordinary items as part of the FASB’s initiative to reduce complexity in accounting standards. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-01 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently Adopted

In March 2013, the FASB issued ASU 2013-05 “Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). The amendments in ASU 2013-05 indicate that a cumulative translation adjustment (“CTA”) is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated), or a step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The amendments in ASU 2013-05 are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. The adoption of ASU 2013-05 on January 1, 2014 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In July 2013, the FASB issued ASU 2013-11 “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). The amendments in ASU 2013-11 indicate that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU 2013-11 on January 1, 2014 resulted in a $3.1 million reclassification of a portion of the Company’s unrecognized tax benefits from “Long-term income tax liabilities” to “Deferred charges and other assets.” See Note 22, Income Taxes, for further information.

Acquisition of Alpine Access, Inc.
Acquisition of Alpine Access, Inc.

Note 2. Acquisition of Alpine Access, Inc.

On August 20, 2012, the Company acquired 100% of the outstanding common shares and voting interest of Alpine, pursuant to the terms of the merger agreement. Alpine, an industry leader in the virtual at-home agent space, provides award-winning customer contact management services through a secured and proprietary virtual call center environment with its operations located in the United States and Canada. The results of Alpine’s operations have been included in the Company’s consolidated financial statements since its acquisition on August 20, 2012. The Company acquired Alpine to: create significant competitive differentiation for quality, speed to market, scalability and flexibility driven by proprietary, internally-developed software, systems, processes and other intellectual property, which uniquely overcome the challenges of the virtual at-home agent delivery model; strengthen the Company’s current service portfolio and go-to-market offering while expanding the breadth of clients with minimal client overlap; broaden the addressable market opportunity within existing and new verticals as well as clients; expand the addressable pool of skilled labor; leverage operational best practices across the Company’s global platform, with the potential to convert more of its fixed costs to variable costs; and further enhance the growth and margin profile of the Company to drive shareholder value. This resulted in the Company paying a substantial premium for Alpine resulting in the recognition of goodwill.

The acquisition date fair value of the consideration transferred totaled $149.0 million, which was funded through cash on hand of $41.0 million and borrowings of $108.0 million under the Company’s credit agreement, dated May 3, 2012. See Note 20, Borrowings, for further information.

The Company accounted for the acquisition in accordance with ASC 805 “Business Combinations”, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed from Alpine based on their estimated fair values as of the closing date. During the three months ended December 31, 2012, the final working capital adjustment was approved by the authorized representative of Alpine’s shareholders. The Company finalized its purchase price allocation during the three months ended December 31, 2012, resulting in no changes from the estimated acquisition date fair values previously reported.

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

 

     Amount  

Cash and cash equivalents

   $ 1,859   

Receivables

     11,831   

Prepaid expenses

     617   
  

 

 

 

Total current assets

     14,307   

Property and equipment

     11,326   

Goodwill

     80,766   

Intangibles

     57,720   

Deferred charges and other assets

     916   

Accounts payable

     (880

Accrued employee compensation and benefits

     (3,774

Income taxes payable

     (141

Deferred revenue

     (94

Other accrued expenses and current liabilities

     (601
  

 

 

 

Total current liabilities

     (5,490

Other long-term liabilities (1) 

     (10,592
  

 

 

 
   $ 148,953   
  

 

 

 

 

(1) 

Primarily includes long-term deferred tax liabilities.

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

 

The following table presents the Company’s purchased intangibles assets as of August 20, 2012, the acquisition date (in thousands):

 

     Amount
Assigned
     Weighted
Average
Amortization
Period (years)
 

Customer relationships

   $ 46,000         8   

Trade names

     10,600         8   

Non-compete agreements

     670         2   

Favorable lease agreement

     450         2   
  

 

 

    
   $ 57,720         8   
  

 

 

    

The $80.8 million of goodwill was assigned to the Company’s Americas operating segment. Pursuant to Federal income tax regulations, no amount of intangibles or goodwill from this acquisition will be deductible for tax purposes.

The fair value of receivables purchased was $11.8 million, with the gross contractual amount of $11.8 million.

The amount of Alpine’s revenues and net loss since the August 20, 2012 acquisition date, included in the Company’s accompanying Consolidated Statement of Operations for the year ended December 31, 2012 was as follows (in thousands):

 

     From
August 20,
2012 Through
December 31,
2012
 

Revenues

   $ 40,635   

(Loss) from continuing operations before income taxes

   $ (3,201

(Loss) from continuing operations, net of taxes

   $ (2,166

The loss from continuing operations before income taxes of $3.2 million includes $3.6 million in severance costs, depreciation resulting from the adjustment to fair value of the acquired property and equipment, and amortization of the fair values of the acquired intangibles.

The following table presents the unaudited pro forma combined revenues and net earnings as if Alpine had been included in the consolidated results of the Company for the entire year for the year ended December 31, 2012. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2012 (in thousands):

 

     Year Ended
December 31, 2012
 

Revenues

   $ 1,190,150   

Income from continuing operations, net of taxes

   $ 37,352   

Income from continuing operations per common share:

  

Basic

   $ 0.87   

Diluted

   $ 0.87   

These amounts have been calculated to reflect the additional depreciation, amortization and interest expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2012, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies’ operating results. Included in these costs are severance, advisory and legal costs, net of the tax effects.

 

Merger and integration costs associated with Alpine were as follows (none in 2014) (in thousands):

 

     Years Ended December 31,  
     2013      2012  

Severance costs included in “Direct salaries and related costs”: (1)

     

Americas

   $ 526       $ —     
  

 

 

    

 

 

 
     526         —     

Severance costs included in “General and administrative”: (1)

     

Americas

     985         591   

Corporate

     159         377   
  

 

 

    

 

 

 
     1,144         968   

Transaction and integration costs included in “General and administrative”: (1)

     

Corporate

     444         3,793   
  

 

 

    

 

 

 
     444         3,793   
  

 

 

    

 

 

 

Total merger and integration costs

   $ 2,114       $ 4,761   
  

 

 

    

 

 

 

 

(1)

In the accompanying Consolidated Statements of Operations.

Discontinued Operations
Discontinued Operations

Note 3. Discontinued Operations

In November 2011, the Finance Committee of the Board of Directors (the “Board”) of the Company approved a plan to sell its Spanish operations, which were operated through its Spanish subsidiary, Sykes Enterprises, Incorporated S.L. (“Sykes Spain”). Sykes Spain operated customer contact management centers, providing contact center services through a total of three customer contact management centers in Spain to clients in Spain. The decision to sell the Spanish operations was made in 2011 after management completed a strategic review of the Spanish market and determined the operations were no longer consistent with the Company’s strategic direction.

On March 29, 2012, Sykes Spain entered into the asset purchase agreement, by and between Sykes Spain and Iberphone, S.A.U., and pursuant thereto, on March 29, 2012, Sykes Spain sold the fixed assets located in Ponferrada, Spain, which were previously written down to zero, cash of $4.1 million, and certain contracts and licenses relating to the business of Sykes Spain, to Iberphone, S.A.U. Under the asset purchase agreement, Ponferrada, Spain employees were transferred to Iberphone S.A.U. which assumed certain payroll liabilities in the approximate amount of $1.7 million, and paid a nominal purchase price for the assets.

On March 30, 2012, the Company entered into a stock purchase agreement with a former member of Sykes Spain’s management, and pursuant thereto, on March 30, 2012, the Company sold all of the shares of capital stock of Sykes Spain to the purchaser for a nominal price. Pursuant to the stock purchase agreement, immediately prior to closing, the Company made a cash capital contribution of $8.6 million to Sykes Spain to cover a portion of Sykes Spain’s liabilities and to fund the $4.1 million of cash transferred and sold pursuant to the asset purchase agreement with Iberphone, S.A.U. discussed above. As this was a stock transaction, the Company anticipates no future obligation with regard to Sykes Spain and there were no material post-closing obligations.

The Company reflected the operating results related to the Spanish operations as discontinued operations in the accompanying Consolidated Statement of Operations for the year ended December 31, 2012. Cash flows from discontinued operations are included in the accompanying Consolidated Statement of Cash Flows for the year ended December 31, 2012. This business was historically reported by the Company as part of the EMEA segment.

The results of discontinued operations were as follows (none in 2014 and 2013) (in thousands):

 

     Year Ended  
     December 31, 2012  

Revenues

   $ 10,102   
  

 

 

 

(Loss) from discontinued operations before income taxes

   $ (820

Income taxes (1)

     —     
  

 

 

 

(Loss) from discontinued operations, net of taxes

   $ (820
  

 

 

 

(Loss) on sale of discontinued operations before income taxes

   $ (10,707

Income taxes (1)

     —     
  

 

 

 

(Loss) on sale of discontinued operations, net of taxes

   $ (10,707
  

 

 

 

 

(1) 

There were no income taxes as any tax benefit from the losses would be offset by a valuation allowance.

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

Note 4. Costs Associated with Exit or Disposal Activities

During 2011 and 2010, the Company announced several initiatives to streamline excess capacity through targeted seat reductions (the “Exit Plans”) in an on-going effort to manage and optimize capacity utilization. These Exit Plans included, but were not limited to, closing customer contact management centers in The Philippines, the United Kingdom, Ireland and South Africa and consolidating leased space in various locations in the U.S. and the Netherlands. These Exit Plans impacted approximately 800 employees. The Company has paid $14.5 million in cash through December 31, 2014 under these Exit Plans.

The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of December 31, 2014 (in thousands):

 

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

Lease obligations and facility exit costs

   $ 1,365       $ 19       $ 1,914       $ 6,729       $ 10,027   

Severance and related costs

     —           5,857         185         —           6,042   

Legal-related costs

     —           110         —           —           110   

Non-cash impairment charges

     480         474         159         3,847         4,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,845       $ 6,460       $ 2,258       $ 10,576       $ 21,139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Restructuring charges in the Company’s Consolidated Statements of Operations are summarized as follows (in thousands):

 

     Years Ended December 31,  
     2014     2013     2012  

By Type:

      

Lease obligations and facility exit costs

   $ (185   $ 318      $ 858   

Severance and related costs

     (129     (56     857   

Legal-related costs

     —          —          89   
  

 

 

   

 

 

   

 

 

 

Total

   $ (314   $ 262      $ 1,804   
  

 

 

   

 

 

   

 

 

 
     Years Ended December 31,  
     2014     2013     2012  

By Statements of Operations Caption:

      

Direct salaries and related costs

   $ —        $ —        $ 715   

General and administrative

     (314     262        1,089   
  

 

 

   

 

 

   

 

 

 

Total

   $ (314   $ 262      $ 1,804   
  

 

 

   

 

 

   

 

 

 
     Years Ended December 31,  
     2014     2013     2012  

By Segment:

      

Americas

   $ —        $ —        $ 1,426   

EMEA

     (314     262        378   
  

 

 

   

 

 

   

 

 

 

Total

   $ (314   $ 262      $ 1,804   
  

 

 

   

 

 

   

 

 

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the years ended December 31, 2014, 2013 and 2012 (in thousands):

 

     Lease Obligation
and Facility Exit
Costs
    Severance and
Related Costs
    Legal-Related
Costs
    Total  

Balance at January 1, 2012

   $ 4,839      $ 4,470      $ 13      $ 9,322   

Charges (reversals) (1) 

     858        857        89        1,804   

Cash payments

     (1,926     (5,134     (91     (7,151

Other non-cash changes (4)

     1        (6     (1     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     3,772        187        10        3,969   

Charges (reversals) (2) 

     318        (56     —          262   

Cash payments

     (1,264     (8     (10     (1,282

Other non-cash changes (4)

     17        8        —          25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     2,843        131        —          2,974   

Charges (reversals) (3) 

     (185     (129     —          (314

Cash payments

     (1,095     —          —          (1,095

Other non-cash changes (4)

     (5     (2     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 1,558      $ —        $ —        $ 1,558   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

During 2012, the Company recorded lease obligations and facility exit costs due to the initiation of one of the Exit Plans, recorded additional severance and related costs and legal-related costs due to a change in estimates and recorded additional lease obligations due to an unanticipated lease termination penalty, all of which were included in “General and administrative” costs in the accompanying Consolidated Statement of Operations. Also, during 2012, the Company reversed accruals related to the final settlement of lease obligations and facility exit costs for one of the Ireland sites, which reduced “General and administrative” costs in the accompanying Consolidated Statement of Operations.

 

(2)

During 2013, the Company recorded additional lease obligations and facility exit costs for one of the Ireland site’s lease restoration. Also during 2013, the Company reversed accruals related to the final settlement of severance and related costs for the Netherlands site, which reduced “General and administrative” costs in the accompanying Consolidated Statement of Operations.

 

(3)

During 2014, the Company reversed accruals related to the final settlement of lease obligations and facility exit costs as well as severance and related costs for the Ireland sites, which reduced “General and administrative” costs in the accompanying Consolidated Statement of Operations.

 

(4)

Effect of foreign currency translation.

The charges (reversals) for the lease obligations and facility exit costs of $0.9 million for the year ended December 31, 2012 is net of a reversal of $0.6 million as described in (1) to the table above.

 

Restructuring Liability Classification

The following table summarizes the Company’s short-term and long-term accrued liabilities associated with its exit and disposal activities, by plan, as of December 31, 2014 and 2013 (in thousands):

 

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

December 31, 2014

         

Short-term accrued restructuring liability (1)

  $ 109      $ —        $ —        $ 521      $ 630   

Long-term accrued restructuring liability (2)

    203        —          —          725        928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending accrual at December 31, 2014

  $ 312      $ —        $ —        $ 1,246      $ 1,558   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

         

Short-term accrued restructuring liability (1)

  $ 136      $ 131      $ 538      $ 440      $ 1,245   

Long-term accrued restructuring liability (2)

    376        —          —          1,353        1,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending accrual at December 31, 2013

  $ 512      $ 131      $ 538      $ 1,793      $ 2,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

(2) 

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

The remaining restructuring liability relates to future rent obligations to be paid through the remainder of the lease terms, the last of which ends in February 2017.

Fair Value
Fair Value

Note 5. Fair Value

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

 

          Fair Value Measurements at December 31, 2014 Using:  
    Balance at     Quoted Prices
in  Active
Markets For
Identical Assets
    Significant
Other
Observable
Inputs
    Significant
Unobservable
Inputs
 
    December 31, 2014     Level (1)     Level (2)     Level (3)  

Assets:

       

Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)

  $ 100,915      $ 100,915      $ —        $ —     

Money market funds and open-end mutual funds included in “Deferred charges and other assets” (1)

    10        10        —          —     

Foreign currency forward and option contracts included in “Other current assets” (2)

    1,489        —          1,489        —     

Foreign currency forward contracts included in “Deferred charges and other assets” (2)

    4,060        —          4,060        —     

Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)

    5,589        5,589        —          —     

Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)

    1,363        1,363        —          —     

Guaranteed investment certificates (4)

    79        —          79        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 113,505      $ 107,877      $ 5,628      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Long-term debt (5)

  $ 75,000      $ —        $ 75,000      $ —     

Foreign currency forward and option contracts included in “Other accrued expenses and current liabilities” (2)

    1,261        —          1,261        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 76,261      $ —        $ 76,261      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

          Fair Value Measurements at December 31, 2013 Using:  
    Balance at     Quoted Prices
in  Active
Markets For
Identical Assets
    Significant
Other
Observable
Inputs
    Significant
Unobservable
Inputs
 
    December 31, 2013     Level (1)     Level (2)     Level (3)  

Assets:

       

Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)

  $ 50,627      $ 50,627      $ —        $ —     

Money market funds and open-end mutual funds included in “Deferred charges and other assets” (1)

    11        11        —          —     

Foreign currency forward and option contracts included in “Other current assets” (2)

    2,240        —          2,240        —     

Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)

    5,251        5,251        —          —     

Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)

    1,170        1,170        —          —     

Guaranteed investment certificates (4)

    80        —          80        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 59,379      $ 57,059      $ 2,320      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Long-term debt (5)

  $ 98,000      $ —        $ 98,000      $ —     

Foreign currency forward and option contracts included in “Other accrued expenses and current liabilities” (2)

    5,063        —          5,063        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 103,063      $ —        $ 103,063      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

In the accompanying Consolidated Balance Sheet.

 

(2) 

In the accompanying Consolidated Balance Sheet. See Note 12, Financial Derivatives.

 

(3) 

Included in “Other current assets” in the accompanying Consolidated Balance Sheet. See Note 13, Investments Held in Rabbi Trust.

 

(4) 

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

 

(5) 

The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 20, Borrowings.

 

 

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs as described in Note 1, Overview and Summary of Significant Accounting Policies, like those associated with acquired businesses, including goodwill, other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at December 31, 2014 and 2013.

The table below summarizes impairment losses resulting from nonrecurring fair value measurements of certain assets (no liabilities), primarily long-lived assets that the Company determined were no longer being used and were disposed of, as follows (in thousands):

 

      Total Impairment (Loss)  
     Years Ended December 31,  
     2014     2013      2012  

Americas:

       

Property and equipment, net (1)

   $ (89   $  —         $ (355

EMEA:

       

Property and equipment, net (1)

     —          —           —     
  

 

 

   

 

 

    

 

 

 
   $ (89   $ —         $ (355
  

 

 

   

 

 

    

 

 

 

 

(1)

See Note 1, Overview and Summary of Significant Accounting Policies, for additional information regarding the fair value measurement as outlined in Property and Equipment.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 6. Goodwill and Intangible Assets

The following table presents the Company’s purchased intangible assets as of December 31, 2014 (in thousands):

 

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

Customer relationships

   $ 100,719       $ (47,571   $ 53,148         8   

Trade name

     11,600         (4,128     7,472         8   

Non-compete agreements

     1,209         (1,209     —           2   

Proprietary software

     850         (850     —           2   

Favorable lease agreement

     449         (449     —           2   
  

 

 

    

 

 

   

 

 

    
   $ 114,827       $ (54,207   $ 60,620         8   
  

 

 

    

 

 

   

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2013 (in thousands):

 

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

Customer relationships

   $ 102,774       $ (35,873   $ 66,901         8   

Trade name

     11,600         (2,803     8,797         8   

Non-compete agreements

     1,220         (1,009     211         2   

Proprietary software

     850         (847     3         2   

Favorable lease agreement

     449         (306     143         2   
  

 

 

    

 

 

   

 

 

    
   $ 116,893       $ (40,838   $ 76,055         8   
  

 

 

    

 

 

   

 

 

    

 

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to December 31, 2014, is as follows (in thousands):

 

Years Ending December 31,

   Amount  

2015

     13,884   

2016

     13,884   

2017

     13,884   

2018

     7,565   

2019

     6,961   

2020 and thereafter

     4,442   

Changes in goodwill for the year ended December 31, 2014 consist of the following (in thousands):

 

     January 1, 2014      Acquisitions      Impairments      Effect of Foreign
Currency
    December 31,
2014
 

Americas

   $ 199,802       $ —         $ —         $ (5,971   $ 193,831   

EMEA

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 199,802       $ —         $ —         $ (5,971   $ 193,831   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Changes in goodwill for the year ended December 31, 2013 consist of the following (in thousands):

 

     January 1, 2013      Acquisitions      Impairments      Effect of Foreign
Currency
    December 31,
2013
 

Americas

   $ 204,231       $ —         $ —         $ (4,429   $ 199,802   

EMEA

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 204,231       $ —         $ —         $ (4,429   $ 199,802   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Concentrations of Credit Risk
Concentrations of Credit Risk

Note 7. Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company’s credit concentrations are limited due to the wide variety of customers and markets in which the Company’s services are sold. See Note 12, Financial Derivatives, for a discussion of the Company’s credit risk relating to financial derivative instruments, and Note 27, Segments and Geographic Information, for a discussion of the Company’s customer concentration.

Receivables, Net
Receivables, Net

Note 8. Receivables, Net

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

 

     December 31,  
     2014     2013  

Trade accounts receivable

   $  290,711      $ 266,048   

Income taxes receivable

     993        1,377   

Other

     3,354        2,478   
  

 

 

   

 

 

 
     295,058        269,903   

Less: Allowance for doubtful accounts

     4,661        4,987   
  

 

 

   

 

 

 
   $ 290,397      $ 264,916   
  

 

 

   

 

 

 

Allowance for doubtful accounts as a percent of trade receivables

     1.6     1.9
  

 

 

   

 

 

 
Prepaid Expenses
Prepaid Expenses

Note 9. Prepaid Expenses

Prepaid expenses consist of the following (in thousands):

 

     December 31,  
     2014      2013  

Prepaid maintenance

   $ 5,315       $ 5,852   

Prepaid rent

     3,147         3,009   

Prepaid insurance

     3,112         2,631   

Prepaid other

     3,322         4,218   
  

 

 

    

 

 

 
   $ 14,896       $ 15,710   
  

 

 

    

 

 

 
Other Current Assets
Other Current Assets

Note 10. Other Current Assets

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

 

     December 31,  
     2014      2013  

Deferred tax assets (Note 22)

   $ 13,703       $ 7,961   

Financial derivatives (Note 12)

     1,489         2,240   

Investments held in rabbi trust (Note 13)

     6,952         6,421   

Value added tax certificates (Note 11)

     6,303         2,066   

Other current assets

     1,209         1,984   
  

 

 

    

 

 

 
   $ 29,656       $ 20,672   
  

 

 

    

 

 

 
Value Added Tax Receivables
Value Added Tax Receivables

Note 11. Value Added Tax Receivables

The VAT receivables balances, and the respective locations in the accompanying Consolidated Balance Sheets, are presented below (in thousands):

 

     December 31,  
     2014      2013  

VAT included in:

     

Other current assets (Note 10)

   $ 6,303       $ 2,066   

Deferred charges and other assets (Note 15)

     856         5,406   
  

 

 

    

 

 

 
   $ 7,159       $ 7,472   
  

 

 

    

 

 

 

During the years ended December 31, 2014, 2013 and 2012, the Company wrote down the VAT receivables balances by the following amounts, which are reflected in the accompanying Consolidated Statements of Operations (in thousands):

 

     Years Ended December 31,  
     2014      2013      2012  

Write-downs (recoveries) of value added tax receivables

   $ (638 )     $ 143       $ 546   
  

 

 

    

 

 

    

 

 

 
Financial Derivatives
Financial Derivatives

Note 12. Financial Derivatives

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

The deferred gains (losses) and related taxes on the Company’s cash flow hedges recorded in “Accumulated other comprehensive income (loss)” in the accompanying Consolidated Balance Sheets are as follows (in thousands):

 

      December 31,  
     2014     2013  

Deferred gains (losses) in AOCI

   $ (157   $ (2,704

Tax on deferred gains (losses) in AOCI

     46        169   
  

 

 

   

 

 

 

Deferred gains (losses) in AOCI, net of taxes

   $ (111   $ (2,535
  

 

 

   

 

 

 

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

   $ (157  
  

 

 

   

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

Net Investment Hedge — During 2014 and 2013, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, as defined under ASC 815. The Company did not hedge net investments in foreign operations during 2012. The purpose of these derivative instruments is to protect the Company’s interests against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to the Company’s foreign currency-based investments in these subsidiaries.

Non-Designated Hedges — 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 pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 180 days in duration.

 

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

 

     As of December 31, 2014      As of December 31, 2013  

Contract Type

   Notional
Amount in
USD
     Settle Through
Date
     Notional
Amount in
USD
     Settle Through
Date
 

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

   $ 73,000         December 2015       $ 59,000         December 2014   

Forwards:

           

Philippine Pesos

     9,000         March 2015         63,300         July 2014   

Costa Rican Colones

     51,600         October 2015         41,600         October 2014   

Hungarian Forints

     —          
—  
  
     550         January 2014   

Romanian Leis

     10,414         December 2015         619         January 2014   

Net investment hedges: (2)

           

Forwards:

           

Euros

     51,648         March 2016         32,657         September 2014   

Non-designated hedges: (3)

           

Forwards

     64,541         March 2015         59,207         June 2014   

 

(1) 

Cash flow hedge as defined under ASC 815. Purpose is to protect against the risk that eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates.

 

(2) 

Net investment hedge as defined under ASC 815. Purpose is to protect against the risk that the net assets of certain of our international subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to our foreign currency-based investments in these subsidiaries.

 

(3) 

Foreign currency hedge contract not designated as a hedge as defined under ASC 815. Purpose is to reduce the effects on the Company’s operating results and cash flows from fluctuations caused by volatility in currency exchange rates, primarily related to intercompany loan payments and cash held in non-functional currencies. See Note 1, Overview and Summary of Significant Accounting Policies, for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

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 $5.5 million and $2.2 million as of December 31, 2014 and 2013, 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 $4.4 million and $0.4 million, and liability positions of $0.1 million and $3.3 million as of December 31, 2014 and 2013, respectively.

Although legally enforceable master netting arrangements exist between the Company and each counterparty, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in the accompanying Consolidated Balance Sheets. Additionally, the Company is not required to pledge, nor is it entitled to receive, cash collateral related to these derivative transactions.

 

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

 

    Derivative Assets  
    December 31, 2014     December 31, 2013  
    Fair Value     Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

   

Foreign currency forward and option contracts (1) 

  $ 974      $ 862   

Derivatives designated as net investment hedging instruments under ASC 815:

   

Foreign currency forward contracts (2)

    4,060        —     
 

 

 

   

 

 

 
    5,034        862   

Derivatives not designated as hedging instruments under ASC 815:

   

Foreign currency forward contracts (1)

    515        1,378   
 

 

 

   

 

 

 

Total derivative assets

  $ 5,549      $ 2,240   
 

 

 

   

 

 

 

 

    Derivative Liabilities  
    December 31, 2014     December 31, 2013  
    Fair Value     Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

   

Foreign currency forward and option contracts (3) 

  $ 406      $ 2,997   

Derivatives designated as net investment hedging instruments under ASC 815:

   

Foreign currency forward contracts (3)

    —          1,720   
 

 

 

   

 

 

 
    406        4,717   

Derivatives not designated as hedging instruments under ASC 815:

   

Foreign currency forward contracts (3)

    855        346   
 

 

 

   

 

 

 

Total derivative liabilities

  $ 1,261      $ 5,063   
 

 

 

   

 

 

 

 

(1)

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

 

(2)

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

 

(3)

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

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012 (in thousands):

 

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

(Effective Portion)
    Gain (Loss)
Recognized  in “Revenues”
on Derivatives
(Ineffective Portion)
 
    December 31,     December 31,     December 31,  
    2014     2013     2012     2014     2013     2012     2014     2013     2012  

Derivatives designated as cash flow hedging instruments under ASC 815:

                 

Foreign currency forward and option contracts

  $ (2,787   $ (2,823   $ 4,400      $ (5,339   $ (666   $ 4,156      $ (3   $ 119      $ 17   

Derivatives designated as net investment hedging instruments under ASC 815:

                 

Foreign currency forward contracts

    6,344        (1,720     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency forward and option contracts

  $ 3,557      $ (4,543   $ 4,400      $ (5,339 )    $ (666   $ 4,156      $ (3 )    $ 119      $ 17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Gain (Loss) Recognized in
“Other income and (expense)”
on Derivatives
 
     December 31,  
     2014     2013      2012  

Derivatives not designated as hedging instruments under ASC 815:

       

Foreign currency forward contracts

   $ (44 )    $ 4,216       $ (295
  

 

 

   

 

 

    

 

 

 

Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 13. Investments Held in Rabbi Trust

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

 

     December 31, 2014      December 31, 2013  
     Cost      Fair Value      Cost      Fair Value  

Mutual funds

   $ 5,160       $ 6,952       $ 4,749       $ 6,421   
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in the rabbi trust were 80% equity-based and 20% debt-based as of December 31, 2014. Net investment income (losses), included in “Other income (expense)” in the accompanying Consolidated Statements of Operations consists of the following (in thousands):

 

     Years Ended December 31,  
     2014      2013      2012  

Gross realized gains from sale of trading securities

   $ 586       $ 160       $ 163   

Gross realized (losses) from sale of trading securities

     —           (10      (1

Dividend and interest income

     58         279         129   

Net unrealized holding gains (losses)

     (276      568         312   
  

 

 

    

 

 

    

 

 

 

Net investment income (losses)

   $ 368       $ 997       $ 603   
  

 

 

    

 

 

    

 

 

 
Property and Equipment
Property and Equipment

Note 14. Property and Equipment

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

 

     December 31,  
     2014      2013  

Land

   $ 3,600       $ 4,144   

Buildings and leasehold improvements

     94,786         92,652   

Equipment, furniture and fixtures

     293,857         287,728   

Capitalized internally developed software costs

     7,963         7,752   

Transportation equipment

     531         624   

Construction in progress

     8,071         1,909   
  

 

 

    

 

 

 
     408,808         394,809   

Less: Accumulated depreciation

     298,928         277,260   
  

 

 

    

 

 

 
   $ 109,880       $ 117,549   
  

 

 

    

 

 

 

Capitalized internally developed software, net of depreciation, included in “Property and equipment, net” in the accompanying Consolidated Balance Sheets as of December 31, 2014 and 2013 was as follows (in thousands):

 

     December 31,  
     2014      2013  

Capitalized internally developed software costs, net

   $   1,270       $   2,599   
  

 

 

    

 

 

 

Sale of Fixed Assets, Land and Building Located in Bismarck, North Dakota

In November 2014, the Company sold the fixed assets, land and building located in Bismarck, North Dakota for cash of $3.1 million (net of selling costs of $0.2 million) resulting in a net gain on disposal of property and equipment of $2.6 million, which is included in “Net gain (loss) on disposal of property and equipment” in the accompanying Consolidated Statement of Operations for the year ended December 31, 2014. These assets, with a carrying value of $0.9 million, were included in “Property and equipment” in the accompanying Consolidated Balance Sheet as of December 31, 2013. Related to these assets were deferred property grants of $0.4 million, which were included in “Deferred grants” in the accompanying Consolidated Balance Sheet as of December 31, 2013.

Deferred Charges and Other Assets
Deferred Charges and Other Assets

Note 15. Deferred Charges and Other Assets

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

 

     December 31,  
     2014      2013  

Non-current deferred tax assets (Note 22)

   $ 1,681       $ 13,048   

Non-current mandatory tax security deposits (Note 22)

     15,906         17,317   

Non-current value added tax certificates (Note 11)

     856         5,406   

Foreign currency forward contracts (Note 12)

     4,060         —     

Rent and other deposits

     3,215         3,169   

Other

     4,365         4,632   
  

 

 

    

 

 

 
   $ 30,083       $ 43,572   
  

 

 

    

 

 

 
Accrued Employee Compensation and Benefits
Accrued Employee Compensation and Benefits

Note 16. Accrued Employee Compensation and Benefits

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

 

     December 31,  
     2014      2013  

Accrued compensation

   $ 32,786       $ 32,003   

Accrued bonus and commissions

     18,590         14,265   

Accrued vacation

     16,613         17,055   

Accrued employment taxes

     9,362         12,448   

Other

     4,721         5,293   
  

 

 

    

 

 

 
   $ 82,072       $ 81,064   
  

 

 

    

 

 

 

Deferred Revenue
Deferred Revenue

Note 17. Deferred Revenue

The components of deferred revenue consist of the following (in thousands):

 

     December 31,  
     2014      2013  

Future service

   $ 25,222       $ 25,102   

Estimated potential penalties and holdbacks

     9,023         9,923   
  

 

 

    

 

 

 
   $ 34,245       $ 35,025   
  

 

 

    

 

 

 

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

Note 18. Other Accrued Expenses and Current Liabilities

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

 

     December 31,  
     2014      2013  

Accrued legal and professional fees

   $ 4,508       $ 3,220   

Accrued equipment and software

     2,196         1,779   

Accrued roadside assistance claim costs

     1,878         2,341   

Accrued utilities

     1,329         1,425   

Foreign currency forward and option contracts (Note 12)

     1,261         5,063   

Accrued telephone charges

     1,068         1,475   

Customer deposits

     793         2,418   

Accrued rent

     640         2,057   

Accrued restructuring (Note 4)

     630         1,245   

Other

     7,913         9,370   
  

 

 

    

 

 

 
   $ 22,216       $ 30,393   
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 19. Deferred Grants

The components of deferred grants consist of the following (in thousands):

 

     December 31,  
     2014     2013  

Property grants

   $ 5,110      $ 6,643   

Employment grants

     207        146   
  

 

 

   

 

 

 

Total deferred grants

     5,317        6,789   

Less: Property grants — short-term (1)

     —          (6

Less: Employment grants — short-term (1)

     (207     (146
  

 

 

   

 

 

 

Total long-term deferred grants (2)

   $ 5,110      $ 6,637   
  

 

 

   

 

 

 

 

(1) 

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

 

(2) 

Included in “Deferred grants” in the accompanying Consolidated Balance Sheets.

Borrowings
Borrowings

Note 20. Borrowings

On May 3, 2012, the Company entered into a $245 million revolving credit facility (the “2012 Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent (“KeyBank”). The 2012 Credit Agreement replaced the Company’s previous $75 million revolving credit facility dated February 2, 2010, as amended, which agreement was terminated simultaneous with entering into the 2012 Credit Agreement. The 2012 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.

The 2012 Credit Agreement includes a $184 million alternate-currency sub-facility, a $10 million swingline sub-facility and a $35 million letter of credit sub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. The Company is not currently aware of any inability of its lenders to provide access to the full commitment of funds that exist under the revolving credit facility, if necessary. However, there can be no assurance that such facility will be available to the Company, even though it is a binding commitment of the financial institutions.

Borrowings consist of the following (in thousands):

 

     December 31,  
     2014      2013  

Revolving credit facility

   $ 75,000       $ 98,000   

Less: Current portion

     —           —     
  

 

 

    

 

 

 

Total long-term debt

   $ 75,000       $ 98,000   
  

 

 

    

 

 

 

The 2012 Credit Agreement matures on May 2, 2017 and has no varying installments due.

Borrowings under the 2012 Credit Agreement will bear interest at the rates set forth in the Credit Agreement. In addition, the Company is required to pay certain customary fees, including a commitment fee of 0.175%, which is due quarterly in arrears and calculated on the average unused amount of the 2012 Credit Agreement.

The 2012 Credit Agreement is guaranteed by all of the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of the non-voting and 65% of the voting capital stock of all the direct foreign subsidiaries of the Company and those of the guarantors.

In May 2012, the Company paid an underwriting fee of $0.9 million for the 2012 Credit Agreement, which is deferred and amortized over the term of the loan. The 2012 Credit Agreement had an average daily utilization of $85.9 million and $102.5 million during the years ended December 31, 2014 and 2013, respectively, and $96.8 million for the period outstanding during the year ended December 31, 2012. During the years ended December 31, 2014, 2013 and 2012, the related interest expense, excluding amortization of deferred loan fees, under our credit agreements was $1.1 million, $1.5 million and $0.5 million, respectively, which represented weighted average interest rates of 1.3%, 1.5% and 1.5%, respectively.

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

Note 21. Accumulated Other Comprehensive Income (Loss)

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

 

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

Balance at January 1, 2012

   $ 5,995      $ (2,565   $ 985      $ (438   $ 459      $ 4,436   

Pre-tax amount

     9,516        —          499        4,417        92        14,524   

Tax (provision) benefit

     —          —          (90     (306     —          (396

Reclassification of (gain) loss to net income

     570        —          (48     (4,174     (56     (3,708

Foreign currency translation

     2        —          67        (69     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     16,083        (2,565     1,413        (570     495        14,856   

Pre-tax amount

     (3,465     (1,720     (136     (2,704     (127     (8,152

Tax (provision) benefit

     —          602        16        449        —          1,067   

Reclassification of (gain) loss to net income

     —          —          (41     321        (54     226   

Foreign currency translation

     133        —          (102     (31     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     12,751        (3,683     1,150        (2,535     314        7,997   

Pre-tax amount

     (34,947     6,344        (50     (2,790     77        (31,366

Tax (provision) benefit

     —          (2,385     57        (17     —          (2,345

Reclassification of (gain) loss to net income

     —          —          (35     5,237        (49     5,153   

Foreign currency translation

     120        —          (114     (6     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Years Ended December 31,    

Statements of Operations Location

     2014     2013      

Actuarial Gain (Loss) Related to Pension Liability: (1)

      

Pre-tax amount

   $ 50      $ 60      Direct salaries and related costs

Tax (provision) benefit

     (15     (19   Income taxes
  

 

 

   

 

 

   

Reclassification to net income

     35        41     

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

      

Pre-tax amount

     (5,342     (547   Revenues

Tax (provision) benefit

     105        226      Income taxes
  

 

 

   

 

 

   

Reclassification to net income

     (5,237     (321  

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

      

Pre-tax amount

     49        54      General and administrative

Tax (provision) benefit

     —          —        Income taxes
  

 

 

   

 

 

   

Reclassification to net income

     49        54     
  

 

 

   

 

 

   

Total reclassification of gain (loss) to net income

   $ (5,153 )    $ (226  
  

 

 

   

 

 

   

 

(1) 

See Note 25, Defined Benefit Pension Plan and Postretirement Benefits, for further information.

 

(2)

See Note 12, Financial Derivatives, for further information.

 

Except as discussed in Note 22, Income Taxes, earnings associated with the Company’s investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments have been provided.

Income Taxes
Income Taxes

Note 22. Income Taxes

The income from continuing operations before income taxes includes the following components (in thousands):

 

     Years Ended December 31,  
     2014      2013      2012  

Domestic (U.S., state and local)

   $ 28,563       $ 5,544       $ (10,430

Foreign

     48,596         45,781         55,587   
  

 

 

    

 

 

    

 

 

 

Total income from continuing operations before income taxes

   $ 77,159       $ 51,325       $ 45,157   
  

 

 

    

 

 

    

 

 

 

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

 

     Years Ended December 31,  
     2014     2013     2012  

Current:

      

U.S. federal

   $ 2,579      $ 881      $ 236   

State and local

     542        82        (61

Foreign

     11,382        13,464        9,899   
  

 

 

   

 

 

   

 

 

 

Total current provision for income taxes

     14,503        14,427        10,074   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

U.S. federal

     5,437        866        (2,846

State and local

     (446     —          —     

Foreign

     (126     (1,228     (2,021
  

 

 

   

 

 

   

 

 

 

Total deferred provision (benefit) for income taxes

     4,865        (362     (4,867
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 19,368      $ 14,065      $ 5,207   
  

 

 

   

 

 

   

 

 

 

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

 

     Years Ended December 31,  
     2014     2013     2012  

Net operating loss and tax credit carryforwards

   $ 19,335      $ 8,029      $ (4,113

Depreciation and amortization

     (6,220     (5,030     (5,684

Accrued expenses/liabilities

     (4,505     954        (1,274

Valuation allowance

     (3,706     (1,887     4,120   

Deferred statutory income

     (29     (2,425     2,084   

Other

     (10     (3     —     
  

 

 

   

 

 

   

 

 

 

Total deferred provision (benefit) for income taxes

   $ 4,865      $ (362   $ (4,867
  

 

 

   

 

 

   

 

 

 

 

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

 

     Years Ended December 31,  
     2014     2013     2012  

Tax at U.S. federal statutory tax rate

   $ 27,005      $ 17,964      $ 15,805   

State income taxes, net of federal tax benefit

     934        82        (61

Foreign rate differential

     (13,164     (9,319     (7,078

Tax holidays

     (2,749     (4,686     (6,450

Permanent differences

     10,170        9,051        3,531   

Tax credits

     (4,894     (5,020     (699

Foreign withholding and other taxes

     2,541        4,643        1,263   

Change in valuation allowance, net of related adjustments

     (7     1,354        (538

Changes in uncertain tax positions

     (468     (4     (613

Change of assertion related to foreign earnings distribution

     —          —          47   
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 19,368      $ 14,065      $ 5,207   
  

 

 

   

 

 

   

 

 

 

Withholding taxes on offshore cash movements assessed by certain foreign governments of $1.8 million, $4.1 million and $0.8 million were included in the provision for income taxes in the accompanying Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012, respectively.

Earnings associated with the investments in the Company’s foreign subsidiaries of $380.8 million at December 31, 2014 are considered to be indefinitely reinvested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740 “Income Taxes.” Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

The Company has been granted tax holidays in The Philippines, Colombia, Costa Rica and El Salvador. The tax holidays have various expiration dates ranging from 2015 through 2028. In some cases, the tax holidays expire without possibility of renewal. In other cases, the Company expects to renew these tax holidays, but there are no assurances from the respective foreign governments that they will renew them. This could potentially result in future adverse tax consequences in the local jurisdiction, the impact of which is not practicable to estimate due to the inherent complexity of estimating critical variables such as long-term future profitability, tax regulations and rates in the multi-national tax environment in which the Company operates. The Company’s tax holidays decreased the provision for income taxes by $2.7 million ($0.06 per diluted share), $4.7 million ($0.11 per diluted share) and $6.5 million ($0.15 per diluted share) for the years ended December 31, 2014, 2013 and 2012, respectively.

 

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

 

     December 31,  
     2014     2013  

Deferred tax assets:

    

Net operating loss and tax credit carryforwards

   $ 35,400      $ 61,626   

Valuation allowance

     (34,146     (42,664

Accrued expenses

     25,694        21,305   

Deferred revenue

     3,757        4,045   

Depreciation and amortization

     835        559   

Other

     —          104   
  

 

 

   

 

 

 
     31,540        44,975   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Depreciation and amortization

     (20,172     (26,379

Deferred statutory income

     (772     (241

Accrued liabilities

     (141     (79

Other

     (1     (114
  

 

 

   

 

 

 
     (21,086     (26,813
  

 

 

   

 

 

 

Net deferred tax assets

   $ 10,454      $ 18,162   
  

 

 

   

 

 

 
     December 31,  
     2014     2013  

Classified as follows:

    

Other current assets (Note 10)

   $ 13,703      $ 7,961   

Other long-term liabilities

     (4,786     (2,763

Deferred charges and other assets (Note 15)

     1,681        13,048   

Current deferred income tax liabilities

     (144     (84
  

 

 

   

 

 

 

Net deferred tax assets

   $ 10,454      $ 18,162   
  

 

 

   

 

 

 

There are approximately $185.0 million of income tax loss carryforwards as of December 31, 2014, with varying expiration dates, approximately $131.4 million relating to foreign operations and $53.6 million relating to U.S. state operations. For U.S. federal purposes, $2.7 million of tax credits are available for carryforward as of December 31, 2014, with the latest expiration date ending December 2035. With respect to foreign operations, $109.0 million of the net operating loss carryforwards have an indefinite expiration date and the remaining $22.4 million net operating loss carryforwards have varying expiration dates through December 2035. Regarding the U.S. state and foreign aforementioned tax loss carryforwards, no benefit has been recognized for $50.3 million and $123.5 million, respectively, as it is more likely than not that these losses will expire without realization of tax benefits.

The Company has accrued $13.3 million and $15.0 million as of December 31, 2014 and 2013, respectively, excluding penalties and interest, for the liability for unrecognized tax benefits. As of December 31, 2014, $2.7 million of unrecognized tax benefits have been recorded to “Deferred charges and other assets” in the accompanying Consolidated Balance Sheet in accordance with ASU 2013-11. The remaining $10.6 million of the unrecognized tax benefits at December 31, 2014 and the $15.0 million at December 31, 2013 are recorded in “Long-term income tax liabilities” in the accompanying Consolidated Balance Sheets. Had the Company recognized these tax benefits, approximately $13.3 million and $15.0 million, and the related interest and penalties, would have favorably impacted the effective tax rate in 2014 and 2013, respectively. The Company anticipates that approximately $2.2 million of the unrecognized tax benefits will be recognized in the next twelve months due to a lapse in the applicable statute of limitations.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had $10.1 million and $10.5 million accrued for interest and penalties as of December 31, 2014 and 2013, respectively. Of the accrued interest and penalties at December 31, 2014 and 2013, $3.3 million and $3.8 million, respectively, relate to statutory penalties. The amount of interest and penalties, net, included in the provision for income taxes in the accompanying Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 was $(0.5) million, $0.4 million and $(0.1) million, respectively.

 

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

 

     Years Ended December 31,  
     2014     2013     2012  

Gross unrecognized tax benefits as of January 1,

   $ 14,991      $ 16,897      $ 17,136   

Prior period tax position increases (decreases) (1)

     —          —          321   

Decreases from settlements with tax authorities

     —          —          (426

Decreases due to lapse in applicable statute of limitations

     —          (390     (561

Foreign currency translation increases (decreases)

     (1,706     (1,516     427   
  

 

 

   

 

 

   

 

 

 

Gross unrecognized tax benefits as of December 31,

   $ 13,285      $ 14,991      $ 16,897