SYKES ENTERPRISES INC, 10-Q filed on 5/3/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
Apr. 26, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
SYKE 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
Entity Central Index Key
0001010612 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
42,613,318 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 259,885 
$ 235,358 
Receivables, net
286,252 
277,096 
Prepaid expenses
21,080 
17,321 
Other current assets
13,447 
33,262 
Total current assets
580,664 
563,037 
Property and equipment, net
118,116 
111,962 
Goodwill, net
199,038 
195,733 
Intangibles, net
47,885 
50,896 
Deferred charges and other assets
41,577 
26,144 
Total assets
987,280 
947,772 
Current liabilities:
 
 
Accounts payable
20,887 
23,255 
Accrued employee compensation and benefits
80,124 
77,246 
Current deferred income tax liabilities
 
1,120 
Income taxes payable
2,016 
1,959 
Deferred revenue
30,564 
28,119 
Other accrued expenses and current liabilities
26,692 
21,476 
Total current liabilities
160,283 
153,175 
Deferred grants
4,620 
4,810 
Long-term debt
70,000 
70,000 
Long-term income tax liabilities
19,636 
18,512 
Other long-term liabilities
25,998 
22,595 
Total liabilities
280,537 
269,092 
Commitments and loss contingency (Note 14)
   
   
Shareholders' equity:
 
 
Preferred stock, $0.01 par value per share, 10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value per share, 200,000 shares authorized; 42,639 and 42,785 shares issued, respectively
426 
428 
Additional paid-in capital
275,178 
275,380 
Retained earnings
472,279 
458,325 
Accumulated other comprehensive income (loss)
(39,267)
(53,662)
Treasury stock at cost: 115 and 113 shares, respectively
(1,873)
(1,791)
Total shareholders' equity
706,743 
678,680 
Total liabilities and shareholders' equity
$ 987,280 
$ 947,772 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
42,639,000 
42,785,000 
Treasury stock, shares
115,000 
113,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Income Statement [Abstract]
 
 
Revenues
$ 320,746 
$ 323,685 
Operating expenses:
 
 
Direct salaries and related costs
205,555 
213,927 
General and administrative
80,510 
72,727 
Depreciation, net
10,784 
11,059 
Amortization of intangibles
3,627 
3,431 
Total operating expenses
300,476 
301,144 
Income from operations
20,270 
22,541 
Other income (expense):
 
 
Interest income
153 
166 
Interest (expense)
(808)
(439)
Other income (expense)
553 
(829)
Total other income (expense)
(102)
(1,102)
Income before income taxes
20,168 
21,439 
Income taxes
6,214 
5,800 
Net income
$ 13,954 
$ 15,639 
Net income per common share:
 
 
Basic
$ 0.33 
$ 0.37 
Diluted
$ 0.33 
$ 0.37 
Weighted average common shares outstanding:
 
 
Basic
41,704 
42,181 
Diluted
42,023 
42,440 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
Net income
$ 13,954 
$ 15,639 
Other comprehensive income (loss), net of taxes:
 
 
Foreign currency translation gain (loss), net of taxes
13,899 
(27,124)
Unrealized gain (loss) on net investment hedges, net of taxes
(1,930)
3,903 
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(8)
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
2,430 
1,415 
Unrealized gain (loss) on postretirement obligation, net of taxes
(13)
(15)
Other comprehensive income (loss), net of taxes
14,395 
(21,829)
Comprehensive income (loss)
$ 28,349 
$ (6,190)
Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2015
$ 678,680 
$ 428 
$ 275,380 
$ 458,325 
$ (53,662)
$ (1,791)
Beginning Balance, shares at Dec. 31, 2015
 
42,785 
 
 
 
 
Stock-based compensation expense
2,182 
 
2,182 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
1,911 
 
1,911 
 
 
 
Issuance of common stock under equity award plans, net of shares withheld for employee taxes
(4,379)
(2)
(4,295)
 
 
(82)
Issuance of common stock under equity award plans, net of shares withheld for employee taxes, shares
 
(146)
 
 
 
 
Comprehensive income (loss)
28,349 
 
 
13,954 
14,395 
 
Ending Balance at Mar. 31, 2016
$ 706,743 
$ 426 
$ 275,178 
$ 472,279 
$ (39,267)
$ (1,873)
Ending Balance, shares at Mar. 31, 2016
 
42,639 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities:
 
 
Net income
$ 13,954 
$ 15,639 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
10,954 
11,255 
Amortization of intangibles
3,627 
3,431 
Amortization of deferred grants
(226)
(199)
Unrealized foreign currency transaction (gains) losses, net
(947)
(277)
Stock-based compensation expense
2,182 
1,996 
Excess tax (benefit) from stock-based compensation
(1,911)
(169)
Deferred income tax provision (benefit)
(1,562)
2,748 
Unrealized (gains) losses on financial instruments, net
349 
(70)
Amortization of deferred loan fees
67 
65 
Imputed interest expense and fair value adjustments to contingent consideration
213 
 
Other
(245)
148 
Changes in assets and liabilities, net of acquisition:
 
 
Receivables
(7,458)
8,716 
Prepaid expenses
(3,601)
(160)
Other current assets
339 
(11,391)
Deferred charges and other assets
(980)
2,144 
Accounts payable
(2,844)
(26)
Income taxes receivable / payable
2,592 
737 
Accrued employee compensation and benefits
1,509 
(4,174)
Other accrued expenses and current liabilities
5,206 
1,430 
Deferred revenue
949 
(3,234)
Other long-term liabilities
3,350 
33 
Net cash provided by operating activities
25,517 
28,642 
Cash flows from investing activities:
 
 
Capital expenditures
(16,205)
(10,869)
Proceeds from sale of property and equipment
26 
50 
Investment in restricted cash
(225)
(5)
Release of restricted cash
 
Net investment hedge settlement
10,339 
 
Net cash (used for) investing activities
(6,057)
(10,824)
Cash flows from financing activities:
 
 
Payments of long-term debt
 
(1,000)
Excess tax benefit from stock-based compensation
1,911 
169 
Cash paid for repurchase of common stock
 
(5,136)
Proceeds from grants
22 
49 
Shares repurchased for minimum tax withholding on equity awards
(4,379)
(1,131)
Net cash (used for) financing activities
(2,446)
(7,049)
Effects of exchange rates on cash and cash equivalents
7,513 
(11,842)
Net increase (decrease) in cash and cash equivalents
24,527 
(1,073)
Cash and cash equivalents - beginning
235,358 
215,137 
Cash and cash equivalents - ending
259,885 
214,064 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
406 
368 
Cash paid during period for income taxes
3,781 
5,606 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
4,831 
2,070 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
(13)
(15)
Shares repurchased for minimum tax withholding on common stock and restricted stock under equity awards included in current liabilities
$ 487 
$ 127 
Overview and Basis of Presentation
Overview and Basis of Presentation

Note 1. Overview and Basis of Presentation

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) 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, chat and digital self-service. 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, which includes order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

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

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016.

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

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On April 1, 2016, the Company acquired 100% of the outstanding membership units of Clear Link Holdings, LLC (“Clearlink”). In conjunction with the acquisition of Clearlink, the Company borrowed $216.0 million under its existing credit agreement. See Note 20, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

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

 

New Accounting Standards Not Yet Adopted

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

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

In February 2016, the FASB issued ASC 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases”. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASC 2016-05, “Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”). These amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Entities have the option to apply the amendments on either a prospective basis or a modified retrospective basis. The Company is evaluating the methods of adoption but does not expect the adoption of ASU 2016-05 to materially impact its financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASC 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”). These amendments clarify the implementation guidance on principal versus agent considerations and require entities to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. These amendments affect the guidance in ASU 2014-09, which is not yet effective. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09, as updated by ASU 2015-14.

 

In March 2016, the FASB issued ASC 2016-09, “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). These amendments are intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Entities have the option to apply the amendments on either a prospective basis or a modified retrospective basis. The Company is currently evaluating the impact the guidance will have on its financial condition, results of operations and cash flows.

In April 2016, the FASB issued ASC 2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing” (“ASU 2016-10”). These amendments clarify the identification of performance obligations and the licensing implementation guidance. These amendments affect the guidance in ASU 2014-09, which is not yet effective. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09, as updated by ASU 2015-14.

New Accounting Standards Recently Adopted

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 (“ASC”) 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; early adoption is permitted. Entities may apply the amendments either (1) prospective to all awards granted or modified after the effective date or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

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. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments either prospectively or retrospectively to all prior periods presented in the financial statements. The adoption of ASU 2015-01 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis) (“ASU 2015-02”). These amendments are intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. These amendments affect the consolidation evaluation for reporting organizations. In addition, the amendments simplify and improve current U.S. GAAP by reducing the number of consolidation models. The amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments using either a modified retrospective approach or retrospectively. The adoption of ASU 2015-02 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of  Debt Issuance Costs” (“ASU 2015-03”). These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. These amendments are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the amendments retrospectively. The adoption of ASU 2015-03 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

 

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). These amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. These amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015; early adoption is permitted. Entities can adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The adoption of ASU 2015-05 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In September 2015, the FASB issued ASC 2015-16, “Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). These amendments eliminate the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. These amendments are effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2015-16 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In November 2015, the FASB issued ASC 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). These amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The existing requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by these amendments. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted as of the beginning of the interim or annual reporting period. The adoption of ASU 2015-17 on January 1, 2016 resulted in the reclassification of $12.0 million of current deferred tax assets included in “Other current assets” and $1.1 million of current deferred tax liabilities included in “Current deferred income tax liabilities” to noncurrent deferred income tax assets and liabilities. All future deferred tax assets and liabilities will be classified as noncurrent. No prior periods were adjusted.

Acquisition of Qelp
Acquisition of Qelp

Note 2. Acquisition of Qelp

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

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

 

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

 

     Total  

Cash

    $ 9,885     

Contingent consideration

     6,000     

Working capital adjustment

     (65)    
  

 

 

 
    $                     15,820     
  

 

 

 

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

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

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

 

     July 2, 2015  

Cash and cash equivalents

    $ 450     

Receivables (1)

     1,471     

Prepaid expenses

     24     
  

 

 

 

Total current assets

     1,945     

Property and equipment

     2,168     

Goodwill

     10,054     

Intangibles

     6,000     

Deferred charges and other assets

     55     

Short-term debt

     (323)    

Accrued employee compensation and benefits

     (207)    

Income taxes payable

     (94)    

Deferred revenue

     (967)    

Other accrued expenses and current liabilities

     (1,030)    
  

 

 

 

Total current liabilities

     (2,621)    

Other long-term liabilities (2)

     (1,781)    
  

 

 

 
    $                         15,820     
  

 

 

 

 

(1) The fair value equals the gross contractual value of the receivables.

(2) Primarily includes long-term deferred tax liabilities.

  

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

 

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

 

     Amount Assigned      Weighted Average
  Amortization Period  
(years)
 

Customer relationships

    $ 5,400           7     

Trade name and trademarks

     100           3     

Content library

     500           2     
  

 

 

    
    $                             6,000           7     
  

 

 

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

Note 3. Costs Associated with Exit or Disposal Activities

In connection with the Company’s initiatives to streamline excess capacity in The Philippines and various locations in the U.S. (the “Exit Plans”), the Company has paid $7.6 million in cash through March 31, 2016. The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of March 31, 2016 (in thousands):

 

     Americas
Fourth

  Quarter 2011  
Exit Plan
     Americas
Third

  Quarter 2010  
Exit Plan
     Total  

Lease obligations and facility exit costs

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

Non-cash impairment charges

     480           3,847           4,327     
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three months ended March 31, 2016 and 2015 (in thousands):

 

     Three Months Ended March 31,  
     2016      2015  

Beginning accrual

     $ 733           $ 1,558     

Lease obligations and facility exit costs

     -           -     

Cash payments (1)

     (206)          (212)    
  

 

 

    

 

 

 

Ending accrual

     $                     527           $                 1,346     
  

 

 

    

 

 

 

 

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

     

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 March 31, 2016 and December 31, 2015 (in thousands):

 

     Americas
Fourth
Quarter 2011
Exit Plan
     Americas
Third
 Quarter 2010 

Exit Plan
     Total  

March 31, 2016

        

Short-term accrued restructuring liability (1)

     $ 121           $ 406           $               527     

Long-term accrued restructuring liability (2)

     -           -           -     
  

 

 

    

 

 

    

 

 

 

Ending accrual at March 31, 2016

     $               121           $ 406           $ 527     
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Short-term accrued restructuring liability (1)

     $ 144           $ 487           $ 631     

Long-term accrued restructuring liability (2)

     22           80           102     
  

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2015

     $ 166           $               567           $ 733     
  

 

 

    

 

 

    

 

 

 

 

(1)

 

 

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

(2)   Included in “Other long-term liabilities” in the accompanying Condensed 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 4. Fair Value

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

 

 

Level 1  Quoted prices for identical instruments in active markets.

 

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

 

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

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

 

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

Money Market and Open-End Mutual Funds — The Company uses quoted market prices in active markets to determine the fair value. These items are classified in Level 1 of the fair value hierarchy.

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

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

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

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.

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

 

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

 

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

Assets:

            

Foreign currency forward and option contracts

  (1)    $ 2,817          $ -              $ 2,817          $ -         

Embedded derivatives

  (1)     139           -               -               139     

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

  (2)     6,325           6,325           -               -         

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

  (2)     1,803           1,803           -               -         

Guaranteed investment certificates

  (3)     86           -               86           -         
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 11,170          $ 8,128          $ 2,903          $ 139     
   

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

            

Long-term debt

  (4)    $ 70,000          $ -              $ 70,000          $ -         

Foreign currency forward and option contracts

  (1)     3,692           -               3,692           -         

Embedded derivatives

  (1)     81           -               -               81     

Contingent consideration included in “Other long-term liabilities”

  (5)     6,806           -               -               6,806     
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 80,579          $ -              $ 73,692          $ 6,887     
   

 

 

    

 

 

    

 

 

    

 

 

 
               Fair Value Measurements at December 31, 2015 Using:  
        Balance at      Quoted Prices
in Active
Markets For
 Identical Assets 
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
          December 31, 2015        Level (1)      Level (2)      Level (3)  

Assets:

            

Foreign currency forward and option contracts

  (1)    $ 10,962          $ -              $ 10,962          $ -         

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

  (2)     6,229           6,229           -               -         

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

  (2)     1,622           1,622           -               -         

Guaranteed investment certificates

  (3)     86           -               86           -         
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 18,899          $ 7,851          $ 11,048          $ -         
   

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

            

Long-term debt

  (4)    $ 70,000          $ -              $ 70,000          $ -         

Foreign currency forward and option contracts

  (1)     835           -               835           -         

Contingent consideration included in “Other long-term liabilities”

  (5)     6,280           -               -               6,280     
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 77,115          $ -              $ 70,835          $ 6,280     
   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  See Note 6, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.
(2)  Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 7, Investments Held in Rabbi Trust.
(3)  Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)  The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 10, Borrowings.
(5)  In the accompanying Condensed Consolidated Balance Sheets.

 

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

Embedded Derivatives in Lease Agreements

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

 

             Fair Value          

Balance at December 31, 2015

    $ -         

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

     56     

Effect of foreign currency

     2     
  

 

 

 

Balance at March 31, 2016

    $ 58     
  

 

 

 

Unrealized gain (loss) for the three months ended March 31, 2016

    $ 55     
  

 

 

 

 

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

     

Contingent Consideration

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

 

           Fair Value        

Balance at January 1, 2015

    $ -         

Acquisition (1)

     6,000     

Payments

     -         

Imputed interest/adjustments

     408     

Effect of foreign currency

     (128)    
  

 

 

 

Balance at December 31, 2015

     6,280     

Acquisition

     -         

Payments

     -         

Imputed interest/adjustments

     213     

Effect of foreign currency

     313     
  

 

 

 

Balance at March 31, 2016

    $ 6,806     
  

 

 

 

 

(1)  Related to the Qelp acquisition on July 2, 2015. See Note 2, Acquisition of Qelp.

     

The Company did not record any fair value adjustments to the contingent consideration as the key assumptions used to calculate the fair value at the acquisition date remained consistent at March 31, 2016. Should the assumptions regarding probability of achievement of certain revenue and EBITDA targets change in future periods, the change in fair value of the contingent consideration will be recognized in the accompanying Condensed Consolidated Statements of Operations. The Company accretes interest expense each period using the effective interest method until the contingent consideration reaches the estimated future value of $9.1 million. Interest expense related to the contingent consideration is included in “Interest (expense)” in the accompanying Condensed Consolidated Statements of Operations.

Non-Recurring Fair Value

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, like those associated with acquired businesses, including goodwill, other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at March 31, 2016 and December 31, 2015.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 5.  Goodwill and Intangible Assets

Intangible Assets

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

 

      Gross Intangibles       Accumulated
        Amortization        
         Net Intangibles            Weighted Average  
Amortization

Period (years)
 

Customer relationships

    $ 103,999          $ (62,328)         $ 41,671           8      

Trade names and trademarks

     11,703           (5,810)          5,893           8      

Content library

     514           (193)          321           2      

Non-compete agreements

     1,196           (1,196)          -               2      

Proprietary software

     850           (850)          -               2      

Favorable lease agreement

     449           (449)          -               2      
  

 

 

    

 

 

    

 

 

    
    $ 118,711          $ (70,826)         $ 47,885           8      
  

 

 

    

 

 

    

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2015 (in thousands):

 

      Gross Intangibles       Accumulated
        Amortization        
         Net Intangibles            Weighted Average  
Amortization

Period (years)
 

Customer relationships

    $ 102,594          $ (58,294)         $ 44,300           8      

Trade names and trademarks

     11,698           (5,470)          6,228           8      

Content library

     491           (123)          368           2      

Non-compete agreements

     1,190           (1,190)          -               2      

Proprietary software

     850           (850)          -               2      

Favorable lease agreement

     449           (449)          -               2      
  

 

 

    

 

 

    

 

 

    
    $ 117,272          $ (66,376)         $ 50,896           8      
  

 

 

    

 

 

    

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to March 31, 2016, is as follows (in thousands):

 

Years Ending December 31,    Amount  

2016 (remaining nine months)

   $               11,056     

2017

     14,554     

2018

     8,282     

2019

     7,679     

2020

     5,169     

2021

     784     

2022 and thereafter

     361     

Goodwill

Changes in goodwill for the three months ended March 31, 2016 consist of the following (in thousands):

 

                     Effect of Foreign           
         January 1, 2016                Acquisition            Currency            March 31, 2016        

Americas

    $ 186,049          $ -              $ 2,797          $ 188,846     

EMEA

     9,684           -               508           10,192     
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 195,733          $ -              $ 3,305          $ 199,038     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Changes in goodwill for the year ended December 31, 2015 consist of the following (in thousands):

 

                     Effect of Foreign           
           January 1, 2015                Acquisition (1)          Currency          December 31, 2015      

Americas

    $ 193,831          $ -              $ (7,782)         $ 186,049     

EMEA

     -               10,054           (370)          9,684     
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 193,831          $ 10,054          $ (8,152)         $ 195,733     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  See Note 2, Acquisition of Qelp, for further information.

     

The Company has five reporting units with goodwill and performs its annual goodwill impairment test during the third quarter, or more frequently, if indicators of impairment exist.

For the annual goodwill impairment test, the Company elected to forgo the option to first assess qualitative factors and performed its annual two-step goodwill impairment test as of July 31, 2015. Under ASC 350, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes comparing a reporting unit’s calculated fair value to its carrying value. The calculation of fair value requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

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

 

 

Revenue projections, including revenue growth during the forecast periods;

 

EBITDA margin projections over the forecast periods;

 

Estimated income tax rates;

 

Estimated capital expenditures; and

 

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

As of July 31, 2015, the Company concluded that goodwill was not impaired for all five of the reporting units. While the fair values of four of the reporting units were substantially in excess of their carrying value, the Qelp reporting unit’s fair value approximated its carrying value due to the proximity to the acquisition date of July 2, 2015. The newly acquired Qelp reporting unit’s carrying value was $15.6 million at July 31, 2015, including $9.9 million of goodwill.

The Qelp reporting unit is at risk for future impairment if projected operating results are not met or other inputs into the fair value measurement change. However, as of March 31, 2016 and December 31, 2015, there was no impairment as the fair value of the reporting unit exceeded its carrying value by a small margin. The Company will continue to review the calculated fair value of this reporting unit.

Financial Derivatives
Financial Derivatives

Note 6. Financial Derivatives

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

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

 

          March 31, 2016             December 31, 2015    

Deferred gains (losses) in AOCI

    $ 2,008          $ (558)    

Tax on deferred gains (losses) in AOCI

     (105)          31     
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ 1,903          $ (527)    
  

 

 

    

 

 

 

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

    $ 2,008        
  

 

 

    

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

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

Non-Designated Hedges

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

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

 

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

 

       As of March 31, 2016      As of December 31, 2015

Contract Type

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

Cash flow hedges:

                   

Options:

                   

Philippine Pesos

       $ 71,500           March 2017        $ 71,750           December 2016

Forwards:

                   

Costa Rican Colones

       23,000           December 2016        34,500           November 2016

Hungarian Forints

       2,050           December 2016                -

Romanian Leis

       5,060           December 2016                -

Net investment hedges:

                   

Forwards:

                   

Euros

       65,229           September 2017        63,470           March 2016

Non-designated hedges:

                   

Forwards

       61,262           June 2016        50,603           March 2016

Embedded derivatives

       12,210           April 2030                -

Master netting agreements exist with each respective counterparty to reduce credit risk by permitting net settlement of derivative positions. In the event of default by the Company or one of its counterparties, these agreements include a set-off clause that provides the non-defaulting party the right to net settle all derivative transactions, regardless of the currency and settlement date. The maximum amount of loss due to credit risk that, based on gross fair value, the Company would incur if parties to the derivative transactions that make up the concentration failed to perform according to the terms of the contracts was $3.0 million and $11.0 million as of March 31, 2016 and December 31, 2015, respectively. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions are asset positions of $2.5 million and $10.2 million as of March 31, 2016 and December 31, 2015, respectively, and liability positions of $3.3 million and $0.1 million as of March 31, 2016 and December 31, 2015, respectively.

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

 

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

 

     Derivative Assets  
              March 31, 2016                     December 31, 2015        
     Fair Value      Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:      
Foreign currency forward and option contracts (1)     $ 2,748          $ 544     
Derivatives designated as net investment hedging instruments under ASC 815:      
Foreign currency forward contracts (1)      -               10,161     
  

 

 

    

 

 

 
     2,748           10,705     
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts (1)

     69           257     

Embedded derivatives (1)

     10           -         

Embedded derivatives (2)

     129           -         
  

 

 

    

 

 

 

Total derivative assets

    $ 2,956          $ 10,962     
  

 

 

    

 

 

 
     Derivative Liabilities  
     March 31, 2016      December 31, 2015  
     Fair Value      Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:      
Foreign currency forward and option contracts (3)     $ 14          $ 396     
Derivatives designated as net investment hedging instruments under ASC 815:      
Foreign currency forward contracts (4)      3,290           -         
  

 

 

    

 

 

 
     3,304           396     
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts (3)

     388           439     

Embedded derivatives (3)

     3           -         

Embedded derivatives (4)

     78           -         
  

 

 

    

 

 

 

Total derivative liabilities

    $ 3,773          $ 835     
  

 

 

    

 

 

 

 

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

 

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

 

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

 

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

 

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

 

       Gain (Loss) Recognized in  
  AOCI on Derivatives  
  (Effective Portion)  
     Gain (Loss) Reclassified
From Accumulated AOCI
  Into “Revenues” (Effective   
Portion)
     Gain (Loss) Recognized in
 “Revenues” on Derivatives 
(Ineffective Portion and
Amount  Excluded from
Effectiveness Testing)
 
     March 31,      March 31,      March 31,  
     2016      2015      2016      2015      2016      2015  
Derivatives designated as cash flow hedging instruments under ASC 815:                  
Foreign currency forward and option contracts     $ 2,503          $ 2,055          $ (54)         $ 589          $ -          $ 1     
Derivatives designated as net investment hedging instruments under ASC 815:                  
Foreign currency forward contracts      (3,112)          6,358           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    $ (609)         $   8,413          $    (54)         $     589          $      -          $      1     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       Gain (Loss) Recognized  
in “Other income
(expense)” on
Derivatives
 
     March 31,  
     2016      2015  
Derivatives not designated as hedging instruments under ASC 815:      
Foreign currency forward contracts     $ 795          $ (164)    
Embedded derivatives      (56)          -       
  

 

 

    

 

 

 
    $       739          $   (164)    
  

 

 

    

 

 

 
Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 7.  Investments Held in Rabbi Trust

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

 

     March 31, 2016      December 31, 2015  
     Cost      Fair Value      Cost      Fair Value  

 Mutual funds

    $             6,109          $             8,128          $             6,217          $             7,851     
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in rabbi trust were 78% equity-based and 22% debt-based as of March 31, 2016. Net investment income (losses), included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):

 

          Three Months Ended March 31,       
     2016      2015  

Gross realized gains from sale of trading securities

    $ -              $ 3     

Gross realized (losses) from sale of trading securities

     -               (1)    

Dividend and interest income

     9           5     

Net unrealized holding gains (losses)

     20           123     
  

 

 

    

 

 

 

Net investment income (losses)

    $     29          $     130     
  

 

 

    

 

 

 
Deferred Revenue
Deferred Revenue

Note 8. Deferred Revenue

Deferred revenue consists of the following (in thousands):

 

         March 31, 2016              December 31, 2015    

Future service

    $ 23,880          $ 22,112     

Estimated potential penalties and holdbacks

     6,684           6,007     
  

 

 

    

 

 

 
    $ 30,564          $ 28,119     
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 9. Deferred Grants

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

 

       March 31, 2016        December 31, 2015  
  

 

 

 

Property grants

     $ 4,207           $ 4,377     

Lease grants

     494           513     

Employment grants

     143           149     
  

 

 

    

 

 

 

  Total deferred grants

     4,844           5,039     

Less: Property grants - short-term (1)

     -           -     

Less: Lease grants - short-term (1)

     (81)          (80)    

Less: Employment grants - short-term (1)

     (143)          (149)    
  

 

 

    

 

 

 

  Total long-term deferred grants

     $                       4,620           $                       4,810     
  

 

 

    

 

 

 

 

(1)

 

 

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

Borrowings
Borrowings

Note 10. Borrowings

On May 12, 2015, the Company entered into a $440 million revolving credit facility (the “2015 Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”). The 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.

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

Borrowings consist of the following (in thousands):

 

         March 31, 2016            December 31, 2015    

Revolving credit facility

    $ 70,000         $ 70,000     

Less: Current portion

     -             -     
  

 

 

    

 

 

 

Total long-term debt

    $ 70,000         $ 70,000     
  

 

 

    

 

 

 

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

Borrowings under the 2015 Credit Agreement bear interest at the rates set forth in the 2015 Credit Agreement. In addition, the Company is required to pay certain customary fees, including a commitment fee of 0.125%, which is due quarterly in arrears and calculated on the average unused amount of the 2015 Credit Agreement.

 

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

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

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

 

                 Three Months Ended March 31,               
     2016      2015  

Average daily utilization

    $ 70,000          $ 74,322     

Interest expense, including commitment fee (1)

    $ 375          $ 319     

Weighted average interest rate

     2.1%         1.7%     

 

(1)  Excludes the amortization of deferred loan fees.

     

 

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

Note 11. Accumulated Other Comprehensive Income (Loss)

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

 

     Foreign
Currency
    Translation    
Gain (Loss)
     Unrealized
  Gain (Loss) on  
Net

Investment
Hedge
     Unrealized
  Actuarial Gain  
(Loss) Related

to Pension
Liability
     Unrealized
  Gain (Loss) on  
Cash Flow
Hedging
Instruments
     Unrealized
  Gain (Loss) on  
Post

Retirement
Obligation
          Total       

Balance at January 1, 2015

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

Pre-tax amount

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

Tax (provision) benefit

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

Reclassification of (gain) loss to net income

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

Foreign currency translation

     6           -             (45)          39          -             -       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

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

Pre-tax amount

     13,929           (3,112)          -             2,503           -             13,320     

Tax (provision) benefit

     -             1,182           -             (117)          -             1,065     

Reclassification of (gain) loss to net income

     -             -             (12)          35           (13)          10     

Foreign currency translation

     (30)          -             21           9           -           -       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2016

    $     (44,702)         $     2,240          $     1,038          $     1,903          $     254          $         (39,267)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

      Three Months Ended March 31,           Statements of Operations    
     2016      2015     

Location

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

Pre-tax amount

     $ 12           $ 11         Direct salaries and related costs

Tax (provision) benefit

     -           -         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     12           11        
Gain (Loss) on Cash Flow Hedging Instruments: (2)         

Pre-tax amount

     (54)          590         Revenues

Tax (provision) benefit

     19           6         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     (35)          596        
Gain (Loss) on Post Retirement Obligation: (1)         

Pre-tax amount

     13           14         General and administrative

Tax (provision) benefit

     -           -         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     13           14        
Total reclassification of gain (loss) to net         
  

 

 

    

 

 

    
income      $             (10)          $             621        
  

 

 

    

 

 

    

 

(1)

 

 

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

(2)

  See Note 6, Financial Derivatives, for further information.

Except as discussed in Note 12, Income Taxes, earnings associated with the Company’s investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments have been provided.

Income Taxes
Income Taxes

Note 12. Income Taxes

The Company’s effective tax rate was 30.8% and 27.1% for the three months ended March 31, 2016 and 2015, respectively. The increase in the effective tax rate is predominately due to several factors, including shifts in earnings among the various jurisdictions in which the Company operates, none of which are individually material. The difference between the Company’s effective tax rate of 30.8% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the recognition of tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions, changes in uncertain tax positions, adjustments of valuation allowances and tax credits, partially offset by the tax impact of permanent differences and foreign withholding taxes.

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

The Company is currently under audit in several tax jurisdictions. The Company received assessments for the Canadian 2003-2009 audit. Requests for Competent Authority Assistance were filed with both the Canadian Revenue Agency and the U.S. Internal Revenue Service and the Company paid mandatory security deposits to Canada as part of this process. The total amount of deposits, net of the effects of foreign exchange rate adjustments, are $14.3 million and $13.4 million as of March 31, 2016 and December 31, 2015, respectively, and are included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets. Although the outcome of examinations by taxing authorities is always uncertain, the Company believes it is adequately reserved for these audits and resolution is not expected to have a material impact on its financial condition and results of operations.

 

The significant tax jurisdictions currently under audit are as follows:

 

  Tax Jurisdiction        Tax Years Ended    

 

  Canada

   2003 to 2009
Earnings Per Share
Earnings Per Share

Note 13. Earnings Per Share

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

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

 

          Three Months Ended March 31,       
     2016      2015  
  

 

 

 

Basic:

     

  Weighted average common shares outstanding

     41,704           42,181     

Diluted:

     

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

     319           259     
  

 

 

    

 

 

 

Total weighted average diluted shares outstanding

     42,023           42,440     
  

 

 

    

 

 

 

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

     20           21     
  

 

 

    

 

 

 

On August 18, 2011, the Company’s Board of Directors (the “Board”) authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). On March 16, 2016, the Board authorized an increase of 5.0 million shares to the 2011 Share Repurchase Program. A total of 4.9 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.

The shares repurchased under the Company’s share repurchase programs were as follows (in thousands, except per share amounts) (none in 2016):

 

     Total Number                        Total Cost of  
     of Shares             Range of Prices Paid Per Share         Shares  
     Repurchased          Low      High          Repurchased      

 

    

 

 

    

 

 

    

 

 

 

  Three Months Ended:

           

  March 31, 2015

     221           $ 22.81           $ 23.46           $ 5,136     

 

Commitments and Loss Contingency
Commitments and Loss Contingency

Note 14. Commitments and Loss Contingency

Commitments

During the three months ended March 31, 2016, the Company entered into several leases in the ordinary course of business. The following is a schedule of future minimum rental payments required under operating leases that have noncancelable lease terms as of March 31, 2016 (in thousands):

 

     Amount  

 

 

  2016 (remaining nine months)

     $ 1,973     

  2017

     4,125     

  2018

     3,978     

  2019

     3,994     

  2020

     3,524     

  2021

     1,642     

  2022 and thereafter

     54     
  

 

 

 

  Total minimum payments required

     $             19,290     
  

 

 

 

During the three months ended March 31, 2016, the Company entered into agreements with third-party vendors in the ordinary course of business whereby the Company committed to purchase goods and services used in its normal operations. These agreements generally are not cancelable, range from one to five year periods and may contain fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments. The following is a schedule of the future minimum purchases remaining under the agreements as of March 31, 2016 (in thousands):

 

     Amount    

 

 

  2016 (remaining nine months)

     $ 6,542     

  2017

     865     

  2018

     402     

  2019

     -     

  2020

     -     

  2021

     -     

  2022 and thereafter

     -     
  

 

 

 

  Total minimum payments required

     $             7,809     
  

 

 

 

The July 2015 Qelp acquisition included contingent consideration of $6.0 million, based on achieving targets tied to revenues and EBITDA for the years ended December 31, 2016, 2017 and 2018. The estimated future value of the contingent consideration is $9.1 million and is expected to be paid over a three year period.

Except as outlined above, there have not been any material changes to the outstanding contractual obligations from the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2015.

Loss Contingency

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

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

Note 15. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

           Three Months Ended March 31,        
     2016     2015  

Service cost

    $ 118         $ 115     

Interest cost

     44          36     

Recognized actuarial (gains)

     (12)         (11)    
  

 

 

   

 

 

 

Net periodic benefit cost

     $ 150          $ 140     
  

 

 

   

 

 

 

Employee Retirement Savings Plans

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

 

           Three Months Ended March 31,        
     2016     2015  

401(k) plan contributions

    $ 285         $ 283     
  

 

 

   

 

 

 

Split-Dollar Life Insurance Arrangement

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

 

         March 31, 2016            December 31, 2015    

Postretirement benefit obligation

     $ 35           $ 37     

Unrealized gains (losses) in AOCI (1)

     $ 254           $ 267     

 

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

Stock-Based Compensation
Stock-Based Compensation

Note 16. Stock-Based Compensation

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

 

     Three Months Ended March 31,  
     2016      2015  

Stock-based compensation (expense) (1)

     $                 (2,182)          $                 (1,996)    

Income tax benefit (2)

     829           729     

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

     1,911           169     

 

  (1)  Included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.
  (2)  Included in “Income taxes” in the accompanying Condensed Consolidated Statements of Operations.
  (3)  Included in “Additional paid-in capital” in the accompanying Condensed Consolidated Statements of Changes in Shareholders’ Equity.

There were no capitalized stock-based compensation costs as of March 31, 2016 and December 31, 2015.

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

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

The following table summarizes SARs activity as of March 31, 2016 and for the three months then ended:

 

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

 

 

Outstanding at January 1, 2016

     481          $ -             

Granted

     -            $ -             

Exercised

     (34)         $ -             

Forfeited or expired

     -            $ -             
  

 

 

          

Outstanding at March 31, 2016

     447          $ -             7.9          $ 3,646     
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest at March 31, 2016

     447          $ -             7.9          $ 3,646     
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2016

                         236          $                     -                                 7.2          $                 2,212     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended March 31,  
     2016      2015  

Number of SARs granted

     -               -         

Weighted average grant-date fair value per SAR

     $ -               $ -         

Intrinsic value of SARs exercised

     $ 413           $ 402     

Fair value of SARs vested

     $                     1,520           $                     1,302     

The following table summarizes nonvested SARs activity as of March 31, 2016 and for the three months then ended:

 

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

 

 

Nonvested at January 1, 2016

     424         $ 7.50     

Granted

     -           $ -     

Vested

     (213)        $ 7.14     

Forfeited or expired

     -           $ -     
  

 

 

    

Nonvested at March 31, 2016

                            211         $                   7.86     
  

 

 

    

As of March 31, 2016, there was $1.6 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested SARs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 1.3 years.

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

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

The following table summarizes nonvested restricted shares/RSUs activity as of March 31, 2016 and for the three months then ended:

 

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

 

 

Nonvested at January 1, 2016

     1,246        $ 20.03     

Granted

     -          $ -     

Vested

     (421)       $ 16.10     

Forfeited or expired

     (65)       $ 15.25     
  

 

 

    

Nonvested at March 31, 2016

                         760        $                 22.62     
  

 

 

    

 

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

 

     Three Months Ended March 31,  
     2016      2015  

Number of restricted shares/RSUs granted

     -             -       

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

    $ -            $ -       

Fair value of restricted shares/RSUs vested

    $                     6,785          $                     2,019     

As of March 31, 2016, based on the probability of achieving the performance goals, there was $12.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted shares/RSUs granted under the 2011 Plan. This cost is expected to be recognized over a weighted average period of 1.6 years.

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

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

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

The 2004 Fee Plan expired in May 2014, prior to the 2014 Annual Shareholder Meeting. In March 2014, upon the recommendation of the Compensation Committee, the Board determined that, following the expiration of the 2004 Fee Plan, the compensation of non-employee Directors should continue on the same terms as provided in the Fifth Amended and Restated Non-Employee Director Fee Plan, and that the stock portion of such compensation would be issued under the 2011 Plan.

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

The Board may pay additional cash compensation to any non-employee director for services on behalf of the Board over and above those typically expected of directors, including but not limited to service on a special committee of the Board.

The following table summarizes nonvested common stock share award activity as of March 31, 2016 and for the three months then ended:

 

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

 

 

Nonvested at January 1, 2016

     11         $ 23.74     

Granted

     2         $ 28.97     

Vested

     (8)        $ 24.53     

Forfeited or expired

     (1)        $ 24.70     
  

 

 

    

Nonvested at March 31, 2016

                         4         $                 24.70     
  

 

 

    

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

 

     Three Months Ended March 31,  
     2016      2015  

Number of share awards granted

     2           -       

Weighted average grant-date fair value per share award

    $                     28.97          $ -       

Fair value of share awards vested

    $ 190          $                     160     

As of March 31, 2016, there was $0.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock share awards granted under the Fee Plan. This cost is expected to be recognized over a weighted average period of 1.1 years.

Deferred Compensation Plan — The Company’s non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is not shareholder-approved, was adopted by the Board effective December 17, 1998, It was last amended and restated on August 20, 2014, effective as of January 1, 2014. It provides certain eligible employees the ability to defer any portion of their compensation until the participant’s retirement, termination, disability or death, or a change in control of the Company. Using the Company’s common stock, the Company matches 50% of the amounts deferred by certain senior management participants on a quarterly basis up to a total of $12,000 per year for the president, chief executive officer and executive vice presidents and $7,500 per year for senior vice presidents, global vice presidents and vice presidents (participants below the level of vice president are not eligible to receive matching contributions from the Company). Matching contributions and the associated earnings vest over a seven year service period. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Company’s common stock (see Note 7, Investments Held in Rabbi Trust). As of March 31, 2016 and December 31, 2015, liabilities of $8.1 million and $7.9 million, respectively, of the Deferred Compensation Plan were recorded in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.

Additionally, the Company’s common stock match associated with the Deferred Compensation Plan, with a carrying value of approximately $1.7 million and $1.6 million at March 31, 2016 and December 31, 2015, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.

 

The following table summarizes nonvested common stock activity as of March 31, 2016 and for the three months then ended:

 

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

 

 

Nonvested at January 1, 2016

     3         $ 19.53     

Granted

     4         $ 30.18     

Vested

     (5)        $ 27.96     

Forfeited or expired

     -           $ -     
  

 

 

    

Nonvested at March 31, 2016

                         2         $               22.12     
  

 

 

    

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

 

     Three Months Ended March 31,  
     2016      2015  

Number of shares of common stock granted

     4           5     

Weighted average grant-date fair value per common stock

    $                     30.18          $                     24.85     

Fair value of common stock vested

    $ 122          $ 129     

Cash used to settle the obligation

    $ 359          $ 65     

As of March 31, 2016, there was less than $0.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 2.7 years.

Segments and Geographic Information
Segments and Geographic Information

Note 17. Segments and Geographic Information

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

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

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

 

     Americas      EMEA      Other (1)      Consolidated  

Three Months Ended March 31, 2016:

           

Revenues

    $ 262,076          $ 58,625          $ 45          $ 320,746     

Percentage of revenues

     81.7%         18.3%         0.0%         100.0%   

Depreciation, net

    $ 9,176          $ 1,164          $ 444          $ 10,784     

Amortization of intangibles

    $ 3,368          $ 259          $ -          $ 3,627     

Income (loss) from operations

    $ 32,987          $ 3,410          $ (16,127)         $ 20,270     

Other (expense), net

              (102)    

Income taxes

              (6,214)    
           

 

 

 

Net income

             $ 13,954     
           

 

 

 

Total assets as of March 31, 2016

    $ 1,080,628          $ 1,490,462          $ (1,583,810)         $ 987,280     
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended March 31, 2015:

           

Revenues

    $ 264,173          $ 59,495          $ 17          $ 323,685     

Percentage of revenues

     81.6%         18.4%         0.0%         100.0%   

Depreciation, net

    $ 9,580          $ 1,143          $ 336          $ 11,059     

Amortization of intangibles

    $ 3,431          $ -          $ -          $ 3,431     

Income (loss) from operations

    $ 32,541          $ 3,788          $ (13,788)         $ 22,541     

Other (expense), net

              (1,102)    

Income taxes

              (5,800)    
           

 

 

 

Net income

             $ 15,639     
           

 

 

 

Total assets as of March 31, 2015

    $       1,069,686          $       1,370,912          $       (1,521,514)         $       919,084     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

Other items (including corporate and other costs, impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the three months ended March 31, 2016 and 2015. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the performance of its geographic segments based on revenues and income (loss) from operations, and does not include segment assets or other income and expense items for management reporting purposes.

Other Income (Expense)
Other Income (Expense)

Note 18. Other Income (Expense)

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

 

     Three Months Ended March 31,  
     2016      2015  

Foreign currency transaction gains (losses)

    $ 1,346          $ (935)    

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

     (739)          (164)    

Other miscellaneous income (expense)

     (54)          270     
  

 

 

    

 

 

 
    $                     553          $                     (829)    
  

 

 

    

 

 

 
Related Party Transactions
Related Party Transactions

Note 19. Related Party Transactions

In January 2008, the Company entered into a lease for a customer contact management center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the 20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. There are significant penalties for early cancellation which decrease over time. The Company paid $0.1 million to the landlord during both the three months ended March 31, 2016 and 2015 under the terms of the lease.

Subsequent Event
Subsequent Event

Note 20. Subsequent Event

On April 1, 2016, the Company, one of its wholly-owned subsidiaries (“Merger Sub”), Clear Link Holdings, LLC, a Delaware limited liability company (“Clearlink”), and Pamlico Capital Management, L.P., as the representative of the equity holders of Clearlink, completed the acquisition outlined in the definitive Agreement and Plan of Merger (the “Merger Agreement”) dated March 6, 2016.

Pursuant to the terms of the Merger Agreement and subject to the conditions set forth therein, Clearlink merged into Merger Sub, with Merger Sub surviving as an indirect wholly-owned subsidiary of the Company (the “Merger”).

In the Merger, each outstanding membership unit of Clearlink was converted into the right to receive an amount in cash as set forth in the Merger Agreement. The aggregate cash consideration paid in the Merger was approximately $209.5 million, which included $3.1 million of Clearlink’s cash and cash equivalents at the closing of the Merger, and subject to certain post-closing adjustments relating to Clearlink’s working capital at the closing of the Merger. Approximately $2.6 million of the purchase price was placed in an escrow account as security for the indemnification obligations of Clearlink’s members under the Merger Agreement. The Company has obtained an insurance policy which will provide $20.7 million of coverage to the Company for breaches of most of the representations and warranties of Clearlink in the Merger Agreement, subject to a deductible.

On April 1, 2016, the Company borrowed $216.0 million under its 2015 Credit Agreement in connection with the acquisition of Clearlink, of which $4.0 million represented a short-term loan to Clearlink for working capital purposes. During the three months ended March 31, 2016, the Company incurred $1.4 million of merger and integration costs, which were included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

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

The Company will account for the Clearlink acquisition under the purchase method of accounting for business combinations. Accordingly, the purchase price will be allocated to the underlying net assets in proportion to estimates of their respective fair values. Any excess of the purchase price over the estimated fair value of the net assets acquired will be recorded as goodwill.

The Company has excluded the purchase price allocation and pro forma disclosures for the Clearlink acquisition as the initial accounting is currently incomplete. The Company is currently in the process of performing its valuation related to the acquired assets and liabilities. The Company will reflect the preliminary valuation of the net assets acquired in its second quarter 2016 Condensed Consolidated Financial Statements. In addition, the results of Clearlink’s operations will be included in the Company’s Consolidated Financial Statements as of the closing date of the Clearlink acquisition, April 1, 2016.

Overview and Basis of Presentation (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, chat and digital self-service. 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, which includes order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

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

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016.

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

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. On April 1, 2016, the Company acquired 100% of the outstanding membership units of Clear Link Holdings, LLC (“Clearlink”). In conjunction with the acquisition of Clearlink, the Company borrowed $216.0 million under its existing credit agreement. See Note 20, Subsequent Event, for further information. There were no other material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

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

New Accounting Standards Not Yet Adopted

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

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

In February 2016, the FASB issued ASC 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases”. These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASC 2016-05, “Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”). These amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Entities have the option to apply the amendments on either a prospective basis or a modified retrospective basis. The Company is evaluating the methods of adoption but does not expect the adoption of ASU 2016-05 to materially impact its financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASC 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”). These amendments clarify the implementation guidance on principal versus agent considerations and require entities to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. These amendments affect the guidance in ASU 2014-09, which is not yet effective. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09, as updated by ASU 2015-14.

 

In March 2016, the FASB issued ASC 2016-09, “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). These amendments are intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Entities have the option to apply the amendments on either a prospective basis or a modified retrospective basis. The Company is currently evaluating the impact the guidance will have on its financial condition, results of operations and cash flows.

In April 2016, the FASB issued ASC 2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing” (“ASU 2016-10”). These amendments clarify the identification of performance obligations and the licensing implementation guidance. These amendments affect the guidance in ASU 2014-09, which is not yet effective. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09, as updated by ASU 2015-14.

New Accounting Standards Recently Adopted

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 (“ASC”) 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; early adoption is permitted. Entities may apply the amendments either (1) prospective to all awards granted or modified after the effective date or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

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. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments either prospectively or retrospectively to all prior periods presented in the financial statements. The adoption of ASU 2015-01 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis)” (“ASU 2015-02”). These amendments are intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. These amendments affect the consolidation evaluation for reporting organizations. In addition, the amendments simplify and improve current U.S. GAAP by reducing the number of consolidation models. The amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments using either a modified retrospective approach or retrospectively. The adoption of ASU 2015-02 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of  Debt Issuance Costs” (“ASU 2015-03”). These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. These amendments are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the amendments retrospectively. The adoption of ASU 2015-03 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

 

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). These amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. These amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015; early adoption is permitted. Entities can adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The adoption of ASU 2015-05 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In September 2015, the FASB issued ASC 2015-16, “Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). These amendments eliminate the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. These amendments are effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2015-16 on January 1, 2016 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In November 2015, the FASB issued ASC 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). These amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The existing requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by these amendments. These amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted as of the beginning of the interim or annual reporting period. The adoption of ASU 2015-17 on January 1, 2016 resulted in the reclassification of $12.0 million of current deferred tax assets included in “Other current assets” and $1.1 million of current deferred tax liabilities included in “Current deferred income tax liabilities” to noncurrent deferred income tax assets and liabilities. All future deferred tax assets and liabilities will be classified as noncurrent. No prior periods were adjusted.

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

 

 

Level 1  Quoted prices for identical instruments in active markets.

 

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

 

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

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

 

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

Money Market and Open-End Mutual Funds — The Company uses quoted market prices in active markets to determine the fair value. These items are classified in Level 1 of the fair value hierarchy.

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

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

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

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.

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

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

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

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

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

Acquisition of Qelp (Tables) (Qelp [Member])

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

 

     Total  

Cash

    $ 9,885     

Contingent consideration

     6,000     

Working capital adjustment

     (65)    
  

 

 

 
    $                     15,820     
  

 

 

 

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

 

     July 2, 2015  

Cash and cash equivalents

    $ 450     

Receivables (1)

     1,471     

Prepaid expenses

     24     
  

 

 

 

Total current assets

     1,945     

Property and equipment

     2,168     

Goodwill

     10,054     

Intangibles

     6,000     

Deferred charges and other assets

     55     

Short-term debt

     (323)    

Accrued employee compensation and benefits

     (207)    

Income taxes payable

     (94)    

Deferred revenue

     (967)    

Other accrued expenses and current liabilities

     (1,030)    
  

 

 

 

Total current liabilities

     (2,621)    

Other long-term liabilities (2)

     (1,781)    
  

 

 

 
    $                         15,820     
  

 

 

 

 

(1) The fair value equals the gross contractual value of the receivables.

(2) Primarily includes long-term deferred tax liabilities.

  

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

 

     Amount Assigned      Weighted Average
  Amortization Period  
(years)
 

Customer relationships

    $ 5,400           7     

Trade name and trademarks

     100           3     

Content library

     500           2     
  

 

 

    
    $                             6,000           7     
  

 

 

    
Costs Associated with Exit or Disposal Activities (Tables)

The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of March 31, 2016 (in thousands):

 

     Americas
Fourth

  Quarter 2011  
Exit Plan
     Americas
Third

  Quarter 2010  
Exit Plan
     Total  

Lease obligations and facility exit costs

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

Non-cash impairment charges

     480           3,847           4,327     
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three months ended March 31, 2016 and 2015 (in thousands):

 

     Three Months Ended March 31,  
     2016      2015  

Beginning accrual

     $ 733           $ 1,558     

Lease obligations and facility exit costs

     -           -     

Cash payments (1)

     (206)          (212)    
  

 

 

    

 

 

 

Ending accrual

     $                     527           $                 1,346     
  

 

 

    

 

 

 

 

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

     

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 March 31, 2016 and December 31, 2015 (in thousands):

 

     Americas
Fourth
Quarter 2011
Exit Plan
     Americas
Third
 Quarter 2010 

Exit Plan
     Total  

March 31, 2016

        

Short-term accrued restructuring liability (1)

     $ 121           $ 406           $               527     

Long-term accrued restructuring liability (2)

     -           -           -     
  

 

 

    

 

 

    

 

 

 

Ending accrual at March 31, 2016

     $               121           $ 406           $ 527     
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Short-term accrued restructuring liability (1)

     $ 144           $ 487           $ 631     

Long-term accrued restructuring liability (2)

     22           80           102     
  

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2015

     $ 166           $               567           $ 733     
  

 

 

    

 

 

    

 

 

 

 

(1)

 

 

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

(2)   Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Fair Value (Tables)

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

 

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

Assets:

            

Foreign currency forward and option contracts

  (1)    $ 2,817          $ -              $ 2,817          $ -         

Embedded derivatives

  (1)     139           -               -               139     

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

  (2)     6,325           6,325           -               -         

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

  (2)     1,803           1,803           -               -         

Guaranteed investment certificates

  (3)     86           -               86           -         
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 11,170          $ 8,128          $ 2,903          $ 139     
   

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

            

Long-term debt

  (4)    $ 70,000          $ -              $ 70,000          $ -         

Foreign currency forward and option contracts

  (1)     3,692           -               3,692           -         

Embedded derivatives

  (1)     81           -               -               81     

Contingent consideration included in “Other long-term liabilities”

  (5)     6,806           -               -               6,806     
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 80,579          $ -              $ 73,692          $ 6,887     
   

 

 

    

 

 

    

 

 

    

 

 

 
               Fair Value Measurements at December 31, 2015 Using:  
        Balance at      Quoted Prices
in Active
Markets For
 Identical Assets 
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
          December 31, 2015        Level (1)      Level (2)      Level (3)  

Assets:

            

Foreign currency forward and option contracts

  (1)    $ 10,962          $ -              $ 10,962          $ -         

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

  (2)     6,229           6,229           -               -         

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

  (2)     1,622           1,622           -               -         

Guaranteed investment certificates

  (3)     86           -               86           -         
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 18,899          $ 7,851          $ 11,048          $ -         
   

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

            

Long-term debt

  (4)    $ 70,000          $ -              $ 70,000          $ -         

Foreign currency forward and option contracts

  (1)     835           -               835           -         

Contingent consideration included in “Other long-term liabilities”

  (5)     6,280           -               -               6,280     
   

 

 

    

 

 

    

 

 

    

 

 

 
     $ 77,115          $ -              $ 70,835          $ 6,280     
   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  See Note 6, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.
(2)  Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 7, Investments Held in Rabbi Trust.
(3)  Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)  The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 10, Borrowings.
(5)  In the accompanying Condensed Consolidated Balance Sheets.

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

 

             Fair Value          

Balance at December 31, 2015

    $ -         

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

     56     

Effect of foreign currency

     2     
  

 

 

 

Balance at March 31, 2016

    $ 58     
  

 

 

 

Unrealized gain (loss) for the three months ended March 31, 2016

    $ 55     
  

 

 

 

 

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

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

 

           Fair Value        

Balance at January 1, 2015

    $ -         

Acquisition (1)

     6,000     

Payments

     -         

Imputed interest/adjustments

     408     

Effect of foreign currency

     (128)    
  

 

 

 

Balance at December 31, 2015

     6,280     

Acquisition

     -         

Payments

     -         

Imputed interest/adjustments

     213     

Effect of foreign currency

     313     
  

 

 

 

Balance at March 31, 2016

    $ 6,806     
  

 

 

 

 

(1)  Related to the Qelp acquisition on July 2, 2015. See Note 2, Acquisition of Qelp.

     


Goodwill and Intangible Assets (Tables)

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

 

      Gross Intangibles       Accumulated
        Amortization        
         Net Intangibles            Weighted Average  
Amortization

Period (years)
 

Customer relationships

    $ 103,999          $ (62,328)         $ 41,671           8      

Trade names and trademarks

     11,703           (5,810)          5,893           8      

Content library

     514           (193)          321           2      

Non-compete agreements

     1,196           (1,196)          -               2      

Proprietary software

     850           (850)          -               2      

Favorable lease agreement

     449           (449)          -               2      
  

 

 

    

 

 

    

 

 

    
    $ 118,711          $ (70,826)         $ 47,885           8      
  

 

 

    

 

 

    

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2015 (in thousands):

 

      Gross Intangibles       Accumulated
        Amortization        
         Net Intangibles            Weighted Average  
Amortization

Period (years)
 

Customer relationships

    $ 102,594          $ (58,294)         $ 44,300           8      

Trade names and trademarks

     11,698           (5,470)          6,228           8      

Content library

     491           (123)          368           2      

Non-compete agreements

     1,190           (1,190)          -               2      

Proprietary software

     850           (850)          -               2      

Favorable lease agreement

     449           (449)          -               2      
  

 

 

    

 

 

    

 

 

    
    $ 117,272          $ (66,376)         $ 50,896           8      
  

 

 

    

 

 

    

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to March 31, 2016, is as follows (in thousands):

 

Years Ending December 31,    Amount  

2016 (remaining nine months)

   $               11,056     

2017

     14,554     

2018

     8,282     

2019

     7,679     

2020

     5,169     

2021

     784     

2022 and thereafter

     361     

Changes in goodwill for the three months ended March 31, 2016 consist of the following (in thousands):

 

                     Effect of Foreign           
         January 1, 2016                Acquisition            Currency            March 31, 2016        

Americas

    $ 186,049          $ -              $ 2,797          $ 188,846     

EMEA

     9,684           -               508           10,192     
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 195,733          $ -              $ 3,305          $ 199,038     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Changes in goodwill for the year ended December 31, 2015 consist of the following (in thousands):

 

                     Effect of Foreign           
           January 1, 2015                Acquisition (1)          Currency          December 31, 2015      

Americas

    $ 193,831          $ -              $ (7,782)         $ 186,049     

EMEA

     -               10,054           (370)          9,684     
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 193,831          $ 10,054          $ (8,152)         $ 195,733     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  See Note 2, Acquisition of Qelp, for further information.

     

Financial Derivatives (Tables)

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

 

          March 31, 2016             December 31, 2015    

Deferred gains (losses) in AOCI

    $ 2,008          $ (558)    

Tax on deferred gains (losses) in AOCI

     (105)          31     
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ 1,903          $ (527)    
  

 

 

    

 

 

 

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

    $ 2,008        
  

 

 

    

 

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

 

       As of March 31, 2016      As of December 31, 2015

Contract Type

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

Cash flow hedges:

                   

Options:

                   

Philippine Pesos

       $ 71,500           March 2017        $ 71,750           December 2016

Forwards:

                   

Costa Rican Colones

       23,000           December 2016        34,500           November 2016

Hungarian Forints

       2,050           December 2016                -

Romanian Leis

       5,060           December 2016                -

Net investment hedges:

                   

Forwards:

                   

Euros

       65,229           September 2017        63,470           March 2016

Non-designated hedges:

                   

Forwards

       61,262           June 2016        50,603           March 2016

Embedded derivatives

       12,210           April 2030                -

 

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

 

     Derivative Assets  
              March 31, 2016                     December 31, 2015        
     Fair Value      Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:      
Foreign currency forward and option contracts (1)     $ 2,748          $ 544     
Derivatives designated as net investment hedging instruments under ASC 815:      
Foreign currency forward contracts (1)      -               10,161     
  

 

 

    

 

 

 
     2,748           10,705     
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts (1)

     69           257     

Embedded derivatives (1)

     10           -         

Embedded derivatives (2)

     129           -         
  

 

 

    

 

 

 

Total derivative assets

    $ 2,956          $ 10,962     
  

 

 

    

 

 

 
     Derivative Liabilities  
     March 31, 2016      December 31, 2015  
     Fair Value      Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:      
Foreign currency forward and option contracts (3)     $ 14          $ 396     
Derivatives designated as net investment hedging instruments under ASC 815:      
Foreign currency forward contracts (4)      3,290           -         
  

 

 

    

 

 

 
     3,304           396     
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts (3)

     388           439     

Embedded derivatives (3)

     3           -         

Embedded derivatives (4)

     78           -         
  

 

 

    

 

 

 

Total derivative liabilities

    $ 3,773          $ 835     
  

 

 

    

 

 

 

 

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

 

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

 

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

 

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

 

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

 

       Gain (Loss) Recognized in  
  AOCI on Derivatives  
  (Effective Portion)  
     Gain (Loss) Reclassified
From Accumulated AOCI
  Into “Revenues” (Effective   
Portion)
     Gain (Loss) Recognized in
 “Revenues” on Derivatives 
(Ineffective Portion and
Amount  Excluded from
Effectiveness Testing)
 
     March 31,      March 31,      March 31,  
     2016      2015      2016      2015      2016      2015  
Derivatives designated as cash flow hedging instruments under ASC 815:                  
Foreign currency forward and option contracts     $ 2,503          $ 2,055          $ (54)         $ 589          $ -          $ 1     
Derivatives designated as net investment hedging instruments under ASC 815:                  
Foreign currency forward contracts      (3,112)          6,358           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    $ (609)         $   8,413          $    (54)         $     589          $      -          $      1     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       Gain (Loss) Recognized  
in “Other income
(expense)” on
Derivatives
 
     March 31,  
     2016      2015  
Derivatives not designated as hedging instruments under ASC 815: