SYKES ENTERPRISES INC, 10-Q filed on 8/4/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Jul. 23, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
SYKE 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
Entity Central Index Key
0001010612 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
43,521,251 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 222,350 
$ 215,137 
Receivables, net
272,430 
290,397 
Prepaid expenses
15,865 
14,896 
Other current assets
41,807 
29,656 
Total current assets
552,452 
550,086 
Property and equipment, net
104,219 
109,880 
Goodwill, net
190,866 
193,831 
Intangibles, net
53,095 
60,620 
Deferred charges and other assets
27,937 
30,083 
Total assets
928,569 
944,500 
Current liabilities:
 
 
Accounts payable
20,384 
25,523 
Accrued employee compensation and benefits
80,891 
82,072 
Current deferred income tax liabilities
311 
144 
Income taxes payable
2,425 
3,662 
Deferred revenue
29,940 
34,245 
Other accrued expenses and current liabilities
23,733 
22,216 
Total current liabilities
157,684 
167,862 
Deferred grants
5,144 
5,110 
Long-term debt
65,000 
75,000 
Long-term income tax liabilities
22,282 
20,630 
Other long-term liabilities
17,689 
17,680 
Total liabilities
267,799 
286,282 
Commitments and loss contingency (Note 14)
   
   
Shareholders' equity:
 
 
Preferred stock, $0.01 par value per share, 10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value per share, 200,000 shares authorized; 43,521 and 43,291 shares issued, respectively
435 
433 
Additional paid-in capital
281,631 
279,288 
Retained earnings
429,065 
400,514 
Accumulated other comprehensive income (loss)
(36,775)
(20,561)
Treasury stock at cost: 639 and 132 shares, respectively
(13,586)
(1,456)
Total shareholders' equity
660,770 
658,218 
Total liabilities and shareholders' equity
$ 928,569 
$ 944,500 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
43,521,000 
43,291,000 
Treasury stock, shares
639,000 
132,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Income Statement [Abstract]
 
 
 
 
Revenues
$ 307,453 
$ 320,498 
$ 631,138 
$ 644,927 
Operating expenses:
 
 
 
 
Direct salaries and related costs
202,143 
221,085 
416,070 
442,710 
General and administrative
72,651 
74,005 
145,378 
147,382 
Depreciation, net
11,007 
11,322 
22,066 
22,620 
Amortization of intangibles
3,435 
3,659 
6,866 
7,310 
Total operating expenses
289,236 
310,071 
590,380 
620,022 
Income from operations
18,217 
10,427 
40,758 
24,905 
Other income (expense):
 
 
 
 
Interest income
151 
237 
317 
468 
Interest (expense)
(610)
(552)
(1,049)
(1,051)
Other income (expense)
(167)
(399)
(996)
264 
Total other income (expense)
(626)
(714)
(1,728)
(319)
Income before income taxes
17,591 
9,713 
39,030 
24,586 
Income taxes
4,679 
1,376 
10,479 
5,936 
Net income
$ 12,912 
$ 8,337 
$ 28,551 
$ 18,650 
Net income per common share:
 
 
 
 
Basic
$ 0.31 
$ 0.20 
$ 0.68 
$ 0.44 
Diluted
$ 0.31 
$ 0.19 
$ 0.67 
$ 0.44 
Weighted average common shares outstanding:
 
 
 
 
Basic
42,008 
42,711 
42,095 
42,726 
Diluted
42,216 
42,810 
42,328 
42,845 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 12,912 
$ 8,337 
$ 28,551 
$ 18,650 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Foreign currency translation gain (loss), net of taxes
7,058 
3,480 
(20,066)
(2,079)
Unrealized gain (loss) on net investment hedges, net of taxes
(1,135)
70 
2,768 
105 
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(20)
42 
(28)
21 
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
(347)
4,029 
1,068 
1,287 
Unrealized gain (loss) on postretirement obligation, net of taxes
59 
12 
44 
18 
Other comprehensive income (loss), net of taxes
5,615 
7,633 
(16,214)
(648)
Comprehensive income (loss)
$ 18,527 
$ 15,970 
$ 12,337 
$ 18,002 
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, 2014
$ 658,218 
$ 433 
$ 279,288 
$ 400,514 
$ (20,561)
$ (1,456)
Beginning Balance, shares at Dec. 31, 2014
 
43,291 
 
 
 
 
Issuance of common stock
Issuance of common stock, shares
 
30 
 
 
 
 
Stock-based compensation expense
3,284 
 
3,284 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
169 
 
169 
 
 
 
Net vesting (forfeitures) of common stock and restricted stock under equity award plans
(1,269)
(1,110)
 
 
(161)
Net vesting (forfeitures) of common stock and restricted stock under equity award plans, shares
 
200 
 
 
 
 
Repurchase of common stock
(11,969)
 
 
 
 
(11,969)
Comprehensive income (loss)
12,337 
 
 
28,551 
(16,214)
 
Ending Balance at Jun. 30, 2015
$ 660,770 
$ 435 
$ 281,631 
$ 429,065 
$ (36,775)
$ (13,586)
Ending Balance, shares at Jun. 30, 2015
 
43,521 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
 
 
Net income
$ 28,551 
$ 18,650 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
22,458 
23,090 
Amortization of intangibles
6,866 
7,310 
Amortization of deferred grants
(441)
(829)
Unrealized foreign currency transaction (gains) losses, net
(1,093)
(449)
Stock-based compensation expense
3,284 
1,691 
Excess tax (benefit) from stock-based compensation
(169)
 
Deferred income tax provision (benefit)
3,127 
2,619 
Net (gain) loss on disposal of property and equipment
105 
59 
Bad debt expense (reversals)
(207)
(389)
Unrealized (gains) losses on financial instruments, net
88 
2,503 
Amortization of deferred loan fees
269 
130 
Other
15 
(360)
Changes in assets and liabilities:
 
 
Receivables
13,029 
(13,322)
Prepaid expenses
(1,212)
(2,754)
Other current assets
(11,895)
(5,542)
Deferred charges and other assets
1,753 
7,852 
Accounts payable
(3,487)
2,481 
Income taxes receivable / payable
(3,992)
(3,536)
Accrued employee compensation and benefits
363 
2,789 
Other accrued expenses and current liabilities
1,777 
(176)
Deferred revenue
(2,341)
780 
Other long-term liabilities
256 
(3,255)
Net cash provided by operating activities
57,104 
39,342 
Cash flows from investing activities:
 
 
Capital expenditures
(19,476)
(24,236)
Proceeds from sale of property and equipment
53 
81 
Investment in restricted cash
(5)
(3)
Release of restricted cash
 
168 
Proceeds from insurance settlement
500 
 
Net cash (used for) investing activities
(18,928)
(23,990)
Cash flows from financing activities:
 
 
Payments of long-term debt
(10,000)
(19,000)
Excess tax benefit from stock-based compensation
169 
 
Cash paid for repurchase of common stock
(11,969)
(2,605)
Proceeds from grants
472 
107 
Shares repurchased for minimum tax withholding on equity awards
(1,269)
(422)
Cash paid for loan fees related to long-term debt
(962)
 
Net cash (used for) financing activities
(23,559)
(21,920)
Effects of exchange rates on cash and cash equivalents
(7,404)
(919)
Net increase (decrease) in cash and cash equivalents
7,213 
(7,487)
Cash and cash equivalents - beginning
215,137 
211,985 
Cash and cash equivalents - ending
222,350 
204,498 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
735 
904 
Cash paid during period for income taxes
14,231 
9,341 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
4,324 
2,804 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
44 
18 
Shares repurchased for minimum tax withholding on common stock and restricted stock under equity awards included in other accrued expenses and current liabilities
$ 126 
 
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 and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2015. 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, 2014, as filed with the Securities and Exchange Commission (“SEC”) on February 19, 2015.

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 July 2, 2015, the Company acquired 100% of the outstanding capital stock of Qelp B.V. and Qelp Do Brasil Software E Conteudo Digital LTDA. 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.

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. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period; early adoption is not permitted. 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. On July 9, 2015, the FASB agreed to defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and the interim periods within that year. 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 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 Company does not expect the adoption of ASU 2014-12 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). This amendment eliminates from U.S. GAAP the concept of extraordinary items as part of the FASB’s initiative to reduce complexity in accounting standards. 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 Company does not expect the adoption of ASU 2015-01 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-02 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-03 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-05 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently Adopted

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

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

Note 2. Costs Associated with Exit or Disposal Activities

During 2011 and 2010, the Company announced several initiatives to streamline excess capacity through targeted seat reductions (the “Exit Plans”) in an on-going effort to manage and optimize capacity utilization. These Exit Plans included, but were not limited to, closing customer contact management centers in The Philippines, the United Kingdom, Ireland and South Africa and consolidating leased space in various locations in the U.S. and the Netherlands. These Exit Plans impacted approximately 800 employees. The Company has paid $14.9 million in cash through June 30, 2015 under these Exit Plans.

The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of June 30, 2015 (in thousands):

 

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

Lease obligations and facility exit costs

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

Severance and related costs

     —           5,857         185         —           6,042   

Legal-related costs

     —           110         —           —           110   

Non-cash impairment charges

     480         474         159         3,847         4,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Beginning accrual

   $ 1,346      $ 2,731      $ 1,558      $ 2,974   

Lease obligations and facility exit costs (1)

     —          (185     —          (185

Severance and related costs

     —          —          —          —     

Legal-related costs

     —          —          —          —     

Cash payments (2)

     (196     (428     (408     (673

Other non-cash changes (3)

     —          (7     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accrual

   $ 1,150      $ 2,111      $ 1,150      $ 2,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During 2014, the Company reversed accruals related to the final settlement of lease obligations and facility exit costs for one of the Ireland sites, included in the EMEA segment, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

(2) 

Related to lease obligations and facility exit costs.

(3) 

Effect of foreign currency translation.

 

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 June 30, 2015 and December 31, 2014 (in thousands):

 

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

June 30, 2015

        

Short-term accrued restructuring liability (1)

   $ 140       $ 487       $ 627   

Long-term accrued restructuring liability (2)

     115         408         523   
  

 

 

    

 

 

    

 

 

 

Ending accrual at June 30, 2015

   $ 255       $ 895       $ 1,150   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Short-term accrued restructuring liability (1)

   $ 109       $ 521       $ 630   

Long-term accrued restructuring liability (2)

     203         725         928   
  

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2014

   $ 312       $ 1,246       $ 1,558   
  

 

 

    

 

 

    

 

 

 

 

(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. The EMEA Fourth Quarter 2011 and EMEA Fourth Quarter 2010 Exit Plans were settled during 2014.

Fair Value
Fair Value

Note 3. 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.

 

   

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

Fair Value Measurements ASC 820 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.

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 6, 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.

 

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 June 30, 2015 Using:  
          Balance at
June 30, 2015
     Quoted Prices
in Active
Markets For
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
             Level (1)      Level (2)      Level (3)  

Assets:

              

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

   (1)    $ 10,704       $ —         $ 10,704       $ —     

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

   (2)      6,184         6,184         —           —     

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

   (2)      1,555         1,555         —           —     

Guaranteed investment certificates

   (3)      86         —           86         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 18,529       $ 7,739       $ 10,790       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt

   (4)    $ 65,000       $ —         $ 65,000       $ —     

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

   (1)      471         —           471         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 65,471       $ —         $ 65,471       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

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

Assets:

              

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

   (5)    $ 100,915       $ 100,915       $ —         $ —     

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

   (5)      10         10         —           —     

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

   (1)      1,489         —           1,489         —     

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

   (1)      4,060         —           4,060         —     

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

   (2)      5,589         5,589         —           —     

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

   (2)      1,363         1,363         —           —     

Guaranteed investment certificates

   (3)      79         —           79         —     
     

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt

   (4)    $ 75,000       $ —         $ 75,000       $ —     

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

   (1)      1,261         —           1,261         —     
     

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheets. See Note 5, Financial Derivatives.

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 6, 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.

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, like those associated with acquired businesses, including goodwill, other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at June 30, 2015 and December 31, 2014.

Intangible Assets
Intangible Assets

Note 4. Intangible Assets

The following table presents the Company’s purchased intangible assets as of June 30, 2015 (in thousands):

 

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

Customer relationships

   $ 99,268       $ (52,982   $ 46,286         8   

Trade name

     11,600         (4,791     6,809         8   

Non-compete agreements

     1,201         (1,201     —           2   

Proprietary software

     850         (850     —           2   

Favorable lease agreement

     449         (449     —           2   
  

 

 

    

 

 

   

 

 

    
$ 113,368    $ (60,273 $ 53,095      8   
  

 

 

    

 

 

   

 

 

    

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

 

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

Customer relationships

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

Trade name

     11,600         (4,128     7,472         8   

Non-compete agreements

     1,209         (1,209     —           2   

Proprietary software

     850         (850     —           2   

Favorable lease agreement

     449         (449     —           2   
  

 

 

    

 

 

   

 

 

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

 

 

    

 

 

   

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to June 30, 2015, is as follows (in thousands):

 

Years Ending December 31,

   Amount  

2015 (remaining six months)

   $ 6,836   

2016

     13,702   

2017

     13,702   

2018

     7,509   

2019

     6,917   

2020

     4,429   

2021 and thereafter

     —     
Financial Derivatives
Financial Derivatives

Note 5. Financial Derivatives

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

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

 

     June 30, 2015      December 31, 2014  

Deferred gains (losses) in AOCI

   $ 946       $ (157

Tax on deferred gains (losses) in AOCI

     11         46   
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

   $ 957       $ (111
  

 

 

    

 

 

 

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

   $ 946      
  

 

 

    

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

Net Investment Hedge – During the six months ended June 30, 2015 and 2014, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, 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 – 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.

 

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

 

     As of June 30, 2015    As of December 31, 2014

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

   $ 81,000       June 2016    $ 73,000       December 2015

Forwards:

           

Philippine Pesos

     1,000       October 2015      9,000       March 2015

Costa Rican Colones

     45,900       March 2016      51,600       October 2015

Hungarian Forints

     1,377       December 2015      —        

Romanian Leis

     5,194       December 2015      10,414       December 2015

Net investment hedges: (2)

           

Forwards:

           

Euros

     63,470       March 2016      51,648       March 2016

Non-designated hedges: (3)

           

Forwards

     58,243       December 2015      64,541       March 2015

 

(1)

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

(2)

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

(3)

Foreign currency hedge contract not designated as a hedge as defined under ASC 815. Purpose is to reduce the effects on the Company’s operating results and cash flows from fluctuations caused by volatility in currency exchange rates, primarily related to intercompany receivables and payables, and cash held in non-functional currencies.

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 $10.7 million and $5.5 million as of June 30, 2015 and December 31, 2014, 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 $10.4 million and $4.4 million as of June 30, 2015 and December 31, 2014, respectively, and liability positions of $0.2 million and $0.1 million as of June 30, 2015 and December 31, 2014, respectively.

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

 

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

 

     Derivative Assets  
     June 30, 2015      December 31, 2014  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1)

   $ 1,872       $ 974   

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     8,570         —     

Foreign currency forward contracts (2)

     —           4,060   
  

 

 

    

 

 

 
     10,442         5,034   

Derivatives not designated as hedging instruments under

ASC 815:

     

Foreign currency forward contracts (1)

     262         515   
  

 

 

    

 

 

 

Total derivative assets

   $ 10,704       $ 5,549   
  

 

 

    

 

 

 
     Derivative Liabilities  
     June 30, 2015      December 31, 2014  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments

under ASC 815:

     

Foreign currency forward and option contracts (3)

   $ 123       $ 406   

Derivatives not designated as hedging instruments under

ASC 815:

     

Foreign currency forward contracts (3)

     348         855   
  

 

 

    

 

 

 

Total derivative liabilities

   $ 471       $ 1,261   
  

 

 

    

 

 

 

 

(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.

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended June 30, 2015 and 2014 (in thousands):

 

     Gain (Loss) Recognized
in AOCI on Derivatives
(Effective Portion)
     Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues”
(Effective Portion)
    Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded  from
Effectiveness Testing)
 
     June 30,      June 30,     June 30,  
     2015     2014      2015      2014     2015      2014  

Derivatives designated as cash flow hedging instruments under ASC 815:

               

Foreign currency forward and option contracts

   $ 357      $ 2,475       $ 739       $ (1,755   $ 1       $ (1

Derivatives designated as net investment hedging instruments under ASC 815:

               

Foreign currency forward contracts

     (1,848     108         —           —          —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ (1,491   $ 2,583       $ 739       $ (1,755   $ 1       $ (1
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
                  Statement of
Operations Location
    Gain (Loss) Recognized
on Derivatives
 
          June 30,  
          2015      2014  

Derivatives not designated as hedging instruments under ASC 815:

               

Foreign currency forward contracts

         

 

Other income

and (expense)

  

  

  $ 67       $ (1,331

Foreign currency forward contracts

          Revenues        4         —     
            

 

 

    

 

 

 
             $       71       $ (1,331
            

 

 

    

 

 

 

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the six months ended June 30, 2015 and 2014 (in thousands):

 

     Gain (Loss) Recognized
in AOCI on Derivatives
(Effective Portion)
    Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues”
(Effective Portion)
    Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
     June 30,     June 30,     June 30,  
     2015      2014     2015      2014     2015     2014  

Derivatives designated as cash flow hedging instruments under ASC 815:

              

Foreign currency forward and option contracts

   $ 2,412       $ (2,543   $ 1,328       $ (4,129   $ 2      $ (4

Derivatives designated as net investment hedging instruments under ASC 815:

              

Foreign currency forward contracts

     4,510         162        —           —          —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 6,922       $ (2,381   $ 1,328       $ (4,129   $      2      $ (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
                  Statement of
Operations Location
    Gain (Loss) Recognized
on Derivatives
 
          June 30,  
          2015     2014  

Derivatives not designated as hedging instruments under ASC 815:

              

Foreign currency forward contracts

         
 
Other income
and (expense)
  
  
  $ (97   $ (608

Foreign currency forward contracts

          Revenues        4        —     
             $ (93   $ (608
Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 6. Investments Held in Rabbi Trust

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

 

     June 30, 2015      December 31, 2014  
     Cost      Fair Value      Cost      Fair Value  

Mutual funds

   $ 5,853       $ 7,739       $ 5,160       $ 6,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in rabbi trust were 80% equity-based and 20% debt-based as of June 30, 2015. 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 June 30,      Six Months Ended June 30,  
     2015     2014      2015     2014  

Gross realized gains from sale of trading securities

   $ 17      $ —         $ 20      $ 3   

Gross realized (losses) from sale of trading securities

     —          —           (1     —     

Dividend and interest income

     13        9         18        18   

Net unrealized holding gains (losses)

     (50     204         73        279   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income (losses)

$ (20 $ 213    $ 110    $ 300   
  

 

 

   

 

 

    

 

 

   

 

 

 
Property and Equipment
Property and Equipment

Note 7. Property and Equipment

In February 2015, customer contact management centers (the “facilities”) located in Perry County, Kentucky, Buchanan County, Virginia and Wise, Virginia experienced damage to the buildings and contents as a result of winter storms. The Company filed an insurance claim with its property insurance company to recover losses of $1.6 million. In April 2015, the insurance company paid $0.5 million to the Company for costs to clean up and repair the facility. The Company received $1.1 million from the insurance company in July 2015 and finalized the claim during the third quarter of 2015. The Company is in the process of completing the repairs to the facilities.

Deferred Revenue
Deferred Revenue

Note 8. Deferred Revenue

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

 

     June 30, 2015      December 31, 2014  

Future service

   $ 23,525       $ 25,222   

Estimated potential penalties and holdbacks

     6,415         9,023   
  

 

 

    

 

 

 
$                 29,940    $ 34,245   
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 9. Deferred Grants

The components of deferred grants, net of accumulated amortization, consist of the following (in thousands):

 

     June 30, 2015      December 31, 2014  

Property grants

   $ 4,717       $ 5,110   

Lease grants

     427         —     

Employment grants

     190         207   

Total deferred grants

     5,334         5,317   

Less: Property grants - short-term (1)

     —           —     

Less: Lease grants - short-term (1)

     —           —     

Less: Employment grants - short-term (1)

     (190      (207
  

 

 

    

 

 

 

Total long-term deferred grants (2)

   $                   5,144       $ 5,110   
  

 

 

    

 

 

 

 

(1) 

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

(2)

Included in “Deferred grants” 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 replaced the Company’s previous $245 million revolving credit facility dated May 3, 2012 (the “2012 Credit Agreement”), as amended, which agreement was terminated simultaneous with entering into the 2015 Credit Agreement. The 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants.

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

 

Borrowings consist of the following (in thousands):

 

     June 30, 2015      December 31, 2014  

Revolving credit facility

   $ 65,000       $ 75,000   

Less: Current portion

     —           —     
  

 

 

    

 

 

 

Total long-term debt

$ 65,000    $ 75,000   
  

 

 

    

 

 

 

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

Borrowings under the 2015 Credit Agreement will bear interest at either LIBOR or the base rate plus, in each case, an applicable margin based on the Company’s leverage ratio. The applicable interest rate will be determined quarterly based on the Company’s leverage ratio at such time. The base rate is a rate per annum equal to the greatest of (i) the rate of interest established by KeyBank, from time to time, as its “prime rate”; (ii) the Federal Funds effective rate in effect from time to time, plus 1/2 of 1% per annum; and (iii) the then-applicable LIBOR rate for one month interest periods, plus 1.00%. Swingline loans will bear interest only at the base rate plus the base rate margin.

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 was deferred and will be amortized over the term of the loan. The Company then expensed $0.1 million of the deferred loan fees related to the 2012 Credit Agreement and the remaining $0.4 million will be amortized over the term of the 2015 Credit Agreement.

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Average daily utilization

   $ 70,198      $ 90,242      $ 72,249      $ 93,271   

Interest expense, including commitment fee (1)

   $ 320      $ 368      $ 638      $ 749   

Weighted average interest rate

     1.8     1.6     1.8     1.6

 

(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, 2014

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

Pre-tax amount

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

Tax (provision) benefit

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

Reclassification of (gain) loss to net income

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

Foreign currency translation

     120        —          (114     (6     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

Pre-tax amount

  (20,055   4,510      —        2,414      72      (13,059

Tax (provision) benefit

  —        (1,742   —        (23   —        (1,765

Reclassification of (gain) loss to net income

  —        —        (21   (1,341   (28   (1,390

Foreign currency translation

  (11   —        (7   18      —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

$ (42,142 $ 3,044    $ 980    $ 957    $ 386    $ (36,775
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Statements of Operations

Location

           2015                  2014                 2015                  2014          

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

            

Pre-tax amount

   $ 10       $ 13      $ 21       $ 25     

Direct salaries and related costs

Tax (provision) benefit

     —           —          —           —       

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  10      13      21      25   

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

Pre-tax amount

  740      (1,756   1,330      (4,133

Revenues

Tax (provision) benefit

  5      17      11      113   

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  745      (1,739   1,341      (4,020

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

Pre-tax amount

  14      12      28      23   

General and administrative

Tax (provision) benefit

  —        —        —        —     

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  14      12      28      23   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total reclassification of gain (loss) to net income

$ 769    $ (1,714 $ 1,390    $ (3,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1)

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

(2)

See Note 5, 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 26.6% and 14.2% for the three months ended June 30, 2015 and 2014, respectively. The increase in the effective tax rate is predominately due to a shift in earnings to higher tax rate jurisdictions as well as several factors that are not individually material. The difference between the Company’s effective tax rate of 26.6% 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.

The Company’s effective tax rate was 26.8% and 24.1% for the six months ended June 30, 2015 and 2014, respectively. The increase in the effective tax rate is due to several factors, including fluctuations 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 26.8% 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.

The Company has accrued $12.0 million and $13.3 million as of June 30, 2015 and December 31, 2014, respectively, excluding penalties and interest, for the liability for unrecognized tax benefits. As of December 31, 2014, $2.7 million of unrecognized tax benefits was recorded to “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet in accordance with ASU 2013-11 “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The $12.0 million and the remaining $10.6 million of the unrecognized tax benefits at June 30, 2015 and December 31, 2014, respectively, are recorded in “Long-term income tax liabilities” in the accompanying Condensed Consolidated Balance Sheets.

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 for temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

The Company 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 fluctuations in the foreign exchange rate, are $14.9 million and $15.9 million as of June 30, 2015 and December 31, 2014, 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 Year Ended

Canada

   2003 to 2009

The Philippines

   2010

 

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 a rabbi trust using the treasury stock method.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
           2015                  2014                  2015                  2014        

Basic:

           

Weighted average common shares outstanding

     42,008         42,711         42,095         42,726   

Diluted:

           

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

     208         99         233         119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted average diluted shares outstanding

  42,216      42,810      42,328      42,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  27      49      24      70   
  

 

 

    

 

 

    

 

 

    

 

 

 

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”). A total of 4.5 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):

 

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

Three Months Ended:

           

June 30, 2015

     279       $ 24.14       $ 24.79       $ 6,833   

June 30, 2014

     —         $ —         $ —         $ —     

Six Months Ended:

           

June 30, 2015

     500       $ 22.81       $ 24.79       $ 11,969   

June 30, 2014

     130       $ 19.92       $ 19.98       $ 2,605   
Commitments and Loss Contingency
Commitments and Loss Contingency

Note 14. Commitments and Loss Contingency

Commitments

During the six months ended June 30, 2015, the Company entered into several leases in the ordinary course of business. The following is a schedule of future minimum rental payments required under operating leases that have noncancelable lease terms as of June 30, 2015 (in thousands):

 

     Amount  

2015 (remaining six months)

   $ 2,153   

2016

     9,527   

2017

     9,320   

2018

     9,271   

2019

     9,530   

2020

     8,677   

2021 and thereafter

     18,932   
  

 

 

 

Total minimum payments required

$ 67,410   
  

 

 

 

During the six months ended June 30, 2015, 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, which are not cancelable, generally range from one to five year periods and contain fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments based on certain conditions. The following is a schedule of the future minimum purchases remaining under the agreements as of June 30, 2015 (in thousands):

 

     Amount  

2015 (remaining six months)

   $ 2,681   

2016

     787   

2017

     633   

2018

     —     

2019

     —     

2020

     —     

2021 and thereafter

     —     
  

 

 

 

Total minimum payments required

$ 4,101   
  

 

 

 

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, 2014.

Loss Contingency

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

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

Note 15. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Service cost

   $ 113      $ 101      $ 228      $ 201   

Interest cost

     35        31        71        61   

Recognized actuarial (gains)

     (10     (13     (21     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

$ 138    $ 119    $ 278    $ 237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee Retirement Savings Plans

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

401(k) plan contributions

   $ 188      $ 221      $ 471      $ 480   
  

 

 

   

 

 

   

 

 

   

 

 

 

Split-Dollar Life Insurance Arrangement

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

 

                                                             
     June 30, 2015     December 31, 2014  

Postretirement benefit obligation

   $ 25      $ 46   

Unrealized gains (losses) in AOCI (1)

   $ 386      $ 342   

 

(1) 

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

Stock-Based Compensation
Stock-Based Compensation

Note 16. Stock-Based Compensation

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
           2015                  2014                  2015                  2014        

Stock-based compensation (expense) (1)

   $ (1,288    $ (937    $ (3,284    $ (1,691

Income tax benefit (2)

     486         328         1,215         592   

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

     —           (84      169         (30

 

(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 June 30, 2015 and December 31, 2014.

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 the assumptions used to estimate the fair value of SARs granted:

 

     Six Months Ended June 30,  
           2015                 2014        

Expected volatility

     34.1     38.9

Weighted-average volatility

     34.1     38.9

Expected dividend rate

     0.0     0.0

Expected term (in years)

     5.0        5.0   

Risk-free rate

     1.6     1.7

 

The following table summarizes SARs activity as of June 30, 2015 and for the six months then ended:

 

                                                                                                   

Stock Appreciation Rights

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

Outstanding at January 1, 2015

     959      $ —           

Granted

     217      $ —           

Exercised

     (81   $ —           

Forfeited or expired

     —        $ —           
  

 

 

         

Outstanding at June 30, 2015

     1,095      $ —           7.1       $ 5,158   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at June 30, 2015

     1,095      $ —           7.1       $ 5,158   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2015

     670      $ —           5.8       $ 3,895   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Six Months Ended June 30,  
           2015                  2014        

Number of SARs granted

     217         246   

Weighted average grant-date fair value per SAR

   $ 8.17       $ 7.20   

Intrinsic value of SARs exercised

   $ 734       $ 333   

Fair value of SARs vested

   $ 1,302       $ 1,553   

The following table summarizes nonvested SARs activity as of June 30, 2015 and for the six months then ended:

 

                                                       

Nonvested Stock Appreciation Rights

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

Nonvested at January 1, 2015

     411      $     6.61   

Granted

     217      $     8.17   

Vested

     (203   $     6.41   

Forfeited or expired

     —        $      —     
  

 

 

   

Nonvested at June 30, 2015

     425      $     7.50   
  

 

 

   

As of June 30, 2015, there was $2.8 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 1.5 years.

Restricted Shares The Board, at the recommendation of the Compensation Committee, has approved in the past, and may approve in the future, awards of performance and employment-based restricted shares (“restricted shares”) for eligible participants. In some instances, where the issuance of restricted shares has adverse tax consequences to the recipient, the Board may instead issue restricted stock units (“RSUs”). The restricted shares are shares of the Company’s common stock (or in the case of RSUs, represent an equivalent number of shares of the Company’s common stock) which are issued to the participant subject to (a) restrictions on transfer for a period of time and (b) forfeiture under certain conditions. The performance goals, including revenue growth and income from operations targets, provide a range of vesting possibilities from 0% to 100% and will be measured at the end of the performance period. If the performance conditions are met for the performance period, the shares will vest and all restrictions on the transfer of the restricted shares will lapse (or in the case of RSUs, an equivalent number of shares of the Company’s common stock will be issued to the recipient). The Company recognizes compensation cost, net of 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 June 30, 2015 and for the six months then ended:

 

                                                       

Nonvested Restricted Shares and RSUs

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

Nonvested at January 1, 2015

     1,194      $ 16.80   

Granted

     441      $ 25.06   

Vested

     (125   $ 16.10   

Forfeited or expired

     (264   $ 15.71   
  

 

 

   

Nonvested at June 30, 2015

     1,246      $ 20.03   
  

 

 

   

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

 

     Six Months Ended June 30,  
     2015      2014  

Number of restricted shares/RSUs granted

     441         500   

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

   $ 25.06       $ 19.77   

Fair value of restricted shares/RSUs vested

   $ 2,019       $ 895   

As of June 30, 2015, based on the probability of achieving the performance goals, there was $18.8 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 2.0 years.

Non-Employee Director Fee Plan The Company’s 2004 Non-Employee Director Fee Plan (the “2004 Fee Plan”), as last 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. Prior to May 20, 2011, the annual cash awards for the Chairpersons of the Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee were $12,500 and the members of such committees were entitled to an annual cash award of $7,500. On May 20, 2011, the Board increased the additional annual cash award to the Chairperson of the Compensation Committee to $15,000. All other additional cash awards remained unchanged.

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 9, 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 June 30, 2015 and for the six months then ended:

 

                                                       

Nonvested Common Stock Share Awards

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

Nonvested at January 1, 2015

     12      $ 20.24   

Granted

     32      $ 24.70   

Vested

     (16   $ 22.36   

Forfeited or expired

     —        $ —     
  

 

 

   

Nonvested at June 30, 2015

     28      $ 24.19   
  

 

 

   

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

 

     Six Months Ended June 30,  
           2015                  2014        

Number of share awards granted

     32         36   

Weighted average grant-date fair value per share award

   $ 24.70       $ 20.15   

Fair value of share awards vested

   $ 370       $ 310   

As of June 30, 2015, there was $0.6 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 0.5 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 6, Investments Held in Rabbi Trust). As of June 30, 2015 and December 31, 2014, liabilities of $7.7 million and $7.0 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 $1.6 million and $1.5 million at June 30, 2015 and December 31, 2014, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.

The following table summarizes nonvested common stock activity as of June 30, 2015 and for the six months then ended:

 

Nonvested Common Stock

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

Nonvested at January 1, 2015

     5      $ 17.88   

Granted

     6      $ 24.69   

Vested

     (7   $ 23.56   

Forfeited or expired

     —        $ —     
  

 

 

   

Nonvested at June 30, 2015

     4      $ 18.81   
  

 

 

   

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

 

     Six Months Ended June 30,  
     2015      2014  

Number of shares of common stock granted

     6         8   

Weighted average grant-date fair value per common stock

   $ 24.69       $ 20.43   

Fair value of common stock vested

   $ 169       $ 146   

Cash used to settle the obligation

   $ 65       $ 21   

As of June 30, 2015, 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 2.1 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 June 30, 2015:

        

Revenues

   $ 249,682      $ 57,752      $ 19      $ 307,453   

Percentage of revenues

     81.2     18.8     0.0     100.0

Depreciation, net

   $ 9,605      $ 1,084      $ 318      $ 11,007   

Amortization of intangibles

   $ 3,435      $ —        $ —        $ 3,435   

Income (loss) from operations

   $ 28,669      $ 2,969      $ (13,421   $ 18,217   

Other (expense), net

         (626     (626

Income taxes

         (4,679     (4,679
        

 

 

 

Net income

$ 12,912   
        

 

 

 

Total assets as of June 30, 2015

$ 1,067,801    $ 1,394,836    $ (1,534,068 $ 928,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2014:

Revenues

$ 256,663    $ 63,835    $ —      $ 320,498   

Percentage of revenues

  80.1   19.9   0.0   100.0

Depreciation, net

$ 10,107    $ 1,215    $ —      $ 11,322   

Amortization of intangibles

$ 3,659    $ —      $ —      $ 3,659   

Income (loss) from operations

$ 21,135    $ 1,561    $ (12,269 $ 10,427   

Other (expense), net

  (714   (714

Income taxes

  (1,376   (1,376
        

 

 

 

Net income

$ 8,337   
        

 

 

 

Total assets as of June 30, 2014

$ 1,093,003    $ 1,444,643    $ (1,591,697 $ 945,949   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Americas     EMEA     Other (1)     Consolidated  

Six Months Ended June 30, 2015:

        

Revenues

   $    513,855      $    117,247      $ 36      $ 631,138   

Percentage of revenues

     81.4     18.6     0.0     100.0

Depreciation, net

   $ 19,185      $ 2,227      $ 654      $ 22,066   

Amortization of intangibles

   $ 6,866      $ —        $ —        $ 6,866   

Income (loss) from operations

   $ 61,210      $ 6,757      $      (27,209   $ 40,758   

Other (expense), net

         (1,728     (1,728

Income taxes

         (10,479     (10,479
        

 

 

 

Net income

$ 28,551   
        

 

 

 

Six Months Ended June 30, 2014:

Revenues

$ 517,909    $ 127,018    $ —      $ 644,927   

Percentage of revenues

  80.3   19.7   0.0   100.0

Depreciation, net

$ 20,248    $ 2,372    $ —      $ 22,620   

Amortization of intangibles

$ 7,310    $ —      $ —      $ 7,310   

Income (loss) from operations

$ 43,782    $ 4,445    $ (23,322 $ 24,905   

Other (expense), net

  (319   (319

Income taxes

  (5,936   (5,936
        

 

 

 

Net income

$ 18,650   
        

 

 

 

 

(1) 

Other items (including corporate and other costs, impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the three and six months ended June 30, 2015 and 2014. 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 June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Foreign currency transaction gains (losses)

   $ (90   $ 759      $ (1,025   $ 631   

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

     67        (1,331     (97     (608

Other miscellaneous income (expense)

     (144     173        126        241   
  

 

 

   

 

 

   

 

 

   

 

 

 
$ (167 $ (399 $ (996 $ 264   
  

 

 

   

 

 

   

 

 

   

 

 

 
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 June 30, 2015 and 2014 and $0.2 million during both the six months ended June 30, 2015 and 2014 under the terms of the lease.

Subsequent Event
Subsequent Event

Note 20. Subsequent Event

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 Qelp Do Brasil Software E Conteudo Digital LTDA (together, known as “Qelp”.) The strategic acquisition of Qelp is to further broaden and strengthen the Company’s service portfolio around digital customer support and extend its reach into adjacent, but complementary, markets.

The consideration consists of an initial purchase price and a contingent purchase price. The initial purchase price of $9.9 million, paid at the closing of the transaction on July 2, 2015, is subject to certain post-closing adjustments relating to Qelp’s working capital. Approximately $0.9 million of the initial purchase price has been placed in an escrow account as security for the indemnification obligations of the Sellers under the Purchase Agreement. The contingent purchase price, which in total will not exceed EUR 10.0 million (U.S. Dollar equivalent of $11.1 million as of July 2, 2015), is based on achieving targets tied to revenues and EBITDA for the years ended December 31, 2016, 2017 and 2018, as defined by the Purchase Agreement. The initial purchase price was funded through cash on hand.

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

The Purchase Agreement was approved by the Board of Directors of the Company, the Board of Directors of Qelp and the requisite shareholders of Qelp.

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 and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including order processing, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2015. 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, 2014, as filed with the Securities and Exchange Commission (“SEC”) on February 19, 2015.

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 July 2, 2015, the Company acquired 100% of the outstanding capital stock of Qelp B.V. and Qelp Do Brasil Software E Conteudo Digital LTDA. 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.

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. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period; early adoption is not permitted. 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. On July 9, 2015, the FASB agreed to defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and the interim periods within that year. 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 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 Company does not expect the adoption of ASU 2014-12 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). This amendment eliminates from U.S. GAAP the concept of extraordinary items as part of the FASB’s initiative to reduce complexity in accounting standards. 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 Company does not expect the adoption of ASU 2015-01 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-02 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-03 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

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 Company does not expect the adoption of ASU 2015-05 on January 1, 2016 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently Adopted

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

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.

 

   

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

Fair Value Measurements ASC 820 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.

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 for temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration is not practicable due to the inherent complexity of the multi-national tax environment in which the Company operates.

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 a rabbi trust using the treasury stock method.

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

Costs Associated with Exit or Disposal Activities (Tables)

The cumulative costs expected and incurred as a result of the Exit Plans were as follows as of June 30, 2015 (in thousands):

 

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

Lease obligations and facility exit costs

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

Severance and related costs

     —           5,857         185         —           6,042   

Legal-related costs

     —           110         —           —           110   

Non-cash impairment charges

     480         474         159         3,847         4,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the accrued liability associated with the Exit Plans’ exit or disposal activities and related charges for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Beginning accrual

   $ 1,346      $ 2,731      $ 1,558      $ 2,974   

Lease obligations and facility exit costs (1)

     —          (185     —          (185

Severance and related costs

     —          —          —          —     

Legal-related costs

     —          —          —          —     

Cash payments (2)

     (196     (428     (408     (673

Other non-cash changes (3)

     —          (7     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accrual

   $ 1,150      $ 2,111      $ 1,150      $ 2,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During 2014, the Company reversed accruals related to the final settlement of lease obligations and facility exit costs for one of the Ireland sites, included in the EMEA segment, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

(2) 

Related to lease obligations and facility exit costs.

(3) 

Effect of foreign currency translation.

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 June 30, 2015 and December 31, 2014 (in thousands):

 

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

June 30, 2015

        

Short-term accrued restructuring liability (1)

   $ 140       $ 487       $ 627   

Long-term accrued restructuring liability (2)

     115         408         523   
  

 

 

    

 

 

    

 

 

 

Ending accrual at June 30, 2015

$ 255    $ 895    $ 1,150   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

Short-term accrued restructuring liability (1)

$ 109    $ 521    $ 630   

Long-term accrued restructuring liability (2)

  203      725      928   
  

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2014

$ 312    $ 1,246    $ 1,558   
  

 

 

    

 

 

    

 

 

 

 

(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)
Assets and Liabilities Measured at Fair Value on a Recurring Basis

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 June 30, 2015 Using:  
          Balance at
June 30, 2015
     Quoted Prices
in Active
Markets For
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
             Level (1)      Level (2)      Level (3)  

Assets:

              

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

   (1)    $ 10,704       $ —         $ 10,704       $ —     

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

   (2)      6,184         6,184         —           —     

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

   (2)      1,555         1,555         —           —     

Guaranteed investment certificates

   (3)      86         —           86         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 18,529       $ 7,739       $ 10,790       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt

   (4)    $ 65,000       $ —         $ 65,000       $ —     

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

   (1)      471         —           471         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 65,471       $ —         $ 65,471       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

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

Assets:

              

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

   (5)    $ 100,915       $ 100,915       $ —         $ —     

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

   (5)      10         10         —           —     

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

   (1)      1,489         —           1,489         —     

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

   (1)      4,060         —           4,060         —     

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

   (2)      5,589         5,589         —           —     

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

   (2)      1,363         1,363         —           —     

Guaranteed investment certificates

   (3)      79         —           79         —     
     

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt

   (4)    $ 75,000       $ —         $ 75,000       $ —     

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

   (1)      1,261         —           1,261         —     
     

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheets. See Note 5, Financial Derivatives.

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets. See Note 6, 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.

Intangible Assets (Tables)

The following table presents the Company’s purchased intangible assets as of June 30, 2015 (in thousands):

 

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

Customer relationships

   $ 99,268       $ (52,982   $ 46,286         8   

Trade name

     11,600         (4,791     6,809         8   

Non-compete agreements

     1,201         (1,201     —           2   

Proprietary software

     850         (850     —           2   

Favorable lease agreement

     449         (449     —           2   
  

 

 

    

 

 

   

 

 

    
$ 113,368    $ (60,273 $ 53,095      8   
  

 

 

    

 

 

   

 

 

    

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

 

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

Customer relationships

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

Trade name

     11,600         (4,128     7,472         8   

Non-compete agreements

     1,209         (1,209     —           2   

Proprietary software

     850         (850     —           2   

Favorable lease agreement

     449         (449     —           2   
  

 

 

    

 

 

   

 

 

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

 

 

    

 

 

   

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to June 30, 2015, is as follows (in thousands):

 

Years Ending December 31,

   Amount  

2015 (remaining six months)

   $ 6,836   

2016

     13,702   

2017

     13,702   

2018

     7,509   

2019

     6,917   

2020

     4,429   

2021 and thereafter

     —     
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):

 

     June 30, 2015      December 31, 2014  

Deferred gains (losses) in AOCI

   $ 946       $ (157

Tax on deferred gains (losses) in AOCI

     11         46   
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

$ 957    $ (111
  

 

 

    

 

 

 

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

$ 946   
  

 

 

    

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

 

     As of June 30, 2015    As of December 31, 2014

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

   $ 81,000       June 2016    $ 73,000       December 2015

Forwards:

           

Philippine Pesos

     1,000       October 2015      9,000       March 2015

Costa Rican Colones

     45,900       March 2016      51,600       October 2015

Hungarian Forints

     1,377       December 2015      —        

Romanian Leis

     5,194       December 2015      10,414       December 2015

Net investment hedges: (2)

           

Forwards:

           

Euros

     63,470       March 2016      51,648       March 2016

Non-designated hedges: (3)

           

Forwards

     58,243       December 2015      64,541       March 2015

 

(1)

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

(2)

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

(3)

Foreign currency hedge contract not designated as a hedge as defined under ASC 815. Purpose is to reduce the effects on the Company’s operating results and cash flows from fluctuations caused by volatility in currency exchange rates, primarily related to intercompany receivables and payables, and cash held in non-functional currencies.

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

 

     Derivative Assets  
     June 30, 2015      December 31, 2014  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1)

   $ 1,872       $ 974   

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     8,570         —     

Foreign currency forward contracts (2)

     —           4,060   
  

 

 

    

 

 

 
  10,442      5,034   

Derivatives not designated as hedging instruments under

ASC 815:

Foreign currency forward contracts (1)

  262      515   
  

 

 

    

 

 

 

Total derivative assets

$ 10,704    $ 5,549   
  

 

 

    

 

 

 
     Derivative Liabilities  
     June 30, 2015      December 31, 2014  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments

under ASC 815:

     

Foreign currency forward and option contracts (3)

   $ 123       $ 406   

Derivatives not designated as hedging instruments under

ASC 815:

     

Foreign currency forward contracts (3)

     348         855   
  

 

 

    

 

 

 

Total derivative liabilities

$ 471    $ 1,261   
  

 

 

    

 

 

 

 

(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.

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended June 30, 2015 and 2014 (in thousands):

 

     Gain (Loss) Recognized
in AOCI on Derivatives
(Effective Portion)
     Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues”
(Effective Portion)
    Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded  from
Effectiveness Testing)
 
     June 30,      June 30,     June 30,  
     2015     2014      2015      2014     2015      2014  

Derivatives designated as cash flow hedging instruments under ASC 815:

               

Foreign currency forward and option contracts

   $ 357      $ 2,475       $ 739       $ (1,755   $ 1       $ (1

Derivatives designated as net investment hedging instruments under ASC 815:

               

Foreign currency forward contracts

     (1,848     108         —           —          —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ (1,491   $ 2,583       $ 739       $ (1,755   $ 1       $ (1
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
                  Statement of
Operations Location
    Gain (Loss) Recognized
on Derivatives
 
          June 30,  
          2015      2014  

Derivatives not designated as hedging instruments under ASC 815:

               

Foreign currency forward contracts

         

 

Other income

and (expense)

  

  

  $ 67       $ (1,331

Foreign currency forward contracts

          Revenues        4         —     
            

 

 

    

 

 

 
             $       71       $ (1,331
            

 

 

    

 

 

 

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the six months ended June 30, 2015 and 2014 (in thousands):

 

     Gain (Loss) Recognized
in AOCI on Derivatives
(Effective Portion)
    Gain (Loss) Reclassified
From Accumulated AOCI
Into “Revenues”
(Effective Portion)
    Gain (Loss) Recognized in
“Revenues” on Derivatives
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
     June 30,     June 30,     June 30,  
     2015      2014     2015      2014     2015     2014  

Derivatives designated as cash flow hedging instruments under ASC 815:

              

Foreign currency forward and option contracts

   $ 2,412       $ (2,543   $ 1,328       $ (4,129   $ 2      $ (4

Derivatives designated as net investment hedging instruments under ASC 815:

              

Foreign currency forward contracts

     4,510         162        —           —          —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 6,922       $ (2,381   $ 1,328       $ (4,129   $      2      $ (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
                  Statement of
Operations Location
    Gain (Loss) Recognized
on Derivatives
 
          June 30,  
          2015     2014  

Derivatives not designated as hedging instruments under ASC 815:

              

Foreign currency forward contracts

         
 
Other income
and (expense)
  
  
  $ (97   $ (608

Foreign currency forward contracts

          Revenues        4        —     
             $ (93   $ (608
            

 

 

   

 

 

 

Investments Held in Rabbi Trust (Tables)

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

 

     June 30, 2015      December 31, 2014  
     Cost      Fair Value      Cost      Fair Value  

Mutual funds

   $ 5,853       $ 7,739       $ 5,160       $ 6,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in rabbi trust were 80% equity-based and 20% debt-based as of June 30, 2015. 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 June 30,      Six Months Ended June 30,  
     2015     2014      2015     2014  

Gross realized gains from sale of trading securities

   $ 17      $ —         $ 20      $ 3   

Gross realized (losses) from sale of trading securities

     —          —           (1     —     

Dividend and interest income

     13        9         18        18   

Net unrealized holding gains (losses)

     (50     204         73        279   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income (losses)

$ (20 $ 213    $ 110    $ 300   
  

 

 

   

 

 

    

 

 

   

 

 

 
Deferred Revenue (Tables)
Components of Deferred Revenue

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

 

     June 30, 2015      December 31, 2014  

Future service

   $ 23,525       $ 25,222   

Estimated potential penalties and holdbacks

     6,415         9,023   
  

 

 

    

 

 

 
$                 29,940    $ 34,245   
  

 

 

    

 

 

 
Deferred Grants (Tables)
Schedule of Deferred Grants, Net of Accumulated Amortization

The components of deferred grants, net of accumulated amortization, consist of the following (in thousands):

 

     June 30, 2015      December 31, 2014  

Property grants

   $ 4,717       $ 5,110   

Lease grants

     427         —     

Employment grants

     190         207   

Total deferred grants

     5,334         5,317   

Less: Property grants - short-term (1)

     —           —     

Less: Lease grants - short-term (1)

     —           —     

Less: Employment grants - short-term (1)

     (190      (207
  

 

 

    

 

 

 

Total long-term deferred grants (2)

   $                   5,144       $ 5,110   
  

 

 

    

 

 

 

 

(1) 

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

(2)

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

Borrowings (Tables)

Borrowings consist of the following (in thousands):

 

     June 30, 2015      December 31, 2014  

Revolving credit facility

   $ 65,000       $ 75,000   

Less: Current portion

     —           —     
  

 

 

    

 

 

 

Total long-term debt

$ 65,000    $ 75,000   
  

 

 

    

 

 

 

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2015     2014     2015     2014  

Average daily utilization

   $ 70,198      $ 90,242      $ 72,249      $ 93,271   

Interest expense, including commitment fee (1)

   $ 320      $ 368      $ 638      $ 749   

Weighted average interest rate

     1.8     1.6     1.8     1.6

 

(1)

Excludes the amortization of deferred loan fees.

Accumulated Other Comprehensive Income (Loss) (Tables)

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, 2014

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

Pre-tax amount

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

Tax (provision) benefit

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

Reclassification of (gain) loss to net income

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

Foreign currency translation

     120        —          (114     (6     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

Pre-tax amount

  (20,055   4,510      —        2,414      72      (13,059

Tax (provision) benefit

  —        (1,742   —        (23   —        (1,765

Reclassification of (gain) loss to net income

  —        —        (21   (1,341   (28   (1,390

Foreign currency translation

  (11   —        (7   18      —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

$ (42,142 $ 3,044    $ 980    $ 957    $ 386    $ (36,775
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Statements of Operations

Location

           2015                  2014                 2015                  2014          

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

            

Pre-tax amount

   $ 10       $ 13      $ 21       $ 25     

Direct salaries and related costs

Tax (provision) benefit

     —           —          —           —       

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  10      13      21      25   

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

Pre-tax amount

  740      (1,756   1,330      (4,133

Revenues

Tax (provision) benefit

  5      17      11      113   

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  745      (1,739   1,341      (4,020

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

Pre-tax amount

  14      12      28      23   

General and administrative

Tax (provision) benefit

  —        —        —        —     

Income taxes

  

 

 

    

 

 

   

 

 

    

 

 

   

Reclassification to net income

  14      12      28      23   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total reclassification of gain (loss) to net income

$ 769    $ (1,714 $ 1,390    $ (3,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1)

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

(2)

See Note 5, Financial Derivatives, for further information.

Income Taxes (Tables)
Summary of Significant Tax Jurisdictions Currently under Audit

The significant tax jurisdictions currently under audit are as follows:

 

Tax Jurisdiction

   Tax Year Ended

Canada

   2003 to 2009

The Philippines

   2010

 

Earnings Per Share (Tables)

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
           2015                  2014                  2015                  2014        

Basic:

           

Weighted average common shares outstanding

     42,008         42,711         42,095         42,726   

Diluted:

           

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

     208         99         233         119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted average diluted shares outstanding

  42,216      42,810      42,328      42,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  27      49      24      70   
  

 

 

    

 

 

    

 

 

    

 

 

 

The shares repurchased under the Company’s share repurchase programs were as follows (in thousands, except per share amounts):

 

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

Three Months Ended:

           

June 30, 2015

     279       $ 24.14       $ 24.79       $ 6,833   

June 30, 2014

     —         $ —         $ —         $ —     

Six Months Ended:

           

June 30, 2015

     500       $ 22.81       $ 24.79       $ 11,969   

June 30, 2014

     130       $ 19.92       $ 19.98       $ 2,605