SYKES ENTERPRISES, INCORPORATED This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in theSykes Enterprises, Incorporated ("SYKES," "our," "we" or "us") Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with the Securities and Exchange Commission ("SEC"). Our discussion and analysis may contain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, and projections about SYKES, our beliefs, and assumptions made by us, including our belief that our operations have not been materially impacted by theApril 2020 cyber incident, as discussed in our Form 10-Q for the three months endedMarch 31, 2020 , as filed with theSEC , or theOctober 2020 cyber incident, as discussed in Note 18, Subsequent Event, in our Form 10-Q for the three and nine months endedSeptember 30, 2020 , as filed with theSEC . In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time. Words such as "believe," "estimate," "project," "expect," "intend," "may," "anticipate," "plan," "seek," variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives, or goals also are forward-looking statements. Further, statements about the effects of the novel coronavirus ("COVID-19") pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our clients, third parties and us. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this report. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the impact of economic recessions in theU.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (iv) the timing of significant orders for our products and services, (v) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (vi) changes in applicable accounting principles or interpretations of such principles, (vii) difficulties or delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing and other objectives, (ix) construction delays of new or expansion of existing customer experience management centers, (x) delays in our ability to develop new products and services and market acceptance of new products and services, (xi) rapid technological change, (xii) loss or addition of significant clients, (xiii) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel, (xv) our ability to continue the growth of our support service revenues through additional technical and customer experience management centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on the demand for outsourcing, (xxii) risk of interruption of technical and customer experience management center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with acquisitions not being realized, or not being realized within the anticipated time period, (xxvii) risks related to the integration of the acquisitions and the impairment of any related goodwill, (xxviii) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement and (xxix) other risk factors that are identified herein and in our most recent Annual Report on Form 10-K for the year endedDecember 31, 2020 , including factors identified under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 30 --------------------------------------------------------------------------------
Executive Summary
We are a leading full lifecycle provider of global customer experience
management services, multichannel demand generation and digital transformation.
We provide differentiated full lifecycle customer experience management
solutions and services primarily to Global 2000 companies and their end
customers principally in the financial services, technology, communications,
transportation & leisure and healthcare industries. Our differentiated full
lifecycle services platform effectively engages customers at every touchpoint
within the customer journey, including digital media and acquisition, sales
expertise, customer service, technical support and retention, many of which can
be optimized by a suite of digital transformation capabilities under our SYKES
Digital Services ("SDS") group, which spans robotic process automation ("RPA"),
self-service, insight analytics and digital learning. In addition to digital
transformation, we also provide artificial intelligence ("AI") solutions that
can be embedded and leveraged across our lifecycle offerings. We serve our
clients through two geographic operating regions: the Americas (United States ,
Canada , Latin America , Australia and the Asia Pacific Rim) and EMEA (Europe , the
Middle East and Africa ). Our Americas and EMEA regions primarily provide
customer experience management solutions and services with an emphasis on
inbound multichannel demand generation, customer service and technical support
to our clients' customers. These services, which represented 98.7% and 98.9% of
consolidated revenues during the three months ended June 30, 2021 and 2020,
respectively, and 98.8% and 98.7% of consolidated revenues during the six months
ended June 30, 2021 and 2020, respectively, are delivered through multiple
communication channels including phone, e-mail, social media, text messaging,
chat and digital self-service. We also provide various enterprise support
services in the United States ("U.S.") that include services for our clients'
internal support operations, from technical staffing services to outsourced
corporate help desk services. In Europe , we also provide fulfillment services,
which include order processing, payment processing, inventory control, product
delivery and product returns handling. Additionally, through our acquisition of
RPA provider Symphony Ventures Ltd ("Symphony") coupled with our investment in
AI through XSell Technologies, Inc. ("XSell"), we also provide a suite of
digital transformation capabilities that optimizes our differentiated full
lifecycle management services platform. Our complete service offering helps our
clients acquire, retain and increase the lifetime value of their customer
relationships. We have developed an extensive global reach with customer
experience management centers across six continents, including North America ,
South America , Europe , Asia , Australia and Africa . We deliver cost-effective
solutions that generate demand, enhance the customer service experience, promote
stronger brand loyalty, and bring about high levels of performance and
profitability.
Recent Developments
Proposed Transaction with Sitel Global
OnJune 17, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withSitel Worldwide Corporation , aDelaware corporation ("Parent"), andFlorida Mergersub, Inc. , aFlorida corporation and wholly owned subsidiary of Parent ("Merger Sub"). Parent and Merger Sub are subsidiaries ofSitel Group , a global provider of customer experience products and solutions. Pursuant to the Merger Agreement, and subject to the terms thereof, Parent will acquire each share of the Company's common stock ("Company Common Stock") issued and outstanding immediately prior to the effective time of the merger contemplated by the Merger Agreement for$54.00 in cash, without interest and subject to any required tax withholding (the "Merger"). Consummation of the Merger is subject to customary closing conditions, including, among others, (i) the absence of certain legal impediments that prohibit the consummation of the Merger and the other transactions contemplated by the Merger Agreement, (ii) receipt of certain regulatory clearances, including, the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the adoption of the Merger Agreement by the holders of a majority of the issued and outstanding shares of Company Common Stock and (iv) all consents, approvals, clearances and other authorizations of any governmental entity.
The full text of the Merger Agreement was filed as Exhibit 2.1 to our Current
Report on Form 8-K filed on
31
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In connection with the Merger, we have incurred, and will continue to incur,
merger-related legal and advisory costs, some of which are contingent on the
closing of the Merger. Transaction expenses associated with the proposed Merger
of $3.5 million were recorded in "General and administrative" costs in the Other
segment in the accompanying Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2021 . We expect the Merger to close in
the second half of 2021.
Coronavirus
On March 11, 2020 , the World Health Organization characterized the novel
coronavirus ("COVID-19") a pandemic. The global nature, rapid spread and
continually evolving response by governments throughout the world to combat the
spread has had a negative impact on the global economy. Certain of our customer
experience management centers have been impacted by local government actions
restricting facility access or are operating at lower capacity utilization
levels to achieve social distancing. We are committed to the health and safety
of our workforce and ensuring business continuity for the brands we serve. In
response, we have shifted as many employees as possible to a work-at-home model.
As of the middle of July 2021 , approximately 69% of agents assigned to our
brick-and-mortar have temporarily transitioned to a work-at-home model, 30% are
working in our centers and 1% of our agents are idle primarily due to the lack
of technical infrastructure to work from home. Our operations in the
Philippines , El Salvador and Mexico have been most impacted by the governmental
restrictions.
We continue to closely monitor the prevalence of COVID-19 and the vaccination
rates in the communities where our centers are located as well as guidance from
public health authorities, federal and local agencies and municipalities. We
will work with employees and clients to transition agents back to our centers
based on that guidance, but risk further disruption to our business as a result
of COVID-19 and government-imposed restrictions. Over time, we anticipate a
permanent transition to a work-at-home or hybrid model for a portion of our
workforce.
Exit of Leased Space
We continue to reevaluate our real estate footprint in connection with the transition of a portion of our workforce to a permanent remote working environment in both theAmericas and EMEA. SinceApril 2020 , we have decided to terminate, sublease or abandon leases prior to the end of their lease terms at certain of our sites as approximately 4,200 seats transitioned from brick and mortar to at home agents. As such, we recorded impairments of right-of-use ("ROU") assets of$13.4 million and impairments of property and equipment of$7.6 million since the initiation of our reevaluation inApril 2020 , of which$0.7 million of ROU assets and$0.5 million of property and equipment impairments were recorded during the six months endedJune 30, 2021 . See Note 4, Fair Value, in the accompanying "Notes to Condensed Consolidated Financial Statements" for further information. Annualized lease expense savings of$0.7 million is expected from the actions in 2021, of which approximately 70% is anticipated to be realized as cash savings.
OnDecember 31, 2020 , through our wholly-owned subsidiary,Clear Link Technologies, LLC , we completed the acquisition ofTaylor Media Corp. ("TMC"), a personal finance digital media company and owner of The Penny Hoarder. Of the total initial purchase price of$104.9 million ,$87.2 million was paid upon closing using$63.0 million of additional borrowings under our credit agreement as well as cash on hand. Of the remaining$17.7 million of the purchase price,$0.2 million was used to repay outstanding debt and$17.5 million of the purchase price was deferred and is payable onDecember 31, 2027 , the seventh anniversary of the closing. In the event TMC's previous owner remains employed by the Company or one of its subsidiaries onDecember 31, 2022 , the second anniversary of the closing, the deferred payment will be accelerated and due at that time. TMC's assets and liabilities have been reflected in our consolidated balance sheet as ofDecember 31, 2020 in theAmericas segment and the results of TMC's operations have been reflected in our consolidated financial statements sinceJanuary 1, 2021 . 32
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Results of Operations
The following table sets forth, for the periods indicated, the amounts presented
in the accompanying Condensed Consolidated Statements of Operations as well as
the change between the periods:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2021 2020 $ Change 2021 2020 $ Change
Revenues $ 448,885 $ 416,833 $ 32,052 $ 906,771 $ 827,999 $ 78,772
Operating expenses:
Direct salaries and
related costs 292,086 268,433 23,653 591,563 535,378 56,185
General and
administrative 110,924 102,664 8,260 220,551 205,911 14,640
Depreciation, net 12,809 12,630 179 25,924 25,091 833
Amortization of
intangibles 2,959 4,093 (1,134 ) 5,946 8,212 (2,266 )
Impairment of long-lived
assets 386 1,800 (1,414 ) 1,536 1,800 (264 )
Total operating expenses 419,164 389,620 29,544 845,520 776,392 69,128
Income from operations 29,721 27,213 2,508 61,251 51,607 9,644
Other income (expense):
Interest income 103 165 (62 ) 201 428 (227 )
Interest (expense) (382 ) (560 ) 178 (805 ) (1,280 ) 475
Other income (expense),
net 92 1,797 (1,705 ) (230 ) (2,996 ) 2,766
Total other income
(expense), net (187 ) 1,402 (1,589 ) (834 ) (3,848 ) 3,014
Income before income
taxes 29,534 28,615 919 60,417 47,759 12,658
Income taxes 6,354 6,385 (31 ) 12,259 11,611 648
Net income $ 23,180 $ 22,230 $ 950 $ 48,158 $ 36,148 $ 12,010
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Revenues
Three Months Ended June 30,
2021 2020
(in thousands) Amount % of Revenues Amount % of Revenues $ Change
Americas $ 356,427 79.4% $ 339,272 81.4% $ 17,155
EMEA 92,455 20.6% 77,561 18.6% 14,894
Other 3 0.0% - 0.0% 3
Consolidated $ 448,885 100.0% $ 416,833 100.0% $ 32,052 Consolidated revenues increased
The increase inAmericas' revenues was due to higher volumes from existing clients of$12.8 million , new clients of$19.5 million and a favorable foreign currency impact of$5.8 million , partially offset by end-of-life client programs of$20.9 million primarily in the communications and technology verticals. Revenues from our offshore operations represented 44.9% ofAmericas' revenues in 2021, compared to 42.6% for the comparable period in 2020. The increase in EMEA's revenues was due to higher volumes from existing clients of$6.4 million , new clients of$2.5 million and a favorable foreign currency impact of$8.8 million , partially offset by end-of-life client programs of$2.8 million primarily in the communications and technology verticals. On a consolidated basis, we had 44,600 brick-and-mortar seats as ofJune 30, 2021 , a decrease of 4,000 seats from the comparable period in 2020, driven by decisions made by certain clients to permanently alter their delivery mix away from brick and mortar to a home agent solution due to COVID-19, coupled with the consolidation of underutilized facilities in both theAmericas and EMEA. On a segment basis, 37,100 seats were located in theAmericas , a decrease of 3,300 seats from the comparable period in 2020, and 7,500 seats were located in EMEA, a decrease of 700 seats from the comparable period in 2020. On a consolidated basis, the capacity utilization rate was 73%, compared to 73% in the comparable period in 2020. As of the middle ofJuly 2021 , approximately 69% of agentswho typically work in our brick-and-mortar facilities 33 --------------------------------------------------------------------------------
have temporarily transitioned to work at home, 30% are working in our centers and the remaining 1% of agents are at home but idle.
The capacity utilization rate for theAmericas was 73% in 2021 and in the comparable period in 2020. The capacity utilization rate for EMEA in 2021 was 72%, compared to 69% in the comparable period in 2020. We strive to attain a capacity utilization rate of 85% at each of our locations. Capacity utilization is measured by taking the number of agents and indirect support headcount and dividing it by the number of seats provisioned for utilization. Agents assigned to brick-and-mortar facilities but temporarily working from home to meet social distancing requirements resulting from the COVID-19 pandemic are included as if they were working in a center. Capacity utilization is a critical metric for us as it is used as an input to the pricing, revenue and margin drivers of our business as well as capital allocation.
Direct Salaries and Related Costs
Three Months Ended June 30,
2021 2020
Change in % of
(in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues
Americas $ 226,429 63.5% $ 214,606 63.3% $ 11,823 0.2%
EMEA 65,657 71.0% 53,827 69.4% 11,830 1.6%
Consolidated
0.7%
The increase of
The increase inAmericas' direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher customer-acquisition advertising costs of 2.9% driven primarily by the activity at recently acquired TMC in the current period and higher auto tow claim costs of 0.4%, partially offset by lower compensation costs of 1.7% primarily due to higher agent productivity in the healthcare and financial services verticals, lower travel costs of 1.2% primarily driven by employee transportation costs during the pandemic in the prior period and lower other costs of 0.2%. The increase in EMEA's direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher compensation costs of 1.1% primarily driven by lower agent productivity in the financial services, communications and technology verticals and higher fulfillment materials costs of 1.0%, partially offset by lower communications costs of 0.4% and lower other costs of 0.1%. General and Administrative Three Months Ended June 30, 2021 2020 Change in % of (in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues Americas$ 70,412 19.8%$ 69,018 20.3%$ 1,394 -0.5% EMEA 19,095 20.7% 17,026 22.0% 2,069 -1.3% Other 21,417 - 16,620 - 4,797 -
Consolidated$ 110,924 24.7%$ 102,664 24.6%$ 8,260 0.1%
The increase of
The decrease inAmericas' general and administrative expenses, as a percentage of revenues, was primarily attributable to a higher net gain on lease terminations of 0.6%, lower merger and integration costs of 0.4% and lower facility-related costs of 0.3%, partially offset by higher compensation costs of 0.4%, higher software and maintenance costs of 0.2% and higher legal and professional fees of 0.2%. The decrease in EMEA's general and administrative expenses, as a percentage of revenues, was primarily attributable to lower compensation costs of 0.9% and lower facility-related costs of 0.8%, partially offset by higher severance costs of 0.4%. 34
-------------------------------------------------------------------------------- The increase in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher merger and integration costs of$3.7 million resulting primarily from the proposed Merger withSitel Group and higher compensation costs of$1.3 million driven by higher long-term and annual performance-based compensation in the current period, partially offset by lower other costs of$0.2 million .
Depreciation, Amortization and Impairment of Long-Lived Assets
Three Months Ended June 30,
2021 2020
Change in % of
(in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues
Depreciation, net:
Americas $ 9,864 2.8% $ 10,088 3.0% $ (224 ) -0.2%
EMEA 2,212 2.4% 1,818 2.3% 394 0.1%
Other 733 - 724 - 9 -
Consolidated $ 12,809 2.9% $ 12,630 3.0% $ 179 -0.1%
Amortization of
intangibles:
Americas $ 2,061 0.6% $ 3,281 1.0% $ (1,220 ) -0.4%
EMEA 898 1.0% 812 1.0% 86 0.0%
Other - - - - - -
Consolidated $ 2,959 0.7% $ 4,093 1.0% $ (1,134 ) -0.3%
Impairment of
long-lived
assets:
Americas $ 386 0.1% $ 1,800 0.5% $ (1,414 ) -0.4%
EMEA - 0.0% - 0.0% - 0.0%
Other - - - - - -
Consolidated $ 386 0.1% $ 1,800 0.4% $ (1,414 ) -0.3%
The increase in depreciation was primarily due to new depreciable fixed assets
placed into service supporting site expansions and infrastructure upgrades as
well as accelerated depreciation related to certain site exits, partially offset
by the impact since the prior period of certain fully depreciated fixed assets
as well as assets that were impaired.
The decrease in amortization was primarily due to the impact since the prior period of certain fully amortized intangible assets.
See Note 4, Fair Value, in the accompanying "Notes to Condensed Consolidated
Financial Statements" for further information on the impairment of long-lived
assets.
Other Income (Expense)
Three Months Ended June 30,
(in thousands) 2021 2020 $ Change
Interest income $ 103 $ 165 $ (62 )
Interest (expense) $ (382 ) $ (560 ) $ 178
Other income (expense), net:
Foreign currency transaction gains
(losses) $ (72 ) $ 48 $ (120 )
Gains (losses) on derivative instruments
not
designated as hedges (42 ) (164 ) 122
Gains (losses) on investments held in
rabbi trust 1,123 1,816 (693 )
Other miscellaneous income (expense) (917 ) 97 (1,014 )
Total other income (expense), net $ 92 $ 1,797 $ (1,705 ) The decrease in interest income was primarily due to lower invested balances and interest rates than in the comparable period.
35
--------------------------------------------------------------------------------The decrease in interest (expense) was primarily due to lower average outstanding borrowings and interest rates than in the comparable period.
The change in other income (expense), net, was primarily due to an increase in
losses from XSell, our equity method investee, and a decrease in the value of
investments held in rabbi trust. See Note 7, Investments Held in Rabbi Trust, in
the accompanying "Notes to Condensed Consolidated Financial Statements" for
further information.
Income Taxes
Three Months Ended June 30,
(in thousands) 2021 2020 $ Change
Income before income taxes $ 29,534 $ 28,615 $ 919
Income taxes 6,354 6,385 (31 )
% Change
Effective tax rate 21.5 % 22.3 % -0.8 %
The decrease in the effective tax rate in 2021 compared to 2020 was primarily
due to a $1.0 million discrete tax benefit relating to changes in the Company's
valuation allowances, which was partially offset by the UK tax rate change in
the current period. The decrease was also affected by shifts in earnings among
the various jurisdictions in which we operate. Several additional factors, none
of which are individually material, also impacted the rate.
Six Months Ended
Revenues
Six Months Ended June 30,
2021 2020
(in thousands) Amount % of Revenues Amount % of Revenues $ Change
Americas $ 720,146 79.4% $ 672,198 81.2% $ 47,948
EMEA 186,622 20.6% 155,794 18.8% 30,828
Other 3 0.0% 7 0.0% (4 )
Consolidated $ 906,771 100.0% $ 827,999 100.0% $ 78,772 Consolidated revenues increased
The increase inAmericas' revenues was due to higher volumes from existing clients of$47.9 million , new clients of$35.6 million and a favorable foreign currency impact of$9.2 million , partially offset by end-of-life client programs of$44.8 million primarily in the communications, technology and financial services verticals. Revenues from our offshore operations represented 43.8% ofAmericas' revenues in 2021, compared to 42.7% for the comparable period in 2020. The increase in EMEA's revenues was due to higher volumes from existing clients of$15.6 million , new clients of$4.1 million and a favorable foreign currency impact of$16.9 million , partially offset by end-of-life client programs of$5.8 million primarily in the communications and technology verticals.
Direct Salaries and Related Costs
Six Months Ended June 30,
2021 2020
Change in % of
(in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues
Americas $ 460,926 64.0% $ 427,234 63.6% $ 33,692 0.4%
EMEA 130,637 70.0% 108,144 69.4% 22,493 0.6%
Consolidated
0.5%
The increase of
The increase inAmericas' direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher customer-acquisition advertising costs of 2.5% driven primarily by the activity at recently acquired TMC in 36 -------------------------------------------------------------------------------- the current period, partially offset by lower compensation costs of 0.9%, lower travel costs of 0.8%, lower communication costs of 0.2% and lower recruiting costs of 0.2%. The increase in EMEA's direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher fulfillment materials costs of 0.8% and higher compensation costs of 0.7%, partially offset by lower software purchased for resale of 0.2%, lower rebillable costs of 0.2% and lower other costs of 0.5%. General and Administrative Six Months Ended June 30, 2021 2020 Change in % of (in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues Americas$ 142,088 19.7%$ 140,218 20.9%$ 1,870 -1.2% EMEA 38,092 20.4% 35,224 22.6% 2,868 -2.2% Other 40,371 - 30,469 - 9,902 -
Consolidated
-0.6%
The increase of
The decrease inAmericas' general and administrative expenses, as a percentage of revenues, was primarily attributable to lower facility-related costs of 0.6%, a higher net gain on lease terminations of 0.3%, lower merger and integration costs of 0.3%, lower travel costs of 0.2% and lower other costs of 0.2%, partially offset by higher compensation costs of 0.2% and higher software and maintenance costs of 0.2%. The decrease in EMEA's general and administrative expenses, as a percentage of revenues, was primarily attributable to lower compensation costs of 0.9%, lower facility-related costs of 0.9% and lower travel costs of 0.4%. The increase in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher compensation costs of$7.4 million driven by higher long-term and annual performance-based compensation and mark-to-market adjustment of executive deferred compensation in the current period and higher merger and integration costs of$3.8 million resulting primarily from the proposed Merger withSitel Group , partially offset by lower insurance costs of$0.6 million , lower legal and professional fees of$0.4 million and lower travel costs of$0.3 million .
Depreciation, Amortization and Impairment of Long-Lived Assets
Six Months Ended June 30,
2021 2020
Change in % of
(in thousands) Amount % of Revenues Amount % of Revenues $ Change Revenues
Depreciation, net:
Americas $ 20,085 2.8% $ 20,121 3.0% $ (36 ) -0.2%
EMEA 4,368 2.3% 3,523 2.3% 845 0.0%
Other 1,471 - 1,447 - 24 -
Consolidated $ 25,924 2.9% $ 25,091 3.0% $ 833 -0.1%
Amortization of
intangibles:
Americas $ 4,157 0.6% $ 6,567 1.0% $ (2,410 ) -0.4%
EMEA 1,789 1.0% 1,645 1.1% 144 -0.1%
Other - - - - - -
Consolidated $ 5,946 0.7% $ 8,212 1.0% $ (2,266 ) -0.3%
Impairment of
long-lived
assets:
Americas $ 743 0.1% $ 1,800 0.3% $ (1,057 ) -0.2%
EMEA 475 0.3% - 0.0% 475 0.3%
Other 318 - - - 318 -
Consolidated $ 1,536 0.2% $ 1,800 0.2% $ (264 ) 0.0%
37
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The increase in depreciation was primarily due to new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades as well as accelerated depreciation related to certain site exits, partially offset by the impact since the prior period of certain fully depreciated fixed assets as well as assets that were impaired.
The decrease in amortization was primarily due to the impact since the prior period of certain fully amortized intangible assets.
See Note 4, Fair Value, in the accompanying "Notes to Condensed Consolidated
Financial Statements" for further information on the impairment of long-lived
assets.
Other Income (Expense)
Six Months Ended June 30,
(in thousands) 2021 2020 $ Change
Interest income $ 201 $ 428 $ (227 )
Interest (expense) $ (805 ) $ (1,280 ) $ 475
Other income (expense), net:
Foreign currency transaction gains
(losses) $ (257 ) $ (1,558 ) $ 1,301
Gains (losses) on derivative instruments
not
designated as hedges (7 ) (410 ) 403
Gains (losses) on investments held in
rabbi trust 1,648 (241 ) 1,889
Other miscellaneous income (expense) (1,614 )
(787 ) (827 )
Total other income (expense), net $ (230 )
The decrease in interest income was primarily due to lower invested balances and interest rates than in the comparable period.
The decrease in interest (expense) was primarily due to lower average outstanding borrowings and interest rates than in the comparable period.
The change in other income (expense), net, was primarily due to an increase in
the value of investments held in rabbi trust, partially offset by an increase in
losses from XSell. See Note 7, Investments Held in Rabbi Trust, in the
accompanying "Notes to Condensed Consolidated Financial Statements" for further
information.
Income Taxes
Six Months Ended June 30,
(in thousands) 2021 2020 $ Change
Income before income taxes $ 60,417 $ 47,759 $ 12,658
Income taxes 12,259 11,611 648
% Change
Effective tax rate 20.3 % 24.3 % -4.0 %
The decrease in the effective tax rate in 2021 compared to 2020 was primarily
due to $2.0 million in discrete tax benefits relating to changes in the
Company's valuation allowances, Philippines tax law changes and stock
compensation recognized, partially offset by the UK tax rate change in the
current period. The decrease was also affected by shifts in earnings among the
various jurisdictions in which we operate. Several additional factors, none of
which are individually material, also impacted the rate.
Client Concentration
Our top ten clients accounted for 38.6% and 45.9% of our consolidated revenues in the three months endedJune 30, 2021 and 2020, respectively, and 39.4% and 45.3% of our consolidated revenues in the six months endedJune 30, 2021 and 2020, respectively. 38
-------------------------------------------------------------------------------- Total revenues by segment from our largest client in each of the periods, which was in the financial services vertical for the three and six months endedJune 30, 2021 and 2020, were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Amount % of Revenues Amount % of Revenues Amount % of Revenues Amount % of Revenues Americas$ 26,413 7.4%$ 32,123 9.5%$ 58,749 8.2%$ 61,726 9.2% EMEA - 0.0% - 0.0% - 0.0% - 0.0%$ 26,413 5.9%$ 32,123 7.7%$ 58,749 6.5%$ 61,726 7.5% Total revenues by segment of our clients that each individually represents 10% or greater of that segment's revenues in each of the periods were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Amount % of Revenues Amount % of Revenues Amount % of Revenues Amount % of Revenues Americas $ - 0.0% $ - 0.0% $ - 0.0% $ - 0.0% EMEA 32,982 35.7% 17,683 22.8% 67,297 36.1% 35,156 22.6%$ 32,982 7.3%$ 17,683 4.2%$ 67,297 7.4%$ 35,156 4.2%
Liquidity and Capital Resources
Our primary sources of liquidity are typically cash flows generated by operating activities and from available borrowings under our revolving credit facility. We utilize these capital resources to make capital expenditures associated primarily with our customer experience management services, invest in technology applications and tools to further develop our service offerings and for working capital and other general corporate purposes, including the repurchase of our common stock in the open market and to fund acquisitions. In future periods, we intend similar uses of these funds. Our Board of Directors authorized us to purchase up to 10.0 million shares of our outstanding common stock (the "2011 Share Repurchase Program") onAugust 18, 2011 , as amended onMarch 16, 2016 . A total of 8.3 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. During the six months endedJune 30, 2021 , cash increased due to$65.9 million from operating activities,$0.2 million from the sale of intangible assets and$0.2 million of other miscellaneous cash inflows, partially offset by$40.0 million used to repay long-term debt,$19.1 million used for capital expenditures,$3.8 million used to pay taxes related to net share settlement of equity awards,$0.3 million to purchase intangible assets and$0.2 million related to paying for an acquisition, resulting in a$0.1 million increase in available cash, cash equivalents and restricted cash (including the unfavorable effects of foreign currency exchange rates on cash, cash equivalents and restricted cash of$2.8 million ). Net cash flows provided by operating activities for the six months endedJune 30, 2021 were$65.9 million , compared to$86.6 million for the comparable period in 2020. The$20.7 million decrease in net cash flows from operating activities was due to a$33.5 million decrease in cash flows from assets and liabilities, partially offset by a$12.0 million increase in net income and a net increase of$0.8 million in non-cash reconciling items, such as stock compensation, impairment, depreciation, amortization, deferred income taxes, unrealized foreign currency transaction gains (losses), net unrealized gains (losses) and premiums on financial instruments, and net gains (losses) on lease terminations. The$33.5 million decrease in 2021 from 2020 in cash flows from assets and liabilities was principally a result of a$13.6 million decrease in other liabilities, a$7.1 million increase in accounts receivable, a$5.8 million change in net taxes payable, a$4.6 million change in operating lease assets and liabilities and a$3.1 million increase in other assets, partially offset by a$0.7 million increase in deferred revenue and customer liabilities. The$13.6 million decrease in the change in other liabilities was primarily due to a$13.7 million decrease principally related to accrued employee compensation and benefits driven by an increase in annual performance-based compensation and the timing of payroll as well as a$5.9 million decrease principally related to the timing of other long-term liabilities driven by the deferral of our portion of social security taxes in the prior period as 39 -------------------------------------------------------------------------------- permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, partially offset by a$6.5 million increase principally related to the timing of other accrued expenses and current liabilities. The$7.1 million decrease in the change in accounts receivable was primarily due to the timing of billing and collections. The$5.8 million decrease in net taxes payable was primarily due to extensions of payment deadlines in the prior period granted by several jurisdictions. The$4.6 million change in operating lease assets and liabilities was primarily due to the timing of rent payments as compared to timing of ROU asset amortization. The$3.1 million increase in the change in other assets was primarily due to a$1.2 million increase in deferred charges and other assets and a$1.1 million increase in prepaid expenses. Capital expenditures, which are generally funded by cash generated from operating activities, available cash balances and borrowings available under our credit facilities, were$19.1 million for the six months endedJune 30, 2021 , compared to$22.9 million for the comparable period in 2020, a decrease of$3.8 million . In 2021, we anticipate capital expenditures in the range of$47.0 million to$53.0 million , primarily for systems infrastructure upgrades and additions as well as new seat additions. OnFebruary 14, 2019 , we entered into a$500 million senior revolving credit facility (the "2019 Credit Agreement") with a group of lenders,KeyBank National Association , as Administrative Agent, SwingLine Lender and Issuing Lender ("KeyBank"), the lenders named therein, andKeyBanc Capital Markets Inc. as Lead Arranger and Sole Book Runner. The 2019 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. We are not currently aware of any inability of our lenders to provide access to the full commitment of funds that exist under the 2019 Credit Agreement, if necessary. However, there can be no assurance that such facility will be available to us, even though it is a binding commitment of the financial institutions. The 2019 Credit Agreement will mature onFebruary 14, 2024 . As ofJune 30, 2021 , we were in compliance with all loan requirements of the 2019 Credit Agreement and had$23.0 million of outstanding borrowings under this facility. For additional discussion of our credit agreements, see Note 18, Borrowings in the "Notes to the Consolidated Financial Statements" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our credit agreements had an average daily utilization of$44.8 million and$71.4 million during the three months endedJune 30, 2021 and 2020, respectively, and$49.4 million and$67.6 million during the six months endedJune 30, 2021 and 2020, respectively. During the three months endedJune 30, 2021 and 2020, the related interest expense, excluding the commitment fee and the amortization of deferred loan fees, was$0.1 million and$0.3 million , respectively, which represented weighted average interest rates of 1.1% and 1.5%, respectively. During the six months endedJune 30, 2021 and 2020, the related interest expense, excluding the commitment fee and the amortization of deferred loan fees, was$0.3 million and$0.7 million , respectively, which represented weighted average interest rates of 1.2% and 2.1%, respectively.
We repaid
We are currently under audit in several tax jurisdictions. We believe we have adequate reserves related to all matters pertaining to these audits. Should we experience unfavorable outcomes from these audits, such outcomes could have a significant impact on our financial condition, results of operations and cash flows. As part of theJuly 1, 2018 WhistleOut Pty Ltd acquisition, an AUD 14.0 million three-year retention bonus was payable in installments on or aroundJuly 1, 2019 , 2020 and 2021. We paid the first installment of AUD 6.0 million ($4.2 million ) inJuly 2019 . We accelerated the 2021 installment of the retention bonus and paid AUD 8.0 million ($5.6 million ) inJuly 2020 , which represented both the 2020 and 2021 installments. No further amounts are due. As part of the Symphony acquisition onNovember 1, 2018 , a portion of the purchase price, with an acquisition date present value ofGBP 7.9 million ($10.0 million ), was deferred and is payable in equal installments over three years, on or aroundNovember 1, 2019 , 2020 and 2021. We paid the first installment ofGBP 2.7 million ($3.3 million ) inOctober 2019 and the second installment ofGBP 2.7 million ($3.4 million ) inOctober 2020 . The Symphony deferred purchase price was included in "Other accrued expenses and current liabilities" in the accompanying Condensed Consolidated Balance Sheets as ofJune 30, 2021 andDecember 31, 2020 . Also, as part of theDecember 31, 2020 TMC acquisition,$17.4 million of the purchase price was deferred and is payable onDecember 31, 2027 , the seventh anniversary of the closing. In the event TMC's previous owner remains employed by us or one of our subsidiaries onDecember 31, 2022 , the second anniversary of the closing, the deferred payment will be accelerated and due at that time. The TMC deferred purchase price was included in "Other long-term liabilities" in the accompanying Condensed Consolidated Balance Sheets as ofJune 30, 2021 andDecember 31, 2020 . 40 -------------------------------------------------------------------------------- As ofJune 30, 2021 , we had$103.2 million in cash and cash equivalents, of which approximately 84.8%, or$87.5 million , was held in international operations. Most of these funds will not be subject to additional taxes inthe United States if repatriated; however, certain jurisdictions may impose additional withholding taxes. There are circumstances where we may be unable to repatriate some of the cash and cash equivalents held by our international operations due to country restrictions. We expect our current cash levels and cash flows from operations to be adequate to meet our anticipated working capital needs, including investment activities such as capital expenditures and debt repayment for the next twelve months and the foreseeable future. However, from time to time, we may borrow funds under our 2019 Credit Agreement as a result of the timing of our working capital needs, including capital expenditures. Our cash resources could also be affected by various risks and uncertainties, including but not limited to, the risks described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Off-Balance Sheet Arrangements
As ofJune 30, 2021 , we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Contractual Obligations
There have not been any material changes to the outstanding contractual
obligations outside of the ordinary course of business from the disclosure in
our Annual Report on Form 10-K for the year ended
Critical Accounting Estimates
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our critical accounting estimates, including a description of the methods and key assumptions used and how the key assumptions were determined.
New Accounting Standards Not Yet Adopted
See Note 1, Overview and Basis of Presentation, in the accompanying "Notes to Condensed Consolidated Financial Statements" for information related to recent accounting pronouncements.
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