e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 0-28274
Sykes Enterprises, Incorporated
(Exact name of Registrant as specified in its charter)
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Florida
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56-1383460 |
(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.) |
400 North Ashley Drive, Tampa, FL 33602
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (813) 274-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o | |
Accelerated filer þ | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of October 22, 2009, there were 41,366,049 outstanding shares of common stock.
Sykes Enterprises, Incorporated and Subsidiaries
INDEX
2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except per share data) |
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September 30, 2009 |
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December 31, 2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
270,638 |
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$ |
219,050 |
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Receivables, net |
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178,985 |
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157,067 |
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Prepaid expenses |
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10,375 |
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7,084 |
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Other current assets |
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12,094 |
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13,317 |
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Total current assets |
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472,092 |
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396,518 |
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Property and equipment, net |
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80,680 |
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80,390 |
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Goodwill |
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21,120 |
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23,191 |
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Intangibles, net |
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2,308 |
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4,586 |
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Deferred charges and other assets |
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26,249 |
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24,857 |
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$ |
602,449 |
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$ |
529,542 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
20,105 |
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$ |
26,419 |
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Accrued employee compensation and benefits |
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55,944 |
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47,194 |
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Income taxes payable |
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4,049 |
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4,485 |
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Deferred revenue |
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33,064 |
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26,955 |
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Other accrued expenses and current liabilities |
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16,295 |
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21,057 |
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Total current liabilities |
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129,457 |
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126,110 |
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Deferred grants |
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11,539 |
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9,340 |
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Long-term income tax liabilities |
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5,104 |
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5,077 |
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Other long-term liabilities |
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4,814 |
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4,985 |
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Total liabilities |
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150,914 |
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145,512 |
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Commitments and loss contingency (Note 14) |
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Shareholders equity: |
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Preferred stock, $0.01 par value, 10,000 shares
authorized; no shares issued and outstanding |
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Common stock, $0.01 par value, 200,000 shares authorized;
41,635 and 41,271 shares issued |
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416 |
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413 |
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Additional paid-in capital |
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163,124 |
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158,216 |
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Retained earnings |
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285,088 |
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237,188 |
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Accumulated other comprehensive income (loss) |
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7,367 |
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(10,683 |
) |
Treasury stock at cost: 329 shares and 96 shares |
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(4,460 |
) |
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(1,104 |
) |
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Total shareholders equity |
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451,535 |
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384,030 |
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$ |
602,449 |
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$ |
529,542 |
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See accompanying notes to condensed consolidated financial statements.
3
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(in thousands, except per share data) |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues |
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$ |
213,494 |
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$ |
207,066 |
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$ |
625,574 |
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$ |
618,416 |
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Operating expenses: |
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Direct salaries and related costs |
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134,429 |
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130,509 |
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398,409 |
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395,197 |
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General and administrative |
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58,047 |
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57,304 |
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170,011 |
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171,083 |
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Impairment loss on goodwill and intangibles |
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324 |
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1,908 |
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Total operating expenses |
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192,800 |
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187,813 |
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570,328 |
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566,280 |
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Income from operations |
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20,694 |
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19,253 |
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55,246 |
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52,136 |
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Other income (expense): |
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Interest income |
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495 |
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1,274 |
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1,951 |
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4,354 |
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Interest (expense) |
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(138 |
) |
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(47 |
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(490 |
) |
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(274 |
) |
Impairment (loss) on investment in SHPS |
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(2,089 |
) |
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Other income |
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119 |
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2,737 |
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1,214 |
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7,001 |
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Total other income (expense) |
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476 |
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3,964 |
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586 |
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11,081 |
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Income before provision for income taxes |
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21,170 |
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23,217 |
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55,832 |
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63,217 |
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Provision for income taxes |
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2,388 |
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3,725 |
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7,932 |
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10,286 |
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Net income |
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$ |
18,782 |
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$ |
19,492 |
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$ |
47,900 |
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$ |
52,931 |
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Net income per share: |
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Basic |
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$ |
0.46 |
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$ |
0.48 |
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$ |
1.18 |
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$ |
1.30 |
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Diluted |
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$ |
0.46 |
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$ |
0.47 |
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$ |
1.17 |
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$ |
1.29 |
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Weighted average shares: |
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Basic |
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40,743 |
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40,678 |
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40,662 |
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40,590 |
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Diluted |
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41,097 |
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41,070 |
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41,011 |
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40,928 |
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See accompanying notes to condensed consolidated financial statements.
4
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders Equity
Nine months Ended September 30, 2008, Three months Ended December 31, 2008 and
Nine months Ended September 30, 2009
(Unaudited)
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Accumulated |
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Common Stock |
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Additional |
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Other |
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Shares |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury |
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(In thousands) |
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Issued |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Stock |
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Total |
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Balance at January 1, 2008 |
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45,537 |
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$ |
455 |
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$ |
184,184 |
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$ |
195,203 |
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$ |
37,457 |
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$ |
(51,978 |
) |
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$ |
365,321 |
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Adjustment upon adoption of
ASC 715-60 |
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(482 |
) |
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(482 |
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Issuance of common stock |
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105 |
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1 |
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1,173 |
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1,174 |
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Stock-based compensation expense |
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3,554 |
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3,554 |
|
Excess tax benefit from stock-
based compensation |
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|
688 |
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|
688 |
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Issuance of common stock and
restricted stock under equity award
plans |
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233 |
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3 |
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93 |
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(132 |
) |
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(36 |
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Retirement of treasury stock |
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(4,644 |
) |
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(46 |
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(33,346 |
) |
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(18,094 |
) |
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51,486 |
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Issuance of common stock for
business acquisition |
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37 |
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676 |
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676 |
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Comprehensive income (loss) |
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52,931 |
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(35,340 |
) |
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17,591 |
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Balance at September 30, 2008 |
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41,268 |
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|
413 |
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157,022 |
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229,558 |
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2,117 |
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(624 |
) |
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388,486 |
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Stock-based compensation expense |
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1,202 |
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1,202 |
|
Excess tax benefit from stock-
based compensation |
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24 |
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24 |
|
Issuance of common stock and
restricted stock under equity award
plans |
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3 |
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(32 |
) |
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32 |
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Repurchase of common stock |
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(512 |
) |
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(512 |
) |
Comprehensive income (loss) |
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7,630 |
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(12,800 |
) |
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(5,170 |
) |
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Balance at December 31, 2008 |
|
|
41,271 |
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|
413 |
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|
158,216 |
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|
237,188 |
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|
|
(10,683 |
) |
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|
(1,104 |
) |
|
|
384,030 |
|
|
Issuance of common stock |
|
|
112 |
|
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|
1 |
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|
1,599 |
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|
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|
1,600 |
|
Stock-based compensation expense |
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|
|
|
|
|
|
|
|
3,981 |
|
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|
|
|
|
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|
|
|
|
|
|
|
3,981 |
|
Excess tax benefit from stock-
based compensation |
|
|
|
|
|
|
|
|
|
|
247 |
|
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|
|
|
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|
247 |
|
Issuance of common stock and
restricted stock under equity award
plans |
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|
252 |
|
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|
2 |
|
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|
(919 |
) |
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(163 |
) |
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|
(1,080 |
) |
Repurchase of common stock |
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(3,193 |
) |
|
|
(3,193 |
) |
Comprehensive income |
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|
|
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|
47,900 |
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|
18,050 |
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65,950 |
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|
Balance at September 30, 2009 |
|
|
41,635 |
|
|
$ |
416 |
|
|
$ |
163,124 |
|
|
$ |
285,088 |
|
|
$ |
7,367 |
|
|
$ |
(4,460 |
) |
|
$ |
451,535 |
|
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|
|
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|
See accompanying notes to condensed consolidated financial statements.
5
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2009 and 2008
(Unaudited)
|
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|
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|
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|
(in thousands) |
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,900 |
|
|
$ |
52,931 |
|
Depreciation and amortization, net |
|
|
20,917 |
|
|
|
21,125 |
|
Impairment losses |
|
|
3,997 |
|
|
|
|
|
Unrealized foreign currency transaction (gains), net |
|
|
(2,632 |
) |
|
|
(6,524 |
) |
Stock-based compensation expense |
|
|
3,981 |
|
|
|
3,554 |
|
Excess tax benefit from stock-based compensation |
|
|
(247 |
) |
|
|
(688 |
) |
Deferred income tax provision (benefit) |
|
|
(2,015 |
) |
|
|
219 |
|
Net loss on disposal of property and equipment |
|
|
129 |
|
|
|
|
|
Bad debt expense |
|
|
1,147 |
|
|
|
457 |
|
Write down of value added tax credit receivables |
|
|
414 |
|
|
|
482 |
|
Unrealized loss on financial instruments, net |
|
|
973 |
|
|
|
1,108 |
|
Amortization of discount on short-term investments |
|
|
|
|
|
|
(173 |
) |
Amortization of actuarial gains on pension |
|
|
(46 |
) |
|
|
(49 |
) |
Foreign exchange (gain) loss on liquidation of foreign entities |
|
|
(5 |
) |
|
|
3 |
|
Release of valuation allowance on deferred tax assets |
|
|
(2,285 |
) |
|
|
(6,121 |
) |
Amortization of unrealized (gain) on post retirement obligation |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(19,488 |
) |
|
|
(17,679 |
) |
Prepaid expenses |
|
|
(2,582 |
) |
|
|
(2,455 |
) |
Other current assets |
|
|
(1,203 |
) |
|
|
369 |
|
Deferred charges and other assets |
|
|
(809 |
) |
|
|
(759 |
) |
Accounts payable |
|
|
(3,173 |
) |
|
|
1,789 |
|
Income taxes receivable / payable |
|
|
2,993 |
|
|
|
1,600 |
|
Accrued employee compensation and benefits |
|
|
7,564 |
|
|
|
3,984 |
|
Other accrued expenses and current liabilities |
|
|
1,711 |
|
|
|
128 |
|
Deferred revenue |
|
|
2,662 |
|
|
|
2,379 |
|
Other long-term liabilities |
|
|
(41 |
) |
|
|
750 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
59,834 |
|
|
|
56,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(23,207 |
) |
|
|
(25,730 |
) |
Cash paid for business acquisitions, net of cash aquired |
|
|
|
|
|
|
(2,400 |
) |
Proceeds from sale of property and equipment |
|
|
170 |
|
|
|
167 |
|
Sale of short-term investments |
|
|
|
|
|
|
17,535 |
|
Investment in restricted cash |
|
|
|
|
|
|
(997 |
) |
Proceeds from release of restricted cash |
|
|
839 |
|
|
|
855 |
|
Other |
|
|
|
|
|
|
(130 |
) |
|
|
|
|
|
|
|
Net cash (used for) investing activities |
|
|
(22,198 |
) |
|
|
(10,700 |
) |
|
|
|
|
|
|
|
6
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2009 and 2008
(Unaudited)
(continued)
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of stock |
|
|
1,600 |
|
|
|
1,174 |
|
Excess tax benefit from stock-based compensation |
|
|
247 |
|
|
|
688 |
|
Cash paid for repurchase of common stock |
|
|
(3,193 |
) |
|
|
|
|
Proceeds from grants |
|
|
3,491 |
|
|
|
|
|
Shares repurchased for minimum tax withholding on restricted stock |
|
|
(1,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,065 |
|
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash |
|
|
12,887 |
|
|
|
(5,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
51,588 |
|
|
|
42,369 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning |
|
|
219,050 |
|
|
|
177,682 |
|
|
|
|
|
|
|
|
Cash and cash equivalents ending |
|
$ |
270,638 |
|
|
$ |
220,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for interest |
|
$ |
752 |
|
|
$ |
277 |
|
Cash paid during period for income taxes |
|
$ |
11,522 |
|
|
$ |
13,702 |
|
|
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Property and equipment additions in accounts payable |
|
$ |
2,035 |
|
|
$ |
2,562 |
|
Unrealized gain on post retirement obligation in accumulated other
comprehensive income (loss) |
|
$ |
342 |
|
|
$ |
|
|
Issuance of common stock for business acquisition |
|
$ |
|
|
|
$ |
676 |
|
See accompanying notes to condensed consolidated financial statements
7
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries (Sykes or the Company) provides
outsourced customer contact management solutions and services in the business process outsourcing
arena to companies, primarily within the communications, financial services, healthcare,
technology/consumer and transportation and leisure 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
communications channels encompassing phone, e-mail, Web and chat. Sykes complements its outsourced
customer contact management services with various enterprise support services in the United States
that encompass services for a companys internal support operations, from technical staffing
services to outsourced corporate help desk services. In Europe, Sykes also provides fulfillment
services including multilingual sales order processing via the Internet and phone, payment
processing, inventory control, product delivery and product returns handling. The Company has
operations in two geographic regions entitled (1) the Americas, which includes the United States,
Canada, Latin America, India and the Asia Pacific Rim, in which the client base is primarily
companies in the United States that are using the Companys services to support their customer
management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
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) for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results that may be expected
for any future quarters or the year ending December 31, 2009. For further information, refer to the
consolidated financial statements and notes thereto, included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange
Commission (SEC). Subsequent events have been evaluated through the date and time the condensed
consolidated financial statements were issued on November 3, 2009. See Note 16 Subsequent Event.
Recognition of Revenue Revenue is recognized pursuant to Accounting Standards
Codification (ASC) 605 Revenue Recognition. The Company primarily recognizes its revenue from
services as those services are performed, which is based on either a per minute, per call or per
transaction basis, under a fully executed contractual agreement and records reductions to revenue
for contractual penalties and holdbacks for failure to meet specified minimum service levels and
other performance based contingencies. Revenue recognition is limited to the amount that is not
contingent upon delivery of any future product or service or meeting other specified performance
conditions. Product sales, accounted for within fulfillment services, are recognized upon shipment
to the customer and satisfaction of all obligations.
In accordance with ASC 605-25, Revenue Recognition- Multiple-Element Arrangements, revenue from
contracts with multiple-deliverables is allocated to separate units of accounting based on their
relative fair value, if the deliverables in the contract(s) meet the criteria for such treatment.
Certain fulfillment services contracts contain multiple-deliverables. Additionally, the Company had
a contract containing multiple-deliverables for customer contact management services and
fulfillment services that ended during 2008. Separation criteria included whether a delivered item
has value to the customer on a standalone basis, whether there is objective and reliable evidence
of the fair value of the undelivered items and, if the arrangement includes a general right of
return related to a delivered item, whether delivery of the undelivered item is considered probable
and in the Companys control. Fair value is the price of a deliverable when it is regularly sold on
a standalone basis, which generally consists of vendor-specific objective evidence of fair value.
If there is no evidence of the fair value for a delivered product or service, revenue is allocated
first to the fair value of the undelivered product or service and then the residual revenue is
allocated to the delivered product or service. If there is no evidence of the fair value for an
undelivered product or service, the contract(s) is accounted for as a single unit of accounting,
resulting in delay of revenue recognition for the delivered
8
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recognition of Revenue (continued)
product or service until the undelivered product or service portion of the contract is complete.
The Company recognizes revenue for delivered elements only when the fair values of undelivered
elements are known, uncertainties regarding client acceptance are resolved, and there are no
client-negotiated refund or return rights affecting the revenue recognized for delivered elements.
Once the Company determines the allocation of revenue between deliverable elements, there are no
further changes in the revenue allocation. If the separation criteria are met, revenue from these
services is recognized as the services are performed under a fully executed contractual agreement.
If the separation criteria are not met because there is insufficient evidence to determine fair
value of one of the deliverables, all of the services are accounted for as a single combined unit
of accounting. For these deliverables with insufficient evidence to determine fair value, revenue
is recognized on the proportional performance method using the straight-line basis over the
contract period, or the actual number of operational seats used to serve the client, as
appropriate.
Property and Equipment The carrying value of property and equipment to be held and used is
evaluated for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable in accordance with ASC 360 Property, Plant and Equipment. For
purposes of recognition and measurement of an impairment loss, assets are grouped at the lowest
levels for which there are identifiable cash flows (the reporting unit). An asset is considered
to be impaired when the sum of the undiscounted future net cash flows expected to result from the
use of the asset and its eventual disposition does not exceed its carrying amount. The amount of
the impairment loss, if any, is measured as the amount by which the carrying value of the asset
exceeds its estimated fair value, which is generally determined based on appraisals or sales prices
of comparable assets. Occasionally, the Company redeploys property and equipment from
under-utilized centers to other locations to improve capacity utilization if it is determined that
the related undiscounted future cash flows in the under-utilized centers would not be sufficient to
recover the carrying amount of these assets. The Company determined that its property and equipment
was not impaired as of September 30, 2009.
Investment in SHPS The Company held a noncontrolling interest in SHPS, Inc. (SHPS),
which was accounted for at cost of approximately $2.1 million as of December 31, 2008 and was
included in Deferred charges and other assets in the accompanying Condensed Consolidated Balance
Sheet. In June 2009, the Company received notice from SHPS that the shareholders of SHPS had
approved a merger agreement between SHPS and SHPS Acquisition, Inc., pursuant to which the common
stock of SHPS, including the common stock owned by the Company, would be converted into the right
to receive $0.000001 per share in cash. SHPS informed the Company that it believed the estimated
fair value of the SHPS common stock to be equal to such per share amount. As a result of this
transaction and evaluation of the Companys legal options, the Company believed it was more likely
than not that it would not be able to recover the $2.1 million carrying value of the investment in
SHPS. Therefore, due to the decline in value that is other than temporary, management recorded a
non-cash impairment loss of $2.1 million included in Impairment loss on investment in SHPS during
the second quarter ended June 30, 2009. Subsequent to the recording of the impairment loss, the
Company liquidated its noncontrolling interest in SHPS by converting its SHPS common stock into
cash for $0.000001 per share during the three months ended September 30, 2009. See Note 2 for
further information.
9
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Goodwill - The Company accounts for goodwill and other intangible assets under ASC 350 (ASC 350)
Intangibles Goodwill and Other. Goodwill and other intangible assets with indefinite lives are
not subject to amortization, but instead must be reviewed at least annually, and more frequently in
the presence of certain circumstances, for impairment by applying a fair value based test. Fair
value for goodwill is based on discounted cash flows, market multiples and/or appraised values as
appropriate. Under ASC 350, the carrying value of assets is calculated at the lowest levels for
which there are identifiable cash flows (the reporting unit). If the fair value of the reporting
unit is less than its carrying value, an impairment loss is recorded to the extent that the fair
value of the goodwill within the reporting unit is less than its carrying value. During the second
quarter of 2009, based on the presence of certain circumstances, the Company recorded an impairment
loss on the goodwill related to the March 2005 acquisition of Kelly, Luttmer & Associates Limited
(KLA). See Note 2 for further information.
During the third quarter of 2009, the Company completed its annual goodwill impairment test, which
included the consideration of recent economic developments, and determined that the carrying amount
of goodwill was not impaired as of September 30, 2009. The Company expects to receive future
benefits from the remaining previously acquired goodwill over an indefinite period of time.
Intangible Assets - Intangible assets, primarily customer relationships, existing technologies and
covenants not to compete, are amortized using the straight-line method over their estimated useful
lives which approximates the pattern in which the economic benefits of the assets are consumed. The
Company periodically evaluates the recoverability of intangible assets and takes into account
events or changes in circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. Fair value for intangible assets is based on discounted cash flows,
market multiples and/or appraised values as appropriate. The Company does not have
intangible assets with indefinite lives. During the three and nine months ended September 30, 2009,
based on changes in circumstances, the Company recorded an impairment loss on intangible assets
related to the KLA acquisition mentioned above. See Note 2 for further information.
Value Added Tax Credit Receivables The Philippine operations are subject to Value Added Tax
(VAT), which is usually applied to all goods and services purchased throughout the Philippines.
Upon validation and certification of the VAT credit receivables by the Philippine government, the
VAT credit receivables are held for sale through third-party brokers. The Company sells VAT credits
to others due to its current tax holiday status in the Philippines and resulting inability to fully
utilize these credits. This process through collection typically takes three to five years. The
VAT credit receivables balance recorded at net realizable value, which approximates fair value, is
approximately $6.5 million and $7.5 million as of September 30, 2009 and December 31, 2008,
respectively. See Fair Value Measurements in this Note 1 for further information. As of
September 30, 2009 and December 31, 2008, the VAT credit receivables of $5.1 million and $4.9
million, respectively, are included in Deferred Charges and Other Assets, $1.4 million and $1.1
million, respectively, are included in Other Current Assets and $0.0 million and $1.5 million,
respectively, are included in Receivables, net in the accompanying Condensed Consolidated
Financial Statements. During the three and nine months ended September 30, 2009, the Company
determined that a portion of the VAT credit receivable balance was not recoverable and wrote down
the balance by $0.1 million and $0.4 million, respectively. During the comparable 2008 periods, the
Company wrote down the balance by $0.1 million and $0.5 million, respectively.
Stock-Based Compensation The Company has three stock-based compensation plans: the 2001 Equity
Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan
(for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan
(for certain eligible employees).
10
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
All of these plans are discussed more fully in Note 12. Stock-based awards under these plans may
consist of common stock, common stock units, stock options, cash-settled or stock-settled stock
appreciation rights, restricted stock and other stock-based awards. The Company issues common stock
and treasury stock to satisfy stock option exercises or vesting of stock awards.
The Company recognizes in its statement of operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and directors. Compensation expense for
equity-based awards is recognized over the requisite service period, usually the vesting period,
while compensation expense for liability-based awards (those usually settled in cash rather than
stock) is measured to fair-value at each balance sheet date until the award is settled.
Fair Value of Financial Instruments The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is practicable to
estimate that value:
|
|
|
Cash, Accounts Receivable, Value Added Tax Credit Receivables, Short-term and Other
Investments, Investments Held in Rabbi Trust and Accounts Payable. The carrying values
reported in the balance sheet for cash, accounts receivable, value added tax credit
receivables, short-term investments, investments held in rabbi trust and accounts payable
approximate their fair values. |
|
|
|
Foreign currency forward contracts. Foreign currency forward contracts are recognized in
the balance sheet 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. |
|
|
|
Long-Term Debt. The fair value of long-term debt, including the current portion thereof,
is estimated based on the quoted market price for the same or similar types of borrowing
arrangements. As of September 30, 2009 and December 31, 2008, the Company had no
outstanding long-term debt. |
Fair Value Measurements - Effective January 1, 2008, the Company adopted the provisions
of ASC 820 (ASC 820) Fair Value Measurements and Disclosures and ASC 825 (ASC 825) Financial
Instruments. ASC 820, which 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 permits an entity to measure certain financial assets and financial liabilities at fair
value with changes in fair value recognized in earnings each period. Since the date of adoption on
January 1, 2008, the Company has not elected to use the fair value option permitted under ASC 825
for any of its financial assets and financial liabilities that are not already recorded at fair
value.
A description of the Companys policies regarding fair value measurement is summarized below.
Fair Value Hierarchy - ASC 820-10-35 requires disclosure about how fair value is determined
for assets and liabilities and establishes a hierarchy for which these assets and liabilities must
be grouped, based on significant levels of observable or unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the
Companys 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:
11
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Fair Value Measurements (continued)
|
|
|
|
|
|
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
|
|
|
|
|
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations in which all significant inputs
and significant value drivers are observable in active markets. |
|
|
|
|
|
|
|
|
|
Level 3 Valuations derived from valuation techniques in which one
or more significant inputs or significant value drivers are
unobservable. |
Determination of Fair Value - The Company generally uses quoted market prices (unadjusted)
in active markets for identical assets or liabilities that the Company has the ability to access to
determine fair value, and classifies such items in Level 1. Fair values determined by Level 2
inputs utilize inputs other than quoted market prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices
in active markets for similar assets or liabilities, and inputs other than quoted market prices
that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the
asset or liability, and include situations where there is little, if any, market activity for the
asset or liability.
If quoted market prices are not available, fair value is based upon internally developed valuation
techniques that use, where possible, current market-based or independently sourced market
parameters, such as interest rates, currency rates, etc. Assets or liabilities valued using such
internally generated valuation techniques are classified according to the lowest level input or
value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even
though there may be some significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure fair
value, including an indication of the level in the fair value hierarchy in which each asset or
liability is generally classified.
Money Market Funds and Open-end Mutual Funds The Company uses quoted market prices in active
markets to determine the fair value of money market funds and open-end mutual funds, which are
classified in Level 1 of the fair value hierarchy.
Foreign Currency Forward Contracts The Company enters into foreign currency forward contracts
over the counter and values such contracts based on quoted market prices of comparable instruments
or, if none are available, on pricing models or formulas using current market and model
assumptions. The key inputs include forward foreign currency exchange rates and interest rates. The
item is classified in Level 2 of the fair value hierarchy.
Investments Held in Rabbi Trust The Company maintains a non-qualified deferred compensation plan
structured as a rabbi trust for certain eligible employees. The investment assets of the rabbi
trust are valued using quoted market prices multiplied by the number of shares held in the trust,
which are classified in Level 1 of the fair value hierarchy. For additional information about our
deferred compensation plan, see Notes 5 and 12.
Guaranteed Investment Certificates Guaranteed investment certificates, with variable interest
rates linked to the prime rate, approximate fair value due to the automatic ability to reprice with
changes in the market; such items are classified in Level 2 of the fair value hierarchy.
Value Added Tax Credit Receivables The VAT credit receivables are recorded at net realizable
value, which approximates fair value. The Company determines the net realizable value based on
estimated discounted future cash flows using such factors as historical sales experience and
current market conditions. Such items are classified in Level 3 of the fair value hierarchy.
12
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Foreign Currency Translation - The assets and liabilities of the Companys foreign subsidiaries,
whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in
effect on the reporting date, and income and expenses are translated at the weighted average
exchange rate during the period. The net effect of translation gains and losses is not included in
determining net income, but is included in Accumulated other comprehensive income (loss), which
is reflected as a separate component of shareholders equity until the sale or until the complete
or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign
currency
transactional gains and losses are included in Other income (expense) in the accompanying
Condensed Consolidated Statements of Operations.
Foreign Currency and Derivative Instruments The Company accounts for financial derivative
instruments under ASC 815 (ASC 815) Derivatives and Hedging. The Company generally utilizes
non-deliverable forward contracts expiring within one to 24 months to reduce its foreign currency
exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional
foreign currencies. Upon proper qualification, these contracts are accounted for as cash-flow
hedges, as defined by ASC 815. 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. In using derivative financial instruments to hedge exposures to changes in exchange
rates, the Company exposes itself to counterparty credit risk.
All derivatives, including foreign currency forward contracts, are recognized in the balance sheet
at fair value. On the date the derivative contract is entered into, the Company determines whether
the derivative contract should be designated as a cash flow hedge. Changes in the fair value of
derivatives that are highly effective and designated as cash flow hedges are recorded in
Accumulated other comprehensive income (loss), until the forecasted underlying transactions
occur. Any realized gains or losses resulting from the cash flow hedges are recognized together
with the hedged transaction within Revenues. Cash flows from the derivative contracts are
classified within Cash flows from operating activities in the accompanying Condensed Consolidated
Statement of Cash Flows. Ineffectiveness is measured based on the change in fair value of the
forward contracts and the fair value of the hypothetical derivatives with terms that match the
critical terms of the risk being hedged. Hedge ineffectiveness is recognized within Revenues.
The Company formally documents all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various hedging activities. This
process includes linking all derivatives that are designated as cash flow hedges to forecasted
transactions. The Company also formally assesses, both at the hedges inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items on a prospective and retrospective basis. When it
is determined that a derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge or if a forecasted hedge is no longer probable of occurring, the Company
discontinues hedge accounting prospectively. At September 30, 2009, all hedges were determined to
be highly effective.
The Company also periodically enters into forward contracts that are not designated as hedges as
defined under ASC 815. The purpose of these derivative instruments is to reduce the effects on its
operating results and cash flows from fluctuations caused by volatility in currency exchange rates.
The Company records changes in the fair value of these derivative instruments within Revenues or
Other income, depending on the purpose of the transaction, in the accompanying Condensed
Consolidated Statements of Operations. See Note 4 for further information on financial derivative
instruments.
Recent Accounting Pronouncements - In September 2006, the Financial Accounting Standards Board
(FASB) issued ASC 820 (ASC 820) Fair Value Measurements and Disclosures, which defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements. The Company adopted
the provisions of ASC 820 on January 1, 2008. The adoption of this standard did not have a material
impact on the Companys financial condition, results of operations or cash flows. See Note 2 Fair
Value for further information.
13
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In March 2007, the Emerging Issues Task Force (EITF) reached a consensus on ASC 715-60 (ASC
715-60) Topic 715 Compensation Retirement Benefits Subtopic 60 Defined Benefits Plans Other
Postretirement ASC 715-60 provides guidance on the employers recognition of assets, liabilities
and related compensation costs for collateral assignment split-dollar life insurance arrangements
that provide a benefit to an employee that extends into postretirement periods. The Company
adopted the provisions of ASC 715-60 on January 1, 2008. As a result of the implementation of ASC
715-60, the Company recognized a $0.5 million liability for a postretirement benefit
obligation related to a split dollar arrangement on behalf of its founder and former Chairman and
Chief Executive Officer which was accounted for as a reduction to the January 1, 2008 balance of
retained earnings. See Note 13 Defined Benefit Pension Plan and Post-Retirement Benefits for
further information.
In December 2007, the FASB issued ASC 805 (ASC 805) Business Combinations and modifications to
ASC 810 (ASC 810) Consolidation. ASC 805 changes how business acquisitions are accounted for
and impacts financial statements both on the acquisition date and in subsequent periods. ASC 810
includes changes to the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of shareholders equity.
On January 1, 2009, the Company adopted the provisions of ASC 805 and the modifications to ASC 810,
relating to noncontrolling interests. ASC 805 will be applied prospectively for all business
combinations entered into after January 1, 2009, the date of adoption. The modified provisions of
ASC 810 will also be applied prospectively to all noncontrolling interests, except for the
presentation and disclosure provisions which are applied retrospectively to any noncontrolling
interests that arose before January 1, 2009. The adoption of these standards did not have a
material impact on the Companys financial condition, results of operations or cash flows.
In March 2008, the FASB issued modifications to ASC 815 (ASC 815) Derivatives and Hedging,
requiring increased qualitative, quantitative, and credit-risk disclosures about an entitys
derivative instruments and hedging activities. On January 1, 2009, the Company adopted the
modifications to ASC 815. The adoption of this standard did not have a material impact on the
Companys financial condition, results of operations or cash flows. See Note 4 Financial
Derivatives for further information.
In April 2008, the FASB issued modifications to ASC 350 (ASC 350) Intangibles Goodwill and
Other. The modifications to ASC 350 amended the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful life of recognized intangible
assets. This new guidance applies prospectively to intangible assets that are acquired
individually or with a group of other assets in business combinations and asset acquisitions. On
January 1, 2009, the Company adopted the modifications to ASC 350. The adoption of this standard
did not have a material impact on the Companys financial condition, results of operations or cash
flows.
In December 2008, the FASB issued modifications to ASC 715-20 (ASC 715-20) Topic 715
Compensation Retirement Benefits Subtopic 20 Defined Benefits Plans General, which provides
additional guidance on an employers disclosures about plan assets of a defined benefit pension or
other postretirement plan. The modifications to ASC 715-20 are effective for financial statements
issued for fiscal years ending after December 15, 2009. The Company is currently evaluating the
impact of adopting the modifications to ASC 715-20 on its financial condition, results of
operations and cash flows.
14
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In April 2009, the FASB issued modifications to ASC 805-20 (ASC 805-20) Topic 805 Business
Combinations Subtopic 20 Identifiable Assets and Liabilities, and Any Noncontrolling Interests,
which requires that assets acquired and liabilities assumed in a business combination that arise
from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair
value of such an asset or liability cannot be reasonably estimated, the asset or liability would
generally be recognized in accordance with ASC 450 (ASC 450) Contingencies. Further, ASC 805-20
requires that a systematic and rational basis for subsequently measuring and accounting for the
assets or liabilities arising from contingencies be developed based on their nature. The
modifications to ASC 805-20 are effective for assets or liabilities arising from contingencies in
business combinations whose acquisition date is
on or after January 1, 2009. The adoption of these modifications to ASC 805-20 did not have a
material impact on the Companys financial condition, results of operations or cash flows.
In April 2009, the FASB issued modifications to ASC 825 (ASC 825) Financial Instruments, to
extend the annual disclosures about fair value of financial instruments to interim reporting
periods. The modifications to ASC 825 is effective for interim reporting periods ending after June
15, 2009, and were adopted on April 1, 2009. The adoption of these modifications to ASC 825 did not
have a material impact on the Companys financial condition, results of operations or cash flows.
See Note 1- Basis of Presentation and Summary of Significant Accounting Policies Fair Value
Measurements for further information.
In April 2009, the FASB issued modifications to ASC 820. The modifications to ASC 820 provide
additional guidance on estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for the asset or
liability. The modifications to ASC 820 also provide guidance on circumstances that may indicate a
transaction is not orderly (that is, distressed or forced). The modifications to ASC 820 are
effective on a prospective basis for interim and annual reporting periods ending after June 15,
2009, and were adopted on April 1, 2009. The adoption of these modifications to ASC 820 did not
have a material impact on the Companys financial condition, results of operations or cash flows.
In April 2009, the FASB issued modifications to ASC 320 (ASC 320) InvestmentsDebt and Equity
Securities, which amends the recognition and presentation of other-than-temporary impairments for
debt securities and provides new disclosure requirements for both debt and equity securities. Upon
adoption of the modifications to ASC 320, the non-credit component of previously recognized
other-than-temporary impairment on debt securities held on that date is reclassified from Retained
Earnings to Accumulated Other Comprehensive Income and reported as a cumulative-effect adjustment
as of the beginning of the period of adoption, if the entity does not intend to sell the security
and it is not more likely than not that it will be required to sell the security before recovery of
its amortized cost basis. The modifications to ASC 320 are effective for interim and annual
reporting periods ending after June 15, 2009, and were adopted on April 1, 2009. The adoption of
these ASC 320 modifications did not have a material impact on the Companys financial condition,
results of operations or cash flows. See Note 5 Investments Held in Rabbi Trust for further
information.
In May 2009, the FASB issued ASC 855 (ASC 855) Subsequent Events, which establishes general
standards of accounting for, and disclosures of, events that occur after the balance sheet date but
before the financial statements are issued or are available to be issued. ASC 855 is effective on a
prospective basis for interim or annual periods ending after June 15, 2009, and was adopted on
April 1, 2009. This standard did not have a material impact on the Companys financial condition,
results of operations and cash flows.
15
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In June 2009, the FASB issued ASC 105 (ASC 105) Generally Accepted Accounting Principles. ASC
105 states that the FASB Accounting Standards Codification (Codification) will become the single
source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the
FASB. The Codification and all of its contents, which changes the referencing of financial
standards, will carry the same level of authority. In other words, the GAAP hierarchy will be
modified to include only two levels of GAAP, authoritative and nonauthoritative. ASC 105 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009, and was adopted July 1, 2009. Therefore, all references to GAAP use the new Codification
numbering system prescribed by the FASB. As the Codification is not intended to change or alter
existing GAAP, it did not have an impact on the Companys financial condition, results of
operations and cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05 (ASU 2009-05),
Measuring Liabilities at Fair Value, which provides clarification for the fair value measurement
of liabilities in circumstances in which a quoted price in an active market for an identical
liability is not available. ASU 2009-05 is effective for the first interim period ending after
December 15, 2009, and was adopted on October 1, 2009. This standard did not have a material impact
on the Companys financial condition, results of operations or cash flows.
In September 2009, the FASB issued ASU No. 2009-12 (ASU 2009-12), Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent), which provides guidance on
measuring the fair value of certain alternative investments. ASU 2009-12 amends ASC 820 to offer
investors a practical expedient for measuring the fair value of investments in certain entities
that calculate net asset value per share. ASU 2009-12 is effective for interim and annual periods
ending after December 15, 2009. The Company is currently evaluating the impact of adopting this
standard on its financial condition, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-13 (ASU 2009-13), Multiple-Deliverable Revenue
Arrangements, which amends ASC 605, Revenue Recognition. ASU 2009-13 provides guidance related
to the determination of when the individual deliverables included in a multiple-element arrangement
may be treated as separate units of accounting and modifies the manner in which the transaction
consideration is allocated across the individual deliverables. Also, the standard expands the
disclosure requirements for revenue arrangements with multiple deliverables. ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating
the impact of adopting this standard on its financial condition, results of operations and cash
flows.
16
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 2 Fair Value
The Companys assets and liabilities measured at fair value on a recurring basis as of September
30, 2009 subject to the requirements of ASC 820 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurments at September 30, 2009 Using: |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Balance at |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
September 30, 2009 |
|
|
Level (1) |
|
|
Level (2) |
|
|
Level (3) |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Open-end
Mutual Funds (1) |
|
$ |
86,168 |
|
|
$ |
86,168 |
|
|
$ |
|
|
|
$ |
|
|
Foreign Currency Forward Contracts (2) |
|
|
1,136 |
|
|
|
|
|
|
|
1,136 |
|
|
|
|
|
Investments held in Rabbi Trust
for the Deferred Compensation Plan (3) |
|
|
2,250 |
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
Guaranteed Investment Certificates (4) |
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
Value Added Tax Credit Receivables (5) |
|
|
6,485 |
|
|
|
|
|
|
|
|
|
|
|
6,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
96,086 |
|
|
$ |
88,418 |
|
|
$ |
1,183 |
|
|
$ |
6,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Forward Contracts (6) |
|
$ |
3,934 |
|
|
$ |
|
|
|
$ |
3,934 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
3,934 |
|
|
$ |
|
|
|
$ |
3,934 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included $85.5 million in Cash and cash equivalents and $0.7 million in Deferred
charges and other assets in the accompanying Condensed Consolidated Balance Sheet. |
|
(2) |
|
Included $1.0 million in Other current assets and $0.2 million in Deferred charges
and other assets in the accompanying Condensed Consolidated Balance Sheet. See Note 4. |
|
(3) |
|
Included in Other current assets in the accompanying Condensed Consolidated
Balance Sheet. See Note 5. |
|
(4) |
|
Included in Deferred charges and other assets in
the accompanying Condensed Consolidated Balance Sheet. |
|
(5) |
|
Included $5.1 million in Deferred charges and other assets and $1.4 million in Other
current assets in the accompanying Condensed Consolidated Balance Sheet. |
|
(6) |
|
Included in Other accrued expense and current liabilities in the accompanying
Condensed Consolidated Balance Sheet. See Note 4. |
17
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 2 Fair Value (continued)
The Companys assets and liabilities measured at fair value on a recurring basis as of December 31,
2008 subject to the requirements of ASC 820 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurments at December 31, 2008 Using: |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Balance at |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
December 31, 2008 |
|
|
Level (1) |
|
|
Level (2) |
|
|
Level (3) |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Open-end
Mutual Funds (1) |
|
$ |
111,423 |
|
|
$ |
111,423 |
|
|
$ |
|
|
|
$ |
|
|
Investments held in Rabbi Trust
for the Deferred Compensation Plan (2) |
|
|
1,386 |
|
|
|
1,386 |
|
|
|
|
|
|
|
|
|
Guaranteed Investment Certificates (3) |
|
|
858 |
|
|
|
|
|
|
|
858 |
|
|
|
|
|
Value Added Tax Credit Receivables (4) |
|
|
7,501 |
|
|
|
|
|
|
|
|
|
|
|
7,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
121,168 |
|
|
$ |
112,809 |
|
|
$ |
858 |
|
|
$ |
7,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Forward Contracts (5) |
|
$ |
11,654 |
|
|
$ |
|
|
|
$ |
11,654 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
11,654 |
|
|
$ |
|
|
|
$ |
11,654 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included $110.7 million in Cash and cash equivalents and $0.7 million in
Deferred charges and other assets in the accompanying Condensed Consolidated Balance Sheet. |
|
(2) |
|
Included in Other current assets in the accompanying Condensed
Consolidated Balance Sheet. See Note 5. |
|
(3) |
|
Included in Other current assets in the accompanying Condensed Consolidated Balance Sheet. |
|
(4) |
|
Included $4.9 million in Deferred charges and other assets, $1.1 million in
Other current assets and $1.5 million in Receivables in the accompanying Condensed Consolidated
Balance Sheet. |
|
(5) |
|
Included in Other accrued expense and current liabilities in the accompanying
Condensed Consolidated Balance Sheet. See Note 4. |
18
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 2 Fair Value (continued)
The following table presents a reconciliation of the beginning and ending balances for the
Companys value added tax credit receivables measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2009
and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Description |
|
2009 |
|
|
2008 |
|
Beginning Balance, July 1 |
|
$ |
7,062 |
|
|
$ |
7,238 |
|
Included in
earnings (1) |
|
|
(94 |
) |
|
|
(121 |
) |
Purchases, issuances and settlements |
|
|
(483 |
) |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, September 30 |
|
$ |
6,485 |
|
|
$ |
7,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Description |
|
2009 |
|
|
2008 |
|
Beginning Balance, January 1 |
|
$ |
7,501 |
|
|
$ |
8,247 |
|
Included in
earnings (1) |
|
|
(414 |
) |
|
|
(482 |
) |
Purchases, issuances and settlements |
|
|
(602 |
) |
|
|
(615 |
) |
|
|
|
|
|
|
|
|
Ending Balance, September 30 |
|
$ |
6,485 |
|
|
$ |
7,150 |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Unrealized Gains (Losses) Included in Earnings Above |
|
|
|
|
|
|
|
|
For the three months ended September 30 |
|
$ |
|
|
|
$ |
|
|
For the nine months ended September 30 |
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
Represents the write down to net realizable value included in
General and administrative costs in the accompanying Condensed Consolidated
Statement of Operations. |
19
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 2 Fair Value (continued)
Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis
utilizing Level 3 inputs as described in Note 1, like those associated with acquired businesses,
including goodwill and other intangible assets, investments at cost and other long-lived assets.
For these assets, measurement at fair value in periods subsequent to their initial recognition is
applicable if one or more of these assets are determined to be impaired. The Companys assets
measured at fair value on a nonrecurring basis (no liabilities) as of September 30, 2009 subject to
the requirements of ASC 820 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level (3) Fair Value Measurments |
|
|
|
|
|
|
|
at September 30, 2009: |
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
Balance at |
|
|
2009 |
|
|
2009 |
|
|
|
September 30, |
|
|
Total Gains |
|
|
Total Gains |
|
|
|
2009 |
|
|
(Losses) |
|
|
(Losses) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KLA assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
$ |
(629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net |
|
|
|
|
|
|
(324 |
) |
|
|
(1,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(324 |
) |
|
|
(1,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in SHPS (1) |
|
|
|
|
|
|
|
|
|
|
(2,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
|
|
|
$ |
(324 |
) |
|
$ |
(3,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 1, Investment in SHPS, for the reason for the
fair value measurement, description of the inputs and the information
used to develop the inputs. |
On June 30, 2009, the Company committed to a plan to sell or close its Employee Assistance and
Occupational Health operations in Calgary, Alberta, Canada, which was originally acquired on March
1, 2005 when the Company purchased the shares of KLA. As a result of KLAs actual and forecasted
operating results for 2009, deterioration of the KLA customer base and loss of key employees, the
Company determined to sell or close the Calgary operations on or before December 31, 2009 for less
than its current carrying value. This decline in value was other than temporary, therefore, the
Company recorded a non-cash impairment loss of $1.0 million related to intangible assets (primarily
customer relationships) and $0.6 million related to goodwill included in Impairment loss on
goodwill and intangibles during the three months ended June 30, 2009. Subsequently, the Company
determined to close the Calgary operations and wrote off the remaining balance of the intangible
assets of $0.3 million during the three months ended September 30, 2009. The accompanying
Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2009 includes Impairment loss on goodwill and intangibles of $0.3 million and $1.9 million,
respectively, related to the Calgary operations (none in the comparable 2008 period). In addition,
the Company estimates $0.6 million to $1.0 million of cash expenditures for the Calgary closing,
including facility-related costs of $0.5 million to $0.9 million to be paid through the remainder
of the lease term ending July 2012 and $0.1 million in one-time employee termination benefits. The
exact timing and actual amounts of the facility-related payments are dependent upon the Companys
ability to sublease these facilities. If the events and circumstances regarding the Companys
ability to sublease the facilities change, these estimates would change. Income (loss) from
operations for KLA for the three and nine months ended September 2009 and 2008 were not material to
the consolidated income from operations; therefore, the results of operations of KLA have not been
presented as discontinued operations in the accompanying Condensed Consolidated Statement of
Operations.
20
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 3 Goodwill and Intangible Assets
The following table presents the Companys purchased intangible assets (in thousands) as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Amortization |
|
|
|
Intangibles |
|
|
Amortization |
|
|
Intangibles |
|
|
Period (years) |
|
Customer relationships |
|
$ |
4,421 |
|
|
$ |
2,395 |
|
|
$ |
2,026 |
|
|
|
6 |
|
Trade name |
|
|
804 |
|
|
|
522 |
|
|
|
282 |
|
|
|
5 |
|
Non-compete agreement |
|
|
161 |
|
|
|
161 |
|
|
|
|
|
|
|
2 |
|
Other |
|
|
133 |
|
|
|
133 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,519 |
|
|
$ |
3,211 |
|
|
$ |
2,308 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys purchased intangible assets (in thousands) as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Amortization |
|
|
|
Intangibles |
|
|
Amortization |
|
|
Intangibles |
|
|
Period (years) |
|
Customer relationships |
|
$ |
6,711 |
|
|
$ |
2,596 |
|
|
$ |
4,115 |
|
|
|
7 |
|
Trade name |
|
|
892 |
|
|
|
446 |
|
|
|
446 |
|
|
|
5 |
|
Non-compete agreement |
|
|
610 |
|
|
|
610 |
|
|
|
|
|
|
|
2 |
|
Other |
|
|
237 |
|
|
|
212 |
|
|
|
25 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,450 |
|
|
$ |
3,864 |
|
|
$ |
4,586 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense, related to the purchased intangible assets resulting from acquisitions
(other than goodwill), of $0.2 million and $0.8 million for the three and nine months ended
September 30, 2009, respectively, is included in General and administrative costs in the
accompanying Condensed Consolidated Statements of Operations. In the comparable 2008 periods, the
Company recognized amortization expense of $0.4 million and $1.1 million, respectively.
21
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 3 Goodwill and Intangible Assets (continued)
The Companys estimated future amortization expense for the five succeeding years is as follows (in
thousands):
|
|
|
|
|
Years Ending December 31, |
|
Amount |
|
2009 (remaining three months)
|
|
$ |
225 |
|
2010
|
|
$ |
898 |
|
2011
|
|
$ |
817 |
|
2012
|
|
$ |
368 |
|
2013
|
|
$ |
|
|
Changes in goodwill, within the Americas segment, consist of the following (in thousands):
|
|
|
|
|
Years Ending December 31, |
|
Amount |
|
|
Balance at December 31, 2007 |
|
$ |
22,468 |
|
Contingent payment for Apex acquisition |
|
|
3,076 |
|
Foreign currency translation |
|
|
(2,353 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
|
23,191 |
|
Impairment on KLA goodwill (see Note 2) |
|
|
(629 |
) |
Foreign currency translation |
|
|
(1,442 |
) |
|
|
|
|
Balance at September 30, 2009 |
|
$ |
21,120 |
|
|
|
|
|
Note 4 Financial Derivatives
The Company had derivative assets and liabilities relating to outstanding forward contracts,
designated as cash flow hedges, as defined under ASC 815, consisting of Philippine peso (PHP)
contracts, maturing within 15 months with a notional value of $66.4 million and $107.0 million as
of September 30, 2009 and December 31, 2008, respectively. 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 Company had a total of $0.4 million and $7.8 million of deferred losses, net of taxes of $0.4
million and $3.3 million, on these derivative instruments as of September 30, 2009 and December 31,
2008, respectively, recorded in Accumulated other comprehensive income (loss) (AOCI) in the
accompanying Condensed Consolidated Balance Sheets. The deferred losses expected to be
reclassified to Revenues from AOCI during the next twelve months is $1.0 million. However, this
amount and other future reclassifications from AOCI will fluctuate with movements in the underlying
market price of the forward contracts.
In October
2009, the Company entered into forward contracts to sell U.S. dollars
of $5.1 million at fixed prices of 5.5 million Canadian dollars to
hedge intercompany forecasted cash outflows through June 2010.
The Company also periodically enters into forward contracts that are not designated as hedges as
defined under ASC 815. The purpose of these derivative instruments is to reduce the effects on its
operating results and cash flows from fluctuations caused by volatility in currency exchange rates,
primarily related to intercompany loan payments. During the nine months ended September 30, 2009,
the Company entered into and settled forward contracts to sell $0.9 million U.S. dollars at fixed
prices of 1.1 million Canadian dollars as well as forward contracts to sell PHP 175.0 million at
fixed prices of Euro 2.8 million. During the nine months ended September 30, 2008, the Company
entered into a forward contract to sell 25.0 million Canadian dollars at fixed prices of Euro 14.6
million through December 2009. See Note 1 for further information on foreign currency and
derivative instruments.
22
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 4 Financial Derivatives (continued)
The Company had the following outstanding foreign currency forward contracts (in thousands):
|
|
|
|
|
|
|
As of September 30, 2009 |
|
As of December 31, 2008 |
Foreign |
|
Currency |
|
Foreign |
|
Currency |
Currency |
|
Denomination |
|
Currency |
|
Denomination |
U.S. Dollars
|
|
Philippine
Pesos 3,164,419
|
|
U.S. Dollars
|
|
Philippine
Pesos 4,645,715 |
|
|
|
|
|
|
|
Canadian Dollars
|
|
Euros 14,641
|
|
Canadian Dollars
|
|
Euros 14,641 |
As of September 30, 2009, the maximum amount of loss due to credit risk that, based on the
gross fair value of the financial instruments, the Company would incur if parties to the financial
instruments that make up the concentration failed to perform according to the terms of the
contracts is $1.1 million.
The following tables present the fair value of the Companys derivative instruments as of September
30, 2009 and December 31, 2008 included in the accompanying Condensed Consolidated Balance Sheets
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets |
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
Location |
|
|
Fair Value |
|
|
Location |
|
|
Fair Value |
|
Derivatives designated as hedging
instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts |
|
assets |
|
$ |
971 |
|
|
|
|
|
|
$ |
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges and |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
other assets |
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
|
|
|
$ |
1,136 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 4 Financial Derivatives (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities |
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Location |
|
|
Fair Value |
|
|
Location |
|
|
Fair Value |
|
Derivatives designated as hedging
instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued
|
|
|
|
|
|
Other accrued |
|
|
|
|
|
|
expenses and |
|
|
|
|
|
expenses and |
|
|
|
|
Foreign currency forward contracts |
|
current liabilities |
|
$ |
1,992 |
|
|
current liabilities |
|
$ |
11,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments under ASC 815(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued |
|
|
|
|
|
Other accrued |
|
|
|
|
|
|
expenses and |
|
|
|
|
|
expenses and |
|
|
|
|
Foreign currency forward contracts |
|
current liabilities |
|
|
1,942 |
|
|
current liabilities |
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
|
|
|
|
$ |
3,934 |
|
|
|
|
|
|
$ |
11,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 1 for additional information on the Companys purpose for entering into
derivatives not designated as hedging instruments and its overall risk management strategies. |
The following tables present the effect of the Companys derivative instruments for the three
months ended September 30, 2009 and 2008 in the accompanying Condensed Consolidated Financial
Statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
Gain (Loss) |
|
|
|
Reclassified From |
|
Gain (Loss) |
|
|
Recognized in AOCI |
|
|
|
Accumulated AOCI |
|
Recognized in Income |
|
|
on Derivative |
|
Statement |
|
Into Income (Effective |
|
on Derivative |
Derivatives in ASC 815 |
|
(Effective Portion) |
|
of |
|
Portion) |
|
(Ineffective Portion) |
cash flow hedging |
|
September 30, |
|
Operations |
|
September 30, |
|
September 30, |
relationships: |
|
2009 |
|
2008 |
|
Location |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Foreign currency forward contracts |
|
$ |
1,528 |
|
|
$ |
(1,964 |
) |
|
Revenues |
|
$ |
(2,291 |
) |
|
$ |
(1,621 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,528 |
|
|
$ |
(1,964 |
) |
|
|
|
|
|
$ |
(2,291 |
) |
|
$ |
(1,621 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 4 Financial Derivatives (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized |
|
|
|
Statement of |
|
in Income on Derivative |
|
Derivatives not designated as hedging |
|
Operations |
|
September 30, |
|
instruments under ASC 815: |
|
Location |
|
2009 |
|
|
2008 |
|
Foreign currency forward contracts |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
Foreign currency forward contracts |
|
Other income
and (expense) |
|
|
(877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(877 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
The following tables present the effect of the Companys derivative instruments for the nine
months ended September 30, 2009 and 2008 in the accompanying Condensed Consolidated Financial
Statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
Reclassified From |
|
|
Gain (Loss) |
|
|
|
Recognized in AOCI |
|
|
|
|
|
|
Accumulated AOCI |
|
|
Recognized in Income |
|
|
|
on Derivative |
|
|
Statement |
|
|
Into Income (Effective |
|
|
on Derivative |
|
Derivatives in ASC 815 |
|
(Effective Portion) |
|
|
of |
|
|
Portion) |
|
|
(Ineffective Portion) |
|
cash flow hedging |
|
September 30, |
|
|
Operations |
|
|
September 30, |
|
|
September 30, |
|
relationships: |
|
2009 |
|
|
2008 |
|
|
Location |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Foreign currency forward
contracts |
|
$ |
2,331 |
|
|
$ |
(20,016 |
) |
|
Revenues
|
|
$ |
(7,837 |
) |
|
$ |
1,841 |
|
|
$ |
|
|
|
$ |
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,331 |
|
|
$ |
(20,016 |
) |
|
|
|
|
|
$ |
(7,837 |
) |
|
$ |
1,841 |
|
|
$ |
|
|
|
$ |
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized |
|
|
|
Statement of |
|
in Income on Derivative |
|
Derivatives not designated as hedging |
|
Operations |
|
September 30, |
|
instruments under ASC 815: |
|
Location |
|
2009 |
|
|
2008 |
|
Foreign currency forward contracts |
|
Revenues |
|
$ |
(53 |
) |
|
$ |
6 |
|
Foreign currency forward contracts |
|
Other income and (expense) |
|
|
(1,393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,446 |
) |
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
25
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 5 Investments Held in Rabbi Trust
The Companys Investments Held in Rabbi Trust, classified as trading securities and included in
Other current assets at fair value in the accompanying Condensed Consolidated Balance Sheets
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
Mutual Funds |
|
$ |
2,343 |
|
|
$ |
2,250 |
|
|
$ |
1,810 |
|
|
$ |
1,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments Held in Rabbi Trust were comprised of mutual funds, 67% of which are equity-based
and 33% were debt-based at September 30, 2009. Investment income, included in Other income
(expense) in the accompanying Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2009 and 2008 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Gross realized gains from sale of trading securities |
|
$ |
38 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
1 |
|
Gross realized losses from sale of trading securities |
|
|
|
|
|
|
(7 |
) |
|
|
(21 |
) |
|
|
(9 |
) |
Dividend and interest income |
|
|
7 |
|
|
|
5 |
|
|
|
21 |
|
|
|
18 |
|
Net unrealized holding gains (losses) |
|
|
202 |
|
|
|
(209 |
) |
|
|
292 |
|
|
|
(359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (losses) |
|
$ |
247 |
|
|
$ |
(211 |
) |
|
$ |
332 |
|
|
$ |
(349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Deferred Revenue
The components of deferred revenue consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Future service |
|
$ |
26,142 |
|
|
$ |
23,530 |
|
Estimated potential penalties and holdbacks |
|
|
6,922 |
|
|
|
3,425 |
|
|
|
|
|
|
|
|
|
|
$ |
33,064 |
|
|
$ |
26,955 |
|
|
|
|
|
|
|
|
Note 7 Accumulated Other Comprehensive Income (Loss)
The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders
Equity in accordance with ASC 220 (ASC 220) Comprehensive Income. 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):
26
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 7 Accumulated Other Comprehensive Income (Loss) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Unrealized |
|
|
|
|
Foreign |
|
Actuarial Gain |
|
Gain (Loss) on |
|
Gain (Loss) on |
|
|
|
|
Currency |
|
(Loss) Related |
|
Cash Flow |
|
Post |
|
|
|
|
Translation |
|
to Pension |
|
Hedging |
|
Retirement |
|
|
|
|
Adjustment |
|
Liability |
|
Instruments |
|
Obligation |
|
Total |
|
|
|
Balance at January 1, 2008 |
|
$ |
30,292 |
|
|
$ |
2,165 |
|
|
$ |
5,000 |
|
|
$ |
|
|
|
$ |
37,457 |
|
Pre tax amount |
|
|
(34,451 |
) |
|
|
48 |
|
|
|
(21,247 |
) |
|
|
|
|
|
|
(55,650 |
) |
Tax (provision) benefit |
|
|
|
|
|
|
(479 |
) |
|
|
5,664 |
|
|
|
|
|
|
|
5,185 |
|
Reclassification to net income |
|
|
(4 |
) |
|
|
(61 |
) |
|
|
2,390 |
|
|
|
|
|
|
|
2,325 |
|
Foreign currency translation |
|
|
(73 |
) |
|
|
(286 |
) |
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
(4,236 |
) |
|
|
1,387 |
|
|
|
(7,834 |
) |
|
|
|
|
|
|
(10,683 |
) |
Pre tax amount |
|
|
10,431 |
|
|
|
|
|
|
|
2,331 |
|
|
|
370 |
|
|
|
13,132 |
|
Tax (provision) benefit |
|
|
|
|
|
|
|
|
|
|
(2,850 |
) |
|
|
|
|
|
|
(2,850 |
) |
Reclassification to net income |
|
|
5 |
|
|
|
(46 |
) |
|
|
7,837 |
|
|
|
(28 |
) |
|
|
7,768 |
|
Foreign currency translation |
|
|
(106 |
) |
|
|
5 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
6,094 |
|
|
$ |
1,346 |
|
|
$ |
(415 |
) |
|
$ |
342 |
|
|
$ |
7,367 |
|
|
|
|
Except as discussed in Note 9, earnings associated with the Companys investments in its
subsidiaries are considered to be permanently invested and no provision for income taxes on those
earnings or translation adjustments has been provided.
Note 8 Borrowings
On March 30, 2009, the Company entered into a new credit agreement with KeyBank National
Association and Bank of America, N.A. (the Credit Facility). The Credit Facility replaces the
Companys prior credit agreement, dated March 15, 2004, among the Company, KeyBank National
Association and BNP Paribas. The new Credit Facility provides the Company with a $50 million
revolving credit facility, which amount is subject to certain borrowing limitations, and includes
certain customary financial and restrictive covenants. Pursuant to the terms of the Credit
Facility, the amount of $50 million may be increased up to a maximum of $100 million with the prior
written consent of the lenders. The $50 million Credit Facility includes a $40 million
multi-currency subfacility, a $10 million swingline subfacility and a $5 million letter of credit
subfacility. The Credit Facility will terminate on March 29, 2012.
The Credit Facility may be used for general corporate purposes including strategic acquisitions,
share repurchases, working capital support, and letters of credit, subject to certain limitations.
Under the Credit Facility, the Company may obtain base rate loans (which include all loans under
the swingline subfacility), eurodollar loans and alternate currency loans. Base rate loans accrue
interest at the highest of the base rate (defined as the higher of the lenders prime rate, the
Federal Funds rate plus 0.50%, or the London Interbank Offered Rate (LIBOR) plus 1%) plus an
applicable margin up to 2.50%. Eurodollar loans bear interest at the eurodollar rate plus an
applicable margin up to 3.50%. Alternate currency loans accrue interest at the alternate currency
rate applicable to the alternate currency plus an applicable margin up to 3.50%. In addition, a
commitment fee of up to 0.65% is charged on the unused portion of the Credit Facility on a
quarterly basis. The borrowings under the Credit Facility, which will terminate on March 29, 2012,
are secured by a pledge of 65% of the stock of each of the Companys active direct foreign
subsidiaries.
The Credit Facility prohibits the Company from incurring additional indebtedness, subject to
certain specific exclusions. There were no borrowings during the nine months ended September 30,
2009 and 2008, and no outstanding balances as of September 30, 2009 and December 31, 2008, with $50
million availability on the Credit Facility.
27
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 9 Income Taxes
The Companys effective tax rate was 14.2% and 16.3% for the nine months ended September 30, 2009
and 2008, respectively. The decrease in the effective tax rate of 2.1% was primarily due to the
reduction in foreign withholding taxes, shift in our mix of earnings, partially offset by effects
of permanent differences, changes in valuation allowances, state income taxes and foreign income
tax rate differentials (inclusive of income tax holiday jurisdictions).
The differences in the Companys effective tax rate of 14.2% as compared to the U.S. statutory
federal income tax rate of 35.0% was primarily due to foreign income tax rate differentials
(inclusive of income tax holiday jurisdictions), the recognition of tax benefits from the effects
of valuation allowance changes (as discussed below) and a favorable mix of earnings, partially
offset by foreign withholding taxes and the effects of permanent differences.
In September, 2009, the Company determined that its profitability and expectations of future
profitability of its foreign and domestic operations indicated that it was more likely than not
that portions of the deferred tax assets would be realized. Accordingly, in the third quarter of
2009, the Company recognized a net increase in its U. S.
deferred tax assets of $3.6 million through a partial reversal of the valuation allowance related
to its anticipated utilization of its domestic net operating loss carry-forward. This tax benefit
was partially offset by a decrease of $1.3 million in deferred tax assets when the Company placed an
additional valuation allowance on a foreign subsidiarys deferred tax assets related to the future
use of its net operating loss. The net reversal of the valuation allowance of $2.3 million reduced
the provision for income taxes in the accompanying Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2009.
The liability for unrecognized tax benefits is recorded as Long-term income tax liabilities in
the accompanying Condensed Consolidated Balance Sheets and was $5.1 million at September 30, 2009
and December 31, 2008. If the Company recognized its remaining unrecognized tax benefits at
September 30, 2009, approximately $5.1 million, including related interest and penalties of $2.1
million, would favorably impact the effective tax rate.
Generally, earnings associated with the Companys investments in its subsidiaries are considered to
be permanently invested. The determination of the amount of unrecognized deferred tax liabilities
for temporary differences related to these earnings is not practicable. For 2009, the Company
changed its intent with respect to the distribution of current earnings for one lower tier
subsidiary. The Company accrued withholding tax of $1.7 million as of September 30, 2009 with
respect to this subsidiarys current earnings. The U.S. Department of the Treasury released the
General Explanations of the Administrations Fiscal Year 2010 Revenue Proposals in May 2009.
These proposals represent a significant shift in international tax policy, which may materially
impact U.S. taxation of international earnings, including our position on permanent reinvestment of
foreign earnings. We continue to monitor these proposals and are currently evaluating the
potential impact on our financial condition, results of operations, and cash flows.
The German tax authority is currently auditing periods 2005 through 2007. A Philippine subsidiary
is being audited by the Philippine tax authorities for tax years 2006 and 2007. The Company is
currently under examination in India for tax years ended March 31, 2005 through 2008.
Note 10 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 options, stock appreciation rights, restricted stock, common stock units and shares held in a
rabbi trust using the treasury stock method. The impact of outstanding options to purchase shares
of common stock and stock appreciation rights that were antidilutive and excluded from the
calculation of diluted earnings per share for the nine months ended September 30, 2009 was 0.1
million (not material in the three months ended September 30, 2009) and 0.1 million and 0.2 million
for the three and nine months ended September 30, 2008, respectively.
28
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 10 Earnings Per Share (continued)
The numbers of shares used in the earnings per share computations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
40,743 |
|
|
|
40,678 |
|
|
|
40,662 |
|
|
|
40,590 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock op tions, stock appreciation
rights, restricted stock, common stock units and
shares held in a rabbi trust |
|
|
354 |
|
|
|
392 |
|
|
|
349 |
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted shares outstanding |
|
|
41,097 |
|
|
|
41,070 |
|
|
|
41,011 |
|
|
|
40,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 5, 2002, the Companys Board of Directors authorized the Company to purchase up to
three million shares of its outstanding common stock. A total of 1.9 million shares have been
repurchased under this 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 and general market conditions. During the
nine months ended September 30, 2009, the Company repurchased 224 thousand common shares under the
2002 repurchase program (none in the comparable 2008 period) at prices ranging from $13.72 to
$14.75 per share for a total cost of $3.2 million.
During the nine months ended September 30, 2008, the Company cancelled 4.6 million shares of its
Treasury stock and recorded reductions of $0.1 million to Common stock, $33.3 million to
Additional paid-in capital, $51.5 million to Treasury stock and $18.1 million to Retained
earnings.
Note 11 Segments and Geographic Information
The Company operates within two regions, the Americas and EMEA which represented 71.6% and
28.4%, respectively, of the Companys consolidated revenues for the three months ended September
30, 2009, and 71.1% and 28.9%, respectively, of the Companys consolidated revenues for the nine
months ended September 30, 2009. In the comparable 2008 periods, the Americas and the EMEA region
represented 66.9% and 33.1%, respectively, of the Companys consolidated revenues for the three
months ended September 30, 2008, and 66.9% and 33.1%, respectively, of the Companys consolidated
revenues for the nine months ended September 30, 2008. 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
Companys global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada,
Latin America, India 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, India and the Asia Pacific Rim are included
in the Americas region given the nature of the business and client profile, which is primarily made
up of U.S. based companies that are using the Companys services in these locations to support
their customer contact management needs.
29
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 11 Segments and Geographic Information (continued)
Information about the Companys reportable segments for the three and nine months ended September
30, 2009 compared to the corresponding prior year period, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
152,940 |
|
|
$ |
60,554 |
|
|
|
|
|
|
$ |
213,494 |
|
Depreciation and amortization |
|
$ |
5,671 |
|
|
$ |
1,308 |
|
|
|
|
|
|
$ |
6,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
27,830 |
|
|
$ |
3,899 |
|
|
$ |
(11,035 |
) |
|
$ |
20,694 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
476 |
|
|
|
476 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(2,388 |
) |
|
|
(2,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
138,573 |
|
|
$ |
68,493 |
|
|
|
|
|
|
$ |
207,066 |
|
Depreciation and amortization |
|
$ |
5,609 |
|
|
$ |
1,320 |
|
|
|
|
|
|
$ |
6,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
22,237 |
|
|
$ |
7,079 |
|
|
$ |
(10,063 |
) |
|
$ |
19,253 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
3,964 |
|
|
|
3,964 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(3,725 |
) |
|
|
(3,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
444,682 |
|
|
$ |
180,892 |
|
|
|
|
|
|
$ |
625,574 |
|
Depreciation and amortization |
|
$ |
17,135 |
|
|
$ |
3,782 |
|
|
|
|
|
|
$ |
20,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
76,207 |
|
|
$ |
10,310 |
|
|
$ |
(31,271 |
) |
|
$ |
55,246 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
586 |
|
|
|
586 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(7,932 |
) |
|
|
(7,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 11 Segments and Geographic Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
413,469 |
|
|
$ |
204,947 |
|
|
|
|
|
|
$ |
618,416 |
|
Depreciation and amortization |
|
$ |
17,205 |
|
|
$ |
3,920 |
|
|
|
|
|
|
$ |
21,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
66,178 |
|
|
$ |
15,764 |
|
|
$ |
(29,806 |
) |
|
$ |
52,136 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
11,081 |
|
|
|
11,081 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(10,286 |
) |
|
|
(10,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other items (including corporate costs, other income and expense, and
income taxes) are shown for purposes of reconciling to the Companys consolidated totals as
shown in the table above for the three and nine months ended September 30, 2009 and 2008. The
accounting policies of the reportable segments are the same as those described in Note 1 to
the consolidated financial statements in the Annual Report on Form 10-K for the year ended
December 31, 2008. Inter-segment revenues are not material to the Americas and EMEA segment
results. The Company evaluates the performance of its geographic segments based on revenue
and income (loss) from operations, and does not include segment assets or other income and
expense items for management reporting purposes. |
Note 12 Stock-Based Compensation
A detailed description of each of the Companys stock-based compensation plans is provided below,
including the 2001 Equity Incentive Plan, the 2004 Non-Employee Director Fee Plan and the Deferred
Compensation Plan. Stock-based compensation expense related to these plans, which is included in
General and administrative costs in the accompanying Condensed Consolidated Statements of
Operations, was $1.2 million and $4.0 million for the three and nine months ended September 30,
2009, respectively, and $1.2 million and $3.6 million for the comparable 2008 periods,
respectively. The Company recognized income tax benefits of $0.5 million and $1.6 million in the
accompanying Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2009, respectively, and $0.5 million and $1.4 million for the comparable 2008
periods, respectively. The Company recognized a $0.1 million and $0.2 million benefit of tax
deductions in excess of recognized tax benefits from the exercise of stock options for the three
and nine months ended September 30, 2009, respectively and $0.1 million and $0.7 million for the
three and nine months ended September 30, 2008, respectively. There were no capitalized stock-based
compensation costs at September 30, 2009 or December 31, 2008.
2001 Equity Incentive Plan The Companys 2001 Equity Incentive Plan (the
Plan), which is shareholder-approved, permits the grant of stock options, stock appreciation
rights, restricted stock and other stock-based awards to certain employees of the Company, and
certain non-employees who provide services to the Company, for up to 7.0 million shares of common
stock, in order to encourage them to remain in the employment of or to diligently provide services
to the Company and to increase their interest in the Companys success.
Stock Options Options are granted at fair market value on the date of the grant and generally
vest over one to four years. All options granted under the Plan expire if not exercised by the
tenth anniversary of their grant date. The fair value of each stock option award is estimated on
the date of grant using the Black-Scholes valuation model that uses various assumptions. The fair
value of the stock option awards is expensed on a straight-line basis over the vesting period of
the award. Expected volatility is based on historical volatility of the Companys stock. The
risk-free rate for periods within the contractual life of the award is based on the yield curve of
a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the
expected term of the award. Exercises and forfeitures are estimated within the valuation model
using employee termination and other historical data. The expected term of the stock option awards
granted is derived from historical exercise experience under the Plan and represents the period of
time that stock option awards granted are expected to be outstanding. No stock options were granted
during the nine months ended September 30, 2009 and 2008.
31
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock Options (continued)
The following table summarizes stock option activity under the Plan as of September 30, 2009, and
changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term (in |
|
|
Intrinsic |
|
Stock Options |
|
Shares (000s) |
|
|
Price |
|
|
years) |
|
|
Value (000s) |
|
|
Outstanding at January 1, 2009 |
|
$ |
335 |
|
|
$ |
12.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(112 |
) |
|
|
14.34 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(27 |
) |
|
|
22.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
196 |
|
|
$ |
10.79 |
|
|
|
2.04 |
|
|
$ |
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at September 30, 2009 |
|
|
196 |
|
|
$ |
10.79 |
|
|
|
2.04 |
|
|
$ |
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009 |
|
|
196 |
|
|
$ |
10.79 |
|
|
|
2.04 |
|
|
$ |
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised during the three and nine months ended September 30, 2009 had an intrinsic
value of $0.4 million and $0.6 million, respectively. Options exercised in the comparable periods
of 2008 had an intrinsic value of $0.3
million and $0.8 million, respectively. All options were fully vested as of December 31, 2006 and
there is no unrecognized compensation cost as of September 30, 2009 related to these options
granted under the Plan (the effect of estimated forfeitures is not material).
Cash received from stock options exercised under this Plan for the nine months ended September 30,
2009 and 2008, was $1.6 million and $1.2 million, respectively.
Stock Appreciation Rights The Companys Board of Directors, at the recommendation of the
Compensation and Human Resource Development Committee (the Committee), approves 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 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 fair market value of the Companys 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. In the event of a change in control, the SARs will vest on the date of the change in
control, provided that the participant is employed by the Company on the date of the change in
control.
The SARs are exercisable within three months after the death, disability, retirement or termination
of the participants employment with the Company, if and to the extent the SARs were exercisable
immediately prior to such termination. If the participants employment is terminated for cause, or
the participant terminates his or her own employment with the Company, any portion of the SARs not
yet exercised (whether or not vested) terminates immediately on the date of termination of
employment.
The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation
model that uses various assumptions. The fair value of the SARs is expensed on a straight-line
basis over the requisite service period. Expected volatility is based on historical volatility of
the Companys stock. The risk-free rate for periods
32
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock Appreciation Rights (continued)
within the contractual life of the award is based on the yield curve of a zero-coupon U.S. Treasury
bond on the date the award is granted with a maturity equal to the expected term of the award.
Exercises and forfeitures are estimated within the valuation model using employee termination and
other historical data. The expected term of the SARs
granted represents the period of time the SARs are expected to be outstanding.
The following table summarizes the assumptions used to estimate the fair value of SARs granted
during the nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Expected volatility |
|
|
47 |
% |
|
|
47 |
% |
Weighted-average volativity |
|
|
47 |
% |
|
|
47 |
% |
Expected dividends |
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
4.0 |
|
|
|
4.0 |
|
Risk-free rate |
|
|
1.3 |
% |
|
|
3.1 |
% |
The following table summarizes SARs activity under the Plan as of September 30, 2009, and
changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term (in |
|
|
Intrinsic |
|
Stock Appreciation Rights |
|
Shares (000s) |
|
|
Price |
|
|
years) |
|
|
Value (000s) |
|
|
Outstanding at January 1, 2009 |
|
$ |
367 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
526 |
|
|
$ |
|
|
|
|
8.1 |
|
|
$ |
1,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at September 30, 2009 |
|
|
526 |
|
|
$ |
|
|
|
|
8.1 |
|
|
$ |
1,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009 |
|
|
220 |
|
|
$ |
|
|
|
|
7.1 |
|
|
$ |
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of the SARs granted during the nine months ended
September 30, 2009 and 2008 was $7.42 and $7.20, respectively. Total intrinsic value of SARs
exercised during the nine months ended September 30, 2009 and 2008 was $0.1 million and $0.1
million, respectively.
33
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock Appreciation Rights (continued)
The following table summarizes the status of nonvested SARs under the Plan as of September 30,
2009, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares (In |
|
Grant-Date |
Nonvested Stock Appreciation Rights |
|
thousands) |
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
255 |
|
|
$ |
7.38 |
|
Granted |
|
|
177 |
|
|
$ |
7.42 |
|
Vested |
|
|
(126 |
) |
|
$ |
7.39 |
|
Forfeited or expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2009 |
|
|
306 |
|
|
$ |
7.40 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, there was $1.5 million of total unrecognized compensation cost, net
of estimated forfeitures, related to nonvested stock appreciation rights granted under the Plan.
This cost is expected to be recognized over a weighted-average period of 2.1 years. SARs that
vested during the nine months ended September 30, 2008 had a fair value of $0.1 million as of the
vesting date (no fair value on vested shares in the comparable 2009 period).
Restricted Shares The Companys Board of Directors, at the recommendation of the Committee,
approves 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 will instead issue restricted stock units (RSUs). The
Restricted Shares are shares of the Companys common stock (or in the case of RSUs, represent an
equivalent number of shares of the Companys 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 Companys 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 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.
In the event of a change in control (as defined in the Plan) prior to the date the Restricted
Shares vest, all of the Restricted Shares will vest and the restrictions on transfer will lapse
with respect to such vested shares on the date of the change in control, provided that participant
is employed by the Company on the date of the change in control.
If the participants employment with the Company is terminated for any reason, either by the
Company or participant, prior to the date on which the Restricted Shares have vested and the
restrictions have lapsed with respect to such vested shares, any Restricted Shares remaining
subject to the restrictions will be forfeited, unless there has been a change in control prior to
such date.
34
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Restricted Shares (continued)
The weighted-average grant-date fair value of the Restricted Shares/Units granted during the nine
months ended September 30, 2009 and 2008 was $19.69 and $17.86, respectively.
The following table summarizes the status of nonvested Restricted Shares/Units under the Plan as of
September 30, 2009, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares (In |
|
Grant-Date |
Nonvested Restricted Shares / Units |
|
thousands) |
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
548 |
|
|
$ |
16.57 |
|
Granted |
|
|
231 |
|
|
$ |
19.69 |
|
Vested |
|
|
(198 |
) |
|
$ |
14.95 |
|
Forfeited or expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2009 |
|
|
581 |
|
|
$ |
18.36 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, based on the probability of achieving the performance goals, there
was $6.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to
nonvested Restricted Shares/Units granted under the Plan. This cost is expected to be recognized
over a weighted-average period of 2.1 years. The restricted shares that vested during the nine
months ended September 30, 2009 and 2008 had a fair value of $3.2 million and $1.4 million as of
the vesting date, respectively.
Other Awards The Companys Board of Directors, at the recommendation of the Committee, approves
awards of Common Stock Units (CSUs) for eligible participants. A CSU is a bookkeeping entry on
the Companys books that records the equivalent of one share of common stock. If the performance
goals described under Restricted Shares in this Note 12 are met, performance-based CSUs will vest
on the third anniversary of the grant date. The Company recognizes compensation cost, net of
estimated forfeitures, based on the fair value (which approximates the current market price) of the
CSUs 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
CSUs 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. On the date each CSU vests, the participant
will become entitled to receive a share of the Companys common stock and the CSU will be canceled.
35
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Other Awards (continued)
The following table summarizes CSUs activity under the Plan as of September 30, 2009, and changes
during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares (In |
|
Grant-Date |
Nonvested Common Stock Units |
|
thousands) |
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
77 |
|
|
$ |
16.99 |
|
Granted |
|
|
26 |
|
|
$ |
19.69 |
|
Vested |
|
|
(26 |
) |
|
$ |
15.44 |
|
Forfeited or expired |
|
|
(9 |
) |
|
$ |
18.61 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2009 |
|
|
68 |
|
|
$ |
18.37 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, there was $0.3 million of total unrecognized compensation costs, net
of estimated forfeitures, related to nonvested CSUs granted under the Plan. This cost is expected
to be recognized over a weighted-average period of 1.7 years. The fair value of the CSUs that
vested during the nine months ended September 30, 2009 and 2008 had a fair value of $0.4 million
and $0.2 million as of the vesting date, respectively. Until a CSU vests, the participant has none
of the rights of a shareholder with respect to the CSU or the common stock underlying the CSU.
CSUs are not transferable.
2004 Non-Employee Director Fee Plan The Companys 2004 Non-Employee
Director Fee Plan (the 2004 Fee Plan), which is shareholder-approved, replaced and superseded the
1996 Non-Employee Director Fee Plan (the 1996 Fee Plan) and was used in lieu of the 2004
Nonemployee Director Stock Option Plan (the 2004 Stock Option Plan). Prior to amendments adopted
by the Board of Directors in August 2008 which are described below, the 2004 Fee Plan provided that
all new non-employee directors joining the Board would receive an initial grant of common stock
units (CSUs) on the date the new director is appointed or elected, the number of which will be
determined by dividing a dollar amount to be determined from time to time by the Board ($30,000 in
2008) by an amount equal to 110% of the average closing prices of the Companys common stock for
the five trading days prior to the date the director is elected. A CSU is a bookkeeping entry on
the Companys books that records the equivalent of one share of common stock. Prior to amendments
to the 2004 Fee Plan adopted by the Board of Directors in March 2008 which are described below, the
initial grant of CSUs vested in three equal installments, one-third on the date of each of the
following three annual shareholders meetings, and all unvested and unearned CSUs automatically
vested upon the termination of a directors service as a director, whether by reason of death,
retirement, resignation, removal or failure to be reelected at the end of his or her term.
In March 2008, the 2004 Fee Plan was amended by the Board, upon the recommendation of the
Compensation and Human Resource Development Committee, to provide that, beginning with grants in
2008, instead of an award of CSUs, a new non-employee director would receive an award of shares of
common stock. The initial grant of stock to directors joining the Board would vest and be earned
in twelve equal quarterly installments over the following three years, and all unvested and
unearned stock will lapse in the event the person ceases to serve as a director of the Company.
Until a quarterly installment of stock vests and becomes payable, the director has none of the
rights of a shareholder with respect to the unearned stock grants. In August 2008, upon the
recommendation of the Compensation and Human Resource Development Committee, the Board of Directors
amended the 2004 Fee Plan to provide that the initial grant of shares to directors joining the
Board will be the number determined by dividing $60,000 by an amount equal to the closing price of
the Companys common stock on the day preceding the new directors election. The increase in the
amount of the share award was approved by the shareholders at the 2009 Annual Shareholders Meeting.
36
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
2004 Non-Employee Director Fee Plan (continued)
The 2004 Fee Plan also provides that each non-employee director will receive, on the day after the
annual shareholders meeting, an annual retainer for service as a non-employee director, the amount
of which shall be determined from time to time by the Board. Prior to the August 2008 amendments
to the 2004 Fee Plan, the annual retainer was $50,000, which was paid 75% in CSUs ($37,500) and 25%
in cash ($12,500). The number of CSUs to be granted was determined by dividing the amount of the
annual retainer by an amount equal to 105% of the average of the closing prices for the Companys
common stock on the five trading days preceding the award date (the day after the annual meeting).
Prior to the March 2008 amendments to the 2004 Fee Plan, the annual retainer grant of CSUs vested
in two equal installments, one-half on the date of each of the following two annual shareholders
meetings, and all CSUs automatically vested upon the termination of a directors service as a
director, whether by reason of death, retirement, resignation, removal or failure to be reelected
at the end of his or her term.
As part of the amendments to the 2004 Fee Plan in March 2008, the 2004 Fee Plan was amended to
provide that, beginning with grants in 2008, the annual retainer grants of stock to directors would
vest and be earned in eight equal quarterly installments, with the first installment being made on
the day following the annual meeting of shareholders, and the remaining seven installments to be
made on each third monthly anniversary of such date thereafter. In the event a person ceases to
serve as a director of the Company, the award lapses with respect to all unvested stock, and such
unvested stock is forfeited.
In August 2008, as part of the amendments to the 2004 Fee Plan, the 2004 Fee Plan was amended to
increase the amount and alter the form of the annual retainer award. The equity portion of the
award is now payable in shares of common stock, rather than CSUs, and the number of shares to be
issued is now determined by dividing the dollar amount of the annual retainer to be paid in shares
by an amount equal to the closing price of a share of the Companys common stock on the date of the
Companys annual meeting of shareholders. Effective retroactively to May 2008, the cash portion of
the annual retainer was increased from $12,500 to $32,500, and as approved by the shareholders at
the 2009 Annual Shareholders Meeting, the equity portion of the annual retainer award was increased
from $37,500 to $45,000. This resulted in the annual retainer award being set at $77,500,
effective as of May 22, 2008.
In addition to the annual retainer award, the 2004 Fee Plan also provides for additional annual
cash awards to non-employee directors who serve on board committees. These annual cash awards for
committee members also were increased in August 2008, effective retroactively to May 2008. The
additional annual cash award for the Chairperson of the Audit Committee was increased from $10,000
to $20,000, and Audit Committee members awards were increased from a per meeting fee of $1,250 to
an annual fee award of $10,000. The annual cash awards for the Chairpersons of the Compensation
and Human Resource Development Committee, Finance Committee and Nominating and Corporate Governance
Committee were each increased from $5,000 to $12,500, and the awards for members of such committees
were increased from a per meeting fee of $1,250 to an annual award of $7,500. The additional
annual cash award in the amount of $100,000 for a non-employee Chairman of the Board was not
changed. These additional cash awards also vest in eight equal quarterly installments, one-eighth
on the day following the annual meeting of shareholders, and one eighth on each third monthly
anniversary of such date thereafter, and the award lapses with respect to all unpaid cash in the
event the non-employee director ceases to be a director of the Company, and such unvested cash is
forfeited.
37
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
2004 Non-Employee Director Fee Plan (continued)
The weighted-average grant-date fair value of common stock units and share awards granted during
the nine months ended September 30, 2009 and 2008 was $16.76 and $20.11, respectively.
The following table summarizes the status of the nonvested CSUs and share awards under the 2004 Fee
Plan as of September 30, 2009, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares (In |
|
Grant-Date |
Nonvested Common Stock Units / Share Awards |
|
thousands) |
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
20 |
|
|
$ |
19.69 |
|
Granted |
|
|
31 |
|
|
$ |
16.76 |
|
Vested |
|
|
(16 |
) |
|
$ |
19.58 |
|
Forfeited or expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2009 |
|
|
35 |
|
|
$ |
17.18 |
|
|
|
|
|
|
|
|
|
|
CSUs and share awards that vested during the nine months ended September 30, 2009 and 2008 had
a fair value of $0.3 million and $0.5 million as of the vesting date, respectively.
Compensation expense for CSUs granted after the adoption of ASC 715 (ASC 715) Compensation -
Retirement Benefits on January 1, 2006 and before the 2004 Fee Plan amendment in March 2008 (as
discussed above), is recognized immediately on the date of grant since these grants automatically
vest upon termination of a Directors service, whether by death, retirement, resignation, removal
or failure to be reelected at the end of his or her term. However, compensation expense for CSUs
granted before adoption of ASC 715 is recognized over the requisite service period, or nominal
vesting period of two to three years using the intrinsic value method. As of September 30, 2009,
there was no unrecognized compensation cost, net of estimated forfeitures, which relates to
nonvested CSUs granted under the 2004 Fee Plan before adoption of ASC 715. As of September 30,
2009, there was $0.6 million of total unrecognized compensation costs, net of estimated
forfeitures, related to nonvested CSUs granted since March 2008 under the Plan. This cost is
expected to be recognized over a weighted-average period of 1.2 years.
Deferred Compensation Plan The Companys non-qualified Deferred Compensation
Plan (the Deferred Compensation Plan), which is not shareholder-approved, was adopted by the
Board of Directors effective December 17, 1998 and amended on March 29, 2006 and May 23, 2006. It
provides certain eligible employees the ability to defer any portion of their compensation until
the participants retirement, termination, disability or death, or a change in control of the
Company. Using the Companys 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 and senior vice presidents and $7,500 per year for 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 Companys common stock (see Note 5,
Investments Held in Rabbi Trust). As of September 30, 2009 and December 31, 2008, liabilities of
$2.3 million and $1.4 million, respectively, of the Deferred Compensation Plan were recorded in
Accrued employee compensation and benefits in the accompanying Condensed Consolidated Balance
Sheets.
Additionally, the Companys common stock match associated with the Deferred Compensation Plan, with
a carrying value of approximately $0.8 million and $0.6 million as of September 30, 2009 and
December 31, 2008, respectively, is included in Treasury stock in the accompanying Condensed
Consolidated Balance Sheets.
38
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Deferred Compensation Plan - (continued)
The weighted-average grant-date fair value of common stock awarded during the nine months ended
September 30, 2009 and 2008 was $17.26 and $18.26, respectively.
The following table summarizes the status of the nonvested common stock issued under the Deferred
Compensation Plan as of September 30, 2009, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares (In |
|
Grant-Date |
Nonvested Common Stock |
|
thousands) |
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
5 |
|
|
$ |
16.35 |
|
Granted |
|
|
9 |
|
|
$ |
17.26 |
|
Vested |
|
|
(8 |
) |
|
$ |
17.41 |
|
Forfeited or expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2009 |
|
|
6 |
|
|
$ |
17.14 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, there was $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 4.2 years. The total
fair value of the common stock vested during the nine months ended September 30, 2009 and 2008 was
$0.2 million and $0.2 million, respectively.
There were no cash settlements related to the Companys obligation under the Deferred Compensation
Plan for the nine months ended September 30, 2009 and 2008.
Note 13 Defined Benefit Pension Plan and Post-Retirement Benefits
Defined Benefit Pension Plan
The Company sponsors a non-contributory defined benefit pension plan (the Pension Plan) for its
employees in the Philippines. The Pension Plan provides defined benefits based on years of service
and final salary. All permanent employees meeting the minimum service requirement are eligible to
participate in the Pension Plan. As of September 30, 2009, the Pension Plan is unfunded.
The following table provides information about net periodic benefit cost for the Pension Plan for
the three and nine months ended September 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
|
|
|
$ |
(90 |
) |
|
$ |
80 |
|
|
$ |
114 |
|
Interest Costs |
|
|
|
|
|
|
(36 |
) |
|
|
46 |
|
|
|
45 |
|
Recognized actuarial gain |
|
|
(15 |
) |
|
|
(15 |
) |
|
|
(46 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
(15 |
) |
|
$ |
(141 |
) |
|
$ |
80 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 13 Defined Benefit Pension Plan and Post-Retirement Benefits (continued)
Post-Retirement Benefits
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. Effective January 1, 2008, the Company recorded a $0.5 million liability for a
post-retirement benefit obligation related to this arrangement, which was accounted for as a
reduction to the January 1, 2008 balance of retained earnings in accordance with ASC 715-60. The
post-retirement benefit obligation of $0.2 million was included in Other long-term liabilities as
of September 30, 2009 and $0.1 million and $0.4 million were included in Accrued employee
compensation and benefits and Other long-term liabilities, respectively, as of December 31,
2008, in the accompanying Condensed Consolidated Balance Sheets. In addition, the Company has an
unrealized gain of $0.4 million as of September 30, 2009 due to the change in discount rates
related to the post retirement obligation, which was recorded in AOCI in the accompanying
Condensed Consolidated Balance Sheet (none as of December 31, 2008).
Note 14 Commitments and Loss Contingency
The Company has previously disclosed regulatory sanctions assessed against our Spanish subsidiary
relating to the alleged inappropriate acquisition of personal information in connection with two
outbound client contracts. In order to appeal these claims, the Company issued a bank guarantee of
$0.9 million. During the year ended December 31, 2008, $0.4 million of the bank guarantee was
returned to the Company. The remaining balance of the bank guarantee of $0.5 million is included as
restricted cash in Deferred charges and other assets in the accompanying Condensed Consolidated
Balance Sheets as of September 30, 2009 and December 31, 2008. The Company will continue to
vigorously defend these matters. However, due to further progression of several of these claims
within the Spanish court system, and based upon opinion of legal counsel regarding the likely
outcome of several of the matters before the courts, the Company accrued a liability in the amount
of $1.3 million as of September 30, 2009 and December 31, 2008 under ASC 450 Contingencies
because management now believes that a loss is probable and the amount of the loss can be
reasonably estimated as to three of the subject claims. There are two other related claims, one of
which is currently under appeal, and the other of which is in the early stages of investigation,
but the Company has not accrued any amounts related to either of those claims because management
does not currently believe a loss is probable, and it is not currently possible to reasonably
estimate the amount of any loss related to those two claims.
Note 15 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 Sykes, the Companys founder, former Chairman and Chief Executive Officer, and a current major
stockholder. 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 and $0.3 million during the
three and nine months ended September 30, 2009 and $0.1 million and $0.2 million during the three
and nine months ended September 30, 2008, respectively, under the terms of the lease.
Additionally, during the three and nine month periods ended September 30, 2008, the Company paid
$0.1 million and $0.2 million, respectively (none in the comparable 2009 periods), for transitional
real estate consulting services provided by David Reule, the Companys former Senior Vice President
of Real Estate who retired in December, 2007. Mr. Reule was employed by JHS Equity, LLC, a company
owned by John Sykes, the Companys founder, former Chairman and Chief Executive Officer, and a
current major stockholder. Accordingly, the payments for Mr. Reules services were made to JHS
Equity, LLC to reimburse it for the time spent by Mr. Reule on the Companys business.
40
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 16 Subsequent Event
On October 5, 2009, Sykes, SH Merger Subsidiary I, Inc., a direct wholly-owned subsidiary of Sykes
(Merger Sub), SH Merger Subsidiary II, LLC, a direct wholly-owned subsidiary of Sykes (Merger
Sub II), and ICT Group, Inc (ICT) entered into a merger agreement. Subject to the terms and
conditions of the merger agreement, Merger Sub will be merged with and into ICT, with ICT
continuing as the interim surviving corporation, which activity we refer to as the merger.
Immediately following the effectiveness of the merger, the interim surviving corporation will be
merged with and into Merger Sub II, with Merger Sub II surviving and continuing as a wholly owned
subsidiary of Sykes, which activity we refer to as the upstream merger. The merger and the
upstream merger, together, are referred to herein as the transaction. Under the merger agreement,
each share of ICT common stock held by an ICT shareholders will be converted into the right to
receive consideration valued at $15.38, subject to adjustment as described below. The
consideration is payable (i) in cash, without interest, in the amount of $7.69 per share of ICT
common stock, and (ii) the remainder payable in shares of the Companys common stock equal to the
exchange ratio described below divided by two (2). Except as described below, the exchange ratio
will be the quotient determined by dividing $15.38 by the volume weighted average of the per share
prices of the Companys common stock for the ten consecutive trading days ending on (and including)
the third trading day immediately prior to the effective time of the merger (the measurement
value). The exchange ratio is subject to a symmetrical collar of 7.5% above and 7.5% below
$20.8979, which is the volume weighted average of the per share price of the Companys common stock
for the ten consecutive trading days ending on October 2, 2009, the last trading day immediately
prior to the date of the merger agreement. Within this collar, the exchange ratio will be
determined pursuant to the calculation described above. If, however, the measurement value is
equal to or less than $19.3306, then the exchange ratio will be 0.7956 and 0.3978 shares of the
Companys common stock will be issued for each share of ICT common stock. If the measurement value
is equal to or greater than $22.4652, then the exchange ratio will be 0.6846 and 0.3423 shares of
the Companys common stock will be issued for each share of ICT common stock.
Each outstanding option to acquire ICT common stock granted under ICTs stock incentive plans,
whether or not then vested and exercisable, will become fully vested and exercisable immediately
prior to, and then will be canceled at, the effective time of the merger, and the holder of such
option will be entitled to receive as soon as practicable after the effective time of the merger
but in no event later than ten business days following the effective time of the merger an amount
in cash, without interest and less any applicable tax to be withheld, equal to (i) the excess, if
any, of $15.38 over the per share exercise price of such ICT stock option multiplied by (ii) the
total number of shares of ICT common stock underlying such ICT stock option, with the aggregate
amount of such payment rounded up to the nearest cent. If the per share exercise price of any ICT
stock option is equal to or greater than $15.38, then the stock option will be canceled without any
payment to the stock option holder.
Also at the effective time of the merger, each outstanding restricted stock unit award (RSU),
will become fully vested and then will be canceled and the holder of such vested awards will be
entitled to receive $15.38 in cash, without interest and less any applicable tax to be withheld, in
respect of each share of ICT common stock into which the RSU would otherwise be convertible. These
cash amounts will be paid out as soon as practicable after the effective time of the merger but in
no event later than ten business days following the effective time of the merger.
The Company intends to finance the merger, the costs and expenses related to the merger and the
ongoing working capital of Sykes and its subsidiaries with two $75 million term loans. One $75
million term loan will be part of a $150 million senior credit facility, which also will include a
$75 million revolving facility. Pursuant to a commitment letter dated October 2, 2009, the
Companys existing senior lender, KeyBank National Association (Key), has, subject to certain
conditions, agreed to serve as lead arranger, sole book runner and administrative agent with
respect to the $150 million facility and has committed to provide up to $90 million of the
principal amount of the $150 million facility ($75 million of the term loan and $15 million of the
revolving facility). Key intends to arrange a syndicate of lenders to provide the balance of the
$150 million facility. The commitment letter will expire on January 31, 2010, if the merger has
not been consummated. The $150 million facility will replace the Companys existing senior
revolving credit facility provided by Key, the balance of which was $0 as of September 30, 2009.
41
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2009 and 2008
(Unaudited)
Note 16 Subsequent Event (continued)
Additionally, pursuant to a commitment letter dated October 2, 2009, Key has committed to provide
an additional $75 million short-term loan to a wholly-owned subsidiary of Sykes, which loan is not
contingent on the closing of the merger. The commitment letter for this loan will expire on
December 31, 2009, and this loan is expected to close in December 2009, prior to the consummation
of the merger.
The final terms of the $150 million facility and the $75 million short-term loan are subject to
negotiation and to customary closing conditions. The Company may not be able to successfully close
either loan, and Key may not be able to fully syndicate the $150 million facility, in which event
the Company may need to seek alternative or additional financing or fund the merger using its and
its subsidiaries cash and cash equivalents, which may increase the expense of the merger. The
merger is not contingent on the closing of either the $150 million facility or the $75 million
short-term loan.
The merger is subject to ICT shareholder approval, governmental and regulatory approvals, and other
usual and customary closing conditions. The merger is currently expected to be completed at the end
of the fourth quarter of 2009 or the beginning of the first quarter of 2010, subject to receipt of
ICT shareholder approval, governmental and regulatory approvals, and other usual and customary
closing conditions.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated
400 North Ashley Drive
Tampa, FL 33602
We have reviewed the accompanying condensed consolidated balance sheet of Sykes Enterprises,
Incorporated and subsidiaries (the Company) as of September 30, 2009, and the related condensed
consolidated statements of operations for the three and nine-month periods ended September 30, 2009
and 2008, of changes in shareholders equity for the nine-month periods ended September 30, 2009
and 2008 and the three-month period ended December 31, 2008, and of cash flows for the nine-month
periods ended September 30, 2009 and 2008. These interim financial statements are the
responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company as of December 31,
2008, and the related consolidated statements of operations, changes in shareholders equity, and
cash flows for the year then ended (not presented herein); and in our report dated March 10, 2009,
we expressed an unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance sheet as of December
31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
November 3, 2009
43
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
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
the Sykes Enterprises, Incorporated (Sykes, our, we or us) Annual Report on Form 10-K for
the year ended December 31, 2008, 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. 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. 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 the U.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 contact 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
contact 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 trend toward outsourcing, (xxii) risk of interruption of
technical and customer contact 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), and (xxvi) other risk factors
which are identified in our most recent Annual Report on Form 10-K, including factors identified
under the headings Business, Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Additional risks and uncertainties related to our proposed merger transaction (Merger) pursuant
to the merger agreement with ICT Group, Inc (ICT) may cause actual future experience and results
to differ materially from those discussed in these forward-looking statements. Important factors
related to the proposed Merger that might cause such a difference include, but are not limited to,
(a) costs related to the Merger; (b) failure of ICTs stockholders to approve the Merger; (c)
Sykes or ICTs inability to satisfy the conditions of the Merger; (d) the inability to integrate
Sykes and ICTs businesses successfully and grow such merged businesses as anticipated; (e) the
need for outside financing to meet capital requirements; and (f) the risk factors set forth herein
under Part II Item 1A Risk Factors. Sykes filings with the Securities and Exchange Commission
are available for review at www.sec.gov under Search for Company Filings. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the date
hereof. Except as required by law, we undertake no
44
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise.
Pending Merger
On October 5, 2009, Sykes, SH Merger Subsidiary I, Inc., a direct wholly-owned subsidiary of
Sykes (Merger Sub), SH Merger Subsidiary II, LLC, a direct wholly-owned subsidiary of Sykes
(Merger Sub II), and ICT entered into a merger agreement. Subject to the terms and conditions of
the merger agreement, Merger Sub will be merged with and into ICT, with ICT continuing as the
interim surviving corporation, which activity we refer to as the merger. Immediately following the
effectiveness of the merger, the interim surviving corporation will be merged with and into Merger
Sub II, with Merger Sub II surviving and continuing as a wholly owned subsidiary of Sykes, which
activity we refer to as the upstream merger. The merger and the upstream merger, together, are
referred to herein as the transaction. Under the merger agreement, each share of ICT common stock
held by an ICT shareholders will be converted into the right to receive consideration valued at
$15.38, subject to adjustment as described below. The consideration is payable (i) in cash,
without interest, in the amount of $7.69 per share of ICT common stock, and (ii) the remainder
payable in shares of our common stock equal to the exchange ratio described below divided by two
(2). Except as described below, the exchange ratio will be the quotient determined by dividing
$15.38 by the volume weighted average of the per share prices of our common stock for the ten
consecutive trading days ending on (and including) the third trading day immediately prior to the
effective time of the merger (the measurement value). The exchange ratio is subject to a
symmetrical collar of 7.5% above and 7.5% below $20.8979, which is the volume weighted average of
the per share price of our common stock for the ten consecutive trading days ending on October 2,
2009, the last trading day immediately prior to the date of the merger agreement. Within this
collar, the exchange ratio will be determined pursuant to the calculation described above. If,
however, the measurement value is equal to or less than $19.3306, then the exchange ratio will be
0.7956 and 0.3978 shares of our common stock will be issued for each share of ICT common stock. If
the measurement value is equal to or greater than $22.4652, then the exchange ratio will be 0.6846
and 0.3423 shares of our common stock will be issued for each share of ICT common stock.
Each outstanding option to acquire ICT common stock granted under ICTs stock incentive plans,
whether or not then vested and exercisable, will become fully vested and exercisable immediately
prior to, and then will be canceled at, the effective time of the merger, and the holder of such
option will be entitled to receive as soon as practicable after the effective time of the merger
but in no event later than ten business days following the effective time of the merger an amount
in cash, without interest and less any applicable tax to be withheld, equal to (i) the excess, if
any, of $15.38 over the per share exercise price of such ICT stock option multiplied by (ii) the
total number of shares of ICT common stock underlying such ICT stock option, with the aggregate
amount of such payment rounded up to the nearest cent. If the per share exercise price of any ICT
stock option is equal to or greater than $15.38, then the stock option will be canceled without any
payment to the stock option holder.
Also at the effective time of the merger, each outstanding restricted stock unit award (RSU),
will become fully vested and then will be canceled and the holder of such vested awards will be
entitled to receive $15.38 in cash, without interest and less any applicable tax to be withheld, in
respect of each share of ICT common stock into which the RSU would otherwise be convertible. These
cash amounts will be paid out as soon as practicable after the effective time of the merger but in
no event later than ten business days following the effective time of the merger.
We intend to finance the merger, the costs and expenses related to the merger and our ongoing
working capital with two $75 million term loans. One $75 million term loan will be part of a $150
million senior credit facility, which also will include a $75 million revolving facility. Pursuant
to a commitment letter dated October 2, 2009, our existing senior lender, KeyBank National
Association (Key), has, subject to certain conditions, agreed to serve as lead arranger, sole
book runner and administrative agent with respect to the $150 million facility and has committed to
provide up to $90 million of the principal amount of the $150 million facility ($75 million of the
term loan and $15 million of the revolving facility). Key intends to arrange a syndicate of
lenders to provide the balance of the $150 million facility. The commitment letter will expire on
January 31, 2010, if the merger has not been consummated.
45
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
The $150 million facility will replace our existing senior revolving credit facility provided by
Key, the balance of which was $0 as of September 30, 2009.
Additionally, pursuant to a commitment letter dated October 2, 2009, Key has committed to provide
an additional $75 million short-term loan to one of our wholly-owned subsidiaries, which loan is
not contingent on the closing of the merger. The commitment letter for this loan will expire on
December 31, 2009, and this loan is expected to close in December 2009, prior to the consummation
of the merger.
The final terms of the $150 million facility and the $75 million short-term loan are subject to
negotiation and to customary closing conditions. We may not be able to successfully close either
loan, and Key may not be able to fully syndicate the $150 million facility, in which event we may
need to seek alternative or additional financing or fund the merger using its and its subsidiaries
cash and cash equivalents, which may increase the expense of the merger. The merger is not
contingent on the closing of either the $150 million facility or the $75 million short-term loan.
The merger is subject to ICT shareholder approval, governmental and regulatory approvals, and other
usual and customary closing conditions. The merger is currently expected to be completed at the end
of the fourth quarter of 2009 or the beginning of the first quarter of 2010, subject to receipt of
ICT shareholder approval, governmental and regulatory approvals, and other usual and customary
closing conditions.
Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Condensed
Consolidated Statements of Operations and certain of such data expressed as a percentage of
revenues (in thousands, except percentage amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Revenues |
|
$ |
213,494 |
|
|
$ |
207,066 |
|
|
$ |
625,574 |
|
|
$ |
618,416 |
|
Percentage of revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs |
|
$ |
134,429 |
|
|
$ |
130,509 |
|
|
$ |
398,409 |
|
|
$ |
395,197 |
|
Percentage of revenues |
|
|
63.0 |
% |
|
|
63.0 |
% |
|
|
63.7 |
% |
|
|
63.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
58,047 |
|
|
$ |
57,304 |
|
|
$ |
170,011 |
|
|
$ |
171,083 |
|
Percentage of revenues |
|
|
27.2 |
% |
|
|
27.7 |
% |
|
|
27.2 |
% |
|
|
27.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss on goodwill and intangibles |
|
$ |
324 |
|
|
$ |
|
|
|
$ |
1,908 |
|
|
$ |
|
|
Percentage of revenues |
|
|
0.2 |
% |
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
20,694 |
|
|
$ |
19,253 |
|
|
$ |
55,246 |
|
|
$ |
52,136 |
|
Percentage of revenues |
|
|
9.7 |
% |
|
|
9.3 |
% |
|
|
8.8 |
% |
|
|
8.4 |
% |
46
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
The following table summarizes our revenues, for the periods indicated, by geographic region
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Americas |
|
$ |
152,940 |
|
|
|
71.6 |
% |
|
$ |
138,573 |
|
|
|
66.9 |
% |
|
$ |
444,682 |
|
|
|
71.1 |
% |
|
$ |
413,469 |
|
|
|
66.9 |
% |
EMEA |
|
|
60,554 |
|
|
|
28.4 |
% |
|
|
68,493 |
|
|
|
33.1 |
% |
|
|
180,892 |
|
|
|
28.9 |
% |
|
|
204,947 |
|
|
|
33.1 |
% |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
213,494 |
|
|
|
100.0 |
% |
|
$ |
207,066 |
|
|
|
100.0 |
% |
|
$ |
625,574 |
|
|
|
100.0 |
% |
|
$ |
618,416 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
The following table summarizes the amounts and percentage of revenue for direct salaries and
related costs and general and administrative costs for the periods indicated, by geographic region
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Direct salaries and related costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
92,348 |
|
|
|
60.4 |
% |
|
$ |
85,311 |
|
|
|
61.6 |
% |
|
$ |
271,112 |
|
|
|
61.0 |
% |
|
$ |
255,300 |
|
|
|
61.7 |
% |
EMEA |
|
|
42,081 |
|
|
|
69.5 |
% |
|
|
45,198 |
|
|
|
66.0 |
% |
|
|
127,297 |
|
|
|
70.4 |
% |
|
|
139,897 |
|
|
|
68.3 |
% |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
134,429 |
|
|
|
63.0 |
% |
|
$ |
130,509 |
|
|
|
63.0 |
% |
|
$ |
398,409 |
|
|
|
63.7 |
% |
|
$ |
395,197 |
|
|
|
63.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
32,438 |
|
|
|
21.2 |
% |
|
$ |
31,025 |
|
|
|
22.4 |
% |
|
$ |
95,455 |
|
|
|
21.5 |
% |
|
$ |
91,991 |
|
|
|
22.2 |
% |
EMEA |
|
|
14,574 |
|
|
|
24.1 |
% |
|
|
16,216 |
|
|
|
23.7 |
% |
|
|
43,285 |
|
|
|
23.9 |
% |
|
|
49,286 |
|
|
|
24.0 |
% |
Corporate |
|
|
11,035 |
|
|
|
|
|
|
|
10,063 |
|
|
|
|
|
|
|
31,271 |
|
|
|
|
|
|
|
29,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
58,047 |
|
|
|
27.2 |
% |
|
$ |
57,304 |
|
|
|
27.7 |
% |
|
$ |
170,011 |
|
|
|
27.2 |
% |
|
$ |
171,083 |
|
|
|
27.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss on
goodwill and intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
324 |
|
|
|
0.2 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
1,908 |
|
|
|
0.4 |
% |
|
$ |
|
|
|
|
0.0 |
% |
EMEA |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
324 |
|
|
|
0.2 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
1,908 |
|
|
|
0.3 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Revenues
For the three months ended September 30, 2009, we recognized consolidated revenues of $213.5
million, an increase of $6.4 million, or 3.1%, from $207.1 million of consolidated revenues for the
comparable 2008 period.
On a geographic segmentation basis, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 71.6%, or $152.9 million, for
the three months ended September 30, 2009, compared to 66.9%, or $138.6 million, for the comparable
2008 period. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 28.4%, or $60.6 million, for the three months ended September 30, 2009, compared to
33.1%, or $68.5 million, for the comparable 2008 period.
47
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
The increase in the Americas revenue of $14.3 million, or 10.4%, for the three months ended
September 30, 2009, compared to the same period in 2008, reflects an $18.3 million increase in
client demand, partially offset by a negative foreign currency impact of $4.0 million. Excluding
this $4.0 million foreign currency impact, Americas
revenue increased 13.2% for the three months
ended September 30, 2009, compared to the same period in 2008. The $18.3 million increase includes
new and existing client relationships, primarily due to a combination of new programs with existing
clients, expansion of existing programs and new client relationships. New client relationships
represented 24.8% of the increase in the Americas revenue over the comparable 2008 period.
Revenues from our offshore operations represented 60.5% of Americas revenues for the three months
ended September 30, 2009, compared to 62.1% for the comparable 2008 period. The trend of generating
more of our
revenues in our offshore operations is likely to continue in 2009 although we are experiencing
increasing demand for our domestic operations. While operating margins generated offshore are
generally comparable to those in the United States, our ability to maintain these offshore
operating margins longer term is difficult to predict due to potential increased competition for
the available workforce, the trend of higher occupancy costs and costs of functional currency
fluctuations in offshore markets. We weight these factors in our focus to re-price or replace
marginally profitable target client programs. Americas revenues for the three months ended
September 30, 2009 and 2008 also included a $2.4 million and a $1.6 million net loss on foreign
currency hedges, respectively. Excluding the effect of this $0.8 million foreign currency hedging
fluctuation, the Americas revenue increased $15.1 million compared with the same period last year.
The decrease in EMEA revenues of $7.9 million, or 11.6%, for the three months
ended September 30, 2009, compared to the same period in 2008, reflects a $4.9 million negative
foreign currency impact and a decrease of $3.0 million in client demand. This $3.0 million decrease
in client demand includes a $3.8 million reduction in existing client programs offset by a $0.8
million increase in new client relationships. Excluding the $4.9 million foreign currency impact,
EMEAs revenue decreased 4.5% for the three months ended September 30, 2009 compared to the same
period in 2008.
Direct Salaries and Related Costs
Direct salaries and related costs increased $3.9 million, or 3.0%, to $134.4 million for the three
months ended September 30, 2009, from $130.5 million in the comparable 2008 period.
On a reporting segment basis, direct salaries and related costs from the Americas segment increased
$7.0 million, or 8.2%, to $92.3 million for the three months ended September 30, 2009 from $85.3
million for the comparable 2008 period. Direct salaries and related costs from the EMEA segment
decreased $3.1 million, or 6.9%, to $42.1 million for the three months ended September 30, 2009
from $45.2 million for the comparable 2008 period. While changes in foreign currency exchange
rates negatively impacted revenues in the Americas and EMEA, they positively impacted direct
salaries and related costs in 2009 compared to the same period in 2008 by $5.1 million and $3.2
million, respectively.
In the Americas segment, as a percentage of revenues, direct salaries and related costs
decreased to 60.4% for the three months ended September 30, 2009 from 61.6% in the comparable 2008
period. This decrease of 1.2%, as a percentage of revenues, was primarily attributable to lower
auto tow claim costs of 0.5%, lower compensation costs of 0.3%, lower recruiting costs of 0.2%, and
lower other costs of 0.2%.
In the EMEA segment, as a percentage of revenues, direct salaries and related costs increased to
69.5% for the three months ended September 30, 2009 from 66% in the comparable 2008 period. This
increase of 3.5%, as a percentage of revenues, was primarily attributable to higher compensation
costs of 3.4%, higher fulfillment material costs of 0.2%, higher billable supply costs of 0.2%,
higher seminar costs of 0.1% and higher other costs of 0.4%, partially offset by lower recruiting
costs of 0.6% and lower travel costs of 0.2%.
General and Administrative
General and administrative expenses increased $0.8 million, or 1.3%, to $58.1 million for the three
months ended September 30, 2009, from $57.3 million in the comparable 2008 period.
48
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
On a reporting segment basis, general and administrative expenses from the Americas segment
increased $1.5 million, or 4.6%, to $32.5 million for the three months ended September 30, 2009
from $31.0 million for the comparable 2008 period. General and administrative expenses from the
EMEA segment decreased $1.6 million, or 10.1%, to $14.6 million for the three months ended
September 30, 2009 from $16.2 million for the comparable 2008 period. While changes in foreign
currency exchange rates negatively impacted revenues in the Americas and EMEA, they positively
impacted general and administrative expenses in 2009 compared to the same period in 2008 by
approximately $1.5 million and $1.3 million, respectively. Corporate general and administrative
expenses increased $0.9 million, or 9.7%, to $11.0 million for the three months ended September 30,
2009 from $10.1 million in the comparable 2008 period. This increase of $0.9 million was primarily
attributable to higher legal and
professional fees of $1.1 million (primarily related to the pending ICT merger) and higher
compensation costs of $0.7 million, partially offset by lower travel costs of $0.4 million, lower
charitable contributions of $0.2 million, lower seminar costs of $0.2 million and lower other costs
of $0.1 million.
In the Americas segment, as a percentage of revenues, general and administrative expenses
decreased to 21.2% for the three months ended September 30, 2009 from 22.4% in the comparable 2008
period. This decrease of 1.2%, as a percentage of revenues, was primarily attributable to lower
depreciation and amortization costs of 0.4%, lower recruiting costs of 0.2% and lower other costs
of 0.9%, partially offset by higher bad debt expense of 0.2% and higher legal and professional fees
of 0.1%.
In the EMEA segment, as a percentage of revenues, general and administrative expenses increased to
24.1% for the three months ended September 30, 2009 from 23.7% in the comparable 2008 period. This
increase of 0.4%, as a percentage of revenues, was primarily attributable to higher compensation
costs of 0.7%, higher communication costs of 0.3%, higher legal and professional fees of 0.2%,
higher depreciation and amortization costs of 0.2% and higher net asset disposal costs of 0.1%,
partially offset by lower travel costs of 0.5%, lower bad debt expense of 0.2%, lower recruiting
costs of 0.3% and lower other costs of 0.1%.
Impairment Loss on Intangibles
We make certain estimates and assumptions, including, among other things, an assessment of market
conditions and projections of cash flows, investment rates and cost of capital and growth rates
when estimating the value of our intangibles. Based on actual and forecasted operating results,
deterioration of the related customer base and loss of key employees, the Americas segment
recorded an impairment loss of $0.3 million on the intangibles during the three months ended
September 30, 2009 (none in the comparable 2008 period) related to the March 2005 acquisition of
Kelly, Luttmer & Associates Limited (KLA).
Interest Income
Interest income was $0.5 million for the three months ended September 30, 2009, compared to $1.3
million for the comparable 2008 period reflecting lower average rates earned on higher average
balances of interest bearing investments in cash and cash equivalents.
Interest Expense
Interest expense was $0.1 million for the three months ended September 30, 2009 (not material in
the comparable 2008 period).
Other Income (Expense)
Other income, net, was $0.2 million for the three months ended September 30, 2009 compared to other
income, net, of $2.7 million for the comparable 2008 period. The net decrease of $2.5 million was
primarily attributable to a decrease of $2.3 million in unrealized and realized foreign currency transaction gains, net of
losses. Other income (expense) excludes the cumulative translation effects and unrealized gains
(losses) on financial derivatives that are included in Accumulated Other Comprehensive Income in
shareholders equity in the accompanying Condensed Consolidated Balance Sheets.
49
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Provision for Income Taxes
The provision for income taxes of $2.4 million for the three months ended September 30, 2009, was
based upon pre-tax book income of $21.2 million, compared to a provision of $3.7 million for the
three months ended September 30, 2008 based upon pre-tax book income of $23.2 million. The
effective tax rate for the three months ended September 30, 2009 was 11.3% compared to an effective
tax rate of 16.0% for the comparable 2008 period. The decrease in the effective tax rate of 4.7%
was primarily due to a favorable $4.9 million reduction in the accrual of foreign withholding
taxes, partially offset by an unfavorable $3.8 million reduction in the reversal of a valuation
allowance on deferred tax assets in the three month period ended September 30, 2009 over the
comparable 2008 period. The effective tax rate is also impacted by the shift in our mix of earnings, the effects of permanent
differences, state income taxes and foreign income tax rate differentials (inclusive of income tax
holiday jurisdictions).
Net Income
As a result of the foregoing, we reported income from operations for the three months ended
September 30, 2009 of $20.7 million, compared to $19.3 million in the comparable 2008 period. This
$1.4 million increase was principally attributable to a $6.4 million increase in revenues offset by a $3.9 million increase in direct salaries and related costs, a $0.8 million increase in general and
administrative expenses and a $0.3 million impairment loss on intangibles. The $1.4 million
increase in income from operations and $1.3 million lower income tax provision, partially offset by
a $0.8 million decrease in interest income, a $0.1 million increase in interest expense and $2.5
million decrease in other income resulted in net income of $18.8 million for the three months ended
September 30, 2009, a decrease of $0.7 million compared to the same period in 2008.
Nine months Ended September 30, 2009 Compared to Nine months Ended September 30, 2008
Revenues
For the nine months ended September 30, 2009, we recognized consolidated revenues of $625.6
million, an increase of $7.2 million, or 1.2%, from $618.4 million of consolidated revenues for the
comparable 2008 period.
On a geographic segmentation basis, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 71.1%, or $444.7 million, for
the nine months ended September 30, 2009, compared to 66.9%, or $413.5 million, for the comparable
2008 period. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 28.9%, or $180.9 million, for the nine months ended September 30, 2009, compared to
33.1%, or $204.9 million, for the comparable 2008 period.
The increase in the Americas revenue of $31.2 million, or 7.5%, for the nine months ended
September 30, 2009, compared to the same period in 2008, reflects a $54.9 million increase in
client demand, partially offset by a negative foreign currency impact of $23.7 million. Excluding
this $23.7 million foreign currency impact, Americas revenue increased 13.3% for the nine months
ended September 30, 2009, compared to the same period in 2008. The $54.9 million increase includes
new and existing client relationships, primarily due to a combination of new programs with existing
clients, expansion of existing programs and new client relationships. New client relationships
represented 14.5% of the increase in the Americas revenue over the comparable 2008 period.
Revenues from our offshore operations represented 60.8% of Americas revenues for the nine months
ended September 30, 2009, compared to 61.4% for the comparable 2008 period. The trend of generating
more of our revenues in our offshore operations is likely to continue in 2009 although we are
experiencing increasing demand for our domestic operations. While operating margins generated
offshore are generally comparable to those in the United States, our ability to maintain these
offshore operating margins longer term is difficult to predict due to potential increased
competition for the available workforce, the trend of higher occupancy costs and costs of
functional currency fluctuations in offshore markets. We weight these factors in our focus to
re-price or replace marginally profitable target client programs. Americas revenues for the nine
months ended September 30, 2009 and 2008 also included a $7.8 million net loss on foreign currency
hedges and a $1.4 million net gain on foreign currency hedges, respectively. Excluding the effect
of this $9.2 million foreign currency hedging fluctuation, the Americas revenue increased $40.4
million, compared with the same period last year.
50
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
The decrease in EMEA revenues of $24.0 million, or 11.7%, for the nine months ended
September 30, 2009, compared to the same period in 2008, reflects a $29.2 million negative foreign
currency impact, partially offset by an increase of $5.2 million in client demand. This $5.2
million increase includes expansion of existing client programs and new client relationships. New
client relationships represented 49.7% of the increase in EMEAs revenue over the comparable 2008
period. Excluding the $29.2 million foreign currency impact, EMEAs revenue increased 2.5% for the
nine months ended September 30, 2009 compared to the same period in 2008.
Direct Salaries and Related Costs
Direct
salaries and related costs increased $3.2 million, or 0.8%, to $398.4 million for the nine
months ended September 30, 2009, from $395.2 million in the comparable 2008 period.
On a reporting segment basis, direct salaries and related costs from the Americas segment increased
$15.8 million, or 6.2%, to $271.1 million for the nine months ended September 30, 2009 from $255.3
million for the comparable 2008 period. Direct salaries and related costs from the EMEA segment
decreased $12.6 million, or 9%, to $127.3 million for the nine months ended September 30, 2009 from
$139.9 million for the comparable 2008 period. While changes in foreign currency exchange rates
negatively impacted revenues in the Americas and EMEA, they positively impacted direct salaries and
related costs in 2009 compared to the same period in 2008 by $23.2 million and $19.9 million,
respectively.
In the Americas segment, as a percentage of revenues, direct salaries and related costs decreased
to 61.0% for the nine months ended September 30, 2009 from 61.7% in the comparable 2008 period.
This decrease of 0.7%, as a percentage of revenues, was primarily attributable to lower auto tow
claim costs of 0.7%, lower travel costs of 0.1%, lower recruiting costs of 0.1% and lower other
costs of 0.4%, partially offset by higher compensation costs of 0.6%.
In the EMEA segment, as a percentage of revenues, direct salaries and related costs increased to
70.4% for the nine months ended September 30, 2009 from 68.3% in the comparable 2008 period. This
increase of 2.1%, as a percentage of revenues, was primarily attributable to higher compensation
costs of 2.1%, higher fulfillment material costs of 0.2% and higher other costs of 0.3%, partially
offset by lower recruiting costs of 0.5%.
General and Administrative
General and administrative expenses decreased $1.1 million, or 0.6%, to $170.0 million for the nine
months ended September 30, 2009, from $171.1 million in the comparable 2008 period.
On a reporting segment basis, general and administrative expenses from the Americas segment
increased $3.5 million, or 3.8%, to $95.5 million for the nine months ended September 30, 2009 from
$92.0 million for the comparable 2008 period. General and administrative expenses from the EMEA segment decreased $6.0 million, or 12.2%, to $43.3 million for the nine months ended September 30,
2009 from $49.3 million for the comparable 2008 period. While changes in foreign currency exchange
rates negatively impacted revenues in the Americas and EMEA, they positively impacted general and
administrative expenses in 2009 compared to the same period in 2008 by approximately $6.7 million
and $7.5 million, respectively. Corporate general and administrative expenses increased $1.4
million, or 4.9%, to $31.2 million for the nine months ended September 30, 2009 from $29.8 million in
the comparable 2008 period. This increase of $1.4 million was primarily attributable to higher
compensation costs of $3.0 million, higher legal and professional fees of $1.3 million (primarily
related to the pending ICT merger), higher business development costs of $0.4 million and higher
software maintenance costs of $0.3 million, partially offset by lower travel costs of $1.2 million,
lower bad debt expense of $0.8 million, lower seminar costs of $0.5 million, lower consulting costs
of $0.4 million, lower insurance costs of $0.4 million and lower facility related costs of $0.3
million.
In the Americas segment, as a percentage of revenues, general and administrative expenses decrease
to 21.5% for the nine months ended September 30, 2009 from 22.2% in the comparable 2008 period.
This decrease of 0.7%, as a percentage of revenues, was primarily attributable to lower
depreciation and amortization costs of 0.3%, lower compensation costs of 0.1%, lower software
maintenance costs of 0.1% and lower other costs of 0.6%, partially offset by higher legal and
professional fees of 0.2% and higher bad debt expense of 0.2%.
51
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
In the
EMEA segment, as a percentage of revenues, general and administrative expenses decreased to
23.9% for the nine months ended September 30, 2009 from 24.0% in the comparable 2008 period. This
decrease of 0.1%, as a percentage of revenues, was primarily attributable to lower travel costs of
0.4%, lower recruiting costs of 0.2%, lower communication costs of 0.1%, and lower other costs of
0.4%, partially offset by higher compensation costs of 0.4%, higher legal and professional fees of
0.2%, higher bad debt expense of 0.2% and higher depreciation and amortization costs of 0.2%.
Impairment Loss on Goodwill and Intangibles
We make certain estimates and assumptions, including, among other things, an assessment of market
conditions and projections of cash flows, investment rates and cost of capital and growth rates
when estimating the value of our intangibles. Based on actual and forecasted operating results,
deterioration of the related customer base and loss of key employees, the Americas segment
recorded an impairment loss of $1.9 million on the goodwill and intangibles during the nine months
ended September 30, 2009 (none in the comparable 2008 period) related to the March 2005 acquisition
of Kelly, Luttmer & Associates Limited (KLA).
Interest Income
Interest
income was $1.9 million for the nine months ended September 30, 2009, compared to $4.4
million for the comparable 2008 period reflecting lower average rates earned on higher average
balances of interest bearing investments in cash and cash equivalents.
Interest Expense
Interest expense was $0.5 million for the nine months ended September 30, 2009 compared to $0.3
million for the comparable 2008 period due primarily to higher average rates and fees paid on our
unused credit facility.
Impairment Loss on Investment in SHPS
During the nine months ending September 30, 2009, the we received notice from SHPS that the
shareholders of SHPS had approved a merger agreement between SHPS and SHPS Acquisition, Inc.,
pursuant to which the common stock of SHPS, including the common stock owned by us, would be
converted into the right to receive $0.000001 per share in cash. SHPS informed us that it believed
the estimated fair value of the SHPS common stock to be equal to such per share amount. As a result
of this transaction and careful evaluation of our legal options, the we believed it was more likely
than not that we will not be able to recover the $2.1 million carrying value of the investment in
SHPS. Therefore, in the Americas segment, we recorded a non-cash impairment loss of $2.1 million
during the second quarter ended June 30, 2009. Subsequent to the recording of the impairment loss,
the we liquidated our noncontrolling interest in SHPS by converting our SHPS common stock into cash
for $0.000001 per share during the three and nine months ended September 30, 2009 (none in the
comparable 2008 periods). See Note 2 for further information.
Other Income (Expense)
Other income, net, was $1.2 million for the nine months ended September 30, 2009 compared to other
income, net, of $7.0 million for the comparable 2008 period. The net decrease of $5.8 million was
primarily attributable to a decrease of $5.3 million in
unrealized and realized foreign currency transaction gains, net of
losses. Other income (expense) excludes the cumulative translation effects and unrealized gains
(losses) on financial derivatives that are included in Accumulated Other Comprehensive Income in
shareholders equity in the accompanying Condensed Consolidated Balance Sheets.
52
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Provision for Income Taxes
The provision for income taxes of $7.9 million for the nine months ended September 30, 2009, was
based upon pre-tax book income of $55.8 million, compared to $10.3 million for the nine months
ended September 30, 2008 based upon pre-tax book income of $63.2 million. The effective tax rate
for the nine months ended September 30, 2009 was 14.2% compared to an effective tax rate of 16.3%
for the comparable 2008 period. The decrease in the effective tax rate of 2.1% was primarily due
to a favorable $4.4 million reduction in the accrual of foreign withholding taxes, partially offset
by an unfavorable $3.8 million reduction in the reversal of a valuation allowance on deferred tax
assets in the nine month period ended September 30, 2009 over the comparable 2008 period. The
effective tax rate is also impacted by the shift in our mix of
earnings, the effects of permanent
differences, state income taxes and foreign income tax rate differentials (inclusive of income tax
holiday jurisdictions).
Net Income
As a result of the foregoing, we reported income from operations for the nine months ended
September 30, 2009 of $55.3 million, compared to $52.1 million in the comparable 2008 period. This
$3.2 million increase was principally attributable to a $7.2 million increase in revenues and a
$1.1 million decrease in general and administrative expenses
partially offset by a $3.2 million
increase in direct salaries and related costs and an impairment loss
of $1.9 million. The $3.2
million increase in income from operations and a $2.4 million lower income tax provision, partially
offset by a $2.5 million decrease in interest income, a $0.2 million increase in interest expense,
a $2.1 million impairment loss on investment in SHPS and a $5.8 million decrease in other income
resulted in net income of $47.9 million for the nine months ended September 30, 2009, a decrease of
$5.0 million compared to the same period in 2008.
Client Concentration
Total consolidated revenues included $28.5 million, or 13.4%, and $75.8 million, or 12.1%, of
consolidated revenues, for the three and nine months ended September 30, 2009, respectively, from
AT&T Corporation, a major provider of communication services for which we provide various customer
support services. This included $26.2 million and $69.1 million in revenue from the Americas for
the three and nine months ended September 30, 2009, respectively, and $2.3 million and $6.7 million
in revenue from EMEA for the three and nine months ended September 30, 2009, respectively.
The revenues for the comparable periods as it relates to this relationship were $13.6 million, or
6.6%, and $38.1 million, or 6.2%, of consolidated revenues, for the three and nine months ended
September 30, 2008, respectively. This included $11.1 million and $30.4 million in revenue from the
Americas and $2.5 million and $7.7 million in revenue from EMEA for the three and nine months ended
September 30, 2008, respectively.
Liquidity and Capital Resources
Our primary sources of liquidity are generally cash flows generated by operating activities and
from available borrowings under our revolving credit facilities. We utilize these capital resources
to make capital expenditures associated primarily with our customer contact management services,
invest in technology applications and tools to further develop our service offerings and for
working capital and other general corporate purposes, including repurchase of our common stock in
the open market and to fund possible acquisitions. In future periods, we intend similar uses of
these funds. See Part I Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations Pending Merger.
On August 5, 2002, the Board of Directors authorized the Company to purchase up to three million
shares of our outstanding common stock. A total of 1.9 million shares have been
repurchased under this 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 and general market conditions. During the
nine months ended September 30, 2009, we repurchased 224 thousand common shares under the 2002
53
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
repurchase program at prices ranging between $13.72 and $14.75 per share for a total cost of $3.2
million. We expect to make additional stock repurchases under this program in 2009 if market
conditions are favorable.
During the nine months ended September 30, 2009, we generated $59.8 million in cash from operating
activities, received $3.5 million in cash from grant proceeds, $0.8 million from the release of
restricted cash, $0.2 million from proceeds from the sale of property and equipment, $1.6 million
proceeds from the issuance of common stock and $0.3 million in excess tax benefits from stock-based
compensation. Further, we used $23.2 million for capital expenditures, repurchased $3.2 million of
the Companys stock and repurchased an additional $1.1 million of stock for minimum tax withholding
on restricted stock resulting in a $51.6 million increase in available cash (including the
favorable effects of international currency exchange rates on cash of $12.9 million).
Net cash flows provided by operating activities for the nine months ended September 30, 2009 were
$59.8 million, compared to $56.4 million provided by operating activities for the comparable 2008
period. The $3.4 increase in net cash flows from operating activities was due to a $10.9 million
increase in non-cash reconciling items such as impairment losses, unrealized gains on financial
instruments, stock-based compensation, depreciation and amortization and deferred income taxes,
offset by a $5.0 million decrease in net income and a net decrease of $2.5 million in cash flows
from assets and liabilities. The $2.5 million decrease in cash flows from assets and liabilities
was principally a result of a $1.4 million increase in income taxes payable and a $0.3 million
increase in deferred revenue offset by a $1.8 million increase in receivables, a $1.7 million
increase in other assets and a $0.7 million decrease in other liabilities.
Capital expenditures, which are generally funded by cash generated from operating activities,
available cash balances and borrowings available under our credit facilities, were $23.2 million
for the nine months ended September 30, 2009, compared to $25.7 million for the comparable 2008
period, a decrease of $2.5 million. During the nine months ended September 30, 2009, approximately
43% of the capital expenditures were the result of investing in new and existing customer contact
management centers, primarily offshore, and 57% was expended primarily for maintenance and
technology systems infrastructure. In 2009, we anticipate capital expenditures in the range of
$28.0 million to $30.0 million.
On March 30, 2009, we entered into a new credit agreement with KeyBank National Association and
Bank of America, N.A. (the Credit Facility). The Credit Facility replaces the prior credit
agreement, dated March 15, 2004, with KeyBank National Association and BNP Paribas. The new Credit
Facility provides us with a $50 million revolving credit facility, which amount is subject to
certain borrowing limitations, and includes certain customary financial and restrictive covenants.
Pursuant to the terms of the Credit Facility, the amount of $50 million may be increased up to a
maximum of $100 million with the prior written consent of the lenders. The $50 million Credit
Facility includes a $40 million multi-currency subfacility, a $10 million swingline subfacility and
a $5 million letter of credit subfacility. The Credit Facility will terminate on March 29, 2012.
We are not currently aware of any inability of our lenders to provide access to the full commitment
of funds that exist under the Credit Facility, if necessary. However, due to recent economic
conditions and the volatile business climate facing financial institutions, there can be no
assurance that such facility will be available to us, even though it is a binding commitment.
The Credit Facility may be used for general corporate purposes including strategic acquisitions,
share repurchases, working capital support, and letters of credit, subject to certain limitations.
Under the Credit Facility, we may obtain base rate loans (which include all loans under the
swingline subfacility), eurodollar loans and alternate currency loans. Base rate loans accrue
interest at the highest of the base rate (defined as the higher of the lenders prime rate, the
Federal Funds rate plus 0.50%, or the London Interbank Offered Rate (LIBOR) plus 1%) plus an
applicable margin up to 2.50%. Eurodollar loans bear interest at the eurodollar rate plus an
applicable margin up to 3.50%. Alternate currency loans accrue interest at the alternate currency
rate applicable to the alternate currency plus an applicable margin up to 3.50%. In addition, a
commitment fee of up to 0.65% is charged on the unused portion of the Credit Facility on a
quarterly basis. The borrowings under the Credit Facility, which will terminate on March 29, 2012,
are secured by a pledge of 65% of the stock of each of our active direct foreign subsidiaries. The
Credit Facility prohibits us from incurring additional indebtedness, subject to certain specific
exclusions. There were no borrowings in the first nine months of 2009 and no outstanding balances
as of September 30, 2009 and December
54
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
31, 2008, with $50 million availability on the Credit
Facility. At September 30, 2009, we were in compliance with all loan requirements of the Credit
Facility.
Effective January 1, 2008, the Company adopted the provisions of ASC 820 (ASC 820) Fair Value
Measurements and Disclosures. Adoption of ASC 820 did not have a material effect on our financial
condition, results of operations or cash flows. At September 30, 2009, the aggregate amount of
assets requiring fair value measurement (no liabilities) included in Level 3 represented
approximately 0.9% of the aggregate amount of consolidated assets and liabilities. Of the aggregate
amount of total assets and liabilities requiring fair value measurement, approximately 6.5% are
included in Level 3. The amount we report in Level 3 in future periods will be directly affected by
market conditions. There were no material changes made to the valuation techniques and
methodologies used to measure fair value during the nine months ended September 30, 2009. See Note
1 of the
accompanying Condensed Consolidated Financial Statements for further information related to the
adoption of ASC 820and Item 3 Quantitative and Qualitative Disclosures about Market Risk for
further information regarding foreign currency risk.
At September 30, 2009, we had $270.6 million in cash and cash equivalents, of which approximately
92.2% or $249.5 million, was held in international operations and may be subject to additional
taxes if repatriated to the United States. The U.S. Department of the Treasury released the
General Explanations of the Administrations Fiscal Year 2010 Revenue Proposals in May 2009.
These proposals represent a significant shift in international tax policy, which may materially
impact U.S. taxation of international earnings, including our position on permanent reinvestment of
foreign earnings. We continue to monitor these proposals and are currently evaluating the
potential impact on our financial condition, results of operations, and cash flows.
On October 5, 2009, we entered into a definitive merger agreement with ICT Group, Inc. (ICT),
under which, we expect to acquire ICT for approximately $263.0 million. See Part I Item 2-
Managements Discussion and Analysis of Financial Condition and Results of Operations Pending
Merger.
We believe that our resources including our current cash levels, accessible funds under our credit
facilities and cash generated from future operations will be adequate to fund this acquisition as
well as meet anticipated working capital needs, future debt repayment requirements, continued
expansion objectives, anticipated levels of capital expenditures and contractual obligations for
the foreseeable future and any stock repurchases. Our cash resources could also be affected by
various risks and uncertainties, including, but not limited to the risks detailed in Part II,
Item 1A titled Risk Factors.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires estimations and assumptions that affect the
reported amounts of assets and liabilities and the 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. These estimates and assumptions are based on historical experience and
various other factors that are believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or conditions.
We believe the following accounting policies are the most critical since these policies require
significant judgment or involve complex estimations that are important to the portrayal of our
financial condition and operating results:
Recognition of Revenue
We recognize revenue pursuant to Accounting Standards Codification (ASC) 605 Revenue
Recognition.
We primarily recognize revenues from services as the services are performed, which is based on
either a per minute, per call or per transaction basis, under a fully executed contractual
agreement and record reductions to revenue for contractual penalties and holdbacks for failure to
meet specified minimum service levels and other performance
55
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
based contingencies. Revenue
recognition is limited to the amount that is not contingent upon delivery of any future product or
service or meeting other specified performance conditions.
Product sales, accounted for within our fulfillment services, are recognized upon shipment to the
customer and satisfaction of all obligations.
Revenue from contracts with multiple-deliverables is allocated to separate units of accounting
based on their relative fair value, if the deliverables in the contract(s) meet the criteria for
such treatment. Certain fulfillment services contracts contain multiple-deliverables. Separation
criteria include whether a delivered item has value to the customer on a standalone basis, whether
there is objective and reliable evidence of the fair value of the undelivered items and, if the
arrangement includes a general right of return related to a delivered item, whether delivery of the
undelivered item is considered probable and in our control. Fair value is the price of a
deliverable when it is
regularly sold on a standalone basis, which generally consists of vendor-specific objective
evidence of fair value. If there is no evidence of the fair value for a delivered product or
service, revenue is allocated first to the fair value of the undelivered product or service and
then the residual revenue is allocated to the delivered product or service. If there is no evidence
of the fair value for an undelivered product or service, the contract(s) is accounted for as a
single unit of accounting, resulting in delay of revenue recognition for the delivered product or
service until the undelivered product or service portion of the contract is complete. We recognize
revenue for delivered elements only when the fair values of undelivered elements are known,
uncertainties regarding client acceptance are resolved, and there are no client-negotiated refund
or return rights affecting the revenue recognized for delivered elements. Once we determine the
allocation of revenue between deliverable elements, there are no further changes in the revenue
allocation. If the separation criteria are met, revenue from these services is recognized as the
services are performed under a fully executed contractual agreement. If the separation criteria are
not met because there is insufficient evidence to determine fair value of one of the deliverables,
all of the services are accounted for as a single combined unit of accounting. For these
deliverables with insufficient evidence to determine fair value, revenue is recognized on the
proportional performance method using the straight-line basis over the contract period, or the
actual number of operational seats used to serve the client, as appropriate.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts of $3.7 million as of September 30, 2009, or 2.1% of
accounts receivables, for estimated losses arising from the inability of our customers to make
required payments. Our estimate is based on factors surrounding the credit risk of certain
clients, historical collection experience and a review of the current status of trade accounts
receivable. It is reasonably possible that our estimate of the allowance for doubtful accounts will
change if the financial condition of our customers were to deteriorate, resulting in a reduced
ability to make payments.
Income Taxes
We reduce deferred tax assets by a valuation allowance if, based on the weight of available
evidence for each respective tax jurisdiction, it is more likely than not that some portion or all
of such deferred tax assets will not be realized. The valuation allowance for a particular tax
jurisdiction is allocated between current and non-current deferred tax assets for that jurisdiction
on a pro rata basis. Available evidence which is considered in determining the amount of valuation
allowance required includes, but is not limited to, our estimate of future taxable income and any
applicable tax-planning strategies.
At December 31, 2008, we determined that a valuation allowance of $30.6 million was necessary to
reduce U.S. deferred tax assets by $10.8 million and foreign deferred tax assets by $19.8 million,
where it was more likely than not that some portion or all of such deferred tax assets will not be
realized. The recoverability of the remaining net deferred tax asset of $19.4 million at December
31, 2008 is dependent upon future profitability within each tax jurisdiction. We establish a
valuation allowance to reduce the deferred tax assets if, based on the weight of the available
evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than
not that some portion or all of the deferred tax assets will be realized. In September,
2009, we
determined that our profitability and expectations of future profitability of our foreign and
domestic operations indicated that it was more likely than not that portions of the deferred tax
assets would be realized. Accordingly, in the third quarter of
56
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
2009, we recognized a net increase
in our U. S. deferred tax assets of $3.6 million through a partial reversal of the valuation
allowance related to our anticipated utilization of our domestic net operating loss carry-forward.
This tax benefit was partially offset by a net decrease of $1.3 million in deferred tax assets when we placed
an additional valuation allowance on a foreign subsidiarys deferred tax assets related to the
future use of its net operating loss. The net reversal of the valuation allowance of $2.3 million
reduced the provision for income taxes in the accompanying Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2009.
We evaluate tax positions that have been taken or are expected to be taken in our tax returns, and
record a liability for uncertain tax positions in accordance with ASC 740 (ASC 740), Income
Taxes. The calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. ASC 740 contains a two-step approach to recognizing and
measuring uncertain tax positions. First, tax positions are recognized if the weight of available
evidence indicates that it is more likely than not that the position will be sustained upon
examination,
including resolution of related appeals or litigation processes, if any. Second, the tax position
is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being
realized upon settlement. We reevaluate these uncertain tax positions on a quarterly basis. This
evaluation is based on factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit activity. Such a change
in recognition or measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision.
Impairment of Long-lived Assets
We review long-lived assets, which had a carrying value of $104.1 million as of September 30, 2009,
including goodwill, intangibles and property and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be recoverable and at
least annually for impairment testing of goodwill. An asset is considered to be impaired when the
carrying amount exceeds the fair value. Upon determination that the carrying value of the asset is
impaired, we record an impairment charge or loss to reduce the asset to its fair value. Future
adverse changes in market conditions or poor operating results of the underlying investment could
result in losses or an inability to recover the carrying value of the investment and, therefore,
might require an impairment charge in the future. See Notes 1 and 2 for impairment losses recorded
during the three and nine months ended September 30, 2009 related to investment in SHPS,
intangibles and goodwill.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued ASC 820 (ASC 820)
"Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. We adopted the provisions of ASC 820 on January 1, 2008.
The adoption of this standard did not have a material impact on our financial condition, results of
operations or cash flows. See Note 2 Fair Value to our Condensed Consolidated Financial
Statements for further information.
In March 2007, the Emerging Issues Task Force (EITF) reached a consensus on ASC 715-60 (ASC
715-60) Topic 715 Compensation Retirement Benefits Subtopic 60 Defined Benefits Plans Other
Postretirement. ASC 715-60 provides guidance on the employers recognition of assets, liabilities
and related compensation costs for collateral assignment split-dollar life insurance arrangements
that provide a benefit to an employee that extends into postretirement periods. We adopted the
provisions of ASC 715-60 on January 1, 2008. As a result of the implementation of ASC 715-60, we
recognized a $0.5 million liability for a postretirement benefit obligation related to a split
dollar arrangement on behalf of our founder and former Chairman and Chief Executive Officer which
was accounted for as a reduction to the January 1, 2008 balance of retained earnings. See Note 13
-Defined Benefit Pension Plan and Post-Retirement Benefits to our Condensed Consolidated Financial
Statements for further information.
In December 2007, the FASB issued ASC 805 (ASC 805) Business Combinations and modifications to
ASC 810 (ASC 810) Consolidation. ASC 805 changes how business acquisitions are accounted for
and impacts financial statements both on the acquisition date and in subsequent periods. ASC 810
includes changes to the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and
57
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
classified as a component of shareholders equity.
On January 1, 2009, we adopted the provisions of ASC 805 and the modifications to ASC 810, relating
to noncontrolling interests. ASC 805 will be applied prospectively for all business combinations
entered into after January 1, 2009, the date of adoption. The modified provisions of ASC 810 will
also be applied prospectively to all noncontrolling interests, except for the presentation and
disclosure provisions which are applied retrospectively to any noncontrolling interests that arose
before January 1, 2009. The adoption of these standards did not have a material impact on our
financial condition, results of operations or cash flows.
In March 2008, the FASB issued modifications to ASC 815 (ASC 815) Derivatives and Hedging,
requiring increased qualitative, quantitative, and credit-risk disclosures about an entitys
derivative instruments and hedging activities. On January 1, 2009, we adopted the modifications to
ASC 815. The adoption of this standard did not have
a material impact on our financial condition, results of operations or cash flows. See Note 4 -
Financial Derivatives to our Condensed Consolidated Financial Statements for further information.
In April 2008, the FASB issued modifications to ASC 350 (ASC 350) Intangibles Goodwill and
Other. The modifications to ASC 350 amended the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful life of recognized intangible
assets. This new guidance applies prospectively to intangible assets that are acquired
individually or with a group of other assets in business combinations and asset acquisitions. One
January 1, 2009 we adopted the modifications to ASC 350. The adoption of this standard did not have
a material impact on our financial condition, results of operations or cash flows.
In December 2008, the FASB issued modifications to ASC 715-20 (ASC 715-20) Topic 715
Compensation Retirement Benefits Subtopic 20 Defined Benefits Plans General, which provides
additional guidance on an employers disclosures about plan assets of a defined benefit pension or
other postretirement plan. The modifications to ASC 715-20 are effective for financial statements
issued for fiscal years ending after December 15, 2009. We are currently evaluating the impact of
adopting the modifications to ASC 715-20 on our financial condition, results of operations and cash
flows.
In April 2009, the FASB issued modifications to ASC 805-20 (ASC 805-20) Topic 805 Business
Combinations Subtopic 20 Identifiable Assets and Liabilities, and Any Noncontrolling Interests,
which requires that assets acquired and liabilities assumed in a business combination that arise
from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair
value of such an asset or liability cannot be reasonably estimated, the asset or liability would
generally be recognized in accordance with ASC 450 (ASC 450) Contingencies. Further, ASC 805-20
requires that a systematic and rational basis for subsequently measuring and accounting for the
assets or liabilities arising from contingencies be developed based on their nature. The
modifications to ASC 805-20 are effective for assets or liabilities arising from contingencies in
business combinations whose acquisition date is on or after January 1, 2009. The adoption of these
modifications to ASC 805-20 did not have a material impact on our financial condition, results of
operations or cash flows.
In April 2009, the FASB issued modifications to ASC 825 (ASC 825) Financial Instruments, to
extend the annual disclosures about fair value of financial instruments to interim reporting
periods. The modifications to ASC 825 is effective for interim reporting periods ending after June
15, 2009, and were adopted on April 1, 2009. The adoption of these modifications to ASC 825did not
have a material impact on our financial condition, results of operations or cash flows. See Note 1-
Basis of Presentation and Summary of Significant Accounting Policies Fair Value Measurements for
further information.
In April 2009, the FASB issued modifications to ASC 820. The modifications to ASC 820 provide
additional guidance on estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for the asset or
liability. The modifications to ASC 820 also provide guidance on circumstances that may indicate a
transaction is not orderly (that is, distressed or forced). The modifications to ASC 820 are
effective on a prospective basis for interim and annual reporting periods ending after June 15,
2009, and were adopted on April 1, 2009. The adoption of these modifications to ASC 820 did not
have a material impact on our financial condition, results of operations or cash flows.
58
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
In April 2009, the FASB issued modifications to ASC 320 (ASC 320) InvestmentsDebt and Equity
Securities, which amends the recognition and presentation of other-than-temporary impairments for
debt securities and provides new disclosure requirements for both debt and equity securities. Upon
adoption of the modifications to ASC 320, the non-credit component of previously recognized
other-than-temporary impairment on debt securities held on that date is reclassified from Retained
Earnings to Accumulated Other Comprehensive Income and reported as a cumulative-effect adjustment
as of the beginning of the period of adoption, if the entity does not intend to sell the security
and it is not more likely than not that it will be required to sell the security before recovery of
its amortized cost basis. The modifications to ASC 320 are effective for interim and annual
reporting periods ending after June 15, 2009, and were adopted on April 1, 2009. The adoption of
these ASC 320 modifications did not have a material impact on our financial condition, results of
operations or cash flows. See Note 5 Investments Held in Rabbi Trust for further information.
In May 2009, the FASB issued ASC 855 (ASC 855) Subsequent Events, which establishes general
standards of accounting for, and disclosures of, events that occur after the balance sheet date but
before the financial statements are issued or are available to be issued. ASC 855 is effective on a
prospective basis for interim or annual periods ending after June 15, 2009, and was adopted on
April 1, 2009. This standard did not have a material impact on our financial condition, results of
operations and cash flows.
In June 2009, the FASB issued ASC 105 (ASC 105) Generally Accepted Accounting Principles". ASC
105 states that the FASB Accounting Standards Codification (Codification) will become the single
source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the
FASB. The Codification and all of its contents, which changes the referencing of financial
standards, will carry the same level of authority. In other words, the GAAP hierarchy will be
modified to include only two levels of GAAP, authoritative and nonauthoritative. ASC 105 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009, and was adopted July 1, 2009. Therefore, all references to GAAP use the new Codification
numbering system prescribed by the FASB. As the Codification is not intended to change or alter
existing GAAP, it did not have an impact on our financial condition, results of operations and cash
flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05 (ASU 2009-05),
"Measuring Liabilities at Fair Value, which provides clarification for the fair value measurement
of liabilities in circumstances in which a quoted price in an active market for an identical
liability is not available. ASU 2009-05 is effective for the first interim period ending after
December 15, 2009, and was adopted on October 1, 2009. This standard did not have a material impact
on our financial condition, results of operations or cash flows.
In September 2009, the FASB issued ASU No. 2009-12 (ASU 2009-12), Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent), which provides guidance on
measuring the fair value of certain alternative investments. ASU 2009-12 amends ASC 820 to offer
investors a practical expedient for measuring the fair value of investments in certain entities
that calculate net asset value per share. ASU 2009-12 is effective for interim and annual periods
ending after December 15, 2009. We are currently evaluating the impact of adopting this standard on
our financial condition, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-13 (ASU 2009-13), Multiple-Deliverable Revenue
Arrangements, which amends ASC 605, Revenue Recognition. ASU 2009-13 provides guidance related
to the determination of when the individual deliverables included in a multiple-element arrangement
may be treated as separate units of accounting and modifies the manner in which the transaction
consideration is allocated across the individual deliverables. Also, the standard expands the
disclosure requirements for revenue arrangements with multiple deliverables. ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010. We are currently evaluating the
impact of adopting this standard on our financial condition, results of operations and cash flows.
59
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Our earnings and cash flows are subject to fluctuations due to changes in non-U.S. currency
exchange rates. We are exposed to non-U.S. exchange rate fluctuations as the financial results of
non-U.S. subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary,
those results, when translated, may vary from expectations and adversely impact overall expected
profitability. The cumulative translation effects for subsidiaries using functional currencies
other than the U.S. dollar are included in Accumulated other comprehensive income (loss) in
shareholders equity. Movements in non-U.S. currency exchange rates may negatively or positively
affect our competitive position, as exchange rate changes may affect business practices and/or
pricing strategies of non-U.S.
based competitors. Periodically, we use foreign currency contracts to hedge intercompany
receivables and payables, and transactions initiated in the United States that are denominated in
foreign currency.
We serve a number of U.S.-based clients using customer contact management center capacity in the
Philippines which is within our Americas segment. Although the contracts with these clients are
priced in U.S. dollars, a substantial portion of the costs incurred to render services under these
contracts are denominated in Philippine pesos (PHP), which represent a foreign exchange exposure.
As of September 30, 2009, we had outstanding forward contracts with counterparties to acquire a
total of PHP 2.7 billion through December 2010 at fixed prices of $66.4 million U.S. dollars, which
approximates 40.1% of our exposure related to the anticipated cash flow requirements denominated in
PHP. The fair value of these derivative instruments as of September 30, 2009 is presented in Note
4 of the accompanying Condensed Consolidated Financial Statements. If the U.S. dollar/PHP exchange
rate were to adversely change by 10% from current period-end levels, we would incur a $6.6 million
loss on the underlying exposures of the derivative instruments. However, this loss would be offset
by a corresponding gain of $6.6 million in our underlying exposures.
In October
2009, we entered into forward contracts to sell U.S. dollars of $5.1
million at fixed prices of 5.5 million Canadian dollars to hedge
intercompany forecasted cash outflows through June 2010.
We evaluate the credit quality of potential counterparties to derivative transactions and only
enter into contracts with those considered to have minimal credit risk. We periodically monitor
changes to counterparty credit quality as well as our concentration of credit exposure to
individual counterparties. We do not use derivative instruments for trading or speculative
purposes.
Interest Rate Risk
Our exposure to interest rate risk results from variable debt outstanding under our $50 million
revolving credit facility. During the nine months ended September 30, 2009, we had no debt
outstanding under this credit facility; therefore, a one-point increase in the weighted average
interest rate, which historically has equaled the LIBOR rate plus an applicable margin, would not
have had any impact on our financial position or results of operations.
We have not historically used derivative instruments to manage exposure to changes in interest
rates.
Fluctuations in Quarterly Results
For the year ended December 31, 2008, quarterly revenues as a percentage of total consolidated
annual revenues were approximately 25% each quarter. We have experienced and anticipate that in the future we will experience
variations in quarterly revenues. The variations are due to the timing of new contracts and renewal
of existing contracts, the timing and frequency of client spending for customer contact management
services, non-U.S. currency fluctuations, and the seasonal pattern of customer contact management
support and fulfillment services.
60
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Item 4 Controls and Procedures
As of September 30, 2009, under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a 15(e) under the Securities Exchange Act of 1934, as amended.
Our disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed in our SEC reports is recorded, processed, summarized and
reported within the time period specified by the SECs rules and forms, and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. We concluded that, as of
September 30, 2009, our disclosure controls and procedures were effective at the reasonable
assurance level.
There were no changes in our internal controls over financial reporting during the quarter ended
September 30, 2009 that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
61
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Part II OTHER INFORMATION
Item 1 Legal Proceedings
We have previously disclosed regulatory sanctions assessed against our Spanish subsidiary relating
to the alleged inappropriate acquisition of personal information in connection with two outbound
client contracts. In order to appeal these claims, we issued a bank guarantee of $0.9 million.
During the year ended December 31, 2008, $0.4 million of the bank guarantee was returned to us. The
remaining balance of the bank guarantee of $0.5 million is included as restricted cash in Deferred
charges and other assets in the accompanying Condensed Consolidated Balance Sheets as of September
30, 2009 and December 31, 2008. We will continue to vigorously defend these matters. However, due
to further progression of several of these claims within the Spanish court system, and based upon
opinion of legal counsel regarding the likely outcome of several of the matters before the courts,
we accrued a liability in the amount of $1.3 million as of September 30, 2009 and December 31, 2008
under ASC 450 Contingencies because we now believe that a loss is probable and the amount of the
loss can be reasonably estimated as to three of the subject claims. There are two other related
claims, one of which is currently under appeal, and the other of which is in the early stages of
investigation, but we have not accrued any amounts related to either of those claims because we do
not currently believe a loss is probable, and it is not currently possible to reasonably estimate
the amount of any loss related to those two claims.
From time to time, we are involved in legal actions arising in the ordinary course of business.
With respect to these matters, we believe that we have adequate legal defenses and/or provided
adequate accruals for related costs such that the ultimate outcome will not have a material adverse
effect on our future financial position or results of operations.
Item 1A Risk Factors
We may fail to realize all of the anticipated benefits of the proposed acquisition of ICT, which
may adversely affect the value of our common stock.
The success of our proposed acquisition of ICT will depend, in part, on our ability to realize the
anticipated benefits and cost savings from combining our businesses with those of ICT. However, to
realize these anticipated benefits and cost savings we must successfully combine our businesses
with those of ICT. If we are not able to achieve these objectives within the anticipated time
frame, or at all, the anticipated benefits and cost savings of the merger may not be realized fully
or at all or may take longer to realize than expected and the value of our common stock may be
adversely affected.
We and ICT have operated and, until the completion of the merger, will continue to operate,
independently. It is possible that the integration process could result in the loss of key
employees, result in the disruption of each companys ongoing businesses or identify
inconsistencies in standards, controls, procedures and policies that adversely affect our ability
to maintain relationships with customers, suppliers, distributors, creditors and lessors, or to
achieve the anticipated benefits of the merger.
Specifically, issues that must be addressed in integrating the operations of ICT into our
operations in order to realize the anticipated benefits of the merger include, among other things:
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integrating our marketing and promotion activities and information technology systems
with those of ICT; |
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conforming standards, controls, procedures and policies, business cultures and
compensation structures between the companies; |
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consolidating corporate and administrative infrastructures; |
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consolidating sales and marketing operations; |
62
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
|
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retaining existing customers and attracting new customers; |
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identifying and eliminating redundant and underperforming operations and assets; |
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coordinating geographically dispersed organizations; |
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managing tax costs or inefficiencies associated with integrating the operations of the
combined company; and |
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making any necessary modifications to operating control standards to comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. |
Integration efforts between the two companies will also divert management attention and resources.
An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as
well as any delays encountered in the integration process, could have an adverse effect on our
business and results of operations, which may affect the value of the shares of our common stock
after the completion of the merger.
In addition, the actual integration may result in additional and unforeseen expenses, and the
anticipated benefits of the integration plan may not be realized. Actual cost and sales synergies,
if achieved at all, may be lower than we expect and may take longer to achieve than anticipated. If
we are not able to adequately address these challenges, we may be unable to successfully integrate
ICTs operations into our own, or to realize the anticipated benefits of the integration of the two
companies.
The market price of our common stock after the merger may be affected by factors different from
those affecting our shares currently.
Our businesses and those of ICT differ in important respects and, accordingly, the results of
operations of the combined company and the market price of our shares of common stock following the
merger may be affected by factors different from those currently affecting the independent results
of operations of Sykes and ICT.
Failure to complete the merger could negatively impact our stock price and our future business and
financial results.
If the merger is not completed, our ongoing businesses may be adversely affected and, without
realizing any of the benefits of having completed the merger, we will be subject to a number of
risks, including the following:
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we will be required to pay certain costs relating to the merger, whether or not the
merger is completed; and |
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matters relating to the merger (including integration planning) may require substantial
commitments of time and resources by our management, which could otherwise have been
devoted to other opportunities that may have been beneficial to us. |
We also could be subject to litigation related to any failure to complete the merger or related to
any enforcement proceeding commenced against us or ICT to perform our respective obligations under
the merger agreement. If the merger is not completed, these risks may materialize and may adversely
affect our business, financial results and stock price.
We will incur substantial additional indebtedness to finance the proposed acquisition of ICT, which
will decrease our business flexibility and increase our borrowing costs.
It is anticipated that we will incur acquisition debt financing of approximately $150 million.
While we have a commitment from KeyBank National Association, to provide $165 million to us, the
final terms of the credit facilities are subject to negotiation. The financial and other covenants
to which we agree in connection with such indebtedness and our increased indebtedness and higher
debt-to-equity ratio in comparison to that we have had on a
63
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
recent historical basis will have the effect, among other things, of reducing our flexibility to
respond to changing business and economic conditions and increasing borrowing costs. In addition,
the terms and conditions of such indebtedness may not be favorable to us, and as such, could
further increase the cost of the merger, as well as the overall burden of such indebtedness upon us
and our business flexibility. Unfavorable debt financing terms may also adversely affect our
financial results.
If we do not borrow the funds to finance the proposed ICT acquisition, we will be required to use
funds held in international operations and may be subject to additional taxes.
In the event that we are not able to obtain financing for the acquisition, we will fund the cash
portion of the merger consideration using our existing cash and cash equivalents, which totaled
$270.6 million at September 30, 2009, of which approximately 92.2% or $249.5 million, was held in
international operations and may be subject to additional taxes if repatriated to the United
States. The imposition of such taxes on the repatriation of such income would increase our tax
expense for the post-combination operations.
We, ICT and, subsequently, the combined company must continue to retain, motivate and recruit
executives and other key employees, which may be difficult in light of uncertainty regarding the
proposed ICT acquisition, and failure to do so could negatively affect the combined company.
For the merger to be successful, during the period before the merger is completed, both we and ICT
must continue to retain, motivate and recruit executives and other key employees. The combined
company also must be successful at retaining key employees following the completion of the merger.
Experienced employees are in high demand and competition for their talents can be intense.
Employees of both Sykes and ICT may experience uncertainty about their future role with the
combined company until, or even after, strategies with regard to the combined company are announced
or executed. These potential distractions of the merger may adversely affect the ability of Sykes,
ICT or the combined company to attract, motivate and retain executives and other key employees and
keep them focused on applicable strategies and goals. A failure by us, ICT or the combined company
to retain and motivate executives and other key employees during the period prior to or after the
completion of the merger could have a negative impact on the business of Sykes, ICT or the combined
company.
We will incur significant transaction and merger-related costs in connection with the proposed ICT
acquisition.
We expect to incur a number of non-recurring costs associated with combining the operations of the
two companies. The substantial majority of non-recurring expenses resulting from the merger will be
comprised of transaction costs related to the merger, facilities and systems consolidation costs
and employment-related costs. We will also incur transaction fees and costs related to formulating
integration plans. Additional unanticipated costs may be incurred in the integration of the two
companies businesses. Although we expect that the elimination of duplicative costs, as well as the
realization of other efficiencies related to the integration of the businesses, should allow us to
offset incremental transaction and merger-related costs over time, this net benefit may not be
achieved in the near term, or at all.
The proposed ICT acquisition may not be accretive and may cause dilution to our earnings per share,
which may negatively affect the market price of our common stock.
We expect to realize synergies of up to $20 million annually in connection with the merger. Giving
consideration to realizing a portion of the anticipated synergies in 2010, the acquisition is
currently expected to be neutral to our earnings per diluted share in 2010. On an adjusted basis,
which excludes expenses related to the amortization of acquisition-related intangible assets, while
including the expected synergies, the merger is expected to be earnings per diluted share accretive
in 2010. These expectations are based on preliminary estimates which may materially change. We
could also encounter additional transaction and integration-related costs or other factors such as
the failure to realize all of the benefits anticipated in the merger. All of these factors could
cause dilution to our earnings per share or decrease or delay the expected accretive effect of the
merger and cause a decrease in the price of our common stock.
64
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
The proposed ICT acquisition may result in substantial goodwill for the combined company. If the
combined companys goodwill becomes impaired, then the profits of the combined company may be
significantly reduced or eliminated and shareholders equity may be reduced.
The actual amount of goodwill will depend in part on the market value of our common stock as of the
date on which the merger is completed and the appropriate allocation of the purchase price, which
may be impacted by a number of factors, including changes in the net assets acquired and changes in
the fair values of the net assets acquired. On at least an annual basis, we assesse whether there
has been an impairment in the value of goodwill. If the carrying value of goodwill exceeds its
estimated fair value, impairment is deemed to have occurred and the carrying value of goodwill is
written down to fair value. Under GAAP, this would result in a charge to the combined companys
operating earnings. Accordingly, any determination requiring the write-off of a significant portion
of goodwill recorded in connection with the merger would negatively affect the combined companys
results of operations.
The required regulatory approvals for the proposed ICT acquisition may not be obtained or may
contain materially burdensome conditions that could have an adverse effect on us.
Completion of the merger is conditioned upon the receipt of certain governmental approvals,
including, without limitation, the expiration or termination of the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act. Although we and ICT have agreed in the merger
agreement to use our reasonable best efforts to obtain the requisite governmental approvals, there
can be no assurance that these approvals will be obtained. In addition, the governmental
authorities from which these approvals are required may impose conditions on the completion of the
merger or require changes to the terms of the merger. If we become subject to any material
conditions in order to obtain any approvals required to complete the merger, the business and
results of operations of the combined company may be adversely affected.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Below is a summary of stock repurchases for the quarter ended September 30, 2009 (in thousands,
except average price per share). See Note 10, Earnings Per Share, to the Condensed Consolidated
Financial Statements for information regarding our stock repurchase program.
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Total |
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Number of |
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Shares |
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Maximum |
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Purchased as |
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Number Of |
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Part of |
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Shares That |
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Total |
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Publicly |
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May Yet Be |
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Number of |
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Average Price |
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Announced |
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Purchased |
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Shares |
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Paid Per |
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Plans or |
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Under Plans |
Period |
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Purchased (1) |
|
Share |
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Programs |
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or Programs |
|
July 1, 2009 - July 31, 2009 |
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1,098 |
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August 1, 2009 - August 31, 2009 |
|
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|
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|
|
|
|
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1,098 |
|
September 1, 2009 - September 30, 2009 |
|
|
|
|
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|
|
|
|
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1,098 |
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Total |
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1,098 |
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(1) |
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All shares purchased as part of a repurchase plan publicly announced on August 5, 2002. Total number of shares
approved for repurchase under the plan was 3.0 million with no expiration date. |
65
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
Item 6 Exhibits
The following documents are filed as an exhibit to this Report:
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15 |
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Awareness letter. |
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31.1 |
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Certification of Chief Executive Officer, pursuant to Rule 13a-14(a). |
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31.2 |
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Certification of Chief Financial Officer, pursuant to Rule 13a-14(a). |
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32.1 |
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. |
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32.2 |
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Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. |
66
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2009
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SYKES ENTERPRISES, INCORPORATED
(Registrant)
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Date: November 3, 2009 |
By: |
/s/ W. Michael Kipphut
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W. Michael Kipphut |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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67
EXHIBIT INDEX
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Exhibit |
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Number |
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15
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Awareness letter. |
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31.1
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Certification of Chief Executive Officer, pursuant to Rule 13a-14(a). |
|
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31.2
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Certification of Chief Financial Officer, pursuant to Rule 13a-14(a). |
|
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32.1
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. |
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32.2
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Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. |