UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Sykes Enterprises, Incorporated

(Exact name of Registrant as specified in its charter)

Florida		56-1383460
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
400 North Ashley Drive, Tampa, FL		33602
(Address of principal executive offices)		(Zip Code)

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 “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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, 2010, there were 46,850,569 outstanding shares of common stock.

 

 

Sykes Enterprises, Incorporated and Subsidiaries

INDEX

		Page
		No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2010 and December 31, 2009 (Unaudited)			3
Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2010 and 2009 (Unaudited)			4
Condensed Consolidated Statements of Changes in Shareholders’ Equity Nine months ended September 30, 2009, three months ended December 31, 2009 and nine months ended September 30, 2010 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2010 and 2009 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Report of Independent Registered Public Accounting Firm			47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			48
Item 3. Quantitative and Qualitative Disclosures About Market Risk			62
Item 4. Controls and Procedures			64
Part II. Other Information
Item 1. Legal Proceedings			65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			65
Item 6. Exhibits			66
Signature			67
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets
(Unaudited)

(in thousands, except per share data)		September 30, 2010				December 31, 2009
Assets
Current assets:
Cash and cash equivalents		$	202,757			$	279,853
Restricted cash			614				80,342
Receivables, net			248,393				167,666
Prepaid expenses			14,412				9,419
Other current assets			16,927				10,574
Total current assets			483,103				547,854
Property and equipment, net			120,416				80,264
Goodwill			114,294				21,209
Intangibles, net			56,336				2,091
Deferred charges and other assets			42,298				21,053
		$	816,447			$	672,471
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt		$	—			$	75,000
Accounts payable			30,320				21,725
Accrued employee compensation and benefits			77,848				51,127
Current deferred income tax liabilities			7,968				6,453
Income taxes payable			3,765				3,341
Deferred revenue			31,237				30,083
Other accrued expenses and current liabilities			22,438				12,689
Total current liabilities			173,576				200,418
Deferred grants			11,073				11,005
Long-term income tax liabilities			7,159				5,376
Other long-term liabilities			31,512				4,998
Total liabilities			223,320				221,797
Commitments and loss contingency (Note 16)
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $0.01 par value, 200,000 shares authorized; 47,066 and 41,817 shares issued			471				418
Additional paid-in capital			301,607				166,514
Retained earnings			282,628				280,399
Accumulated other comprehensive income			9,368				7,819
Treasury stock at cost: 81 shares and 329 shares			(947	)			(4,476	)
Total shareholders’ equity			593,127				450,674
		$	816,447			$	672,471

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands, except per share data)		2010				2009				2010				2009
Revenues		$	306,950			$	213,494			$	881,344			$	625,574
Operating expenses:
Direct salaries and related costs			199,889				134,429				575,653				398,409
General and administrative			89,984				58,047				286,124				170,011
Impairment of goodwill and intangibles			362				324				362				1,908
Impairment of long-lived assets			3,642				—				3,642				—
Total operating expenses			293,877				192,800				865,781				570,328
Income from operations			13,073				20,694				15,563				55,246
Other income (expense):
Interest income			312				495				820				1,951
Interest (expense)			(1,451	)			(138	)			(5,449	)			(490	)
Impairment (loss) on investment in SHPS			—				—				—				(2,089	)
Other income (expense)			(555	)			119				(6,023	)			1,214
Total other income (expense)			(1,694	)			476				(10,652	)			586
Income before (benefit) provision for income taxes			11,379				21,170				4,911				55,832
(Benefit) provision for income taxes			(2,267	)			2,388				(1,768	)			7,932
Net income		$	13,646			$	18,782			$	6,679			$	47,900
Net income per share:
Basic		$	0.29			$	0.46			$	0.15			$	1.18
Diluted		$	0.29			$	0.46			$	0.15			$	1.17
Weighted average shares:
Basic			46,468				40,743				45,889				40,662
Diluted			46,559				41,097				45,989				41,011

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity
Nine Months Ended September 30, 2009, Three Months Ended December 31, 2009 and
Nine Months Ended September 30, 2010
(Unaudited)

																		Accumulated
		Common Stock								Additional								Other
		Shares								Paid-in				Retained				Comprehensive				Treasury
(In thousands)		Issued				Amount				Capital				Earnings				Income (Loss)				Stock				Total
Balance at January 1, 2009			41,271			$	413			$	158,216			$	237,188			$	(10,683	)		$	(1,104	)		$	384,030
Issuance of common stock			112				1				1,599				—				—				—				1,600
Stock-based compensation expense			—				—				3,981				—				—				—				3,981
Excess tax benefit from stock- based compensation			—				—				247				—				—				—				247
Issuance of common stock and restricted stock under equity award Plans			252				2				(919	)			—				—				(163	)			(1,080	)
Repurchase of common stock			—				—				—				—				—				(3,193	)			(3,193	)
Comprehensive income			—				—				—				47,900				18,050				—				65,950
Balance at September 30, 2009			41,635				416				163,124				285,088				7,367				(4,460	)			451,535
Issuance of common stock			179				1				1,567				—				—				—				1,568
Stock-based compensation expense			—				—				1,177				—				—				—				1,177
Excess tax benefit from stock- based compensation			—				—				631				—				—				—				631
Issuance of common stock and restricted stock under equity award Plans			3				1				15				—				—				(16	)			—
Comprehensive income (loss)			—				—				—				(4,689	)			452				—				(4,237	)
Balance at December 31, 2009			41,817				418				166,514				280,399				7,819				(4,476	)			450,674
Issuance of common stock			2				—				34				—				—				—				34
Stock-based compensation expense			—				—				3,652				—				—				—				3,652
Excess tax benefit from stock- based compensation			—				—				360				—				—				—				360
Issuance of common stock and restricted stock under equity award Plans			204				2				(1,107	)			—				—				(177	)			(1,282	)
Repurchase of common stock			—				—				—				—				—				(5,212	)			(5,212	)
Retirement of treasury stock			(558	)			(6	)			(4,462	)			(4,450	)			—				8,918				—
Issuance of common stock for business acquisition			5,601				57				136,616				—				—				—				136,673
Comprehensive income			—				—				—				6,679				1,549				—				8,228
Balance at September 30, 2010			47,066			$	471			$	301,607			$	282,628			$	9,368			$	(947	)		$	593,127

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2010 and 2009
(Unaudited)

(in thousands)		2010				2009
Cash flows from operating activities:
Net income		$	6,679			$	47,900
Depreciation and amortization, net			43,236				20,917
Impairment losses			4,004				3,997
Unrealized foreign currency transaction (losses), net			(2,860	)			(2,632	)
Stock-based compensation expense			3,652				3,981
Excess tax benefit from stock-based compensation			(360	)			(247	)
Deferred income tax (benefit)			(8,644	)			(2,015	)
Net loss on disposal of property and equipment			63				129
Bad debt expense			58				1,147
Write down of value added tax receivables			434				414
Unrealized loss on financial instruments, net			377				973
Amortization of actuarial (gains) on pension			(38	)			(46	)
Foreign exchange (gain) loss on liquidation of foreign entities			6				(5	)
Increase (decrease) in valuation allowance on deferred tax assets			1,588				(2,285	)
Amortization of unrealized (gain) on post retirement obligation			(23	)			(28	)
Amortization of deferred loan fees			2,772				—
Changes in assets and liabilities:
Receivables			3,301				(19,488	)
Prepaid expenses			(410	)			(2,582	)
Other current assets			(5,500	)			(1,203	)
Deferred charges and other assets			1,123				(809	)
Accounts payable			(3,952	)			(3,173	)
Income taxes receivable / payable			(7,542	)			2,993
Accrued employee compensation and benefits			2,019				7,564
Other accrued expenses and current liabilities			(1,247	)			1,711
Deferred revenue			593				2,662
Other long-term liabilities			828				(41	)
Net cash provided by operating activities			40,157				59,834
Cash flows from investing activities:
Capital expenditures			(21,501	)			(23,207	)
Cash paid for business acquisition, net of cash acquired			(77,174	)			—
Proceeds from sale of property and equipment			23				170
Investment in restricted cash			(260	)			—
Release of restricted cash			80,000				839
Net cash (used for) investing activities			(18,912	)			(22,198	)

Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2010 and 2009
(Unaudited)

(continued)

(in thousands)		2010				2009
Cash flows from financing activities:
Payment of long term debt			(75,000	)			—
Proceeds from issuance of long term debt			75,000				—
Proceeds from issuance of stock			34				1,600
Excess tax benefit from stock-based compensation			360				247
Cash paid for repurchase of common stock			(5,212	)			(3,193	)
Proceeds from grants			148				3,491
Payments on short-term debt			(85,000	)			—
Shares repurchased for minimum tax withholding on equity awards			(1,282	)			(1,080	)
Cash paid for loan fees related to debt			(3,035	)			—
Net cash (used for) provided by financing activities			(93,987	)			1,065
Effects of exchange rates on cash			(4,354	)			12,887
Net increase (decrease) in cash and cash equivalents			(77,096	)			51,588
Cash and cash equivalents — beginning			279,853				219,050
Cash and cash equivalents — ending		$	202,757			$	270,638
Supplemental disclosures of cash flow information:
Cash paid during period for interest		$	2,431			$	752
Cash paid during period for income taxes		$	16,811			$	11,522
Non-cash transactions:
Property and equipment additions in accounts payable		$	1,331			$	2,035
Unrealized gain on post retirement obligation in accumulated other comprehensive income (loss)		$	202			$	342
Issuance of common stock for business acquisition		$	136,673			$	—

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 1 — Significant Accounting Policies

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 communication 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 company’s 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 reportable segments 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 Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) 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, 2010 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2010. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission (“SEC”). Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the condensed consolidated financial statements.

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 hour, 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. Separation criteria includes 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 Company’s 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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(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. Currently, the Company has no contracts containing multiple-deliverables for customer contact management services and fulfillment services.

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. Except as discussed in Note 3, the Company determined that its property and equipment were not impaired as of September 30, 2010.

Investments Held in Rabbi Trust for Former ICT Chief Executive Officer — Securities held in a rabbi trust for a nonqualified plan trust agreement dated February 1, 2010 (the “Trust Agreement”) with respect to severance payable to John J. Brennan, the former chief executive officer of ICT Group, Inc. (“ICT”), include the fair market value of debt securities, primarily U.S. Treasury bills. See Note 7 for further information. The fair market value of these debt securities, classified as trading securities in accordance with ASC 320 (“ASC 320”) “Investment – Debt and Equity Securities”, is determined by quoted market prices and is adjusted to the current market price at the end of each reporting period. The net realized and unrealized gains and losses on trading securities, which are included in “Other income and expense” in the accompanying Condensed Consolidated Statements of Operations, are not material for the three and nine months ended September 30, 2010. For purposes of determining realized gains and losses, the cost of securities sold is based on specific identification.

The “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2010 includes a $0.3 million obligation for severance payable to the former executive due in varying installments over the next five months in accordance with the Trust Agreement.

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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Goodwill — (continued)

goodwill within the reporting unit is less than its carrying value. The Company completed its annual goodwill impairment test during the third quarter of 2010, which included the consideration of certain economic factors and determined that the carrying amount of goodwill was not impaired as of September 30, 2010, except for $0.1 million related to its United Kingdom operations. See Note 3 for additional information. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time.

Intangible Assets — Intangible assets, primarily customer relationships, trade name, existing technologies and covenants not to compete, are amortized using the straight-line method over their estimated useful lives which approximate the pattern in which the economic benefits of the assets are consumed. The Company periodically evaluates the recoverability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Fair value for intangible assets is based on discounted cash flows, market multiples and/or appraised values as appropriate. The Company does not have intangible assets with indefinite lives. See Note 3 for additional information regarding the impairment of $0.3 million related to the Company’s United Kingdom operations, which was recorded in the third quarter of 2010.

Value Added Tax Receivables — The Philippine operations are subject to Value Added Tax (“VAT”), which is usually applied to all goods and services purchased throughout the Philippines. Upon validation and certification of the VAT receivables by the Philippine government, the VAT 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 receivables balance, which is recorded at net realizable value, is approximately $7.4 million and $6.2 million as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, the VAT receivables of $5.4 million and $5.6 million, respectively, are included in “Deferred charges and other assets”, $2.0 million and $0.0 million, respectively, are included in “Other current assets” and $0.0 million and $0.6 million, respectively, are included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2010 the Company recognized losses on the VAT receivables balance of $0.1 million and $0.4 million, respectively. During the comparable 2009 periods, the Company recognized losses on the VAT receivables balance of $0.1 million and $0.4 million, respectively.

Deferred Grants — The Company receives government employment grants, primarily in the U.S., Ireland and Canada, as an incentive to create and maintain permanent employment positions for a specified time period. The grants are repayable, under certain terms and conditions, if the Company’s relevant employment levels do not meet or exceed the employment levels set forth in the grant agreements. Accordingly, grant monies received are deferred and amortized using the proportionate performance model over the required employment period. As of September 30, 2010 and December 31, 2009, employment deferred grants totaled $12.7 million, of which $1.6 million is included in total current liabilities, and $11.9 million, of which $0.9 million is included in total current liabilities, respectively. Amortization of these grants, recorded as a reduction to “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations, was $0.3 million and $0.8 million for the three and nine months ended September 30, 2010, respectively, and $0.3 million and $0.9 million for the comparable 2009 periods, 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). All of these plans are discussed more fully in Note 14. 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.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Stock-Based Compensation — (continued)

In accordance with ASC 718 (“ASC 718”) “Compensation — Stock Compensation”, the Company recognizes in its Condensed Consolidated 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 re-measured to fair-value at each balance sheet date until the awards are settled.

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

	•		Cash, Short-term and Other Investments, Investments Held in Rabbi Trust, Short-term Debt and Accounts Payable. The carrying values for cash, short-term and other investments, investments held in rabbi trust, short-term debt and accounts payable approximate their fair values.
	•		Forward currency forward contracts and options. Forward currency forward contracts and options are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk.
	•		Long-Term Debt. The carrying value of long-term debt, including the current portion thereof, approximates its estimated fair value as it reprices at varying interest rates.

Fair Value Measurements — The provisions of ASC 820 (“ASC 820”) “Fair Value Measurements and Disclosures” 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 (“ASC 825”) “Financial Instruments” permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to use the fair value option permitted under ASC 825 for any of its financial assets and financial liabilities that are not already recorded at fair value.

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

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

	•		Level 1 – Quoted prices for identical instruments in active markets.
	•		Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
	•		Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Fair Value Measurements —(continued)

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

Investments Held in Rabbi Trusts — The investment assets of the rabbi trusts are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information, refer to Notes 7 and 14.

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.

Foreign Currency Translation — The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income, but is included in “Accumulated other comprehensive income (loss)” (AOCI), which is reflected as a separate component of shareholders’ equity until the sale or until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign currency transactional gains and losses are included in “Other income (expense)” in the accompanying 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 and options expiring within one to 24 months to reduce its foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies and net investments in foreign operations. In using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to counterparty credit risk.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies — (continued)

Foreign Currency and Derivative Instruments — (continued)

All derivatives, including foreign currency forward contracts and options, are recognized in the balance sheet at fair value. Derivatives are recorded either as assets, within “Other current assets,” or “Deferred charges and other assets,” or as liabilities, within “Other accrued expenses and current liabilities,” or “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.

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

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

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring, the Company discontinues hedge accounting prospectively. At September 30, 2010, all hedges were determined to be highly effective.

The Company also periodically enters into forward contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to reduce the effects from fluctuations caused by volatility in currency exchange rates on the Company’s operating results and cash flows. All changes in the fair value of the derivative instruments are included in “Other income (expense)”. See Note 6 – Financial Derivatives for further information on financial derivative instruments.

New Accounting Standards —There are no recently issued accounting standards that are expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 2 — Acquisition of ICT

On February 2, 2010, the Company acquired 100% of the outstanding common shares and voting interest of ICT through a merger of ICT with and into a subsidiary of the Company. ICT provides outsourced customer management and business process outsourcing solutions with its operations located in the United States, Canada, Europe, Latin America, India, Australia and the Philippines. The results of ICT’s operations have been included in the Company’s consolidated financial statements since its acquisition on February 2, 2010. The Company acquired ICT to expand and complement its global footprint, provide entry into additional vertical markets, and increase revenues to enhance its ability to leverage the Company’s infrastructure to produce improved sustainable operating margins. This resulted in the Company paying a substantial premium for ICT resulting in recognition of goodwill.

The acquisition date fair value of the consideration transferred totaled $277.8 million, which consisted of the following:

		Amount
Form		(in thousands)
Cash		$	141,161
Common stock			136,673
Total consideration		$	277,834

The fair value of the 5.6 million common shares issued was determined based on the Company’s closing share price of $24.40 on the acquisition date.

The cash portion of the acquisition was funded through borrowings consisting of a $75.0 million short-term loan from Key Bank and a $75 million Term Loan. See Note 9 for further information.

The Company accounted for the acquisition in accordance with ASC 805 (“ASC 805”) “Business Combinations”, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed from ICT based on their estimated fair values as of the closing date. Certain amounts are provisional and are subject to change, including the following items:

	•		Amounts for property and equipment, pending completion of certain physical counts and the confirmation of the condition of certain property and equipment.
	•		Tax entries required cannot be estimated until the Company completes its tax analysis of the assets acquired and liabilities assumed in connection with the acquisition of ICT. Additionally, as of February 2, 2010, the date of the ICT acquisition, the Company determined that it intended to distribute all of the accumulated and undistributed earnings of the ICT Philippine subsidiary and its direct parent, ICT Group Netherlands B.V., to Sykes Enterprises, Incorporated, its ultimate U.S. parent. Tax adjustments required to reflect this intent, which could be significant, cannot be estimated until the Company completes its tax analysis. The Company asserts its intention that all other ICT past and current earnings are permanently reinvested in foreign business operations in accordance with ASC 740-30 (“ASC 740-30”) “Income Taxes — Other Considerations or Special Areas”.
	•		The amount and allocation of goodwill among reporting units.

The Company expects to complete its analysis of the purchase price allocation during the fourth quarter of 2010. As of September 30, 2010, there were no changes in the recognized amounts of goodwill resulting from the acquisition of ICT.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 2 — Acquisition of ICT — (continued)

The following table summarizes the estimated acquisition date fair values of the assets acquired and liabilities assumed (in thousands):

		Amount
Cash and cash equivalents		$	63,987
Receivables			75,890
Income tax receivable			2,844
Prepaid expenses			4,846
Other current assets			4,950
Total current assets			152,517
Property and equipment			57,910
Goodwill			90,123
Intangibles			60,310
Deferred charges and other assets			7,978
Short-term debt			(10,000	)
Accounts payable			(12,412	)
Accrued employee compensation and benefits			(23,873	)
Income taxes payable			(2,451	)
Other accrued expenses and current liabilities			(10,951	)
Total current liabilities			(59,687	)
Deferred grants			(706	)
Long-term income tax liabilities			(5,573	)
Other long-term liabilities (1)			(25,038	)
Purchase price		$	277,834

Total net assets acquired by operating segment as of February 2, 2010, the acquisition date, were as follows (in thousands):

														Consolidated
		Americas				EMEA				Other				Total
Net assets		$	273,748			$	4,086			$	—			$	277,834

Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. The following table presents the Company’s purchased intangibles assets as of February 2, 2010, the acquisition date (in thousands):

						Weighted
						Average
						Amortization
Purchased intangible Assets		Amount Assigned				Period (years)
Customer relationships		$	57,900				8
Trade name			1,000				3
Proprietary Software			850				2
Non-compete agreements			560				1
		$	60,310				8

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 2 — Acquisition of ICT — (continued)

The $90.1 million of goodwill was assigned to the Company’s Americas and EMEA operating segments in the amount of $90.0 million and $0.1 million, respectively. See Note 3 for impairment of EMEA’s goodwill recorded during the third quarter of 2010. The goodwill recognized is attributable primarily to synergies the Company expects to achieve as the acquisition increases the opportunity for sustained long-term operating margin expansion by leveraging general and administrative expenses over a larger revenue base. Pursuant to Federal income tax regulations, the ICT acquisition was considered to be a non-taxable transaction; therefore, no amount of intangibles or goodwill from this acquisition will be deductible for tax purposes. The fair value of receivables acquired is $75.9 million, with the gross contractual amount being $76.4 million, of which $0.5 million was not expected to be collected.

After the ICT acquisition in February, 2010, the Company paid off the $10.0 million outstanding balance plus accrued interest of the ICT short-term debt assumed upon acquisition. The related interest expense included in “Interest expense” in the accompanying Condensed Statement of Operations for the three and nine months ended September 30, 2010 were not material.

The amount of ICT’s revenues and net income (loss) since the February 2, 2010 acquisition date, included in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2010, are $101.2 million and $2.1 million and $265.1 million and $(13.7) million, respectively. The following table presents the unaudited pro forma combined revenues and net earnings as if ICT had been included in the consolidated results of the Company for the entire three and nine month periods ended September 30, 2010 and 2009. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2010 and 2009 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	306,950			$	316,054			$	922,278			$	922,542
Net income		$	15,546			$	19,295			$	28,856			$	44,386
Net income per basic share		$	0.33			$	0.42			$	0.62			$	0.96
Net income per diluted share		$	0.33			$	0.41			$	0.62			$	0.95

These amounts have been calculated to reflect the additional depreciation, amortization, and interest expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2010 and January 1, 2009, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies operating results. Included in these costs are severance, advisory and legal costs, net of the consequential tax effects.

Acquisition-related costs of $6.3 million, comprised of $2.7 million in lease termination and other costs ($2.1 million in Corporate and $0.6 million in the Americas), $0.1 million in severance costs (primarily in Corporate), $0.3 million in transaction and integration costs, and $3.2 million in additional depreciation related to the increase in fair values of the acquired property and equipment and amortization of the fair values of the acquired intangibles, are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations for the three months ended September 30, 2010. Acquisition-related costs of $35.6 million, comprised of $15.3 million in severance costs ($14.1 million in Corporate and $1.2 million in the Americas), $2.7 million in lease termination and other costs ($2.1 million in Corporate and $0.6 million in the Americas), $9.0 million in transaction and integration costs, and $8.6 million in additional depreciation related to the increase in fair values of the acquired property and equipment and amortization of the fair values of the acquired intangibles, are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 3 — Fair Value

The Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 subject to the requirements of ASC 820 consist of the following (in thousands):

		Fair Value Measurements at September 30, 2010 Using:
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets For				Observable				Unobservable
		Balance at				Identical Assets				Inputs				Inputs
		September 30, 2010				Level (1)				Level (2)				Level (3)
Assets:
Money Market Funds and Open-end Mutual Funds (1)		$	18,212			$	18,212			$	—			$	—
Foreign Currency Forward Contracts (2)			1,757				—				1,757				—
Foreign Currency Option Contracts (3)			3,982				—				3,982				—
Investments held in a Rabbi Trust for the Deferred Compensation Plan (4)			3,074				3,074				—				—
U.S. Treasury Bills held in a Rabbi Trust for the former ICT chief executive officer (4)			291				291				—				—
Guaranteed Investment Certificates (5)			53				—				53				—
Total Assets		$	27,369			$	21,577			$	5,792			$	—
Liabilities:
Foreign Currency Forward Contracts (6)		$	2,227			$	—			$	2,227			$	—
Total Liabilities		$	2,227			$	—			$	2,227			$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 3 — Fair Value — (continued)

The Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 subject to the requirements of ASC 820 consist of the following (in thousands):

		Fair Value Measurements at December 31, 2009 Using:
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets For				Observable				Unobservable
		Balance at				Identical Assets				Inputs				Inputs
		December 31, 2009				Level (1)				Level (2)				Level (3)
Assets:
Money Market Funds and Open-end Mutual Funds (1)		$	234,659			$	234,659			$	—			$	—
Foreign Currency Forward Contracts (2)			2,866				—				2,866				—
Investments held in a Rabbi Trust for the Deferred Compensation Plan (3)			2,437				2,437				—				—
Guaranteed Investment Certificates(4)			46				—				46				—
Total Assets		$	240,008			$	237,096			$	2,912			$	—
Liabilities:
Foreign Currency Forward Contracts (5)		$	326			$	—			$	326			$	—
Total Liabilities		$	326			$	—			$	326			$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 3 — Fair Value — (continued)

Certain assets, under certain conditions, are measured at fair value on a non-recurring basis utilizing Level 3 inputs as described in Note 1, like those associated with acquired businesses, including goodwill and other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets was determined to be impaired. The Company’s assets measured at fair value on a nonrecurring basis (no liabilities) as of September 30, 2010 subject to the requirements of ASC 820 consist of the following (in thousands):

						Level (3) Fair Value Measurements
						at September 30, 2010:
						Three Months				Nine Months
						Ended				Ended
						September 30,				September 30,
		Balance at				2010				2010
		September 30,				Total Gains				Total Gains
		2010				(Losses)				(Losses)
Assets:
EMEA — United Kingdom:
Goodwill (1)		$	—			$	(84	)		$	(84	)
Intangibles, net (1)			—				(278	)			(278	)
			—				(362	)			(362	)
Americas:			—
Property and equipment, net (1)			105,706				(3,642	)			(3,642	)
		$	105,706			$	(4,004	)		$	(4,004	)

Based on actual and forecasted operating results and deterioration of the related customer base in the Company’s United Kingdom operations during the quarter ended September 30, 2010, the EMEA segment recorded an impairment loss of $0.1 million on goodwill and $0.3 million on intangibles (primarily customer relationships) during the three and nine months ended September 30, 2010.

During the three and nine months ended September 30, 2010, in connection with its periodic review for impairment, the Company determined that the carrying value of certain long-lived assets, primarily leasehold improvements, in one of its underutilized customer contact management centers in Argentina (a component of the Americas’ segment), were no longer recoverable and recorded an impairment charge of $0.5 million. The impairment charge represented the amount by which the carrying value exceeded the fair value of these assets which cannot be redeployed to other locations.

In addition, during the three and nine months ended September 30, 2010 in connection with a plan to close and consolidate facilities within the Americas’ segment as discussed more fully in Note 5, the Company recorded an impairment charge of $3.1 million, comprised of a $2.9 million impairment of long-lived assets for leasehold improvements in certain of its underutilized customer contact management centers in the Philippines and a $0.2 million impairment of long-lived assets for leasehold improvements related to a plan to consolidate corporate leased space in the United States.

During the three and nine months ended September 30, 2009, due to the decline in value that is other than temporary, the Company recorded impairment losses of $0.3 million and $1.9 million, respectively, on its investment of goodwill and intangible assets related to the March 2005 acquisition of Kelly, Luttmer & Associates Limited (“KLA”). Additionally, during the nine months ended September 30, 2009 the Company recorded an impairment loss of $2.1 million on its investment in SHPS (none in the comparable three month period in 2010).

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 4 — Goodwill and Intangible Assets

The following table presents the Company’s purchased intangible assets (in thousands) as of September 30, 2010 (including the ICT acquisition described in Note 2):

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	62,621			$	(7,872	)		$	54,749				8
Trade name			1,777				(883	)			894				4
Non-compete agreements			715				(529	)			186				1
Proprietary software			850				(343	)			507				2
Other			128				(128	)			—				3
		$	66,091			$	(9,755	)		$	56,336				8

The following table presents the Company’s purchased intangible assets (in thousands) as of December 31, 2009:

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	4,437			$	(2,588	)		$	1,849				6
Trade name			807				(565	)			242				5
Non-compete agreements			161				(161	)			—				2
Other			133				(133	)			—				3
		$	5,538			$	(3,447	)		$	2,091				6

Amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), of $2.4 million and $6.5 million for the three and nine months ended September 30, 2010, respectively, is included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations. In the comparable 2009 periods, the Company recognized amortization expense of $0.2 million and $0.8 million, respectively.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 4 — Goodwill and Intangible Assets — (continued)

The Company’s estimated future amortization expense for the five succeeding years is as follows (in thousands):

Years Ending December 31,		Amount
2010 (remaining three months)		$	2,411
2011		$	8,702
2012		$	8,082
2013		$	7,358
2014		$	7,296
2015		$	7,293
2016 and thereafter		$	15,194

Changes in goodwill consist of the following (in thousands):

						Accumulated
		Gross				Impairment
		Amount				Losses				Net Amount
Americas:
Balance at January 1, 2010		$	21,838			$	(629	)		$	21,209
Acquisition of ICT (See Note 2)			90,036				—				90,036
Foreign currency translation			3,049				—				3,049
Balance at September 30, 2010			114,923				(629	)			114,294
EMEA:
Balance at January 1, 2010			—				—				—
Acquisition of ICT (See Note 2)			87				(87	)			—
Foreign currency translation			(3	)			3				—
Balance at September 30, 2010			84				(84	)			—
		$	115,007			$	(713	)		$	114,294

See Note 3 for additional information regarding the impairment of the EMEA goodwill.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 5 — Costs Associated with Exit or Disposal Activities

During the third quarter of 2010, consistent with our long-term goals to manage and optimize capacity utilization, the Company closed or committed to close four customer contact management centers in the Philippines and consolidated or committed to consolidate leased space in its Wilmington, Delaware and Newtown, Pennsylvania locations (the “Plan”). These actions were in response to the facilities consolidation and capacity rationalization related to the ICT acquisition in February 2010, enabling the Company to reduce operating costs by eliminating redundant space and to optimize capacity utilization rates where overlap exists. The number of seats slated for rationalization approximates 2,000; and the cost savings associated with these actions is anticipated to be approximately $5.8 million annually. There are no employees affected by the Plan, and the Company expects to complete these actions on or before January 31, 2011. In accordance with the Company’s previously discussed 12 to 18 month integration timeline, following the ICT acquisition in February 2010, management expects to continue to evaluate opportunities for further such actions around facilities consolidation and capacity optimization.

The major costs expected to be incurred as a result of these actions are impairments of long-lived assets (primarily leasehold improvements) and facility-related costs (primarily consisting of those costs associated with the real estate leases) estimated at $7.2 million, all of which are in the Americas’ segment. The Company recorded $3.1 million of the costs associated with this Plan as non-cash impairment charges included in “Impairment of long-lived assets” in the accompanying Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2010 (see Note 3 for further information), while approximately $4.1 million represents cash expenditures for facility-related costs, primarily rent obligations to be paid through the remainder of the lease terms, the last of which ends in February 2017. The exact timing and actual amounts of the facility-related payments are dependent upon the Company’s ability to sublease these facilities. If the events and circumstances regarding the Company’s ability to sublease the facilities change, these estimates would change. In the third quarter ended September 30, 2010, since the Company ceased using certain of these facilities during the third quarter, the Company charged $2.4 million to “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations related to the facility-related costs, of which $0.5 million was paid in cash.

The following tables summarize the 2010 accrued liability for costs associated with the Plan’s exit or disposal activities and related charges for the three and nine months ended September 30, 2010:

														Ending
		Beginning												Accrual at
		Accrual at								Cash				September
		July 1, 2010				2010 Charges				Payments				30, 2010				Short-term(1)				Long-term(2)				Total
Lease obligations and facility exit costs		$	—			$	2,444			$	(504	)		$	1,940			$	929			$	1,011			$	1,940
		$	—			$	2,444			$	(504	)		$	1,940			$	929			$	1,011			$	1,940
		Beginning												Ending
		Accrual at												Accrual at
		January 1,								Cash				September
		2010				2010 Charges				Payments				30, 2010
Lease obligations and facility exit costs		$	—			$	2,444			$	(504	)		$	1,940
		$	—			$	2,444			$	(504	)		$	1,940

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 6 — Financial Derivatives

Cash Flow Hedges — The Company had derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815, consisting of Philippine peso (“PHP”) contracts, maturing within 12 months with a notional value of $89.3 million and $39.4 million as of September 30, 2010 and December 31, 2009, respectively, and Canadian dollar contracts maturing within 15 months with a notional value of $6.1 million and $3.8 million as of September 30, 2010 and December 31, 2009, 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 $2.2 million and $2.0 million of deferred gains, net of taxes of $0.7 million and $0.8 million, on these derivative instruments as of September 30, 2010 and December 31, 2009, respectively, recorded in AOCI in the accompanying Condensed Consolidated Balance Sheets. The deferred gains expected to be reclassified to “Revenues” from AOCI during the next twelve months is $1.6 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 2010, to hedge intercompany forecasted cash outflows, the Company entered into additional forward contracts to buy $3.7 million Canadian Dollars (CAD) versus the U.S. Dollar for maturities between three and 14 months as well as forward and option contracts to sell 1.2 billion Philippine Peso versus the U.S. Dollar for maturities between three and 14 months.

Net Investment Hedges — During the nine months ended September 30, 2010, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, as defined under ASC 815. The aggregate notional value of these hedges was $26.1 million as of September 30, 2010. The Company recorded deferred (losses) of $(3.1) million and $(2.1) million, net of taxes, for the three and nine months ended September 30, 2010, respectively, as a currency translation adjustment, a component of AOCI, offsetting foreign exchange losses attributable to the translation of the net investment. During the three and nine months ended September 30, 2010, net investment hedges settled at a loss of $1.4 million, net of taxes, included as a component of AOCI, offsetting the change in cumulative translation adjustment attributable to the hedged portion of the Company’s net investment in the foreign operation. The remaining balance of net investment hedges settled at a loss of $1.2 million, net of taxes, in October, 2010. The Company did not hedge net investments in foreign operations during the comparable 2009 period.

Other Hedges — The Company periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect our interests against adverse foreign currency moves pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than our subsidiaries functional currencies. These contracts generally do not exceed 60 days in duration. As of September 30, 2010 and December 31, 2009, these contracts total $69.3 million USD and $11.5 million USD, respectively, against foreign currencies including PHP, CAD, Euro Dollar (EUR), Australian Dollar (AUD), Great British Pound (GBP) and Argentine Peso (ARS). In October 2010, the Company entered into additional contracts that have a total notional amount of $72.8 million USD against the PHP, CAD, Euro Dollar (EUR), Danish Krona (DKK), Australian Dollar (AUD), Great British Pound (GBP), Argentine Peso (ARS) and the Egyptian Pound (EGP). These contracts generally do not exceed 60 days in duration.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2010 and 2009
(Unaudited)

Note 6 — Financial Derivatives — (continued)

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

		As of September 30, 2010				As of December 31, 2009
Foreign Currency		Currency Denomination		Settle Through Date		Foreign Currency		Currency Denomination
U.S. Dollars 14,300		Philippine Pesos 706,837		September 2011		U.S. Dollars 39,400		Philippine Pesos 1,970,189
U.S. Dollars 75,000		Philippine Pesos 3,476,490		July 2011
U.S. Dollars 6,124		Canadian Dollars 6,474		December 2011		U.S. Dollars 3,800		Canadian Dollars 4,050
Euros 20,000		U.S. Dollars 26,106		October 2010
U.S. Dollars 13,120		Euros 10,000		October 2010
Canadian Dollars 5,161		U.S. Dollars 5,000		October 2010
Philippine Pesos 632,898		U.S. Dollars 14,400		October 2010
Argentine Peso 31,996		U.S. Dollars 8,000		October 2010
British Pound 9,182		U.S. Dollars 14,250		October 2010
Australian Dollar 15,346		U.S. Dollars 14,500		October 2010
						Canadian Dollars 12,500		Euros 8,066