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 March 31, 2009

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 “large accelerated filer,” “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 (Do not check if a smaller reporting company)		Smaller reporting company o

     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 April 24, 2009, there were 41,243,865 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 March 31, 2009 and December 31, 2008 (Unaudited)			3
Condensed Consolidated Statements of Operations Three months ended March 31, 2009 and 2008 (Unaudited)			4
Condensed Consolidated Statements of Changes in Shareholders’ Equity Three months ended March 31, 2008, nine months ended December 31, 2008 and three months ended March 31, 2009 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2009 and 2008 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Report of Independent Registered Public Accounting Firm			33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			45
Part II. Other Information
Item 1. Legal Proceedings			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6. Exhibits			46
Signature			47
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

(Unaudited)

		March 31,				December 31,
(in thousands, except per share data)		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	208,976			$	219,050
Receivables, net			158,022				157,067
Prepaid expenses			11,204				7,084
Other current assets			12,721				13,317
Total current assets			390,923				396,518
Property and equipment, net			79,558				80,390
Goodwill			21,884				23,191
Intangibles, net			4,033				4,586
Deferred charges and other assets			24,551				24,857
		$	520,949			$	529,542
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	20,028			$	26,419
Accrued employee compensation and benefits			46,136				47,194
Income taxes payable			4,222				4,485
Deferred revenue			25,552				26,955
Other accrued expenses and current liabilities			18,050				21,057
Total current liabilities			113,988				126,110
Deferred grants			12,099				9,340
Long-term income tax liabilities			5,082				5,077
Other long-term liabilities			4,858				4,985
Total liabilities			136,027				145,512
Loss contingency (Note 14)
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; 41,472 and 41,271 shares issued			415				413
Additional paid-in capital			158,961				158,216
Retained earnings			251,958				237,188
Accumulated other comprehensive loss			(21,999	)			(10,683	)
Treasury stock at cost: 327 shares and 96 shares			(4,413	)			(1,104	)
Total shareholders’ equity			384,922				384,030
		$	520,949			$	529,542

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Three Months Ended
		March 31,
(in thousands, except for per share data)		2009				2008
Revenues		$	203,241			$	203,721
Operating expenses:
Direct salaries and related costs			130,253				130,980
General and administrative			55,489				56,424
Total operating expenses			185,742				187,404
Income from operations			17,499				16,317
Other income (expense):
Interest income			851				1,822
Interest (expense)			(114	)			(102	)
Other income			821				531
Total other income (expense)			1,558				2,251
Income before provision for income taxes			19,057				18,568
Provision for income taxes			4,287				2,858
Net income		$	14,770			$	15,710
Net income per share:
Basic		$	0.36			$	0.39
Diluted		$	0.36			$	0.38
Weighted average shares:
Basic			40,630				40,491
Diluted			41,034				40,813

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

		Common																Accumulated
		Stock								Additional								Other
		Shares								Paid-in				Retained				Comprehensive				Treasury
(In thousands)		Issued				Amount				Capital				Earnings				Income (Loss)				Stock				Total
Balance at January 1, 2008			45,537			$	455			$	184,184			$	195,203			$	37,457			$	(51,978	)		$	365,321
Adjustment upon adoption of EITF 06-10			—				—				—				(482	)			—				—				(482	)
Issuance of common stock			60				1				678				—				—				—				679
Stock-based compensation expense			—				—				1,246				—				—				—				1,246
Issuance of common stock and restricted stock under equity award plans			190				1				94				—				—				(96	)			(1	)
Retirement of treasury stock			(4,543	)			(45	)			(33,031	)			(18,094	)			—				51,170				—
Comprehensive income			—				—				—				15,710				303				—				16,013
Balance at March 31, 2008			41,244				412				153,171				192,337				37,760				(904	)			382,776
Issuance of common stock			45				—				495				—				—				—				495
Stock-based compensation expense			—				—				3,510				—				—				—				3,510
Excess tax benefit from stock- based compensation			—				—				712				—				—				—				712
Issuance of common stock and restricted stock under equity award plans			46				2				(33	)			—				—				(4	)			(35	)
Repurchase of common stock			—				—				—				—				—				(512	)			(512	)
Retirement of treasury stock			(101	)			(1	)			(315	)			—				—				316				—
Issuance of common stock for business acquisition			37				—				676				—				—				—				676
Comprehensive income (loss)			—				—				—				44,851				(48,443	)			—				(3,592	)
Balance at December 31, 2008			41,271				413				158,216				237,188				(10,683	)			(1,104	)			384,030
Stock-based compensation expense			—				—				1,616				—				—				—				1,616
Excess tax benefit from stock- based compensation			—				—				79				—				—				—				79
Issuance of common stock and restricted stock under equity award plans			201				2				(950	)			—				—				(116	)			(1,064	)
Repurchase of common stock			—				—				—				—				—				(3,193	)			(3,193	)
Comprehensive income (loss)			—				—				—				14,770				(11,316	)			—				3,454
Balance at March 31, 2009			41,472			$	415			$	158,961			$	251,958			$	(21,999	)		$	(4,413	)		$	384,922

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(Unaudited)

(in thousands)		2009				2008
Cash flows from operating activities:
Net income		$	14,770			$	15,710
Depreciation and amortization, net			6,776				7,019
Unrealized foreign currency transaction gains, net			(284	)			—
Stock-based compensation expense			1,616				1,246
Excess tax benefit from stock-based compensation			(79	)			—
Deferred income tax provision (benefit)			884				(186	)
Net loss on disposal of property and equipment			37				—
Foreign exchange loss (gain) on liquidation of foreign entities			5				(11	)
Bad debt expense			595				224
Write down of value added tax receivables			209				169
Unrealized loss on financial instruments, net			85				691
Amortization of discount on short-term investments			—				(173	)
Amortization of actuarial gains on pension			—				(17	)
Changes in assets and liabilities:
Receivables			(6,202	)			(16,132	)
Prepaid expenses			(4,426	)			(3,941	)
Other current assets			(222	)			491
Deferred charges and other assets			(1,151	)			804
Accounts payable			(2,083	)			(2,133	)
Income taxes receivable/payable			(394	)			(1,197	)
Accrued employee compensation and benefits			(1,164	)			(2,247	)
Other accrued expenses and current liabilities			(692	)			753
Deferred revenue			(388	)			(632	)
Other long-term liabilities			154				598
Net cash provided by operating activities			8,046				1,036
Cash flows from investing activities:
Capital expenditures			(11,057	)			(8,063	)
Proceeds from sale of property and equipment			6				51
Proceeds from release of restricted cash			—				373
Sale of short-term investments			—				17,535
Purchase of short-term investments			—				(175	)
Investment in restricted cash			—				(1,001	)
Other			—				(128	)
Net cash (used for) provided by investing activities			(11,051	)			8,592
Cash flows from financing activities:
Proceeds from issuance of stock			—				679
Excess tax benefit from stock-based compensation			79				—
Cash paid for repurchase of common stock			(3,193	)			—
Proceeds from grants			3,440				—
Proceeds from short-term debt			—				26
Payments on short-term debt			—				(26	)
Net cash provided by financing activities			326				679
Effects of exchange rates on cash			(7,395	)			1,674
Net (decrease) increase in cash and cash equivalents			(10,074	)			11,981
Cash and cash equivalents — beginning			219,050				177,682
Cash and cash equivalents — ending		$	208,976			$	189,663

Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2009 and 2008
(Unaudited)

(continued)

(In thousands)		2009				2008
Supplemental disclosures of cash flow information:
Cash paid during period for interest		$	70			$	67
Cash paid during period for income taxes		$	3,552			$	4,061
Non-cash transactions:
Property and equipment additions included in accounts payable		$	1,691			$	1,681
Shares repurchased for minimum tax withholding on common stock and restricted stock under equity awards plans included in other accrued expenses and current liabilities		$	1,063			$	—

See accompanying notes to condensed consolidated financial statements.

Sykes Enterprises, Incorporated and Subsidiaries

(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 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 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 Company’s 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 months ended March 31, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission (“SEC”).

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 SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. 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 March 31, 2009.

Goodwill — The Company accounts for goodwill and other intangible assets under SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” 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 SFAS 142, 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. The Company completed its annual goodwill impairment test during the third quarter of 2008, which included the consideration of recent economic developments

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Goodwill — (continued)

and determined that the carrying amount of goodwill was not impaired. The Company expects to receive future benefits from 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 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.

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. This process through collection typically takes three to five years. The VAT receivables balance recorded at net realizable value, which approximates fair value, is approximately $7.5 million and $7.5 million as of March 31, 2009 and December 31, 2008, respectively. See fair value measurements in this Note 1 for further information. As of March 31, 2009 and December 31, 2008, the VAT receivables of $5.5 million and $4.9 million, respectively, are included in “Deferred charges and other assets”, $1.1 million and $1.1 million, respectively, are included in “Other current assets” and $0.9 million and $1.5 million, respectively, are included in “Receivables” in the accompanying Condensed Consolidated Balance Sheets. During the three months ended March 31, 2009 and 2008, the Company wrote down the VAT receivables balance by $0.2 million and $0.2 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). 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 Measurements — Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157 (SFAS 157), “Fair Value Measurements” and SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115”. SFAS 157, 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. SFAS 157 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.

SFAS 159 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 SFAS 159 for any of its financial assets and financial liabilities that are not already recorded at fair value.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Fair Value Measurements — (continued)

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

Fair Value Hierarchy — SFAS 157 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.

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 using a discounted cash flows model. 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, refer to Notes 5 and 12.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Fair Value Measurements — (continued)

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 Receivables — The VAT 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.

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)”, 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 utilizing SFAS No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities”, as amended. 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 SFAS 133. 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 hedge’s 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 March 31, 2009, all hedges were determined to be highly effective.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Foreign Currency and Derivative Instruments — (continued)

The Company also periodically enters into forward contracts that are not designated as hedges as defined under SFAS 133. 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 “Other income” 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 SFAS No. 157 (SFAS 157), “Fair Value Measurements”, 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 SFAS 157 on January 1, 2008. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows. See Note 2 — Fair Value for further information.

In March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-10 (EITF 06-10), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 provides guidance on the employer’s 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 EITF 06-10 on January 1, 2008. As a result of the implementation of EITF 06-10, 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 SFAS No. 141 (revised 2007) (SFAS 141R), “Business Combinations” and SFAS No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51”. SFAS 141R changes how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. SFAS 160 changes 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 SFAS 141R and SFAS 160. SFAS 141R will be applied prospectively for all business combinations entered into after January 1, 2009, the date of adoption. The provisions of SFAS 160 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 Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures About Derivative Instruments and Hedging Activities”, which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, by requiring increased qualitative, quantitative, and credit-risk disclosures about an entity’s derivative instruments and hedging activities. On January 1, 2009, the Company adopted the provisions of SFAS 161. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows. See Note 4 — Financial Derivatives for further information.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (FSP 142-3), “Determination of the Useful Life of Intangible Assets”. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other 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. The Company adopted the provisions of FSP 142-3 on January 1, 2009. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Recent Accounting Pronouncements — (continued)

In May 2008, the FASB issued SFAS No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles”, which reorganizes the generally accepted accounting principles (GAAP) hierarchy. SFAS 162 is intended to improve financial reporting by providing a consistent framework for determining what accounting principles should be used in preparing U.S. GAAP financial statements. With the issuance of SFAS 162, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. SFAS 162 was effective November 15, 2008, and did not have any material impact on the Company’s financial condition, results of operations and cash flows.

In December 2008, the FASB issued FSP No. FAS 132(R)-1 (FSP 132R-1), “Employers Disclosures about Postretirement Benefit Plan Assets”, which provides additional guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132R-1 is effective for financial statements issued for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting FSP 132R-1 on its financial statements, results of operations and cash flows.

In April 2009, the FASB issued FSP No. FAS 141(R)-1 (FSP 141(R)-1), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, which amends the guidance in SFAS 141R to require 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 FASB Statement No. 5, “Accounting for Contingencies”, and FASB Interpretation (FIN) No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB decided to remove the subsequent accounting guidance for assets and liabilities arising from contingencies from Statement 141R, and carry forward without significant revision the guidance in SFAS 141R. Like SFAS 141R, FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations whose acquisition date is on or after January 1, 2009.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 (FSP 107-1), “Interim Disclosures about Fair Value of Financial Instruments”, which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, and APB Opinion No. 28, “Interim Financial Reporting”, to extend the annual disclosures about fair value of financial instruments to interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. The Company is currently evaluating the impact of adopting FSP 107-1 on its financial statements, results of operations and cash flows.

In April 2009, the FASB issued FSP No. FAS 157-4 (FSP 157-4), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which amends SFAS 157, “Fair Value Measurements”, and supersedes FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. FSP 157-4 provides 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. FSP 157-4 also provides guidance on circumstances that may indicate a transaction is not orderly (that is, distressed or forced). FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company is currently evaluating the impact of adopting FSP 157-4 on its financial statements, results of operations and cash flows.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2 (FSP 115-2), “Recognition and Presentation of Other-Than Temporary Impairments”, 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. FSP

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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

Recent Accounting Pronouncements — (continued)

115-2 is effective for interim and annual reporting periods ending after June 15, 2009. Upon adoption of the provisions of FSP 115-2, the Company will report a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the non-credit component of previously recognized other-than-temporary impairment on debt securities held at that date from Retained Earnings to Accumulated Other Comprehensive Income, if the Company 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 Company is currently evaluating the impact of adopting FSP 115-2 on its financial statements, results of operations and cash flows.

Note 2 — Fair Value

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the requirements of SFAS 157 consist of the following (in thousands):

								Fair Value Measurements at March 31, 2009 Using:
								Quoted Prices in
								Active Markets				Significant Other				Significant
								For Identical				Observable				Unobservable
				Balance at				Assets				Inputs				Inputs
				March 31, 2009				(Level 1)				(Level 2)				(Level 3)
Assets:
Money Market and Open-end Mutual Funds		(1)		$	90,253			$	90,253			$	—			$	—
Foreign Currency Forward Contracts		(2)			185				—				185				—
Investments Held in Rabbi Trust for the Deferred Compensation Plan		(2)			1,612				1,612				—				—
Guaranteed Investment Certificates		(3)			854				—				854				—
Value Added Tax Receivables		(4)			7,533				—				—				7,533
Total Assets				$	100,437			$	91,865			$	1,039			$	7,533
Liabilities:
Foreign Currency Forward Contracts		(5)		$	9,129			$	—			$	9,129			$	—
Total Liabilities				$	9,129			$	—			$	9,129			$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 2 — Fair Value — (continued)

The following table presents a reconciliation of the beginning and ending balances for the Company’s value added tax receivables measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2009 and 2008:

		March 31,
Description		2009				2008
Beginning Balance, January 1		$	7,501			$	8,247
Included in earnings1			(209	)			(169	)
Purchases, issuances and settlements			241				602
Ending Balance, March 31		$	7,533			$	8,680
Unrealized Gains (Losses) Included in Earnings Above		$	—			$	—

At March 31, 2009, the Company also had assets that under certain conditions would be subject to measurement at fair value on a non-recurring basis, 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; however, no impairment losses have occurred relative to any of these assets during the three months ended March 31, 2009 and 2008. When and if recognition of these assets at their fair value is necessary, such measurements would be determined utilizing Level 3 inputs.

Note 3 — Goodwill and Intangible Assets

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

														Weighted
														Average
		Gross				Accumulated				Net				Amortization
		Intangibles				Amortization				Intangibles				Period (years)
Customer relationships		$	6,306			$	2,658			$	3,648				7
Trade Name			830				456				374				5
Non-compete agreements			583				583				—				2
Other			224				213				11				3
		$	7,943			$	3,910			$	4,033				6

The following table presents the Company’s 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 agreements			610				610				—				2
Other			237				212				25				3
		$	8,450			$	3,864			$	4,586				6

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 3 — Goodwill and Intangible Assets — (continued)

Amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), of $0.3 million and $0.4 million for the three months ended March 31, 2009 and 2008, respectively, is included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

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

Periods Ending December 31,		Amount
2009 (remaining nine months)		$	973
2010		$	1,282
2011		$	1,199
2012		$	579
2013		$	—

Changes in goodwill, within the America’s segment, consist of the following (in thousands):

		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
Foreign currency translation			(1,307	)
Balance at March 31, 2009		$	21,884

Note 4 — Financial Derivatives

The Company had derivative assets and liabilities relating to outstanding forward contracts, designated as cash flow hedges, as defined under SFAS 133, consisting of Philippine peso (“PHP”) contracts, maturing within 15 months with a notional value of $100.3 million and $107.0 million as of March 31, 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 $6.1 million and $7.8 million of deferred losses, net of taxes of $2.4 million and $3.3 million, on these derivative instruments as of March 31, 2009 and December 31, 2008, respectively, recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) in the accompanying Consolidated Balance Sheets. The deferred losses expected to be reclassified to “Revenues” from AOCI during the next twelve months is $8.5 million. However, this amount and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts.

The Company also periodically enters into forward contracts that are not designated as hedges as defined under SFAS 133. These contracts include a forward contract to sell PHP 175.0 million at fixed prices of Euro 2.8 million through April 2009 to hedge an intercompany loan payment denominated in PHP as well as a forward contract to sell 25.0 million Canadian dollars at fixed prices of Euro 14.6 million. 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. See Note 1 for further information on foreign currency and derivative instruments.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 4 — Financial Derivatives — (continued)

As of March 31, 2009, the Company had the following outstanding foreign currency forward contracts (in thousands):

Foreign Currency		Currency Denomination
U.S. Dollar		Philippine Pesos 4,523,208
Canadian Dollars		Euro 14,641
Philippine Pesos		Euro 2,846

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 $0.2 million.

The following tables present the fair value of the Company’s derivative instruments as of March 31, 2009 and December 31, 2008 included in the accompanying Condensed Consolidated Balance Sheets (in thousands):

		Derivative Assets
		March 31, 2009						December 31, 2008
		Balance Sheet						Balance Sheet
		Location		Fair Value				Location				Fair Value
Derivatives designated as hedging instruments under SFAS 133:
Foreign currency forward contracts		Other current assets		$	35				—			$	—
Derivatives not designated as hedging instruments under SFAS 133(1):
Foreign currency forward contracts		Other current assets			150				—				—
Total derivative assets				$	185							$	—

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 4 — Financial Derivatives — (continued)

		Derivative Liabilities
		March 31, 2009						December 31, 2008
		Balance Sheet						Balance Sheet
		Location		Fair Value				Location		Fair Value
Derivatives designated as hedging instruments under SFAS 133:
Foreign currency forward contracts		Other accrued expenses and current liabilities		$	8,596			Other accrued expenses and current liabilities		$	11,377
Foreign currency forward contracts		Other long-term liabilities			56			—			—
					8,652						11,377
Derivatives not designated as hedging instruments under SFAS 133(1):
Foreign currency forward contracts		Other accrued expenses and current liabilities			477			Other accrued expenses and current liabilities			277
Total derivative liabilities				$	9,129					$	11,654

The following tables present the effect of the Company’s derivative instruments for the three months ended March 31, 2009 and 2008 in the accompanying Condensed Consolidated Financial Statements (in thousands):

																						Gain (Loss)
		Gain (Loss)												Gain (Loss)								Recognized in
		Recognized in AOCI												Reclassified From								Income on
		on Derivative												AOCI Into Income								Derivative
		(Effective Portion)								Statement of				(Effective Portion)								(Ineffective Portion)
		March 31,								Operations				March 31,								March 31,
		2009				2008				Location				2009				2008				2009				2008
Derivatives in SFAS 133 cash flow hedging relationships:
Foreign currency forward contracts		$	(568	)		$	(1,767	)		Revenues				$	(3,021	)		$	2,835			$	—			$	(260	)
		$	(568	)		$	(1,767	)						$	(3,021	)		$	2,835			$	—			$	(260	)

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 4 — Financial Derivatives — (continued)

				Gain (Loss) Recognized in Income on
		Statement of		Derivative
		Operations		March 31,
		Location		2009				2008
Derivatives not designated as hedging instruments under SFAS 133:
Foreign currency forward contracts		Other income and (expense)		$	(95	)		$	6
				$	(95	)		$	6

Note 5 — Investments Held in Rabbi Trust

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

		March 31, 2009								December 31, 2008
		Cost				Fair Value				Cost				Fair Value
Mutual funds		$	2,145			$	1,612			$	1,810			$	1,386

Investments Held in Rabbi Trust were comprised of mutual funds, 64% of which are equity-based and 36% were debt-based at March 31, 2009. Investment income, included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 consists of the following (in thousands):

		March 31,
		2009				2008
Gross realized losses from sale of trading securities		$	(21	)		$	(2	)
Dividend and interest income			7				6
Net unrealized holding gains (losses)			(94	)			(114	)
Net investment income (losses)		$	(108	)		$	(110	)

Note 6 — Deferred Revenue

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

		March 31, 2009				December 31, 2008
Future service		$	21,600			$	23,530
Estimated penalties and holdbacks			3,952				3,425
		$	25,552			$	26,955

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 7 — Accumulated Other Comprehensive Income (Loss)

The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders’ Equity in accordance with SFAS No. 130 (SFAS 130), “Reporting Comprehensive Income”. SFAS 130 establishes rules for the reporting of comprehensive income (loss) and its components. The components of accumulated other comprehensive income (loss) consist of the following (in thousands):

		Foreign				Unrealized				Unrealized Gain
		Currency				Actuarial Gain				(Loss) on Cash
		Translation				(Loss) Related to				Flow Hedging
		Adjustment				Pension Liability				Instruments				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			—				(479	)			5,664				5,185
Reclassification adjustment included in 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			(12,936	)			—				(568	)			(13,504	)
Tax benefit			—				—				(828	)			(828	)
Reclassification adjustment included in net income			(5	)			—				3,021				3,016
Foreign currency translation			(108	)			(23	)			131				—
Balance at March 31, 2009		$	(17,285	)		$	1,364			$	(6,078	)		$	(21,999	)

Except as discussed in Note 9, earnings associated with the Company’s 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 Company’s 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 $50.0 million may be increased up to a maximum of $100.0 million with the prior written consent of the lenders. The $50.0 million Credit Facility includes a $40.0 million multi-currency subfacility, a $10.0 million swingline subfacility and a $5.0 million letter of credit subfacility. The Credit Facility will terminate on March 29, 2012.

The Credit Facility, which includes certain financial covenants, may be used for general corporate purposes including strategic acquisitions, share repurchases, working capital support, and letters of credit, subject to certain limitations. The Credit Facility, including the multi-currency subfacility, accrues interest, at the Company’s option, at (a) the rate (defined as the higher of the lender’s 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%, or (b) the eurodollar rate plus an applicable margin up to 3.50%. Borrowings under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to 2.50% and borrowings under the letter of credit subfacility accrue interest at the LIBOR 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 Company’s active direct foreign subsidiaries.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 8 — Borrowings — (continued)

The Credit Facility prohibits the Company from incurring additional indebtedness, subject to certain specific exclusions. There were no borrowings during the three months ended March 31, 2009, and no outstanding balances as of March 31, 2009 and December 31, 2008, with $50.0 million availability on the Credit Facility.

Note 9 — Income Taxes

The Company’s effective tax rate was 22.5% and 15.4% for the three months ended March 31, 2009 and 2008, respectively. The increase in the effective tax rate of 7.1% was primarily due to the recognition of income tax benefits of $1.3 million, including interest and penalties of $0.8 million, during the three month period ended March 31, 2008, relating to transfer pricing as a result of a favorable tax audit determination. The differences in the Company’s effective tax rate of 22.5% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the recognition of tax benefits resulting from additional income earned in certain tax holiday jurisdictions, accompanied by the effects of valuation allowances, permanent differences, losses in jurisdictions for which tax benefits cannot be recognized, foreign withholding and other taxes, accrued interest and penalties and foreign income tax rate differentials.

As of March 31, 2009, the Company had $3.3 million of unrecognized tax benefits, a net decrease of $0.1 million from $3.4 million as of December 31, 2008. This decrease relates to foreign currency fluctuations.

If the Company recognized its remaining unrecognized tax benefits at March 31, 2009, approximately $3.0 million and related interest and penalties would favorably impact the effective tax rate. The Company believes it is reasonably possible that its unrecognized tax benefits will decrease or be recognized in the next twelve months by up to $0.3 million due to transfer pricing and the classification of tax attributes related to intercompany accounts that will be resolved under audit or appeal in various tax jurisdictions.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had $2.1 million and $2.0 million accrued for interest and penalties as of March 31, 2009 and December 31, 2008, respectively. Of the accrued interest and penalties at March 31, 2009 and December 31, 2008, $1.2 million and $1.2 million, respectively, relate to statutory penalties. The amount of interest and penalties recognized in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 was $0.1 million and $0.1 million, respectively.

Generally, earnings associated with the Company’s 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. Determination of any unrecognized deferred tax liability for temporary differences related to investments in subsidiaries that are essentially permanent in nature 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 $0.5 million as of March 31, 2009 with respect to this subsidiary’s current earnings.

The German tax authority is currently auditing tax periods 2005 through 2007. A Philippine subsidiary is being audited by the Philippine tax authorities for tax years 2007 and 2006. The Company is currently under examination in India for tax years ended March 31, 2006 and 2005.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

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. For the three month periods ended March 31, 2009 and 2008, the impact of outstanding options to purchase shares of common stock and stock appreciation rights of 0.2 million shares and 0.2 million shares, respectively, were antidilutive and were excluded from the calculation of diluted earnings per share.

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

		Three Months Ended
		March 31,
		2009				2008
Basic:
Weighted average common shares outstanding			40,630				40,491
Diluted:
Dilutive effect of stock options, stock appreciation rights, restricted stock, common stock units and shares held in a rabbi trust			404				322
Total weighted average diluted shares outstanding			41,034				40,813

On August 5, 2002, the Company’s 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 three months ended March 31, 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 three months ended March 31, 2008, the Company cancelled 4.5 million shares of its treasury stock and recorded reductions of $0.1 million to “Common stock”, $33.0 million to “Additional paid-in capital”, $51.2 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 70.3% and 29.7%, respectively, of the Company’s consolidated revenues for the three months ended March 31, 2009 and 67.4% and 32.6%, respectively, of the Company’s consolidated revenues for the comparable 2008 period. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into two segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers.

The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, 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 Company’s services in these locations to support their customer contact management needs.

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 11 — Segments and Geographic Information — (continued)

Information about the Company’s reportable segments for the three months ended March 31, 2009 compared to the corresponding prior year period, is as follows (in thousands):

														Consolidated
		Americas				EMEA				Other(1)				Total
Three Months Ended March 31, 2009:
Revenues		$	142,806			$	60,435							$	203,241
Depreciation and amortization		$	5,598			$	1,178							$	6,776
Income (loss) from operations		$	23,376			$	4,659			$	(10,536	)		$	17,499
Other income, net											1,558				1,558
Provision for income taxes											(4,287	)			(4,287	)
Net income														$	14,770

														Consolidated
		Americas				EMEA				Other(1)				Total
Three Months Ended March 31, 2008:
Revenues		$	137,357			$	66,364							$	203,721
Depreciation and amortization		$	5,786			$	1,233							$	7,019
Income (loss) from operations		$	21,862			$	4,620			$	(10,165	)		$	16,317
Other income, net											2,251				2,251
Provision for income taxes											(2,858	)			(2,858	)
Net income														$	15,710

Note 12 — Stock-Based Compensation

A detailed description of each of the Company’s 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 $1.6 million and $1.2 million for the three months ended March 31, 2009 and 2008, respectively. The Company recognized income tax benefits related to the stock-based compensation of $0.6 million and $0.5 million during the three months ended March 31, 2009 and 2008, respectively. The Company recognized a $0.1 million benefit of tax deductions in excess of recognized tax benefits from the exercise of stock options in the three months ended March 31, 2009 (none in the comparable 2008 period). There were no capitalized stock-based compensation costs at March 31, 2009 or December 31, 2008.

2001 Equity Incentive Plan — The Company’s 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 Company’s 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

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 12 — Stock-Based Compensation — (continued)

Stock Options — (continued)

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 Company’s 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 three months ended March 31, 2009 and 2008.

The following table summarizes stock option activity under the Plan as of March 31, 2009, and changes during the three months then ended:

										Weighted
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Shares				Exercise				Term				Value
Stock Options		(000s)				Price				(in years)				(000s)
Outstanding at January 1, 2009			335			$	12.94
Granted			—				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at March 31, 2009			335			$	12.94				1.95			$	1,461
Vested or expected to vest at March 31, 2009			335			$	12.94				1.95			$	1,461
Exercisable at March 31, 2009			335			$	12.94				1.95			$	1,461

Options exercised during the three months ended March 31, 2008 had an intrinsic value of $0.3 million (none in the comparable 2009 period). All options were fully vested as of December 31, 2006 and there is no unrecognized compensation cost as of March 31, 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 three months ended March 31, 2008 was $0.7 million (none in the comparable 2009 period).

Stock Appreciation Rights — The Company’s 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 Company’s common stock on the date of the grant and vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date. The SARs have a term of 10 years from the date of grant. 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 participant’s employment with the Company, if and to the extent the SARs were exercisable immediately prior to

Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(Unaudited)

Note 12 — Stock-Based Compensation — (continued)

Stock Appreciation Rights — (continued)

such termination. If the participant’s 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 Company’s 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 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 three months ended March 31, 2009 and 2008:

		Three Months Ended
		March 31,
		2009				2008
Expected volatility			47	%			47	%
Weighted-average volatility			47	%			47	%
Expected dividends			—				—
Expected term (in years)			4.0				3.9
Risk-free rate			1.3	%			3.1	%

The following table summarizes SARs activity under the Plan as of March 31, 2009, and changes during the three months then ended:

										Weighted
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Shares				Exercise				Term				Value
Stock Appreciation Rights		(000s)				Price				(in years)				(000s)
Outstanding at January 1, 2009			367			$	—
Granted			177				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at March 31, 2009			544			$	—				8.5			$	233
Vested or expected to vest at March 31, 2009			544			$	—				8.5			$	233
Exercisable at March 31, 2009			238			$	—				7.7			$	233