SYKES ENTERPRISES INC, 10-Q filed on 5/6/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2014
Apr. 30, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q1 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
Entity Central Index Key
0001010612 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
43,922,642 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 210,498 
$ 211,985 
Receivables, net
272,352 
264,916 
Prepaid expenses
15,087 
15,710 
Other current assets
24,982 
20,672 
Total current assets
522,919 
513,283 
Property and equipment, net
114,653 
117,549 
Goodwill, net
196,386 
199,802 
Intangibles, net
71,956 
76,055 
Deferred charges and other assets
30,757 
43,572 
Total assets
936,671 
950,261 
Current liabilities:
 
 
Accounts payable
25,720 
25,540 
Accrued employee compensation and benefits
72,804 
81,064 
Current deferred income tax liabilities
196 
84 
Income taxes payable
2,784 
1,274 
Deferred revenue
35,226 
35,025 
Other accrued expenses and current liabilities
30,752 
30,393 
Total current liabilities
167,482 
173,380 
Deferred grants
6,096 
6,637 
Long-term debt
96,000 
98,000 
Long-term income tax liabilities
20,182 
24,647 
Other long-term liabilities
11,357 
11,893 
Total liabilities
301,117 
314,557 
Commitments and loss contingency (Note 13)
   
   
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; 44,069 and 43,997 shares issued, respectively
441 
440 
Additional paid-in capital
278,780 
279,513 
Retained earnings
358,337 
349,366 
Accumulated other comprehensive income (loss)
(284)
7,997 
Treasury stock at cost: 127 and 122 shares, respectively
(1,720)
(1,612)
Total shareholders' equity
635,554 
635,704 
Total liabilities and shareholders' equity
$ 936,671 
$ 950,261 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000 
10,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000 
200,000 
Common stock, shares issued
44,069 
43,997 
Treasury stock, shares
127 
122 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Income Statement [Abstract]
 
 
Revenues
$ 324,429 
$ 301,244 
Operating expenses:
 
 
Direct salaries and related costs
221,625 
203,706 
General and administrative
73,377 
73,733 
Depreciation, net
11,298 
10,169 
Amortization of intangibles
3,651 
3,759 
Total operating expenses
309,951 
291,367 
Income from operations
14,478 
9,877 
Other income (expense):
 
 
Interest income
231 
224 
Interest (expense)
(499)
(508)
Other income (expense)
663 
125 
Total other income (expense)
395 
(159)
Income before income taxes
14,873 
9,718 
Income taxes
4,560 
3,200 
Net income
$ 10,313 
$ 6,518 
Net income per common share:
 
 
Basic
$ 0.24 
$ 0.15 
Diluted
$ 0.24 
$ 0.15 
Weighted average common shares outstanding:
 
 
Basic
42,739 
43,036 
Diluted
42,837 
43,052 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Statement Of Income And Comprehensive Income [Abstract]
 
 
Net income
$ 10,313 
$ 6,518 
Other comprehensive income (loss), net of taxes:
 
 
Foreign currency translation gain (loss), net of taxes
(5,559)
(5,728)
Unrealized gain (loss) on net investment hedge, net of taxes
35 
282 
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(21)
(8)
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
(2,742)
2,019 
Unrealized gain (loss) on postretirement obligation, net of taxes
(43)
Other comprehensive income (loss), net of taxes
(8,281)
(3,478)
Comprehensive income (loss)
$ 2,032 
$ 3,040 
Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2013
$ 635,704 
$ 440 
$ 279,513 
$ 349,366 
$ 7,997 
$ (1,612)
Beginning Balance, shares at Dec. 31, 2013
 
43,997 
 
 
 
 
Stock-based compensation expense
754 
 
754 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
54 
 
54 
 
 
 
Vesting of common stock and restricted stock under equity award plans, net of forfeitures
(385)
(279)
 
 
(108)
Vesting of common stock and restricted stock under equity award plans, net of forfeitures, shares
 
202 
 
 
 
 
Repurchase of common stock
(2,605)
 
 
 
 
(2,605)
Retirement of treasury stock
 
(1)
(1,262)
(1,342)
 
2,605 
Retirement of treasury stock, shares
 
(130)
 
 
 
 
Comprehensive income (loss)
2,032 
 
 
10,313 
(8,281)
 
Ending Balance at Mar. 31, 2014
$ 635,554 
$ 441 
$ 278,780 
$ 358,337 
$ (284)
$ (1,720)
Ending Balance, shares at Mar. 31, 2014
 
44,069 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Cash flows from operating activities:
 
 
Net income
$ 10,313 
$ 6,518 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Depreciation
11,539 
10,422 
Amortization of intangibles
3,651 
3,759 
Amortization of deferred grants
(589)
(253)
Unrealized foreign currency transaction (gains) losses, net
277 
291 
Stock-based compensation expense
754 
664 
Excess tax (benefit) from stock-based compensation
(54)
 
Deferred income tax provision (benefit)
3,371 
(2,043)
Net (gain) loss on disposal of property and equipment
48 
Bad debt expense
305 
Unrealized (gains) losses on financial instruments, net
950 
1,418 
Amortization of deferred loan fees
65 
65 
Other
(122)
66 
Changes in assets and liabilities:
 
 
Receivables
(7,079)
(21,019)
Prepaid expenses
515 
(575)
Other current assets
(6,182)
(3,164)
Deferred charges and other assets
8,329 
931 
Accounts payable
2,537 
(5,295)
Income taxes receivable / payable
(868)
499 
Accrued employee compensation and benefits
(7,545)
(7,194)
Other accrued expenses and current liabilities
(1,321)
1,460 
Deferred revenue
1,271 
295 
Other long-term liabilities
(3,710)
28 
Net cash provided by (used for) operating activities
16,156 
(12,813)
Cash flows from investing activities:
 
 
Capital expenditures
(11,706)
(13,066)
Proceeds from sale of property and equipment
16 
34 
Investment in restricted cash
 
(7)
Release of restricted cash
168 
 
Net cash (used for) investing activities
(11,522)
(13,039)
Cash flows from financing activities:
 
 
Payments of long-term debt
(2,000)
(2,000)
Proceeds from issuance of long-term debt
 
22,000 
Excess tax benefit from stock-based compensation
54 
 
Cash paid for repurchase of common stock
(2,605)
 
Proceeds from grants
58 
103 
Shares repurchased for minimum tax withholding on equity awards
(385)
(93)
Net cash provided by (used for) financing activities
(4,878)
20,010 
Effects of exchange rates on cash
(1,243)
(3,682)
Net increase (decrease) in cash and cash equivalents
(1,487)
(9,524)
Cash and cash equivalents - beginning
211,985 
187,322 
Cash and cash equivalents - ending
210,498 
177,798 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
445 
481 
Cash paid during period for income taxes
3,796 
5,017 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
3,916 
3,354 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
$ 6 
$ (43)
Overview and Basis of Presentation
Overview and Basis of Presentation

Note 1. Overview and Basis of Presentation

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) provides comprehensive outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, financial services, technology/consumer, transportation and leisure, and healthcare industries. SYKES provides flexible, high-quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels encompassing phone, e-mail, social media, text messaging and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including 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, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2014. 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, 2013, as filed with the Securities and Exchange Commission (“SEC”) on February 20, 2014.

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

New Accounting Standards Not Yet Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The amendments in ASU 2014-08 indicate that only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations

 

presentation. The amendments should be applied to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company does not expect the adoption of ASU 2014-08 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently Adopted

In March 2013, the FASB issued ASU 2013-05 “Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). The amendments in ASU 2013-05 indicate that a cumulative translation adjustment (“CTA”) is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated), or a step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The amendments in ASU 2013-05 are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. The adoption of ASU 2013-05 on January 1, 2014 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In July 2013, the FASB issued ASU 2013-11 “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments in ASU 2013-11 indicate that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU 2013-11 on January 1, 2014 resulted in a $3.1 million reclassification of a portion of the Company’s unrecognized tax benefits from “Long-term income tax liabilities” to “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2014. See Note 11, Income Taxes, for further information.

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

Note 2. Costs Associated with Exit or Disposal Activities

Fourth Quarter 2011 Exit Plan

During 2011, the Company announced a plan to rationalize seats in certain U.S. sites and close certain locations in EMEA (the “Fourth Quarter 2011 Exit Plan”). The details are described below, by segment.

Americas

During 2011, as part of an on-going effort to streamline excess capacity related to the integration of the ICT Group, Inc. (“ICT”) acquisition and align it with the needs of the market, the Company announced a plan to rationalize approximately 900 seats in the U.S., some of which were revenue generating, and migrated the associated revenues to other locations within the U.S. Approximately 300 employees were affected and the Company has completed the actions associated with the Fourth Quarter 2011 Exit Plan in the Americas.

The major costs incurred as a result of these actions are program transfer costs, facility-related costs (primarily consisting of those costs associated with the real estate leases), and impairments of long-lived assets (primarily leasehold improvements and equipment) estimated at $1.9 million as of March 31, 2014 ($1.9 million at December

 

31, 2013). The Company recorded $0.5 million of the costs associated with these actions as non-cash impairment charges, while approximately $1.4 million represents cash expenditures for program transfer and facility-related costs, including obligations under the leases, the last of which ends in February 2017. The Company has paid $0.9 million in cash through March 31, 2014 under the Fourth Quarter 2011 Exit Plan in the Americas.

The following tables summarize the accrued liability associated with the Americas Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
  at January 1, 2014  
     Charges
(Reversals) for the
Three Months Ended 
 March 31, 2014 
       Cash Payments          Other Non-Cash   
Changes
     Ending Accrual at 
 March 31, 2014 
 

Lease obligations and facility exit costs

    $ 512          $ -            $ (43 )      $ -            $ 469    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

       Beginning Accrual  
  at January 1, 2013  
     Charges
(Reversals) for the
Three Months Ended 
 March 31, 2013 
       Cash Payments          Other Non-Cash   
Changes
     Ending Accrual at 
 March 31, 2013 
 

Lease obligations and facility exit costs

    $ 682          $ -            $ (35 )       $ -            $ 647     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

EMEA

During 2011, to improve the Company’s overall profitability and improve its cost structure in the EMEA region by optimizing its capacity utilization, the Company committed to close a customer contact management center in South Africa and a customer contact management center in Ireland, as well as some capacity rationalization in the Netherlands, all components of the EMEA segment. While the Company migrated approximately $3.2 million of annualized call volumes of the Ireland facility to other facilities within EMEA, the Company did not migrate the remaining call volume in Ireland or any of the annualized revenue from the Netherlands or South Africa facilities, which was $18.8 million for 2011, to other facilities within the region. The number of seats rationalized across the EMEA region approximated 900 with approximately 500 employees affected by the actions. The Company closed these facilities and substantially completed the actions associated with the EMEA plan on September 30, 2012.

The major costs incurred as a result of these actions are facility-related costs (primarily consisting of those costs associated with the real estate leases), impairments of long-lived assets (primarily leasehold improvements and equipment) and severance-related costs estimated at $6.7 million as of March 31, 2014 ($6.7 million as of December 31, 2013). The Company recorded $0.5 million of the costs associated with these actions as non-cash impairment charges, while approximately $6.2 million represents cash expenditures for severance and related costs and facility-related costs, primarily rent obligations to be paid through the remainder of the noncancelable term of the leases, the last of which ended in March 2013. The Company has paid $5.9 million in cash through March 31, 2014 under the Fourth Quarter 2011 Exit Plan in EMEA.

 

The following tables summarize the accrued liability associated with EMEA’s Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
at January 1, 2014
     Charges
(Reversals) for the
  Three Months Ended  
March 31, 2014
       Cash Payments            Other Non-Cash    
Changes (2)
       Ending Accrual at  
March 31, 2014
 

Severance and related costs

   $ 131        $ -             $ -            $ 1       $ 132   

Legal-related costs

     -              -              -              -              -        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 131        $ -             $ -            $ 1       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
  Three Months Ended  
March 31, 2013 (1)
       Cash Payments           Other Non-Cash    
Changes (2)
      Ending Accrual at  
March 31, 2013
 

Severance and related costs

   $ 187       $ 6       $ (7   $ (4   $ 182   

Legal-related costs

     10         1         (7     1        5   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 197       $ 7       $ (14   $ (3   $ 187   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

  (1) 

During 2013, the Company recorded additional severance and related costs and legal-related costs, which are recorded in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

  (2) 

Effect of foreign currency translation.

Fourth Quarter 2010 Exit Plan

During 2010, in furtherance of the Company’s long-term goals to manage and optimize capacity utilization, the Company committed to and closed a customer contact management center in the United Kingdom and a customer contact management center in Ireland, both components of the EMEA segment (the “Fourth Quarter 2010 Exit Plan”). These actions were substantially completed by January 31, 2011.

The major costs incurred as a result of these actions were facility-related costs (primarily consisting of those costs associated with the real estate leases), impairments of long-lived assets (primarily leasehold improvements and equipment) and severance-related costs totaling $2.5 million as of March 31, 2014 ($2.5 million as of December 31, 2013). The Company recorded $0.2 million of the costs associated with these actions as non-cash impairment charges, while approximately $2.1 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 ended in March 2014, and $0.2 million represents cash expenditures for severance-related costs. As of March 31, 2014, the remaining accrual relates primarily to the lease restoration obligation, which is expected to be settled by December 31, 2014. The Company has paid $1.8 million in cash through March 31, 2014 under the Fourth Quarter 2010 Exit Plan.

The following tables summarize the accrued liability associated with the Fourth Quarter 2010 Exit Plan’s exit or disposal activities and related charges during the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
at January 1, 2014
     Charges
(Reversals) for the
Three Months
  Ended March 31,  
2014
     Cash
    Payments    
      Other Non-Cash  
Changes (1)
       Ending Accrual  
at March 31,

2014
 

Lease obligations and facility exit costs

   $ 538        $ -            $ (106   $ 1       $ 433   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
Three Months
  Ended March 31,  
2013
     Cash
    Payments    
      Other Non-Cash  
Changes (1)
      Ending Accrual  
at March 31,

2013
 

Lease obligations and facility exit costs

   $ 539        $ -            $ (75   $ (15   $ 449   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

  (1) 

Effect of foreign currency translation.

 

Third Quarter 2010 Exit Plan

During 2010, consistent with the Company’s 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 our Wilmington, Delaware and Newtown, Pennsylvania locations (the “Third Quarter 2010 Exit Plan”). These actions were substantially completed by January 31, 2011.

The major costs incurred as a result of these actions were 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 $10.5 million as of March 31, 2014 ($10.5 million as of December 31, 2013), all of which are in the Americas segment. The Company recorded $3.8 million of the costs associated with these actions as non-cash impairment charges, while approximately $6.7 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 Company has paid $5.0 million in cash through March 31, 2014 under the Third Quarter 2010 Exit Plan.

The following tables summarize the accrued liability associated with the Third Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Beginning Accrual
  at January 1, 2014  
     Charges
(Reversals) for the
Three Months

  Ended March 31,  
2014
         Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at
March 31, 2014
 

Lease obligations and facility exit costs

   $ 1,793       $ -         $ (96   $ -         $ 1,697   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Beginning Accrual
  at January 1, 2013  
     Charges
(Reversals) for the
Three Months Ended
March 31, 2013
         Cash Payments             Other Non-Cash    
Changes (1)
     Ending Accrual at
  March 31, 2013  
 

Lease obligations and facility exit costs

   $ 2,551       $ -         $ (224   $ 1       $ 2,328   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1)

Effect of foreign currency translation.

Restructuring Liability Classification

The following table summarizes the Company’s short-term and long-term accrued liabilities associated with its exit and disposal activities, by plan, as of March 31, 2014 and December 31, 2013 (in thousands):

 

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

March 31, 2014

              

Short-term accrued restructuring liability (1)

   $ 136       $ 132       $ 433       $ 495       $ 1,196   

Long-term accrued restructuring liability (2)

     333         -           -           1,202         1,535   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at March 31, 2014

   $ 469       $ 132       $ 433       $ 1,697       $ 2,731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Short-term accrued restructuring liability (1)

    $ 136        $ 131        $ 538        $ 440        $ 1,245   

Long-term accrued restructuring liability (2)

     376         -           -           1,353         1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2013

    $ 512        $ 131        $ 538        $ 1,793        $ 2,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

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

  (2) 

Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.

Fair Value
Fair Value

Note 3. Fair Value

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

 

   

Level 1 Quoted prices for identical instruments in active markets.

   

Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

   

Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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

 

   

Cash, Short-Term and Other Investments, Investments Held in Rabbi Trust and Accounts Payable The carrying values for cash, short-term and other investments, investments held in rabbi trust and accounts payable approximate their fair values.

   

Foreign Currency Forward Contracts and Options Foreign currency forward contracts and options, including premiums paid on options, are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk.

   

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

Fair Value Measurements ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10-20 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

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

Determination of Fair Value The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value, and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value on a recurring basis, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.

 

Money Market and Open-End Mutual Funds The Company uses quoted market prices in active markets to determine the fair value of money market 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 Trust The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 6, Investments Held in Rabbi Trust, and Note 15, Stock-Based Compensation.

Guaranteed Investment Certificates Guaranteed investment certificates, with variable interest rates linked to the prime rate, approximate fair value due to the automatic ability to re-price with changes in the market; such items are classified in Level 2 of the fair value hierarchy.

 

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

 

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

Assets:

             

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

  (1)      $ 87,513          $ 87,513          $ -            $ -        

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

  (1)       10           10           -             -        

Foreign currency forward and option contracts

  (2)       764           -               764           -        

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

  (3)       5,622           5,622           -             -        

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

  (3)       1,318           1,318           -             -        

Guaranteed investment certificates

  (4)       80           -               80           -        
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 95,307          $   94,463          $ 844          $ -        
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             

Long-term debt

  (5)      $ 96,000          $ -            $ 96,000          $ -        

Foreign currency forward and option contracts

  (6)       7,068           -             7,068           -        
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 103,068          $ -            $ 103,068          $ -        
    

 

 

    

 

 

    

 

 

    

 

 

 

 

         Fair Value Measurements at December 31, 2013 Using:  
         Balance at      Quoted Prices in
Active Markets
For
 Identical Assets 
     Significant
Other
    Observable    
Inputs
     Significant
   Unobservable   
Inputs
 
            December 31, 2013       Level (1)      Level (2)      Level (3)  

Assets:

             

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

  (1)      $ 50,627          $ 50,627          $ -             $ -         

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

  (1)       11           11           -               -         

Foreign currency forward and option contracts

  (2)       2,240           -               2,240           -         

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

  (3)       5,251           5,251           -               -         

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

  (3)       1,170           1,170           -               -         

Guaranteed investment certificates

  (4)       80           -               80           -         
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 59,379          $ 57,059          $ 2,320         $ -         
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             

Long-term debt

  (5)      $ 98,000          $ -              $ 98,000         $ -         

Foreign currency forward and option contracts

  (6)       5,063           -               5,063           -         
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 103,063          $ -              $ 103,063         $ -         
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheet.

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 5, Financial Derivatives.

(3) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 6, Investments Held in Rabbi Trust.

(4) 

Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet.

(5) 

The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 9, Borrowings.

(6) 

Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 5, Financial Derivatives.

 

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs, like those associated with acquired businesses, including goodwill, other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if these assets were determined to be impaired. The adjusted carrying values for assets measured at fair value on a nonrecurring basis (no liabilities) subject to the requirements of ASC 820 were not material at March 31, 2014 and December 31, 2013.

Intangible Assets
Intangible Assets

Note 4.   Intangible Assets

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

 

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

Customer relationships

   $ 102,014         $ (38,736 )     $ 63,278           8     

Trade name

     11,600           (3,135 )       8,465           8     

Non-compete agreements

     1,215           (1,088 )       127           2     

Proprietary software

     850           (850 )       -           2     

Favorable lease agreement

     449           (363 )       86           2     
  

 

 

    

 

 

   

 

 

    
   $ 116,128         $ (44,172 )     $ 71,956           8     
  

 

 

    

 

 

   

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2013 (in thousands):

 

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

Customer relationships

   $ 102,774         $ (35,873 )     $ 66,901           8     

Trade name

     11,600           (2,803 )       8,797           8     

Non-compete agreements

     1,220           (1,009 )       211           2     

Proprietary software

     850           (847 )       3           2     

Favorable lease agreement

     449           (306 )       143           2     
  

 

 

    

 

 

   

 

 

    
   $ 116,893         $ (40,838 )     $ 76,055           8     
  

 

 

    

 

 

   

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to March 31, 2014, is as follows (in thousands):

 

Years Ending December 31,    Amount  

 

 

2014 (remaining nine months)

   $                     10,750     

2015

     14,046     

2016

     14,046     

2017

     14,046     

2018

     7,609     

2019

     6,995     

2020 and thereafter

     4,464     
Financial Derivatives
Financial Derivatives

Note 5.   Financial Derivatives

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

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

 

           March 31, 2014             December 31, 2013   

Deferred gains (losses) in AOCI

    $ (5,357)         $ (2,704)    

Tax on deferred gains (losses) in AOCI

     80           169     
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ (5,277)         $ (2,535)    
  

 

 

    

 

 

 

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

    $ (5,357)       
  

 

 

    

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

Net Investment Hedge – During the three months ended March 31, 2014 and 2013, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to the Company’s foreign currency-based investments in these subsidiaries.

Non-Designated Hedges – The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against adverse foreign currency moves pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 180 days in duration.

 

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

 

     As of March 31, 2014      As of December 31, 2013  

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

     $ 75,500          December 2014          $ 59,000          December 2014    

Forwards:

           

Philippine Pesos

     25,900          July 2014          63,300          July 2014    

Costa Rican Colones

     45,100          December 2014          41,600          October 2014    

Hungarian Forints

     2,776          December 2014          550          January 2014    

Romanian Leis

     6,445          December 2014          619          January 2014    

Net investment hedges: (2)

           

Forwards:

           

Euros

     41,028          September 2014          32,657          September 2014    

Non-designated hedges: (3)

           

Forwards

     43,591          July 2014          59,207          June 2014    

 

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

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

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

      

      

        

As of March 31, 2014, the maximum amount of loss due to credit risk that 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 was $0.8 million, based on the gross fair value of the financial instruments.

Master netting agreements exist with each respective counterparty used to transact foreign exchange derivatives. These agreements allow the Company to net settle transactions of the same currency in a single transaction. In the event of default by the Company or one of its counterparties, these agreements include a set-off clause that provides the non-defaulting party the right to net settle all derivative transactions, regardless of the currency and settlement date. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in the accompanying Condensed Consolidated Balance Sheets. Additionally, the Company is not required to pledge nor is it entitled to receive cash collateral related to these derivative transactions.

 

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

 

     Derivative Assets  
         March 31, 2014              December 31, 2013      
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1) 

    $ 363         $ 862     

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     107           -       
  

 

 

    

 

 

 
     470           862     

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     294           1,378     
  

 

 

    

 

 

 

Total derivative assets

    $ 764          $ 2,240     
  

 

 

    

 

 

 
     Derivative Liabilities  
         March 31, 2014              December 31, 2013      
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (2) 

    $ 4,993          $ 2,997     

Derivatives designated as net investment hedging instruments under ASC 815:

     

Foreign currency forward contracts (2)

     1,773           1,720     
  

 

 

    

 

 

 
     6,766           4,717     

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (2)

     302           346     
  

 

 

    

 

 

 

Total derivative liabilities

    $ 7,068          $ 5,063     
  

 

 

    

 

 

 

 

  (1)

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets.

  (2)

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

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Gain (Loss) Recognized
  in AOCI on Derivatives  
(Effective Portion)
     Gain (Loss) Reclassified
  From Accumulated AOCI  
Into “Revenues”

(Effective Portion)
     Gain (Loss) Recognized in
 “Revenues” on Derivatives 
(Ineffective Portion)
 
     March 31,      March 31,      March 31,  
           2014                  2013                  2014                  2013                  2014                  2013        
Derivatives designated as cash flow hedging instruments under ASC 815:                  
Foreign currency forward and option contracts    $ (5,018)        $ 2,717         $ (2,374)       $ 731         $ (3)        $ 12     
Derivatives designated as net investment hedging instruments under ASC 815:                  

Foreign currency forward contracts

     54           433           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency forward and option contracts

   $ (4,964)        $ 3,150         $ (2,374)        $ 731         $ (3)        $ 12     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Gain (Loss) Recognized
in “Other income and
(expense)” on

Derivatives
 
     March 31,  
           2014                  2013        
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts

    $ 723          $ (525 )  
  

 

 

    

 

 

 
Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 6.  Investments Held in Rabbi Trust

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

 

     March 31, 2014      December 31, 2013  
               Cost                           Fair Value                           Cost                           Fair Value             

Mutual funds

      $ 5,159        $ 6,940          $ 4,749          $ 6,421     
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in the rabbi trusts were 81% equity-based and 19% debt-based as of March 31, 2014. Net investment income (losses), included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):

 

     Three Months Ended March 31,  
               2014                           2013             

Gross realized gains from sale of trading securities

   $ 3         $ 96     

Gross realized (losses) from sale of trading securities

     -           (3)    

Dividend and interest income

     9           10     

Net unrealized holding gains (losses)

     75           195     
  

 

 

    

 

 

 

Net investment income (losses)

   $ 87         $ 298     
  

 

 

    

 

 

 
Deferred Revenue
Deferred Revenue

Note 7.  Deferred Revenue

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

 

       March 31, 2014          December 31, 2013    

Future service

   $ 23,465         $ 25,102     

Estimated potential penalties and holdbacks

     11,761           9,923     
  

 

 

    

 

 

 
   $ 35,226         $ 35,025     
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 8.  Deferred Grants

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

 

       March 31, 2014          December 31, 2013    

Property grants

   $ 6,096         $ 6,643     

Employment grants

     144           146     
  

 

 

    

 

 

 

Total deferred grants

     6,240           6,789     

Less: Property grants – short-term (1)

     -           (6)    

Less: Employment grants – short-term (1)

     (144)          (146)    
  

 

 

    

 

 

 

Total long-term deferred grants (2)

   $ 6,096         $ 6,637     
  

 

 

    

 

 

 

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

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

Borrowings
Borrowings

Note 9.  Borrowings

On May 3, 2012, the Company entered into a $245 million revolving credit facility (the “2012 Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent (“KeyBank”). The 2012 Credit Agreement replaced the Company’s previous $75 million revolving credit facility (the “2010 Credit Agreement”) dated February 2, 2010, as amended, which agreement was terminated simultaneous with entering into the 2012 Credit Agreement. The 2012 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. The Company borrowed $108.0 million under the 2012 Credit Agreement’s revolving credit facility on August 20, 2012 in connection with the acquisition of Alpine Access, Inc. on such date.

The 2012 Credit Agreement includes a $184 million alternate-currency sub-facility, a $10 million swingline sub-facility and a $35 million letter of credit sub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. The Company is not currently aware of any inability of its lenders to provide access to the full commitment of funds that exist under the revolving credit facility, if necessary. However, there can be no assurance that such facility will be available to the Company, even though it is a binding commitment of the financial institutions.

Borrowings consist of the following (in thousands):

 

     March 31, 2014      December 31, 2013  

Revolving credit facility

   $ 96,000         $ 98,000     

Less: Current portion

     -           -     
  

 

 

    

 

 

 

Total long-term debt

   $ 96,000         $ 98,000     
  

 

 

    

 

 

 

The 2012 Credit Agreement matures on May 2, 2017 and has no varying installments due.

 

Borrowings under the 2012 Credit Agreement will bear interest at the rates set forth in the Credit Agreement. In addition, the Company is required to pay certain customary fees, including a commitment fee of 0.175%, which is due quarterly in arrears and calculated on the average unused amount of the 2012 Credit Agreement.

The 2012 Credit Agreement is guaranteed by all of the Company’s existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of the non-voting and 65% of the voting capital stock of all the direct foreign subsidiaries of the Company and those of the guarantors.

In May 2012, the Company paid an underwriting fee of $0.9 million for the 2012 Credit Agreement, which is deferred and amortized over the term of the loan. In addition, the Company pays a quarterly commitment fee on the 2012 Credit Agreement.

The 2012 Credit Agreement had an average daily utilization of $96.3 million and $91.2 million during the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, the related interest expense, excluding amortization of deferred loan fees, under our credit agreements was $0.3 million and $0.3 million, respectively, which represented weighted average interest rates of 1.3% and 1.4%, respectively.

Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss)

Note 10.  Accumulated Other Comprehensive Income (Loss)

The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders’ Equity in accordance with ASC 220 “Comprehensive Income” (“ASC 220”). ASC 220 establishes rules for the reporting of comprehensive income (loss) and its components. The components of accumulated other comprehensive income (loss) consist of the following (in thousands):

 

     Foreign
Currency
  Translation  
Gain (Loss)
    Unrealized
 Gain (Loss) on 
Net
Investment
Hedge
    Unrealized
 Actuarial Gain 
(Loss) Related
to Pension
Liability
    Unrealized
 Gain (Loss) on 
Cash Flow
Hedging
Instruments
    Unrealized
 Gain (Loss) on 
Post
Retirement
Obligation
            Total          

Balance at January 1, 2013

   $ 16,083      $ (2,565   $ 1,413      $ (570   $ 495      $ 14,856   

Pre-tax amount

     (3,465     (1,720     (136     (2,704     (127     (8,152

Tax (provision) benefit

     -          602        16        449        -          1,067   

Reclassification of (gain) loss to net income

     -          -          (41     321        (54     226   

Foreign currency translation

     133        -          (102     (31     -          -     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

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

Pre-tax amount

     (5,583     54        -          (5,021     17        (10,533

Tax (provision) benefit

     -          (19     -          16        -          (3

Reclassification of (gain) loss to net income

     -          -          (12     2,278        (11     2,255   

Foreign currency translation

     24        -          (9     (15     -          -     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

   $ 7,192      $ (3,648   $ 1,129      $ (5,277   $ 320      $ (284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months Ended March 31,      Statements of Operations Location
     2014      2013       

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

        

Pre-tax amount

     $ 12         $ 15         Direct salaries and related costs

Tax (provision) benefit

     -           (5)        Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     12           10       

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

        

Pre-tax amount

     (2,374)          743         Revenues

Tax (provision) benefit

     96           (5)        Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     (2,278)          738        

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

        

Pre-tax amount

     11           16         General and administrative

Tax (provision) benefit

     -           -         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     11           16        
  

 

 

    

 

 

    

Total reclassification of gain (loss) to net income

   $ (2,255)        $ 764        
  

 

 

    

 

 

    

(1) See Note 14, Defined Benefit Pension Plan and Postretirement Benefits, for further information.

(2) See Note 5, Financial Derivatives, for further information.

Except as discussed in Note 11, Income Taxes, earnings associated with the Company’s investments in its subsidiaries are considered to be indefinitely invested and no provision for income taxes on those earnings or translation adjustments have been provided.

Income Taxes
Income Taxes

Note 11.  Income Taxes

The Company’s effective tax rate was 30.7% and 32.9% for the three months ended March 31, 2014 and 2013, respectively. The decrease in the effective tax rate is primarily due to the recognition in 2013 of the retroactive tax impact of The American Taxpayer Relief Act of 2012, partially offset by the fluctuations in earnings within the various tax jurisdictions in which the Company operates. The difference between the Company’s effective tax rate of 30.7% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the recognition of tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions, changes in unrecognized tax positions and tax credits, partially offset by the tax impact of permanent differences, adjustments of valuation allowances and foreign withholding taxes.

The Company accrued $14.4 million at March 31, 2014 and $15.0 million at December 31, 2013, excluding penalties and interest, for the liability for unrecognized tax benefits. The $0.6 million decrease resulted primarily from fluctuations in foreign exchange rates. During the three months ended March 31, 2014, in accordance with the adoption of ASU 2013-11, the Company reclassified $3.1 million of the $14.4 million unrecognized tax benefits from “Long-term income tax liabilities” to “Deferred charges and other assets” as an offset to net operating loss carryforwards and tax credits in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2014. The remaining $11.3 million of the unrecognized tax benefits at March 31, 2014 and the $15.0 million at December 31, 2013 are recorded in “Long-term income tax liabilities” in the accompanying Condensed Consolidated Balance Sheets.

Generally, earnings associated with the investments in the Company’s foreign subsidiaries are considered to be indefinitely invested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740 “Income Taxes”. Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in nature is not practicable.

In 2013, the Company executed offshore cash movements to take advantage of The American Taxpayer Relief Act of 2012 (the “Act”) passed on January 2, 2013, with retroactive application to January 1, 2012. This Act, which extended the tax provisions of the Internal Revenue Code Section 954(c)(6) through the end of 2013, permitted continued tax deferral on such movements which would otherwise be taxable immediately in the U.S. While the 2013 cash movements related to this law change are not taxable in the U.S., related foreign withholding taxes of $2.4 million were included in the provision for income taxes in the accompanying Condensed Consolidated Statement of Operations for the three months ended March 31, 2013.

In 2010, the Company determined that it intended to distribute all of the current year and future years’ earnings of a non-U.S. subsidiary to its foreign parent. Withholding taxes of $0.1 million and $0.2 million related to this distribution are included in the provision for income taxes in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, respectively.

The U.S. Department of the Treasury released the “General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals” in March 2014. These proposals represent a significant shift in international tax policy, which may materially impact U.S. taxation of international earnings. The Company continues to monitor these proposals and is currently evaluating the potential impact on its financial condition, results of operations and cash flows.

The Company is currently under audit in several tax jurisdictions. In April 2012, the Company received an assessment for the Canadian 2003-2006 audit for which the Company filed a Notice of Objection in July 2012 and paid a mandatory security deposit. Requests for Competent Authority Assistance were filed with both the Canadian Revenue Agency and the U.S. Internal Revenue Service for this audit cycle. In July and October 2013, the Company received reassessments for the 2007-2009 audit, which resulted in additional payments. These payments bring the total amount of deposits for both audit cycles, net of fluctuations in the foreign exchange rate, to $16.6 million and $17.3 million as of March 31, 2014 and December 31, 2013, respectively, and are included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets. In December 2013, the Company filed a Notice of Objection to the 2007-2009 reassessment. Although the outcome of examinations by taxing authorities is always uncertain, the Company believes it is adequately reserved for these audits and resolution is not expected to have a material impact on its financial condition and results of operations.

The significant tax jurisdictions currently under audit are as follows:

 

 Tax Jurisdiction    Tax Year Ended 

 

 Canada

   2003 to 2009

 Philippines

   2009 and 2010

 United States

   2011
Earnings Per Share
Earnings Per Share

Note 12.  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, restricted stock units and shares held in a rabbi trust using the treasury stock method.

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

 

     Three Months Ended March 31,  
                 2014                              2013              
  

 

 

 

Basic:

     

Weighted average common shares outstanding

     42,739           43,036     

Diluted:

     

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

     98           16     
  

 

 

    

 

 

 

Total weighted average diluted shares outstanding

     42,837           43,052     
  

 

 

    

 

 

 

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

     74           18     
  

 

 

    

 

 

 

 

On August 18, 2011, the Company’s Board authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). A total of 3.5 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.

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

 

   

 

Total Number of
Shares

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

Three Months Ended:

       

March 31, 2014

    130      $ 19.92      $ 19.98      $ 2,605   

March 31, 2013

    -        $ -        $ -        $ -     
Commitments and Loss Contingency
Commitments and Loss Contingency

Note 13.  Commitments and Loss Contingency

Commitments

During the three months ended March 31, 2014, the Company entered into several leases in the ordinary course of business. The following is a schedule of future minimum rental payments required under operating leases that have noncancelable lease terms as of March 31, 2014 (in thousands):

 

           Amount         

 

 

2014 (remaining nine months)

     $ 596     

2015

     1,606     

2016

     1,339     

2017

     918     

2018

     707     

2019

     223     

2020 and thereafter

     -     
  

 

 

 

Total minimum payments required

     $ 5,389     
  

 

 

 

During the three months ended March 31, 2014, the Company entered into agreements with third-party vendors in the ordinary course of business whereby the Company committed to purchase goods and services used in its normal operations. These agreements, which are not cancelable, generally range from one to five year periods and contain fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments based on certain conditions. The following is a schedule of the future minimum purchases remaining under the agreements as of March 31, 2014 (in thousands):

 

           Amount         

 

 

2014 (remaining nine months)

     $ 2,394     

2015

     1,535     

2016

     383     

2017

     -     

2018

     -     

2019

     -     

2020 and thereafter

     -     
  

 

 

 

Total minimum payments required

     $ 4,312     
  

 

 

 

Except as outlined above, there have not been any material changes to the outstanding contractual obligations from the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Loss Contingency

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

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

Note 14.  Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

         Three Months Ended March 31,      
     2014     2013  

Service cost

   $ 100      $ 88   

Interest cost

     30        29   

Recognized actuarial (gains)

     (12     (15
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 118      $ 102   
  

 

 

   

 

 

 

Employee Retirement Savings Plans

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

 

         Three Months Ended March 31,      
     2014      2013  

401(k) plan contributions

   $ 260       $ 233   
  

 

 

    

 

 

 

Split-Dollar Life Insurance Arrangement

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

 

     March 31, 2014      December 31, 2013  

Postretirement benefit obligation

   $ 70       $ 81   

Unrealized gains (losses) in AOCI (1) 

   $ 320       $ 314   

 

(1)

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

Stock-Based Compensation
Stock-Based Compensation

Note 15.  Stock-Based Compensation

The Company’s stock-based compensation plans include the 2011 Equity Incentive Plan, the 2004 Non-Employee Director Fee Plan and the Deferred Compensation Plan. The following table summarizes the stock-based compensation expense (primarily in the Americas), income tax benefits related to the stock-based compensation and excess tax benefits (deficiencies) (in thousands):

 

     Three Months Ended March 31,  
             2014                     2013          

Stock-based compensation (expense) (1) 

   $ (754   $ (664

Income tax benefit (2)

     264        232   

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

     54        (34

 

  (1) 

Included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

  (2) 

Included in “Income taxes” in the accompanying Condensed Consolidated Statements of Operations.

  (3) 

Included in “Additional paid-in capital” in the accompanying Condensed Consolidated Statements of Changes in Shareholders’ Equity.

There were no capitalized stock-based compensation costs as of March 31, 2014 and December 31, 2013.

2011 Equity Incentive Plan The Company’s Board of Directors (the “Board”) adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the “2011 Plan”) on March 23, 2011, as amended on May 11, 2011 to reduce the number of shares of common stock available to 4.0 million shares. The 2011 Plan was approved by the shareholders at the May 2011 annual shareholders meeting. The 2011 Plan replaced and superseded the Company’s 2001 Equity Incentive Plan (the “2001 Plan”), which expired on March 14, 2011. The outstanding awards granted under the 2001 Plan will remain in effect until their exercise, expiration or termination. The 2011 Plan permits the grant of restricted stock, stock appreciation rights, stock options and other stock-based awards to certain employees of the Company, members of the Company’s Board of Directors and certain non-employees who provide services to the Company in order to encourage them to remain in the employment of, or to faithfully provide services to, the Company and to increase their interest in the Company’s success.

Stock Appreciation Rights The Board, at the recommendation of the Compensation Committee (the “Committee”), has approved in the past, and may approve in the future, awards of stock-settled stock appreciation rights (“SARs”) for eligible participants. SARs represent the right to receive, without payment to the Company, a certain number of shares of common stock, as determined by the Committee, equal to the amount by which the fair market value of a share of common stock at the time of exercise exceeds the grant price. The SARs are granted at the fair market value of the Company’s common stock on the date of the grant and vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date. The SARs have a term of 10 years from the date of grant. The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation model that uses various assumptions.

The following table summarizes the assumptions used to estimate the fair value of SARs granted:

 

     Three Months Ended March 31,  
               2014                          2013             

Expected volatility

     38.9     45.2

Weighted-average volatility

     38.9     45.2

Expected dividend rate

     0.0     0.0

Expected term (in years)

     5.0        5.0   

Risk-free rate

     1.7     0.8

 

The following table summarizes SARs activity as of March 31, 2014 and for the three months then ended:

 

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

 

 

Outstanding at January 1, 2014

    963       $ -          

Granted

    246       $ -          

Exercised

    (47)       $ -          

Forfeited or expired

    -         $ -          
 

 

 

       

Outstanding at March 31, 2014

    1,162       $ -           7.8       $ 2,611    
 

 

 

   

 

 

   

 

 

   

 

 

 

Vested or expected to vest at March 31, 2014

    1,162       $ -           7.8       $ 2,611    
 

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at March 31, 2014

    627       $ -           6.6       $ 1,250    
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended March 31,  
     2014      2013  

Number of SARs granted

     246         318   

Weighted average grant-date fair value per SAR

   $ 7.20       $ 6.08   

Intrinsic value of SARs exercised

   $ 208       $ -     

Fair value of SARs vested

   $ 1,553       $ 1,298   

The following table summarizes nonvested SARs activity as of March 31, 2014 and for the three months then ended:

 

Nonvested Stock Appreciation Rights    Shares (000s)      Weighted
Average Grant-
Date Fair Value
 

 

 

Nonvested at January 1, 2014

     535        $ 6.17   

Granted

     246        $ 7.20   

Vested

     (246)        $ 6.31   

Forfeited or expired

     -          $ -     
  

 

 

    

Nonvested at March 31, 2014

     535        $ 6.58   
  

 

 

    

As of March 31, 2014, there was $3.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested SARs granted under the 2011 Plan and 2001 Plan. This cost is expected to be recognized over a weighted average period of 1.7 years.

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

Changes in the probability of achieving the performance goals from period to period will result in corresponding changes in compensation expense. The employment-based restricted shares currently outstanding vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date.

 

The following table summarizes nonvested restricted shares/RSUs activity as of March 31, 2014 and for the three months then ended:

 

Nonvested Restricted Shares and RSUs        Shares (000s)          Weighted
Average Grant-
 Date Fair Value 
 

 

 

Nonvested at January 1, 2014

     1,367         $ 15.96     

Granted

     500         $ 19.77     

Vested

     (57)        $ 15.67     

Forfeited or expired

     (292)        $ 18.56     
  

 

 

    

Nonvested at March 31, 2014

     1,518         $ 16.73     
  

 

 

    

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

 

     Three Months Ended March 31,  
                 2014                               2013               

Number of restricted shares/RSUs granted

     500           706     

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

   $ 19.77         $ 15.25     

Fair value of restricted shares/RSUs vested

   $ 895         $ 366     

As of March 31, 2014, based on the probability of achieving the performance goals, there was $23.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted shares/RSUs granted under the 2011 Plan and 2001 Plan. This cost is expected to be recognized over a weighted average period of 2.1 years.

2004 Non-Employee Director Fee Plan The Company’s 2004 Non-Employee Director Fee Plan (the “2004 Fee Plan”), as amended on May 17, 2012, provides that all new non-employee directors joining the Board will receive an initial grant of shares of common stock on the date the new director is elected or appointed, the number of which will be determined by dividing $60,000 by the closing price of the Company’s common stock on the trading day immediately preceding the date a new director is elected or appointed, rounded to the nearest whole number of shares. The initial grant of shares vests in twelve equal quarterly installments, one-twelfth on the date of grant and an additional one-twelfth on each successive third monthly anniversary of the date of grant. The award lapses with respect to all unvested shares in the event the non-employee director ceases to be a director of the Company, and any unvested shares are forfeited.

The 2004 Fee Plan also provides that each non-employee director will receive, on the day after the annual shareholders meeting, an annual retainer for service as a non-employee director (the “Annual Retainer”). Prior to May 17, 2012, the Annual Retainer was $95,000, of which $50,000 was payable in cash, and the remainder was paid in stock. The annual grant of cash vests in four equal quarterly installments, one-fourth on the day following the annual meeting of shareholders, and an additional one-fourth on each successive third monthly anniversary of the date of grant. The annual grant of shares paid to non-employee directors prior to May 17, 2012 vests in eight equal quarterly installments, one-eighth on the day following the annual meeting of shareholders, and an additional one-eighth on each successive third monthly anniversary of the date of grant. On May 17, 2012, upon the recommendation of the Compensation Committee, the Board adopted the Fifth Amended and Restated Non-Employee Director Fee Plan (the “Amendment”), which increased the common stock component of the Annual Retainer by $30,000, resulting in a total Annual Retainer of $125,000, of which $50,000 is payable in cash and the remainder paid in stock. In addition, the Amendment also changed the vesting period for the annual equity award, from a two-year vesting period, to a one-year vesting period (consisting of four equal quarterly installments, one-fourth on the date of grant and an additional one-fourth on each successive third monthly anniversary of the date of grant). The award lapses with respect to all unpaid cash and unvested shares in the event the non-employee director ceases to be a director of the Company, and any unvested shares and unpaid cash are forfeited.

In addition to the Annual Retainer award, the 2004 Fee Plan also provides for any non-employee Chairman of the Board to receive an additional annual cash award of $100,000, and each non-employee director serving on a committee of the Board to receive an additional annual cash award. The additional annual cash award for the Chairperson of the Audit Committee is $20,000 and Audit Committee members’ are entitled to an annual cash award of $10,000. Prior to May 20, 2011, the annual cash awards for the Chairpersons of the Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee were $12,500 and the members of such committees were entitled to an annual cash award of $7,500. On May 20, 2011, the Board increased the additional annual cash award to the Chairperson of the Compensation Committee to $15,000. All other additional cash awards remained unchanged.

The Board may pay additional cash compensation to any non-employee director for services on behalf of the Board over and above those typically expected of directors, including but not limited to service on a special committee of the Board.

The following table summarizes nonvested common stock share award activity as of March 31, 2014 and for the three months then ended:

 

Nonvested Common Stock Share Awards       Shares (000s)         Weighted  
Average Grant-  
Date Fair Value  
 

 

 

Nonvested at January 1, 2014

     9        $ 16.01   

Granted

     -        $ -     

Vested

     (9)       $ 16.01   

Forfeited or expired

     -        $ -     
  

 

 

   

Nonvested at March 31, 2014

     -        $ -     
  

 

 

   

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

 

         Three Months Ended March 31,      
     2014     2013  

Number of share awards granted

     -          -     

Weighted average grant-date fair value per share award

   $ -        $ -     

Fair value of share awards vested

   $ 150        $ 219     

As of March 31, 2014, there was no unrecognized compensation cost related to nonvested common stock share awards granted since March 2008 under the 2004 Fee Plan.

Deferred Compensation Plan The Company’s non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is not shareholder-approved, was adopted by the Board effective December 17, 1998 and amended on March 29, 2006 and May 23, 2006. It provides certain eligible employees the ability to defer any portion of their compensation until the participant’s retirement, termination, disability or death, or a change in control of the Company. Using the Company’s common stock, the Company matches 50% of the amounts deferred by certain senior management participants on a quarterly basis up to a total of $12,000 per year for the president, executive vice presidents and senior vice presidents and $7,500 per year for vice presidents (participants below the level of vice president are not eligible to receive matching contributions from the Company). Matching contributions and the associated earnings vest over a seven year service period. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Company’s common stock (see Note 6, Investments Held in Rabbi Trust). As of March 31, 2014 and December 31, 2013, liabilities of $6.9 million and $6.4 million, respectively, of the Deferred Compensation Plan were recorded in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.

Additionally, the Company’s common stock match associated with the Deferred Compensation Plan, with a carrying value of approximately $1.7 million and $1.6 million at March 31, 2014 and December 31, 2013, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.

 

The following table summarizes nonvested common stock activity as of March 31, 2014 and for the three months then ended:

 

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

 

 

Nonvested at January 1, 2014

     6        $ 16.89   

Granted

     5        $ 19.87   

Vested

     (4)       $ 19.53   

Forfeited or expired

     -         $ -     
  

 

 

   

Nonvested at March 31, 2014

     7        $ 17.26   
  

 

 

   

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

 

         Three Months Ended March 31,      
     2014     2013  

Number of shares of common stock granted

     5          6     

Weighted average grant-date fair value per common stock

   $ 19.87        $ 15.96     

Fair value of common stock vested

   $ 101        $ 104     

Cash used to settle the obligation

   $ 21        $ 953     

As of March 31, 2014, there was $0.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 2.7 years.

Segments and Geographic Information
Segments and Geographic Information

Note 16. Segments and Geographic Information

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

The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Company’s services in these locations to support their customer contact management needs.

Information about the Company’s reportable segments is as follows (in thousands):

 

           Americas                   EMEA                   Other (1)                Consolidated      

Three Months Ended March 31, 2014:

           

Revenues

    $ 261,246         $ 63,183             $ 324,429     

Percentage of revenues

     80.5%          19.5%             100.0%    

Depreciation, net (2)

    $ 10,140         $ 1,158             $ 11,298     

Amortization of intangibles

    $ 3,651         $ -             $ 3,651     

Income (loss) from operations

    $ 22,647         $ 2,884          $ (11,053)         $ 14,478     

Other income (expense), net

           395           395     

Income taxes

           (4,560)          (4,560)    
           

 

 

 

Net income

             $ 10,313     
           

 

 

 

Total assets as of March 31, 2014

    $ 1,084,443         $ 1,446,686          $ (1,594,458)        $ 936,671     
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended March 31, 2013:

           

Revenues

    $ 255,214         $ 46,030            $ 301,244     

Percentage of revenues

     84.7%          15.3%             100.0%    

Depreciation, net (2)

    $ 9,178         $ 991            $ 10,169     

Amortization of intangibles

    $ 3,759         $ -            $ 3,759     

Income (loss) from operations

    $ 19,522         $ 1,855          $ (11,500)        $ 9,877     

Other income (expense), net

           (159)          (159)    

Income taxes

           (3,200)          (3,200)    
           

 

 

 

Net income

             $ 6,518     
           

 

 

 

Total assets as of March 31, 2013

    $ 1,095,705         $ 709,892          $ (885,996)         $ 919,601     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

Other items (including corporate costs, impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the three months ended March 31, 2014 and 2013. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the performance of its geographic segments based on revenue and income (loss) from operations, and does not include segment assets or other income and expense items for management reporting purposes.

  (2) 

Depreciation is net of property grant amortization.

Other Income (Expense)
Other Income (Expense)

Note 17. Other Income (Expense)

Gains and losses resulting from foreign currency transactions are recorded in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations during the period in which they occur. Other income (expense) consists of the following (in thousands):

 

    Three Months Ended March 31,  
                2014                              2013               

Foreign currency transaction gains (losses)

  $ (128   $ 234   

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

    723        (525

Other miscellaneous income (expense)

    68        416   
 

 

 

   

 

 

 
  $ 663      $ 125   
 

 

 

   

 

 

 
Related Party Transactions
Related Party Transactions

Note 18. Related Party Transactions

In January 2008, the Company entered into a lease for a customer contact management center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and Chief Executive Officer and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the 20 year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. There are significant penalties for early cancellation which decrease over time. The Company paid $0.1 million to the landlord during both the three months ended March 31, 2014 and 2013 under the terms of the lease.

Overview and Basis of Presentation (Policies)

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) provides comprehensive outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, financial services, technology/consumer, transportation and leisure, and healthcare industries. SYKES provides flexible, high-quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels encompassing phone, e-mail, social media, text messaging and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including 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, Australia and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2014. 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, 2013, as filed with the Securities and Exchange Commission (“SEC”) on February 20, 2014.

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

New Accounting Standards Not Yet Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The amendments in ASU 2014-08 indicate that only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations

 

presentation. The amendments should be applied to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company does not expect the adoption of ASU 2014-08 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently Adopted

In March 2013, the FASB issued ASU 2013-05 “Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). The amendments in ASU 2013-05 indicate that a cumulative translation adjustment (“CTA”) is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, a loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated), or a step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The amendments in ASU 2013-05 are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. The adoption of ASU 2013-05 on January 1, 2014 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In July 2013, the FASB issued ASU 2013-11 “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments in ASU 2013-11 indicate that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU 2013-11 on January 1, 2014 resulted in a $3.1 million reclassification of a portion of the Company’s unrecognized tax benefits from “Long-term income tax liabilities” to “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2014. See Note 11, Income Taxes, for further information.

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

 

   

Level 1 Quoted prices for identical instruments in active markets.

   

Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

   

Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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

 

   

Cash, Short-Term and Other Investments, Investments Held in Rabbi Trust and Accounts Payable The carrying values for cash, short-term and other investments, investments held in rabbi trust and accounts payable approximate their fair values.

   

Foreign Currency Forward Contracts and Options Foreign currency forward contracts and options, including premiums paid on options, are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk.

   

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

Fair Value Measurements ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10-20 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

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

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

Generally, earnings associated with the investments in the Company’s foreign subsidiaries are considered to be indefinitely invested outside of the U.S. Therefore, a U.S. provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740 “Income Taxes”. Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in nature is not practicable.

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, restricted stock units and shares held in a rabbi trust using the treasury stock method.

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

Costs Associated with Exit or Disposal Activities (Tables)

The following table summarizes the Company’s short-term and long-term accrued liabilities associated with its exit and disposal activities, by plan, as of March 31, 2014 and December 31, 2013 (in thousands):

 

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

March 31, 2014

              

Short-term accrued restructuring liability (1)

   $ 136       $ 132       $ 433       $ 495       $ 1,196   

Long-term accrued restructuring liability (2)

     333         -           -           1,202         1,535   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at March 31, 2014

   $ 469       $ 132       $ 433       $ 1,697       $ 2,731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Short-term accrued restructuring liability (1)

    $ 136        $ 131        $ 538        $ 440        $ 1,245   

Long-term accrued restructuring liability (2)

     376         -           -           1,353         1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2013

    $ 512        $ 131        $ 538        $ 1,793        $ 2,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

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

  (2) 

Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.

The following tables summarize the accrued liability associated with the Americas Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
  at January 1, 2014  
     Charges
(Reversals) for the
Three Months Ended 
 March 31, 2014 
       Cash Payments          Other Non-Cash   
Changes
     Ending Accrual at 
 March 31, 2014 
 

Lease obligations and facility exit costs

    $ 512          $ -            $ (43 )      $ -            $ 469    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

       Beginning Accrual  
  at January 1, 2013  
     Charges
(Reversals) for the
Three Months Ended 
 March 31, 2013 
       Cash Payments          Other Non-Cash   
Changes
     Ending Accrual at 
 March 31, 2013 
 

Lease obligations and facility exit costs

    $ 682          $ -            $ (35 )       $ -            $ 647     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

The following tables summarize the accrued liability associated with EMEA’s Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
at January 1, 2014
     Charges
(Reversals) for the
  Three Months Ended  
March 31, 2014
       Cash Payments            Other Non-Cash    
Changes (2)
       Ending Accrual at  
March 31, 2014
 

Severance and related costs

   $ 131        $ -             $ -            $ 1       $ 132   

Legal-related costs

     -              -              -              -              -        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 131        $ -             $ -            $ 1       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
  Three Months Ended  
March 31, 2013 (1)
       Cash Payments           Other Non-Cash    
Changes (2)
      Ending Accrual at  
March 31, 2013
 

Severance and related costs

   $ 187       $ 6       $ (7   $ (4   $ 182   

Legal-related costs

     10         1         (7     1        5   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 197       $ 7       $ (14   $ (3   $ 187   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

  (1) 

During 2013, the Company recorded additional severance and related costs and legal-related costs, which are recorded in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

  (2) 

Effect of foreign currency translation.

The following tables summarize the accrued liability associated with the Fourth Quarter 2010 Exit Plan’s exit or disposal activities and related charges during the three months ended March 31, 2014 and 2013 (in thousands):

 

       Beginning Accrual  
at January 1, 2014
     Charges
(Reversals) for the
Three Months
  Ended March 31,  
2014
     Cash
    Payments    
      Other Non-Cash  
Changes (1)
       Ending Accrual  
at March 31,

2014
 

Lease obligations and facility exit costs

   $ 538        $ -            $ (106   $ 1       $ 433   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
Three Months
  Ended March 31,  
2013
     Cash
    Payments    
      Other Non-Cash  
Changes (1)
      Ending Accrual  
at March 31,

2013
 

Lease obligations and facility exit costs

   $ 539        $ -            $ (75   $ (15   $ 449   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

  (1) 

Effect of foreign currency translation.

The following tables summarize the accrued liability associated with the Third Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Beginning Accrual
  at January 1, 2014  
     Charges
(Reversals) for the
Three Months

  Ended March 31,  
2014
         Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at
March 31, 2014
 

Lease obligations and facility exit costs

   $ 1,793       $ -         $ (96   $ -         $ 1,697   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Beginning Accrual
  at January 1, 2013  
     Charges
(Reversals) for the
Three Months Ended
March 31, 2013
         Cash Payments             Other Non-Cash    
Changes (1)
     Ending Accrual at
  March 31, 2013  
 

Lease obligations and facility exit costs

   $ 2,551       $ -         $ (224   $ 1       $ 2,328   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1)

Effect of foreign currency translation.

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

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

 

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

Assets:

             

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

  (1)      $ 87,513          $ 87,513          $ -            $ -        

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

  (1)       10           10           -             -        

Foreign currency forward and option contracts

  (2)       764           -               764           -        

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

  (3)       5,622           5,622           -             -        

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

  (3)       1,318           1,318           -             -        

Guaranteed investment certificates

  (4)       80           -               80           -        
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 95,307          $   94,463          $ 844          $ -        
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             

Long-term debt

  (5)      $ 96,000          $ -            $ 96,000          $ -        

Foreign currency forward and option contracts

  (6)       7,068           -             7,068           -        
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 103,068          $ -            $ 103,068          $ -        
    

 

 

    

 

 

    

 

 

    

 

 

 

 

         Fair Value Measurements at December 31, 2013 Using:  
         Balance at      Quoted Prices in
Active Markets
For
 Identical Assets 
     Significant
Other
    Observable    
Inputs
     Significant
   Unobservable   
Inputs
 
            December 31, 2013       Level (1)      Level (2)      Level (3)  

Assets:

             

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

  (1)      $ 50,627          $ 50,627          $ -             $ -         

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

  (1)       11           11           -               -         

Foreign currency forward and option contracts

  (2)       2,240           -               2,240           -         

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

  (3)       5,251           5,251           -               -         

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

  (3)       1,170           1,170           -               -         

Guaranteed investment certificates

  (4)       80           -               80           -         
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 59,379          $ 57,059          $ 2,320         $ -         
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

             

Long-term debt

  (5)      $ 98,000          $ -              $ 98,000         $ -         

Foreign currency forward and option contracts

  (6)       5,063           -               5,063           -         
    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 103,063          $ -              $ 103,063         $ -         
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheet.

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 5, Financial Derivatives.

(3) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 6, Investments Held in Rabbi Trust.

(4) 

Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet.

(5) 

The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates. See Note 9, Borrowings.

(6) 

Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 5, Financial Derivatives.

Intangible Assets (Tables)

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

 

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

Customer relationships

   $ 102,014         $ (38,736 )     $ 63,278           8     

Trade name

     11,600           (3,135 )       8,465           8     

Non-compete agreements

     1,215           (1,088 )       127           2     

Proprietary software

     850           (850 )       -           2     

Favorable lease agreement

     449           (363 )       86           2     
  

 

 

    

 

 

   

 

 

    
   $ 116,128         $ (44,172 )     $ 71,956           8     
  

 

 

    

 

 

   

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2013 (in thousands):

 

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

Customer relationships

   $ 102,774         $ (35,873 )     $ 66,901           8     

Trade name

     11,600           (2,803 )       8,797           8     

Non-compete agreements

     1,220           (1,009 )       211           2     

Proprietary software

     850           (847 )       3           2     

Favorable lease agreement

     449           (306 )       143           2     
  

 

 

    

 

 

   

 

 

    
   $ 116,893         $ (40,838 )     $ 76,055           8     
  

 

 

    

 

 

   

 

 

    

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to March 31, 2014, is as follows (in thousands):

 

Years Ending December 31,    Amount  

 

 

2014 (remaining nine months)

   $                     10,750     

2015

     14,046     

2016

     14,046     

2017

     14,046     

2018

     7,609     

2019

     6,995     

2020 and thereafter

     4,464     
Financial Derivatives (Tables)

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

 

           March 31, 2014             December 31, 2013   

Deferred gains (losses) in AOCI

    $ (5,357)         $ (2,704)    

Tax on deferred gains (losses) in AOCI

     80           169     
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ (5,277)         $ (2,535)    
  

 

 

    

 

 

 

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

    $ (5,357)       
  

 

 

    

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

 

     As of March 31, 2014      As of December 31, 2013  

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

     $ 75,500          December 2014          $ 59,000          December 2014    

Forwards:

           

Philippine Pesos

     25,900          July 2014          63,300          July 2014    

Costa Rican Colones

     45,100          December 2014          41,600          October 2014    

Hungarian Forints

     2,776          December 2014          550          January 2014    

Romanian Leis

     6,445          December 2014          619          January 2014    

Net investment hedges: (2)

           

Forwards:

           

Euros

     41,028          September 2014          32,657          September 2014    

Non-designated hedges: (3)

           

Forwards

     43,591          July 2014          59,207          June 2014    

 

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