SYKES ENTERPRISES INC, 10-Q filed on 11/9/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Nov. 1, 2012
Entity Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
SYKE 
 
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
 
43,788,118 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 176,568 
$ 211,122 
Receivables, net
251,113 
229,702 
Prepaid expenses
12,842 
11,540 
Other current assets
20,068 
20,120 
Assets held for sale, discontinued operations
 
9,590 
Total current assets
460,591 
482,074 
Property and equipment, net
99,411 
91,080 
Goodwill
204,971 
121,342 
Intangibles, net
96,047 
44,472 
Deferred charges and other assets
43,595 
30,162 
Total assets
904,615 
769,130 
Current liabilities:
 
 
Accounts payable
23,982 
23,109 
Accrued employee compensation and benefits
76,910 
62,452 
Current deferred income tax liabilities
256 
663 
Income taxes payable
1,581 
423 
Deferred revenue
37,213 
34,319 
Other accrued expenses and current liabilities
26,484 
21,191 
Liabilities held for sale, discontinued operations
 
7,128 
Total current liabilities
166,426 
149,285 
Deferred grants
7,859 
8,563 
Long-term debt
98,000 
 
Long-term income tax liabilities
26,374 
26,475 
Other long-term liabilities
14,368 
11,241 
Total liabilities
313,027 
195,564 
Commitments and loss contingency (Note 16)
   
   
Shareholders' equity:
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value, 200,000 shares authorized; 43,788 and 44,306 shares issued, respectively
438 
443 
Additional paid-in capital
276,821 
281,157 
Retained earnings
301,897 
291,803 
Accumulated other comprehensive income
13,812 
4,436 
Treasury stock at cost: 106 shares and 299 shares, respectively
(1,380)
(4,273)
Total shareholders' equity
591,588 
573,566 
Total liabilities and shareholders' equity
$ 904,615 
$ 769,130 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
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
43,788 
44,306 
Treasury stock, shares
106 
299 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenues
$ 280,526 1
$ 293,310 1
$ 823,426 1
$ 893,033 1
Operating expenses:
 
 
 
 
Direct salaries and related costs
183,628 
189,082 
536,758 
581,952 
General and administrative
87,905 
82,116 
254,247 
259,019 
Net (gain) loss on disposal of property and equipment
199 
(8)
83 
(3,432)
Impairment of long-lived assets
122 
38 
271 
764 
Total operating expenses
271,854 
271,228 
791,359 
838,303 
Income from continuing operations
8,672 
22,082 
32,067 
54,730 
Other income (expense):
 
 
 
 
Interest income
297 
357 
1,015 
947 
Interest (expense)
(421)
(272)
(1,049)
(827)
Other (expense)
(715)
(329)
(1,804)
(2,272)
Total other income (expense)
(839)
(244)
(1,838)
(2,152)
Income from continuing operations before income taxes
7,833 
21,838 
30,229 
52,578 
Income taxes
(309)
2,969 
3,569 
6,224 
Income from continuing operations, net of taxes
8,142 
18,869 
26,660 
46,354 
(Loss) from discontinued operations, net of taxes
 
(755)
(820)
(3,091)
(Loss) on sale of discontinued operations, net of taxes
 
 
(10,707)
 
Net income
$ 8,142 
$ 18,114 
$ 15,133 
$ 43,263 
Basic:
 
 
 
 
Continuing operations
$ 0.19 
$ 0.42 
$ 0.62 
$ 1.01 
Discontinued operations
 
$ (0.02)
$ (0.27)
$ (0.07)
Net income (loss) per common share
$ 0.19 
$ 0.40 
$ 0.35 
$ 0.94 
Diluted:
 
 
 
 
Continuing operations
$ 0.19 
$ 0.42 
$ 0.62 
$ 1.00 
Discontinued operations
 
$ (0.02)
$ (0.27)
$ (0.06)
Net income (loss) per common share
$ 0.19 
$ 0.40 
$ 0.35 
$ 0.94 
Weighted average common shares:
 
 
 
 
Basic
43,014 
45,557 
43,130 
46,106 
Diluted
43,031 
45,653 
43,179 
46,202 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net income
$ 8,142 
$ 18,114 
$ 15,133 
$ 43,263 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Foreign currency translation adjustment, net of taxes
5,802 
(14,572)
7,977 
(6,311)
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(5)
(24)
16 
48 
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
(1,369)
(2,838)
1,339 
(4,418)
Unrealized gain (loss) on postretirement obligation, net of taxes
(5)
98 
44 
122 
Other comprehensive income (loss), net of taxes
4,423 
(17,336)
9,376 
(10,559)
Comprehensive income
$ 12,565 
$ 778 
$ 24,509 
$ 32,704 
Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Beginning Balance at Dec. 31, 2010
$ 583,195 
$ 471 
$ 302,911 
$ 265,676 
$ 15,108 
$ (971)
Beginning Balance, shares at Dec. 31, 2010
 
47,066 
 
 
 
 
Issuance of common stock
191 
 
191 
 
 
 
Stock-based compensation expense
3,411 
 
3,411 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(52)
 
(52)
 
 
 
Vesting of common stock and restricted stock under equity award plans, net of forfeitures
(1,190)
(992)
 
 
(201)
Vesting of common stock and restricted stock under equity award plans, shares
 
312 
 
 
 
 
Repurchase of common stock
(42,677)
 
 
 
 
(42,677)
Retirement of treasury stock
 
(28)
(22,359)
(20,290)
 
42,677 
Retirement of treasury stock, shares
 
(2,798)
 
 
 
 
Comprehensive income (loss)
32,704 
 
 
43,263 
(10,559)
 
Ending Balance at Sep. 30, 2011
575,582 
446 
283,110 
288,649 
4,549 
(1,172)
Ending Balance, shares at Sep. 30, 2011
 
44,580 
 
 
 
 
Issuance of common stock
120 
 
120 
 
 
 
Issuance of common stock, shares
 
33 
 
 
 
 
Stock-based compensation expense
171 
 
171 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
44 
 
44 
 
 
 
Vesting of common stock and restricted stock under equity award plans, net of forfeitures
 
 
13 
 
 
(13)
Vesting of common stock and restricted stock under equity award plans, shares
 
(19)
 
 
 
 
Repurchase of common stock
(7,316)
 
 
 
 
(7,316)
Retirement of treasury stock
 
(3)
(2,301)
(1,924)
 
4,228 
Retirement of treasury stock, shares
 
(288)
 
 
 
 
Comprehensive income (loss)
4,965 
 
 
5,078 
(113)
 
Ending Balance at Dec. 31, 2011
573,566 
443 
281,157 
291,803 
4,436 
(4,273)
Ending Balance, shares at Dec. 31, 2011
 
44,306 
 
 
 
 
Stock-based compensation expense
3,111 
 
3,111 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(278)
 
(278)
 
 
 
Vesting of common stock and restricted stock under equity award plans, net of forfeitures
(1,412)
(1,224)
 
 
(191)
Vesting of common stock and restricted stock under equity award plans, shares
 
227 
 
 
 
 
Repurchase of common stock
(7,908)
 
 
 
 
(7,908)
Retirement of treasury stock
 
(8)
(5,945)
(5,039)
 
10,992 
Retirement of treasury stock, shares
 
(745)
 
 
 
 
Comprehensive income (loss)
24,509 
 
 
15,133 
9,376 
 
Ending Balance at Sep. 30, 2012
$ 591,588 
$ 438 
$ 276,821 
$ 301,897 
$ 13,812 
$ (1,380)
Ending Balance, shares at Sep. 30, 2012
 
43,788 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities:
 
 
Net income
$ 15,133 
$ 43,263 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization, net
36,677 
41,630 
Impairment losses
271 
764 
Unrealized foreign currency transaction (gains) losses, net
(646)
1,743 
Stock-based compensation expense
3,111 
3,411 
Deferred income tax provision (benefit)
(3,981)
(3,830)
Net (gain) loss on disposal of property and equipment
83 
(3,450)
Bad debt expense
806 
322 
Unrealized (gains) losses on financial instruments, net
(584)
273 
Increase (decrease) in valuation allowance on deferred tax assets
 
(1,394)
Amortization of deferred loan fees
303 
439 
Loss on sale of discontinued operations
10,707 
 
Other
219 
331 
Changes in assets and liabilities, net of acquisition:
 
 
Receivables
(9,955)
6,362 
Prepaid expenses
98 
(4,272)
Other current assets
5,198 
(5,475)
Deferred charges and other assets
(11,568)
2,072 
Accounts payable
(2,206)
(4,159)
Income taxes receivable / payable
1,950 
(3,244)
Accrued employee compensation and benefits
8,842 
11,615 
Other accrued expenses and current liabilities
7,193 
(5,211)
Deferred revenue
2,486 
2,025 
Other long-term liabilities
(8,803)
(3,316)
Net cash provided by operating activities
55,334 
79,899 
Cash flows from investing activities:
 
 
Capital expenditures
(26,355)
(21,788)
Cash paid for business acquisition, net of cash acquired
(147,094)
 
Proceeds from sale of property and equipment
422 
3,949 
Investment in restricted cash
(63)
(520)
Release of restricted cash
356 
 
Cash divested on sale of discontinued operations
(9,100)
 
Other
228 
1,654 
Net cash (used for) investing activities
(181,606)
(16,705)
Cash flows from financing activities:
 
 
Payment of long-term debt
(10,000)
 
Proceeds from issuance of long-term debt
108,000 
 
Proceeds from issuance of stock
 
191 
Cash paid for repurchase of common stock
(7,908)
(42,677)
Proceeds from grants
88 
81 
Shares repurchased for minimum tax withholding on equity awards
(1,412)
(1,190)
Cash paid for loan fees related to debt
(857)
 
Other
 
(52)
Net cash provided by (used for) financing activities
87,911 
(43,647)
Effects of exchange rates on cash
3,807 
(4,586)
Net increase (decrease) in cash and cash equivalents
(34,554)
14,961 
Cash and cash equivalents - beginning
211,122 
189,829 
Cash and cash equivalents - ending
176,568 
204,790 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
1,726 
787 
Cash paid during period for income taxes
25,673 
18,233 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
3,427 
1,503 
Unrealized gain on postretirement obligation in accumulated other comprehensive income (loss)
$ 44 
$ 122 
Overview and Summary of Significant Accounting Policies
Overview and Summary of Significant Accounting Policies

Note 1. Overview and Summary of Significant Accounting 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, healthcare and other 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, Internet, 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, India and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.

Acquisition On August 20, 2012, the Company completed the acquisition of Alpine Access, Inc. (“Alpine”), a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated July 27, 2012. The Company has reflected the operating results in the Condensed Consolidated Statements of Operations since August 20, 2012. See Note 2, Acquisition of Alpine Access, Inc., for additional information on the acquisition of Alpine.

Discontinued Operations In November 2011, the Company, authorized by the Finance Committee of the Company’s Board of Directors, decided to pursue a buyer for its operations located in Spain (the “Spanish operations”) as these operations were no longer consistent with the Company’s strategic direction. The Company sold its Spanish operations, pursuant to an asset purchase agreement dated March 29, 2012 and a stock purchase agreement dated March 30, 2012. See Note 3, Discontinued Operations, for additional information on the sale of the Spanish operations.

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 “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 nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2012. 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, 2011, as filed with the Securities and Exchange Commission (“SEC”).

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.

Recognition of Revenue The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition” (“ASC 605”). The Company primarily recognizes revenues from services as the services are performed, which is based on either a per minute, per call or per transaction basis, under a fully executed contractual agreement and record reductions to revenues for contractual penalties and holdbacks for failure to meet specified minimum service levels and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of any future product or service or meeting other specified performance conditions. Product sales, accounted for within our fulfillment services, are recognized upon shipment to the customer and satisfaction of all obligations.

Revenues from fulfillment services account for 1.4% and 1.5% of total consolidated revenues for the nine months ended September 30, 2012 and 2011, respectively, some of which contain multiple-deliverables. The service offerings for these fulfillment service contracts typically include pick-pack-and-ship, warehousing, process management, finished goods assembly and pass-through costs. In accordance with ASC 605-25 “Revenue Recognition — Multiple-Element Arrangements” (“ASC 605-25”) [as amended by Accounting Standards Update (“ASU”) 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”)], the Company determines if the services provided under these contracts with multiple-deliverables represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenues from these services are recognized as the services are performed under a fully executed contractual agreement. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into a single unit of accounting and recognized on the proportional performance method using the straight-line basis over the contract period, or the actual number of operational seats used to serve the client, as appropriate.

As a result of the adoption of ASU 2009-13, the Company allocates revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on the Company’s best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once the Company allocates revenue to each deliverable, the Company recognizes revenue when all revenue recognition criteria are met. As of September 30, 2012, the Company’s fulfillment contracts with multiple-deliverables met the separation criteria as outlined in ASC 605-25 and the revenue was accounted for accordingly. The Company had no other contracts that contain multiple-deliverables as of September 30, 2012.

Assets and Liabilities Held for Sale The Company classifies its assets and related liabilities as held for sale when management commits to a plan to sell the assets, the assets are ready for immediate sale in their present condition, an active program to locate buyers and other actions required to complete the plan to sell the assets has been initiated, the sale of the assets is probable and expected to be completed within one year, the assets are marketed at reasonable prices in relation to their fair value and it is unlikely that significant changes will be made to the plan to sell the assets. The Company measures the value of assets held for sale at the lower of the carrying amount or fair value, less costs to sell.

Property and Equipment Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Improvements to leased premises are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Cost and related accumulated depreciation on assets retired or disposed of are removed from the accounts and any resulting gains or losses are credited or charged to income. The Company capitalizes certain costs incurred, if any, to internally develop software upon the establishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility are expensed as incurred.

 

The carrying value of property and equipment to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360 “Property, Plant and Equipment.” For purposes of recognition and measurement of an impairment loss, assets are grouped at the lowest levels for which there are identifiable cash flows (the “reporting unit”). An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals, sales prices of comparable assets or independent third party offers. Occasionally, the Company redeploys property and equipment from under-utilized centers to other locations to improve capacity utilization if it is determined that the related undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the carrying amount of these assets. Except as discussed in Note 5, Fair Value, the Company determined that its property and equipment were not impaired as of September 30, 2012.

Goodwill The Company accounts for goodwill and other intangible assets under ASC 350 “Intangibles – Goodwill and Other” (“ASC 350”). The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. For goodwill and other intangible assets with indefinite lives not subject to amortization, the Company reviews goodwill and intangible assets at least annually in the third quarter, and more frequently in the presence of certain circumstances, for impairment by applying a fair value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values, as appropriate, and an analysis of our market capitalization. Under ASC 350, the carrying value of assets is calculated at the reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

The Company completed its annual goodwill impairment test during the three months ended September 30, 2012, which included the consideration of certain economic factors, and determined that the carrying amount of goodwill was not impaired.

Intangible Assets — Intangible assets, primarily customer relationships, trade names, existing technologies and covenants not to compete, are amortized using the straight-line method over their estimated useful lives which approximate the pattern in which the economic benefits of the assets are consumed. The Company periodically evaluates the recoverability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Fair value for intangible assets is based on discounted cash flows, market multiples and/or appraised values as appropriate.

Income Taxes The Company accounts for income taxes under ASC 740 “Income Taxes” (“ASC 740”) which requires recognition of deferred tax assets and liabilities to reflect tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the accompanying condensed consolidated financial statements. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that the deferred tax assets will not be realized in accordance with the criteria of ASC 740. Valuation allowances are established against deferred tax assets due to an uncertainty of realization. Valuation allowances are reviewed each period on a tax jurisdiction by tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence, in accordance with criteria of ASC 740, to support a change in judgment about the ability to realize the related deferred tax assets. Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions.

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions in accordance with ASC 740. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying condensed consolidated financial statements.

 

Stock-Based Compensation — The Company has three stock-based compensation plans: the 2011 Equity Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan (for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan (for certain eligible employees). All of these plans are discussed more fully in Note 18, Stock-Based Compensation. Stock-based awards under these plans may consist of common stock, common stock units, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock and uses treasury stock to satisfy stock option exercises or vesting of stock awards.

In accordance with ASC 718 “Compensation — Stock Compensation” (“ASC 718”), the Company recognizes in its accompanying Condensed Consolidated Statements of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Compensation expense for equity-based awards is recognized over the requisite service period, usually the vesting period, while compensation expense for liability-based awards (those usually settled in cash rather than stock) is re-measured to fair value at each balance sheet date until the awards are settled.

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

 

   

Cash, Short-Term and Other Investments, Investments Held in Rabbi Trusts and Accounts Payable The carrying values for cash, short-term and other investments, investments held in rabbi trusts 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.

Fair Value Measurements ASC 820 “Fair Value Measurements and Disclosures” (“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.

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

Fair Value Hierarchy ASC 820-10-35 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:

 

   

Level 1 — Quoted prices for identical instruments in active markets.

 

   

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

 

   

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

 

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

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

The following section describes the valuation methodologies used by the Company to measure 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 Trusts The investment assets of the rabbi trusts are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 8, Investments Held in Rabbi Trusts, and Note 18, 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.

Foreign Currency Translation The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income, but is included in “Accumulated other comprehensive income (loss)” (“AOCI”), which is reflected as a separate component of shareholders’ equity until the sale or until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign currency transactional gains and losses are included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations.

Foreign Currency and Derivative Instruments The Company accounts for financial derivative instruments under ASC 815 “Derivatives and Hedging” (“ASC 815”). The Company generally utilizes non-deliverable forward contracts and options expiring within one to 24 months to reduce its foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies and net investments in foreign operations. In using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to counterparty credit risk.

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

 

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

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring or if the Company de-designates a derivative as a hedge, the Company discontinues hedge accounting prospectively. At September 30, 2012 and December 31, 2011, all hedges were determined to be highly effective.

The Company also periodically enters into forward contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to reduce the effects from fluctuations caused by volatility in currency exchange rates on the Company’s operating results and cash flows. All changes in the fair value of the derivative instruments are included in “Other income (expense)”. See Note 7, Financial Derivatives, for further information on financial derivative instruments.

New Accounting Standards Not Yet Adopted

In December 2011, the FASB issued ASU 2011-11 “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The amendments in ASU 2011-11 will enhance disclosures by requiring improved information about financial and derivative instruments that are either 1) offset (netting assets and liabilities) in accordance with Section 210-20-45 or Section 815-10-45 of the FASB Accounting Standards Codification or 2) subject to an enforceable master netting arrangement or similar agreement. The amendments in ASU 2011-11 are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to materially impact its financial condition, results of operations and cash flows.

In July 2012, the FASB issued ASU 2012-02 “Intangibles — Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). The amendments in ASU 2012-02 provide entities with the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. Under the amendments in ASU 2012-02, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of ASU 2012-02 to materially impact its financial condition, results of operations and cash flows.

 

New Accounting Standards Recently Adopted

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued ASU 2011-04 “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 as of January 1, 2012 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“ASU 2011-05”). The amendments in ASU 2011-05 require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 are to be applied retrospectively and are effective during interim and annual periods beginning after December 15, 2011. As this standard impacts presentation only, the adoption of ASU 2011-05 as of January 1, 2012 did not impact the financial condition, results of operations and cash flows of the Company.

In September 2011, the FASB issued ASU 2011-08 “Intangibles — Goodwill and Other (Topic 350) Testing Goodwill for Impairment” (“ASU 2011-08”). The amendments in ASU 2011-08 provide entities with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 as of January 1, 2012 did not have a material impact on the financial condition, results of operations and cash flows of the Company.

In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220) — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). The amendments in ASU 2011-12 defer the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. The amendments in ASU 2011-12 are effective at the same time as ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that ASU 2011-05 is deferring. The amendments in ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As ASU 2011-12 impacts presentation only, the adoption of ASU 2011-12 as of January 1, 2012 did not impact the financial condition, results of operations and cash flows of the Company.

Acquisition of Alpine Access, Inc.
Acquisition of Alpine Access, Inc.

Note 2. Acquisition of Alpine Access, Inc.

On August 20, 2012, the Company acquired 100% of the outstanding common shares and voting interest of Alpine, pursuant to the terms of the merger agreement. Alpine is an industry leader in the at-home agent space – recruiting, training, managing and delivering award-winning customer contact management services through a secured and proprietary virtual call center environment with its operations located in the United States and Canada. The results of Alpine’s operations have been included in the Company’s consolidated financial statements since its acquisition on August 20, 2012. The Company acquired Alpine to: create significant competitive differentiation for quality, speed to market, scalability and flexibility driven by proprietary, internally-developed software, systems, processes and other intellectual property which uniquely overcome the challenges of the at-home delivery model; strengthen the Company’s current service portfolio and go-to-market offering while expanding the breadth of clients with minimal client overlap; broaden the addressable market opportunity within existing and new verticals as well as clients; expand the addressable pool of skilled labor; leverage operational best practices across the Company’s global platform, with the potential to convert more of its fixed cost to variable cost; and to further enhance the growth and margin profile of the Company to drive shareholder value. This resulted in the Company paying a substantial premium for Alpine resulting in the recognition of goodwill.

The acquisition date fair value of the consideration transferred totaled $149.0 million, which was funded through cash on hand of $41.0 million and borrowings of $108.0 million under the Company’s credit agreement, dated May 3, 2012. See Note 12, Borrowings, for further information.

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

 

   

the approval of the final working capital adjustment by the authorized representative of Alpine’s shareholders, and

 

   

the amount of goodwill.

The Company expects to complete its analysis of the purchase price allocation during the fourth quarter of 2012.

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

 

     Amount  

Cash and cash equivalents

   $ 1,859   

Receivables

     11,831   

Prepaid expenses

     617   
  

 

 

 

Total current assets

     14,307   

Property and equipment

     11,326   

Goodwill

     80,766   

Intangibles

     57,720   

Deferred charges and other assets

     916   

Accounts payable

     (880

Accrued employee compensation and benefits

     (3,774

Income taxes payable

     (141

Deferred revenue

     (94

Other accrued expenses and current liabilities

     (601
  

 

 

 

Total current liabilities

     (5,490

Other long-term liabilities (1)

     (10,592
  

 

 

 
   $ 148,953   
  

 

 

 

 

(1) 

Primarily includes long-term deferred tax liabilities.

 

Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. The following table presents the Company’s purchased intangibles assets as of August 20, 2012, the acquisition date (in thousands):

 

     Amount
Assigned
     Weighted
Average
Amortization
Period (years)
 

Customer relationships

   $ 46,000         8   

Trade names

     10,600         8   

Non-compete agreements

     670         2   

Favorable lease agreement

     450         2   
  

 

 

    
   $ 57,720         8   
  

 

 

    

The $80.8 million of goodwill was assigned to the Company’s Americas operating segment. Pursuant to Federal income tax regulations, no amount of intangibles or goodwill from this acquisition will be deductible for tax purposes.

The fair value of receivables acquired is $11.8 million, with the gross contractual amount of $11.8 million.

The amount of Alpine’s revenues and net loss since the August 20, 2012 acquisition date, included in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012 were as follows (in thousands):

 

     From
August 20,
2012 Through
September 30,
2012
 

Revenues

   $ 10,095   

(Loss) from continuing operations before income taxes

   $ (1,935

(Loss) from continuing operations, net of taxes

   $ (1,907

The loss from continuing operations before income taxes of $1.9 million includes $1.3 million in severance costs, depreciation resulting from the adjustment to fair value of the acquired property and equipment and amortization of the fair values of the acquired intangibles.

The following table presents the unaudited pro forma combined revenues and net earnings as if Alpine had been included in the consolidated results of the Company for the entire three and nine month periods ended September 30, 2012 and 2011. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2012 and 2011 (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

Revenues

   $ 292,580       $ 318,932       $ 885,878       $ 966,926   

Income from continuing operations, net of taxes

   $ 9,622       $ 16,380       $ 24,296       $ 41,164   

Income from continuing operations per common share:

           

Basic

   $ 0.22       $ 0.36       $ 0.57       $ 0.89   

Diluted

   $ 0.22       $ 0.36       $ 0.57       $ 0.89   

These amounts have been calculated to reflect the additional depreciation, amortization and interest expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2012 and January 1, 2011, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies’ operating results. Included in these costs are severance, advisory and legal costs, net of the tax effects.

 

Acquisition-related costs associated with Alpine, comprised of severance costs and transaction and integration costs, and included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012 were as follows (none in the comparable periods in 2011) (in thousands):

 

     Three Months Ended September 30, 2012      Nine Months Ended September 30, 2012  

Severance costs:

     

Americas

   $ 320       $ 320   

Corporate

     377         377   
  

 

 

    

 

 

 
     697         697   

Transaction and integration costs:

     

Corporate

     3,045         3,095   
  

 

 

    

 

 

 
     3,045         3,095   
  

 

 

    

 

 

 

Total acquisition-related costs

   $ 3,742       $ 3,792   
  

 

 

    

 

 

 
Discontinued Operations
Discontinued Operations

Note 3. Discontinued Operations

In November 2011, the Finance Committee of the Board of Directors of the Company approved a plan to sell its Spanish operations, which were operated through its Spanish subsidiary, Sykes Enterprises, Incorporated S.L. (“Sykes Spain”). Sykes Spain operated customer contact management centers, with annual revenues of approximately $39.3 million in 2011, providing contact center services through a total of three customer contact management centers in Spain to clients in Spain. The decision to sell the Spanish operations was made in 2011 after management completed a strategic review of the Spanish market and determined the operations were no longer consistent with the Company’s strategic direction.

On March 29, 2012, Sykes Spain entered into the asset purchase agreement, by and between Sykes Spain and Iberphone, S.A.U., and pursuant thereto, on March 29, 2012, Sykes Spain completed the sale of fixed assets located in Ponferrada, Spain, which were previously written down to zero, cash of $4.1 million, and certain contracts and licenses relating to the business of Sykes Spain, to Iberphone, S.A.U. Under the asset purchase agreement, Ponferrada, Spain employees were transferred to Iberphone S.A.U. which assumed certain payroll liabilities in the approximate amount of $1.7 million, and paid a nominal purchase price for the assets.

On March 30, 2012, the Company entered into a stock purchase agreement with a former member of Sykes Spain’s management, and pursuant thereto, on March 30, 2012, the Company completed the sale of all of the shares of capital stock of Sykes Spain to the purchaser for a nominal price. Pursuant to the stock purchase agreement, immediately prior to closing, the Company made a cash capital contribution of $8.6 million to Sykes Spain to cover a portion of Sykes Spain’s liabilities and to fund the $4.1 million of cash transferred and sold pursuant to the asset purchase agreement with Iberphone, S.A.U. discussed above. As this was a stock transaction, the Company anticipates no future obligation with regard to Sykes Spain and there are no material post closing obligations.

The Spanish operations met the held for sale criteria as of December 31, 2011; therefore, the Company reflected the assets and related liabilities of the Spanish operations as “Assets held for sale, discontinued operations” and “Liabilities held for sale, discontinued operations” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2011. The Company reflected the operating results related to the Spanish operations as discontinued operations in the accompanying Condensed Consolidated Statements of Operations for all periods presented. Cash flows from discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011. This business was historically reported by the Company as part of the EMEA segment.

 

The results of the Spanish operations included in discontinued operations were as follows (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011     2012     2011  

Revenues

   $ —         $ 9,235      $ 10,102      $ 29,582   
  

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) from discontinued operations before income taxes

   $ —         $ (755   $ (820   $ (3,091

Income taxes (1)

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) from discontinued operations, net of taxes

   $ —         $ (755   $ (820   $ (3,091
  

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) on sale of discontinued operations before income taxes

   $ —         $ —        $ (10,707   $ —     

Income taxes (1)

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) on sale of discontinued operations, net of taxes

   $ —         $ —        $ (10,707   $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

There were no income taxes as any tax benefit from the losses would be offset by a valuation allowance.

The assets and liabilities of the Spanish operations in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2011 were as follows (in thousands):

 

Assets

  

Current assets:

  

Receivables, net

   $ 8,970   

Prepaid expenses

     23   
  

 

 

 

Total current assets

     8,993   

Deferred charges and other assets

     597   
  

 

 

 

Total assets (1)

     9,590   
  

 

 

 

Liabilities

  

Current liabilities:

  

Accounts payable

     1,191   

Accrued employee compensation and benefits

     4,592   

Deferred revenue

     335   

Other accrued expenses and current liabilities

     1,010   
  

 

 

 

Total current liabilities (2)

     7,128   
  

 

 

 

Total net assets

   $ 2,462   
  

 

 

 

 

(1) 

Classified as current and included in “Assets held for sale, discontinued operations” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2011.

 

(2) 

Classified as current and included in “Liabilities held for sale, discontinued operations” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2011.

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

Note 4. 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 are revenue generating, with plans to migrate the associated revenues to other locations within the U.S. Approximately 300 employees were affected and the Company has substantially completed the actions associated with the Americas plan.

 

The major costs estimated to be 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 ($1.0 million at December 31, 2011). This increase of $0.4 million and $0.9 million included in “General and administrative” costs included in the accompanying Condensed Consolidated Statement of Operations during the three and nine months ended September 30, 2012, respectively, is primarily due to a change in estimate in lease obligations and additional lease obligation costs. 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 January 2013. The Company has paid $0.3 million in cash through September 30, 2012 under the Fourth Quarter 2011 Exit Plan in the Americas.

The following table summarizes 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 September 30, 2012 (none in the comparable period in 2011) (in thousands):

 

    Beginning
Accrual at
July 1, 2012
    Charges (Reversals)
for the Three
Months Ended
September 30, 2012 (1)
    Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2012
    Short-term  (3)     Long-term  (4)  

Lease obligations and facility exit costs

  $ 598      $ 418      $ (281   $ —        $ 735      $ 148      $ 587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During the three months ended September 30, 2012, the Company recorded additional charges due to a change in estimate in lease obligations and facility exit costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

Effect of foreign currency translation.

 

(3) 

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

 

(4) 

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

The following table summarizes the accrued liability associated with the Americas Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the nine months ended September 30, 2012 (none in the comparable period in 2011) (in thousands):

 

     Beginning
Accrual at
January 1, 2012
     Charges (Reversals)
for the Nine Months
Ended September 30, 2012 (1)
     Cash
Payments
    Other Non-Cash
Changes (2)
     Ending Accrual at
September 30, 2012
 

Lease obligations and facility exit costs

   $ —         $ 1,074       $ (339   $ —         $ 735   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

During the nine months ended September 30, 2012, the Company recorded additional lease obligations and facility exit costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

Effect of foreign currency translation.

EMEA

During 2011, to improve the Company’s overall profitability in the EMEA region, 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. Through these actions, the Company expects to improve its cost structure in the EMEA region by optimizing its capacity utilization. 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 estimated to be 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 anticipated severance-related costs estimated at $7.6 million as of September 30, 2012 ($7.6 million as of December 31, 2011). The Company recorded $0.5 million of the costs associated with these actions as non-cash impairment charges, while approximately $7.1 million will be cash expenditures for severance-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 ends in March 2013. The Company has paid $5.7 million in cash through September 30, 2012 under the Fourth Quarter 2011 Exit Plan in EMEA.

The following table summarizes 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 September 30, 2012 (none in the comparable period in 2011) (in thousands):

 

    Beginning
Accrual at
July 1, 2012
    Charges (Reversals)
for the Three
Months Ended
September 30, 2012 (1)
    Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2012
    Short-term (3)     Long-term (4)  

Lease obligations and facility exit costs

  $ 565      $ —        $ (5   $ 8      $ 568      $ 568      $ —     

Severance and related costs

    3,320        151        (2,886     (17     568        568        —     

Legal-related costs

    5        12        (16     (1     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,890      $ 163      $ (2,907   $ (10   $ 1,136      $ 1,136      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During the three months ended September 30, 2012, the Company recorded additional severance and related costs and legal-related costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

Effect of foreign currency translation.

 

(3) 

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

 

(4) 

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

The Company charged $0.7 million to “Direct salaries and related costs” for severance and related costs and $0.5 million to “General and administrative” costs for severance and related costs and legal-related costs in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2012. The following table summarizes the accrued liability associated with EMEA’s Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the nine months ended September 30, 2012 (none in the comparable period in 2011) (in thousands):

 

     Beginning
Accrual at
January 1, 2012
     Charges (Reversals)
for the Nine Months
Ended September 30, 2012 (1)
     Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2012
 

Lease obligations and facility exit costs

   $ 577       $ —         $ (5   $ (4   $ 568   

Severance and related costs

     4,470         1,093         (4,898     (97     568   

Legal-related costs

     13         83         (95     (1     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,060       $ 1,176       $ (4,998   $ (102   $ 1,136   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

During the nine months ended September 30, 2012, the Company recorded additional severance and related costs and legal-related costs.

 

(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 $2.2 million as of September 30, 2012 ($2.2 million as of December 31, 2011). The Company recorded $0.2 million of the costs associated with the Fourth Quarter 2010 Exit Plan as non-cash impairment charges. Approximately $1.8 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 March 2014, and $0.2 million represents cash expenditures for severance-related costs. The Company has paid $1.3 million in cash through September 30, 2012 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 September 30, 2012 and 2011 (in thousands):

 

    Beginning
Accrual at
July 1, 2012
    Charges (Reversals)
for the Three
Months Ended
September 30, 2012
    Cash
Payments
    Other Non-Cash
Changes (1)
    Ending Accrual at
September 30, 2012
    Short-term  (2)     Long-term  (3)  

Lease obligations and facility exit costs

  $ 656      $ —        $ (66   $ 5      $ 595      $ 419      $ 176   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Beginning
Accrual at
July 1, 2011
    Charges (Reversals)
for the Three
Months Ended
September 30, 2011
    Cash
Payments
    Other Non-Cash
Changes(1)
    Ending Accrual at
September 30, 2011
    Short-term     Long-term  

Lease obligations and facility exit costs

  $ 1,652      $ —        $ (8   $ (93   $ 1,551      $ 1,010      $ 541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Effect of foreign currency translation.

 

(2) 

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

 

(3) 

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

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 nine months ended September 30, 2012 and 2011 (in thousands):

 

     Beginning
Accrual at
January 1, 2012
     Charges (Reversals)
for the Nine Months
Ended September 30, 2012
     Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2012
 

Lease obligations and facility exit costs

   $ 835       $ —         $ (229   $ (11   $ 595   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     Beginning
Accrual at
January 1, 2011
     Charges (Reversals)
for the Nine Months
Ended September 30, 2011 (1)
     Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2011
 

Lease obligations and facility exit costs

   $ 1,711       $ 523       $ (671   $ (12   $ 1,551   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

During the nine months ended September 30, 2011, the Company recorded additional lease termination costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

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 September 30, 2012 ($10.5 million as of December 31, 2011), all of which are in the Americas segment. The Company recorded $3.8 million of the costs associated with the Third Quarter 2010 Exit Plan as non-cash impairment charges, of which $0.7 million is included in “Impairment of long-lived assets” in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2011 (see Note 5, Fair Value, for further information). The remaining $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 $4.1 million in cash through September 30, 2012 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 September 30, 2012 and 2011 (in thousands):

 

    Beginning
Accrual at
July 1, 2012
    Charges (Reversals)
for the Three
Months Ended
September 30, 2012
    Cash
Payments
    Other Non-Cash
Changes (1)
    Ending Accrual at
September 30, 2012
    Short-term  (2)     Long-term  (3)  

Lease obligations and facility exit costs

  $ 2,755      $ —        $ (146   $ —        $ 2,609      $ 510      $ 2,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Beginning
Accrual at
July 1, 2011
    Charges (Reversals)
for the Three
Months Ended
September 30, 2011
    Cash
Payments
    Other Non-Cash
Changes (1)
    Ending Accrual at
September 30, 2011
    Short-term     Long-term  

Lease obligations and facility exit costs

  $ 5,049      $ —        $ (627   $ —        $ 4,422      $ 1,589      $ 2,833   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Effect of foreign currency translation.

 

(2) 

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

 

(3) 

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

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 nine months ended September 30, 2012 and 2011 (in thousands):

 

     Beginning
Accrual at
January 1, 2012
     Charges (Reversals)
for the Nine Months
Ended September 30 2012
     Cash
Payments
    Other Non-Cash
Changes (2)
     Ending Accrual at
September 30, 2012
 

Lease obligations and facility exit costs

   $ 3,427       $ —         $ (818   $ —         $ 2,609   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Beginning
Accrual at
January 1, 2011
     Charges (Reversals)
for the Nine Months
Ended September 30, 2011 (1)
     Cash
Payments
    Other Non-Cash
Changes (2)
     Ending Accrual at
September 30, 2011
 

Lease obligations and facility exit costs

   $ 6,141       $ 249       $ (1,973   $ 5       $ 4,422   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

During the nine months ended September 30, 2011, the Company recorded additional lease termination costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

Effect of foreign currency translation.

ICT Restructuring Plan

As of February 2, 2010, the Company assumed the liabilities of ICT, including restructuring accruals in connection with ICT’s plans to reduce its overall cost structure and adapt to changing economic conditions by closing various customer contact management centers in Europe and Canada prior to the end of their existing lease terms (the “ICT Restructuring Plan”). These remaining restructuring accruals, which related to ongoing lease and other contractual obligations, were paid in December 2011. Since acquiring ICT in February 2010, the Company paid $1.9 million in cash related to the ICT Restructuring Plan through December 31, 2011, the date at which the ICT Restructuring Plan concluded.

The following table summarizes the accrued liability associated with the ICT Restructuring Plan’s exit or disposal activities for the three months ended September 30, 2011 (none in the comparable period in 2012) (in thousands):

 

    Beginning
Accrual at
July 1, 2011
    Charges (Reversals)
for the Three
Months Ended
September 30, 2011
    Cash
Payments
    Other Non-Cash
Changes (1)
    Ending Accrual at
September 30, 2011
    Short-term     Long-term  

Lease obligations and facility exit costs

  $ 507      $ —        $ (28   $ (13   $ 466      $ 466      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Effect of foreign currency translation.

 

The following table summarizes the accrued liability associated with the ICT Restructuring Plan’s exit or disposal activities for the nine months ended September 30, 2011 (none in the comparable period in 2012) (in thousands):

 

     Beginning
Accrual at
January 1, 2011
     Charges (Reversals)
for the Nine Months
Ended September 30, 2011 (1)
    Cash
Payments
    Other Non-Cash
Changes (2)
    Ending Accrual at
September 30, 2011
 

Lease obligations and facility exit costs

   $ 1,462       $ (262   $ (721   $ (13   $ 466   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During the nine months ended September 30, 2011, the Company reversed accruals related to the final settlement of termination costs, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.

 

(2) 

Effect of foreign currency translation.

Fair Value
Fair Value

Note 5. Fair Value

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 September 30, 2012 Using:  
     Balance at      Quoted Prices
in Active
Markets For
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     September 30, 2012      Level (1)      Level (2)      Level (3)  

Assets:

           

Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)

   $ 3,428       $ 3,428       $ —         $ —     

Money market funds and open-end mutual funds in “Deferred charges and other assets” (1)

     11         11         —           —     

Foreign currency forward and option contracts (2)

     2,165         —           2,165         —     

Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)

     3,146         3,146         —           —     

Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)

     1,994         1,994         —           —     

Guaranteed investment certificates (4)

     80         —           80         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,824       $ 8,579       $ 2,245       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward and option contracts (5)

   $ 729       $ —         $ 729       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 729       $ —         $ 729       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheet.

 

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.

 

(3) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 8.

 

(4) 

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

 

(5)

Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.

 

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 December 31, 2011 Using:  
    Balance at      Quoted Prices
in Active
Markets For
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     December 31, 2011      Level (1)      Level (2)      Level (3)  

Assets:

          

Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)

  $ 68,651       $ 68,651       $ —         $ —     

Money market funds and open-end mutual funds in “Deferred charges and other assets” (1)

    12         12         —           —     

Foreign currency forward and option contracts (2)

    710         —           710         —     

Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)

    2,817         2,817         —           —     

Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)

    1,365         1,365         —           —     

Guaranteed investment certificates (4)

    65         —           65         —     
 

 

 

    

 

 

    

 

 

    

 

 

 
  $ 73,620       $ 72,845       $ 775       $ —     
 

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

          

Foreign currency forward and option contracts (5)

  $ 752       $ —         $ 752       $ —     
 

 

 

    

 

 

    

 

 

    

 

 

 
  $ 752       $ —         $ 752       $ —     
 

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

In the accompanying Condensed Consolidated Balance Sheet.

 

(2) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.

 

(3) 

Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 8.

 

(4) 

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

 

(5)

Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.

Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs as described in Note 1, Overview and Summary of Significant Accounting Policies, 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 September 30, 2012 and December 31, 2011.

The following table summarizes the total impairment losses related to nonrecurring fair value measurements of certain assets (no liabilities) subject to the requirements of ASC 820 (in thousands):

 

     Total Impairment (Loss)  
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Americas:

        

Property and equipment, net (1)

   $ (122   $ (38   $ (271   $ (764
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See Note 1 for additional information regarding the fair value measurement.

 

 

Impairment of Long-Lived Assets

During the three and nine months ended September 30, 2012, the Company determined that the carrying value of certain long-lived assets, primarily software licenses, in one of its customer contact management centers in Canada (a component of the Americas segment), were no longer being used and were disposed of. As a result, the Company recorded an impairment loss of $0.1 million.

During the nine months ended September 30, 2012, as part of an on-going effort to streamline excess capacity related to the integration of the ICT acquisition and align it with the needs of the market, the Company closed one of the customer contact management centers in Costa Rica and recorded an impairment charge of $0.1 million within the Americas segment as these assets were unable to be redeployed. The amount of the impairment charge was measured as the amount by which the carrying value of the assets exceeded the estimated fair value, which was based on an independent third party offer less estimated selling costs.

During the three and nine months ended September 30, 2011, in connection with its periodic review for impairment, the Company determined that the carrying value of certain long-lived assets, primarily leasehold improvements, in one of its underutilized customer contact management centers in the U.S. (a component of the Americas segment), were no longer recoverable and recorded an impairment charge of less than $0.1 million. The impairment charge represented the amount by which the carrying value exceeded the fair value of these assets which cannot be redeployed to other locations.

During the nine months ended September 30, 2011, in connection with the Third Quarter 2010 Exit Plan within the Americas segment, as discussed more fully in Note 4, Costs Associated with Exit or Disposal Activities, the Company recorded an impairment charge of $0.7 million, resulting from a change in assumptions related to the redeployment of property and equipment. The amount of the impairment charge was measured as the amount by which the carrying value of the assets exceeded the estimated fair value, which was based on an independent third party offer less estimated selling costs.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 6. Goodwill and Intangible Assets

The following table presents the Company’s purchased intangible assets as of September 30, 2012 (in thousands):

 

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

Customer relationships

   $ 104,722       $ (20,359   $ 84,363         8   

Trade name

     11,600         (1,036     10,564         8   

Non-compete agreements

     1,230         (597     633         2   

Proprietary software

     850         (788     62         2   

Favorable lease agreement

     450         (25     425         2   
  

 

 

    

 

 

   

 

 

    
   $ 118,852       $ (22,805   $ 96,047         8   
  

 

 

    

 

 

   

 

 

    

 

The following table presents the Company’s purchased intangible assets as of December 31, 2011 (in thousands):

 

  

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

Customer relationships

   $ 58,027       $ (14,056   $ 43,971         8   

Trade name

     1,000         (639     361         3   

Non-compete agreements

     560         (560     —           1   

Proprietary software

     850         (710     140         2   
  

 

 

    

 

 

   

 

 

    
   $ 60,437       $ (15,965   $ 44,472         8   
  

 

 

    

 

 

   

 

 

    

 

The following table presents amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

Amortization expense

   $ 2,774       $ 1,978       $ 6,644       $ 6,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to September 30, 2012, is as follows (in thousands):

 

Years Ending December 31,

   Amount  

2012 (remaining three months)

   $ 3,882   

2013

     15,007   

2014

     14,742   

2015

     14,382   

2016

     14,382   

2017

     14,382   

2018 and thereafter

     19,270   

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

 

     Gross Amount      Accumulated
Impairment
Losses
    Net Amount  

Americas:

       

Balance at January 1, 2012

   $ 121,971       $ (629   $ 121,342   

Acquisition of Alpine (1)

     80,766         —          80,766   

Foreign currency translation

     2,863         —          2,863   
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

     205,600         (629     204,971   
  

 

 

    

 

 

   

 

 

 

EMEA:

       

Balance at January 1, 2012

     84         (84     —     

Foreign currency translation

     —           —          —     

Balance at September 30, 2012

     84         (84     —     
  

 

 

    

 

 

   

 

 

 
   $ 205,684       $ (713   $ 204,971   
  

 

 

    

 

 

   

 

 

 

 

(1) 

See Note 2, Acquisition of Alpine Access, Inc., for further information.

Financial Derivatives
Financial Derivatives

Note 7. Financial Derivatives

Cash Flow Hedges — The Company had derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815, consisting of Philippine Peso and Costa Rican Colones 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 derivative instruments recorded in “Accumulated other comprehensive income (loss)” in the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):

 

     September 30, 2012     December 31, 2011  

Deferred gains (losses) in AOCI

   $ 1,076      $ (670

Tax on deferred gains (losses) in AOCI

     (175     232   
  

 

 

   

 

 

 

Deferred gains (losses) in AOCI, net of taxes

   $ 901      $ (438
  

 

 

   

 

 

 

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

   $ 1,076     
  

 

 

   

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

Other 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 our interests against adverse foreign currency moves pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 90 days in duration.

 

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

 

     As of September 30, 2012      As of December 31, 2011  

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

   $ 57,000         May 2013       $ 85,500         September 2012   

Forwards:

           

Philippine Pesos

   $ 3,000         October 2012       $ 12,000         March 2012   

Costa Rican Colones

   $ 53,000         September 2013       $ 30,000         September 2012   

Non-designated hedges: (2)

           

Forwards

   $ 42,992         January 2013       $ 27,192         March 2012   

 

(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) 

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.

See Note 1, Overview and Summary of Significant Accounting Policies, for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

As of September 30, 2012, the maximum amount of loss due to credit risk that, based on the gross fair value of the financial instruments, the Company would incur if parties to the financial instruments that make up the concentration failed to perform according to the terms of the contracts is $2.2 million.

 

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  
     September 30, 2012      December 31, 2011  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1)

   $ 2,125       $ 704   

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     40         6   
  

 

 

    

 

 

 

Total derivative assets

   $ 2,165       $ 710   
  

 

 

    

 

 

 
     September 30, 2012      December 31, 2011  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (2)

   $ 704       $ 485   

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (2)

     25         267   
  

 

 

    

 

 

 

Total derivative liabilities

   $ 729       $ 752   
  

 

 

    

 

 

 

 

(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 September 30, 2012 and 2011 (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)
 
     September 30,     September 30,      September 30,  
     2012      2011     2012      2011      2012      2011  

Derivatives designated as cash flow hedging instruments under ASC 815:

                

Foreign currency forward and option contracts

   $ 127       $ (1,993   $ 1,631       $ 1,378       $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Gain (Loss) Recognized
in “Other income and
(expense)” on
Derivatives
 
     September 30,  
     2012     2011  

Derivatives not designated as hedging instruments under ASC 815:

    

Foreign currency forward contracts

   $ (849   $ 3,835   
  

 

 

   

 

 

 

The following tables present the effect of the Company’s derivative instruments included in the accompanying Condensed Consolidated Financial Statements for the nine months ended September 30, 2012 and 2011 (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)
 
     September 30,     September 30,      September 30,  
     2012      2011     2012      2011      2012      2011  

Derivatives designated as cash flow hedging instruments under ASC 815:

                

Foreign currency forward and option contracts

   $ 4,090       $ (2,933   $ 2,290       $ 2,430       $ 17       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Gain (Loss) Recognized
in “Other income and
(expense)”
on  Derivatives
 
     September 30,  
     2012     2011  

Derivatives not designated as hedging instruments under ASC 815:

    

Foreign currency forward contracts

   $ (1,046   $ 103   
  

 

 

   

 

 

 
Investments Held in Rabbi Trusts
Investments Held in Rabbi Trusts

Note 8. Investments Held in Rabbi Trusts

The Company’s investments held in rabbi trusts, 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):

 

     September 30, 2012      December 31, 2011  
             Cost                    Fair Value                    Cost                    Fair Value        

Mutual funds

   $ 4,632       $ 5,140       $ 3,938       $ 4,182   
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in the rabbi trusts were 61% equity-based and 39% debt-based as of September 30, 2012. 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 September 30,     Nine Months Ended September 30,  
     2012      2011     2012     2011  

Gross realized gains from sale of trading securities

   $ 58       $ 1      $ 139      $ 9   

Gross realized (losses) from sale of trading securities

     —           (20     (1     (20

Dividend and interest income

     11         9        31        27   

Net unrealized holding gains (losses)

     189         (568     353        (418
  

 

 

    

 

 

   

 

 

   

 

 

 

Net investment income (losses)

   $ 258       $ (578   $ 522      $ (402
  

 

 

    

 

 

   

 

 

   

 

 

 
Property and Equipment
Property and Equipment

Note 9. Property and Equipment

Tornado Damage to the Ponca City, Oklahoma Customer Contact Management Center

In April 2011, the customer contact management center (the “facility”) located in Ponca City, Oklahoma experienced significant damage to its building and contents as a result of a tornado. The Company filed an insurance claim with its property insurance company to recover losses of $1.4 million. During 2011, the insurance company paid $1.2 million to the Company for costs to clean up and repair the facility of $0.9 million and for reimbursement of a portion of the Company’s out-of-pocket costs of $0.3 million. The Company completed the repairs to the facility during 2011 and collected the remaining $0.2 million in February 2012. No additional funds are expected.

Sale of Land and Building Located in Minot, North Dakota

In June 2011, the Company sold the land and building located in Minot, North Dakota, which were held for sale, for cash of $3.9 million (net of selling costs of $0.2 million) resulting in a net gain on sale of $3.7 million. The carrying value of these assets of $0.8 million was offset by the related deferred grants of $0.6 million. The net gain on the sale of $3.7 million is included in “Net gain on disposal of property and equipment” in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2011.

Typhoon Damage to the Marikina City, the Philippines Customer Contact Management Center

In September 2009, the building and contents of one of the Company’s customer contact management centers located in Marikina City, the Philippines (acquired as part of the ICT acquisition) was severely damaged by flooding from Typhoon Ondoy. Upon settlement with the insurer in November 2010, the Company recognized a net gain of $2.0 million. The damaged property and equipment had been written down by ICT prior to the ICT acquisition in February 2010. In August 2011, the Company received an additional $0.4 million from the insurer for rent payment made during the claim period. This net gain on insurance settlement is included in “General and administrative” expenses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011.

Deferred Revenue
Deferred Revenue

Note 10. Deferred Revenue

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

 

     September 30, 2012      December 31, 2011  

Future service

   $ 27,324       $ 25,809   

Estimated potential penalties and holdbacks

     9,889         8,510   
  

 

 

    

 

 

 
   $ 37,213       $ 34,319   
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 11. Deferred Grants

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

 

     September 30, 2012     December 31, 2011  

Property grants

   $ 7,505      $ 8,210   

Employment grants

     1,119        1,123   
  

 

 

   

 

 

 

Total deferred grants

     8,624        9,333   

Less: Property grants—short-term (1)

     —          —     

Less: Employment grants—short-term (1)

     (765     (770
  

 

 

   

 

 

 

Total long-term deferred grants (2) 

   $ 7,859      $ 8,563   
  

 

 

   

 

 

 

 

(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.

Amortization of the Company’s property grants included as a reduction to “General and administrative” costs and amortization of the Company’s employment grants included as a reduction to “Direct salaries and related costs” in the accompanying Condensed Consolidated Statements of Operations consist of the following (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

Amortization of property grants

   $ 235       $ 235       $ 705       $ 723   

Amortization of employment grants

     17         18         89         53   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 252       $ 253       $ 794       $ 776   
  

 

 

    

 

 

    

 

 

    

 

 

 
Borrowings
Borrowings

Note 12. Borrowings

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

The New 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):

 

     September 30, 2012      December 31, 2011  

Revolving credit facility

   $ 98,000       $ —     

Less: Current portion

     —           —     
  

 

 

    

 

 

 

Total long-term debt

   $ 98,000       $ —     
  

 

 

    

 

 

 

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

Borrowings under the New Credit Agreement will bear interest at either LIBOR or the base rate plus, in each case, an applicable margin based on the Company’s leverage ratio. The applicable interest rate will be determined quarterly based on the Company’s leverage ratio at such time. The base rate is a rate per annum equal to the greatest of (i) the rate of interest established by KeyBank, from time to time, as its “prime rate”; (ii) the Federal Funds effective rate in effect from time to time, plus 1/2 of 1% per annum; and (iii) the then-applicable LIBOR rate for one month interest periods, plus 1.00%. Swingline loans will bear interest only at the base rate plus the base rate margin. 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 New Credit Agreement.

In May 2012, the Company paid an underwriting fee of $0.9 million for the New Credit Agreement, which is deferred and amortized over the term of the loan. In addition, the Company pays a quarterly commitment fee on the New Credit Agreement. The related interest expense and amortization of deferred loan fees on the Company’s credit agreements of $0.3 million and $0.8 million are included in “Interest expense” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012, respectively. During the comparable 2011 periods, the related interest expense and amortization of deferred loan fees on the Company’s previous $75 million revolving credit facility were $0.3 million and $0.9 million, respectively. The New Credit Agreement had a weighted average interest rate of 1.6% for both the three and nine months ended September 30, 2012, respectively (none in the three and nine months ended September 30, 2011).

The New 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.

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

Note 13. 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
Adjustment
    Unrealized
(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, 2011

   $ 13,992      $ (2,565   $ 1,189      $ 2,146      $ 346      $ 15,108   

Pre-tax amount

     (7,613     —          (184     (1,482     153        (9,126

Tax benefit

     —          —          34        759        —          793   

Reclassification to net loss

     (389     —          (55     (1,855     (40     (2,339

Foreign currency translation

     5        —          1        (6     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     5,995        (2,565     985        (438     459        4,436   

Pre-tax amount

     8,003        —          —          4,107        85        12,195   

Tax benefit

     —          —          —          (419     —          (419

Reclassification to net income

     (17     —          (35     (2,307     (41     (2,400

Foreign currency translation

     (9     —          51        (42     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 13,972      $ (2,565   $ 1,001      $ 901      $ 503      $ 13,812   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Except as discussed in Note 14, 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 14. Income Taxes

The Company’s effective tax rate was (3.9)% and 13.6% for the three months ended September 30, 2012 and 2011, respectively. The decrease in the effective tax rate is primarily due to the recognition of tax benefits for acquisition and integration costs related to Alpine for the three months ended September 30, 2012 from the comparable period in 2011. The difference between the Company’s effective tax rate of (3.9)% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the aforementioned acquisition costs, the recognition of tax benefits resulting from income earned in certain tax holiday jurisdictions, foreign tax rate differentials, changes in unrecognized tax positions and tax credits, offset by the tax impact of permanent differences, adjustments of valuation allowances and foreign withholding taxes.

The Company’s effective tax rate was 11.8% for both the nine months ended September 30, 2012 and 2011. The difference between the Company’s effective tax rate of 11.8% 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 income earned in certain tax holiday jurisdictions, foreign tax rate differentials, changes in unrecognized tax positions and tax credits, offset by the tax impact of permanent differences, adjustments of valuation allowances and foreign withholding taxes.

The liability for unrecognized tax benefits is recorded as “Long-term income tax liabilities” in the accompanying Condensed Consolidated Balance Sheets. The Company has accrued $17.3 million at September 30, 2012, and $17.1 million at December 31, 2011, excluding penalties and interest. The $0.2 million increase results primarily from the expiration of the statutes of limitations for a foreign subsidiary, partially offset by fluctuations in foreign 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. 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 addition, the U.S. Department of the Treasury released the “General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals” in February 2012. 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. As required by the Notice of Objection process, the Company paid a mandatory security deposit in the amount of $14.2 million to the Canadian Revenue Agency and an additional deposit to the Province of Ontario in the amount of $0.4 million, which are included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and “Cash paid during period for income taxes” in the accompanying Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2012. This process will allow the Company to submit the case to the U.S. and Canada Competent Authority for ultimate resolution. Although the outcome of examinations by taxing authorities is always uncertain, the Company believes it is adequately reserved for these audits and that resolutions of them are 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

     2007 to 2010   

United States

     2010   
Earnings Per Share
Earnings Per Share

Note 15. 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 trusts using the treasury stock method.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

Basic:

           

Weighted average common shares outstanding

     43,014         45,557         43,130         46,106   

Diluted:

           

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

     17         96         49         96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted average diluted shares outstanding

     43,031         45,653         43,179         46,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     —           3         —           2   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 3.0 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 Company’s Board previously authorized the Company on August 5, 2002 to purchase up to 3.0 million shares of its outstanding common stock, the last of which were repurchased during 2011.

 

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

 

     Total Number
of Shares

Repurchased
     Range of Prices Paid Per Share      Total Cost  of
Shares

Repurchased
 
          
        Low      High     

Three Months Ended:

           

September 30, 2012

     29       $ 14.98       $ 14.98       $ 447   

September 30, 2011

     2,498       $ 12.46       $ 16.10       $ 37,165   

Nine Months Ended:

           

September 30, 2012

     537       $ 13.85       $ 15.00       $ 7,908   

September 30, 2011

     2,798       $ 12.46       $ 18.53       $ 42,677   
Commitments and Loss Contingency
Commitments and Loss Contingency

Note 16. Commitments and Loss Contingency

Commitments

During the nine months ended September 30, 2012, 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 September 30, 2012, including the impact of the leases assumed in connection with the Alpine acquisition (in thousands):

 

     Amount  

2012 (remaining three months)

   $ 1,458   

2013

     6,187   

2014

     4,529   

2015

     2,112   

2016

     920   

2017

     900   

2018 and thereafter

     4,214   
  

 

 

 

Total minimum payments required

   $ 20,320   
  

 

 

 

During the nine months ended September 30, 2012, 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 September 30, 2012, including the impact of the agreements assumed in connection with the Alpine acquisition (in thousands):

 

     Amount  

2012 (remaining three months)

   $ 1,703   

2013

     2,789   

2014

     1,754   

2015

     118   

2016

     118   

2017

     49   

2018 and thereafter

     —     
  

 

 

 

Total minimum payments required

   $ 6,531   
  

 

 

 

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, 2011.

 

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 it 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 17. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Service cost

   $ 94      $ 65      $ 280      $ 148   

Interest cost

     30        26        90        76   

Recognized actuarial (gains)

     (11     (14     (35     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 113      $ 77      $ 335      $ 182   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Statement of Operations were as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

401(k) plan contributions

   $ 245       $ 208       $ 977       $ 770   
  

 

 

    

 

 

    

 

 

    

 

 

 

In connection with the acquisition of Alpine in August 2012, the Company assumed Alpine’s employee benefit plan (Section 401(k)). Under this employee benefit plan, the Company makes a matching contribution on an annual basis in the amount of 100% of the employee contribution for the first 3% of included compensation plus 50% of the employee contribution for the next 2% of included compensation. Employees are 100% vested in contributions, earnings and matching funds at all times. No contributions were made during the three and nine months ended September 30, 2012.

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):

 

     September 30, 2012      December 31, 2011  

Postretirement benefit obligation

   $ 77       $ 114   

Unrealized gains (losses) in AOCI (1)

   $ 503       $ 459   

 

(1)

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

Stock-Based Compensation
Stock-Based Compensation

Note 18. 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 September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Stock-based compensation (expense) (1)

   $ (1,250   $ (798   $ (3,111   $ (3,411

Income tax benefit (2)

     438        311        1,089        1,330   

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

     —          (87     (278     (52

 

(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 Shareholder’s Equity.

There were no capitalized stock-based compensation costs as of September 30, 2012 and December 31, 2011.

2011 Equity Incentive Plan 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 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 stock options, stock appreciation rights and other stock-based awards to certain employees of the Company, 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 Stock appreciation rights (“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:

 

     Nine Months Ended September 30,  
     2012     2011  

Expected volatility

     47.1     44.3

Weighted-average volatility

     47.1     44.3

Expected dividend rate

     0.0     0.0

Expected term (in years)

     4.7        4.6   

Risk-free rate

     0.8     2.0

 

The following table summarizes SARs activity as of September 30, 2012 and for the nine 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, 2012

     657      $ —           

Granted

     259      $ —           

Exercised

     —        $ —           

Forfeited or expired

     (51   $ —           
  

 

 

         

Outstanding at September 30, 2012

     865      $ —           7.5       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at September 30, 2012

     865      $ —           7.5       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2012

     470      $ —           6.3       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Nine Months Ended September 30,  
     2012      2011  

Number of SARs granted

     259         215   

Weighted average grant-date fair value per SAR

   $ 5.97       $ 7.10   

Intrinsic value of SARs exercised

   $ —         $ —     

Fair value of SARs vested

   $ 1,388       $ 1,198   

The following table summarizes nonvested SARs activity as of September 30, 2012 and for the nine months then ended:

 

Nonvested Stock Appreciation Rights

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

Nonvested at January 1, 2012

     362      $ 7.90   

Granted

     259      $ 5.97   

Vested

     (175   $ 7.98   

Forfeited or expired

     (51   $ 6.76   
  

 

 

   

Nonvested at September 30, 2012

     395      $ 6.74   
  

 

 

   

As of September 30, 2012, there was $1.9 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 1.4 years.

Restricted Shares The Company’s Board of Directors approves awards of performance and employment-based restricted shares (“restricted shares”) for eligible participants. In some instances, where the issuance of restricted shares has adverse tax consequences to the recipient, the Board will instead issue restricted stock units (“RSUs”). The restricted shares are shares of the 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 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 September 30, 2012 and for the nine months then ended:

 

Nonvested Restricted Shares and RSUs

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

Nonvested at January 1, 2012

     793      $ 20.39   

Granted

     420      $ 15.21   

Vested

     (195   $ 19.74   

Forfeited or expired

     (146   $ 19.03   
  

 

 

   

Nonvested at September 30, 2012

     872      $ 18.25   
  

 

 

   

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

 

     Nine Months Ended September 30,  
     2012      2011  

Number of restricted shares/RSUs granted

     420         339   

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

   $ 15.21       $ 18.67   

Fair value of restricted shares/RSUs vested

   $ 3,845       $ 4,392   

As of September 30, 2012, based on the probability of achieving the performance goals, there was $15.0 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 1.5 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 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 and Human Resource Development 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.

Prior to 2008, the grants were comprised of CSUs rather than shares of common stock. A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common stock.

 

The following table summarizes nonvested CSUs and share awards activity as of September 30, 2012 and for the nine months then ended:

 

Nonvested Common Stock Units and Share Awards

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

Nonvested at January 1, 2012

     16      $ 21.08   

Granted

     42      $ 16.15   

Vested

     (31   $ 17.75   

Forfeited or expired

     (1   $ 21.83   
  

 

 

   

Nonvested at September 30, 2012

     26      $ 17.18   
  

 

 

   

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

 

     Nine Months Ended September 30,  
     2012      2011  

Number of CSUs/share awards granted

     42         21   

Weighted average grant-date fair value per CSU/share award

   $ 16.15       $ 21.83   

Fair value of CSUs/share awards vested

   $ 551       $ 320   

As of September 30, 2012, there was $0.3 million of total unrecognized compensation costs, net of estimated forfeitures, related to nonvested CSUs granted since March 2008 under the Plan. This cost is expected to be recognized over a weighted average period of 0.3 years.

Deferred Compensation Plan The Board adopted the Sykes Enterprises, Incorporated non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) on December 17, 1998, which was amended on May 23, 2006. The Deferred Compensation Plan, which was not shareholder-approved, 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 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 8, Investments Held in Rabbi Trusts.) As of September 30, 2012 and December 31, 2011, liabilities of $5.1 million and $4.2 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 $1.4 million and $1.2 million at September 30, 2012 and December 31, 2011, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.

The following table summarizes nonvested common stock activity as of September 30, 2012 and for the nine months then ended:

 

Nonvested Common Stock

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

Nonvested at January 1, 2012

     8      $ 18.30   

Granted

     13      $ 15.28   

Vested

     (13   $ 15.63   

Forfeited or expired

     (1   $ 18.22   
  

 

 

   

Nonvested at September 30, 2012

     7      $ 17.17   
  

 

 

   

 

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

 

     Nine Months Ended September 30,  
     2012      2011  

Number of shares of common stock granted

     13         10   

Weighted average grant-date fair value per common stock

   $ 15.28       $ 19.19   

Fair value of common stock vested

   $ 178       $ 141   

Cash used to settle the obligation

   $ 263       $ —     

As of September 30, 2012, 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 3.0 years.

Segments and Geographic Information
Segments and Geographic Information

Note 19. 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, India 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 September 30, 2012:

        

Revenues (2)

   $ 237,541      $ 42,985        $ 280,526   

Percentage of revenues

     84.7     15.3       100.0

Depreciation and amortization (2)

   $ 11,353      $ 1,004        $ 12,357   

Income (loss) from continuing operations

   $ 21,654      $ 2,359      $ (15,341   $ 8,672   

Other (expense), net

         (839     (839

Income taxes

         309        309   
        

 

 

 

Income from continuing operations, net of taxes

           8,142   

(Loss) from discontinued operations, net of taxes (3)

   $ —        $ —            —     
        

 

 

 

Net income

         $ 8,142   
        

 

 

 

Total assets as of September 30, 2012

   $ 1,265,146      $ 1,073,201      $ (1,433,732   $ 904,615   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2011:

        

Revenues (2)

   $ 241,481      $ 51,829        $ 293,310   

Percentage of revenues

     82.3     17.7       100.0

Depreciation and amortization (2)

   $ 11,954      $ 1,066        $ 13,020   

Income (loss) from continuing operations

   $ 30,950      $ 1,893      $ (10,761   $ 22,082   

Other (expense), net

         (244     (244

Income taxes

         (2,969     (2,969
        

 

 

 

Income from continuing operations, net of taxes

           18,869   

(Loss) from discontinued operations, net of taxes (3)

   $ —        $ (755       (755
        

 

 

 

Net income

         $ 18,114   
        

 

 

 

Total assets as of September 30, 2011

   $ 1,150,752      $ 1,174,224      $ (1,544,084   $ 780,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Americas     EMEA     Other (1)     Consolidated  

Nine Months Ended September 30, 2012:

        

Revenues (2)

   $ 688,841      $ 134,585        $ 823,426   

Percentage of revenues

     83.7     16.3       100.0

Depreciation and amortization (2)

   $ 33,687      $ 2,990        $ 36,677   

Income (loss) from continuing operations

   $ 69,388      $ 1,861      $ (39,182   $ 32,067   

Other (expense), net

         (1,838     (1,838

Income taxes

         (3,569     (3,569
        

 

 

 

Income from continuing operations, net of taxes

           26,660   

(Loss) from discontinued operations, net of taxes (3)

   $ (6,302   $ (5,225