SYKES ENTERPRISES INC, 10-Q filed on 11/5/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Oct. 30, 2013
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
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
 
43,978,408 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 196,735 
$ 187,322 
Receivables, net
274,207 
247,633 
Prepaid expenses
17,233 
12,370 
Other current assets
21,280 
20,017 
Total current assets
509,455 
467,342 
Property and equipment, net
114,868 
101,295 
Goodwill, net
201,514 
204,231 
Intangibles, net
80,189 
92,037 
Deferred charges and other assets
43,865 
43,784 
Total assets
949,891 
908,689 
Current liabilities:
 
 
Accounts payable
23,432 
24,985 
Accrued employee compensation and benefits
78,487 
73,103 
Current deferred income tax liabilities
916 
92 
Income taxes payable
1,880 
800 
Deferred revenue
37,187 
34,283 
Other accrued expenses and current liabilities
32,647 
31,320 
Total current liabilities
174,549 
164,583 
Deferred grants
7,040 
7,607 
Long-term debt
105,000 
91,000 
Long-term income tax liabilities
25,192 
26,162 
Other long-term liabilities
12,889 
13,073 
Total liabilities
324,670 
302,425 
Commitments and loss contingency (Note 15)
   
   
Shareholders' equity:
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value, 200,000 shares authorized; 44,048 and 43,790 shares issued, respectively
440 
438 
Additional paid-in capital
278,992 
277,192 
Retained earnings
339,067 
315,187 
Accumulated other comprehensive income
9,519 
14,856 
Treasury stock at cost: 191 shares and 108 shares, respectively
(2,797)
(1,409)
Total shareholders' equity
625,221 
606,264 
Total liabilities and shareholders' equity
$ 949,891 
$ 908,689 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000 
10,000 
Preferred stock, shares issued
   
   
Preferred stock, shares outstanding
   
   
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000 
200,000 
Common stock, shares issued
44,048 
43,790 
Treasury stock, shares
191 
108 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Income Statement [Abstract]
 
 
 
 
Revenues
$ 322,143 
$ 280,526 
$ 928,122 
$ 823,426 
Operating expenses:
 
 
 
 
Direct salaries and related costs
215,001 
183,628 
628,848 
536,758 
General and administrative
73,987 
75,747 
222,967 
217,653 
Depreciation, net
10,677 
9,583 
30,863 
30,033 
Amortization of intangibles
3,699 
2,774 
11,171 
6,644 
Impairment of long-lived assets
   
122 
   
271 
Total operating expenses
303,364 
271,854 
893,849 
791,359 
Income from continuing operations
18,779 
8,672 
34,273 
32,067 
Other income (expense):
 
 
 
 
Interest income
216 
297 
648 
1,015 
Interest (expense)
(630)
(421)
(1,716)
(1,049)
Other income (expense)
356 
(715)
142 
(1,804)
Total other income (expense)
(58)
(839)
(926)
(1,838)
Income from continuing operations before income taxes
18,721 
7,833 
33,347 
30,229 
Income taxes
4,575 
(309)
7,087 
3,569 
Income from continuing operations, net of taxes
14,146 
8,142 
26,260 
26,660 
(Loss) from discontinued operations, net of taxes
 
 
 
(820)
(Loss) on sale of discontinued operations, net of taxes
 
 
 
(10,707)
Net income
$ 14,146 
$ 8,142 
$ 26,260 
$ 15,133 
Basic:
 
 
 
 
Continuing operations
$ 0.33 
$ 0.19 
$ 0.61 
$ 0.62 
Discontinued operations
 
 
 
$ (0.27)
Net income (loss) per common share
$ 0.33 
$ 0.19 
$ 0.61 
$ 0.35 
Diluted:
 
 
 
 
Continuing operations
$ 0.33 
$ 0.19 
$ 0.61 
$ 0.62 
Discontinued operations
 
 
 
$ (0.27)
Net income (loss) per common share
$ 0.33 
$ 0.19 
$ 0.61 
$ 0.35 
Weighted average common shares outstanding:
 
 
 
 
Basic
42,785 
43,014 
42,918 
43,130 
Diluted
42,836 
43,031 
42,948 
43,179 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 14,146 
$ 8,142 
$ 26,260 
$ 15,133 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Foreign currency translation gain (loss), net of taxes
7,200 
5,802 
(2,905)
7,977 
Unrealized gain (loss) on net investment hedge, net of taxes
(797)
 
(774)
 
Unrealized actuarial gain (loss) related to pension liability, net of taxes
(27)
(5)
(123)
16 
Unrealized gain (loss) on cash flow hedging instruments, net of taxes
827 
(1,369)
(1,351)
1,339 
Unrealized gain (loss) on postretirement obligation, net of taxes
(95)
(5)
(184)
44 
Other comprehensive income (loss), net of taxes
7,108 
4,423 
(5,337)
9,376 
Comprehensive income (loss)
$ 21,254 
$ 12,565 
$ 20,923 
$ 24,509 
Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2012
$ 606,264 
$ 438 
$ 277,192 
$ 315,187 
$ 14,856 
$ (1,409)
Beginning Balance, shares at Dec. 31, 2012
 
43,790 
 
 
 
 
Issuance of common stock
59 
 
59 
 
 
 
Issuance of common stock, shares
 
10 
 
 
 
 
Stock-based compensation expense
3,581 
 
3,581 
 
 
 
Excess tax benefit (deficiency) from stock-based compensation
(34)
 
(34)
 
 
 
Vesting of common stock and restricted stock under equity award plans, net of forfeitures
(93)
105 
 
 
(203)
Vesting of common stock and restricted stock under equity award plans, net of forfeitures, shares
 
520 
 
 
 
 
Repurchase of common stock
(5,479)
 
 
 
 
(5,479)
Retirement of treasury stock
 
(3)
(1,911)
(2,380)
 
4,294 
Retirement of treasury stock, shares
 
(272)
 
 
 
 
Comprehensive income (loss)
20,923 
 
 
26,260 
(5,337)
 
Ending Balance at Sep. 30, 2013
$ 625,221 
$ 440 
$ 278,992 
$ 339,067 
$ 9,519 
$ (2,797)
Ending Balance, shares at Sep. 30, 2013
 
44,048 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities:
 
 
Net income
$ 26,260 
$ 15,133 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
31,620 
30,827 
Amortization of intangibles
11,171 
6,644 
Amortization of deferred grants
(859)
(794)
Impairment losses
 
271 
Unrealized foreign currency transaction (gains) losses, net
4,496 
(646)
Stock-based compensation expense
3,581 
3,111 
Deferred income tax provision (benefit)
(801)
(3,981)
Net (gain) loss on disposal of property and equipment
60 
83 
Bad debt expense
398 
806 
Unrealized (gains) losses on financial instruments, net
201 
(584)
Amortization of deferred loan fees
194 
303 
Loss on sale of discontinued operations
 
10,707 
Other
74 
219 
Changes in assets and liabilities, net of acquisition:
 
 
Receivables
(25,912)
(9,955)
Prepaid expenses
(4,723)
98 
Other current assets
(2,000)
5,198 
Deferred charges and other assets
(938)
(11,568)
Accounts payable
(1,958)
(2,206)
Income taxes receivable / payable
(2,080)
1,950 
Accrued employee compensation and benefits
6,304 
8,842 
Other accrued expenses and current liabilities
337 
7,193 
Deferred revenue
4,011 
2,486 
Other long-term liabilities
1,086 
(8,803)
Net cash provided by operating activities
50,522 
55,334 
Cash flows from investing activities:
 
 
Capital expenditures
(45,647)
(26,355)
Cash paid for business acquisition, net of cash acquired
 
(147,094)
Proceeds from sale of property and equipment
89 
422 
Investment in restricted cash
(262)
(63)
Release of restricted cash
 
356 
Cash divested on sale of discontinued operations
 
(9,100)
Other
 
228 
Net cash (used for) investing activities
(45,820)
(181,606)
Cash flows from financing activities:
 
 
Payments of long-term debt
(18,000)
(10,000)
Proceeds from issuance of long-term debt
32,000 
108,000 
Proceeds from issuance of common stock
59 
 
Cash paid for repurchase of common stock
(5,479)
(7,908)
Proceeds from grants
151 
88 
Shares repurchased for minimum tax withholding on equity awards
(93)
(1,412)
Cash paid for loan fees related to long-term debt
 
(857)
Net cash provided by financing activities
8,638 
87,911 
Effects of exchange rates on cash
(3,927)
3,807 
Net increase (decrease) in cash and cash equivalents
9,413 
(34,554)
Cash and cash equivalents - beginning
187,322 
211,122 
Cash and cash equivalents - ending
196,735 
176,568 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
1,593 
1,726 
Cash paid during period for income taxes
12,304 
25,673 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
4,433 
3,427 
Unrealized gain (loss) on postretirement obligation in accumulated other comprehensive income (loss)
$ (184)
$ 44 
Overview and Basis of Presentation
Overview and Basis of Presentation

Note 1. Overview and Basis of Presentation

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) provides comprehensive outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, financial services, technology/consumer, transportation and leisure, and healthcare industries. SYKES provides flexible, high-quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels encompassing phone, e-mail, 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 In August 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 this business.

Discontinued Operations In March 2012, the Company sold its operations in Spain (the “Spanish operations”), pursuant to an asset purchase agreement dated March 29, 2012 and a stock purchase agreement dated March 30, 2012. The Company reflected the operating results related to the Spanish operations as discontinued operations in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012. Cash flows from discontinued operations are included in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2013. 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, 2012, 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.

Goodwill The Company accounts for goodwill and other intangible assets under Accounting Standards Codification (“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 for impairment at least annually in the third quarter, and more frequently in the presence of certain circumstances. The Company has 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, the Company 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 the Company 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 Company is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. 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 elected to forgo the option to first assess qualitative factors and completed its annual two-step goodwill impairment test during the three months ended September 30, 2013, which included the consideration of certain economic factors, and determined that the fair value of each reporting unit was substantially in excess of its carrying value and goodwill was not impaired.

New Accounting Standards Not Yet Adopted

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

In July 2013, the FASB issued ASU 2013-11 “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). The amendments in ASU 2013-11 indicate that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect the adoption of ASU 2013-11 to materially impact its financial condition, results of operations and cash flows.

New Accounting Standards Recently 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 enhanced 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 (“ASC”) 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 adoption of ASU 2011-11 as of January 1, 2013 did not have a material impact on the financial condition, results of operations and cash flows of the Company. See Note 7, Financial Derivatives, for further information.

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 adoption of ASU 2012-02 on January 1, 2013 did not have a material impact on the financial condition, results of operations and cash flows of the Company. See “Goodwill” in this Note 1 for further information.

In January 2013, the FASB issued ASU 2013-01 “Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The amendments in ASU 2013-01 clarify which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. ASU 2013-01 addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to the financial statement users. In choosing to narrow the scope of the offsetting disclosures, the FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under International Financial Reporting Standards (“IFRS”). The amendments in ASU 2013-01 are effective for fiscal years beginning on or after January 1, 2013. Retrospective application is required for any period presented that begins before the entity’s initial application of the new requirements. The adoption of ASU 2013-01 as of January 1, 2013 did not have a material impact on the financial condition, results of operations and cash flows of the Company. See Note 7, Financial Derivatives, for further information.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 as of January 1, 2013 did not have a material impact on the financial condition, results of operations and cash flows of the Company. See Note 12, Accumulated Other Comprehensive Income (Loss), for further information.

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, an industry leader in the at-home agent space, provides award-winning customer contact management services through a secured and proprietary virtual call center environment with its operations located in the United States (“U.S.”) 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 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 11, Borrowings, for further information.

The Company accounted for the acquisition in accordance with 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. During the three months ended December 31, 2012, the final working capital adjustment was approved by the authorized representative of Alpine’s shareholders. The Company finalized its purchase price allocation during the three months ended December 31, 2012, resulting in no changes from the estimated acquisition date fair values previously reported.

The following table summarizes the final purchase price allocation of the 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 intangible assets as of August 20, 2012, the acquisition date (in thousands):

         Amount Assigned         Weighted Average
  Amortization Period 
(years)
 

Customer relationships

    $ 46,000            

Trade names

     10,600            

Non-compete agreements

     670            

Favorable lease agreement

     450            
  

 

 

   
    $ 57,720            
  

 

 

   

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 purchased was $11.8 million, with a 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 accompanying Condensed Consolidated Statements 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. 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 (in thousands):

 

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

Revenues

    $ 292,580         $ 885,878     

Income from continuing operations, net of taxes

    $ 9,622         $ 24,296     

Income from continuing operations per common share:

    

Basic

    $ 0.22         $ 0.57     

Diluted

    $ 0.22         $ 0.57     

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, 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.

 

Merger and integration costs associated with Alpine were as follows (in thousands):

 

      Three Months Ended September 30,          Nine Months Ended September 30,    
     2013      2012      2013      2012  

Severance costs: (1)

           

Americas

    $ (7)         $ -           $ 526         $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 
     (7)          -            526          -      

Severance costs: (2)

           

Americas

     4           320          985          320    

Corporate

     -            377          159          377    
  

 

 

    

 

 

    

 

 

    

 

 

 
     4           697          1,144          697    

Transaction and integration costs: (2)

           

Corporate

     73           3,045          444          3,095    
  

 

 

    

 

 

    

 

 

    

 

 

 
     73           3,045          444          3,095    
           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total merger and integration costs

    $ 70          $ 3,742         $ 2,114         $ 3,792    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

Included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statements of Operations.

  (2) 

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

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 sold the 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 sold 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 Company reflected the operating results related to the Spanish operations as discontinued operations in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012. Cash flows from discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012. 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 (none in the comparable periods in 2013) (in thousands):

 

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

Revenues

    $ -         $ 10,102     
  

 

 

   

 

 

 

(Loss) from discontinued operations before income taxes

    $ -          $ (820)    

Income taxes (1) 

     -          -       
  

 

 

   

 

 

 

(Loss) from discontinued operations, net of taxes

    $ -          $ (820)    
  

 

 

   

 

 

 

(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.

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 were 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 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 as of September 30, 2013 ($1.9 million at December 31, 2012). The Company recorded $0.5 million of the costs associated with these actions as non-cash impairment charges, while approximately $1.4 million represents cash expenditures for program transfer and facility-related costs, including obligations under the leases, the last of which ends in February 2017. The Company has paid $0.8 million in cash through September 30, 2013 under the Fourth Quarter 2011 Exit Plan in the Americas.

 

The following tables summarize the accrued liability associated with the Americas Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended September 30, 2013 and 2012 (in thousands):

 

     Beginning Accrual 
at July 1, 2013
    Charges
 (Reversals) for the 
Three Months  Ended
September 30, 2013 (1)
        Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at 
September 30, 2013
 

Lease obligations and facility exit costs

   $  606        $ -           $ (53)        $ -           $ 553    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Beginning Accrual 
at July 1, 2012
    Charges
 (Reversals) for the 

Three Months Ended
September 30, 2012 (1)
        Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at 
September 30, 2012
 

Lease obligations and facility exit costs

   $  598        $ 418        $ (281)        $ -           $ 735    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

During 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.

The following tables summarize the accrued liability associated with the Americas Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the nine months ended September 30, 2013 and 2012 (in thousands):

 

     Beginning Accrual 
at January 1, 2013
    Charges
 (Reversals) for the 
Nine Months Ended
September  30, 2013 (1)
        Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at 
September 30, 2013
 

Lease obligations and facility exit costs

   $  682        $ -           $ (129)        $ -           $ 553    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Beginning Accrual 
at January 1, 2012
    Charges
 (Reversals) for the 

Nine Months Ended
September 30, 2012 (1)
        Cash Payments             Other Non-Cash    
Changes
     Ending Accrual at 
September 30, 2012
 

Lease obligations and facility exit costs

   $  -           $ 1,074        $ (339)        $ -           $ 735    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

During 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.

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 $6.7 million as of September 30, 2013 ($6.7 million as of December 31, 2012). The Company recorded $0.5 million of the costs associated with these actions as non-cash impairment charges, while approximately $6.2 million represents cash expenditures for severance and related costs and facility-related costs, primarily rent obligations to be paid through the remainder of the noncancelable term of the leases, the last of which ended in March 2013. The Company has paid $5.9 million in cash through September 30, 2013 under the Fourth Quarter 2011 Exit Plan in EMEA.

 

The following tables summarize the accrued liability associated with EMEA’s Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the three months ended September 30, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at July 1, 2013
     Charges
 (Reversals) for the 
Three Months
Ended September 30,
2013 (1)
       Cash Payments            Other Non-Cash    
Changes (2)
      Ending Accrual at 
September 30, 2013
 

Lease obligations and facility exit costs

    $ -            $ -            $ -            $ -            $ -       

Severance and related costs

     184          (62)                          129    

Legal-related costs

             (5)                            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    $ 189         $ (67)         $ -            $        $ 129    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       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
 

Lease obligations and facility exit costs

    $ 565         $ -               $ (5)         $ 8           $ 568    

Severance and related costs

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

Legal-related costs

             12          (16)          (1)            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

During 2013, the Company reversed accruals related to the final settlement of severance and related costs and legal-related costs for the Amsterdam site, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations. During 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.

The following tables summarize the accrued liability associated with EMEA’s Fourth Quarter 2011 Exit Plan’s exit or disposal activities and related charges for the nine months ended September 30, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
  Nine Months Ended  
September 30, 2013 (1)
       Cash Payments            Other Non-Cash    
Changes (2)
       Ending Accrual at  
September 30, 2013
 

Lease obligations and facility exit costs

    $ -             $ -            $ -            $ -            $   

Severance and related costs

     187          (56)          (8)                  129    

Legal-related costs

     10          (1)          (10)                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    $ 197         $ (57)         $ (18)         $        $ 129    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       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 2013, the Company reversed accruals related to the final settlement of severance and related costs and legal-related costs for the Amsterdam site, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations. Additionally, during 2013 and 2012, the Company recorded additional severance and related costs and legal-related costs.

  (2) 

Effect of foreign currency translation.

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 lease obligations and facility exit costs, severance and related costs and legal-related costs in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2012.

 

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, 2013 ($2.2 million as of December 31, 2012). 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 $1.7 million in cash through September 30, 2013 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, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at July 1, 2013
     Charges
  (Reversals) for the  
Three Months
Ended September 30,
2013
     Cash
    Payments    
       Other Non-Cash  
Changes (1)
       Ending Accrual  
at September 30,
2013
 

Lease obligations and facility exit costs

    $ 356          $ -             $ (145)         $ 9          $ 220     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       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
 

Lease obligations and facility exit costs

    $ 656          $ -             $   (66)         $ 5          $ 595     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

Effect of foreign currency translation.

The following tables summarize the accrued liability associated with the Fourth Quarter 2010 Exit Plan’s exit or disposal activities and related charges during the nine months ended September 30, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at January 1, 2013
     Charges
(Reversals) for the
  Nine Months Ended  
September 30, 2013
     Cash
    Payments    
       Other Non-Cash  
Changes (1)
       Ending Accrual  
at September 30,
2013
 

Lease obligations and facility exit costs

    $ 539          $ -             $ (325)         $        $ 220     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Lease obligations and facility exit costs

    $ 835          $ -             $ (229)         $ (11)         $ 595     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

Effect of foreign currency translation.

 

Third Quarter 2010 Exit Plan

During 2010, consistent with the Company’s long-term goals to manage and optimize capacity utilization, the Company closed or committed to close four customer contact management centers in The Philippines and consolidated or committed to consolidate leased space in our Wilmington, Delaware and Newtown, Pennsylvania locations (the “Third Quarter 2010 Exit Plan”). These actions were substantially completed by January 31, 2011.

The major costs incurred as a result of these actions were impairments of long-lived assets (primarily leasehold improvements) and facility-related costs (primarily consisting of those costs associated with the real estate leases) estimated at $10.5 million as of September 30, 2013 ($10.5 million as of December 31, 2012), 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. 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 $4.7 million in cash through September 30, 2013 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, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at July 1, 2013
     Charges
   (Reversals) for the  
Three Months
Ended September 30,
2013
         Cash Payments              Other Non-Cash    
Changes
       Ending Accrual at  
September 30, 2013
 

Lease obligations and facility exit costs

    $ 2,165          $ -             $ (166)         $ -             $ 1,999     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Lease obligations and facility exit costs

    $ 2,755          $ -             $ (146)         $ -             $ 2,609     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 and 2012 (in thousands):

 

       Beginning Accrual  
at January 1, 2013
     Charges
   (Reversals) for the  
Nine Months Ended
September 30, 2013
         Cash Payments              Other Non-Cash    
Changes (1)
       Ending Accrual at  
September 30, 2013
 

Lease obligations and facility exit costs

    $ 2,551          $ -             $ (550)         $ (2)         $ 1,999    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Lease obligations and facility exit costs

    $ 3,427          $ -             $ (818)         $ -             $ 2,609     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

Effect of foreign currency translation.

 

Restructuring Liability Classification

The following table summarizes the Company’s short-term and long-term accrued liabilities associated with its exit and disposal activities, by plan, as of September 30, 2013 and December 31, 2012 (in thousands):

 

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

September 30, 2013

              

Short-term accrued restructuring liability (1)

    $ 135          $   129          $ 220          $ 497          $ 981     

Long-term accrued restructuring liability (2)

     418           -           -           1,502           1,920     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at September 30, 2013

    $ 553          $ 129          $ 220          $ 1,999          $ 2,901     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Short-term accrued restructuring liability (1)

    $ 138          $ 197          $ 448          $ 618          $ 1,401     

Long-term accrued restructuring liability (2)

     544           -           91           1,933           2,568     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrual at December 31, 2012

    $   682          $ 197          $   539          $   2,551          $   3,969     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

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

  (2) 

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

Fair Value
Fair Value

Note 5. Fair Value

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

 

   

Level 1 Quoted prices for identical instruments in active markets.

   

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

   

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

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

 

   

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

   

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

   

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

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

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

 

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

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

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

Money Market and Open-End Mutual Funds The Company uses quoted market prices in active markets to determine the fair value of money market and open-end mutual funds, which are classified in Level 1 of the fair value hierarchy.

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

Investments Held in Rabbi Trust The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 8, Investments Held in Rabbi Trust, and Note 17, Stock-Based Compensation.

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

 

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

 

        Fair Value Measurements at September 30, 2013 Using:  
          Balance at     Quoted Prices
in Active
Markets For
 Identical Assets 
    Significant
Other
    Observable    
Inputs
    Significant
    Unobservable   
Inputs
 
          September 30, 2013          Level (1)         Level (2)     Level (3)  

Assets:

         

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

  (1)     $ 7,763         $ 7,763         $ -            $     -        

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

  (1)      11          11          -             -        

Foreign currency forward and option contracts

  (2)      2,299          -              2,299          -        

Foreign currency forward contracts

  (3)      500          -              500          -        

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

  (4)      4,628          4,628          -             -        

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

  (4)      1,166          1,166          -             -        

Guaranteed investment certificates

  (5)      80          -              80          -        
   

 

 

   

 

 

   

 

 

   

 

 

 
     $ 16,447         $   13,568         $ 2,879         $ -        
   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Long-term debt

  (6)     $ 105,000         $ -           $ 105,000         $ -        

Foreign currency forward and option contracts

  (7)      4,478          -            4,478          -        
   

 

 

   

 

 

   

 

 

   

 

 

 
     $     109,478         $ -           $   109,478         $ -        
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.

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

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

(6)  The carrying value of long-term debt, including the current portion thereof, approximates its estimated fair value as it re-prices at varying interest rates. See Note 11.

(7)  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, 2012 Using:  
        Balance at     Quoted Prices
in Active
Markets For
 Identical Assets 
    Significant
Other
    Observable    
Inputs
    Significant
    Unobservable   
Inputs
 
           December 31, 2012      Level (1)     Level (2)     Level (3)  

Assets:

         

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

  (1)     $ 7,598         $ 7,598         $ -             $ -        

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

  (1)      11          11          -              -        

Foreign currency forward and option contracts

  (2)      2,008          -              2,008          -        

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

  (3)      3,212          3,212          -              -        

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

  (3)      2,049          2,049          -              -        

Guaranteed investment certificates

  (4)      80          -              80          -        
   

 

 

   

 

 

   

 

 

   

 

 

 
     $ 14,958         $ 12,870         $ 2,088         $ -        
   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Long-term debt

  (5)     $ 91,000         $ -             $ 91,000         $ -        

Foreign currency forward and option contracts

  (6)      974          -              974          -        
   

 

 

   

 

 

   

 

 

   

 

 

 
     $     91,974         $ -             $   91,974         $   -        
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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)  The carrying value of long-term debt, including the current portion thereof, approximates its estimated fair value as it re-prices at varying interest rates. See Note 11.

(6)   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, 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 December 31, 2012 (none at September 30, 2013).

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,  
                 2013                               2012                               2013                               2012               

Americas:

           

Property and equipment, net

    $     -         $  (122)         $     -         $  (271)    
  

 

 

    

 

 

    

 

 

    

 

 

 

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 its customer contact management centers in Costa Rica (a component of the Americas segment), and recorded an impairment charge of $0.1 million for the carrying value of the long-lived assets that could not be redeployed to other locations.

Intangible Assets
Intangible Assets

Note 6.  Intangible Assets

The following table presents the Company’s purchased intangible assets as of September 30, 2013 (in thousands):

 

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

Customer relationships

    $ 103,498          $ (32,943)        $ 70,555           8     

Trade name

     11,600           (2,472)          9,128           8     

Non-compete agreements

     1,224           (929)          295           2     

Proprietary software

     850           (839)          11           2     

Favorable lease agreement

     450           (250)          200           2     
  

 

 

    

 

 

    

 

 

    
    $ 117,622          $ (37,433)         $ 80,189           8     
  

 

 

    

 

 

    

 

 

    

The following table presents the Company’s purchased intangible assets as of December 31, 2012 (in thousands):

 

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

Customer relationships

    $ 104,483          $ (23,552)         $ 80,931           8     

Trade name

     11,600           (1,451)          10,149           8     

Non-compete agreements

     1,229           (681)          548           2     

Proprietary software

     850           (810)          40           2     

Favorable lease agreement

     450           (81)          369           2     
  

 

 

    

 

 

    

 

 

    
    $ 118,612          $ (26,575)         $ 92,037           8     
  

 

 

    

 

 

    

 

 

    

 

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, 2013, is as follows (in thousands):

 

Years Ending December 31,    Amount  

 

 

2013 (remaining three months)

   $                     3,680     

2014

     14,587     

2015

     14,229     

2016

     14,229     

2017

     14,229     

2018

     7,668     

2019 and thereafter

     11,567     
Financial Derivatives
Financial Derivatives

Note 7. Financial Derivatives

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

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

 

      September 30, 2013        December 31, 2012   

Deferred gains (losses) in AOCI

    $ (2,136)         $ (512)    

Tax on deferred gains (losses) in AOCI

     215           (58)    
  

 

 

    

 

 

 

Deferred gains (losses) in AOCI, net of taxes

    $ (1,921)         $ (570)    
  

 

 

    

 

 

 
Deferred gains (losses) expected to be reclassified to “Revenues” from AOCI during the next twelve months     $ (2,450)       
  

 

 

    

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

Net Investment Hedge – During 2013, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, as defined under ASC 815. The Company did not hedge net investments in foreign operations during 2012. The purpose of these derivative instruments is to protect the Company’s interests against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to the Company’s foreign currency-based investments in these subsidiaries.

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 the Company’s interests against adverse foreign currency moves pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies. These contracts generally do not exceed 180 days in duration.

 

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

 

     As of September 30, 2013      As of December 31, 2012  

Contract Type

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

Cash flow hedges: (1)

           

Options:

           

Philippine Pesos

     $ 77,000          December 2014          $ 71,000          September 2013    

Forwards:

           

Philippine Pesos

     62,850          July 2014          5,000          August 2013    

Costa Rican Colones

     44,250          August 2014          60,750          December 2013    

Hungarian Forints

     2,164          January 2014          4,744          January 2014    

Romanian Leis

     2,435          January 2014          6,895          January 2014    

Net investment hedges: (2)

           

Forwards:

           

Euros

     32,657          September 2014                    

Non-designated hedges: (3)

           

Forwards

     70,176          March 2014          41,799          June 2013    

 

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

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

      

      

As of September 30, 2013, the maximum amount of loss due to credit risk that the Company would incur if parties to the financial instruments that make up the concentration failed to perform according to the terms of the contracts was $2.8 million, based on the gross fair value of the financial instruments.

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

 

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

 

     Derivative Assets  
         September 30, 2013              December 31, 2012      
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (1) 

    $ 1,364          $ 1,080     

Foreign currency forward and option contracts (2)

     500           14     
  

 

 

    

 

 

 
     1,864           1,094     

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (1)

     935           914     
  

 

 

    

 

 

 

Total derivative assets

    $ 2,799          $ 2,008     
  

 

 

    

 

 

 
     Derivative Liabilities  
     September 30, 2013      December 31, 2012  
     Fair Value      Fair Value  

Derivatives designated as cash flow hedging instruments under ASC 815:

     

Foreign currency forward and option contracts (3)

    $ 3,184          $ 904     

Foreign currency forward and option contracts (4)

     -             8     
  

 

 

    

 

 

 
     3,184           912     

Derivatives designated as a net investment hedge under ASC 815:

     

Foreign currency forward contracts (3) 

    $ 1,191          $ -       

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts (3)

     103           62     
  

 

 

    

 

 

 

Total derivative liabilities

    $ 4,478          $ 974     
  

 

 

    

 

 

 

 

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

(2)      Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets.

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

(4)       Included in “Other long-term 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, 2013 and 2012 (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,  
           2013                2012               2013                2012                 2013                 2012       
Derivatives designated as cash flow hedging instruments under ASC 815:                  
Foreign currency forward and option contracts     $ 145          $ 127          $ (795)         $ 1,631          $ 125          $ -     
Derivatives designated as net investment hedging instruments under ASC 815:                  

Foreign currency forward contracts

     (1,227)          -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency forward and option contracts

    $ (1,082)         $ 127          $ (795)         $ 1,631          $ 125          $ -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Gain (Loss) Recognized 
in “Other income and

(expense)” on
Derivatives
 
     September 30,  
           2013                 2012       
Derivatives not designated as hedging instruments under ASC 815:      

Foreign currency forward contracts

    $ 546          $ (849)    
  

 

 

    

 

 

 

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, 2013 and 2012 (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,  
           2013                2012               2013                2012                 2013                 2012       
Derivatives designated as cash flow hedging instruments under ASC 815:                  
Foreign currency forward and option contracts     $ (1,599)         $ 4,090          $ 4          $ 2,290          $ 100          $ 17     
Derivatives designated as net investment hedging instruments under ASC 815:                  

Foreign currency forward contracts

     (1,191)          -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency forward and option contracts

    $ (2,790)         $ 4,090          $ 4          $ 2,290          $ 100          $ 17     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Gain (Loss) Recognized 
in “Other income and

(expense)” on
Derivatives
 
     September 30,  
           2013                 2012       

 

Derivatives not designated as hedging instruments under ASC 815:

     

Foreign currency forward contracts

    $ 2,776          $ (1,046)    
  

 

 

    

 

 

 
Investments Held in Rabbi Trust
Investments Held in Rabbi Trust

Note 8.  Investments Held in Rabbi Trust

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

 

     September 30, 2013      December 31, 2012  
               Cost                       Fair Value                      Cost                       Fair Value        

Mutual funds

    $ 4,493          $ 5,794          $ 4,812          $  5,261     
  

 

 

    

 

 

    

 

 

    

 

 

 

The mutual funds held in the rabbi trusts were 80% equity-based and 20% debt-based as of September 30, 2013. 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,  
               2013                           2012                           2013                           2012             

Gross realized gains from sale of trading securities

    $ 27          $ 58          $ 139          $ 139     

Gross realized (losses) from sale of trading securities

     -               -               (8)          (1)    

Dividend and interest income

     (12)          11           6           31     

Net unrealized holding gains (losses)

     293           189           489           353     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income (losses)

    $ 308          $ 258          $ 626          $ 522     
  

 

 

    

 

 

    

 

 

    

 

 

 
Deferred Revenue
Deferred Revenue

Note 9. Deferred Revenue

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

 

       September 30, 2013          December 31, 2012    

Future service

    $ 26,821          $ 25,074     

Estimated potential penalties and holdbacks

     10,366           9,209     
  

 

 

    

 

 

 
    $ 37,187          $ 34,283     
  

 

 

    

 

 

 
Deferred Grants
Deferred Grants

Note 10. Deferred Grants

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

 

       September 30, 2013          December 31, 2012    

Property grants

    $ 6,565          $ 7,270     

Employment grants

     475           337     
  

 

 

    

 

 

 

Total long-term deferred grants (1) 

    $ 7,040          $   7,607     
  

 

 

    

 

 

 

 

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

Amortization of the Company’s property grants included as a reduction to “Depreciation, net” and amortization of the Company’s employment grants are primarily 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,  
                 2013                               2012                               2013                               2012               

Amortization of property grants

     $ 253           $ 235           $ 758           $ 705     

Amortization of employment grants

     33           17           101           89     
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 286           $ 252           $ 859           $ 794     
  

 

 

    

 

 

    

 

 

    

 

 

 
Borrowings
Borrowings

Note 11. Borrowings

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

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

Borrowings consist of the following (in thousands):

 

         September 30, 2013              December 31, 2012      

Revolving credit facility

    $ 105,000          $ 91,000     

Less: Current portion

     -             -       
  

 

 

    

 

 

 

Total long-term debt

    $ 105,000          $ 91,000     
  

 

 

    

 

 

 

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

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

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

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

The 2012 Credit Agreement had $105.0 million of outstanding borrowings as of September 30, 2013, with an average daily utilization of $110.4 million and $102.5 million for the three and nine months ended September 30, 2013, respectively, and $106.1 million for the period outstanding during both the three and nine months ended September 30, 2012. During the three and nine months ended September 30, 2013, the related interest expense, excluding amortization of deferred loan fees, under our credit agreements was $0.4 million and $1.1 million, respectively, which represented a weighted average interest rate of 1.5% and 1.5%, respectively. During the three and nine months ended September 30, 2012, the related interest expense, excluding amortization of deferred loan fees, under our credit agreements was $0.2 million and $0.2 million, respectively, which represented a weighted average interest rate of 1.6% and 1.6%, respectively.

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

Note 12. Accumulated Other Comprehensive Income (Loss)

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

 

     Foreign
Currency
  Translation  
Gain (Loss)
     Unrealized
 Gain (Loss) on 
Net

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

Balance at January 1, 2012

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

Pre-tax amount

     9,516           -             499           4,417           92           14,524     

Tax (provision) benefit

     -             -             (90)          (306)          -             (396)    

Reclassification of (gain) loss to net income

     570           -             (48)          (4,174)          (56)          (3,708)    

Foreign currency translation

     2           -             67           (69)          -             -       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

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

Pre-tax amount

     (3,002)          (1,191)          -             (1,499)          (140)          (5,832)    

Tax (provision) benefit

     -             417           -             384           -             801     

Reclassification of (gain) loss to net income

     -             -             (45)          (217)          (44)          (306)    

Foreign currency translation

     97           -             (78)          (19)          -             -       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

    $ 13,178          $ (3,339)         $ 1,290          $ (1,921)         $ 311          $ 9,519     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

         Three Months Ended    
September 30, 2013
         Nine Months Ended    
September 30, 2013
       Statements of Operations Location  

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

        

Pre-tax amount

     $ 16         $ 45         Direct salaries and related costs

Tax (provision) benefit

     -           -         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     16           45        

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

        

Pre-tax amount

     (670)          104         Revenues

Tax (provision) benefit

     125           113         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     (545)          217        

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

        

Pre-tax amount

     14           44         General and administrative

Tax (provision) benefit

     -           -         Income taxes
  

 

 

    

 

 

    

Reclassification to net income

     14           44        
        
  

 

 

    

 

 

    

Total reclassification to net income

     $ (515)          $ 306        
  

 

 

    

 

 

    

(1) See Note 16, Defined Benefit Pension Plan and Postretirement Benefits, for further information.

(2) See Note 7, Financial Derivatives, for further information.

Except as discussed in Note 13, 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 13. Income Taxes

The Company’s effective tax rate was 24.4% and (3.9)% for the three months ended September 30, 2013 and 2012, respectively. The increase in the effective tax rate is primarily due to the fluctuations in earnings among the various tax jurisdictions in which the Company operates, coupled with tax benefits recognized in 2012 as a result of the Alpine acquisition. The difference between the Company’s effective tax rate of 24.4% 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, adjustments of valuation allowances, changes in unrecognized tax positions and tax credits, offset by the tax impact of permanent differences and foreign withholding taxes.

 

The Company’s effective tax rate was 21.3% and 11.8% for the nine months ended September 30, 2013 and 2012, respectively. The increase in the effective tax rate is primarily due to withholding taxes, the fluctuations in earnings among the various tax jurisdictions in which the Company operates and tax benefits recognized in 2012 as a result of the Alpine acquisition. The difference between the Company’s effective tax rate of 21.3% 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, adjustments of valuation allowances, changes in unrecognized tax positions and tax credits, offset by the tax impact of permanent differences 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 $15.6 million at September 30, 2013 and $16.9 million at December 31, 2012, excluding penalties and interest. The $1.3 million decrease results primarily from 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 “Income Taxes”. Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in nature is not practicable.

In 2013, the Company executed offshore cash movements to take advantage of The American Taxpayer Relief Act of 2012 (the “Act”) passed on January 2, 2013, with retroactive application to January 1, 2012. This Act, which extended the tax provisions of the Internal Revenue Code Section 954(c)(6) through the end of 2013, permits continued tax deferral on such movements that would otherwise be taxable immediately in the U.S. While these cash movements are not taxable in the U.S., related foreign withholding taxes of $2.6 million were included in the provision for income taxes in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2013.

In addition, the U.S. Department of the Treasury released the “General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals” in April 2013. These proposals represent a significant shift in international tax policy, which may materially impact U.S. taxation of international earnings. The Company continues to monitor these proposals and is currently evaluating the potential impact on its financial condition, results of operations and cash flows.

The Company is currently under audit in several tax jurisdictions. In April 2012, the Company received an assessment for the Canadian 2003-2006 audit for which the Company filed a Notice of Objection in July 2012 and paid a mandatory security deposit. Requests for Competent Authority Assistance were filed with both the Canadian Revenue Agency and the U.S. Internal Revenue Service for this audit cycle. The Company is still awaiting the final reassessment for the 2007-2009 audit which will be appropriately challenged when received. In July 2013, the Company received another partial assessment for the 2007-2009 audit cycle resulting in the Company’s payment of an additional security deposit of $0.4 million. This payment increased the total amount of deposits for both audit cycles to $15.1 million. These deposits are included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012. Although the outcome of examinations by taxing authorities is always uncertain, the Company believes it is adequately reserved for these audits and that resolution is not expected to have a material impact on its financial condition and results of operations.

The significant tax jurisdictions currently under audit are as follows:

 

 Tax Jurisdiction    Tax Year Ended 

 

 Canada

   2003 to 2009

 Philippines

   2007 and 2009

 United States

   2010 to 2012
Earnings Per Share
Earnings Per Share

Note 14. Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the respective periods and the further dilutive effect, if any, from stock options, stock appreciation rights, restricted stock, restricted stock units and shares held in a rabbi trust using the treasury stock method.

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                2013                         2012                         2013                         2012          
 

 

 

   

 

 

 

Basic:

       

Weighted average common shares outstanding

    42,785          43,014          42,918          43,130     

Diluted:

       

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

    51          17          30          49     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total weighted average diluted shares outstanding

    42,836          43,031          42,948          43,179     
 

 

 

   

 

 

   

 

 

   

 

 

 
Anti-dilutive shares excluded from the diluted earnings per share calculation     56          -          18          -     
 

 

 

   

 

 

   

 

 

   

 

 

 

On August 18, 2011, the Company’s Board authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). A total of 3.4 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, 2013

     69           $ 16.91           $ 16.99           $ 1,185     

September 30, 2012

     29           $ 14.98           $ 14.98           $ 447     

Nine Months Ended:

           

September 30, 2013

     341           $ 15.61           $ 16.99           $ 5,479     

September 30, 2012

     537           $ 13.85           $ 15.00           $ 7,908     
Commitments and Loss Contingency
Commitments and Loss Contingency

Note 15. Commitments and Loss Contingency

Commitments

During the nine months ended September 30, 2013, 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, 2013 (in thousands):

 

           Amount         

 

 

2013 (remaining three months)

     $ 1,232     

2014

     5,456     

2015

     4,899     

2016

     2,971     

2017

     2,706     

2018

     2,339     

2019 and thereafter

     1,717     
  

 

 

 

Total minimum payments required

     $ 21,320     
  

 

 

 

During the nine months ended September 30, 2013, 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, 2013 (in thousands):

 

           Amount         

 

 

2013 (remaining three months)

     $ 101     

2014

     2,347     

2015

     1,839     

2016

     544     

2017

     -     

2018

     -     

2019 and thereafter

     -     
  

 

 

 

Total minimum payments required

     $ 4,831     
  

 

 

 

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, 2012.

Loss Contingency

The Company from time to time is involved in legal actions arising in the ordinary course of business. With respect to these matters, management believes that the Company has adequate legal defenses and/or provided adequate accruals for related costs 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 16. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                2013                              2012                              2013                          2012          

Service cost

   $ 85         $ 94         $ 252         $ 280     

Interest cost

    28          30          84          90     

Recognized actuarial (gains)

    (15)         (11)         (45)         (35)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 98         $ 113         $ 291         $ 335     
 

 

 

   

 

 

   

 

 

   

 

 

 

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,  
                2013                              2012                              2013                          2012          

401(k) plan contributions

   $ 201         $ 245         $ 679         $ 977     
 

 

 

   

 

 

   

 

 

   

 

 

 

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.

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, 2013         December 31, 2012    

Postretirement benefit obligation

   $ 89         $ 72     

Unrealized gains (losses) in AOCI (1)

   $ 311         $ 495     

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

     

Stock-Based Compensation
Stock-Based Compensation

Note 17. 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,  
                 2013                               2012                             2013                           2012             

Stock-based compensation (expense) (1)

     $ (1,391)            $ (1,250)          $ (3,581)          $ (3,111)    

Income tax benefit (2)

     486           438           1,253           1,089     

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

     -           -           (34)          (278)    

 

  (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, 2013 and December 31, 2012.

2011 Equity Incentive Plan The Company’s Board of Directors (the “Board”) adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the “2011 Plan”) on March 23, 2011, as amended on May 11, 2011 to reduce the number of shares of common stock available to 4.0 million shares. The 2011 Plan was approved by the shareholders at the May 2011 annual shareholders meeting. The 2011 Plan replaced and superseded the Company’s 2001 Equity Incentive Plan (the “2001 Plan”), which expired on March 14, 2011. The outstanding awards granted under the 2001 Plan will remain in effect until their exercise, expiration or termination. The 2011 Plan permits the grant of restricted stock, stock appreciation rights, stock options and other stock-based awards to certain employees of the Company, 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 Compensation and Human Resource Development 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,      
               2013                           2012             

Expected volatility

     45.2%          47.1%    

Weighted-average volatility

     45.2%          47.1%    

Expected dividend rate

     0.0%          0.0%    

Expected term (in years)

     5.0            4.7      

Risk-free rate

     0.8%          0.8%    

 

The following table summarizes SARs activity as of September 30, 2013 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, 2013

    865         $ -         

Granted

    318         $ -         

Exercised

    -           $ -         

Forfeited or expired

    -           $ -         
 

 

 

       

Outstanding at September 30, 2013

    1,183         $ -          7.3         $ 1,558     
 

 

 

   

 

 

   

 

 

   

 

 

 

Vested or expected to vest at September 30, 2013

    1,183         $ -          7.3         $ 1,558     
 

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at September 30, 2013

    648         $ -          5.9         $ 307     
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

        Nine Months Ended September 30,      
              2013                          2012             

Number of SARs granted

    318          259     

Weighted average grant-date fair value per SAR

    $ 6.08          $ 5.97     

Intrinsic value of SARs exercised

    $ -              $ -         

Fair value of SARs vested

    $ 1,298          $ 1,388     

The following table summarizes nonvested SARs activity as of September 30, 2013 and for the nine months then ended:

 

Nonvested Stock Appreciation Rights       Shares (000s)        

Weighted

Average Grant-

  Date Fair Value  

 

 

 

Nonvested at January 1, 2013

    395        $ 6.74     

Granted

    318        $ 6.08     

Vested

    (178)       $ 7.28     

Forfeited or expired

    -          $ -     
 

 

 

   

Nonvested at September 30, 2013

    535        $ 6.17     
 

 

 

   

As of September 30, 2013, there was $2.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested SARs granted under the 2011 Plan and 2001 Plan. This cost is expected to be recognized over a weighted average period of 1.4 years.

Restricted Shares The Company’s Board has approved in the past, and may approve in the future, awards of performance and employment-based restricted shares (“restricted shares”) for eligible participants. In some instances, where the issuance of restricted shares has adverse tax consequences to the recipient, the Board 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 currently outstanding vest one-third on each of the first three anniversaries of the date of grant, provided the participant is employed by the Company on such date.

 

The following table summarizes nonvested restricted shares/RSUs activity as of September 30, 2013 and for the nine months then ended:

 

Nonvested Restricted Shares and RSUs        Shares (000s)         

Weighted

Average Grant-

 Date Fair Value 

 

 

 

Nonvested at January 1, 2013

     872         $ 18.25     

Granted

     706         $ 15.25     

Vested

     (20)        $ 18.11     

Forfeited or expired

     (191)        $ 23.55     
  

 

 

    

Nonvested at September 30, 2013

     1,367         $ 15.96     
  

 

 

    

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,      
                 2013                               2012               

Number of restricted shares/RSUs granted

     706           420     

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

     $ 15.25           $ 15.21     

Fair value of restricted shares/RSUs vested

     $ 366           $ 3,845     

As of September 30, 2013, based on the probability of achieving the performance goals, there was $19.7 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 1.6 years.

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

The 2004 Fee Plan also provides that each non-employee director will receive, on the day after the annual shareholders meeting, an annual retainer for service as a non-employee director (the “Annual Retainer”). Prior to May 17, 2012, the Annual Retainer was $95,000, of which $50,000 was payable in cash, and the remainder was paid in stock. The annual grant of cash vests in four equal quarterly installments, one-fourth on the day following the annual meeting of shareholders, and an additional one-fourth on each successive third monthly anniversary of the date of grant. The annual grant of shares paid to non-employee directors prior to May 17, 2012 vests in eight equal quarterly installments, one-eighth on the day following the annual meeting of shareholders, and an additional one-eighth on each successive third monthly anniversary of the date of grant. On May 17, 2012, upon the recommendation of the Compensation 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.

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

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

The following table summarizes nonvested common stock share award activity as of September 30, 2013 and for the nine months then ended:

 

Nonvested Common Stock Share Awards       Shares (000s)         

Weighted  

Average Grant-  

Date Fair Value  

 

 

 

Nonvested at January 1, 2013

     13         $ 17.18     

Granted

     37         $ 16.01     

Vested

     (31)        $ 16.48     

Forfeited or expired

     -           $ -     
  

 

 

    

Nonvested at September 30, 2013

     19         $ 16.01     
  

 

 

    

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

 

             Nine Months Ended September  30,          
     2013      2012  

Number of share awards granted

     37           42     

Weighted average grant-date fair value per share award

    $ 16.01          $ 16.15     

Fair value of share awards vested

    $ 519          $ 551     

As of September 30, 2013, there was $0.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock share awards granted under the 2004 Fee 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 and amended on March 29, 2006 and 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, executive vice presidents and senior vice presidents and $7,500 per year for vice presidents (participants below the level of vice president are not eligible to receive matching contributions from the Company). Matching contributions and the associated earnings vest over a seven year service period. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds and shares of the Company’s common stock (see Note 8, Investments Held in Rabbi Trust). As of September 30, 2013 and December 31, 2012, liabilities of $5.8 million and $5.3 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 $1.6 million and $1.4 million at September 30, 2013 and December 31, 2012, 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, 2013 and for the nine months then ended:

 

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

 

 

Nonvested at January 1, 2013

     8         $ 16.98     

Granted

     12         $ 16.30     

Vested

     (14)        $ 16.56     

Forfeited or expired

     -           $ -     
  

 

 

    

Nonvested at September 30, 2013

     6         $ 16.56     
  

 

 

    

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,      
     2013      2012  

Number of shares of common stock granted

     12           13     

Weighted average grant-date fair value per common stock

    $ 16.30          $ 15.28     

Fair value of common stock vested

    $ 241          $ 178     

Cash used to settle the obligation

    $ 1,014          $ 263     

As of September 30, 2013, there was $0.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 2.8 years.

Segments and Geographic Information
Segments and Geographic Information

Note 18. 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, 2013:

           

Revenues (2) 

    $ 265,878          $ 56,265             $ 322,143     

Percentage of revenues

     82.5%          17.5%             100.0%    

Depreciation, net (2) 

    $ 9,532          $ 1,145             $