SYKES ENTERPRISES INC, 10-Q filed on 8/9/2011
Quarterly Report
Document and Entity Information (USD $)
6 Months Ended
Jun. 30, 2011
Jul. 29, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
SYKES ENTERPRISES INC 
 
 
Entity Central Index Key
0001010612 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q2 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 580,104,317 
Entity Common Stock, Shares Outstanding
 
47,054,315 
 
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 211,855 
$ 189,829 
Receivables, net
271,101 
248,842 
Prepaid expenses
13,370 
10,704 
Other current assets
22,758 
22,913 
Total current assets
519,084 
472,288 
Property and equipment, net
102,211 
113,703 
Goodwill
124,596 
122,303 
Intangibles, net
49,337 
52,752 
Deferred charges and other assets
33,757 
33,554 
Total assets
828,985 
794,600 
Current liabilities:
 
 
Accounts payable
27,220 
30,635 
Accrued employee compensation and benefits
78,945 
65,267 
Current deferred income tax liabilities
99 
3,347 
Income taxes payable
3,289 
2,605 
Deferred revenue
33,830 
31,255 
Other accrued expenses and current liabilities
25,296 
25,621 
Total current liabilities
168,679 
158,730 
Deferred grants
9,780 
10,807 
Long-term income tax liabilities
27,292 
28,876 
Other long-term liabilities
12,167 
12,992 
Total liabilities
217,918 
211,405 
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 47,056 and 47,066 shares issued, respectively
471 
471 
Additional paid-in capital
302,136 
302,911 
Retained earnings
287,716 
265,676 
Accumulated other comprehensive income
21,885 
15,108 
Treasury stock at cost: 90 shares and 81 shares, respectively
(1,141)
(971)
Total shareholders' equity
611,067 
583,195 
Total liabilities and shareholders' equity
$ 828,985 
$ 794,600 
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data
Jun. 30, 2011
Dec. 31, 2010
Shareholders' equity:
 
 
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
47,056 
47,066 
Treasury stock, shares
90 
81 
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Condensed Consolidated Statements of Operations [Abstract]
 
 
 
 
Revenues
$ 309,914 
$ 288,535 
$ 620,070 
$ 555,117 
Operating expenses:
 
 
 
 
Direct salaries and related costs
208,301 
188,693 
411,989 
360,343 
General and administrative
90,087 
90,075 
180,297 
190,040 
Net (gain) loss on disposal of property and equipment
(3,611)
(20)
(3,443)
38 
Impairment of long-lived assets
 
 
726 
 
Total operating expenses
294,777 
278,748 
589,569 
550,421 
Income from continuing operations
15,137 
9,787 
30,501 
4,696 
Other income (expense):
 
 
 
 
Interest income
314 
268 
601 
500 
Interest (expense)
(457)
(1,520)
(864)
(3,866)
Other (expense)
(340)
(3,590)
(1,833)
(5,019)
Total other income (expense)
(483)
(4,842)
(2,096)
(8,385)
Income (loss) from continuing operations before income taxes
14,654 
4,945 
28,405 
(3,689)
Income taxes
2,683 
966 
3,256 
499 
Income (loss) from continuing operations, net of taxes
11,971 
3,979 
25,149 
(4,188)
(Loss) from discontinued operations, net of taxes
 
(1,434)
 
(2,780)
Net income (loss)
$ 11,971 
$ 2,545 
$ 25,149 
$ (6,968)
Basic:
 
 
 
 
Continuing operations
$ 0.26 
$ 0.09 
$ 0.54 
$ (0.09)
Discontinued operations
 
$ (0.04)
 
$ (0.06)
Net income (loss) per common share
$ 0.26 
$ 0.05 
$ 0.54 
$ (0.15)
Diluted:
 
 
 
 
Continuing operations
$ 0.26 
$ 0.09 
$ 0.54 
$ (0.09)
Discontinued operations
 
$ (0.04)
 
$ (0.06)
Net income (loss) per common share
$ 0.26 
$ 0.05 
$ 0.54 
$ (0.15)
Weighted average shares:
 
 
 
 
Basic
46,241 
46,601 
46,359 
45,604 
Diluted
46,293 
46,648 
46,463 
45,712 
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (USD $)
In Thousands
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Beginning Balance at Dec. 31, 2009
$ 450,674 
$ 418 
$ 166,514 
$ 280,399 
$ 7,819 
$ (4,476)
Beginning Balance, Shares at Dec. 31, 2009
 
41,817 
 
 
 
 
Issuance of common stock
29 
 
29 
 
 
 
Stock-based compensation expense
2,909 
 
2,909 
 
 
 
Excess tax benefit from stock-based compensation
360 
 
360 
 
 
 
Issuance of common stock and restricted stock under equity award plans
(1,282)
(1,135)
 
 
(148)
Issuance of common stock and restricted stock under equity award plans, Shares
 
203 
 
 
 
 
Repurchase of common stock
(5,212)
 
 
 
 
(5,212)
Issuance of common stock for business acquisition
136,673 
57 
136,616 
 
 
 
Issuance of common stock for business acquisition, Shares
 
5,601 
 
 
 
 
Comprehensive income (loss)
(22,702)
 
 
(6,968)
(15,734)
 
Ending Balance at Jun. 30, 2010
561,449 
476 
305,293 
273,431 
(7,915)
(9,836)
Ending Balance, Shares at Jun. 30, 2010
 
47,621 
 
 
 
 
Issuance of common stock
 
 
 
 
Issuance of common stock, Shares
 
 
 
 
 
Stock-based compensation expense
2,026 
 
2,026 
 
 
 
Excess tax benefit from stock-based compensation
(6)
 
(6)
 
 
 
Issuance of common stock and restricted stock under equity award plans
 
52 
 
 
(53)
Issuance of common stock and restricted stock under equity award plans, Shares
 
 
 
 
 
Retirement of treasury stock
 
(6)
(4,462)
(4,450)
 
8,918 
Retirement of treasury stock, Shares
 
(558)
 
 
 
 
Comprehensive income (loss)
19,718 
 
 
(3,305)
23,023 
 
Ending Balance at Dec. 31, 2010
583,195 
471 
302,911 
265,676 
15,108 
(971)
Ending Balance, Shares at Dec. 31, 2010
 
47,066 
 
 
 
 
Stock-based compensation expense
2,613 
 
2,613 
 
 
 
Excess tax benefit from stock-based compensation
35 
 
35 
 
 
 
Issuance of common stock and restricted stock under equity award plans
(1,190)
(1,023)
 
 
(170)
Issuance of common stock and restricted stock under equity award plans, Shares
 
290 
 
 
 
 
Repurchase of common stock
(5,512)
 
 
 
 
(5,512)
Retirement of treasury stock
 
(3)
(2,400)
(3,109)
 
5,512 
Retirement of treasury stock, Shares
 
(300)
 
 
 
 
Comprehensive income (loss)
31,926 
 
 
25,149 
6,777 
 
Ending Balance at Jun. 30, 2011
$ 611,067 
$ 471 
$ 302,136 
$ 287,716 
$ 21,885 
$ (1,141)
Ending Balance, Shares at Jun. 30, 2011
 
47,056 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
6 Months Ended
Jun. 30,
2011
2010
Cash flows from operating activities:
 
 
Net income (loss)
$ 25,149 
$ (6,968)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization, net
28,266 
28,015 
Impairment losses
726 
 
Unrealized foreign currency transaction (gains) losses, net
(2,381)
19 
Stock-based compensation expense
2,613 
2,909 
Excess tax (benefit) from stock-based compensation
(35)
(360)
Deferred income tax (benefit)
(3,563)
(3,981)
Net (gain) loss on disposal of property and equipment
(3,443)
38 
Bad debt expense
244 
36 
Unrealized losses on financial instruments, net
2,000 
2,580 
Increase in valuation allowance on deferred tax assets
 
1,588 
Amortization of deferred loan fees
292 
1,750 
Other
586 
319 
Changes in assets and liabilities, net of acquisition:
 
 
Receivables
(14,909)
6,327 
Prepaid expenses
(2,179)
(1,581)
Other current assets
(2,360)
(10,623)
Deferred charges and other assets
(471)
(714)
Accounts payable
(3,986)
(2,394)
Income taxes receivable / payable
120 
(5,876)
Accrued employee compensation and benefits
11,828 
2,870 
Other accrued expenses and current liabilities
(2,576)
(3,806)
Deferred revenue
1,685 
314 
Other long-term liabilities
(3,558)
(142)
Net cash provided by operating activities
34,048 
10,320 
Cash flows from investing activities:
 
 
Capital expenditures
(13,367)
(13,470)
Cash paid for business acquisition, net of cash acquired
 
(77,174)
Proceeds from sale of property and equipment
3,923 
41 
Investment in restricted cash
(30)
(108)
Release of restricted cash
 
80,000 
Proceeds from insurance settlement
500 
 
Net cash (used for) investing activities
(8,974)
(10,711)
Cash flows from financing activities:
 
 
Payment of long-term debt
 
(22,500)
Proceeds from issuance of long-term debt
 
75,000 
Proceeds from issuance of stock
 
29 
Excess tax benefit from stock-based compensation
35 
360 
Cash paid for repurchase of common stock
(5,512)
(5,212)
Proceeds from grants
 
15 
Payments on short-term debt
 
(85,000)
Shares repurchased for minimum tax withholding on equity awards
(1,190)
(1,282)
Cash paid for loan fees related to debt
 
(3,035)
Net cash (used for) financing activities
(6,667)
(41,625)
Effects of exchange rates on cash
3,619 
(13,058)
Net increase (decrease) in cash and cash equivalents
22,026 
(55,074)
Cash and cash equivalents - beginning
189,829 
279,853 
Cash and cash equivalents - ending
211,855 
224,779 
Supplemental disclosures of cash flow information:
 
 
Cash paid during period for interest
521 
1,968 
Cash paid during period for income taxes
12,090 
13,107 
Non-cash transactions:
 
 
Property and equipment additions in accounts payable
2,055 
1,672 
Unrealized gain on postretirement obligation in accumulated other comprehensive income (loss)
24 
119 
Issuance of common stock for business acquisition
 
$ 136,673 
Business, Basis of Presentation and Summary of Significant Accounting Policies
Business, Basis of Presentation and Summary of Significant Accounting Policies
Note 1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) provides outsourced customer contact management solutions and services in the business process outsourcing arena to companies, primarily within the communications, financial services, technology/consumer, transportation and leisure, healthcare and other industries. SYKES provides flexible, high-quality outsourced customer contact management services (with an emphasis on inbound technical support and customer service), which includes customer assistance, healthcare and roadside assistance, technical support and product sales to its clients’ customers. Utilizing SYKES’ integrated onshore/offshore global delivery model, SYKES provides its services through multiple communication channels encompassing phone, e-mail, Internet, text messaging and chat. SYKES complements its outsourced customer contact management services with various enterprise support services in the United States that encompass services for a company’s internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services including multilingual sales order processing via the Internet and phone, payment processing, inventory control, product delivery and product returns handling. The Company has operations in two reportable segments entitled (1) the Americas, which includes the United States, Canada, Latin America, India and the Asia Pacific Rim, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs; and (2) EMEA, which includes Europe, the Middle East and Africa.
On February 2, 2010, the Company completed the acquisition of ICT Group Inc. (“ICT”), pursuant to the Agreement and Plan of Merger, dated October 5, 2009. The Company has reflected the operating results in the Condensed Consolidated Statements of Operations since February 2, 2010. See Note 2, Acquisition of ICT, for additional information on the acquisition of this business.
In December 2010, the Company sold its Argentine operations, pursuant to stock purchase agreements, dated December 16, 2010 and December 29, 2010. The Company reflected the operating results related to the Argentine operations as discontinued operations in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2010. Cash flows from discontinued operations are included in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010. See Note 3, Discontinued Operations, for additional information on the sale of the Argentine operations.
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2011. 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, 2010, as filed with the Securities and Exchange Commission (“SEC”). Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the Condensed Consolidated Financial Statements.
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.
Recognition of Revenue Revenue is recognized in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 605 “Revenue Recognition.” The Company primarily recognizes its revenues from services as those services are performed, which is based on either a per minute, per hour, per call or per transaction basis, under a fully executed contractual agreement and records reductions to revenues for contractual penalties and holdbacks for failure to meet specified minimum service levels and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of any future product or service or meeting other specified performance conditions. Product sales, accounted for within fulfillment services, are recognized upon shipment to the customer and satisfaction of all obligations.
In accordance with ASC 605-25 (“ASC 605-25”), “Revenue Recognition - Multiple-Element Arrangements”, revenue from contracts with multiple-deliverables is allocated to separate units of accounting based on their relative fair value, if the deliverables in the contract(s) meet the criteria for such treatment. Certain fulfillment services contracts contain multiple-deliverables. Separation criteria includes whether a delivered item has value to the customer on a stand-alone basis, whether there is objective and reliable evidence of the fair value of the undelivered items and, if the arrangement includes a general right of return related to a delivered item, whether delivery of the undelivered item is considered probable and in the Company’s control. Fair value is the price of a deliverable when it is regularly sold on a stand-alone basis, which generally consists of vendor-specific objective evidence of fair value. If there is no evidence of the fair value for a delivered product or service, revenue is allocated first to the fair value of the undelivered product or service and then the residual revenue is allocated to the delivered product or service. If there is no evidence of the fair value for an undelivered product or service, the contract(s) is accounted for as a single unit of accounting, resulting in delay of revenue recognition for the delivered product or service until the undelivered product or service portion of the contract is complete. The Company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding client acceptance are resolved, and there are no client-negotiated refund or return rights affecting the revenue recognized for delivered elements. Once the Company determines the allocation of revenues between deliverable elements, there are no further changes in the revenue allocation. If the separation criteria are met, revenues from these services are recognized as the services are performed under a fully executed contractual agreement. If the separation criteria are not met because there is insufficient evidence to determine fair value of one of the deliverables, all of the services are accounted for as a single combined unit of accounting. For deliverables with insufficient evidence to determine fair value, revenue is recognized on the proportional performance method using the straight-line basis over the contract period, or the actual number of operational seats used to serve the client, as appropriate. As of June 30, 2011, the Company’s fulfillment contracts with multiple-deliverables met the separation criteria as outlined in ASC 605-25 and the revenue was accounted for accordingly. The Company has no other contracts that contain multiple-deliverables as of June 30, 2011.
In October 2009, the Financial Accounting Standards Board amended the accounting standards for certain multiple-deliverable revenue arrangements. The Company adopted this guidance on a prospective basis for applicable transactions originated or materially modified since January 1, 2011, the adoption date. Since there were no such transactions executed or materially modified since adoption on January 1, 2011, there was no impact on the Company’s financial condition, results of operations and cash flows. The amended standard:
    updates guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
 
    requires an entity to allocate revenue in an arrangement using the best estimated selling price of deliverables if a vendor does not have vendor-specific objective evidence of selling price or third-party evidence of selling price; and
 
    eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method.
Goodwill The Company accounts for goodwill and other intangible assets under ASC 350 (“ASC 350”) “Intangibles — Goodwill and Other.” The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time. Goodwill and other intangible assets with indefinite lives are not subject to amortization, but instead must be reviewed at least annually, and more frequently in the presence of certain circumstances, for impairment by applying a fair value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values, as appropriate, 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. As of June 30, 2011, there were no indications of impairment, as outlined in ASC 350. The Company expects to receive future benefits from previously acquired goodwill over an indefinite period of time.
Intangible Assets — Intangible assets, primarily customer relationships, trade names, existing technologies and covenants not to compete, are amortized using the straight-line method over their estimated useful lives which approximate the pattern in which the economic benefits of the assets are consumed. The Company periodically evaluates the recoverability of intangible assets and takes into account events or changes in circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Fair value for intangible assets is based on discounted cash flows, market multiples and/or appraised values as appropriate. The Company does not have intangible assets with indefinite lives. As of June 30, 2011, there were no indications of impairment, as outlined by ASC 350.
Income Taxes The Company accounts for income taxes under ASC 740 (“ASC 740”) “Income Taxes” which requires recognition of deferred tax assets and liabilities to reflect tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the accompanying Consolidated Financial Statements. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that the deferred tax assets will not be realized in accordance with the criteria of ASC 740. Valuation allowances are established against deferred tax assets due to an uncertainty of realization. Valuation allowances are reviewed each period on a tax jurisdiction by tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence, in accordance with criteria of ASC 740, to support a change in judgment about the realizability of the related deferred tax assets. Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions.
The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions in accordance with ASC 740. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying Condensed Consolidated Financial Statements.
Self-Insurance Programs The Company self-insures for certain levels of workers’ compensation and, as of January 1, 2011, began self-funding the medical, prescription drug and dental benefit plans in the United States. Estimated costs of this self-insurance program are accrued at the projected settlements for known and anticipated claims.
The Company’s self-insurance liabilities included in the accompanying Condensed Consolidated Balance Sheets consist of the following (in thousands):
                 
    June 30,     December 31,  
    2011     2010  
Self-insurance liability — short-term (1)
   $ 2,275      $ 117  
Self-insurance liability — long-term (2)
    68       68  
 
       
 
  $ 2,343     $ 185  
 
       
 
(1)   Included in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.
 
(2)   Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Deferred Grants Recognition of income associated with grants for land and the acquisition of property, buildings and equipment (together, “property grants”) is deferred until after the completion and occupancy of the building and title has passed to the Company, and the funds have been released from escrow. The deferred amounts for both land and building are amortized and recognized as a reduction of depreciation expense included within general and administrative costs over the corresponding useful lives of the related assets. Amounts received in excess of the cost of the building are allocated to the cost of equipment and, only after the grants are released from escrow, recognized as a reduction of depreciation expense over the weighted average useful life of the related equipment, which approximates five years.
The Company receives government employment grants, primarily in the U.S., Ireland and Canada, as an incentive to create and maintain permanent employment positions for a specified time period. The grants are repayable, under certain terms and conditions, if the Company’s relevant employment levels do not meet or exceed the employment levels set forth in the grant agreements. Accordingly, grant monies received are deferred and amortized using the proportionate performance model over the required employment period. Upon sale of the related facilities, any deferred grant balance is recognized in full and is included in the gain on sale of property and equipment.
The Company’s deferred grants included in the accompanying Condensed Consolidated Balance Sheets consist of the following (in thousands):
                 
    June 30,   December 31,
    2011   2010
Property grants (1)
  $ 8,678     $ 9,787  
Employee grants — short-term (2)
    1,749       1,652  
Employee grants — long-term (1)
    1,102       1,020  
 
       
 
  $ 11,529     $ 12,459  
 
       
 
(1)   Included in “Deferred grants” in the accompanying Condensed Consolidated Balance Sheets.
 
(2)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Amortization of the Company’s deferred grants included as a reduction to “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations consist of the following (in thousands):
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
Amortization of property grants
  $ 235     $ 262     $ 488     $ 523  
Amortization of employment grants
    18       11       36       20  
 
               
 
  $ 253     $ 273     $ 524     $ 543  
 
               
Stock-Based Compensation — The Company has three stock-based compensation plans: the 2011 Equity Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan (for non-employee directors), approved by the shareholders, and the Deferred Compensation Plan (for certain eligible employees). All of these plans are discussed more fully in Note 17, Stock-Based Compensation. Stock-based awards under these plans may consist of common stock, common stock units, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock and treasury stock to satisfy stock option exercises or vesting of stock awards.
In accordance with ASC 718 (“ASC 718”) “Compensation — Stock Compensation”, the Company recognizes in its Consolidated Statements of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Compensation expense for equity-based awards is recognized over the requisite service period, usually the vesting period, while compensation expense for liability-based awards (those usually settled in cash rather than stock) is re-measured to fair value at each balance sheet date until the awards are settled.
Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
   
Cash, Short-Term and Other Investments, Investments Held in Rabbi Trusts and Accounts Payable. The carrying values for cash, short-term and other investments, investments held in rabbi trusts and accounts payable approximate their fair values.
   
Forward Currency Forward Contracts and Options. Forward currency forward contracts and options, including premiums paid on options, are recognized at fair value based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk.
Fair Value Measurements - A description of the Company’s policies regarding fair value measurement, in accordance with the provisions of ASC 820 (“ASC 820”) “Fair Value Measurements and Disclosures,” is summarized below.
Fair Value Hierarchy ASC 820-10-35 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:
   
Level 1 — Quoted prices for identical instruments in active markets.
 
   
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
 
   
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Determination of Fair Value - The Company generally uses quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access to determine fair value, and classifies such items in Level 1. Fair values determined by Level 2 inputs utilize inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, and inputs other than quoted market prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, etc. Assets or liabilities valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
The following section describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.
Money Market and Open-End Mutual Funds - The Company uses quoted market prices in active markets to determine the fair value of money market and open-end mutual funds, which are classified in Level 1 of the fair value hierarchy.
Foreign Currency Forward Contracts and Options - The Company enters into foreign currency forward contracts and options over the counter and values such contracts using quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions, including adjustments for credit risk. The key inputs include forward or option foreign currency exchange rates and interest rates. These items are classified in Level 2 of the fair value hierarchy.
Investments Held in Rabbi Trusts - The investment assets of the rabbi trusts are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 8, Investments Held in Rabbi Trusts, and Note 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.
ASC 825 (“ASC 825”) “Financial Instruments” permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company has not elected to use the fair value option permitted under ASC 825 for any of its financial assets and financial liabilities that are not already recorded at fair value.
Foreign Currency Translation The assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income, but is included in “Accumulated other comprehensive income (loss)” (“AOCI”), which is reflected as a separate component of shareholders’ equity until the sale or until the complete or substantially complete liquidation of the net investment in the foreign subsidiary. Foreign currency transactional gains and losses are included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations.
Foreign Currency and Derivative Instruments The Company accounts for financial derivative instruments under ASC 815 (“ASC 815”) “Derivatives and Hedging”. The Company generally utilizes non-deliverable forward contracts and options expiring within one to 24 months to reduce its foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in non-functional foreign currencies and net investments in foreign operations. In using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to counterparty credit risk.
The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (2) a hedge of a net investment in a foreign operation; or (3) a derivative that does not qualify for hedge accounting. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge.
Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in AOCI, until the forecasted underlying transactions occur. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction within “Revenues”. Changes in the fair value of derivatives that are highly effective and designated as a net investment hedge are recorded in cumulative translation adjustment in AOCI, offsetting the change in cumulative translation adjustment attributable to the hedged portion of the Company’s net investment in the foreign operation. Any unrealized gains and losses from settlements of the net investment hedge remain in AOCI until partial or complete liquidation of the net investment. Ineffectiveness is measured based on the change in fair value of the forward contracts and options and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged. Hedge ineffectiveness is recognized within “Revenues” for cash flow hedges and within “Other income (expense)” for net investment hedges. Cash flows from the derivative contracts are classified within the operating section in the accompanying Condensed Consolidated Statements of Cash Flows.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective on a prospective and retrospective basis. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge or if a forecasted hedge is no longer probable of occurring, the Company discontinues hedge accounting prospectively. At June 30, 2011 and December 31, 2010, all hedges were determined to be highly effective.
The Company also periodically enters into forward contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to reduce the effects from fluctuations caused by volatility in currency exchange rates on the Company’s operating results and cash flows. All changes in the fair value of the derivative instruments are included in “Other income (expense)”. See Note 7, Financial Derivatives, for further information on financial derivative instruments.
New Accounting Standards Not Yet Adopted
In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04 (“ASU 2011-04”) “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this amendment to materially impact its financial condition, results of operations and cash flows.
In June 2011, the FASB issued ASU 2011-05 (“ASU 2011-05”) “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income”. The amendments in ASU 2011-05 require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in ASU 2011-05 are to be applied retrospectively and are effective during interim and annual periods beginning after December 15, 2011, and may be early adopted. The Company is currently evaluating the impact of ASU 2011-05 on its financial statement presentation of comprehensive income.
Acquisition of ICT
Acquisition of ICT
Note 2. Acquisition of ICT
On February 2, 2010, the Company acquired 100% of the outstanding common shares and voting interest of ICT through a merger of ICT with and into a subsidiary of the Company. ICT provides outsourced customer management and business process outsourcing solutions with its operations located in the United States, Canada, Europe, Latin America, India, Australia and the Philippines. The results of ICT’s operations have been included in the Company’s Condensed Consolidated Financial Statements since its acquisition on February 2, 2010. The Company acquired ICT to expand and complement its global footprint, provide entry into additional vertical markets, and increase revenues to enhance its ability to leverage the Company’s infrastructure to produce improved sustainable operating margins. This resulted in the Company paying a substantial premium for ICT resulting in recognition of goodwill.
The acquisition date fair value of the consideration transferred totaled $277.8 million, which consisted of the following (in thousands):
         
    Total
Cash
   $ 141,161  
Common stock
    136,673  
 
   
 
   $ 277,834  
 
   
The fair value of the 5.6 million common shares issued was determined based on the Company’s closing share price of $24.40 on the acquisition date.
The cash portion of the acquisition was funded through borrowings consisting of a $75 million short-term loan from KeyBank and a $75 million Term Loan, which were paid off in March 2010 and July 2010, respectively. 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 ICT based on their estimated fair values as of the closing date. The Company finalized its purchase price allocation during the quarter ended December 31, 2010. The following table summarizes the estimated acquisition date fair values of the assets acquired and liabilities assumed, the measurement period adjustments that occurred during the quarter ended December 31, 2010 and the final purchase price allocation as of February 2, 2010 (in thousands):
                         
    February 2, 2010     Measurement     February 2,  
    (As initially     Period     2010 (As  
    reported)   Adjustments   adjusted)
Cash and cash equivalents
  $ 63,987     $ -     $ 63,987  
Receivables
    75,890       -       75,890  
Income tax receivable
    2,844       (1,941 )     903  
Prepaid expenses
    4,846       -       4,846  
Other current assets
    4,950       149       5,099  
 
           
Total current assets
    152,517       (1,792 )     150,725  
Property and equipment
    57,910       -       57,910  
Goodwill
    90,123       7,647       97,770  
Intangibles
    60,310       -       60,310  
Deferred charges and other assets
    7,978       (3,965 )     4,013  
 
Short-term debt
    (10,000 )     -       (10,000 )
Accounts payable
    (12,412 )     (168 )     (12,580 )
Accrued employee compensation and benefits
    (23,873 )     (1,309 )     (25,182 )
Income taxes payable
    (2,451 )     2,013       (438 )
Other accrued expenses and current liabilities
    (10,951 )     (464 )     (11,415 )
 
           
Total current liabilities
    (59,687 )     72       (59,615 )
Deferred grants
    (706 )     -       (706 )
Long-term income tax liabilities
    (5,573 )     (19,924 )     (25,497 )
Other long-term liabilities (1)
    (25,038 )     17,962       (7,076 )
 
           
 
  $ 277,834     $ -     $ 277,834  
 
           
 
(1)  
Includes primarily long-term deferred tax liabilities.
The above fair values of assets acquired and liabilities assumed were based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. The measurement period adjustments relate primarily to unrecognized tax benefits and related offsets, tax liabilities relating to the determination as of the date of the ICT acquisition that the Company intended to distribute a majority of the accumulated and undistributed earnings of the ICT Philippine subsidiary and its direct parent, ICT Group Netherlands B.V. to SYKES, its ultimate U.S. parent, and certain accrual adjustments related to labor and benefit costs in Argentina. The measurement period adjustments were completed as of December 31, 2010.
The $97.8 million of goodwill was assigned to the Company’s Americas and EMEA operating segments in the amount of $97.7 million and $0.1 million, respectively. The goodwill recognized is attributable primarily to synergies the Company expects to achieve as the acquisition increases the opportunity for sustained long-term operating margin expansion by leveraging general and administrative expenses over a larger revenue base. Pursuant to federal income tax regulations, the ICT acquisition was considered to be a non-taxable transaction; therefore, no amount of intangibles or goodwill from this acquisition will be deductible for tax purposes. The fair value of receivables acquired is $75.9 million, with the gross contractual amount being $76.4 million, of which $0.5 million was not expected to be collected.
Total net assets acquired (liabilities assumed) by operating segment as of February 2, 2010, the acquisition date, were as follows (in thousands):
                                 
    Americas   EMEA   Other   Consolidated
Net assets (liabilities)
  $ 278,703     $ (869 )   $ -     $ 277,834  
 
               
Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. The following table presents the Company’s purchased intangibles assets as of February 2, 2010, the acquisition date (in thousands):
                 
            Weighted
            Average
    Amount   Amortization
    Assigned   Period (years)
Customer relationships
  $ 57,900       8  
Trade name
    1,000       3  
Proprietary software
    850       2  
Non-compete agreements
    560       1  
 
           
 
  $ 60,310       8  
 
           
After the ICT acquisition in February, 2010, the Company paid off the $10.0 million outstanding balance plus accrued interest of the ICT short-term debt assumed upon acquisition. The related interest expense included in “Interest expense” in the accompanying Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2010 was not material.
The Company’s Condensed Consolidated Statement of Operations for the three months ended June 30, 2010 includes ICT revenues from continuing operations of $96.5 million and the ICT net loss from continuing operations of $(1.4) million. The Company’s Condensed Consolidated Statement of Operations for the six months ended June 30, 2010 includes ICT revenues from continuing operations of $160.2 million and the ICT net loss from continuing operations of $(14.6) million from the February 2, 2010 acquisition date through June 30, 2010.
The following table presents the unaudited pro forma combined revenues and net earnings as if ICT had been included in the consolidated results of the Company for the three and six months ended June 30, 2010. The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on January 1, 2010 (in thousands):
                 
    Three Months   Six Months
    Ended   Ended
    June 30,
2010
  June 30,
2010
Revenues
  $ 288,535     $ 595,245  
Income from continuing operations, net of taxes
  $ 5,839     $ 17,642  
Income from continuing operations per common share:
               
Basic
  $ 0.13     $ 0.38  
Diluted
  $ 0.13     $ 0.38  
These amounts have been calculated to reflect the additional depreciation, amortization, and interest expense that would have been incurred assuming the fair value adjustments and borrowings occurred on January 1, 2010, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies operating results. Included in these costs are severance, advisory and legal costs, net of the consequential tax effects.
The following table presents acquisition-related costs included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (in thousands):
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
Severance costs:
                               
Americas
   $ -      $ 411      $ -      $ 1,261  
Corporate
    -       1,330       126       13,926  
 
               
 
    -       1,741       126       15,187  
 
                               
Lease termination and other costs: (1)
                               
Americas
    29       -       249       -  
EMEA
    453       -       523       -  
 
               
 
    482       -       772       -  
 
                               
Transaction and integration costs:
                               
Corporate
    -       1,022       13       8,676  
 
               
 
    -       1,022       13       8,676  
 
                               
Depreciation and amortization: (2)
                               
Americas
    2,994       3,235       6,052       5,388  
EMEA
    -       9       -       15  
 
               
 
    2,994       3,244       6,052       5,403  
 
                               
 
               
Total acquisition-related costs
  $ 3,476     $ 6,007     $ 6,963     $ 29,266  
 
               
     
(1)   Amounts related to the Third Quarter 2010 Exit Plan and the Fourth Quarter 2010 Exit Plan. See Note 4.
 
(2)   Depreciation resulted from the adjustment to fair values of the acquired property and equipment and amortization of the fair values of the acquired intangibles.
Discontinued Operations
Discontinued Operations
Note 3. Discontinued Operations
In December 2010, the Board of Directors of SYKES, upon the recommendation of its Finance Committee, sold its Argentine operations, which were operated through two Argentine subsidiaries: Centro Interaccion Multimedia S.A. (“CIMSA”) and ICT Services of Argentina, S.A. (“ICT Argentina”), together the “Argentine operations.” CIMSA and ICT Argentina were offshore contact centers providing contact center services through a total of three centers in Argentina to clients in the United States and in the Republic of Argentina. The decision to exit Argentina was made due to surging costs, primarily chronic wage increases, which dramatically reduced the appeal of the Argentina footprint among the Company’s existing and new global clients and thus the overall future profitability of the Argentine operations. As these were stock transactions, the Company has no future obligation with regard to the Argentine operations and there are no material post closing obligations.
As a result of the sale of the Argentine operations, the operating results related to the Argentine operations have been reflected as discontinued operations in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2010. This business was historically reported by the Company as part of the Americas segment.
The results of the Argentine operations included in discontinued operations were as follows (in thousands):
                 
    Three Months   Six Months
    Ended   Ended
    June 30,
2010
  June 30,
2010
Revenues
  $ 10,642     $ 19,277  
 
       
 
               
(Loss) from discontinued operations before income taxes
   $ (1,434 )    $ (2,780 )
Income taxes (1)
    -       -  
 
       
(Loss) from discontinued operations, net of taxes
  $ (1,434 )   $ (2,780 )
 
       
 
(1)   There were no income taxes on the loss from discontinued operations 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
Third Quarter 2010 Exit Plan
During the quarter ended September 30, 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 in response to the facilities consolidation and capacity rationalization related to the ICT acquisition, enabling the Company to reduce operating costs by eliminating redundant space and to optimize capacity utilization rates where overlap exists. There are no employees affected by 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 are impairments of long-lived assets (primarily leasehold improvements) and facility-related costs (primarily consisting of those costs associated with the real estate leases) estimated at $11.0 million as of June 30, 2011 ($10.0 million as of December 31, 2010), all of which are in the Americas segment. The increase of $0.1 million and $1.0 million during the three and six months ended June 30, 2011, respectively, is primarily due to the change in assumptions related to the redeployment of property and equipment and a change in estimate of lease termination costs. The Company recorded $3.8 million of the costs associated with the Third Quarter 2010 Exit Plan as non-cash impairment charges, of which $0.7 million is included in “Impairment of long-lived assets” in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2011 (see Note 5, Fair Value, for further information). The remaining $7.2 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 $2.1 million in cash through June 30, 2011 related to these facility-related costs.
The following table summarizes the 2011 accrued liability associated with the Third Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the three months ended June 30, 2011:
                                                                 
            Charges for the                                        
    Beginning     three months             Other Non-     Ending Accrual                    
    Accrual at     ended June 30,     Cash     Cash     at June 30,                    
    April 1, 2011     2011(1)     Payments     Changes(2)     2011     Short-term(3)     Long-term(4)     Total  
Lease obligations and facility exit costs
  $ 5,619     $ 29     $ (602 )   $ 3     $ 5,049     $ 2,043     $ 3,006     $ 5,049  
 
                               
     
(1)   During the three months ended June 30, 2011, the Company recorded less additional lease termination costs related to one of the Philippine customer contact management centers, which is included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.
 
(2)   Effect of foreign currency translation.
 
(3)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet.
 
(4)   Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet.
The following table summarizes the 2011 accrued liability associated with the Third Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the six months ended June 30, 2011:
                                         
    Beginning     Charges for the                      
    Accrual at     Six Months             Other Non-     Ending Accrual  
    January 1,     Ended June 30,     Cash     Cash     at June 30,  
    2011     2011(1)     Payments     Changes(2)     2011  
Lease obligations and facility exit costs
  $ 6,141     $ 249     $ (1,344 )   $ 3     $ 5,049  
 
                   
     
(1)   During the six months ended June 30, 2011, the Company recorded additional lease termination costs, which is included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.
 
(2)   Effect of foreign currency translation.
Fourth Quarter 2010 Exit Plan
During the quarter ended December 31, 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 further enabled the Company to reduce operating costs by eliminating additional redundant space and to optimize capacity utilization rates where overlap exists. These actions were substantially completed by January 31, 2011. None of the revenues from the United Kingdom or Ireland facilities, which were approximately $1.3 million on an annualized basis, were captured and migrated to other facilities within the region. Loss from operations of the United Kingdom and Ireland are not material to the consolidated income (loss) from continuing operations; therefore, their results of operations have not been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations.
The major costs incurred as a result of these actions are facility-related costs (primarily consisting of those costs associated with the real estate leases), impairments of long-lived assets (primarily leasehold improvements and equipment) and severance-related costs totaling $2.6 million as of June 30, 2011 ($2.1 million as of December 31, 2010). This increase of $0.5 million included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations during the three and six months ended June 30, 2011 is primarily due to the change in estimate of lease termination costs. The Company recorded $0.2 million of the costs associated with the Fourth Quarter 2010 Exit Plan as non-cash impairment charges. Approximately $2.2 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 $0.8 million in cash through June 30, 2011 of the facility-related and severance-related costs.
The following table summarizes the 2011 accrued liability associated with the Fourth Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the three months ended June 30, 2011:
                                                                 
            Charges for                                        
            the Three                                        
    Beginning     Months             Other Non-     Ending Accrual                    
    Accrual at April 1,     Ended June 30,     Cash     Cash     at June 30,                    
    2011     2011(1)     Payments     Changes(2)     2011     Short-term(3)     Long-term(4)     Total  
Lease obligations and facility exit costs
  $ 1,452     $ 453     $ (274 )   $ 21     $ 1,652     $ 937     $ 715     $ 1,652  
 
                               
     
(1)   During the three months ended June 30, 2011, the Company recorded additional lease termination costs related to the U.K. customer contact management center, which is included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.
 
(2)   Effect of foreign currency translation.
 
(3)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet.
 
(4)   Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet.
The following table summarizes the 2011 accrued liability associated with the Fourth Quarter 2010 Exit Plan’s exit or disposal activities and related charges for the six months ended June 30, 2011:
                                         
            Charges for                      
    Beginning     the Six                      
    Accrual at     Months             Other Non-     Ending Accrual  
    January 1,     Ended June 30,     Cash     Cash     at June 30,  
    2011     2011(1)     Payments     Changes(2)     2011  
Lease obligations and facility exit costs
  $ 1,711     $ 523     $ (661 )   $ 79     $ 1,652  
 
                   
     
(1)   During the six months ended June 30, 2011, the Company recorded additional lease termination costs, which are included in “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.
 
(2)   Effect of foreign currency translation.
ICT Restructuring Plan
As of February 2, 2010, the Company assumed the liabilities of ICT, including restructuring accruals in connection with ICT’s plans to reduce its overall cost structure and adapt to changing economic conditions by closing various customer contact management centers in Europe and Canada prior to the end of their existing lease terms (the “ICT Restructuring Plan”). These restructuring accruals, which related to ongoing lease and other contractual obligations, are expected to be paid by the end of December 2011. Since acquiring ICT in February 2010, the Company has paid $1.4 million in cash through June 30, 2011 related to the ICT Restructuring Plan.
The following table summarizes the 2011 accrued liability associated with the ICT Restructuring Plan’s exit or disposal activities for the three months ended June 30, 2011:
                                                                 
            Charges for                                        
            the Three                                        
    Beginning     Months             Other Non-     Ending Accrual                    
    Accrual at April 1,     Ended June 30,     Cash     Cash     at June 30,                    
    2011     2011     Payments     Changes(1)     2011     Short-term(2)     Long-term(3)     Total  
Lease obligations and facility exit costs
  $ 817     $ -     $ (270 )   $ (40 )   $ 507     $ 507     $ -     $ 507  
 
                               
     
(1)   Effect of foreign currency translation.
 
(2)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet.
 
(3)   Included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet.
The following table summarizes the 2011 accrued liability associated with the ICT Restructuring Plan’s exit or disposal activities for the six months ended June 30, 2011:
                                         
            Charges for                      
    Beginning     the Six                      
    Accrual at     Months             Other Non-     Ending Accrual  
    January 1,     Ended June     Cash     Cash     at June 30,  
    2011     30, 2011(1)     Payments     Changes(2)     2011  
Lease obligations and facility exit costs
  $ 1,462     $ (262 )   $ (696 )   $ 3     $ 507  
 
                   
     
(1)   During the six months ended June 30, 2011, the Company reversed accruals related to the final settlement of termination costs, which reduced “General and administrative” costs in the accompanying Condensed Consolidated Statement of Operations.
 
(2)   Effect of foreign currency translation.
Fair Value
Fair Value
Note 5. Fair Value
The Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 subject to the requirements of ASC 820 consist of the following (in thousands):
                                 
    Fair Value Measurements at June 30, 2011 Using:
            Quoted Prices   Significant    
            in Active   Other   Significant
    Balance at   Markets For   Observable   Unobservable
    June 30,   Identical Assets   Inputs   Inputs
    2011   Level (1)   Level (2)   Level (3)
Assets:
                               
Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)
  $ 62,633     $ 62,633     $ -     $ -  
Money market funds and open-end mutual funds in “Deferred charges and other assets” (1)
    730       730       -       -  
Foreign currency forward contracts (2)
    1,261       -       1,261       -  
Foreign currency option contracts (2)
    1,616       -       1,616       -  
Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)
    2,956       2,956       -       -  
Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)
    1,171       1,171       -       -  
Guaranteed investment certificates (4)
    65       -       65       -  
 
               
 
  $ 70,432     $ 67,490     $ 2,942     $ -  
 
               
 
                               
Liabilities:
                               
Foreign currency forward contracts (5)
  $ 671     $ -     $ 671     $ -  
 
               
 
  $ 671     $ -     $ 671     $ -  
 
               
     
(1)   In the accompanying Condensed Consolidated Balance Sheet.
 
(2)   Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.
 
(3)   Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 8.
 
(4)   Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet.
 
(5)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.
The Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 subject to the requirements of ASC 820 consist of the following (in thousands):
                                 
    Fair Value Measurements at December 31, 2010 Using:  
            Quoted Prices   Significant    
            in Active   Other   Significant
            Markets For   Observable   Unobservable
    Balance at   Identical Assets   Inputs   Inputs
    December 31, 2010   Level (1)   Level (2)   Level (3)
Assets:
                               
Money market funds and open-end mutual funds included in “Cash and cash equivalents” (1)
  $ 5,893     $ 5,893     $ -     $ -  
Money market funds and open-end mutual funds in “Deferred charges and other assets” (1)
    747       747       -       -  
Foreign currency forward contracts (2)
    1,283       -       1,283       -  
Foreign currency option contracts (2)
    4,951       -       4,951       -  
Equity investments held in a rabbi trust for the Deferred Compensation Plan (3)
    2,647       2,647       -       -  
Debt investments held in a rabbi trust for the Deferred Compensation Plan (3)
    789       789       -       -  
U.S. Treasury Bills held in a rabbi trust for the former ICT chief executive officer (3)
    118       118       -       -  
Guaranteed investment certificates (4)
    53       -       53       -  
 
               
 
  $ 16,481     $ 10,194     $ 6,287     $ -  
 
               
 
                               
Liabilities:
                               
Foreign currency forward contracts (5)
  $ 735     $ -     $ 735     $ -  
 
               
 
  $ 735     $ -     $ 735     $ -  
 
               
     
(1)   In the accompanying Condensed Consolidated Balance Sheet.
 
(2)   Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.
 
(3)   Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet. See Note 8.
 
(4)   Included in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet.
 
(5)   Included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet. See Note 7.
Certain assets, under certain conditions, are measured at fair value on a nonrecurring basis utilizing Level 3 inputs as described in Note 1, Business, Basis of Presentation and Summary of Significant Accounting Policies, like those associated with acquired businesses, including goodwill and other intangible assets and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets was determined to be impaired. The Company’s assets measured at fair value on a nonrecurring basis (no liabilities) as of June 30, 2011 subject to the requirements of ASC 820 consist of the following (in thousands):
                                                 
            Three Months   Six Months           Three Months   Six Months
            Ended June 30,   Ended June 30,           Ended June 30,   Ended June 30,
            2011   2011           2010   2010
    Balance at   Total   Total   Balance at   Total   Total
    June 30,   Impairment   Impairment   December 31,   Impairment   Impairment
    2011   (Losses)   (Losses)   2010   (Losses)   (Losses)
Assets:
                                               
Americas:
                                               
Property and equipment, net (1)
  $ 87,424     $ -     $ (726 )   $ 99,089     $ -     $ -  
EMEA:
                                               
Property and equipment, net (1)
    14,787       -       -       14,614       -       -  
 
                       
 
  $ 102,211     $ -     $ (726 )   $ 113,703     $ -     $ -  
 
                       
     
(1)   See Note 1 for additional information regarding the fair value measurement.
During the six months ended June 30, 2011 in connection with the Third Quarter 2010 Exit Plan within the Americas segment, as discussed more fully in Note 4, Costs Associated with Exit or Disposal Activities, the Company recorded an impairment charge of $0.7 million, resulting from a change in assumptions related to the redeployment of property and equipment.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Note 6. Goodwill and Intangible Assets
The following table presents the Company’s purchased intangible assets as of June 30, 2011 (in thousands):
                                 
                            Weighted
                            Average
    Gross   Accumulated   Net   Amortization
    Intangibles   Amortization   Intangibles   Period (years)
Customer relationships
  $ 59,192     $ (10,629 )   $ 48,563       8  
Trade name
    1,000       (472 )     528       3  
Non-compete agreements
    560       (560 )     -       1  
Proprietary software
    849       (603 )     246       2  
 
                   
 
  $ 61,601     $ (12,264 )   $ 49,337       8  
 
                   
The following table presents the Company’s purchased intangible assets as of December 31, 2010 (in thousands):
                                 
                            Weighted
                            Average
    Gross   Accumulated   Net   Amortization
    Intangibles   Amortization   Intangibles   Period (years)
Customer relationships
  $ 58,471     $ (6,839 )   $ 51,632       8  
Trade name
    1,000       (306 )     694       3  
Non-compete agreements
    560       (513 )     47       1  
Proprietary software
    850       (471 )     379       2  
 
                   
 
  $ 60,881     $ (8,129 )   $ 52,752       8  
 
                   
The following table presents amortization expense, related to the purchased intangible assets resulting from acquisitions (other than goodwill), included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations (in thousands):
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
Amortization expense
  $ 1,985     $ 2,150     $ 4,032     $ 3,577  
 
               
The Company’s estimated future amortization expense for the five succeeding years is as follows (in thousands):
         
Years Ending December 31,   Amount
 
2011 (remaining six months)
$   3,986  
2012
    7,829  
2013
    7,431  
2014
    7,368  
2015
    7,366  
2016
    7,366  
2017 and thereafter
    7,991  
Changes in goodwill consist of the following (in thousands):
                         
            Accumulated        
            Impairment        
    Gross Amount     Losses     Net Amount  
Americas:
                       
Balance at January 1, 2011
  $ 122,932     $ (629 )   $ 122,303  
Foreign currency translation
    2,293             2,293  
 
           
Balance at June 30, 2011
    125,225       (629 )     124,596  
 
           
 
                       
EMEA:
                       
Balance at January 1, 2011
    84       (84 )      
Foreign currency translation
                 
 
           
Balance at June 30, 2011
    84       (84 )      
 
           
 
  $ 125,309     $ (713 )   $ 124,596  
 
           
Financial Derivatives
Financial Derivatives
Note 7. Financial Derivatives
Cash Flow Hedges — The Company had derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815, consisting of Philippine peso contracts and Canadian Dollar 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 and related taxes on the Company’s derivative instruments recorded in “Accumulated other comprehensive income (loss)” in the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):
                 
       As of      As of  
     June 30, 2011        December 31, 2010  
Deferred gains (losses) in AOCI
  $ 718     $ 2,674  
Tax on deferred gains (losses) in AOCI
    (152 )     (528 )
 
       
Deferred gains (losses), net of taxes in AOCI
  $ 566     $ 2,146  
 
       
 
               
Deferred gains expected to be reclassified to “Revenues” from AOCI during the next twelve months   $ 718          
 
       
Deferred gains (losses) and other future reclassifications from AOCI will fluctuate with movements in the underlying market price of the forward contracts.
Other Hedges — The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect our interests against adverse foreign currency moves pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than our subsidiaries functional currencies. These contracts generally do not exceed 90 days in duration.
The Company had the following outstanding foreign currency forward contracts and options (in thousands):
                                 
    As of June 30, 2011     As of December 31, 2010  
    Notional             Notional        
    Amount in     Settle Through     Amount in     Settle Through  
Contract Type   USD     Date     USD     Date  
Cash flow hedge: (1)
                               
Options:
                               
Philippine Pesos
  $ 74,800     December 2011   $ 81,100     December 2011
Forwards:
                               
Philippine Pesos
  $ 20,000     December 2011   $ 28,000     September 2011
Canadian Dollars
  $ 3,600     December 2011   $ 7,200     December 2011
Not designated as hedge: (2)
                               
Forwards
  $ 49,781     November 2011   $ 57,791     February 2011
 
(1)  
Cash flow hedge as defined under ASC 815. Purpose is to protect against the risk that eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates.
 
(2)  
Foreign currency hedge contract not designated as a hedge as defined under ASC 815. Purpose is to reduce the effects on the Company’s operating results and cash flows from fluctuations caused by volatility in currency exchange rates, primarily related to intercompany loan payments and cash held in non-functional currencies.
See Note 1, Business, Basis of Presentation and Summary of Significant Accounting Policies, for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.
As of June 30, 2011, the maximum amount of loss due to credit risk that, based on the gross fair value of the financial instruments, the Company would incur if parties to the financial instruments that make up the concentration failed to perform according to the terms of the contracts is $2.9 million.
Net Investment Hedge — During 2010, the Company entered into foreign exchange forward contracts to hedge its net investment in a foreign operation, as defined under ASC 815, with an aggregate notional value of $26.1 million. These hedges settled in 2010 and the Company recorded deferred (losses) of $(2.6) million, net of taxes, for 2010 as a currency translation adjustment, a component of AOCI, offsetting foreign exchange losses attributable to the translation of the net investment. The Company did not hedge net investments in foreign operations during the six months ended June 30, 2011.
The following tables present the fair value of the Company’s derivative instruments as of June 30, 2011 and December 31, 2010 included in the accompanying Condensed Consolidated Balance Sheets (in thousands):
                                 
    Derivative Assets  
    June 30, 2011     December 31, 2010  
    Balance Sheet             Balance Sheet        
    Location     Fair Value     Location     Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:
                               
Foreign currency forward contracts
  Other current
assets
  $ 1,192     Other current
assets
  $ 1,009  
Foreign currency options
  Other current
assets
    1,616     Other current
assets
    4,951  
 
                   
 
            2,808               5,960  
 
                               
Derivatives not designated as hedging instruments under ASC 815:
                               
Foreign currency forward contracts
  Other current
assets
    69     Other current
assets
    274  
 
                   
Total derivative assets
          $ 2,877             $ 6,234  
 
                   
                                 
    Derivative Liabilities  
    June 30, 2011     December 31, 2010  
    Balance Sheet             Balance Sheet        
    Location     Fair Value     Location     Fair Value  
Derivatives designated as cash flow hedging instruments under ASC 815:
                               
Foreign currency forward contracts
  Other accrued
expenses and
current liabilities
  $     Other accrued
expenses and
current liabilities
  $ 27  
 
                   
 
                          27  
 
                               
Derivatives not designated as hedging instruments under ASC 815:
                               
Foreign currency forward contracts
  Other accrued
expenses and
current liabilities
    671     Other accrued
expenses and
current liabilities
    708  
 
                   
Total derivative liabilities
          $ 671             $ 735  
 
                   
The following tables present the effect of the Company’s derivative instruments for the three months ended June 30, 2011 and 2010 in the accompanying Condensed Consolidated Financial Statements (in thousands):
                                                         
                            Gain (Loss)        
    Gain (Loss)             Reclassified From     Gain (Loss)  
    Recognized in AOCI     Statement of     Accumulated AOCI     Recognized in Income  
    on Derivatives     Operations     Into Income     on Derivatives  
    (Effective Portion)     Location     (Effective Portion)     (Ineffective Portion)  
    June 30,             June 30,     June 30,  
    2011     2010             2011     2010     2011     2010  
Derivatives designated as cash flow hedging instruments under ASC 815:
                                                       
 
                                                       
Foreign currency forward contracts
  $ 9     $ (884 )   Revenues   $ 161     $ 1,107     $     $  
 
                                                       
Foreign currency option contracts
    (677 )     (1,879 )   Revenues     359       (142 )            
 
                           
 
    (668 )     (2,763 )             520       965              
 
                                                       
Derivatives designated as a net investment hedge under ASC 815:
                                                       
 
                                                       
Foreign currency forward contracts
          1,432                                  
 
                           
 
  $ (668 )   $ (1,331 )           $ 520     $ 965     $     $  
 
                           
                         
            Gain (Loss) Recognized  
    Statement of     in Income on Derivatives  
    Operations     June 30,  
    Location     2011     2010  
 
                 
Derivatives not designated as hedging instruments under ASC 815:
                       
 
                       
Foreign currency forward contracts
  Other income
and (expense)
  $ (1,443 )   $ (356 )
 
             
 
          $ (1,443 )   $ (356 )
 
             
The following tables present the effect of the Company’s derivative instruments for the six months ended June 30, 2011 and 2010 in the accompanying Condensed Consolidated Financial Statements (in thousands):
                                                         
    Gain (Loss)             Gain (Loss)     Gain (Loss)  
    Recognized in AOCI         Reclassified From     Recognized in Income  
    on Derivatives         Accumulated AOCI     on Derivatives  
    (Effective Portion)     Statement of     Into Income     (Ineffective Portion)  
    June 30,     Operations     June 30,     June 30,  
    2011     2010     Location     2011     2010     2011     2010  
Derivatives designated as cash flow hedging instruments under ASC 815:
                                                       
 
                                                       
Foreign currency forward contracts
  $ 387     $ 311     Revenues   $ 195     $ 1,999     $ -     $ -  
 
                                                       
Foreign currency option contracts
    (1,327 )     (1,729 )   Revenues     857       (53 )     -       -  
 
                                           
 
    (940 )     (1,418 )             1,052       1,946       -       -  
 
                                                       
Derivatives designated as a net investment hedge under ASC 815:
                                                       
 
                                                       
Foreign currency forward contracts
    -       1,432               -       -       -       -  
 
                                           
 
  $ (940 )   $ 14             $ 1,052     $ 1,946     $ -     $ -  
 
                                         
                     
        Gain (Loss) Recognized  
    Statement of   in Income on Derivatives  
    Operations   June 30,  
    Location   2011     2010  
Derivatives not designated as hedging instruments under ASC 815:
                   
 
                   
Foreign currency forward contracts
  Other income
and (expense)
  $ (3,732 )   $ (1,430 )
 
               
 
      $ (3,732 )   $ (1,430 )
 
               
Investments Held in Rabbi Trusts
Investments Held in Rabbi Trusts
Note 8. Investments Held in Rabbi Trusts
The Company’s investments held in rabbi trusts, classified as trading securities and included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets, at fair value, consist of the following (in thousands):
                                 
    As of June 30, 2011     As of December 31, 2010  
    Cost     Fair Value     Cost     Fair Value  
Mutual funds
  $ 3,573     $ 4,127     $ 3,058     $ 3,436  
U.S. Treasury Bills (1)
    -       -       118       118  
 
                       
 
  $ 3,573     $ 4,127     $ 3,176     $ 3,554  
 
                       
 
(1)   Matured in January 2011.
The mutual funds held in the rabbi trusts were 72% equity-based and 28% debt-based as of June 30, 2011. Investment income, included in “Other income (expense)” in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 consists of the following (in thousands):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
Gross realized gains from sale of trading securities
  $ 6     $ -     $ 8     $ 10  
Gross realized (losses) from sale of trading securities
    -       -       -       (5 )
Dividend and interest income
    13       7       18       14  
Net unrealized holding gains (losses)
    (4 )     (252 )     150       (141 )
 
                       
Net investment income (losses)
  $ 15     $ (245 )   $ 176     $ (122 )
 
                       
Property and Equipment
Property and Equipment
Note 9. Property and Equipment
Sale of Land and Building Located in Minot, North Dakota
In March 2011, the Company classified long-lived assets, consisting of land and a building located in Minot, North Dakota, as held for sale. These assets were classified as held for sale based on the following: management committed to a plan to sell the assets, the assets were available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the plan to sell the assets had been initiated, the assets were being actively marketed for sale at a price that was reasonable in relation to their current fair value, it is probable that the assets would be sold in a reasonable period of time, and it was unlikely that significant changes to the plan to sell the assets would be made or that the plan would be withdrawn. Upon reclassification as held for sale, the Company discontinued depreciating these assets and amortizing the related deferred grants. These assets, previously classified as held and used with a carrying value of $0.9 million, were included in “Property and equipment” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2010. Related to these assets were deferred grants of $0.6 million, which were included in “Deferred grants” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2010.
On June 1, 2011, the Company sold the Minot assets for cash of $3.9 million (net of selling costs of $0.2 million) resulting in a net gain on sale of $3.7 million. The carrying value of these assets of $0.8 million was offset by the related deferred grants of $0.6 million. The net gain on the sale of $3.7 million is included in “Net gain on disposal of property and equipment” in the accompanying Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2011.
Tornado Damage to the Ponca City, Oklahoma Customer Contact Management Center
In April 2011, the customer contact management center (the “facility”) located in Ponca City, Oklahoma experienced significant damage to its building and contents as a result of a tornado. The Company filed an insurance claim with its property insurance company to recover estimated losses of $1.4 million and expects to settle the claim by September 30, 2011. As a result, the Company recognized a receivable from the insurance company of $0.9 million relating to estimated costs to repair the building, which is included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2011. In addition, the insurance company advanced $0.5 million to the Company for estimated costs to clean up the facility and out-of-pocket costs related to the tornado damage. For the three months ended June 30, 2011, out-of-pocket costs totaled $0.2 million. The remaining advance of $0.3 million and the $0.9 million estimated costs to repair the building are included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2011.
Deferred Revenue
Deferred Revenue
Note 10. Deferred Revenue
The components of deferred revenue consist of the following (in thousands):
                 
    June 30,
2011
    December 31,
2010
 
Future service
  $ 26,601     $ 23,919  
Estimated potential penalties and holdbacks
    7,229       7,336  
 
           
 
  $ 33,830     $ 31,255  
 
           
Borrowings
Borrowings
Note 11. Borrowings
The Company had no outstanding borrowings as of June 30, 2011 and December 31, 2010.
On February 2, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent (“KeyBank”). The Credit Agreement provides for a $75 million term loan (the “Term Loan”) and a $75 million revolving credit facility, the amount which is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. The Company drew down the full $75 million Term Loan on February 2, 2010 in connection with the acquisition of ICT on such date. See Note 2, Acquisition of ICT, for further information. The Company paid off the Term Loan balance in 2010, earlier than the scheduled maturity, plus accrued interest. The Term Loan is no longer available for borrowings.
The $75 million revolving credit facility provided under the Credit Agreement includes a $40 million multi-currency sub-facility, a $10 million swingline sub-facility and a $5 million letter of credit sub-facility, which may be used for general corporate purposes including strategic 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. The revolving credit facility will mature on February 1, 2013.
Borrowings under the Credit Agreement bear interest at either LIBOR or the base rate plus, in each case, an applicable margin based on the Company’s leverage ratio. The applicable interest rate is determined quarterly based on the Company’s leverage ratio at such time. The base rate is a rate per annum equal to the greatest of (i) the rate of interest established by KeyBank, from time to time, as its “prime rate”; (ii) the Federal Funds effective rate in effect from time to time, plus 1/2 of 1% per annum; and (iii) the then-applicable LIBOR rate for one month interest periods, plus 1.00%. Swingline loans bear interest only at the base rate plus the base rate margin. In addition, the Company is required to pay certain customary fees, including a commitment fee of up to 0.75%, which is due quarterly in arrears and calculated on the average unused amount of the revolving credit facility.
In 2010, the Company paid an underwriting fee of $3.0 million for the Credit Agreement, which is deferred and amortized over the term of the loan. In addition, the Company pays a quarterly commitment fee on the Credit Agreement. The related interest expense and amortization of deferred loan fees on the Credit Agreement of $0.3 million and $0.6 million are included in “Interest expense” in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011, respectively. During the comparable 2010 periods, the related interest expense and amortization of deferred loan fees on the Credit Agreement were $1.0 million and $1.8 million, respectively. The $75 million Term Loan had a weighted average interest rate of 3.88% and 3.94% for the three and six months ended June 30, 2010, respectively.
The 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 December, 2009, Sykes (Bermuda) Holdings Limited, a Bermuda exempted company (“Sykes Bermuda”) which is an indirect wholly-owned subsidiary of the Company, entered into a credit agreement with KeyBank (the “Bermuda Credit Agreement”). The Bermuda Credit Agreement provided for a $75 million short-term loan to Sykes Bermuda with a maturity date of March 31, 2010. Sykes Bermuda drew down the full $75 million on December 11, 2009. Interest was charged on outstanding amounts, at the option of Sykes Bermuda, at either a Eurodollar Rate (as defined in the Bermuda Credit Agreement) or a Base Rate (as defined in the Bermuda Credit Agreement) plus, in each case, an applicable margin specified in the Bermuda Credit Agreement. The underwriting fee paid of $0.8 million was deferred and amortized over the term of the loan. Sykes Bermuda repaid the entire outstanding amount plus accrued interest on March 31, 2010. The related interest expense and amortization of deferred loan fees of $1.4 million are included in “Interest expense” in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2010 (none in the three months ended June 30, 2010 or for the three and six months ended June 30, 2011).
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 (“ASC 220”) “Comprehensive Income”. 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):
                                                 
                    Unrealized     Unrealized     Unrealized        
    Foreign     Unrealized     Actuarial Gain     Gain (Loss) on     Gain (Loss) on        
    Currency     (Loss) on Net     (Loss) Related     Cash Flow     Post        
    Translation     Investment     to Pension     Hedging     Retirement        
    Adjustment     Hedge     Liability     Instruments     Obligation     Total  
Balance at January 1, 2010
  $ 4,317     $ -     $ 1,207     $ 2,019     $ 276     $ 7,819  
Pre-tax amount
    9,790       (3,955 )     (31 )     4,936       104       10,844  
Tax benefit
    -       1,390       -       321       -       1,711  
Reclassification to net loss
    (7 )     -       (52 )     (5,173 )     (34 )     (5,266 )
Foreign currency translation
    (108 )     -       65       43       -       -  
 
                                   
Balance at December 31, 2010
    13,992       (2,565 )     1,189       2,146       346       15,108  
Pre-tax amount
    8,568       -       87       (940 )     42       7,757  
Tax benefit
    -       -       -       384       -       384  
Reclassification to net income
    (266 )     -       (28 )     (1,052 )     (18 )     (1,364 )
Foreign currency translation
    (41 )     -       13       28       -       -  
 
                                   
Balance at June 30, 2011
  $ 22,253     $ (2,565 )   $ 1,261     $ 566     $ 370     $ 21,885  
 
                                   
Except as discussed in Note 13, Income Taxes, earnings associated with the Company’s investments in its subsidiaries are considered to be permanently invested and no provision for income taxes on those earnings or translation adjustments has been provided.
Income Taxes
Income Taxes
Note 13. Income Taxes
The Company’s effective tax rate was 18.3% and 19.5% for the three months ended June 30, 2011, and 2010, respectively. The difference between the Company’s effective tax rate of 18.3% 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, losses in jurisdictions for which tax benefits either can or cannot be recognized, adjustments of valuation allowances, changes in unrecognized tax positions, foreign withholding taxes and permanent differences.
The Company’s effective tax rate was 11.5% and (13.5)% for the six months ended June 30, 2011 and 2010, respectively. The year-over-year variance in the effective tax rate is primarily due to tax benefits recognized on losses related to ICT acquisition-related costs incurred in 2010. The difference between the Company’s effective tax rate of 11.5% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily due to the recognition of tax benefits resulting from income earned in certain tax holiday jurisdictions, losses in jurisdictions for which tax benefits either can or cannot be recognized, adjustments of valuation allowances, changes in unrecognized tax positions, foreign withholding taxes and permanent differences.
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 $18.5 million at June 30, 2011, and $21.0 million at December 31, 2010, excluding penalties and interest. The $2.5 million decrease relates primarily to a favorable resolution of a tax audit.
Generally, earnings associated with the investments in our subsidiaries are considered to be permanently invested and provisions for income taxes on those earnings or translation adjustments are not recorded. However in 2010, the Company changed its intent to distribute current earnings from various foreign operations to their foreign parents to take advantage of the December 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”), which includes the extension until December 31, 2011 of Internal Revenue Code Section 954(c)(6). The Tax Relief Act permits continued tax deferral on such distributions that would otherwise be taxable immediately in the United States. While the distributions are not taxable in the United States, related foreign withholding taxes have been accrued in the Condensed Consolidated Balance Sheets.
In addition, the U.S. Department of the Treasury released the “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals” in February 2011. 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 their potential impact on its financial condition, results of operations, and cash flows. 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.
The U.S. Internal Revenue Service concluded a limited audit of the 2007 tax year, which resulted in no change to the tax liability as originally reported. The Canadian tax authority is currently auditing tax years 2003 through 2006 and 2008 through 2009. The German tax authority is currently auditing tax periods 2005 through 2007. In the Philippines, the Company is being audited by the Philippine tax authorities for tax years 2007 and 2008. The Company’s Indian subsidiary is currently under examination in India for fiscal tax years 2004 through 2007. As of June 30, 2011, the Company believes it has adequately accrued for these audits.
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, common stock units and shares held in a rabbi trusts using the treasury stock method.
The number of shares used in the earnings per share computation are as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Basic:
                               
Weighted average common shares outstanding
    46,241       46,601       46,359       45,604  
Diluted:
                               
Dilutive effect of stock options, stock appreciation rights, restricted stock, common stock units and shares held in a rabbi trust
    52       47       104       108  
 
                       
Total weighted average diluted shares outstanding
    46,293       46,648       46,463       45,712  
 
                       
 
                               
Anti-dilutive shares excluded from the diluted earnings per share calculation (1)
    271       346       298       94  
 
                       
 
(1)  
Impact of outstanding options to purchase shares of common stock and stock appreciation rights were anti-dilutive and were excluded from the calculation of diluted earnings per share.
On August 5, 2002, the Company’s Board of Directors authorized the Company to purchase up to 3.0 million shares of its outstanding common stock. A total of 2.5 million shares have been repurchased under this program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price and general market conditions. The shares repurchased during the six months ended June 30, 2011 and 2010 were as follows (in thousands, except per share amounts):
                                 
    Total Number                     Total Cost of  
    of Shares     Range of Prices Paid Per Share     Shares  
For the Six Months Ended Purchased     Low     High     Repurchased  
June 30, 2011
    300     $ 18.24     $ 18.53     $ 5,512  
June 30, 2010
    300     $ 16.92     $ 17.60     $ 5,212  
Commitments and Loss Contingency
Commitments and Loss Contingency
Note 15. Commitments and Loss Contingency
Purchase Commitments
During the six months ended June 30, 2011, the Company entered into several 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, range from one to four 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 future minimum purchase commitments under these agreements as of June 30, 2011 (in thousands):
         
    Total  
2011 (remaining six months)
  $ 1,245  
2012
    2,179  
2013
    1,403  
2014
    343  
2015
    -  
2016 and thereafter
    -  
 
     
Total minimum payments required
  $ 5,170  
 
     
Except for the contractual obligations mentioned above, there have not been any material changes to the Company’s outstanding contractual obligations from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Loss Contingency
The Company has previously disclosed three pending matters involving regulatory sanctions assessed against the Company’s Spanish subsidiary. All three matters relate to the alleged inappropriate acquisition of personal information in connection with two outbound client contracts. In connection with the appeal of one of these claims, the Company issued a bank guarantee, which is included as restricted cash of $0.4 million in “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010. Based upon the opinion of legal counsel regarding the likely outcome of these three matters, the Company accrued a liability in the amount of $1.3 million under ASC 450 “Contingencies” because management believed that a loss was probable and the amount of the loss could be reasonably estimated. During the quarter ended December 31, 2010, the Spanish Supreme Court ruled in the Company’s favor in one of the three subject claims. Accordingly, the Company has reversed the accrual in the amount of $0.5 million related to that particular claim. The accrued liability included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets was $0.8 million as of June 30, 2011 and December 31, 2010. One of the other two claims has been finally decided against the Company on procedural grounds, and the final claim remains on appeal to the Spanish Supreme Court.
The Company from time to time is involved in other legal actions arising in the ordinary course of business. With respect to these matters, management believes that it has adequate legal defenses and/or when possible and appropriate, provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on the Company’s financial position or results of operations.
Defined Benefit Pension Plan and Postretirement Benefits
Defined Benefit Pension Plan and Postretirement Benefits
Note 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 pension plans for the three and six months ended June 30, 2011 and 2010 (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Service cost
  $ 64     $ 25     $ 83     $ 35  
Interest cost
    25       24       51       33  
Recognized actuarial (gains)
    (14 )     (18 )     (28 )     (26 )
 
                       
Net periodic benefit cost
  $ 75     $ 31     $ 106     $ 42  
 
                       
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 for the three and six months ended June 30, 2011 and 2010 included in the accompanying Condensed Consolidated Statement of Operations were as follows (in thousands):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
401(k) plan contributions
  $ 270     $ 33     $ 562     $ 368  
 
                       
In connection with the acquisition of ICT in February 2010, the Company assumed ICT’s profit sharing plan (Section 401(k)). Under this profit sharing plan, the Company matches 50% of employee contributions for all qualified employees, as defined, up to a maximum of 6% of the employee’s compensation; however, it may also make additional contributions to the plan based upon profit levels and other factors. No contributions were made during the three and six months ended June 30, 2011. Employees are fully vested in their contributions, while full vesting in the Company’s contributions occurs upon death, disability, retirement or completion of five years of service.
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. Effective January 1, 2008, the Company recorded a $0.5 million liability for a post-retirement benefit obligation related to this arrangement, which was accounted for as a reduction to the January 1, 2008 balance of retained earnings in accordance with ASC 715-60 "Defined Benefit Plans — Other Postretirement”. The post-retirement benefit obligation included in “Other long-term liabilities” as of June 30, 2011 and December 31, 2010 in the accompanying Condensed Consolidated Balance Sheets is as follows (in thousands):
                 
    June 30,
2011
    December 31,
2010
 
Post-retirement benefit obligation
  $ 156     $ 186  
 
           
The Company has an unrealized gain of $0.4 million and $0.3 million as of June 30, 2011 and December 31, 2010, respectively, due to changes in discount rates related to the post-retirement obligation, which was recorded in “Accumulated other comprehensive income” in the accompanying Condensed Consolidated Balance Sheets.
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. Stock-based compensation expense related to these plans, which is included in “General and administrative” costs primarily in the Americas in the accompanying Condensed Consolidated Statements of Operations, was $0.9 million and $2.6 million for the three and six months ended June 30, 2011, respectively, and $1.1 million and $2.9 million for the comparable 2010 periods, respectively. The Company recognized income tax benefits in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 of $0.3 million and $1.0 million, respectively, and $0.4 million and $1.1 million for the comparable 2010 periods, respectively. In addition, the Company recognized benefits of tax deductions in excess of recognized tax benefits of $0.4 million from the exercise of stock options in the six months ended June 30, 2010 (not material for the three months ended June 30, 2010 and the three and six months ended June 30, 2011). There were no capitalized stock-based compensation costs at June 30, 2011 and December 31, 2010.
2011 Equity Incentive Plan The Board of Directors adopted the Sykes Enterprises, Incorporated 2011 Equity Incentive Plan (the “2011 Plan”) on March 23, 2011, which was approved by the shareholders at the May 2011 Annual Meeting. The 2011 Plan replaced and superseded the Company’s 2001 Equity Incentive Plan (the “2001 Plan”), which expired on March 14, 2011. The outstanding awards granted under the 2001 Plan will remain in effect until their exercise, expiration, or termination. The 2011 Plan permits the grant of stock options, stock appreciation rights and other stock-based awards to certain employees of the Company, and certain non-employees who provide services to the Company, for up to 5.7 million shares of common stock 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 Options — The following table summarizes stock option activity as of June 30, 2011 and for the six months then ended:
                                 
                    Weighted        
                    Average        
                    Remaining        
            Weighted     Contractual     Aggregate  
            Average     Term (in     Intrinsic  
Stock Options   Shares (000s)     Exercise Price     years)     Value (000s)  
Outstanding at January 1, 2011
    43     $ 8.54                  
Granted
    -       -                  
Exercised
    -       -                  
Forfeited or expired
    -       -                  
 
                             
Outstanding at June 30, 2011
    43     $ 8.54       0.9     $ 563  
 
                       
Vested or expected to vest at June 30, 2011
    43     $ 8.54       0.9     $ 563  
 
                       
Exercisable at June 30, 2011
    43     $ 8.54       0.9     $ 563  
 
                       
No stock options were granted during the six months ended June 30, 2011 and 2010.
No options were exercised during the three and six months ended June 30, 2011. The intrinsic value of options exercised during the three and six months ended June 30, 2010 was not material. All options were fully vested as of December 31, 2006 and there is no unrecognized compensation cost as of June 30, 2011 related to the options (the effect of estimated forfeitures is not material.)
Stock Appreciation Rights — The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation model that uses various assumptions. The fair value of the SARs is expensed on a straight-line basis over the requisite service period. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Exercises and forfeitures are estimated within the valuation model using employee termination and other historical data. The expected term of the SARs granted represents the period of time the SARs are expected to be outstanding.
The following table summarizes the assumptions used to estimate the fair value of SARs granted during the six months ended June 30, 2011 and 2010:
                 
    Six Months Ended June 30,  
    2011     2010  
Expected volatility
    44.3 %     45.0 %
Weighted-average volatility
    44.3 %     45.0 %
Expected dividends .
    -       -  
Expected term (in years)
    4.6       4.4  
Risk-free rate
    2.0 %     2.4 %
The following table summarizes SARs activity as of June 30, 2011 and for the six months then ended:
                                 
                    Weighted        
                    Average        
                    Remaining        
            Weighted     Contractual     Aggregate  
            Average     Term (in     Intrinsic  
Stock Appreciation Rights   Shares (000s)     Exercise Price     years)     Value (000s)  
Outstanding at January 1, 2011
    442     $ -                  
Granted
    215       -                  
Exercised
    -       -                  
Forfeited or expired
    -       -                  
 
                             
Outstanding at June 30, 2011
    657     $ -       8.0     $ 1,557  
 
                       
Vested or expected to vest at June 30, 2011
    296     $ -       8.0     $ 1,557  
 
                       
Exercisable at June 30, 2011
    296     $ -       6.9     $ 834  
 
                       
The weighted average grant-date fair value of the SARs granted during the six months ended June 30, 2011 and 2010 was $7.10 and $10.21, respectively. The total intrinsic value of SARs exercised during the six months ended June 30, 2010 was $0.6 million (none in the six months ended June 30, 2011).
The following table summarizes the status of nonvested SARs as of June 30, 2011 and for the six months then ended:
                 
            Weighted  
            Average Grant-  
            Date Fair  
Nonvested Stock Appreciation Rights   Shares (000s)     Value  
Nonvested at January 1, 2011
    293     $ 8.63  
Granted
    215     $ 7.10  
Vested
    (146 )   $ 8.18  
Forfeited or expired
    -     $ -  
 
             
Nonvested at June 30, 2011
    362     $ 7.90  
 
             
As of June 30, 2011, there was $2.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested SARs. This cost is expected to be recognized over a weighted average period of 2.1 years. SARs that vested during the six months ended June 30, 2011 and 2010 had a fair value of $0.2 million and $0.6 million, respectively, as of the vesting date.
Restricted Shares — The following table summarizes the status of nonvested Restricted Shares/RSUs as of June 30, 2011 and for the six months then ended:
                 
            Weighted  
            Average Grant-  
            Date Fair  
Nonvested Restricted Shares / RSUs   Shares (000s)     Value  
Nonvested at January 1, 2011
    587     $ 20.30  
Granted
    295     $ 18.67  
Vested
    (187 )   $ 18.01  
Forfeited or expired
    -     $ -  
 
             
Nonvested at June 30, 2011
    695     $ 20.22  
 
             
The weighted average grant-date fair value of the Restricted Shares/RSUs granted during the six months ended June 30, 2011 and 2010 was $18.67 and $23.88, respectively.
As of June 30, 2011, based on the probability of achieving the performance goals, there was $11.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested Restricted Shares/RSUs. This cost is expected to be recognized over a weighted average period of 2.0 years. The Restricted Shares/RSUs that vested during the six months ended June 30, 2011 and 2010 had a fair value of $3.9 million and $4.3 million, respectively, as of the vesting dates.
Other Awards — The following table summarizes the status of common stock units (“CSUs”) as of June 30, 2011, and for the six months then ended:
                 
            Weighted  
            Average Grant-  
            Date Fair  
Nonvested Common Stock Units   Shares (000s)     Value  
Nonvested at January 1, 2011
    66     $ 20.33  
Granted
    44     $ 18.67  
Vested
    (26 )   $ 18.11  
Forfeited or expired
    -     $ -  
 
             
Nonvested at June 30, 2011
    84     $ 20.15  
 
             
A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common stock. The weighted average grant-date fair value of the CSUs granted during the six months ended June 30, 2011 and 2010 was $18.67 and $23.88, respectively.
As of June 30, 2011, there was $1.4 million of total unrecognized compensation costs, net of estimated forfeitures, related to nonvested CSUs. This cost is expected to be recognized over a weighted average period of 2.1 years. The fair value of the CSUs that vested during the six months ended June 30, 2011 and 2010 were $0.5 million and $0.6 million, respectively, as of the vesting dates. Until a CSU vests, the participant has none of the rights of a shareholder with respect to the CSU or the common stock underlying the CSU. CSUs are not transferable.
2004 Non-Employee Director Fee Plan The Company’s 2004 Non-Employee Director Fee Plan (the “2004 Fee Plan”) provides that all new non-employee directors joining the Board of Directors (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”). The Annual Retainer consists of shares of the Company’s common stock and cash. Prior to May 20, 2011, the total value of the Annual Retainer was $77,500, payable $32,500 in cash and the remainder paid in stock, the amount of which was determined by dividing $45,000 by the closing price of the Company’s common stock on the date of the annual meeting of shareholders, rounded to the nearest whole number of shares. On May 20, 2011, upon the recommendation of the Compensation and Human Resource Development Committee, the Board adopted the Fourth Amended and Restated 2004 Non-Employee Director Fee Plan, which increased the cash component of the Annual Retainer by $17,500, resulting in a total Annual Retainer of $95,000, of which $50,000 is payable in cash, and the remainder paid in stock. The method of calculating the number of shares constituting the equity portion of the Annual Retainer remained unchanged.
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 annual grant of cash, including all amounts paid to a non-employee Chairman of the Board and all amounts paid to non-employee directors serving on committees of the Board, vests in four equal quarterly installments, one-fourth on the day following the annual meeting of shareholders, and an additional one-fourth on each successive third monthly anniversary of the date of grant. The annual grant of shares paid to non-employee directors vests in eight equal quarterly installments, one-eighth on the day following the annual meeting of shareholders, and an additional one-eighth on each successive third monthly anniversary of the date of grant. 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.
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.
Prior to 2008, the grants were comprised of CSUs rather than shares of common stock. A CSU is a bookkeeping entry on the Company’s books that records the equivalent of one share of common stock.
The following table summarizes the status of the nonvested CSUs and share awards under the 2004 Fee Plan as of June 30, 2011 and for the six months then ended:
                 
            Weighted  
            Average Grant-  
            Date Fair  
Nonvested Common Stock Units and Share Awards   Shares (000s)     Value  
Nonvested at January 1, 2011
    18     $ 18.67  
Granted
    21     $ 21.83  
Vested
    (12 )   $ 19.04  
Forfeited or expired
    -     $ -  
 
             
Nonvested at June 30, 2011
    27     $ 20.93  
 
             
The weighted average grant-date fair value of common stock awarded during the six months ended June 30, 2011 and 2010 was $21.83 and $19.11, respectively.
As of June 30, 2011, there was $0.5 million of total unrecognized compensation costs, net of estimated forfeitures, related to nonvested CSUs granted since March 2008 under the Plan. This cost is expected to be recognized over a weighted average period of 1.4 years. CSUs and share awards that vested during the six months ended June 30, 2011 and 2010 had a fair value of $0.2 million and $0.3 million, respectively, as of the vesting dates.
Deferred Compensation Plan The Company’s non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which is 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. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in various mutual funds (see Note 8, Investments Held in Rabbi Trusts) and shares of the Company’s common stock. As of June 30, 2011 and December 31, 2010, liabilities of $4.1 million and $3.4 million, respectively, of the Deferred Compensation Plan were recorded in “Accrued employee compensation and benefits” in the accompanying Condensed Consolidated Balance Sheets.
Additionally, the Company’s common stock match associated with the Deferred Compensation Plan, with a carrying value of approximately $1.1 million and $1.0 million at June 30, 2011 and December 31, 2010, respectively, is included in “Treasury stock” in the accompanying Condensed Consolidated Balance Sheets.
The following table summarizes the status of the nonvested common stock issued under the Deferred Compensation Plan as of June 30, 2011 and for the six months then ended:
                 
            Weighted  
            Average Grant-  
            Date Fair  
Nonvested Common Stock   Shares (000s)     Value  
 
Nonvested at January 1, 2011
    8     $ 18.00  
Granted
    8     $ 20.23  
Vested
    (8 )   $ 19.47  
Forfeited or expired
        $  
 
             
Nonvested at June 30, 2011
    8     $ 18.73  
 
             
The weighted average grant-date fair value of common stock awarded during the six months ended June 30, 2011 and 2010 was $20.23 and $20.28, respectively.
As of June 30, 2011, there was $0.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested common stock granted under the Deferred Compensation Plan. This cost is expected to be recognized over a weighted average period of 3.9 years. The total fair value of the common stock vested during the six months ended June 30, 2011 and 2010 was $0.2 million and $0.1 million, respectively, as of the vesting dates.
No cash was used to settle the Company’s obligation under the Deferred Compensation Plan for the six months ended June 30, 2011 and 2010.
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, India and the Asia Pacific Rim, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer contact management solutions (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, India and the Asia Pacific Rim are included in the Americas 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 for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):
                                 
    Americas     EMEA     Other(1)     Consolidated  
Three Months Ended June 30, 2011:
                               
Revenues (2)
  $ 247,543     $ 62,371             $ 309,914  
Percentage of revenues
    79.9 %     20.1 %             100.0 %
 
                               
Depreciation and amortization (2)
  $ 12,546     $ 1,488             $ 14,034  
 
                               
Income (loss) from continuing operations
  $ 31,377     $ (3,388 )   $ (12,852 )   $ 15,137  
Other (expense), net
                    (483 )     (483 )
Income taxes
                    (2,683 )     (2,683 )
 
                             
Income from continuing operations, net of taxes
                            11,971  
(Loss) from discontinued operations, net of taxes
  $ -     $ -               -  
 
                             
Net income
                          $ 11,971  
 
                             
 
                               
Total assets as of June 30, 2011
  $ 1,220,540     $ 1,196,894     $ (1,588,449 )   $ 828,985  
 
                       
                                 
    Americas     EMEA     Other(1)     Consolidated  
Three Months Ended June 30, 2010:
                               
Revenues (2)
  $ 235,315     $ 53,220             $ 288,535  
Percentage of revenues
    81.6 %     18.4 %             100.0 %
 
                               
Depreciation and amortization (2)
  $ 13,209     $ 1,317             $ 14,526  
 
                               
Income (loss) from continuing operations
  $ 25,744     $ (3,908 )   $ (12,049 )   $ 9,787  
Other (expense), net
                    (4,842 )     (4,842 )
Income taxes
                    (966 )     (966 )
 
                             
Income from continuing operations, net of taxes
                            3,979  
(Loss) from discontinued operations, net of taxes
  $ (1,434 )   $ -               (1,434 )
 
                             
Net income
                          $ 2,545  
 
                             
 
                               
Total assets as of June 30, 2010
  $ 1,599,090     $ 851,571     $ (1,601,604 )   $ 849,057  
 
                       
                                 
    Americas     EMEA     Other(1)     Consolidated  
Six Months Ended June 30, 2011:
                               
Revenues (2)
  $ 494,078     $ 125,992             $ 620,070  
Percentage of revenues
    79.7 %     20.3 %             100.0 %
 
                               
Depreciation and amortization (2)
  $ 25,363     $ 2,903             $ 28,266  
 
                               
Income (loss) from continuing operations
  $ 58,402     $ (2,869 )   $ (25,032 )   $ 30,501  
Other (expense), net
                    (2,096 )     (2,096 )
Income taxes
                    (3,256 )     (3,256 )
 
                             
Income from continuing operations, net of taxes
                            25,149  
(Loss) from discontinued operations, net of taxes
  $ -     $ -               -  
 
                             
Net income
                          $ 25,149  
 
                             
                                 
    Americas     EMEA     Other(1)     Consolidated  
Six Months Ended June 30, 2010:
                               
Revenues (2)
  $ 442,218     $ 112,899             $ 555,117  
Percentage of revenues
    79.7 %     20.3 %             100.0 %
 
                               
Depreciation and amortization (2)
  $ 23,928     $ 2,636             $ 26,564  
 
                               
Income (loss) from continuing operations
  $ 53,056     $ (4,614 )   $ (43,746 )   $ 4,696  
Other (expense), net
                    (8,385 )     (8,385 )
Income taxes
                    (499 )     (499 )
 
                             
(Loss) from continuing operations, net of taxes
                            (4,188 )
(Loss) from discontinued operations, net of taxes
  $ (2,780 )   $ -               (2,780 )
 
                             
Net (loss)
                          $ (6,968 )
 
                             
 
(1)   Other items (including corporate costs, provision for regulatory penalties, impairment costs, other income and expense, and income taxes) are shown for purposes of reconciling to the Company’s consolidated totals as shown in the table above for the three and six months ended June 30, 2011 and 2010. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2010. Inter-segment revenues are not material to the Americas and EMEA segment results. The Company evaluates the performance of its geographic segments based on revenue and income (loss) from operations, and does not include segment assets or other income and expense items for management reporting purposes.
 
(2)   Revenues and depreciation and amortization include results from continuing operations only.
Related Party Transactions
Related Party Transactions
Note 19. Related Party Transactions
The Company paid John H. Sykes, the founder, former Chairman and Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company, less than $0.1 million and $0.1 million, for the use of his private jet during the three and six months ended June 30, 2010, which is based on two times fuel costs and other actual costs incurred for each trip (none in the three and six months ended June 30, 2011).
The Company also paid John H. Sykes $0.1 million, which represents the cost for the purchase of his share of the refundable deposit on a sports stadium suite, during the three and six months ended June 30, 2010 (none in the comparable 2011 period).
In January 2008, the Company entered into a lease for a customer contact management center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes. The lease payments on the 20 year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. There are significant penalties for early cancellation which decrease over time. The Company paid $0.1 million and $0.2 million to the landlord during the three and six months ended June 30, 2011, respectively, under the terms of the lease. During the three and six months ended June 30, 2010, the Company paid $0.1 million and $0.2 million, respectively, under the terms of the lease.