SYKES ENTERPRISES, INCORPORATED
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2006
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 0-28274
Sykes Enterprises, Incorporated
(Exact name of Registrant as specified in its charter)
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Florida
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56-1383460 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.) |
400 North Ashley Drive, Tampa, FL 33602
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (813) 274-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 20, 2006, there were 40,536,437 outstanding shares of common stock.
Sykes Enterprises, Incorporated and Subsidiaries
INDEX
2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
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September 30, |
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December 31, |
|
(in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
150,674 |
|
|
$ |
127,612 |
|
Receivables, net |
|
|
109,631 |
|
|
|
88,213 |
|
Prepaid expenses and other current assets |
|
|
15,401 |
|
|
|
10,601 |
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|
|
|
|
|
|
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|
Total current assets |
|
|
275,706 |
|
|
|
226,426 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
65,202 |
|
|
|
72,261 |
|
Goodwill, net |
|
|
20,160 |
|
|
|
5,918 |
|
Intangibles, net |
|
|
8,402 |
|
|
|
2,112 |
|
Deferred charges and other assets |
|
|
28,998 |
|
|
|
24,468 |
|
|
|
|
|
|
|
|
|
|
$ |
398,468 |
|
|
$ |
331,185 |
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|
|
|
|
|
|
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|
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|
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|
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable |
|
$ |
19,960 |
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|
$ |
12,990 |
|
Accrued employee compensation and benefits |
|
|
37,473 |
|
|
|
31,777 |
|
Deferred revenue |
|
|
32,032 |
|
|
|
25,172 |
|
Income taxes payable |
|
|
3,233 |
|
|
|
2,220 |
|
Other accrued expenses and current liabilities |
|
|
9,881 |
|
|
|
10,274 |
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|
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|
|
|
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|
|
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|
|
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Total current liabilities |
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102,579 |
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|
82,433 |
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|
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|
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Deferred grants |
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10,596 |
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|
18,107 |
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Other long-term liabilities |
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7,574 |
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|
4,555 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities |
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|
120,749 |
|
|
|
105,095 |
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|
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Shareholders equity: |
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Preferred stock, $0.01 par value, 10,000 shares
authorized; no shares issued and outstanding |
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Common stock, $0.01 par value, 200,000 shares authorized;
45,254 and 44,009 shares issued |
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|
453 |
|
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|
440 |
|
Additional paid-in capital |
|
|
176,064 |
|
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|
165,674 |
|
Retained earnings |
|
|
149,919 |
|
|
|
115,735 |
|
Accumulated other comprehensive income (loss) |
|
|
3,211 |
|
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|
(3,435 |
) |
|
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|
|
|
|
|
|
|
|
329,647 |
|
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|
278,414 |
|
|
|
|
|
|
|
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Deferred stock compensation |
|
|
|
|
|
|
(355 |
) |
Treasury stock at cost: 4,703 shares and 4,712 shares |
|
|
(51,928 |
) |
|
|
(51,969 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
277,719 |
|
|
|
226,090 |
|
|
|
|
|
|
|
|
|
|
$ |
398,468 |
|
|
$ |
331,185 |
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|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
3
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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|
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Three Months Ended |
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Nine Months Ended |
|
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|
September 30, |
|
|
September 30, |
|
(in thousands, except for per share data) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
149,287 |
|
|
$ |
122,596 |
|
|
$ |
415,595 |
|
|
$ |
366,162 |
|
|
|
|
|
|
|
|
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|
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Operating expenses: |
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|
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Direct salaries and related costs |
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|
94,016 |
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|
|
75,247 |
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|
263,410 |
|
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|
228,702 |
|
General and administrative |
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|
47,281 |
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|
40,387 |
|
|
|
130,609 |
|
|
|
121,646 |
|
Net gain on disposal of property and
equipment |
|
|
(13,870 |
) |
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|
(47 |
) |
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|
(13,856 |
) |
|
|
(1,743 |
) |
Impairment of long-lived assets |
|
|
63 |
|
|
|
605 |
|
|
|
445 |
|
|
|
605 |
|
Reversal of restructuring and other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(314 |
) |
|
|
|
|
|
|
|
|
|
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|
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Total operating expenses |
|
|
127,490 |
|
|
|
116,192 |
|
|
|
380,608 |
|
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|
348,896 |
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|
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|
|
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|
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|
|
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Income from operations |
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|
21,797 |
|
|
|
6,404 |
|
|
|
34,987 |
|
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|
17,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
Other income (expense): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,399 |
|
|
|
719 |
|
|
|
5,175 |
|
|
|
1,665 |
|
Interest expense |
|
|
(187 |
) |
|
|
(113 |
) |
|
|
(463 |
) |
|
|
(572 |
) |
Income from rental operations, net |
|
|
266 |
|
|
|
337 |
|
|
|
1,220 |
|
|
|
347 |
|
Other income (expense) |
|
|
(147 |
) |
|
|
335 |
|
|
|
(355 |
) |
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
1,331 |
|
|
|
1,278 |
|
|
|
5,577 |
|
|
|
2,161 |
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|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Income before provision for income taxes |
|
|
23,128 |
|
|
|
7,682 |
|
|
|
40,564 |
|
|
|
19,427 |
|
Provision for income taxes |
|
|
6,614 |
|
|
|
812 |
|
|
|
6,380 |
|
|
|
4,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,514 |
|
|
$ |
6,870 |
|
|
$ |
34,184 |
|
|
$ |
14,812 |
|
|
|
|
|
|
|
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Net income per share: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
$ |
0.41 |
|
|
$ |
0.17 |
|
|
$ |
0.86 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.17 |
|
|
$ |
0.85 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
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|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
|
40,181 |
|
|
|
39,291 |
|
|
|
39,744 |
|
|
|
39,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
40,497 |
|
|
|
39,566 |
|
|
|
40,113 |
|
|
|
39,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders Equity
Nine Months Ended September 30, 2005, Three Months Ended December 31, 2005 and
Nine Months Ended September 30, 2006
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
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|
Accumulated |
|
|
|
|
|
|
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|
Stock |
|
Additional |
|
|
|
|
|
Other |
|
Deferred |
|
|
|
|
|
|
Shares |
|
|
|
|
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Stock |
|
Treasury |
|
|
(In thousands) |
|
Issued |
|
Amount |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Compensation |
|
Stock |
|
Total |
|
Balance at January 1, 2005 |
|
|
43,832 |
|
|
$ |
438 |
|
|
$ |
163,885 |
|
|
$ |
92,327 |
|
|
$ |
4,871 |
|
|
$ |
|
|
|
$ |
(51,486 |
) |
|
$ |
210,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
129 |
|
|
|
1 |
|
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519 |
|
Deferred stock compensation
for the issuance of
restricted common stock
units |
|
|
|
|
|
|
|
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
(854 |
) |
|
|
|
|
|
|
|
|
Amortization of deferred
stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406 |
|
|
|
|
|
|
|
406 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,812 |
|
|
|
(8,851 |
) |
|
|
|
|
|
|
|
|
|
|
5,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
43,961 |
|
|
|
439 |
|
|
|
165,257 |
|
|
|
107,139 |
|
|
|
(3,980 |
) |
|
|
(448 |
) |
|
|
(51,486 |
) |
|
|
216,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
37 |
|
|
|
1 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
Deferred stock compensation
for the issuance of
restricted common stock
units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
93 |
|
Issuance of common stock
under Deferred Compensation
Plan and held in rabbi trust |
|
|
11 |
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(483 |
) |
|
|
(384 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,596 |
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
9,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
44,009 |
|
|
|
440 |
|
|
|
165,674 |
|
|
|
115,735 |
|
|
|
(3,435 |
) |
|
|
(355 |
) |
|
|
(51,969 |
) |
|
|
226,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
stock compensation balance
upon adoption of SFAS 123R |
|
|
|
|
|
|
|
|
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
355 |
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
660 |
|
|
|
8 |
|
|
|
4,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,336 |
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
1,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,706 |
|
Excess tax benefit from
stock- based compensation |
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Issuance of common stock
under Deferred Compensation
Plan and held in rabbi
trust, net of settlements |
|
|
1 |
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
111 |
|
Issuance of restricted
common stock |
|
|
300 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to
Board of Directors
previously deferred under
the 1996 Non-employee
Director Fee Plan |
|
|
14 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
Modification of Deferred
Compensation Plan |
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
Issuance of common stock for
business acquisition |
|
|
270 |
|
|
|
2 |
|
|
|
4,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,401 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,184 |
|
|
|
6,646 |
|
|
|
|
|
|
|
|
|
|
|
40,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
45,254 |
|
|
$ |
453 |
|
|
$ |
176,064 |
|
|
$ |
149,919 |
|
|
$ |
3,211 |
|
|
$ |
|
|
|
$ |
(51,928 |
) |
|
$ |
277,719 |
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Sykes Enterprises, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005
(Unaudited)
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
34,184 |
|
|
$ |
14,812 |
|
Depreciation and amortization |
|
|
18,200 |
|
|
|
19,927 |
|
Stock compensation expense |
|
|
1,706 |
|
|
|
406 |
|
Deferred income tax provision (benefit) |
|
|
2,849 |
|
|
|
(1,013 |
) |
Net gain on disposal of property and equipment |
|
|
(13,856 |
) |
|
|
(1,743 |
) |
Termination costs associated with exit activities |
|
|
774 |
|
|
|
186 |
|
Foreign exchange gain on liquidation of foreign entities |
|
|
(72 |
) |
|
|
(369 |
) |
Reversal of restructuring and other charges |
|
|
|
|
|
|
(314 |
) |
Impairment of long-lived assets |
|
|
445 |
|
|
|
605 |
|
Bad debt expense (reversals) |
|
|
(135 |
) |
|
|
(141 |
) |
Unrealized gain on investments held in rabbi trust |
|
|
(54 |
) |
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(16,263 |
) |
|
|
1,225 |
|
Prepaid expenses and other current assets |
|
|
(3,014 |
) |
|
|
(117 |
) |
Deferred charges and other assets |
|
|
(2,275 |
) |
|
|
(3,076 |
) |
Accounts payable |
|
|
1,890 |
|
|
|
2,944 |
|
Income taxes receivable/payable |
|
|
1,182 |
|
|
|
(846 |
) |
Accrued employee compensation and benefits |
|
|
1,411 |
|
|
|
645 |
|
Other accrued expenses and current liabilities |
|
|
(1,031 |
) |
|
|
1,830 |
|
Deferred revenue |
|
|
5,722 |
|
|
|
2,726 |
|
Other long-term liabilities |
|
|
952 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
32,615 |
|
|
|
37,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(11,249 |
) |
|
|
(8,666 |
) |
Cash paid for business acquisition, net of cash acquired |
|
|
(17,364 |
) |
|
|
(3,246 |
) |
Proceeds from sale of facilities |
|
|
15,375 |
|
|
|
2,400 |
|
Proceeds from sale of property and equipment |
|
|
121 |
|
|
|
120 |
|
Investment in restricted cash |
|
|
(4,776 |
) |
|
|
(350 |
) |
Other |
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(18,022 |
) |
|
|
(9,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
(381 |
) |
|
|
(77 |
) |
Proceeds from issuance of stock |
|
|
4,336 |
|
|
|
519 |
|
Excess tax benefit from stock-based compensation |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,011 |
|
|
|
442 |
|
|
|
|
|
|
|
|
Effects of exchange rates on cash |
|
|
4,458 |
|
|
|
(4,453 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
23,062 |
|
|
|
23,935 |
|
Cash and cash equivalents beginning |
|
|
127,612 |
|
|
|
93,868 |
|
|
|
|
|
|
|
|
Cash and cash equivalents ending |
|
$ |
150,674 |
|
|
$ |
117,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during period for interest |
|
$ |
257 |
|
|
$ |
408 |
|
Cash paid during period for income taxes |
|
$ |
7,780 |
|
|
$ |
6,308 |
|
See accompanying notes to condensed consolidated financial statements.
6
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Sykes Enterprises, Incorporated and consolidated subsidiaries (Sykes or the Company) provides
outsourced customer contact management solutions and services in the business process outsourcing
arena to companies, primarily within the communications, technology/consumer, financial services,
healthcare, and transportation and leisure industries. Sykes provides flexible, high quality
outsourced customer contact management services (with an emphasis on inbound technical support and
customer service), which includes customer assistance, healthcare and roadside assistance,
technical support and product sales to its clients customers. Utilizing Sykes integrated
onshore/offshore global delivery model, Sykes provides its services through multiple communications
channels encompassing phone, e-mail, Web and chat. Sykes complements its outsourced customer
contact management services with various enterprise support services in the United States that
encompass services for a companys 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, inventory control,
product delivery and product returns handling. The Company has operations in two geographic regions
entitled (1) the Americas, which includes the United States, Canada, Latin America, India and the
Asia Pacific Rim, in which the client base is primarily companies in the United States that are
using the Companys services to support their customer management needs; and (2) EMEA, which
includes Europe, the Middle East, and Africa.
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(generally accepted accounting principles) for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and nine
months ended September 30, 2006 are not necessarily indicative of the results that may be expected
for any future quarters or the year ending December 31, 2006. For further information, refer to the
consolidated financial statements and notes thereto, included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange
Commission (SEC).
Stock-Based Compensation The Company has three stock-based compensation plans: the 2001 Equity
Incentive Plan (for employees and certain non-employees), the 2004 Non-Employee Director Fee Plan
(for non-employee directors), both approved by the shareholders, and the Deferred Compensation Plan
(for certain eligible employees), which are discussed more fully in Note 12. Stock-based awards
under these plans may consist of common stock, common stock units, stock options, cash-settled or
stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company
issues common stock to satisfy stock option exercises or vesting of stock awards.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, (SFAS 123R), Share-Based Payment, for its stock-based compensation
plans. In conjunction with the adoption of SFAS 123R on January 1, 2006 the Company also adopted
the following: Staff Accounting Bulletin (SAB) 107, Share-Based Payments, which provides guidance
on valuation methods available and other matters; Financial Accounting Standards Board (FASB) Staff
Position No. 123 R-2 (SFAS 123R-2), Practical Accommodation to the Application of Grant Date as
Defined in SFAS 123R, which provides guidance on the application of grant date; and FASB Staff
Position SFAS No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share
Based Payment Awards, which provides for an elective alternative transition method that
establishes a computational component to arrive at the beginning balance of the accumulated paid-in
capital pool related to employee compensation and a simplified method to determine the subsequent
impact on the accumulated paid-in capital pool of employee awards that are fully vested and
outstanding upon the adoption of SFAS 123R. The Company elected to use the alternative transition
method in conjunction with the adoption of SFAS 123R. The adoption of SFAS 123R did not have a
material effect on the Companys income before provision for income taxes, net income, cash flows
and basic and diluted earnings per share for the three and nine months ended September 30, 2006.
7
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies -(continued)
Stock-Based Compensation (continued)
SFAS 123R requires companies to recognize in their income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees and directors. The standard
requires that compensation expense for most equity-based awards be 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) be measured to fair-value at each balance sheet
date until the award is settled. Under SFAS 123R, the pro forma disclosures previously permitted
are no longer an alternative to financial statement recognition. The Company elected to use the
modified prospective method which requires the Company to record compensation expense for the
non-vested portion of previously issued awards that remain outstanding at the initial date of
adoption of SFAS 123R and to record compensation expense for any awards issued or modified after
January 1, 2006. Results for prior periods have not been restated. Upon adoption of SFAS 123R, the
deferred stock compensation balance of $0.4 million as of January 1, 2006 was reclassified to
additional paid-in capital in the accompanying Condensed Consolidated Statement of Changes in
Shareholders Equity. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow and a corresponding reduction
in operating cash flows, rather than as an operating cash flow as previously required. Accordingly,
the excess tax benefit of $0.1 million for the nine months ended September 30, 2006 was classified
as a financing cash flow and a corresponding reduction in operating cash flows in the accompanying
Condensed Consolidated Statement of Cash Flows.
On February 1, 2005, the Compensation Committee of the Board of Directors approved accelerating the
vesting of most out-of-the-money, unvested stock options held by current employees, including
executive officers and certain employee directors. An option was considered out-of-the-money if the
stated option exercise price was greater than the closing price, $7.23, of the Companys common
stock on the day the Compensation Committee approved the acceleration. The aggregate number of
shares issuable under the accelerated stock options was 125,550 at a weighted average exercise
price of $9.416 as of February 1, 2005.
The Compensation Committee also approved accelerating the vesting of out-of the-money, unvested
stock options held by non-employee directors, subject to shareholder approval at the May 2005
Annual Shareholders Meeting. Options held by non-employee directors were considered
out-of-the-money if the stated option exercise price was greater than the closing price, $8.39, of
the Companys common stock on May 24, 2005. Upon
shareholder approval in May 2005, the Company accelerated the vesting of 8,332 unvested stock options at an exercise
price of $8.732 on May 24, 2005. There was no additional compensation expense recognized in 2005,
or in the amounts in the pro forma stock-based compensation table presented within this Note 1, as
a result of accelerating the vesting of the stock options on February 1, 2005 and May 24, 2005.
The decision to accelerate vesting of these options and eliminate future compensation expense was
based on a review of the Companys long-term incentive programs in light of current market
conditions and changing accounting rules regarding stock option expensing under SFAS 123R.
Excluding holders of foreign stock options that elected to decline the accelerated vesting, it is
estimated that the maximum future compensation expense that would have been charged to earnings,
absent the acceleration of these options, based on adoption date for SFAS 123R as of January 1,
2006, was less than $0.1 million.
Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations and disclosure
requirements established by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). The
Company had the option under SFAS 123 to measure compensation costs for stock options using the
intrinsic value method prescribed by APB 25. Under APB 25, compensation expense was generally not
recognized for stock option grants if the exercise price was the same as the market price and the
number of shares to be issued was set on the date the employee stock options were granted. Since
the Company granted employee stock options on this basis and the Company elected to use the
intrinsic value method, no compensation expense was recognized for stock option grants. For grants
of common stock units awarded to non-employee directors, under the 2004 Non-Employee Director Fee
Plan, compensation expense was
8
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
recognized over the requisite service periods based on the fair value of the Companys stock on the
date of grant, which is the same under APB 25 and SFAS 123R.
The following table presents the impact on net income and net income per share as if the Company
had elected to recognize compensation expense for the issuance of options to employees of the
Company based on the fair value method of accounting prescribed by SFAS 123 prior to the adoption
of SFAS 123R:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In thousands except per share amounts) |
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net Income: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
6,870 |
|
|
$ |
14,812 |
|
Add: Stock-based compensation included in
reported net income, net of tax |
|
|
93 |
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
Deduct: Stock-based compensation under the
fair value method, net of tax |
|
|
(109 |
) |
|
|
(913 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
6,854 |
|
|
$ |
14,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share: |
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.17 |
|
|
$ |
0.38 |
|
Basic, pro forma |
|
$ |
0.17 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
0.17 |
|
|
$ |
0.38 |
|
Diluted, pro forma |
|
$ |
0.17 |
|
|
$ |
0.36 |
|
The Company has not issued any stock options since January 1, 2004. For options issued before this
date, the Company used the Black-Scholes option pricing model to estimate the fair value of each
stock option at the date of grant using various assumptions.
Investments Held in Rabbi Trust Securities held in a rabbi trust for a supplemental nonqualified
executive retirement program, as more fully described under Deferred Compensation Plan in Note
12, Stock-Based Compensation Plans, include the fair market value of investments in various mutual
funds and shares of the Companys common stock. The fair market value of these investments is
determined by quoted market prices and is adjusted to the current market price at the end of each
reporting period. The investments held in mutual funds, classified as trading securities, had a
fair market value of approximately $0.9 million and $0.7 million at September 30, 2006 and December
31, 2005 and are included in Prepaid expenses and other current assets and Deferred charges and
other assets in the accompanying Condensed Consolidated Balance Sheets, respectively. These
investments were comprised of 75% equity securities and 25% debt securities at September 30, 2006
and 55% equity securities and 45% debt securities at December 31, 2005. During the three and nine
months ended September 30, 2006, the Company recorded $0.1 million in unrealized gains from holding
these investments which is included in Other income (expense) in the accompanying Condensed
Consolidated Statements of Operations (none in the comparable 2005 period.)
The investments held in the Companys common stock had a carrying value of approximately $0.4
million and $0.5 million at September 30, 2006 and December 31, 2005, respectively, and are
included in Treasury Stock in the accompanying Condensed Consolidated Balance Sheets. During the
nine months ended September 30, 2006, the Company recorded approximately $0.1 million in
compensation expense associated with these investments, which is
9
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies -(continued)
Investments Held in Rabbi Trust (continued)
included in General and administrative in the accompanying Condensed Consolidated Statements of
Operations (none in the comparable 2005 period.)
Property and Equipment The carrying value of property and equipment, including leased assets, to
be held and used is evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. An asset is considered to be impaired when the
sum of the undiscounted future net cash flows expected to result from the use of the asset and its
eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if
any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair
value, which is generally determined based on appraisals or sales prices of comparable assets.
Occasionally, the Company redeploys property and equipment from under-utilized centers to other
locations to improve capacity utilization if it is determined that the related undiscounted future
cash flows in the under-utilized centers would not be sufficient to recover the carrying amount of
these assets. During the three months ended March 31, 2006, based on the Companys evaluation for
impairment, the Company recorded a $0.4 million impairment charge for property and equipment in one
of its underutilized European customer contact management centers. This impairment charge
represented the amount by which the carrying value of the assets exceeded the estimated fair value
of those assets which cannot be redeployed to other locations. Additionally, during the three
months ended September 30, 2006, the Company recorded an impairment charge of $0.1 million for
property and equipment no longer used in one of its Philippine facilities. Except as noted above,
the Company determined that its property and equipment, including the idle facility in Perry
County, Kentucky, were not impaired as of September 30, 2006.
On September 13, 2006, the Company sold its third party leased U.S. customer contact management
centers located in Palatka, Florida, Pikeville, Kentucky, Ada, Oklahoma, and Manhattan, Kansas to
an unrelated third party for cash totaling $14.6 million, net of selling costs, resulting in a net
gain of $13.9 million. The net book value of the facilities of $6.3 million and other related
assets of $0.5 million were offset by the related deferred grants of $6.1 million. The cost of the
neighboring vacant land at these locations of $0.5 million, currently held for sale, is classified
as Prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance
Sheet as of September 30, 2006 and the related deferred grants of $0.3 million are shown in current
liabilities.
Foreign Currency Translation - The assets and liabilities of the Companys foreign subsidiaries,
whose functional currency is other than the U.S. Dollar, are translated at the exchange rates in
effect on the reporting date, and income and expenses are translated at the weighted average
exchange rate during the period. The net effect of translation gains and losses is not included in
determining net income, but is included in Accumulated Other Comprehensive Income (Loss), which is
reflected as a separate component of shareholders equity until the sale or until the complete or
substantially complete liquidation of the net investment in the foreign subsidiary. Foreign
currency transactional gains and losses are included in other income (expense) in the accompanying
Condensed Consolidated Statements of Operations.
Foreign Currency and Derivative Instruments Periodically, the Company enters into
foreign currency contracts with financial institutions to protect against currency exchange risks
associated with existing assets and liabilities denominated in a foreign currency. These contracts
require the Company to exchange currencies in the future at rates agreed upon at the contracts
inception. The contracts entered into by the Company have been primarily related to the Euro. A
foreign currency contract acts as an economic hedge as the gains and losses on these contracts
typically offset or partially offset gains and losses on the assets, liabilities, and transactions
being hedged. The Company does not designate its foreign currency contracts as accounting hedges
and does not hold or issue financial instruments for speculative or trading purposes. Foreign
currency contracts are accounted for on a mark-to-market basis, with unrealized gains or losses
recognized as a component of other income (expense). There were no realized and unrealized gains
or losses related to these contracts for the three and nine months ended September 30, 2006 and
2005.
10
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies -(continued)
Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (the EITF)
reached a consensus on Issue No. 03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF 03-1 provides guidance on other-than-temporary
impairment evaluations for securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments
Held by Not-for-Profit Organizations, and non-marketable equity securities accounted for under the
cost method. The EITF developed a basic three-step test to evaluate whether an investment is
other-than-temporarily impaired. In September 2004, the FASB delayed the effective date of the
recognition and measurement provisions of EITF 03-1. However, the disclosure provisions were
effective for fiscal years ending after June 15, 2004. In November 2005, the FASB issued final FASB
Staff Position Nos. SFAS 115-1 and SFAS 124-1 The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments which superseded EITF 03-1 and provided similar guidance.
The Company adopted the guidance in these standards on January 1, 2006. The impact of this adoption
did not have a material impact on the financial condition, results of operations or cash flows of
the Company.
In May 2005, the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes and Error Corrections,
which requires retrospective application to prior periods financial statements for changes in
accounting principle and redefines the term restatement as the revising of previously issued
financial statements to reflect the correction of an error. Under retrospective application, the
new accounting principle is applied as of the beginning of the first period presented as if that
principle had always been used. The cumulative effect of the change is reflected in the carrying
value of assets and liabilities as of the first period presented and the offsetting adjustments are
recorded to opening retained earnings. SFAS 154 is effective for accounting changes and
corrections of errors made in the years beginning after December 31, 2005.
In February 2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 140 (SFAS 140), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for
certain derivatives embedded in other financial instruments by allowing them to be accounted for as
a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155
also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective
for all financial instruments acquired, issued or subject to a remeasurement event occurring in
fiscal years beginning after September 15, 2006. The Company does not expect the adoption of this
standard to have a material impact on its financial position, results of operations or cash flows.
In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6 (FIN 46(R)-6), Determining the
Variability to Be Considered in Applying FASB Interpretation No. 46(R), that will become effective
beginning the first day of the first reporting period after June 15, 2006. FIN 46(R)-6 clarifies
that the variability to be considered in applying FASB Interpretation 46(R) shall be based on an
analysis of the design of the variable interest entity. The adoption of FIN 46(R)-6 did not have a
material impact on the financial condition, results of operations or cash flows of the Company.
In July 2006, the FASB issued FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 provides guidance on the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of this standard on its financial condition, results of operations and cash
flows.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years ending on
11
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies -(continued)
Recent Accounting Pronouncements (continued)
or after November 15, 2007. The Company is currently evaluating the impact of this standard on its
financial condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS 158 requires a company to (a) recognize in its statement of financial position an
asset for a plans overfunded status or a liability for a plans underfunded status (b) measure a
plans assets and its obligations that determine its funded status as of the end of the employers
fiscal year, and (c) recognize changes in the funded status of a defined postretirement plan in the
year in which the changes occur (reported in comprehensive income). The requirement to recognize
the funded status of a benefit plan and the disclosure requirements are effective for fiscal years
ending after December 15, 2006. The requirement to measure the plan assets and benefit obligations
as of a companys year-end balance sheet date is effective for fiscal years ending after December
15, 2008. The Company is currently evaluating the impact of this standard on its financial
condition, results of operations and cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No, 108 (SAB 108), Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or a
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using both a balance
sheet and income statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors considered, is material.
SAB 108 is effective for fiscal years ending on or after November 15, 2006, with early application
encouraged. The Company is currently evaluating the impact of this standard, but does not expect
the adoption of this standard to have a material impact on its financial position, results of
operations or cash flows.
Note 2 Acquisition
On July 3, 2006, the Company completed the acquisition of all the outstanding shares of capital
stock Centro Interacción Multimedia, S.A. (Apex), an established customer contact management
solutions and services provider headquartered in the City of Cordoba, Argentina. Apex serves
clients in Argentina, Mexico and the United States. The results of operations of Apex have been
included in the Companys results of operations for its Americas segment beginning in the third
quarter of 2006. Client programs range from in-bound customer care and help-desk/technical support
to out-bound sales and cross selling within the business-to-consumer and certain
business-to-business segments for Internet Service Providers, wireless carriers and credit card
companies. The Company acquired these operations in an effort to broaden its operations in a
growing market in the communications and financial services verticals. The purchase price for the
shares was $27.4 million less $0.4 million, representing APEXs obligations on certain of its
capital leases as of the closing date, for a net purchase price of $27.0 million, eighty percent of
which ($21.6 million) was paid in cash from offshore operations and twenty percent of which ($5.4
million) was paid by the delivery of 330,992 shares of the common stock of the Company, valued at
$16.324 per share. Of the net purchase price of $27.0 million, $5.0 million was paid to an escrow
account (eighty percent in cash and twenty percent in common stock) to secure the sellers
indemnification obligations and to provide for a holdback of the purchase price until amounts
billed by Apex to a major client reach established targets. At the end of a two-year escrow period,
any portion of the cash and stock not retained to satisfy the holdback provisions of the purchase
price will be returned to the sellers. Based on a third-party valuation, the net purchase price of
$27.0 million less the $5.0 million contingent purchase price held in escrow plus direct
acquisition costs of $0.5 million, or $22.5 million, resulted in a purchase price allocation to net
assets of $4.2 million, to purchased intangible assets of $6.9 million (primarily customer
relationships, existing technologies and covenants not to compete) and to goodwill of $14.3 million
less a deferred tax liability of $2.9 million. The purchased intangible assets (other than
goodwill) are amortized over a period of two to six years.
On July 3, 2006, after the acquisition of Apex was completed, the Company contributed additional
capital of $1.3 million to Apex for working capital support and general corporate purposes.
12
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 2 Acquisition (continued)
The following unaudited pro forma data summarizes the combined results of operations of Sykes and
Apex for all periods presented as if the combination had been consummated on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
$ |
149,287 |
|
|
$ |
127,952 |
|
|
$ |
429,652 |
|
|
$ |
380,073 |
|
|
Income before provision for income taxes |
|
$ |
23,128 |
|
|
$ |
8,340 |
|
|
$ |
43,249 |
|
|
$ |
21,227 |
|
|
Net income |
|
$ |
16,514 |
|
|
$ |
7,310 |
|
|
$ |
35,925 |
|
|
$ |
15,991 |
|
|
Net income per diluted share |
|
$ |
0.41 |
|
|
$ |
0.18 |
|
|
$ |
0.90 |
|
|
$ |
0.40 |
|
Estimated future amortization expense for the five succeeding years excluding the effects of the
contingent purchase price held in escrow is as follows (in thousands):
|
|
|
|
|
Year Ending December 31, |
|
Amount |
2006 (remaining three months) |
|
$ |
316 |
|
2007 |
|
$ |
1,264 |
|
2008 |
|
$ |
1,214 |
|
2009 |
|
$ |
1,137 |
|
2010 |
|
$ |
1,110 |
|
Note 3 Goodwill and Purchased and Other Intangibles, Net
Goodwill In accordance with SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets, the
Company reviews goodwill and other intangible assets with indefinite lives for impairment annually,
or more frequently in the presence of certain circumstances, by applying a fair value based test.
Fair value of goodwill is based on discounted cash flows, market multiples and/or appraised values
as appropriate. Under SFAS 142, the carrying value of assets is calculated at the lowest levels for
which there are identifiable cash flows (the reporting unit). If the fair value of the reporting
unit is less than its carrying value, an impairment loss is recorded to the extent that the fair
value of the goodwill within the reporting unit is less than its carrying value. The Company
completed its annual goodwill impairment test during the third quarter of 2006 and determined that
the carrying amount of goodwill was not impaired. The Company expects to receive future benefits
from previously acquired goodwill over an indefinite period of time.
Intangible Assets SFAS 142 also requires that intangible assets with definite lives be amortized
over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144 (SFAS
144), Accounting for the Impairment or Disposal of Long-Lived Assets. 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 an impairment exists.
The Company amortizes acquired intangible assets with definite lives, primarily customer
relationships, trade name, existing technologies and covenants not to compete, using the
straight-line method over their estimated periods of benefit, generally ranging from two to fifteen
years. Amortization expense was $0.4 million and $0.6 million during the three and nine months
ended September 30, 2006 and $0.1 million and $0.2 million during the comparable 2005 periods,
respectively.
13
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 3 Goodwill and Purchased and Other Intangibles, Net (continued)
The following table presents the purchased intangibles, subject to amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Gross Carrying Amount |
|
$ |
9,351 |
|
|
$ |
2,432 |
|
Accumulated Amortization |
|
|
(949 |
) |
|
|
(320 |
) |
|
|
|
|
|
|
|
Net Carrying Amount |
|
$ |
8,402 |
|
|
$ |
2,112 |
|
|
|
|
|
|
|
|
The increase in purchased intangibles during the nine months ended September 30, 2006 was due to
the Apex acquisition in Argentina, as discussed in Note 2, Acquisitions.
Estimated future amortization expense for the five succeeding years, including estimates for the
Apex acquisition discussed in Note 2, is as follows (in thousands):
|
|
|
|
|
Year Ending December 31, |
|
Amount |
2006 (remaining three months) |
|
$ |
416 |
|
2007 |
|
$ |
1,532 |
|
2008 |
|
$ |
1,349 |
|
2009 |
|
$ |
1,268 |
|
2010 |
|
$ |
1,240 |
|
Note 4 Deferred Revenue
The components of deferred revenue consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Future service |
|
$ |
28,018 |
|
|
$ |
24,247 |
|
Penalties and holdbacks |
|
|
4,014 |
|
|
|
925 |
|
|
|
|
|
|
|
|
|
|
$ |
32,032 |
|
|
$ |
25,172 |
|
|
|
|
|
|
|
|
Note 5 Accumulated Other Comprehensive Income (Loss)
The Company presents data in the Condensed Consolidated Statements of Changes in Shareholders
Equity in accordance with SFAS No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes rules for the reporting of comprehensive income (loss) and its components.
14
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 5 Accumulated Other Comprehensive Income (Loss) (continued)
The components of accumulated other comprehensive income (loss) include foreign currency
translation adjustments as follows (in thousands):
|
|
|
|
|
|
|
Accumulated |
|
|
|
Other |
|
|
|
Comprehensive |
|
|
|
Income (Loss) |
|
Balance at January 1, 2005 |
|
$ |
4,871 |
|
Foreign currency translation adjustment |
|
|
(8,540 |
) |
Less: foreign currency translation loss included in net
income (no tax effect) |
|
|
234 |
|
|
|
|
|
Balance at December 31, 2005 |
|
|
(3,435 |
) |
Foreign currency translation adjustment |
|
|
6,646 |
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
3,211 |
|
|
|
|
|
Earnings associated with the Companys investments in its international subsidiaries are considered
to be permanently invested and no provision for United States federal and state income taxes on
those earnings or translation adjustments has been provided.
Note 6 Termination Costs Associated with Exit Activities
On November 3, 2005, the Company committed to a plan (the Plan) to reduce its workforce by
approximately 200 people in one of its European customer contact management centers in Germany in
response to the October 2005 contractual expiration of a technology client program, which
previously had generated annual revenues of approximately $12.0 million. The Company expected to
complete the Plan by the end of the third quarter of 2006; however, due to a contract extension,
the Company now expects to complete the Plan by the end of the second quarter of 2007. The Company
estimates it will incur total charges related to the Plan of approximately $1.6 million to $1.9
million, an increase of $0.3 million from December 31, 2005. These charges include approximately
$1.3 million to $1.5 million for severance and related costs and $0.1 million to $0.2 million for
other exit costs. Additionally the Company ceased using certain property and equipment estimated at
$0.2 million, and depreciated these assets over a shortened useful life, which approximates eight
months. As a result, the Company recorded additional depreciation of approximately $0.2 million
during the nine months ended September 30, 2006. Termination costs of $0.8 million are included in
Direct salaries and related costs in the accompanying Condensed Consolidated Statement of
Operations for the nine months ended September 30, 2006. Cash payments related to termination costs
made under the Plan totaled $0.6 million for the nine months ended September 30, 2006. Termination
costs to date approximate $1.3 million as of September 30, 2006 with cash payments to date of $0.6
million.
On January 19, 2005, the Company announced to its workforce that, as part of its continued efforts
to optimize assets and improve operating performance, it would migrate the call volumes of the
customer contact management services and related operations from its Bangalore, India facility, a
component of the Companys Americas segment, to other offshore facilities. Before the plan of
migration, the Companys Bangalore facility generated approximately $0.9 million in revenue in the
first quarter of 2005, the last full quarter of operations. The Company substantially completed the
plan of migration, including the redeployment of site infrastructure and the recruiting, training
and ramping-up of agents associated with the migration of Bangalore call volumes to other offshore
facilities, in the second quarter of 2005. In connection with this migration, the Company
terminated 413 employees and accrued over their remaining service period, an estimated liability
for termination costs of $0.2 million million based on the fair value as of the termination date,
in accordance SFAS No. 146, Accounting for Costs associated with Exit or Disposal Activities.
These termination costs are included in Direct salaries and related costs in the accompanying
Consolidated Statement of Operations for the three and nine months ended September 30, 2005,
respectively. Cash payments related to these termination costs totaled $0.1 million and $0.2
million during the three and nine months ended September 30, 2005, respectively.
15
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 7 Restructuring and Other Charges
2002 Charges
In October 2002, the Company approved a restructuring plan to close and consolidate two U.S. and
three European customer contact management centers, to reduce capacity within the European
fulfillment operations and to write-off certain specialized e-commerce assets primarily in response
to the October 2002 notification of the contractual expiration of two technology client programs in
March 2003 with approximate annual revenues of $25.0 million. The restructuring plan was designed
to reduce costs and bring the Companys infrastructure in-line with the current business
environment. Related to these actions, the Company recorded restructuring and other charges in the
fourth quarter of 2002 of $20.8 million primarily for the write-off of certain assets, lease
termination and severance costs. In connection with the 2002 restructuring, the Company reduced the
number of employees by 470 during 2002 and by 330 during 2003. The plan was substantially completed
by the end of 2003.
The following tables summarize the 2002 plan accrued liability for restructuring and other charges
and related activity in 2005 (in thousands) (no activity in 2006):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Other |
|
Balance at |
|
|
July 1, |
|
Cash |
|
Non-Cash |
|
September 30, |
Three Months ended September 30, 2005: |
|
2005 |
|
Outlays |
|
Changes |
|
2005 |
|
|
|
Severance and related costs |
|
$ |
34 |
|
|
$ |
(34 |
) |
|
$ |
|
|
|
$ |
|
|
Other restructuring costs |
|
|
26 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60 |
|
|
$ |
(60 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Other |
|
Balance at |
|
|
January 1, |
|
Cash |
|
Non-Cash |
|
September 30, |
Nine Months ended September 30, 2005: |
|
2005 |
|
Outlays |
|
Changes (1) |
|
2005 |
|
|
|
Severance and related costs |
|
$ |
106 |
|
|
$ |
(34 |
) |
|
$ |
(72 |
) |
|
$ |
|
|
Other restructuring costs |
|
|
285 |
|
|
|
(43 |
) |
|
|
(242 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
391 |
|
|
$ |
(77 |
) |
|
$ |
(314 |
) |
|
$ |
|
|
|
|
|
|
|
|
(1) |
|
During 2005, the Company reversed severance and related costs and certain other closing
costs associated primarily with the closure of certain European customer contact management
centers. |
2000 Charges
The Company recorded restructuring and other charges during the second and fourth quarters of 2000
approximating $30.5 million. The second quarter 2000 restructuring and other charges approximating
$9.6 million resulted from the Companys consolidation of several European and one U.S. fulfillment
center and the closing or consolidation of six technical staffing offices. Included in the second
quarter 2000 restructuring and other charges was a $3.5 million lease termination payment to the
Companys former chairman (and largest shareholder) related to the termination of a ten-year
operating lease agreement for the use of his private jet. As a result of the second quarter 2000
restructuring, the Company reduced the number of employees by 157 during 2000 and satisfied the
remaining lease obligations related to the closed facilities during 2001.
The Company also announced, after a comprehensive review of operations, its decision to exit
certain non-core, lower margin businesses to reduce costs, improve operating efficiencies and focus
on its core competencies of technical support, customer service and consulting solutions. As a
result, the Company recorded $20.9 million in
16
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 7 Restructuring and Other Charges (continued)
2000 Charges (continued)
restructuring and other charges during the fourth quarter of 2000 related to the closure of its
U.S. fulfillment operations, the consolidation of its Tampa, Florida technical support center and
the exit of its worldwide localization operations. Included in the fourth quarter 2000
restructuring and other charges is a $2.4 million severance payment related to the employment
contract of the Companys former President. In connection with the fourth quarter 2000
restructuring, the Company reduced the number of employees by 245 during the first half of 2001 and
satisfied a significant portion of the remaining lease obligations related to the closed facilities
during 2001.
The following tables summarize the 2000 plan accrued liability for restructuring and other charges
and related activity in 2005 (in thousands) (no activity in 2006):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Other |
|
Balance at |
|
|
July 1, |
|
Cash |
|
Non-Cash |
|
September 30, |
Three Months ended September 30, 2005: |
|
2005 |
|
Outlays |
|
Changes |
|
2005 |
|
|
|
Severance and related costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Other |
|
Balance at |
|
|
January 1, |
|
Cash |
|
Non-Cash |
|
September 30, |
Nine Months ended September 30, 2005: |
|
2005 |
|
Outlays |
|
Changes |
|
2005 |
|
|
|
Severance and related costs |
|
$ |
87 |
|
|
$ |
(87 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
Note 8 Borrowings
On March 15, 2004, the Company entered into a $50.0 million revolving credit facility with a group
of lenders (the Credit Facility), which amount is subject to certain borrowing limitations.
Pursuant to the terms of the Credit Facility, the amount of $50.0 million may be increased up to a
maximum of $100.0 million with the prior written consent of the lenders. The $50.0 million Credit
Facility includes a $10.0 million swingline subfacility, a $15.0 million letter of credit
subfacility and a $40.0 million multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general corporate
purposes including acquisitions, share repurchases, working capital support, and letters of credit,
subject to certain limitations. The Credit Facility, including the multi-currency subfacility,
accrues interest, at the Companys option, at (a) the Base Rate (defined as the higher of the
lenders prime rate or the Federal Funds rate plus 0.50%) plus an applicable margin up to 0.50%, or
(b) the London Interbank Offered Rate (LIBOR) plus an applicable margin up to 2.25%. Borrowings
under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to
0.50% and borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an
applicable margin up to 2.25%. In addition, a commitment fee of up to 0.50% is charged on the
unused portion of the Credit Facility on a quarterly basis. The borrowings under the Credit
Facility, which will terminate on March 14, 2008, are secured by a pledge of 65% of the stock of
each of the Companys active direct foreign subsidiaries. The Credit Facility prohibits the Company
from incurring additional indebtedness, subject to certain specific exclusions. There were no
borrowings during the three and nine months ended September 30, 2006 and no outstanding balances as
of September 30, 2006 with $50.0 million availability on the Credit Facility.
Note 9 Income Taxes
The Companys effective tax rate was 15.7% and 23.8% for the nine months ended September 30, 2006
and 2005, respectively. The 8.1% decrease in the effective tax rate was primarily due to tax
benefits of approximately $3.0
17
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 9 Income Taxes (continued)
million resulting from the Canadian tax appeals settlement, additional income earned in tax holiday
jurisdictions accompanied by the shift in the mix of earnings within tax jurisdictions and the
effects of permanent differences, valuation allowances, foreign withholdings and other taxes, state
income taxes and foreign income tax rate differentials. The differences in the Companys effective
tax rate of 15.7% as compared to the U.S. statutory federal income tax rate of 35.0% was primarily
due to tax benefits of approximately $3.0 million resulting from the Canadian tax appeals
settlement and additional income earned in tax holiday jurisdictions; accompanied by the effects of
requisite valuation allowances, permanent differences, foreign withholding and other taxes, state
income taxes and foreign income tax rate differentials.
Earnings associated with the Companys investments in its international subsidiaries are considered
to be permanently invested and no provision for federal and state income taxes on those earnings or
translation adjustments has been provided. Determination of any unrecognized deferred tax liability
for temporary differences related to investments in foreign subsidiaries that are essentially
permanent in nature is not practicable.
The Company is currently under examination in the U.S. by several states for sales and use taxes
and franchise taxes for periods covering 1999 through 2003. The U.S. Internal Revenue Service
completed audits of the Companys U.S. tax returns for tax years through July 31, 1999 and is
currently auditing the tax years ended July 31, 2002, July 31, 2003 and December 31, 2003. Certain
German subsidiaries of the Company are under examination by the German tax authorities for periods
covering 1997 through 2003. Additionally, certain Canadian subsidiaries are under examination by
Canadian tax authorities for tax years 1999 through 2003, a Philippine subsidiary is being audited
by the Philippine tax authorities for tax years 2003 and 2004, and Indias tax authorities have
initiated inquiries with respect to the Companys operations in India for tax years ended in 2004
and 2005.
As of September 30, 2006 and December 31, 2005, the Company had a contingent income tax liability
of $2.2 million and $3.2 million, respectively, consisting of amounts for subsidiaries located in
both the Americas and EMEA segments that is included in Income taxes payable in the accompanying
Condensed Consolidated Balance Sheets. The net decrease of $1.0 million was primarily due to tax
benefits resulting from the Canadian tax appeals settlement for tax years 1993 through 1998,
partially offset by federal and provincial determinations made by the Canadian tax authorities in
the tax examinations for tax years 1999 through 2003. The amount of the contingent liability is
based on an estimate of the probable liability in accordance with SFAS No. 5 Accounting for
Contingencies, using available evidence, including detailed analyses of the potential income tax
issues, income tax assessments and notices of disallowance, consultation with independent outside
tax and legal advisors and the Companys historical experience in settling similar issues without
additional income tax liability. Management believes that the $2.2 million contingent income tax
liability, a net decrease of $1.0 million from December 31, 2005, is the probable amount that will
be paid upon settlement of the related tax audits based on current available evidence and issues
and does not believe there would be a material impact on liquidity beyond what has been provided
for in Income taxes payable.
Note 10 Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding
during the periods. Diluted earnings per share includes the weighted average number of common
shares outstanding during the respective periods and the further dilutive effect, if any, from
stock options, stock appreciation rights, common stock units and shares held in a rabbi trust using
the treasury stock method. Options to purchase 0.1 million shares and 0.3 million shares of common
stock at various prices for the three and nine month periods ended September 30, 2006 and 0.3
million shares and 1.4 million shares of common stock for the comparable 2005 periods were
antidilutive and were excluded from the calculation of diluted earnings per share.
18
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 10 Earnings Per Share (continued)
The numbers of shares used in the earnings per share computations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
40,181 |
|
|
|
39,291 |
|
|
|
39,744 |
|
|
|
39,242 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, stock
appreciation
rights and common stock units |
|
|
316 |
|
|
|
275 |
|
|
|
369 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted shares outstanding |
|
|
40,497 |
|
|
|
39,566 |
|
|
|
40,113 |
|
|
|
39,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 5, 2002, the Companys Board of Directors authorized the Company to purchase up to three
million shares of its outstanding common stock. A total of 1.6 million shares have been repurchased
under this program since inception. The shares are purchased, from time to time, through open
market purchases or in negotiated private transactions, and the purchases are based on factors,
including but not limited to, the stock price and general market conditions. During the nine
months ended September 30, 2006, the Company made no purchases under the 2002 repurchase program.
Note 11 Segments and Geographic Information
The Company operates within two regions, the Americas and EMEA which represented 69.1% and
30.9%, respectively, of the Companys consolidated revenues for the three months ended September
30, 2006 and 67.9% and 32.1%, respectively, of the Companys consolidated revenues for the nine
months ended September 30, 2006. In the comparable 2005 periods, the Americas and EMEA regions
represented 65.5% and 34.5%, respectively, of the Companys consolidated revenues for the three
months ended September 30, 2005 and 63.4% and 36.6%, respectively, of the Companys consolidated
revenues for the nine months ended September 30, 2005. 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 demand of the
Companys global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada,
Latin America, India and the Asia Pacific Rim, and provides outsourced customer contact management
solutions (with an emphasis on technical support and customer service) and technical staffing and
(2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer
contact management solutions (with an emphasis on technical support and customer service) and
fulfillment services. The sites within Latin America, India and the Asia Pacific Rim are included
in the Americas region given the nature of the business and client profile, which is primarily made
up of U.S. based companies that are using the Companys services in these locations to support
their customer contact management needs.
19
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 11 Segments and Geographic Information (continued)
Information about the Companys reportable segments for the three and nine months ended September
30, 2006 compared to the corresponding prior year periods, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Three Months Ended September 30,
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
103,184 |
|
|
$ |
46,103 |
|
|
|
|
|
|
$ |
149,287 |
|
Depreciation and amortization |
|
$ |
5,215 |
|
|
$ |
1,107 |
|
|
|
|
|
|
$ |
6,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
impairment of long-lived assets |
|
$ |
29,457 |
|
|
$ |
3,217 |
|
|
$ |
(10,814 |
) |
|
$ |
21,860 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,797 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
1,331 |
|
|
|
1,331 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(6,614 |
) |
|
|
(6,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
80,310 |
|
|
$ |
42,286 |
|
|
|
|
|
|
$ |
122,596 |
|
Depreciation and amortization |
|
$ |
5,388 |
|
|
$ |
1,249 |
|
|
|
|
|
|
$ |
6,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
impairment of long-lived assets |
|
$ |
13,174 |
|
|
$ |
2,338 |
|
|
$ |
(8,503 |
) |
|
$ |
7,009 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(605 |
) |
|
|
(605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,404 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
1,278 |
|
|
|
1,278 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(812 |
) |
|
|
(812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
282,393 |
|
|
$ |
133,202 |
|
|
|
|
|
|
$ |
415,595 |
|
Depreciation and amortization |
|
$ |
14,740 |
|
|
$ |
3,460 |
|
|
|
|
|
|
$ |
18,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
impairment of long-lived assets |
|
$ |
56,633 |
|
|
$ |
5,591 |
|
|
$ |
(26,792 |
) |
|
$ |
35,432 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(445 |
) |
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,987 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,577 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 11 Segments and Geographic Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
Nine Months Ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
231,980 |
|
|
$ |
134,182 |
|
|
|
|
|
|
$ |
366,162 |
|
Depreciation and amortization |
|
$ |
15,566 |
|
|
$ |
4,361 |
|
|
|
|
|
|
$ |
19,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
reversal of restructuring and other charges
and before impairment of long-lived assets |
|
$ |
35,396 |
|
|
$ |
5,973 |
|
|
$ |
(23,812 |
) |
|
$ |
17,557 |
|
Reversal of restructuring and other charges |
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
314 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(605 |
) |
|
|
(605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,266 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
2,161 |
|
|
|
2,161 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(4,615 |
) |
|
|
(4,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other items (including corporate costs, restructuring and impairment costs,
other income and expense, and income taxes) are shown for purposes of reconciling to the Companys
consolidated totals as shown in the table above for the three and nine months ended September 30,
2006 and 2005. 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, 2005. 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. |
The Americas revenues included $14.5 million and $32.1 million, or 9.7% and 7.7%,
respectively, of consolidated revenues for the three and nine months ended September 30, 2006, from
a leading systems integrator that represents a major provider of communication services to whom the
Company provides various outsourced customer contact management services. During the three and nine
months ended September 30, 2005, the Company had no clients that exceeded ten percent of
consolidated revenues.
Note 12 Stock-Based Compensation
A detailed description of each of the Companys stock-based compensation plans is provided below,
including the 2001 Equity Incentive Plan, the 2004 Non-Employee Director Fee Plan and the Deferred
Compensation Plan. Stock-based compensation expense related to these plans, which is included in
General and administrative costs in the accompanying Condensed Consolidated Statements of
Operations, was $0.6 million and $1.7 million for the three and nine months ended September 30,
2006. The costs for the comparable 2005 periods were $0.1 million and $0.4 million. There were no
related income tax benefits recognized in the accompanying Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2006. In addition, the Company
(reversed) realized the benefit of tax deductions in excess of recognized tax benefits of $(0.6)
million and $0.1 million from the exercise of stock options in the three and nine months ended
September 30, 2006, respectively. There were no capitalized stock-based compensation costs at
September 30, 2006.
2001 Equity Incentive Plan The Companys 2001 Equity Incentive Plan (the
Plan), which is shareholder-approved, permits the grant of stock options, stock appreciation
rights, restricted stock and other stock-based awards to certain employees of the Company, and
certain non-employees who provide services to the Company, for up to 7.0 million shares of common
stock in order to encourage them to remain in the employment of or to diligently provide services
to the Company and to increase their interest in the Companys success.
21
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock Options Options are granted at fair market value on the date of the grant and generally
vest over one to four years. All options granted under the Plan expire if not exercised by the
tenth anniversary of their grant date. The fair value of each stock option award is estimated on
the date of grant using the Black-Scholes valuation model that uses various assumptions. The fair
value of the stock option awards is expensed on a straight-line basis over the vesting period of
the award. Expected volatility is based on historical volatility of the Companys stock. The
risk-free rate for periods within the contractual life of the award is based on the yield curve of
a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the
expected term of the award. Exercises and forfeitures are estimated within the valuation model
using employee termination and other historical data. The expected term of the stock option awards
granted is derived from historical exercise experience under the Plan and represents the period of
time that stock option awards granted are expected to be outstanding. No stock options were granted
during the nine months ended September 30, 2006 and 2005.
The following table summarizes stock option activity under the Plan as of September 30, 2006, and
changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Term |
|
|
Value |
|
Stock Options |
|
(000s) |
|
|
Price |
|
|
(in years) |
|
|
(000s) |
|
|
Outstanding at January 1, 2006 |
|
|
1,213 |
|
|
$ |
10.03 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(614 |
) |
|
|
7.07 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(15 |
) |
|
|
11.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
584 |
|
|
$ |
13.10 |
|
|
|
4.13 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
September 30, 2006 |
|
|
569 |
|
|
$ |
13.37 |
|
|
|
4.08 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
569 |
|
|
$ |
13.37 |
|
|
|
4.08 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no intrinsic value for options exercised during the three and nine months ended
September 30, 2006 and 2005 since the exercise price of the options is the same as the market price
of the underlying stock on the date of grant.
The following table summarizes the status of nonvested stock options under the Plan as of September
30, 2006, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-Date |
Nonvested Stock Options |
|
(In thousands) |
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
93 |
|
|
$ |
7.63 |
|
Granted |
|
|
|
|
|
$ |
|
|
Vested |
|
|
(78 |
) |
|
$ |
8.51 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
15 |
|
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $6 thousand of total unrecognized compensation cost related to
the nonvested stock options granted under the Plan (the effect of estimated forfeitures is not
material.) This cost is expected to be recognized over a weighted-average period of three months.
The total fair value of stock options vested during the nine months ended September 30, 2006 and
2005, was $0.7 million and $0.5 million, respectively.
22
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock
Options (continued)
Cash received from stock options exercised under all stock-based compensation plans for the nine
months ended September 30, 2006 and 2005, was $4.3 million and $0.5 million, respectively. The
actual tax benefit realized for the tax deductions from these stock option exercises totaled $0.1
million for the nine months ended September 30, 2006 (not material in the comparable 2005 period.)
Stock Appreciation Rights On March 29, 2006, the Companys Board of Directors, at the
recommendation of the Compensation and Human Resource Development Committee (the Committee),
approved awards of stock-settled stock appreciation rights (SARs) for a number of eligible
participants. SARs represent the right to receive, without payment to the Company, a certain number
of shares of common stock, as determined by the Committee, equal to the amount by which the fair
market value of a share of common stock exceeds the grant price at the time of exercise.
The SARs were granted at fair market value of the Companys common stock on the date of the grant
and vest one-third on each of the anniversaries of the date of grant, provided the participant is
employed by the Company on such date. The SARs have a term of 10 years from the date of grant. In
the event of a change in control, the SARs will vest on the date of the change in control, provided
that the participant is employed by the Company on the date of the change in control.
The SARs are exercisable within three months after the death, disability, retirement or termination
of the participants employment with the Company, if and to the extent the SARs were exercisable
immediately prior to such termination. If the participants employment is terminated for cause, or
the participant terminates his or her own employment with the Company, any portion of the SARs not
yet exercised (whether or not vested) terminates immediately on the date of termination of
employment.
The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation
model that uses various assumptions. The fair value of the SARs is expensed on a straight-line
basis over the requisite service period. Expected volatility is based on historical volatility of
the Companys 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 nine months ended September 30, 2006 (no SARs were granted in the comparable 2005
period):
|
|
|
|
|
|
|
Nine Months |
|
|
Ended September 30, |
|
|
2006 |
Expected volatility |
|
|
61 |
% |
Weighted-average volatility |
|
|
61 |
% |
Expected dividends |
|
|
|
|
Expected term (in years) |
|
|
3.8 |
|
Risk-free rate |
|
|
4.8 |
% |
23
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Stock
Appreciation Rights (continued)
The following table summarizes SARs activity under the Plan as of September 30, 2006, and changes
during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Term |
|
|
Value |
|
Stock Appreciation Rights |
|
(000s) |
|
|
Price |
|
|
(in years) |
|
|
(000s) |
|
|
Outstanding at January 1, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
126 |
|
|
$ |
|
|
|
|
9.5 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
September 30, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of the SARs granted during the nine months ended
September 30, 2006 was $7.28. No SARs were exercised during the nine months ended September 30,
2006.
The following table summarizes the status of nonvested SARs under the Plan as of September 30,
2006, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-Date |
Nonvested Stock Appreciation Rights |
|
(In thousands) |
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
126 |
|
|
$ |
7.28 |
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
126 |
|
|
$ |
7.28 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $0.8 million of total unrecognized compensation cost, net of
estimated forfeitures, related to nonvested stock appreciation rights granted under the Plan. This
cost is expected to be recognized over a weighted-average period of 2.5 years. None of the SARs
vested during the nine months ended September 30, 2006.
Restricted Shares On March 29, 2006, May 24, 2006 and July 3, 2006, the Companys Board of
Directors, at the recommendation of the Committee, approved awards of performance-based restricted
shares (Restricted Shares) for a number of eligible participants. The Restricted Shares represent
shares of the Companys common stock which are issued to the participant subject to (a)
restrictions on transfer for a period of time and (b) forfeiture under certain conditions. The
performance goals, including revenue growth and income from operations targets, provide a range of
vesting possibilities from 0% to 100% and will be measured as of December 31, 2007 for the
2006-2007 performance period and as of December 31, 2008 for the 2006-2008 performance period. If
the performance conditions are met for the 2006-2007 performance period and for the 2006-2008
performance period, the shares will vest and all restrictions on the transfer of the Restricted
Shares will lapse on March 29, 2008 and March 29, 2009, respectively. The Company recognizes
compensation cost, net of estimated forfeitures, based on the fair value
24
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Restricted Shares (continued)
(which approximates the current market price) of the Restricted Shares on the date of grant ratably
over the requisite service period based on the probability of achieving the performance goals, as
determined in accordance with SFAS No. 5, Accounting for Contingencies. Changes in the
probability of achieving the performance goals from period to period will result in corresponding
changes in compensation expense.
In the event of a change in control (as defined in the Plan) prior to the date the Restricted
Shares vest, all of the Restricted Shares will vest and the restrictions on transfer will lapse
with respect to such vested shares on the date of the change in control, provided that participant
is employed by the Company on the date of the change in control.
If the participants employment with the Company is terminated for any reason, either by the
Company or participant, prior to the date on which the Restricted Shares have vested and the
restrictions have lapsed with respect to such vested shares, any Restricted Shares remaining
subject to the restrictions (together with any dividends paid thereon) will be forfeited, unless
there has been a change in control prior to such date.
The following table summarizes the status of nonvested Restricted Shares under the Plan as of
September 30, 2006, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-Date |
Nonvested Restricted Shares |
|
(In thousands) |
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
300 |
|
|
$ |
14.87 |
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
300 |
|
|
$ |
14.87 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, based on the probability of achieving the performance goals, there was
$3.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to
nonvested restricted shares granted under the Plan. This cost is expected to be recognized over a
weighted-average period of 2.3 years. None of the restricted shares vested during the nine months
ended September 30, 2006.
2004 Non-Employee Director Fee Plan The Companys 2004 Non-Employee Director
Fee Plan (the 2004 Fee Plan), which is shareholder-approved, replaced and superseded the 1996
Non-Employee Director Fee Plan (the 1996 Fee Plan) and was used in lieu of the 2004 Nonemployee
Director Stock Option Plan (the 2004 Stock Option Plan). The 2004 Fee Plan provides that all new
non-employee Directors joining the Board receive an initial grant of common stock units (CSUs) on
the date the new Director is appointed or elected, the number of which will be determined by
dividing a dollar amount to be determined from time to time by the Board (currently set at $30,000)
by an amount equal to 110% of the average closing prices of the Companys common stock for the five
trading days prior to the date the new Director is appointed or elected. The initial grant of CSUs
will vest in three equal installments, one-third on the date of each of the following three annual
shareholders meetings. A CSU is a bookkeeping entry on the Companys books that records the
equivalent of one share of common stock. On the date each CSU vests, the Director will become
entitled to receive a share of the Companys common stock and the CSU will be canceled. For
federal income tax purposes, the Director will not be deemed to have received income with respect
to the CSUs until the CSUs vest. No options were awarded under the 2004 Stock Option Plan and none
will be awarded. The number of shares remaining available for issuance under the 2004 Fee Plan
cannot exceed 378 thousand.
Additionally, the 2004 Fee Plan provides that each non-employee Director receives on the day after
the annual shareholders meeting, an annual retainer for service as a non-employee Director, the
amount of which shall be
25
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
2004 Non-Employee Director Fee Plan (continued)
determined from time to time by the Board (currently set at $50,000) to be paid 75% in CSUs and 25%
in cash. The number of CSUs to be granted under the 2004 Fee Plan will be determined by dividing
the amount of the annual retainer by an amount equal to 105% of the average of the closing prices
for the Companys common stock on the five trading days preceding the award date (the day after the
annual meeting). The annual grant of CSUs will vest in two equal installments, one-half on the
date of each of the following two annual shareholders meetings. There were grants of 30 thousand
and 103 thousand CSUs issued under the 2004 Fee Plan during the nine months ended September 30,
2006 and 2005, respectively.
The following table summarizes the status of the nonvested CSUs under the 2004 Fee Plan as of
September 30, 2006, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-Date |
Nonvested Common Stock Units |
|
(In thousands) |
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
72 |
|
|
$ |
8.26 |
|
Granted |
|
|
30 |
|
|
$ |
16.85 |
|
Vested |
|
|
(46 |
) |
|
$ |
8.25 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
56 |
|
|
$ |
12.81 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $0.6 million of total unrecognized compensation costs, net of
estimated forfeitures, related to nonvested CSUs granted under the 2004 Fee Plan. This cost is
expected to be recognized over a weighted-average period of 1.5 years. During the nine months
ended September 30, 2006 and 2005, a total of 46 thousand and 31 thousand CSUs vested,
respectively.
Before January 1, 2006, the Company accounted for grants of CSUs issued under the 2004 Fee Plan in
accordance with APB 25 and recognized compensation cost over the requisite service period. The fair
value of the CSUs, which is the same under APB 25 and SFAS 123R, was based on the fair value of the
Companys stock on the date of grant. Under SFAS 123R, the Company will continue to recognize
compensation cost over the remaining service period. Until a CSU vests, the Director has none of
the rights of a shareholder with respect to the CSU or the common stock underlying the CSU. CSUs
are not transferable.
Deferred Compensation Plan The Companys non-qualified Deferred Compensation
Plan (the Deferred Compensation Plan), which is not shareholder-approved, was adopted by the
Board of Directors effective December 17, 1998 and amended on March 29, 2006 and May 23, 2006. It
provides certain eligible employees the ability to defer any portion of their compensation until
the participants retirement, termination, disability or death, or a change in control of the
Company. Using the Companys common stock, the Company matches 50% of the amounts deferred by
certain senior management participants on a quarterly basis up to a total of $12,000 per year for
the president and senior vice presidents and $7,500 per year for vice presidents (participants
below the level of vice president are not eligible to receive matching contributions from the
Company). Matching contributions and the associated earnings vest over a seven year service
period. Deferred compensation amounts used to pay benefits, which are held in a rabbi trust,
include investments in various mutual funds and shares of the Companys common stock (See Note 1,
Summary of Accounting Policies, under Investments Held in Rabbi Trust.) The Deferred Compensation
Plans assets totaled $0.9 million and $0.7 million at September 30, 2006 and December 31, 2005,
respectively, excluding the Companys common stock match, while liabilities totaled $0.9 million
and $1.0 million, respectively. As of September 30, 2006 and December 31, 2005, the liabilities of
the Deferred Compensation Plan were recorded in treasury stock and additional paid-in capital, as
appropriate, and accrued employee compensation and benefits as of September 30, 2006 and other
long-term liabilities as of December 31, 2005 in the accompanying Condensed Consolidated Balance
Sheets.
26
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 12 Stock-Based Compensation (continued)
Deferred Compensation Plan (continued)
The following table summarizes the status of the nonvested common stock issued under the Deferred
Compensation Plan as of September 30, 2006, and changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-Date |
Nonvested Common Stock |
|
(In thousands) |
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
21 |
|
|
$ |
6.41 |
|
Granted |
|
|
6 |
|
|
$ |
15.23 |
|
Vested |
|
|
(18 |
) |
|
$ |
10.31 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
9 |
|
|
$ |
8.71 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $0.1 million of total unrecognized compensation cost, net of
estimated forfeitures, related to nonvested common stock granted under the Deferred Compensation
Plan. This cost is expected to be recognized over a weighted-average period of 3.0 years. The total
fair value of the common stock vested during the nine months ended September 30, 2006 was $0.4
million and $0.1 million for the comparable 2005 period.
The deferred compensation obligation of $0.9 million, which was previously included in Other
long-term liabilities as of December 31, 2005 is now included in Accrued employee compensation
and benefits as of September 30, 2006 in the accompanying Condensed Consolidated Balance Sheets.
Cash used to settle the Companys obligation under the Deferred Compensation Plan was less than
$0.1 million for the nine months ended September 30, 2006. There were no cash settlements during
the comparable 2005 period.
Note 13 Pension and Other Post-Retirement Benefits
Defined Benefit Pension Plan
The Company sponsors a non-contributory defined benefit pension plan (the Pension Plan) for its
employees in the Philippines. The Pension Plan provides defined benefits based on years of service
and final salary. All permanent employees meeting the minimum service requirement are eligible to
participate in the Pension Plan. As of September 30, 2006, the Pension Plan is unfunded.
The following tables provide a reconciliation of the change in the benefit obligation for the
Pension Plan and the net amount recognized in the statement of financial position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
Beginning benefit obligation |
|
$ |
830 |
|
|
$ |
519 |
|
Service cost |
|
|
284 |
|
|
|
123 |
|
Interest cost |
|
|
101 |
|
|
|
61 |
|
Actuarial loss |
|
|
224 |
|
|
|
120 |
|
Effect of foreign currency translation |
|
|
73 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Ending benefit obligation |
|
$ |
1,512 |
|
|
$ |
830 |
|
|
|
|
|
|
|
|
27
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 13 Pension and Other Post-Retirement Benefits
Defined Benefit Pension Plan (continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
Funded status |
|
$ |
(1,512 |
) |
|
$ |
(830 |
) |
Unrecognized net actuarial loss |
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(1,315 |
) |
|
$ |
(830 |
) |
|
|
|
|
|
|
|
The net amount recognized in the balance sheet consists of accrued benefit costs of $1.3 million
and $0.8 million as of December 31, 2005 and 2004, respectively.
Weighted-average actuarial assumptions used to determine the benefit obligations for the Pension
Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
Discount rate |
|
|
12 |
% |
|
|
12 |
% |
Rate of compensation increase |
|
|
8 |
% |
|
|
8 |
% |
The Company evaluates these assumptions on a periodic basis taking into consideration current
market conditions and historical market data. The discount rate is used to state expected future
cash flows at a present value on the measurement date, which is December 31. This rate represents
the market rate for high-quality fixed income investments. A lower discount rate would increase the
present value of benefit obligations. Other assumptions include demographic factors such as
retirement, mortality and turnover.
The following table provides information about net periodic benefit cost for the Pension Plan for
the three and nine months ended September 30, 2006 and September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
91 |
|
|
$ |
|
|
|
$ |
409 |
|
|
$ |
633 |
|
Interest cost |
|
|
45 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
Recognized actuarial losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
136 |
|
|
$ |
|
|
|
$ |
611 |
|
|
$ |
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average actuarial assumptions used to determine net periodic benefit cost for the three
and nine months ended September 30, 2006 and September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
Discount rate |
|
|
12 |
% |
|
|
12 |
% |
Rate of compensation increase |
|
|
8 |
% |
|
|
8 |
% |
The Company does not expect to make cash contributions to its Pension Plan during 2006.
28
Sykes Enterprises, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005
(Unaudited)
Note 13 Pension and Other Post-Retirement Benefits (continued)
Defined Benefit Pension Plan (continued)
The estimated future benefit payments, which reflect expected future service, as appropriate, are
as follows (in thousands):
|
|
|
|
|
2006 (remaining three months) |
|
$ |
|
|
2007 |
|
$ |
|
|
2008 |
|
$ |
|
|
2009 |
|
$ |
|
|
2010 |
|
$ |
73 |
|
2011 through 2015 |
|
$ |
395 |
|
Post-Retirement Defined Contribution Healthcare Plan
On January 1, 2005, the Company established a Post-Retirement Defined Contribution Healthcare Plan
(the Healthcare Plan) for eligible employees meeting certain service and age requirements. The
Healthcare Plan is fully funded by the participants and accordingly, the Company does not recognize
expense relating to the Healthcare Plan.
Note 14 Loss Contingency
One of the Companys European subsidiaries has received several inquiries from a regulatory agency related to privacy claims associated with the alleged inappropriate acquisition of personal bank account information. Two of the inquiries have resulted in sanctions by the regulatory agency against the Company approximating $0.7 million. In order to appeal the sanctions through the court system, the Company issued a bank guarantee. Management bel
ieves that the sanctions made in connection with this matter are without merit and intends to vigorously pursue the reversal of the proposed sanctions. The Company has recorded these amounts in Deferred Charges and Other Assets in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2006. The Company has not accrued any amounts related to these claims under SFAS No. 5, Accounting for Contingencies because it does not believe that a loss is proba
ble, and it is not currently possible to reasonably estimate the
amount of any loss related to these claims.
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Sykes Enterprises, Incorporated
400 N. Ashley Drive
Tampa, FL 33602
We have reviewed the accompanying condensed consolidated balance sheet of Sykes Enterprises,
Incorporated and subsidiaries (the Company) as of September 30, 2006, and the related condensed
consolidated statements of operations for the three-month and nine-month periods ended September
30, 2006 and 2005, of changes in shareholders equity for the nine-month periods ended September
30, 2006 and 2005 and for the three-month period ended December 31, 2005, and cash flows for the
nine-month periods ended September 30, 2006 and 2005. These interim financial statements are the
responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company as of December 31,
2005, and the related consolidated statements of operations, changes in shareholders equity, and
cash flows for the year then ended (not presented herein); and in our report dated March 14, 2006,
we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet as of December 31,
2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
November 7, 2006
30
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion should be read in conjunction with the condensed consolidated financial statements
and notes included elsewhere in this report and the consolidated financial statements and notes in
the Sykes Enterprises, Incorporated (Sykes, our, we or us) Annual Report on Form 10-K for
the year ended December 31, 2005, as filed with the Securities and Exchange Commission (SEC).
Our discussion and analysis may contain forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that are based on current expectations,
estimates, forecasts, and projections about Sykes, our beliefs, and assumptions made by us. In
addition, we may make other written or oral statements, which constitute forward-looking
statements, from time to time. Words such as believe, estimate, project, expect, intend,
may, anticipate, plan, seek, variations of such words, and similar expressions
are intended to identify such forward-looking statements. Similarly, statements that describe our
future plans, objectives, or goals also are forward-looking statements. These statements are not
guarantees of future performance and are subject to a number of risks and uncertainties, including
those discussed below and elsewhere in this report. Our actual results may differ materially from
what is expressed or forecasted in such forward-looking statements, and undue reliance should not
be placed on such statements. All forward-looking statements are made as of the date hereof, and we
undertake no obligation to update any such forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors that could cause actual results to differ materially from what is expressed or forecasted
in such forward-looking statements include, but are not limited to: (i) the ability to
successfully integrate Apexs operations and employees, (ii) the ability to deliver on Apexs
potential earnings per share accretion, (iii) the ability to deliver on the future financial and
operating performance of the combined company, (iv) the timing of significant orders for our
products and services, (v) variations in the terms and the elements of services offered under our
standardized contract including those for future bundled service offerings, (vi) changes in
applicable accounting principles or interpretations of such principles, (vii) difficulties or
delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing
and other objectives, (ix) construction delays or higher than anticipated development costs in
connection with new technical and customer contact management centers, (x) delays in our ability to
develop new products and services and market acceptance of new products and services, (xi) rapid
technological change, (xii) loss or addition of significant clients, (xiii) risks inherent in
conducting business abroad, (xiv) currency fluctuations, (xv) fluctuations in business conditions
and the economy, (xvi) our ability to attract and retain key management personnel, (xvii) our
ability to continue the growth of our support service revenues through additional technical and
customer contact management centers, (xviii) our ability to further penetrate into vertically
integrated markets, (xix) our ability to expand our global presence through strategic alliances and
selective acquisitions, (xx) our ability to continue to establish a competitive advantage through
sophisticated technological capabilities, (xxi) the ultimate outcome of any lawsuits, (xxii) our
ability to recognize deferred revenue through delivery of products or satisfactory performance of
services, (xxiii) our dependence on trend toward outsourcing, (xxiv) risk of interruption of
technical and customer contact management center operations due to such factors as fire and other
disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses
and other emergencies, (xxv) the existence of substantial competition, (xxvi) the early termination
of contracts by clients, and (xxvii) other risk factors which are identified in our most recent
Annual Report on Form 10-K, including factors identified under the headings Business, Risk
Factors and Managements Discussion and Analysis of Financial Condition and Results of
Operations.
31
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Condensed
Consolidated Statements of Operations and certain of such data expressed as a percentage of
revenues (in thousands, except percentage amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Revenues |
|
$ |
149,287 |
|
|
$ |
122,596 |
|
|
$ |
415,595 |
|
|
$ |
366,162 |
|
Percentage of revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs |
|
$ |
94,016 |
|
|
$ |
75,247 |
|
|
$ |
263,410 |
|
|
$ |
228,702 |
|
Percentage of revenues |
|
|
63.0 |
% |
|
|
61.4 |
% |
|
|
63.4 |
% |
|
|
62.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
47,281 |
|
|
$ |
40,387 |
|
|
$ |
130,609 |
|
|
$ |
121,646 |
|
Percentage of revenues |
|
|
31.7 |
% |
|
|
32.9 |
% |
|
|
31.4 |
% |
|
|
33.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal of property and equipment |
|
$ |
(13,870 |
) |
|
$ |
(47 |
) |
|
$ |
(13,856 |
) |
|
$ |
(1,743 |
) |
Percentage of revenues |
|
|
(9.3 |
)% |
|
|
|
% |
|
|
(3.3 |
)% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets |
|
$ |
63 |
|
|
$ |
605 |
|
|
$ |
445 |
|
|
$ |
605 |
|
Percentage of revenues |
|
|
|
% |
|
|
0.5 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of restructuring and other charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(314 |
) |
Percentage of revenues |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
21,797 |
|
|
$ |
6,404 |
|
|
$ |
34,987 |
|
|
$ |
17,266 |
|
Percentage of revenues |
|
|
14.6 |
% |
|
|
5.2 |
% |
|
|
8.4 |
% |
|
|
4.7 |
% |
The following table summarizes our revenues, for the periods indicated, by geographic region
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
103,184 |
|
|
$ |
80,310 |
|
|
$ |
282,393 |
|
|
$ |
231,980 |
|
EMEA |
|
|
46,103 |
|
|
|
42,286 |
|
|
|
133,202 |
|
|
|
134,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
149,287 |
|
|
$ |
122,596 |
|
|
$ |
415,595 |
|
|
$ |
366,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
Revenues
For the three months ended September 30, 2006, we recognized consolidated revenues of $149.3
million, an increase of $26.7 million, or 21.8%, from $122.6 million of consolidated revenues for
the comparable 2005 period.
On a geographic segmentation basis, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 69.1%, or $103.2 million, for
the three months ended September 30, 2006, compared to 65.5%, or $80.3 million, for the comparable
2005 period. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 30.9%, or $46.1 million, for the three months ended September 30, 2006, compared to
34.5%, or $42.3 million, for the comparable 2005 period.
The increase in the Americas revenue of $22.9 million, or 28.5%, for the three months ended
September 30, 2006, compared to the same period in 2005, reflects a broad-based growth in client
call volumes, including new
32
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
and existing client programs, within our offshore operations, Canada and the United States as well
as a full quarter of revenue generated from our newly acquired Argentina operations of $7.6
million. Revenues from new and existing client programs in our offshore operations represented
39.8% of consolidated revenues on 13,300 seats for the three months ended September 30, 2006,
compared to 33.3% on 10,100 seats for the comparable 2005 period. The trend of generating more of
our revenues from new and existing client programs in our offshore operations is likely to continue
in 2006. While operating margins generated offshore are generally comparable or higher than those
in the United States, our ability to maintain these offshore operating margins longer term is
difficult to predict due to potential increased competition for the available workforce and costs
of functional currency fluctuations in offshore markets.
EMEA revenues increased $3.8 million, or 9.0%, for the three months ended September 30,
2006, compared to the same period in 2005. EMEA revenues for the third quarter of 2006 experienced
a $2.0 million increase as a result of the strength in the Euro compared to the same period in
2005. Excluding this foreign currency impact, EMEA revenues increased $1.8 million compared with
the same period last year. This increase reflects modest growth in client call volumes, including
new and existing client programs offset by certain program expirations.
Direct Salaries and Related Costs
Direct salaries and related costs increased $18.7 million, or 24.8%, to $94.0 million for the three
months ended September 30, 2006, from $75.3 million in the comparable 2005 period. This increase
included $5.0 million of direct salaries and related costs from our newly acquired Argentina
operations primarily consisting of compensation costs.
As a percentage of revenues, direct salaries and related costs increased to 63.0% for the three
months ended September 30, 2006, from 61.4% for the comparable 2005 period. This increase was
attributable to higher salary costs, including training costs associated with the ramp up of
business in our offshore and U.S. operations, and higher auto tow claim costs in Canada, partially
offset by lower telephone costs. Although the strengthened Euro positively impacted revenues, it
negatively impacted direct salaries and related costs for the three months ended September 30, 2006
by approximately $1.3 million compared to the same period in 2005.
General and Administrative
General and administrative expenses increased $6.9 million to $47.3 million for the three months
ended September 30, 2006, from $40.4 million in the comparable 2005 period. This increase included
$2.1 million of general and administrative costs from our newly acquired Argentina operations.
As a percentage of revenues, general and administrative expenses decreased to 31.7% for the three
months ended September 30, 2006 from 32.9% for the comparable 2005 period. This decrease
was primarily attributable to lower depreciation expense, telephone costs, legal and professional
fees incurred, and lease costs and equipment maintenance incurred, partially offset by a $2.0
million charitable contribution and higher compensation costs including $0.6 million associated
with the companys stock based compensation plans as compared to the same period of 2005. Although
the strengthening Euro positively impacted revenues, it negatively impacted general and
administrative expenses for the three months ended September 30, 2006 by $0.5 million compared to
the same period in 2005.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $13.9 million for the three months ended
September 30, 2006 was primarily a result of the sale of four third party leased U.S. customer
contact management centers located in Palatka, Florida, Pikeville, Kentucky, Ada, Oklahoma, and
Manhattan, Kansas. This compares to a $0.1 million net gain on disposal of property and equipment
for the three months ended September 30, 2005.
Impairment of Long-lived Assets
We recorded an impairment charge of $0.1 million for property and equipment no longer used in our
Philippine facilities for the three months ended September 30, 2006. The $0.6 million impairment
of long-lived assets for the three months ended September 30, 2005 relates to an asset impairment
charge of $0.1 million in India related to the plan of migration of call volumes to other
facilities and $0.5 million related to the impairment and subsequent sale of property and equipment
located in the United States.
33
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Interest Income
Interest income was $1.4 million for the three months ended September 30, 2006, compared to $0.7
million for the comparable 2005 period reflecting higher levels of average interest-bearing
investments in cash and cash equivalents earning higher rates of interest income.
Interest (Expense)
Interest expense was $0.2 million for the three months ended September 30, 2006, compared to $0.1
million for the comparable 2005 period reflecting interest paid on capital leases from our newly
acquired Argentina operations. These capital leases were paid in full subsequent to the acquisition
and prior to the quarter end.
Income from Rental Operations, Net
Income from rental operations, net was unchanged at $0.3 million for the three months ended
September 30, 2006, compared to the comparable 2005 period. We do not currently anticipate future
income from rental operations as a result of the September 2006 sale of the four third party leased
facilities.
Other Income (Expense)
Other expense, net was $0.2 million for the three months ended September 30, 2006, compared to
other income, net of $0.3 million for the comparable 2005 period. The comparable net increase in
other expense of $0.5 million was primarily attributable to an increase in foreign currency
transaction losses, net of gains. Other income (expense) excludes the effects of cumulative
translation effects that are included in Accumulated Other Comprehensive Loss in shareholders
equity in the accompanying Condensed Consolidated Balance Sheets.
Provision for Income Taxes
The provision for income taxes of $6.6 million for the three months ended September 30,
2006 was based upon pre-tax book income of $23.1 million, compared to the provision for
income taxes of $0.8 million for the comparable 2005 period based upon pre-tax book
income of $7.7 million. The effective tax rate for the three months ended September 30,
2006 was 28.6% compared to an effective tax rate of 10.6% for the comparable 2005 period. The
18.0% increase in the effective tax rate was primarily due to a reversal for the three months ended
September 30, 2005 of a $0.7 million beginning of the year valuation allowance for one EMEA legal
entity resulting from a favorable change in forecasted book income, accompanied by a shift in the
mix of earnings within tax jurisdictions and the effects of permanent differences, valuation
allowances, foreign withholding and other taxes, state income taxes, and foreign income tax rate
differentials.
Net Income
As a result of the foregoing, we reported income from operations for the three months ended
September 30, 2006 of $21.8 million, compared to $6.4 million in the comparable 2005
period. This was principally attributable to a $26.7 million increase in revenues, a
$13.8 million increase in net gain on disposal of property and equipment and a $0.5
million decrease in impairment charges, offset by a $18.7 million increase in
direct salaries and related costs, a $6.9 million increase in general and administrative expenses,
as previously discussed. The $15.4 million increase in income from operations, a
$0.7 million increase in interest income, a $0.1 million increase in interest expense and
a $0.1 million decrease in income from rental operations, net, a $0.5 million decrease in
other income and a $5.8 million higher tax provision resulted in net income of $16.5
million for the three months ended September 30, 2006, an increase of $9.6 million
compared to the same period in 2005.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Revenues
For the nine months ended September 30, 2006, we recognized consolidated revenues of $415.6
million, an increase of $49.4 million, or 13.5%, from $366.2 million of consolidated revenues for
the comparable 2005 period.
34
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
On a geographic segmentation basis, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 67.9%, or $282.4 million, for
the nine months ended September 30, 2006, compared to 63.4%, or $232.0 million, for the comparable
2005 period. Revenues from the EMEA region, including Europe, the Middle East and Africa,
represented 32.1%, or $133.2 million, for the nine months ended September 30, 2006, compared to
36.6%, or $134.2 million, for the comparable 2005 period.
The increase in the Americas revenue of $50.4 million, or 21.7%, for the nine months ended
September 30, 2006, compared to the same period in 2005, reflects a broad-based growth in client
call volumes, including new and existing client programs, within our offshore operations, Canada
and the United States as well as a full quarter of revenue generated from our newly acquired
Argentina operations. Revenues from new and existing client programs in our offshore operations
represented 36.6% of consolidated revenues for the nine months ended September 30, 2006, compared
to 31.3% for the comparable 2005 period. The trend of generating more of our revenues from new and
existing client programs in our offshore operations is likely to continue in 2006. While operating
margins generated offshore are generally comparable or higher than those in the United States, our
ability to maintain these offshore operating margins longer term is difficult to predict due to
potential increased competition for the available workforce and costs of functional currency
fluctuations in offshore markets.
EMEA revenues decreased $1.0 million, or 0.7%, for the nine months ended September 30,
2006, compared to the same period in 2005. EMEA revenues for the nine months ended September 30,
2006 experienced a $1.9 million decline as a result of the weakness in the Euro compared to the
same period in 2005. Excluding this foreign currency impact, EMEA revenues increased $0.9 million
compared with the same period last year. This increase reflects modest growth in client call
volumes, including new and existing client programs offset by certain program expirations.
Direct Salaries and Related Costs
Direct salaries and related costs increased $34.7 million, or 15.2%, to $263.4 million for the nine
months ended September 30, 2006, from $228.7 million in the comparable 2005 period. This increase
included $5.0 million of direct salaries and related costs from our newly acquired Argentina
operations primarily consisting of compensation costs.
As a percentage of revenues, direct salaries and related costs increased to 63.4% for the nine
months ended September 30, 2006, from 62.5% for the comparable 2005 period. This increase was
attributable to higher salary costs, including training costs associated with the ramp up of
business in our offshore and U.S. operations, and higher auto tow claim costs in Canada, partially
offset by lower telephone costs. Although the weakened Euro negatively impacted revenues, it
positively impacted direct salaries and related costs for the nine months ended September 30, 2006
by approximately $1.3 million compared to the same period in 2005.
General and Administrative
General and administrative expenses increased $9.0 million to $130.6 million
for the nine months ended September 30, 2006, from $121.6 million in the comparable 2005
period. This increase included $2.1 million of general and administrative costs from our newly
acquired Argentina operations.
As a percentage of revenues, general and administrative expenses decreased to 31.4% for the nine
months ended September 30, 2006 from 33.2% for the comparable 2005 period. This decrease
was primarily attributable to lower legal and professional fees incurred, depreciation expense,
lease costs and equipment maintenance incurred and telephone costs, partially offset by a $2.0
million charitable contribution and higher compensation costs including $1.7 million associated
with the companys stock based compensation plans as compared to the same period of 2005. Although
the weakening Euro negatively impacted revenues, it positively impacted general and administrative
expenses for the nine months ended September 30, 2006 by $0.5 million compared to the
same period in 2005.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $13.9 million for the nine months ended
September 30, 2006 was primarily a result of sale of four third party leased U.S. customer contact
management centers located in Palatka, Florida, Pikeville, Kentucky, Ada, Oklahoma, and Manhattan,
Kansas. This compares to a $1.7
35
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
million net gain on disposal of property and equipment for the comparable 2005 period which was
primarily a result of a $1.7 million net gain on the sale of our Greeley, Colorado facility.
Impairment of Long-lived Assets
The $0.4 million impairment of long-lived assets for the nine months ended September 30, 2006
related to a $0.3 million asset impairment charge in one of our underutilized European customer
contact management centers and a $0.1 million charge for property and equipment no longer used in
one of our Philippine facilities. The $0.6 million impairment of long-lived assets for the
comparable 2005 period relates to an asset impairment charge of $0.1 million in India related to
the plan of migration of call volumes to other facilities and $0.5 million related to the
impairment and subsequent sale of property and equipment located in the United States.
Reversal of Restructuring and Other Charges
The $0.3 million reversal of restructuring and other charges for the nine months ended September
30, 2005 relates to the reversal of severance and other costs primarily with the closure of certain
European customer contact centers. There was no reversal of restructuring and other charges for the
nine months ended September 30, 2006.
Interest Income
Interest income was $5.2 million for the nine months ended September 30, 2006, compared to $1.7
million for the comparable 2005 period reflecting interest income of $1.7 million on a foreign tax
settlement as well as higher levels of average interest-bearing investments in cash and cash
equivalents earning higher rates of interest income.
Interest (Expense)
Interest expense was $0.5 million for the nine months ended September 30, 2006, compared to $0.6
million for the comparable 2005 period. This decrease reflected higher levels of commitment fees
paid on our credit facility in addition to interest paid on a foreign tax settlement for the nine
months ended September 30, 2005 offset by $0.1 million interest paid on capital leases from our
newly acquired Argentina operations for the nine months ended September 30, 2006.
Income from Rental Operations, Net
Income from rental operations, net was $1.2 million for the nine months ended September 30, 2006,
compared to $0.3 million for the comparable 2005 period. The increase of $0.9 million was
primarily related to higher rental income of $0.4 million from the leasing of two additional
centers in the U.S. in the second and fourth quarters of 2005 and lower depreciation costs of $0.5
million. We do not currently anticipate future income from rental operations as a result of the
September 2006 sale of the four third party leased facilities.
Other Income (Expense)
Other expense, net was $0.4 million for the nine months ended September 30, 2006, compared to other
income, net of $0.7 million for the comparable 2005 period. The comparable net increase in other
expense of $1.1 million was primarily attributable to an increase in foreign currency transaction
losses, net of gains. Other income (expense) excludes the effects of cumulative translation effects
that are included in Accumulated Other Comprehensive Loss in shareholders equity in the
accompanying Condensed Consolidated Balance Sheets.
Provision for Income Taxes
The provision for income taxes of $6.4 million for the nine months ended September 30,
2006 was based upon pre-tax book income of $40.6 million, compared to the provision for
income taxes of $4.6 million for the comparable 2005 period based upon pre-tax book
income of $19.4 million. The effective tax rate was 15.7% for the nine months ended
September 30, 2006 compared to an effective tax rate of 23.8% for the comparable 2005 period. The
8.1% decrease in the effective tax rate for the nine months ended September 30, 2006 was primarily
due to 2006 tax benefits of approximately $3.0 million resulting from the Canadian tax appeals
settlement partially offset by a 2005 reversal of a $0.7 million beginning of the year valuation
allowance for one EMEA
36
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
legal entity resulting from a favorable change in forecasted business, additional income earned in
tax holiday jurisdictions accompanied by a shift in the mix of earnings within tax jurisdictions
and the effects of permanent differences, valuation allowances, foreign withholding and other
taxes, state income taxes, and foreign income tax rate differentials.
Net Income
As a result of the foregoing, we reported income from operations for the nine months ended
September 30, 2006 of $35.0 million, an increase of $17.7 million from the
comparable 2005 period. This increase was principally attributable to a $49.4 million
increase in revenues, a $12.1 million increase in net gain on disposal of property and
equipment and a $0.1 million decrease in impairment of long-lived assets, offset by a
$34.7 million increase in direct salaries and related costs, a $9.0 million
increase in general and administrative expenses, and a $0.3 million decrease in reversal of
restructuring and other charges, as previously discussed. The $17.7 million increase in
income from operations, a $3.5 million increase in interest income, a $0.1
million decrease in interest expense and a $0.9 million increase in income from
rental operations, net, a $1.1 million decrease in other income and a $1.7
million higher tax provision resulted in net income of $34.2 million for the nine
months ended September 30, 2006, an increase of $19.4 million compared to the same period
in 2005.
Liquidity and Capital Resources
Our primary sources of liquidity are generally cash flows generated by operating activities and
from available borrowings under our revolving credit facilities. We utilize these capital resources
to make capital expenditures associated primarily with our customer contact management services,
invest in technology applications and tools to further develop our service offerings and for
working capital and other general corporate purposes, including repurchase of our common stock in
the open market and to fund possible acquisitions. In future periods, we intend similar uses of
these funds.
On August 5, 2002, the Board of Directors authorized the Company to purchase up to three million
shares of our outstanding common stock. A total of 1.6 million shares have been
repurchased under this program since inception. The shares are purchased, from time to time,
through open market purchases or in negotiated private transactions, and the purchases are based on
factors, including but not limited to, the stock price and general market conditions. During the
nine months ended September 30, 2006, we did not repurchase common shares under the 2002 repurchase
program.
During the nine months ended September 30, 2006, we generated $32.6 million in cash from
operating activities, received $15.4 million from the sale of four third party leased U.S. customer
contact management centers, $4.3 million in cash from issuance of stock, $0.1 million
from the sale of property and equipment and $0.1 from excess tax benefit from stock-based
compensation. Further, we used $17.3 million in funds for the purchase of Apex, $11.2
million for capital expenditures, $4.8 million for the purchase of investments, $0.4 million
to repay long-term debt and $0.1 million in other investing activities resulting in a
$23.1 million increase in available cash (including the favorable effects of
international currency exchange rates on cash of $4.4 million).
Net cash flows provided by operating activities for the nine months ended September 30, 2006 were
$32.6 million, compared to $37.7 million for the comparable 2005 period. The $5.1 million decrease
in net cash flows from operating activities was due to a $16.8 million net decrease in cash flows
from assets and liabilities and a net decrease of $7.7 million in non-cash reconciling items such
as depreciation expense, stock-based compensation and termination costs associated with exit
activities offset by an increase in net income of $19.4 million. This $16.8 million net change was
principally a result of a $17.5 million increase in receivables, a $2.2 million decrease in other
liabilities and a $2.1 million increase in other assets, offset by a $3.0 million increase in
deferred revenue and a $2.0 increase in income taxes payable.
Capital expenditures, which are generally funded by cash generated from operating activities and
borrowings available under our credit facilities, were $11.3 million for the nine months ended
September 30, 2006, compared to $8.7 million for the comparable 2005 period, an increase of $2.6
million, which was driven primarily by offshore expansion. During the nine months ended September
30, 2006, approximately 18% of the capital expenditures were the result of investing in new and
existing customer contact management centers, primarily offshore, and 82% was expended primarily
for maintenance and systems infrastructure. In 2006, we anticipate capital expenditures in the
range of $16.0 million to $18.0 million.
37
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
On July 3, 2006, the Company completed the acquisition of all the outstanding shares of capital
stock of Apex (See Note 2 to the Condensed Consolidated Financial Statements). The net purchase
price for the shares was $27.0 million, eighty percent of which ($21.6 million) was paid in cash
from offshore operations and twenty percent of which ($5.4 million) was paid by the delivery of
common stock of the Company. On July 3, 2006, after the acquisition of Apex was completed, the
Company contributed additional capital of $1.3 million to Apex for working capital support and
general corporate purposes. In connection with the acquisition, the Company paid $5.0 million of
the total net purchase price to an escrow account (eighty percent in cash and twenty percent in
common stock) to secure the sellers indemnification obligations and to provide for a holdback of
the purchase price until amounts billed by Apex to a major client reach established targets. At the
end of a two-year escrow period, any portion of the cash and stock not retained to satisfy the
holdback provisions of the purchase price will be returned to the sellers.
An available source of future cash flows from financing activities is from borrowings under our
$50.0 million revolving credit facility (the Credit Facility), which amount is subject to certain
borrowing limitations. Pursuant to the terms of the Credit Facility, the amount of $50.0 million
may be increased up to a maximum of $100.0 million with the prior written consent of the lenders.
The $50.0 million Credit Facility includes a $10.0 million swingline subfacility, a $15.0 million
letter of credit subfacility and a $40.0 million multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general corporate
purposes including acquisitions, share repurchases, working capital support, and letters of credit,
subject to certain limitations. The Credit Facility, including the multi-currency subfacility,
accrues interest, at our option, at (a) the Base Rate (defined as the higher of the lenders prime
rate or the Federal Funds rate plus 0.50%) plus an applicable margin up to 0.50%, or (b) the London
Interbank Offered Rate (LIBOR) plus an applicable margin up to 2.25%. Borrowings under the
swingline subfacility accrue interest at the prime rate plus an applicable margin up to 0.50% and
borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an applicable
margin up to 2.25%. In addition, a commitment fee of up to 0.50% is charged on the unused portion
of the Credit Facility on a quarterly basis. The borrowings under the Credit Facility, which will
terminate on March 14, 2008, are secured by a pledge of 65% of the stock of each of our active
direct foreign subsidiaries. The Credit Facility prohibits us from incurring additional
indebtedness, subject to certain specific exclusions. There were no borrowings in the first nine
months of 2006 and 2005 and no outstanding balances as of September 30, 2006 and December 31, 2005,
with $50.0 million availability on the Credit Facility. At September 30, 2006, we were in
compliance with all loan requirements of the Credit Facility.
At September 30, 2006, we had $150.7 million in cash, of which approximately 71.3% or $107.5
million was held in international operations and may be subject to additional taxes if repatriated
to the United States.
We believe that our current cash levels, accessible funds under our credit facilities and cash
flows from future operations will be adequate to meet anticipated working capital needs, future
debt repayment requirements (if any), continued expansion objectives, anticipated levels of capital
expenditures and contractual obligations for the foreseeable future and stock repurchases.
Off-Balance Sheet Arrangements and Other
At September 30, 2006, we did not have any material commercial commitments, including guarantees or
standby repurchase obligations, with unconsolidated entities or financial partnerships, including
entities often referred to as structured finance or special purpose entities or variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
From time to time, during the normal course of business, we may make certain indemnities,
commitments and guarantees under which we may be required to make payments in relation to certain
transactions. These include, but are not limited to: (i) indemnities to clients, vendors and
service providers pertaining to claims based on negligence or willful misconduct and (ii)
indemnities involving breach of contract, the accuracy of representations and warranties, or other
liabilities assumed by us in certain contracts. In addition, we have agreements whereby we will
indemnify certain officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity. The indemnification period covers all
pertinent events and occurrences during the officers or directors lifetime. The maximum potential
amount of future payments we could be required to make under these indemnification agreements is
unlimited; however,
38
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
we have director and officer insurance coverage that limits our exposure and enables us to recover
a portion of any future amounts paid. We believe the applicable insurance coverage is generally
adequate to cover any estimated potential liability under these indemnification agreements. The
majority of these indemnities, commitments and guarantees do not provide for any limitation of the
maximum potential for future payments we could be obligated to make. We have not recorded any
liability for these indemnities, commitments and other guarantees in the accompanying Condensed
Consolidated Balance Sheets. In addition, we have some client contracts that do not contain
contractual provisions for the limitation of liability, and other client contracts that contain
agreed upon exceptions to limitation of liability. We have not recorded any liability in the
accompanying Condensed Consolidated Balance Sheets with respect to any client contracts under which
we have or may have unlimited liability.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires estimations and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates and assumptions are based on historical experience and
various other factors that are believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or conditions.
We believe the following accounting policies are the most critical since these policies require
significant judgment or involve complex estimations that are important to the portrayal of our
financial condition and operating results:
|
|
We recognize revenue pursuant to applicable accounting standards, including SEC Staff
Accounting Bulletin (SAB) No. 101 (SAB 101), Revenue Recognition in Financial Statements,
SAB 104, Revenue Recognition and the Emerging Issues Task Force (EITF) No. 00-21, (EITF
00-21) Revenue Arrangements with Multiple Deliverables. SAB 101, as amended, and SAB 104
summarize certain of the SEC staffs views in applying generally accepted accounting
principles to revenue recognition in financial statements and provide guidance on revenue
recognition issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. EITF 00-21 provides further guidance on how to account for
multiple element contracts. |
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|
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We recognize revenue from services as the services are performed under a fully executed
contractual agreement and record estimated reductions to revenue for contractual penalties and
holdbacks for failure to meet specified minimum service levels and other performance based
contingencies. Royalty revenue is recognized when a contract has been fully executed, the
product has been delivered or provided, the license fees or rights are fixed and determinable,
the collection of the resulting receivable is probable and there are no other contingencies.
Revisions to these estimates, which could result in adjustments to fixed price contracts and
estimated losses, are recorded in the period when such adjustments or losses are known or can be
reasonably estimated. Product sales are recognized upon shipment to the customer and
satisfaction of all obligations. |
|
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We recognize revenue from licenses of our software products and rights when the agreement has
been executed, the product or right has been delivered or provided, collectibility is probable
and the software license fees or rights are fixed and determinable. If any portion of the
license fees or rights is subject to forfeiture, refund or other contractual contingencies, we
defer revenue recognition until these contingencies have been resolved. Revenue from support and
maintenance activities is recognized ratably over the term of the maintenance period and the
unrecognized portion is recorded as deferred revenue. Deferred revenue included in current
liabilities in the accompanying Condensed Consolidated Balance Sheets includes estimated
penalties and holdbacks of approximately $4.0 million and
$0.9 million as of September
30, 2006 and December 31, 2005, respectively, for failure to meet specified minimum service
levels in certain contracts and other performance based contingencies. |
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|
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Certain contracts to sell our products and services contain multiple elements or non-standard
terms and conditions. As a result, we evaluate each contract to determine the appropriate
accounting, including whether the deliverables specified in a multiple element arrangement
should be treated as separate units of accounting for revenue recognition purposes, and if so,
how the price should be allocated among the deliverable elements and the timing of revenue
recognition for each element. We recognize revenue for |
39
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
|
|
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 we determine the allocation
of revenue between deliverable elements, there are no further changes in the revenue allocation. |
|
|
We maintain allowances for doubtful accounts of $2.9 million as of
September 30, 2006, or 2.7% of trade receivables, for estimated
losses arising from the inability of our customers to make
required payments. If the financial condition of our customers
were to deteriorate, resulting in a reduced ability to make
payments, additional allowances may be required which would reduce
income from operations. |
|
|
We reduce deferred tax assets by a valuation allowance if, based
on the weight of available evidence for each respective tax
jurisdiction, it is more likely than not that some portion or all
of such deferred tax assets will not be realized. The valuation
allowance for a particular tax jurisdiction is allocated between
current and noncurrent deferred tax assets for that jurisdiction
on a pro-rata basis. Available evidence which is considered in
determining the amount of valuation allowance required includes,
but is not limited to, our estimate of future taxable income and
any applicable tax-planning strategies. At December 31, 2005,
management determined that a valuation allowance of approximately
$28.8 million was necessary to reduce U.S. deferred tax assets by
$9.9 million and foreign deferred tax assets by $18.9
million, where it was more likely than not that some portion or
all of such deferred tax assets will not be realized. The
recoverability of the remaining net deferred tax asset of $17.9
million at December 31, 2005 is dependent upon future
profitability within each tax jurisdiction. As of September 30,
2006, based on our estimates of future taxable income and any
applicable tax-planning strategies within various tax
jurisdictions, we believe that it is more likely than not that the
remaining net deferred tax asset will be realized. |
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|
We review long-lived assets, which had a carrying value of $93.8
million as of September 30, 2006, including goodwill, intangibles
and property and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable and at least annually for impairment
testing of goodwill. An asset is considered to be impaired when
the carrying amount exceeds the fair value. Upon determination
that the carrying value of the asset is impaired, we would record
an impairment charge or loss to reduce the asset to its fair
value. Future adverse changes in market conditions or poor
operating results of the underlying investment could result in
losses or an inability to recover the carrying value of the
investment and, therefore, might require an impairment charge in
the future. |
Recent Accounting Pronouncements
In March 2004, the EITF reached a consensus on Issue No. 03-1 (EITF 03-1), The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides
guidance on other-than-temporary impairment evaluations for securities accounted for under SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations, and non-marketable
equity securities accounted for under the cost method. The EITF developed a basic three-step test
to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the FASB
delayed the effective date of the recognition and measurement provisions of EITF 03-1. However, the
disclosure provisions were effective for fiscal years ending after September 15, 2004. In November
2005, the FASB issued final FASB Staff Position Nos. SFAS 115-1 and SFAS 124-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments which superseded EITF
03-1 and provided similar guidance. We adopted the guidance in these standards on January 1, 2006.
The impact of this adoption did not have a material impact on our financial condition, results of
operations or cash flows.
In May 2005, the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes and Error Corrections,
which requires retrospective application to prior periods financial statements for changes in
accounting principle and redefines the term restatement as the revising of previously issued
financial statements to reflect the correction of an error. Under retrospective application, the
new accounting principle is applied as of the beginning of the first period presented as if that
principle had always been used. The cumulative effect of the change is reflected in the carrying
value of assets and liabilities as of the first period presented and the offsetting adjustments are
recorded to opening retained earnings. SFAS 154 is effective for accounting changes and
corrections of errors made in the years beginning after December 31, 2005.
40
Sykes Enterprises, Incorporated and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations
In February 2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 140 (SFAS 140), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for
certain derivatives embedded in other financial instruments by allowing them to be accounted for as
a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155
also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective
for all financial instruments acquired, issued or subject to a remeasurement event occurring in
fiscal years beginning after September 15, 2006. We do not expect the adoption of this standard to
have a material impact on our financial position, results of operations or cash flows.
In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6 (FIN 46(R)-6), Determining the
Variability to Be Considered in Applying FASB Interpretation No. 46(R), that will become effective
beginning the first day of the first reporting period after June 15, 2006. FIN 46(R)-6 clarifies
that the variability to be considered in applying FASB Interpretation 46(R) shall be based on an
analysis of the design of the variable interest entity. The adoption of FIN 46(R)-6 did not have a
material impact on our financial condition, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
provides guidance on the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating
the impact of this standard on our financial condition, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years ending on or after November 15, 2007. We are currently evaluating the
impact of this standard on our financial condition, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS 158 requires a company to (a) recognize in its statement of financial position an
asset for a plans overfunded status or a liability for a plans underfunded status (b) measure a
plans assets and its obligations that determine its funded status as of the end of the employers
fiscal year, and (c) recognize changes in the funded status of a defined postretirement plan in the
year in which the changes occur (reported in comprehensive income). The requirement to recognize
the funded status of a benefit plan and the disclosure requirements are effective for fiscal years
ending after December 15, 2006. The requirement to measure the plan assets and benefit obligations
as of a companys year-end balance sheet date is effective for fiscal years ending after December
15, 2008. We are currently evaluating the impact of this standard on our financial condition,
results of operations and cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No, 108 (SAB 108), Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or a
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using both a balance
sheet and income statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors considered, is material.
SAB 108 is effective for fiscal years ending on or after November 15, 2006, with early application
encouraged. We are currently evaluating the impact of this standard, but do not expect the
adoption of this standard to have a material impact on its financial position, results of
operations or cash flows.
41
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended
September 30, 2006
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency and Interest Rate Risk
Our earnings and cash flows are subject to fluctuations due to changes in non-U.S. currency
exchange rates. We are exposed to non-U.S. exchange rate fluctuations as the financial results of
non-U.S. subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary,
those results, when translated, may vary from expectations and adversely impact overall expected
profitability. The cumulative translation effects for subsidiaries using functional currencies
other than the U.S. dollar are included in Accumulated Other Comprehensive Income (Loss) in
shareholders equity. Movements in non-U.S. currency exchange rates may affect our competitive
position, as exchange rate changes may affect business practices and/or pricing strategies of
non-U.S. based competitors. Periodically, we use foreign currency contracts to hedge intercompany
receivables and payables, and transactions initiated in the United States that are denominated in
foreign currency. The principal foreign currency hedged is the Euro using foreign currency
contracts ranging in periods from one to three months. Foreign currency contracts are accounted
for on a mark-to-market basis, with realized and unrealized gains or losses recognized as
a component of other income (expense), as we do not designate our foreign currency contracts as
accounting hedges.
There were no realized or unrealized gains or losses related to these foreign currency contracts
during the three and nine months ended September 30, 2006 and 2005.
Our exposure to interest rate risk results from variable debt outstanding from time to time under
our revolving credit facility. At September 30, 2006, we had no debt outstanding at variable
interest rates. We have not historically used derivative instruments to manage exposure to changes
in interest rates.
Fluctuations in Quarterly Results
For the year ended December 31, 2005, quarterly revenues as a percentage of total consolidated
annual revenues were approximately 26%, 25%, 25% and 24%, respectively, for each of the respective
quarters of the year. We have experienced and anticipate that in the future we will continue to
experience variations in quarterly revenues. The variations are due to the timing of new contracts
and renewal of existing contracts, the timing of the expenses incurred to support new business, the
timing and frequency of client spending for customer contact management services, non-U.S. currency
fluctuations, and the seasonal pattern of customer contact management support and fulfillment
services.
Item 4 Controls and Procedures
As of September 30, 2006, under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a 15(e) under the Securities Exchange Act of 1934, as amended.
We concluded that our disclosure controls and procedures were generally effective as of September
30, 2006, such that the information required to be disclosed in our SEC reports is recorded,
processed, summarized and reported within the time periods specified by the SECs rules and forms,
and is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in our internal controls over financial reporting during the
quarter ended September 30, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
42
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2006
Part II OTHER INFORMATION
Item 1 Legal Proceedings
One of the Companys European subsidiaries has received
several inquiries from a regulatory agency related to privacy claims associated with the alleged inappropriate acquisition
of personal bank account information. Two of the inquiries have resulted in sanctions by the regulatory agency against
the Company approximating $0.7 million. In order to appeal the sanctions through the court system, we issued a bank
guarantee. We believe that the sanctions made in connection with this matter are without merit and intend to vigorously pursue the reversal of the proposed sanctions. We have recorded these amounts in Deferred Charges and Other Assets in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2006. We have not accrued any amounts related to these claims under SFAS No. 5, Accounting for Contingencies because we do not believe that a loss is probable, and it is not currently possible
to reasonably estimate the amount of any loss related to these claims.
From time to time, we are involved in legal actions arising in the ordinary course of business.
With respect to these matters, we believe that we have adequate legal defenses and/or provided
adequate accruals for related costs such that the ultimate outcome will not have a material adverse
effect on our future financial position or results of operations.
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
Below is a summary of stock repurchases for the quarter ended September 30, 2006 (in thousands,
except average price per share). See Note 10, Earnings Per Share, to the Condensed Consolidated
Financial Statements for information regarding our stock repurchase program.
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|
Total Number of |
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Shares Purchased as |
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Maximum Number Of |
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Total Number of |
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Part of Publicly |
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Shares That May Yet |
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Shares |
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Average Price |
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Announced Plans or |
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Be Purchased Under |
Period |
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Purchased (1) |
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Paid Per Share |
|
Programs |
|
Plans or Programs |
July 1, 2006 - July 31, 2006 |
|
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|
|
|
|
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|
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1,644 |
|
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1,356 |
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August 1, 2006 - August 31, 2006 |
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|
|
|
|
|
|
|
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1,644 |
|
|
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1,356 |
|
September 1, 2006- September 30, 2006 |
|
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|
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|
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1,644 |
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1,356 |
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(1) |
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All shares purchased as part of a repurchase plan publicly announced on August 5, 2002.
Total number of shares approved for repurchase under the plan was 3 million with no
expiration date. |
Item 6 Exhibits
Exhibits
The following documents are filed as an exhibit to this Report:
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15
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Awareness letter. |
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31.1
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Certification of Chief Executive Officer, pursuant to Rule 13a-14(a). |
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31.2
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Certification of Chief Financial Officer, pursuant to Rule 13a-14(a). |
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32.1
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. |
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32.2
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Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. |
43
Sykes Enterprises, Incorporated and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2006
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SYKES
ENTERPRISES, INCORPORATED
(Registrant)
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Date: November 7, 2006 |
By: |
/s/ W. Michael Kipphut
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W. Michael Kipphut |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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44
EXHIBIT INDEX
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Exhibit |
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Number |
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15
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Awareness letter. |
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31.1
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Certification of Chief Executive Officer, pursuant to Rule 13a-14(a). |
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31.2
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Certification of Chief Financial Officer, pursuant to Rule 13a-14(a). |
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32.1
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350. |
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32.2
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Certification of Chief Financial Officer, pursuant to 18 U.S.C. §1350. |