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SYKE > SEC Filings for SYKE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SYKES ENTERPRISES INC

Form 10-Q for SYKES ENTERPRISES INC


9-Nov-2012

Quarterly Report


Item 2. Management's 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, 2011, 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 impact of economic recessions in the U.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (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 of new or expansion of existing 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) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel,
(xv) our ability to continue the growth of our support service revenues through additional technical and customer contact management centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on trend toward outsourcing, (xxii) risk of interruption of technical and customer contact management center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with the ICT and Alpine acquisitions not being realized, or not being realized within the anticipated time period,
(xxvii) risks related to the integration of the businesses of SYKES and ICT and Alpine and (xxviii) 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Overview

We provide comprehensive customer contact management solutions and services to a wide range of clients including Fortune 1000 companies, medium-sized businesses, and public institutions around the world, primarily in the communications, financial services, technology/consumer, transportation and leisure, healthcare and other industries. We serve our clients through two geographic operating regions: the Americas (United States, Canada, Latin America, Australia and the Asia Pacific Rim) and EMEA (Europe, the Middle East and Africa). Our Americas and EMEA groups primarily provide customer contact management services (with an emphasis on inbound technical support and customer service), which include customer assistance, healthcare and roadside assistance, technical support and product sales to our clients' customers. These services, which represented 98% of consolidated revenues during both the three and nine months ended September 30, 2012, are delivered through multiple communication channels encompassing phone, e-mail, Internet, text messaging and chat. We also provide various


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enterprise support services in the United States ("U.S.") that include services for our client's internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment services including multilingual sales order processing via the Internet and phone, payment processing, inventory control, product delivery, and product returns handling. Our complete service offering helps our clients acquire, retain and increase the lifetime value of their customer relationships. We have developed an extensive global reach with customer contact management centers throughout the United States, Canada, Europe, Latin America, Asia, India and Africa.

Acquisition of Alpine Access, Inc.

On August 20, 2012, we completed the acquisition of Alpine Access, Inc. ("Alpine"), a Delaware corporation and an industry leader in the at-home agent space - recruiting, training, managing and delivering award-winning customer contact management services through a secured and proprietary virtual call center environment with its operations located in the United States and Canada. We refer to such acquisition herein as the "Alpine acquisition."

The total purchase price of $149.0 million was funded by $41.0 million in cash on hand and borrowings of $108.0 million under our credit agreement with KeyBank National Association, dated May 3, 2012. We repaid $10.0 million and now have $147.0 million available for future borrowings under our New Credit Agreement. See "Liquidity & Capital Resources" later in this Item 2 and Note 12, Borrowings, of "Notes to Condensed Consolidated Financial Statements" for further information.

The results of operations of Alpine have been reflected in the accompanying Condensed Consolidated Statement of Operations since August 20, 2012.

Discontinued Operations

In November 2011, as authorized by the Finance Committee of our Board of Directors, we decided to pursue a buyer for our operations located in Spain (the "Spanish operations") as these operations were no longer consistent with the our strategic direction. We sold our Spanish operations, pursuant to an asset purchase agreement dated March 29, 2012 and a stock purchase agreement dated March 30, 2012. We have reflected the operating results related to the operations in Spain as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. The assets and related liabilities of Spain are presented as held for sale in the accompanying Consolidated Balance Sheet as of December 31, 2011. This business was historically reported as part of the EMEA segment.

See "Results of Operations - Discontinued Operations" later in this Item 2 for more information. Unless otherwise noted, discussions below pertain only to our continuing operations.


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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,
                                              2012            2011             2012            2011
Revenues                                    $ 280,526       $ 293,310        $ 823,426       $ 893,033
Percentage of revenues                          100.0 %         100.0 %          100.0 %         100.0 %
Direct salaries and related costs           $ 183,628       $ 189,082        $ 536,758       $ 581,952
Percentage of revenues                           65.5 %          64.5 %           65.2 %          65.2 %
General and administrative                  $  87,905       $  82,116        $ 254,247       $ 259,019
Percentage of revenues                           31.3 %          28.0 %           30.9 %          29.0 %
Net (gain) loss on disposal of property
and equipment                               $     199       $      (8 )      $      83       $  (3,432 )
Percentage of revenues                            0.1 %          (0.0 )%           0.0 %          (0.4 )%
Impairment of long-lived assets             $     122       $      38        $     271       $     764
Percentage of revenues                            0.0 %           0.0 %            0.0 %           0.1 %
Income from continuing operations           $   8,672       $  22,082        $  32,067       $  54,730
Percentage of revenues                            3.1 %           7.5 %            3.9 %           6.1 %

The following table summarizes our revenues for the periods indicated, by reporting segment (in thousands):

                              Three Months Ended                                    Nine Months Ended
                                September 30,                                         September 30,
                       2012                       2011                       2012                       2011
Americas       $ 237,541        84.7 %    $ 241,481        82.3 %    $ 688,841        83.7 %    $ 735,559        82.4 %
EMEA              42,985        15.3 %       51,829        17.7 %      134,585        16.3 %      157,474        17.6 %

Consolidated   $ 280,526       100.0 %    $ 293,310       100.0 %    $ 823,426       100.0 %    $ 893,033       100.0 %


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The following table summarizes certain amounts and percentages of revenues for the periods indicated, by reporting segment (in thousands):

                                                        Three Months Ended                                       Nine Months Ended
                                                           September 30,                                           September 30,
                                                 2012                        2011                        2012                        2011
Direct salaries and related costs:
Americas                                 $ 154,292        65.0 %     $ 152,827        63.3 %     $ 440,335        63.9 %     $ 468,330        63.7 %
EMEA                                        29,336        68.2 %        36,255        70.0 %        96,423        71.6 %       113,622        72.2 %

Consolidated                             $ 183,628        65.5 %     $ 189,082        64.5 %     $ 536,758        65.2 %     $ 581,952        65.2 %

General and administrative:
Americas                                 $  61,261        25.8 %     $  57,674        23.9 %     $ 178,739        25.9 %     $ 180,549        24.5 %
EMEA                                        11,303        26.3 %        13,681        26.4 %        36,326        27.0 %        42,676        27.1 %
Corporate                                   15,341          -           10,761          -           39,182          -           35,794          -

Consolidated                             $  87,905        31.3 %     $  82,116        28.0 %     $ 254,247        30.9 %     $ 259,019        29.0 %

Net (gain) loss on disposal of
property and equipment:
Americas                                 $     212         0.1 %     $      (8 )      (0.0 )%    $     108         0.0 %     $  (3,439 )      (0.5 )%
EMEA                                           (13 )      (0.0 )%           -          0.0 %           (25 )      (0.0 )%            7         0.0 %

Consolidated                             $     199         0.1 %     $      (8 )      (0.0 )%    $      83         0.0 %     $  (3,432 )      (0.4 )%

Impairment of long-lived assets:
Americas                                 $     122         0.1 %     $      38         0.0 %     $     271         0.0 %     $     764         0.1 %
EMEA                                            -          0.0 %            -          0.0 %            -          0.0 %            -          0.0 %

Consolidated                             $     122         0.0 %     $      38         0.0 %     $     271         0.0 %     $     764         0.1 %

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues

For the three months ended September 30, 2012, we recognized consolidated revenues of $280.5 million, a decrease of $12.8 million or 4.4%, from $293.3 million of consolidated revenues for the comparable period in 2011.

On a geographic segment basis, revenues from the Americas region, including the United States, Canada, Latin America, Australia and the Asia Pacific Rim, represented 84.7%, or $237.5 million, for the three months ended September 30, 2012 compared to 82.3%, or $241.5 million, for the comparable period in 2011. Revenues from the EMEA region, including Europe, the Middle East and Africa represented 15.3%, or $43.0 million, for the three months ended September 30, 2012 compared to 17.7%, or $51.8 million, for the comparable period in 2011.

Americas' revenues decreased $4.0 million, including the negative foreign currency impact of $0.7 million, for the three months ended September 30, 2012 from the comparable period in 2011. The remaining decrease of $3.3 million was primarily due to end-of-life client programs of $19.5 million and lower volumes from existing contracts of $14.0 million, partially offset by new contract sales of $20.1 million and Alpine acquisition revenues of $10.1 million. Revenues from our offshore operations represented 47.2% of Americas' revenues, compared to 48.9% for the comparable period in 2011. While operating margins generated offshore are generally comparable to 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, the trend of higher occupancy costs and costs of functional currency fluctuations in offshore markets. We weight these factors in our continual focus to re-price or replace certain sub-profitable target client programs.

EMEA's revenues decreased $8.8 million, including the negative foreign currency impact of $4.1 million, for the three months ended September 30, 2012 from the comparable period in 2011. The remaining decrease of $4.7 million was primarily due to end-of-life client programs of $7.5 million (including programs exited relating to the closure of certain sites in connection with the Fourth Quarter 2011 Exit Plan) and lower volumes from existing contracts of $2.9 million, partially offset by new contract sales of $5.7 million.

On a consolidated basis, we had 40,200 brick-and-mortar seats as of September 30, 2012, a decrease of 1,600 seats from the comparable period in 2011. The capacity utilization rate on a combined basis was 73% compared to 72% from the comparable period in 2011. This increase was primarily due to a combination of seat rationalizations associated with the strategic actions in connection with the Fourth Quarter 2011 Exit Plan (see Note 4, Costs Associated with Exit or Disposal Activities, of "Notes to Condensed Consolidated Financial Statements").


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On a geographic segment basis, 34,900 seats were located in the Americas, a decrease of 1,000 seats from the comparable period in 2011, and 5,300 seats were located in EMEA, a decrease of 600 seats from the comparable period in 2011. The consolidated offshore seat count as of September 30, 2012 was 22,400, or 56%, of our total seats, a decrease of 200 seats, or 1%, from the comparable period in 2011. Capacity utilization rates as of September 30, 2012 were 72% for the Americas and 78% for EMEA, compared to 73% and 70%, respectively, as of September 30, 2011, primarily due to seat rationalizations associated with the strategic actions in connection with the Fourth Quarter 2011 Exit Plan.

We achieved our 2012 gross seat addition target of approximately 3,700 seats at the end of the third quarter of 2012. For the year ended December 31, 2012, the total seat count on a net basis is expected to decline by approximately 2,000 seats from 2011, primarily due to the strategic actions outlined in the Fourth Quarter 2011 Exit Plan.

Direct Salaries and Related Costs

Direct salaries and related costs decreased $5.5 million, or 2.9%, to $183.6 million for the three months ended September 30, 2012 from $189.1 million in the comparable period in 2011.

On a reporting segment basis, direct salaries and related costs from the Americas segment increased $1.5 million, including the positive foreign currency impact of $0.1 million, for the three months ended September 30, 2012 from the comparable period in 2011. Direct salaries and related costs from the EMEA segment decreased $7.0 million, including the positive foreign currency impact of $2.7 million, for the three months ended September 30, 2012 from the comparable period in 2011.

In the Americas segment, as a percentage of revenues, direct salaries and related costs increased to 65.0% for the three months ended September 30, 2012 from 63.3% in the comparable period in 2011. This increase of 1.7%, as a percentage of revenues, was primarily attributable to higher compensation costs of 1.8% principally driven by lower demand without a commensurate reduction in labor costs and higher other costs of 0.2%, partially offset by lower communication costs of 0.3%.

In the EMEA segment, as a percentage of revenues, direct salaries and related costs decreased to 68.2% for the three months ended September 30, 2012 from 70.0% in the comparable period of 2011. This decrease of 1.8%, as a percentage of revenues, was primarily attributable to lower billable supply costs of 1.2%, lower compensation costs of 0.7% due to a workforce reduction in connection with the Fourth Quarter 2011 Exit Plan, lower communication costs of 0.2% and lower other costs of 0.3%, partially offset by higher fulfillment materials costs of 0.4% and higher travel costs of 0.2%.

General and Administrative

General and administrative expenses increased $5.8 million, or 7.1%, to $87.9 million for the three months ended September 30, 2012 from $82.1 million in the comparable period in 2011.

On a reporting segment basis, general and administrative expenses from the Americas segment increased $3.6 million, including the positive foreign currency impact of $0.1 million, for the three months ended September 30, 2012 from the comparable period in 2011. General and administrative expenses from the EMEA segment decreased $2.4 million, including the positive foreign currency impact of $1.0 million, for the three months ended September 30, 2012 from the comparable period in 2011. Corporate general and administrative expenses increased $4.6 million for the three months ended September 30, 2012 from the comparable period in 2011. This increase of $4.6 million was primarily attributable to higher merger and acquisition costs of $3.4 million related to the Alpine acquisition, higher compensation costs of $1.4 million and higher consulting costs of $0.3 million, partially offset by lower facility-related charges of $0.4 million and lower other costs of $0.1 million.

In the Americas segment, as a percentage of revenues, general and administrative expenses increased to 25.8% for the three months ended September 30, 2012 from 23.9% in the comparable period in 2011. This increase of 1.9%, as a percentage of revenues, was primarily attributable to higher compensation costs of 0.7% primarily related to lower demand without a commensurate reduction in labor costs, higher software maintenance costs of 0.3%, higher legal and professional fees of 0.3%, higher facility-related costs of 0.2%, higher insurance costs of 0.2%, higher taxes of 0.1%, higher communications costs of 0.1% and higher other costs of 0.4%, partially offset by lower equipment and maintenance costs of 0.4%.


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In the EMEA segment, as a percentage of revenues, general and administrative expenses decreased to 26.3% for the three months ended September 30, 2012 from 26.4% in the comparable period in 2011. This decrease of 0.1%, as a percentage of revenues, was primarily attributable to lower legal and professional fees of 0.2% and lower severance-related costs of 0.2%, partially offset by higher compensation costs of 0.2% and higher other costs of 0.1%.

Net (Gain) Loss on Disposal of Property and Equipment

Net (gain) loss on disposal of property and equipment was $0.2 million for the three months ended September 30, 2012, compared to less than $(0.1) million for the comparable 2011 period.

Impairment of Long-Lived Assets

Impairment of long-lived assets was $0.1 million and less than $0.1 million for the three months ended September 30, 2012 and 2011, respectively, in the Americas segment. The impairment losses 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. See Note 5, Fair Value, of the "Notes to Condensed Consolidated Financial Statements" for further information.

Interest Income

Interest income was $0.3 million for the three months ended September 30, 2012, compared to $0.4 million in the same period in 2011, reflecting lower average invested balances of interest bearing investments in cash and cash equivalents.

Interest (Expense)

Interest (expense) was $(0.4) million for the three months ended September 30, 2012, compared to $(0.3) million in the same period in 2011. The increase of $0.1 million primarily reflects interest and fees on borrowings related to the late August acquisition of Alpine in the 2012 period.

Other (Expense)

Other (expense), net, was $(0.7) million for the three months ended September 30, 2012, compared to $(0.3) million in the same period in 2011. The net increase in other (expense), net, of $(0.4) million was primarily attributable to an increase of $4.7 million in foreign currency forward contract losses (which were not designated as hedging instruments), partially offset by a decrease of $3.4 million in realized and unrealized foreign currency transaction losses, net of gains and an increase of $0.9 million in other miscellaneous income, net. Other (expense), net, excludes the cumulative translation effects and unrealized gains (losses) on financial derivatives that are included in "Accumulated other comprehensive income" in shareholders' equity in the accompanying Condensed Consolidated Balance Sheets.

Income Taxes

Income tax (benefit) of $(0.3) million for the three months ended September 30, 2012, was based upon pre-tax book income of $7.8 million. Income tax expense of $3.0 million for the three months ended September 30, 2011, was based upon pre-tax book income of $21.8 million. The effective tax rate for the three months ended September 30, 2012 was (3.9)% compared to an effective tax rate of 13.6% for the same period in 2011. The decrease in the effective tax rate is primarily due to the recognition of tax benefits for acquisition and integration costs incurred for Alpine.

(Loss) from Discontinued Operations

We sold our Spanish operations in March 2012 and accounted for this transaction in accordance with Accounting Standards Codification ("ASC") 205-20 "Discontinued Operation". Accordingly, we reclassified the results of operations for the three months ended September 30, 2011 to discontinued operations. The loss from discontinued operations, net of taxes, totaled $0.8 million for the three months ended September 30, 2011. There was no tax impact on the loss from discontinued operations.


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Net Income

As a result of the foregoing, we reported income from continuing operations for the three months ended September 30, 2012 of $8.7 million, a decrease of $13.4 million from the comparable period in 2011. This decrease was principally attributable to a $12.8 million decrease in revenues and a $5.8 million increase in general and administrative expenses and a $0.3 million increase in net loss on disposal of property and equipment, partially offset by a $5.5 million decrease in direct salaries and related costs. In addition to the $13.4 million decrease in income from continuing operations, we experienced a $0.4 million increase in other (expense), net, a decrease in interest income of $0.1 million and increase in interest (expense) of $0.1 million, partially offset by a $3.3 million decrease in income taxes and a decrease of $0.8 million in loss from discontinued operations, resulting in net income of $8.1 million for the three months ended September 30, 2012, a decrease of $9.9 million compared to the same period in 2011.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues

For the nine months ended September 30, 2012, we recognized consolidated revenues of $823.4 million, a decrease of $69.6 million, or 7.8%, from $893.0 million of consolidated revenues for the comparable period in 2011.

On a geographic segment basis, revenues from the Americas region, including the United States, Canada, Latin America, Australia and the Asia Pacific Rim, represented 83.7%, or $688.8 million, for the nine months ended September 30, 2012 compared to 82.4%, or $735.5 million, for the comparable period in 2011. Revenues from the EMEA region, including Europe, the Middle East and Africa represented 16.3%, or $134.6 million, for the nine months ended September 30, 2012 compared to 17.6%, or $157.5 million, for the comparable period in 2011.

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