10-K 1 d62359d10k.htm 10-K 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

x

Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the fiscal year ended December 31, 2015

Or

 

¨

Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For The Transition Period From                      To                     

Commission File Number 0-28274

Sykes Enterprises, Incorporated

(Exact name of registrant as specified in its charter)

 

Florida   56-1383460

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

400 N. Ashley Drive, Suite 2800, Tampa, Florida   33602
(Address of principal executive offices)   (Zip Code)

(813) 274-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of each exchange on which registered

Common Stock $.01 Par Value   NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant computed by reference to the closing sales price of such shares on the NASDAQ Global Select Market on June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter, was $1,008,374,946.

As of February 10, 2016, there were 42,784,966 outstanding shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE:

 

Documents

  

Form 10-K Reference

Portions of the Proxy Statement for the year 2016 Annual Meeting of Shareholders

  

Part III Items 10–14


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I   

Item 1

 

Business

     3   

Item 1A

 

Risk Factors

     10   

Item 1B

 

Unresolved Staff Comments

     18   

Item 2

 

Properties

     19   

Item 3

 

Legal Proceedings

     20   

Item 4

 

Mine Safety Disclosures

     20   
PART II   

Item 5

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

     21   

Item 6

 

Selected Financial Data

     23   

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

     39   

Item 8

 

Financial Statements and Supplementary Data

     40   

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     40   

Item 9A

 

Controls and Procedures

     41   

Item 9B

 

Other Information

     43   
PART III   

Item 10

 

Directors, Executive Officers and Corporate Governance

     43   

Item 11

 

Executive Compensation

     43   

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

     43   

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

     43   

Item 14

 

Principal Accountant Fees and Services

     43   
PART IV   

Item 15

 

Exhibits and Financial Statement Schedules

     44   

 

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PART I

Item 1. Business

General

Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES,” “our,” “us” or “we”) is a global leader in providing comprehensive outsourced customer contact management solutions and services in the business process outsourcing (“BPO”) arena. We provide an array of sophisticated customer contact management solutions to a wide range of clients including Global 2000 companies, medium-sized businesses and public institutions around the world, primarily in the communications, financial services, technology/consumer, transportation and leisure, healthcare and other industry verticals. 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 regions primarily provide 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 our clients’ customers. These services are delivered through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. We also provide various enterprise support services in the United States that include services for our clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment services, which includes order processing via the Internet and phone, inventory control, product delivery and product returns handling. (See Note 25, Segments and Geographic Information, of the accompanying “Notes to Consolidated Financial Statements” for further information on our segments.) 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 across six continents, including North America, South America, Europe, Asia, Australia and Africa. We deliver cost-effective solutions that enhance the customer service experience, promote stronger brand loyalty, and bring about high levels of performance and profitability.

SYKES was founded in 1977 in North Carolina and we moved our headquarters to Florida in 1993. In March 1996, we changed our state of incorporation from North Carolina to Florida. Our headquarters are located at 400 North Ashley Drive, Suite 2800, Tampa, Florida 33602, and our telephone number is (813) 274-1000.

In July 2015, we completed the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”), pursuant to definitive Share Sale and Purchase Agreement, dated July 2, 2015. The Company has reflected the operating results in the accompanying Consolidated Statement of Operations for the period from July 2, 2015 to December 31, 2015.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as our proxy statements and other materials which are filed with, or furnished to, the Securities and Exchange Commission (“SEC”) are made available, free of charge, on or through our Internet website at www.sykes.com (click on “Company” then “Investor Relations” and then “SEC Filings” under the heading “Financial Reports and Filings”) as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

Industry Overview

The customer contact management industry is highly fragmented and significant in size. According to Ovum, an industry research firm, the total number of individuals, or agent positions, working in the customer contact management industry worldwide was estimated at roughly 9.9 million in 2015. With approximately 78% of the customer contact work done by in-house contact centers, the number of agent positions working for outsourcers, such as SYKES, was estimated at 2.1 million in 2015. Both the outsourced and total agent positions are forecasted by Ovum to grow at compound annual growth rate of 5.4% and 2.0%, respectively, from 2015 to 2018. It is estimated that no single outsourcer has more than five percent of the total agent positions worldwide. Measured in dollar terms, the size of the outsourced portion of the customer contact management industry worldwide was estimated at approximately $68 billion in 2015, according to International Data Corporation (“IDC”), an industry research firm. IDC also estimates that the outsourced portion of the customer contact industry is expected to grow to approximately $81 billion by 2018, a compound annual growth rate of 6.0% from 2015 to 2018.

We believe that growth for outsourced customer contact management solutions and services will be fueled by the trend of Global 2000 companies and medium-sized businesses utilizing outsourcers. In today’s marketplace,

 

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companies require innovative customer contact management solutions that allow them to enhance the end user’s experience with their products and services, strengthen and enhance their company brands, maximize the lifetime value of their customers, efficiently and effectively deliver human interaction when customers value it most, and deploy best-in-class customer management strategies, processes and technologies. However, a myriad of factors, among them intense global competition, pricing pressures, softness in the global economy and rapid changes in technology, continue to make it difficult for companies to cost-effectively maintain the in-house personnel necessary to handle all of their customer contact management needs.

To address these needs, we offer comprehensive global customer contact management solutions that leverage brick-and-mortar and virtual at-home agent delivery infrastructure as well as digital self-service capabilities. We provide consistent high-value support for our clients’ customers across the globe in a multitude of languages, leveraging our dynamic, secure communications infrastructure and our global footprint that reaches across 20 countries. This global footprint includes established brick-and-mortar operations in both onshore and offshore geographies where companies have access to high-quality customer contact management solutions at lower costs compared to other markets. We further complement our brick-and-mortar global delivery model with a highly differentiated and ready-made best-in-class virtual at-home agent delivery model, which we acquired through the Alpine Access, Inc. (“Alpine”) acquisition in August of 2012. In addition, through the acquisition of Qelp, we strengthened our service portfolio, which includes email, chat and social media, to provide digital self-service customer support. The acquisition of Qelp further differentiates our go-to-market strategy as it expands options for companies to best service their customers in their channel of choice to deliver an “effortless customer experience.” By working in partnership with outsourcers, companies can ensure that the crucial task of retaining and growing their customer base is addressed while creating operating flexibility, enabling focus on their core competencies, ensuring service excellence and execution, achieving cost savings through a variable cost structure, leveraging scale, entering niche markets speedily, and efficiently allocating capital within their organizations.

Business Strategy

Broadly speaking, our value proposition to our clients is that of a trusted partner, which provides proven customer service solutions to Global 2000 companies that drive differentiation, brand loyalty and increased lifetime value of end customer relationships. By outsourcing their customer service solutions to us, clients are able to achieve designs of exceptional customer experience and drive tangible business impact with enhanced operational flexibility, lower operating costs and faster speed to market, all of which are at the center of our value proposition. At a tactical level, we deliver on this value proposition through consistent delivery of operational and client excellence. Our business strategy is to leverage this value proposition in order to capitalize on and increase our share of the large and underpenetrated addressable market opportunity for customer contact management services worldwide. We believe through successful execution of our business strategy, we could generate a healthy level of revenue growth and drive targeted long-term operating margins. To deliver on our long-term growth potential and operating margin objectives, we need to manage the key levers of our business strategy, the principles of which include the following:

Build Long-Term Client Relationships Through Customer Service Excellence. We believe that providing high-value, high-quality service is critical in our clients’ decisions to outsource and in building long-term relationships with our clients. To ensure service excellence and consistency across each of our centers globally, we leverage a portfolio of techniques, including SYKES Science of Service®. This standard is a compilation of more than 30 years of experience and best practices. Every customer contact management center strives to meet or exceed the standard, which addresses leadership, hiring and training, performance management down to the agent level, forecasting and scheduling, and the client relationship including continuous improvement, disaster recovery plans and feedback.

Increasing Share of Seats Within Existing Clients and Winning New Clients. We provide customer contact management support to numerous multinational companies. With this client list, we have the opportunity to grow our client base. We strive to achieve this by winning a greater share of our clients’ in-house seats as well as gaining share from our competitors by providing consistently high-quality service as clients continue to consolidate their vendor base. In addition, as we further leverage our highly differentiated virtual at-home agent delivery capability internationally, using our knowledge of verticals and business lines, we plan to win new clients as a way to broaden our base of growth.

Diversifying Verticals and Expanding Service Lines. To mitigate the impact of any negative economic and product cycles on our growth rate, we continue to seek ways to diversify into verticals and service lines that have countercyclical features and healthy growth rates. We are targeting the following verticals for growth: communications, financial services, technology/consumer, healthcare and retail. These verticals cover various business lines, including wireless services, broadband, retail banking, credit card/consumer fraud protection, content moderation, telemedicine and soft and hard goods retailers.

 

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Maximizing Capacity Utilization Rates and Strategically Adding Seat Capacity. Revenues and profitability growth are driven by increasing the capacity utilization rate in conjunction with seat capacity additions. We plan to sustain our focus on increasing the capacity utilization rate by further penetrating existing clients, adding new clients and rationalizing underutilized seat capacity as deemed necessary. With greater operating flexibility resulting from the Alpine acquisition, we can rationalize underutilized capacity more efficiently and drive capacity utilization rates.

Broadening At-Home Agent and Brick-and-Mortar Global Delivery Footprint. Just as increased capacity utilization rates and increased seat capacity are key drivers of our revenues and profitability growth, where we deploy both the seat capacity and the virtual at-home agent delivery platform geographically is also important. By broadening and continuously strengthening our brick-and-mortar global delivery footprint and our virtual at-home agent delivery platform, we are able to meet both our existing and new clients’ customer contact management needs globally as they enter new markets. At the end of 2015, our global delivery brick-and-mortar footprint spanned 20 countries while our virtual at-home agent delivery platform was recently launched in EMEA, building on our existing presence in 40 states and nine provinces within the U.S. and Canada, respectively.

Creating Value-Added Service Enhancements. To improve both revenue and margin expansion, we will continue to introduce new service offerings and add-on enhancements. Multilingual customer support, sales and marketing, digital self-service support and back office services are examples of horizontal service offerings, while data analytics and process improvement products are examples of add-on enhancements. Additionally, with the rapid emergence of on-line communities, such as Facebook and Twitter, we continue to make on-going investments in our social media service offerings, which can be leveraged across both our brick-and-mortar and virtual at-home agent delivery platforms.

Continue to Grow Our Business Organically and through Acquisitions. We have grown our customer contact management outsourcing operations utilizing a strategy of both internal organic growth and external acquisitions. Our organic growth and acquisition strategy is to target markets, clients, verticals, delivery geographies and service mix that will expand our addressable market opportunity, and thus drive our organic growth. Entry into The Philippines, El Salvador, Romania and Colombia are examples of how we leveraged these delivery geographies to further penetrate our base of both existing and new clients, verticals and service mix in order to drive organic growth. While the Alpine and Qelp acquisitions are examples of how we used an acquisition to augment and differentiate our delivery model, the ICT Group, Inc. (“ICT”) acquisition is an example of how we used an acquisition to gain overall size and critical mass in key verticals, clients and geographies.

Continuing to Focus on Expanding the Addressable Market Opportunities. As part of our growth strategy, we continually seek to expand the number of markets we serve. The United States, Canada and Germany, for instance, are markets which are served by in-country centers, centers in offshore regions or a combination thereof. We continually seek ways to broaden the addressable market for our customer contact management services. We currently operate in 14 markets.

Services

We specialize in providing inbound outsourced customer contact management solutions in the BPO arena on a global basis. Our customer contact management services are provided through two reportable segments — the Americas and EMEA. The Americas region, representing 81.3% of consolidated revenues in 2015, includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim. The sites within Latin America and the Asia Pacific Rim are included in the Americas region as they provide a significant service delivery vehicle for U.S.-based companies that are utilizing our customer contact management solutions in these locations to support their customer care needs. In addition, the Americas region also includes revenues from our virtual at-home agent delivery solution, which serves markets in both the U.S. and Canada. The EMEA region, representing 18.7% of consolidated revenues in 2015, includes Europe, the Middle East and Africa. See Note 25, Segments and Geographic Information, of the accompanying “Notes to Consolidated Financial Statements” for further information on our segments. The following is a description of our customer contact management solutions:

Outsourced Customer Contact Management Services. Our outsourced customer contact management services represented approximately 98.1% of total 2015 consolidated revenues. Each year, we handle over 250 million customer contacts including phone, e-mail, social media, text messaging, chat and digital self-service support throughout the Americas and EMEA regions. We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience. These services include:

 

   

Customer care — Customer care contacts primarily include product information requests, describing product features, activating customer accounts, resolving complaints, cross-selling/up-selling, handling billing inquiries, changing addresses, claims handling, ordering/reservations, prequalification and warranty management, providing health information and roadside assistance;

 

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Technical support — Technical support contacts primarily include handling inquiries regarding hardware, software, communications services, communications equipment, Internet access technology and Internet portal usage; and

 

   

Customer acquisition — Our customer acquisition services are primarily focused on inbound and outbound up-selling of our clients’ products and services.

We provide these services, primarily inbound customer calls, through our extensive global network of customer contact management centers in many languages. In addition, we augment those in-bound calls with the option of digital self-service customer support. Our technology infrastructure and managed service solutions allow for effective distribution of calls to one or more centers. These technology offerings provide our clients and us with the leading edge tools needed to maximize quality and customer satisfaction while controlling and minimizing costs.

Fulfillment Services. In Europe, we offer fulfillment services that are integrated with our customer care and technical support services. Our fulfillment solutions include order processing via the Internet and phone, inventory control, product delivery and product returns handling.

Enterprise Support Services. In the United States, we provide a range of enterprise support services including technical staffing services and outsourced corporate help desk solutions.

Operations

Customer Contact Management Centers. We operate across 20 countries in 67 customer contact management centers, which breakdown as follows: 18 centers across Europe and Egypt, 22 centers in the United States, five centers in Canada, three centers in Australia and 19 centers offshore, including the People’s Republic of China, The Philippines, Costa Rica, El Salvador, India, Mexico, Brazil and Colombia. In addition to our customer contact management centers, we employ approximately 7,500 at-home customer contact agents across 40 states in the U.S. and across nine provinces in Canada.

We utilize a sophisticated workforce management system to provide efficient scheduling of personnel. Our internally developed digital private communications network complements our workforce by allowing for effective call volume management and disaster recovery backup. Through this network and our dynamic intelligent call routing capabilities, we can rapidly respond to changes in client call volumes and move call volume traffic based on agent availability and skill throughout our network of centers, improving the responsiveness and productivity of our agents. We also can offer cost competitive solutions for taking calls to our offshore locations.

Our data warehouse captures and downloads customer contact information for reporting on a daily, real-time and historical basis. This data provides our clients with direct visibility into the services that we are providing for them. The data warehouse supplies information for our performance management systems such as our agent scorecarding application, which provides us with the information required for effective management of our operations.

Our customer contact management centers are protected by a fire extinguishing system, backup generators with significant capacity and 24 hour refueling contracts and short-term battery backups in the event of a power outage, reduced voltage or a power surge. Rerouting of call volumes to other customer contact management centers is also available in the event of a telecommunications failure, natural disaster or other emergency. Security measures are imposed to prevent unauthorized physical access. Software and related data files are backed up daily and stored off site at multiple locations. We carry business interruption insurance covering interruptions that might occur as a result of certain types of damage to our business.

Fulfillment Centers. We currently have one fulfillment center located in Europe. We provide our fulfillment services primarily to certain clients operating in Europe who desire this complementary service in connection with outsourced customer contact management services.

 

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Enterprise Support Services Office. Our enterprise support services office, located in a metropolitan area in the United States, provides recruitment services for high-end knowledge workers, a local presence to service major accounts, and outsourced corporate help desk solutions.

Sales and Marketing

Our sales and marketing objective is to leverage our vertical expertise and global presence to develop long-term relationships with existing and future clients. Our customer contact management solutions have been developed to help our clients acquire, retain and increase the lifetime value of their customer relationships. Our plans for increasing our visibility and impacting the market include participation in market-specific industry associations, trade shows and seminars, content marketing to industry leading corporations, and consultative personal visits and solution designs. We research and publish thought provoking perspectives on key industry issues, and use forums speaking engagements, articles and white papers, as well as our website and digital presence to establish our leadership position in the market.

Our sales force is composed of business development managers who pursue new business opportunities and strategic account managers who manage and grow relationships with existing accounts. We emphasize account development to strengthen relationships with existing clients. Business development management and strategic account managers are assigned to markets in their area of expertise in order to develop a complete understanding of each client’s particular needs, to form strong client relationships and encourage cross-selling of our other service offerings. We have inside customer sales representatives who receive customer inquiries and who provide pre-sales relationship development for the business development managers. We use a methodical approach to collecting client feedback through quarterly business reviews, annual strategic reviews, and through our bi-annual Voice of the Client program, which enables us to react to early warning signs, and quickly identify and remedy challenges. It also is used to highlight our most loyal clients, who we then work with to provide references, testimonials and joint speaking engagements at industry conferences.

As part of our marketing efforts, we invite existing and potential clients to experience our customer contact management centers and virtual at-home agent delivery operations, where we can demonstrate the expertise of our skilled staff in partnering to deliver new ways of growing clients’ customer satisfaction and retention rates, and thus profit, through timely, insightful and proven solutions. This forum allows us to demonstrate our capabilities to design, launch and scale programs. It also allows us to illustrate our best innovations in talent management, analytics, and digital channels, and how they can be best integrated into a program’s design.

Clients

We provide service to clients from our locations in the United States, Canada, Latin America, Australia, the Asia Pacific Rim, Europe and Africa. These clients are Global 2000 corporations, medium-sized businesses and public institutions, which span the communications, financial services, technology/consumer, transportation and leisure, healthcare and other industries. Revenue by industry vertical for 2015, as a percentage of our consolidated revenues, was 34% for communications, 24% for financial services, 20% for technology/consumer, 7% for transportation and leisure, 5% for healthcare, 3% for retail and 7% for all other verticals, including government and utilities. We believe our globally recognized client base presents opportunities for further cross marketing of our services.

Total revenues by segment from AT&T Corporation, a major provider of communication services for which we provide various customer support services, were as follows (in thousands):

 

     Years Ended December 31,  
   2015     2014     2013  
   Amount      % of Revenues     Amount      % of Revenues     Amount      % of Revenues  

Americas

   $ 217,449         20.8   $ 212,607         19.9   $ 162,888         15.5

EMEA

     3,003         1.2     3,519         1.4     3,513         1.7
  

 

 

      

 

 

      

 

 

    
   $ 220,452         17.1   $ 216,126         16.3   $ 166,401         13.2
  

 

 

      

 

 

      

 

 

    

We have multiple distinct contracts with AT&T spread across multiple lines of businesses, which expire at varying dates between 2016 and 2017. We have historically renewed most of these contracts. However, there is no assurance that these contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts. Each line

 

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of business is governed by separate business terms, conditions and metrics. Each line of business also has a separate decision maker such that a loss of one line of business would not necessarily impact our relationship with the client and decision makers on other lines of business. The loss of (or the failure to retain a significant amount of business with) any of our key clients, including AT&T, could have a material adverse effect on our performance. Many of our contracts contain penalty provisions for failure to meet minimum service levels and are cancelable by the client at any time or on short notice. Also, clients may unilaterally reduce their use of our services under our contracts without penalty.

Total revenues by segment from our next largest client, which was in the financial services vertical in each of the years, were as follows (in thousands):

 

     Years Ended December 31,  
     2015     2014     2013  
     Amount      % of Revenues     Amount      % of Revenues     Amount      % of Revenues  

Americas

   $ 62,980         6.0   $ 70,255         6.6   $ 73,226         7.0

EMEA

     —             0.0     —             0.0     —             0.0
  

 

 

      

 

 

      

 

 

    
   $ 62,980         4.9   $ 70,255         5.3   $ 73,226         5.8
  

 

 

      

 

 

      

 

 

    

Other than AT&T, total revenues by segment of our clients that each individually represent 10% or greater of that segment’s revenues in each of the years were as follows (in thousands):

 

     Years Ended December 31,  
     2015     2014     2013  
     Amount      % of Revenues     Amount      % of Revenues     Amount      % of Revenues  

Americas

   $ —           0.0   $ —           0.0   $ —           0.0

EMEA

     68,720         28.5     79,811         31.1     55,123         25.9
  

 

 

      

 

 

      

 

 

    
   $ 68,720         5.3   $ 79,811         6.0   $ 55,123         4.4
  

 

 

      

 

 

      

 

 

    

Our top ten clients accounted for approximately 48.5%, 46.8% and 45.9% of our consolidated revenues during the years ended December 31, 2015, 2014 and 2013, respectively.

Competition

The industry in which we operate is global and, therefore, highly fragmented and extremely competitive. While many companies provide customer contact management solutions and services, we believe no one company is dominant in the industry.

In most cases, our principal competition stems from our existing and potential clients’ in-house customer contact management operations. When it is not the in-house operations of a client or potential client, our public and private direct competition includes 24/7 Customer, Alorica, Arise, Atento, Concentrix, Convergys, Expert Global Solutions, Groupe Acticall/Sitel, iQor, LiveOps, StarTek, Sutherland, Teleperformance, TeleTech, Transcom and Working Solutions, as well as the customer care arm of such companies as Accenture, Infosys, Mahindra Satyam, Wipro and Xerox, among others. There are other numerous and varied providers of such services, including firms specializing in various CRM consulting, other customer management solutions providers, niche or large market companies, as well as product distribution companies that provide fulfillment services. Some of these companies possess substantially greater resources, greater name recognition and a more established customer base than we do.

We believe that the most significant competitive factors in the sale of outsourced customer contact management services include service quality, tailored value-added service offerings, industry experience, advanced technological capabilities, global coverage, reliability, scalability, security, price and financial strength. As a result of intense competition, outsourced customer contact management solutions and services frequently are subject to pricing pressure. Clients also require outsourcers to be able to provide services in multiple locations. Competition for contracts for many of our services takes the form of competitive bidding in response to requests for proposal.

 

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Intellectual Property

The success of our business depends, in part, on our proprietary technology and intellectual property. We rely on a combination of intellectual property laws and contractual arrangements to protect our intellectual property. We and our subsidiaries have registered various trademarks and service marks in the U.S. and/or other countries, including SYKES®, REAL PEOPLE. REAL SOLUTIONS®, SYKES HOME®, SYKES HOME POWERED BY ALPINE ACCESS®, SCIENCE OF SERVICE®, ALPINE ACCESS®, ALPINE ACCESS UNIVERSITY®, TALENTSPROUT®, and SECURE TALK®. The duration of trademark and service mark registrations varies from country to country but may generally be renewed indefinitely as long as the marks are in use and their registrations are properly maintained. Our subsidiary, Alpine, was issued U.S. Patent No. 8,565,413 in 2013 which relates to a system and method for establishment and management of a remote agent call center. Alpine was also issued U.S. Patent No. 9,100,484 on August 4, 2015 which relates to a secure call environment. Alpine has an additional pending U.S. patent application.

Employees

As of January 31, 2016, we had approximately 54,550 employees worldwide, including 41,700 customer contact agents handling technical and customer support inquiries at our centers, 7,500 at-home customer contact agents handling technical and customer support inquiries, 5,100 in management, administration, information technology, finance, sales and marketing roles, 50 in enterprise support services and 200 in fulfillment services. Our employees, with the exception of approximately 650 employees in Brazil and various European countries, are not union members and we have never suffered a material interruption of business as a result of a labor dispute. We consider our relations with our employees worldwide to be satisfactory.

We employ personnel through a continually updated recruiting network. This network includes a seasoned team of recruiters, competency-based selection standards and the sharing of global best practices in order to advertise to and source qualified candidates through proven recruiting techniques. Nonetheless, demand for qualified professionals with the required language and technical skills may still exceed supply at times as new skills are needed to keep pace with the requirements of customer engagements. As such, competition for such personnel is intense. Additionally, employee turnover in our industry is high.

Executive Officers

The following table provides the names and ages of our executive officers, and the positions and offices currently held by each of them:

 

Name

    

Age

    

Principal Position

Charles E. Sykes

       53       President and Chief Executive Officer and Director

John Chapman

       49       Executive Vice President and Chief Financial Officer

Lawrence R. Zingale

       59       Executive Vice President, General Manager of Major Markets

Andrew J. Blanchard

       58       Executive Vice President, Financial Services, Healthcare and Retail

Jenna R. Nelson

       52       Executive Vice President, Human Resources

David L. Pearson

       57       Executive Vice President and Chief Information Officer

James T. Holder

       57       Executive Vice President, General Counsel and Corporate Secretary

William N. Rocktoff

       53       Global Vice President and Corporate Controller

Charles E. Sykes joined SYKES in 1986 and was named President and Chief Executive Officer and Director in August 2004. From July 2003 to August 2004, Mr. Sykes was the Chief Operating Officer. From March 2000 to June 2001, Mr. Sykes was Senior Vice President, Marketing, and in June 2001, he was appointed to the position of General Manager, Senior Vice President — the Americas. From December 1996 to March 2000, he served as Vice President, Sales, and held the position of Regional Manager of the Midwest Region for Professional Services from 1992 until 1996.

John Chapman, F.C.C.A, joined SYKES in September 2002 as Vice President, Finance, managing the EMEA finance function and was named Senior Vice President, EMEA Global Region in January 2012, adding operational responsibility. In April 2014, he was named Executive Vice President and Chief Financial Officer. Prior to joining SYKES, Mr. Chapman served as financial controller for seven years for Raytheon UK.

 

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Lawrence R. Zingale joined SYKES in January 2006 as Senior Vice President, Global Sales and Client Management. In May 2010, he was named Executive Vice President, Global Sales and Client Management and in September 2012, he was named Executive Vice President and General Manager of Major Markets. Prior to joining SYKES, Mr. Zingale served as Executive Vice President and Chief Operating Officer of StarTek, Inc. since 2002. From December 1999 until November 2001, Mr. Zingale served as President of the Americas at Stonehenge Telecom, Inc. From May 1997 until November 1999, Mr. Zingale served as President and Chief Operating Officer of International Community Marketing. From February 1980 until May 1997, Mr. Zingale held various senior level positions at AT&T.

Andrew J. Blanchard joined SYKES in November 2014 as Executive Vice President, Financial Services, Healthcare and Retail. From 2013 until his joining SYKES, Mr. Blanchard served as Managing Partner at Avasant, a globally ranked third-party advisory and consulting firm. Prior to 2013, Mr. Blanchard had a 30-year career at Accenture, formerly Andersen Consulting, working across the organization in various leadership roles; subsequently being named Managing Director of a new division, which focused on the global customer contact management industry.

Jenna R. Nelson joined SYKES in August 1993 and was named Senior Vice President, Human Resources, in July 2001. In May 2010, she was named Executive Vice President, Global Human Resources. From January 2001 until July 2001, Ms. Nelson held the position of Vice President, Human Resources. In August 1998, Ms. Nelson was appointed Vice President, Human Resources, and held the position of Director, Human Resources and Administration, from August 1996 to July 1998. From August 1993 until July 1996, Ms. Nelson served in various management positions within SYKES, including Director of Administration.

David L. Pearson joined SYKES in February 1997 as Vice President, Engineering, and was named Vice President, Technology Systems Management, in 2000 and Senior Vice President and Chief Information Officer in August 2004. In May 2010, he was named Executive Vice President and Chief Information Officer. Prior to SYKES, Mr. Pearson held various engineering and technical management roles over a fifteen year period, including eight years at Compaq Computer Corporation and five years at Texas Instruments.

James T. Holder, J.D., joined SYKES in December 2000 as General Counsel and was named Corporate Secretary in January 2001, Vice President in January 2004 and Senior Vice President in December 2006. In May 2010, he was named Executive Vice President. From November 1999 until November 2000, Mr. Holder served in a consulting capacity as Special Counsel to Checkers Drive-In Restaurants, Inc., a publicly held restaurant operator and franchisor. From November 1993 until November 1999, Mr. Holder served in various capacities at Checkers including Corporate Secretary, Chief Financial Officer and Senior Vice President and General Counsel.

William N. Rocktoff, C.P.A., joined SYKES in August 1997 as Corporate Controller and was named Treasurer and Corporate Controller in December 1999 and Vice President and Corporate Controller in March 2002. In January 2011, he was named Global Vice President and Corporate Controller. From November 1989 to August 1997, Mr. Rocktoff held various financial positions, including Corporate Controller, at Kimmins Corporation, a publicly-held contracting company.

Item 1A. Risk Factors

Factors Influencing Future Results and Accuracy of Forward-Looking Statements

This Annual Report on Form 10-K contains 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 us, 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 “may,” “expects,” “projects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” 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 Annual Report on Form 10-K. 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 forward-looking statements, whether as a result of new information, future events or otherwise.

 

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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: the marketplace’s continued receptivity to our terms and elements of services offered under our standardized contract for future bundled service offerings; our ability to continue the growth of our service revenues through additional customer contact management centers; our ability to further penetrate into vertically integrated markets; our ability to expand revenues within the global markets; our ability to continue to establish a competitive advantage through sophisticated technological capabilities, and the following risk factors:

Risks Related to Our Business and Industry

Unfavorable general economic conditions could negatively impact our operating results and financial condition.

Unfavorable general economic conditions could negatively affect our business. While it is often difficult to predict the impact of general economic conditions on our business, these conditions could adversely affect the demand for some of our clients’ products and services and, in turn, could cause a decline in the demand for our services. Also, our clients may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us. If that were to occur, we could be required to increase our allowance for doubtful accounts, and the number of days outstanding for our accounts receivable could increase. In addition, we may not be able to renew our revolving credit facility at terms that are as favorable as those terms available under our current credit facility. Also, the group of lenders under our credit facility may not be able to fulfill their funding obligations, which could adversely impact our liquidity. For these reasons, among others, if unfavorable economic conditions persist or increase, this could adversely affect our revenues, operating results and financial condition, as well as our ability to access debt under comparable terms and conditions.

Our business is dependent on key clients, and the loss of a key client could adversely affect our business and results of operations.

We derive a substantial portion of our revenues from a few key clients. Our top ten clients accounted for approximately 48.5% of our consolidated revenues in 2015. The loss of (or the failure to retain a significant amount of business with) any of our key clients could have a material adverse effect on our business, financial condition and results of operations. Many of our contracts contain penalty provisions for failure to meet minimum service levels and are cancelable by the client at any time or on short-term notice. Also, clients may unilaterally reduce their use of our services under these contracts without penalty. Thus, our contracts with our clients do not ensure that we will generate a minimum level of revenues.

Cyber-attacks as well as improper disclosure or control of personal information could result in liability and harm our reputation, which could adversely affect our business and results of operations.

Our business is heavily dependent upon our computer and voice technologies, systems and platforms. Internal or external attacks on any of those could disrupt the normal operations of our call centers and impede our ability to provide critical services to our clients, thereby subjecting us to liability under our contracts. Additionally, our business involves the use, storage and transmission of information about our employees, our clients and customers of our clients. While we take measures to protect the security of, and unauthorized access to, our systems, as well as the privacy of personal and proprietary information, it is possible that our security controls over our systems, as well as other security practices we follow, may not prevent the improper access to or disclosure of personally identifiable or proprietary information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to substantial competition.

The markets for many of our services operate on a commoditized basis and are highly competitive and subject to rapid change. While many companies provide outsourced customer contact management services, we believe no one company is dominant in the industry. There are numerous and varied providers of our services, including firms specializing in call center operations, temporary staffing and personnel placement, consulting and integration firms, and niche providers of outsourced customer contact management services, many of whom compete in only certain

 

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markets. Our competitors include both companies that possess greater resources and name recognition than we do, as well as small niche providers that have few assets and regionalized (local) name recognition instead of global name recognition. In addition to our competitors, many companies who might utilize our services or the services of one of our competitors may utilize in-house personnel to perform such services. Increased competition, our failure to compete successfully, pricing pressures, loss of market share and loss of clients could have a material adverse effect on our business, financial condition and results of operations.

Many of our large clients purchase outsourced customer contact management services from multiple preferred vendors. We have experienced and continue to anticipate significant pricing pressure from these clients in order to remain a preferred vendor. These companies also require vendors to be able to provide services in multiple locations. Although we believe we can effectively meet our clients’ demands, there can be no assurance that we will be able to compete effectively with other outsourced customer contact management services companies on price. We believe that the most significant competitive factors in the sale of our core services include the standard requirements of service quality, tailored value-added service offerings, industry experience, advanced technological capabilities, global coverage, reliability, scalability, security, price and financial strength.

The concentration of customer support centers in certain geographies poses risks to our operations which could adversely affect our financial condition.

Although we have call centers in many locations throughout the world, we have a concentration of centers in certain geographies outside of the U.S. and Canada, specifically The Philippines and Latin America. Our concentration of operations in those geographies is a result of our ability to access significant numbers of employees with certain language and other skills at costs that are advantageous. However, the concentration of business activities in any geographical area creates risks which could harm operations and our financial condition. Certain risks, such as natural disasters, armed conflict and military or civil unrest, political instability and disease transmission, as well as the risk of interruption to our delivery systems, is magnified when the realization of these, or any other risks, would effect a large portion of our business at once, which may result in a disproportionate increase in operating costs.

Our business is dependent on the trend toward outsourcing.

Our business and growth depend in large part on the industry trend toward outsourced customer contact management services. Outsourcing means that an entity contracts with a third party, such as us, to provide customer contact services rather than perform such services in-house. There can be no assurance that this trend will continue, as organizations may elect to perform such services themselves. A significant change in this trend could have a material adverse effect on our business, financial condition and results of operations. Additionally, there can be no assurance that our cross-selling efforts will cause clients to purchase additional services from us or adopt a single-source outsourcing approach.

We are subject to various uncertainties relating to future litigation.

We cannot predict whether any material suits, claims, or investigations may arise in the future. Regardless of the outcome of any future actions, claims, or investigations, we may incur substantial defense costs and such actions may cause a diversion of management time and attention. Also, it is possible that we may be required to pay substantial damages or settlement costs which could have a material adverse effect on our financial condition and results of operations.

Our industry is subject to rapid technological change which could affect our business and results of operations.

Rapid technological advances, frequent new product introductions and enhancements, and changes in client requirements characterize the market for outsourced customer contact management services. Technological advancements in voice recognition software, as well as self-provisioning and self-help software, along with call avoidance technologies, have the potential to adversely impact call volume growth and, therefore, revenues. Our future success will depend in large part on our ability to service new products, platforms and rapidly changing technology. These factors will require us to provide adequately trained personnel to address the increasingly sophisticated, complex and evolving needs of our clients. In addition, our ability to capitalize on our acquisitions will depend on our ability to continually enhance software and services and adapt such software to new hardware and operating system requirements. Any failure by us to anticipate or respond rapidly to technological advances, new products and enhancements, or changes in client requirements could have a material adverse effect on our business, financial condition and results of operations.

 

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Our business relies heavily on technology and computer systems, which subjects us to various uncertainties.

We have invested significantly in sophisticated and specialized communications and computer technology and have focused on the application of this technology to meet our clients’ needs. We anticipate that it will be necessary to continue to invest in and develop new and enhanced technology on a timely basis to maintain our competitiveness. Significant capital expenditures may be required to keep our technology up-to-date. There can be no assurance that any of our information systems will be adequate to meet our future needs or that we will be able to incorporate new technology to enhance and develop our existing services. Moreover, investments in technology, including future investments in upgrades and enhancements to software, may not necessarily maintain our competitiveness. Our future success will also depend in part on our ability to anticipate and develop information technology solutions that keep pace with evolving industry standards and changing client demands.

Emergency interruption of customer contact management center operations could affect our business and results of operations.

Our operations are dependent upon our ability to protect our customer contact management centers and our information databases against damage that may be caused by fire, earthquakes, severe weather and other disasters, power failure, telecommunications failures, unauthorized intrusion, computer viruses and other emergencies. The temporary or permanent loss of such systems could have a material adverse effect on our business, financial condition and results of operations. Notwithstanding precautions taken to protect us and our clients from events that could interrupt delivery of services, there can be no assurance that a fire, natural disaster, human error, equipment malfunction or inadequacy, or other event would not result in a prolonged interruption in our ability to provide services to our clients. Such an event could have a material adverse effect on our business, financial condition and results of operations.

Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.

Our profitability is significantly influenced by our ability to effectively manage our contact center capacity utilization. The majority of our business involves technical support and customer care services initiated by our clients’ customers and, as a result, our capacity utilization varies and demands on our capacity are, to some degree, beyond our control. In order to create the additional capacity necessary to accommodate new or expanded outsourcing projects, we may need to open new contact centers. The opening or expansion of a contact center may result, at least in the short term, in idle capacity until we fully implement the new or expanded program. Additionally, the occasional need to open customer contact centers fully, or primarily, dedicated to a single client, instead of spreading the work among existing facilities with idle capacity, negatively affects capacity utilization. We periodically assess the expected long-term capacity utilization of our contact centers. As a result, we may, if deemed necessary, consolidate, close or partially close under-performing contact centers to maintain or improve targeted utilization and margins. There can be no guarantee that we will be able to achieve or maintain optimal utilization of our contact center capacity.

As part of our effort to consolidate our facilities, we may seek to sell or sublease a portion of our surplus contact center space, if any, and recover certain costs associated with it. Failure to sell or sublease such surplus space will negatively impact results of operations.

Increases in the cost of telephone and data services or significant interruptions in such services could adversely affect our financial results.

Our business is significantly dependent on telephone and data service provided by various local and long distance telephone companies. Accordingly, any disruption of these services could adversely affect our business. We have taken steps to mitigate our exposure to service disruptions by investing in redundant circuits, although there is no assurance that the redundant circuits would not also suffer disruption. Any inability to obtain telephone or data services at favorable rates could negatively affect our business results. Where possible, we have entered into long-term contracts with various providers to mitigate short-term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of telephone services that is not recoverable through an increase in the price of our services could adversely affect our financial results.

 

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Our profitability may be adversely affected if we are unable to maintain and find new locations for customer contact centers in countries with stable wage rates.

Our business is labor-intensive and therefore wages, employee benefits and employment taxes constitute the largest component of our operating expenses. As a result, expansion of our business is dependent upon our ability to find cost-effective locations in which to operate, both domestically and internationally. Some of our customer contact management centers are located in countries that have experienced inflation and rising standards of living, which requires us to increase employee wages. In addition, collective bargaining is being utilized in an increasing number of countries in which we currently, or may in the future, desire to operate. Collective bargaining may result in material wage and benefit increases. If wage rates and benefits increase significantly in a country where we maintain customer contact management centers, we may not be able to pass those increased labor costs on to our clients, requiring us to search for other cost effective delivery locations. Additionally, some of our customer contact management centers are located in jurisdictions subject to minimum wage regulations, which may result in increased wages in the future. There is no assurance that we will be able to find such cost-effective locations, and even if we do, the costs of closing delivery locations and opening new customer contact management centers can adversely affect our financial results.

The adoption and implementation of new statutory and regulatory requirements for derivative transactions could have an adverse impact on our ability to hedge risks associated with our business.

We enter into forward and option contracts to hedge against the effect of foreign currency exchange rate fluctuations. The United States Congress has passed, and the President has signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including foreign currency and interest rate hedging transactions. The Dodd-Frank Act requires the Commodities Futures and Trading Commission to promulgate rules relating to the Dodd-Frank Act. Until the rules relating to the Dodd-Frank Act are established, we cannot know how these regulations will affect us. The rules adopted by the Commodities Futures and Trading Commission may in the future impact our flexibility to execute strategic hedges to reduce foreign exchange and interest rate uncertainty and thus protect cash flows. In addition, the banks and other derivatives dealers who are our contractual counterparties will be required to comply with the Dodd-Frank Act’s new requirements. It is possible that the costs of such compliance will be passed on to customers such as us.

Risks Related to Our International Operations

Our international operations and expansion involve various risks.

We intend to continue to pursue growth opportunities in markets outside the United States. At December 31, 2015, our international operations were conducted from 31 customer contact management centers located in Sweden, Finland, Germany, Egypt, Scotland, Denmark, Norway, Hungary, Romania, The Philippines, the People’s Republic of China, India and Australia. Revenues from these international operations for the years ended December 31, 2015, 2014, and 2013, were 40.5%, 39.9%, and 38.7% of consolidated revenues, respectively. We also conduct business from 14 customer contact management centers located in Canada, Colombia, Costa Rica, El Salvador, Mexico and Brazil. International operations are subject to certain risks common to international activities, such as changes in foreign governmental regulations, tariffs and taxes, import/export license requirements, the imposition of trade barriers, difficulties in staffing and managing international operations, political uncertainties, longer payment cycles, possible greater difficulties in accounts receivable collection, economic instability as well as political and country-specific risks.

Additionally, we have been granted tax holidays in The Philippines, Colombia, Costa Rica and El Salvador which expire at varying dates from 2016 through 2028. In some cases, the tax holidays expire without possibility of renewal. In other cases, we expect to renew these tax holidays, but there are no assurances from the respective foreign governments that they will renew them. This could potentially result in adverse tax consequences, the impact of which is not practicable to estimate due to the inherent complexity of estimating critical variables such as long-term future profitability, tax regulations and rates in the multi-national tax environment in which we operate. Any one or more of these factors could have an adverse effect on our international operations and, consequently, on our business, financial condition and results of operations. The tax holidays decreased the provision for income taxes by $4.0 million, $2.7 million and $4.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.

 

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As of December 31, 2015, we had cash balances of approximately $221.7 million held in international operations, most of which would be subject to additional taxes if repatriated to the United States. Determination of any unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which we operate.

We conduct business in various foreign currencies and are therefore exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact our results of operations and financial condition. We are also subject to certain exposures arising from the translation and consolidation of the financial results of our foreign subsidiaries. We enter into foreign currency forward and option contracts to hedge against the effect of certain foreign currency exchange exposures. However, there can be no assurance that we can take actions to mitigate such exposure in the future, and if taken, that such actions will be successful or that future changes in currency exchange rates will not have a material adverse impact on our future operating results. A significant change in the value of the U.S. Dollar against the currency of one or more countries where we operate may have a material adverse effect on our financial condition and results of operations. Additionally, our hedging exposure to counterparty credit risks is not secured by any collateral. Although each of the counterparty financial institutions with which we place hedging contracts are investment grade rated by the national rating agencies as of the time of the placement, we can provide no assurances as to the financial stability of any of our counterparties. If a counterparty to one or more of our hedge transactions were to become insolvent, we would be an unsecured creditor and our exposure at the time would depend on foreign exchange rate movements relative to the contracted foreign exchange rate and whether any gains result that are not realized due to a counterparty default.

The fundamental shift in our industry toward global service delivery markets presents various risks to our business.

Clients continue to require blended delivery models using a combination of onshore and offshore support. Our offshore delivery locations include The Philippines, the People’s Republic of China, India, Costa Rica, El Salvador, Mexico, Brazil and Colombia, and while we have operated in global delivery markets since 1996, there can be no assurance that we will be able to successfully conduct and expand such operations, and a failure to do so could have a material adverse effect on our business, financial condition, and results of operations. The success of our offshore operations will be subject to numerous factors, some of which are beyond our control, including general and regional economic conditions, prices for our services, competition, changes in regulation and other risks. In addition, as with all of our operations outside of the United States, we are subject to various additional political, economic and market uncertainties (see “Our international operations and expansion involve various risks”). Additionally, a change in the political environment in the United States or the adoption and enforcement of legislation and regulations curbing the use of offshore customer contact management solutions and services could have a material adverse effect on our business, financial condition and results of operations.

Our global operations expose us to numerous legal and regulatory requirements.

We provide services to our clients’ customers in 20 countries around the world. Accordingly, we are subject to numerous legal regimes on matters such as taxation, government sanctions, content requirements, licensing, tariffs, government affairs, data privacy and immigration as well as internal and disclosure control obligations. In the U.S., as well as several of the other countries in which we operate, some of our services must comply with various laws and regulations regarding the method and timing of placing outbound telephone calls. Violations of these various laws and regulations could result in liability for monetary damages, fines and/or criminal prosecution and unfavorable publicity. Changes in U.S. federal, state and international laws and regulations, specifically those relating to the outsourcing of jobs to foreign countries as well as recently enacted statutory and regulatory requirements related to derivative transactions, may adversely affect our ability to perform our services at our overseas facilities or could result in additional taxes on such services, or impact our flexibility to execute strategic hedges, thereby threatening or limiting our ability or the financial benefit to continue to serve certain markets at offshore locations, or the risks associated therewith.

Risks Related to Our Employees

Our operations are substantially dependent on our senior management.

Our success is largely dependent upon the efforts, direction and guidance of our senior management. Our growth and success also depend in part on our ability to attract and retain skilled employees and managers and on the ability of our executive officers and key employees to manage our operations successfully. We have entered into

 

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employment and non-competition agreements with our executive officers. The loss of any of our senior management or key personnel, or the inability to attract, retain or replace key management personnel in the future, could have a material adverse effect on our business, financial condition and results of operations.

Our inability to attract and retain experienced personnel may adversely impact our business.

Our business is labor intensive and places significant importance on our ability to recruit, train, and retain qualified technical and consultative professional personnel. We generally experience high turnover of our personnel and are continuously required to recruit and train replacement personnel as a result of a changing and expanding work force. Additionally, demand for qualified technical professionals conversant in multiple languages, including English, and/or certain technologies may exceed supply, as new and additional skills are required to keep pace with evolving computer technology. Our ability to locate and train employees is critical to achieving our growth objective. Our inability to attract and retain qualified personnel or an increase in wages or other costs of attracting, training, or retaining qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

Health epidemics could disrupt our business and adversely affect our financial results.

Our customer contact centers typically seat hundreds of employees in one location. Accordingly, an outbreak of a contagious infection in one or more of the markets in which we do business may result in significant worker absenteeism, lower asset utilization rates, voluntary or mandatory closure of our offices and delivery centers, travel restrictions on our employees, and other disruptions to our business. Any prolonged or widespread health epidemic could severely disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Business Strategy

Our strategy of growing through selective acquisitions and mergers involves potential risks.

We evaluate opportunities to expand the scope of our services through acquisitions and mergers. We may be unable to identify companies that complement our strategies, and even if we identify a company that complements our strategies, we may be unable to acquire or merge with the company. Also, a decrease in the price of our common stock could hinder our growth strategy by limiting growth through acquisitions funded with SYKES’ stock.

The actual integration of the company may result in additional and unforeseen expenses, and the full amount of anticipated benefits of the integration plan may not be realized. If we are not able to adequately address these challenges, we may be unable to fully integrate the acquired operations into our own, or to realize the full amount of anticipated benefits of the integration of the companies.

Our acquisition strategy involves other potential risks. These risks include:

 

   

the inability to obtain the capital required to finance potential acquisitions on satisfactory terms;

 

   

the diversion of our attention to the integration of the businesses to be acquired;

 

   

the risk that the acquired businesses will fail to maintain the quality of services that we have historically provided;

 

   

the need to implement financial and other systems and add management resources;

 

   

the risk that key employees of the acquired business will leave after the acquisition;

 

   

potential liabilities of the acquired business;

 

   

unforeseen difficulties in the acquired operations;

 

   

adverse short-term effects on our operating results;

 

   

lack of success in assimilating or integrating the operations of acquired businesses within our business;

 

   

the dilutive effect of the issuance of additional equity securities;

 

   

the impairment of goodwill and other intangible assets involved in any acquisitions;

 

   

the businesses we acquire not proving profitable;

 

   

incurring additional indebtedness; and

 

   

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries.

 

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We may incur significant cash and non-cash costs in connection with the continued rationalization of assets resulting from acquisitions.

We may incur a number of non-recurring cash and non-cash costs associated with the continued rationalization of assets resulting from acquisitions relating to the closing of facilities and disposition of assets.

If our goodwill or amortizable intangible assets become impaired, we could be required to record a significant charge to earnings.

We recorded substantial goodwill and amortizable intangible assets as a result of the ICT, Alpine and Qelp acquisitions. We review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We assess whether there has been an impairment in the value of goodwill at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows and slower growth rates in our industry. We could be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.

Risks Related to Our Common Stock

Our organizational documents contain provisions that could impede a change in control.

Our Board of Directors is divided into three classes serving staggered three-year terms. The staggered Board of Directors and the anti-takeover effects of certain provisions contained in the Florida Business Corporation Act and in our Articles of Incorporation and Bylaws, including the ability of the Board of Directors to issue shares of preferred stock and to fix the rights and preferences of those shares without shareholder approval, may have the effect of delaying, deferring or preventing an unsolicited change in control. This may adversely affect the market price of our common stock or the ability of shareholders to participate in a transaction in which they might otherwise receive a premium for their shares.

The volatility of our stock price may result in loss of investment.

The trading price of our common stock has been and may continue to be subject to wide fluctuations over short and long periods of time. We believe that market prices of outsourced customer contact management services stocks in general have experienced volatility, which could affect the market price of our common stock regardless of our financial results or performance. We further believe that various factors such as general economic conditions, changes or volatility in the financial markets, changing market conditions in the outsourced customer contact management services industry, quarterly variations in our financial results, the announcement of acquisitions, strategic partnerships, or new product offerings, and changes in financial estimates and recommendations by securities analysts could cause the market price of our common stock to fluctuate substantially in the future.

Failure to adhere to laws, rules and regulations applicable to public companies operating in the U.S. may have an adverse effect on our stock price.

Because we are a publicly-traded company, we are subject to certain evolving and extensive federal, state and other rules and regulations relating to, among other things, assessment and maintenance of internal controls and corporate governance. Section 404 of the Sarbanes-Oxley Act of 2002, together with rules and regulations issued by the Securities and Exchange Commission (“SEC”) require us to furnish, on an annual basis, a report by our management (included elsewhere in this Annual Report on Form 10-K) regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not our internal controls over financial reporting are effective. We must include a disclosure of any material weaknesses in our internal control over financial reporting identified by management during the annual assessment. We have in the past discovered, and may potentially in the future discover, areas of internal control over financial reporting which may require improvement. If at any time we are unable to assert that our internal controls over financial reporting are effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, our investors could lose confidence in the accuracy and/or completeness of our financial reports, which could have an adverse effect on our stock price.

 

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Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 subjects us to significant additional executive compensation and corporate governance requirements and disclosures, some of which have yet to be implemented by the SEC. Compliance with these requirements may be costly and adversely affect our business.

Item 1B. Unresolved Staff Comments

There are no material unresolved written comments that were received from the SEC staff 180 days or more before the year ended December 31, 2015 relating to our periodic or current reports filed under the Securities Exchange Act of 1934.

 

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Item 2. Properties

Our principal executive offices are located in Tampa, Florida, which consists of approximately 68,000 square feet of leased office space. This facility currently serves as the headquarters for senior management and the financial, information technology and administrative departments. In addition to our headquarters and the customer contact management centers (“centers”) used by our Americas and EMEA segments discussed below, we also have offices in several countries around the world which support our Americas and EMEA segments.

As of December 31, 2015, excluding centers we have exited, we operated 68 centers that are classified as follows:

 

   

Multi-Client Centers — We own or lease space for these centers and serve multiple clients in each facility;

 

   

Fulfillment Centers — We own or lease space for these centers and serve multiple clients in each facility.

As of December 31, 2015, our centers were located in the following countries:

 

     Multi-Client
Centers
     Fulfillment
Centers
     Total Number  of
Centers
 

Americas

        

Australia

     3         —           3   

Brazil

     2         —           2   

Canada

     5         —           5   

Colombia

     1         —           1   

Costa Rica

     4         —           4   

El Salvador

     1         —           1   

India

     1         —           1   

Mexico

     1         —           1   

People’s Republic of China

     3         —           3   

The Philippines

     6         —           6   

United States of America

     22         —           22   
  

 

 

    

 

 

    

 

 

 

Total Americas centers

     49         —           49   
  

 

 

    

 

 

    

 

 

 

EMEA

        

Denmark

     1         —           1   

Egypt

     1         —           1   

Finland

     1         —           1   

Germany

     4         —           4   

Hungary

     1         —           1   

Norway

     1         —           1   

Romania

     2         —           2   

Scotland

     3         1         4   

Sweden

     4         —           4   
  

 

 

    

 

 

    

 

 

 

Total EMEA centers

     18         1         19   
  

 

 

    

 

 

    

 

 

 

Total centers

     67         1         68   
  

 

 

    

 

 

    

 

 

 

We believe our existing facilities are suitable and adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any physical expansion or any space required due to expiring leases not renewed. We operate from time to time in temporary facilities to accommodate growth before new centers are available. At December 31, 2015, our centers, taken as a whole, were utilized at average capacities of approximately 79% and were capable of supporting a higher level of market demand.

 

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Item 3. Legal Proceedings

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 when possible and appropriate, have provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on our future financial position or results of operations.

Item 4. Mine Safety Disclosures

Not Applicable.

 

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Securities

Our common stock is quoted on the NASDAQ Global Select Market under the symbol SYKE. The following table sets forth, for the periods indicated, certain information as to the high and low intraday sale prices per share of our common stock as quoted on the NASDAQ Global Select Market.

 

     High      Low  

Year Ended December 31, 2015:

     

Fourth Quarter

   $ 33.00       $ 24.91   

Third Quarter

     26.00         22.48   

Second Quarter

     26.04         23.59   

First Quarter

     24.91         22.02   

Year Ended December 31, 2014:

     

Fourth Quarter

   $ 24.71       $ 19.47   

Third Quarter

     22.37         19.01   

Second Quarter

     21.79         19.05   

First Quarter

     21.79         18.60   

Holders of our common stock are entitled to receive dividends out of the funds legally available when and if declared by the Board of Directors. We have not declared or paid any cash dividends on our common stock in the past and do not anticipate paying any cash dividends in the foreseeable future.

As of February 10, 2016, there were 840 holders of record of the common stock. We estimate there were approximately 11,300 beneficial owners of our common stock.

Below is a summary of stock repurchases for the quarter ended December 31, 2015 (in thousands, except average price per share).

 

Period

   Total Number
of Shares
Purchased (1)
     Average Price
Paid Per  Share
     Total Number of
Shares  Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares  That May
Yet Be Purchased
Under Plans or
Programs
 

October 1, 2015 – October 31, 2015

     7       $ 25.00         7         138   

November 1, 2015 – November 30, 2015

     —         $ —           —           138   

December 1, 2015 – December 31, 2015

     —         $ —           —           138   
  

 

 

       

 

 

    

 

 

 

Total

     7            7         138   
  

 

 

       

 

 

    

 

 

 

 

(1) 

All shares purchased as part of the repurchase plan publicly announced on August 18, 2011. Total number of shares approved for repurchase under the 2011 Repurchase Plan was 5.0 million with no expiration date.

 

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Five-Year Stock Performance Graph

The following graph presents a comparison of the cumulative shareholder return on the common stock with the cumulative total return on the NASDAQ Computer and Data Processing Services Index, the NASDAQ Telecommunications Index, the Russell 2000 Index, the S&P Small Cap 600 and the SYKES Peer Group (as defined below). The SYKES Peer Group is comprised of publicly traded companies that derive a substantial portion of their revenues from call center, customer care business, have similar business models to SYKES, and are those most commonly compared to SYKES by industry analysts following SYKES. This graph assumes that $100 was invested on December 31, 2010 in SYKES common stock, the NASDAQ Computer and Data Processing Services Index, the NASDAQ Telecommunications Index, the Russell 2000 Index, the S&P Small Cap 600 and SYKES Peer Group, including reinvestment of dividends.

Comparison of Five-Year Cumulative Total Return (in dollars)

 

LOGO

 

SYKES Peer Group

   Exchange & Ticker Symbol

Convergys Corp.

   NYSE: CVG

StarTek, Inc.

   NYSE: SRT

TeleTech Holdings, Inc.

   NASDAQ: TTEC

Teleperformance

   NYSE Euronext: RCF

There can be no assurance that SYKES’ stock performance will continue into the future with the same or similar trends depicted in the graph above. SYKES does not make or endorse any predictions as to the future stock performance.

The information contained in the Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Exchange Act of 1934.

 

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Item 6. Selected Financial Data

Selected Financial Data

The following selected financial data has been derived from our consolidated financial statements.

We sold our operations in Spain during 2012. Accordingly, we have reclassified the selected financial data for all periods presented to reflect these results as discontinued operations in accordance with Accounting Standards Codification 205-20 “Discontinued Operations”.

The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the accompanying Consolidated Financial Statements and related notes thereto.

 

    Years Ended December 31,  
(in thousands, except per share data)   2015     2014     2013     2012     2011  

Income Statement Data: (1)

         

Revenues

  $ 1,286,340      $ 1,327,523      $ 1,263,460      $ 1,127,698      $ 1,169,267   

Income from continuing operations (2,3,4,5,6,7,8)

    94,264        79,555        53,527        47,779        65,535   

Income from continuing operations, net of taxes (2,3,4,5,6,7,8)

    68,597        57,791        37,260        39,950        52,314   

(Loss) from discontinued operations, net of taxes (7)

    —          —          —          (820     (4,532

Gain (loss) on sale of discontinued operations, net of taxes (8)

    —          —          —          (10,707     559   

Net income

    68,597        57,791        37,260        28,423        48,341   

Net Income (Loss) Per Common Share: (1)

         

Basic:

         

Continuing operations (2,3,4,5,6,7,8)

  $ 1.64      $ 1.36      $ 0.87      $ 0.93      $ 1.15   

Discontinued operations (9,10)

    —          —          —          (0.27     (0.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

  $ 1.64      $ 1.36      $ 0.87      $ 0.66      $ 1.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

         

Continuing operations (2,3,4,5,6,7,8)

  $ 1.62      $ 1.35      $ 0.87      $ 0.93      $ 1.15   

Discontinued operations (9,10)

    —          —          —          (0.27     (0.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

  $ 1.62      $ 1.35      $ 0.87      $ 0.66      $ 1.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares: (1)

         

Basic

    41,899        42,609        42,877        43,105        45,506   

Diluted

    42,447        42,814        42,925        43,148        45,607   

Balance Sheet Data: (1,11)

         

Total assets

  $ 947,772      $ 944,500      $ 950,261      $ 908,689      $ 769,130   

Long-term debt

    70,000        75,000        98,000        91,000        —     

Shareholders’ equity

    678,680        658,218        635,704        606,264        573,566   

 

(1) 

The amounts for 2015 include the Qelp acquisition completed on July 2, 2015. The amounts for 2015, 2014, 2013 and 2012 include the Alpine acquisition completed on August 20, 2012. See Note 2, Acquisitions, for further information.

 

(2) 

The amounts for 2015 include a $0.9 million net gain on insurance settlement, $0.6 million loss on liquidation of a foreign subsidiary, $0.5 million in Qelp acquisition-related costs, $0.4 million in interest accretion on contingent consideration and a $0.4 million net loss on disposal of property and equipment.

 

(3) 

The amounts for 2014 include a $2.0 million net gain on disposal of property and equipment primarily due to the sale of the land and building in Bismarck, North Dakota and a $0.1 million impairment of long-lived assets.

 

(4) 

The amounts for 2013 include $2.1 million in Alpine acquisition-related costs and a $0.2 million net loss on disposal of property and equipment.

 

(5) 

The amounts for 2012 include $4.8 million in Alpine acquisition-related costs, a $0.4 million net loss on the disposal of property and equipment, a $0.1 million net gain on insurance settlement and a $0.4 million impairment of long-lived assets.

 

(6) 

The amounts for 2011 include $11.8 million in ICT acquisition-related costs, a $3.0 million net gain on disposal of property and equipment primarily due to the sale of the land and building in Minot, North Dakota, a $0.5 million net gain on insurance settlement and a $1.7 million impairment of long-lived assets.

 

(7) 

The amounts for 2014, 2013, 2012, and 2011 include $(0.3) million, $0.3 million, $1.8 million and $5.3 million, respectively, related to the Exit Plans. See Note 3, Costs Associated with Exit or Disposal Activities, for further information.

 

(8) 

The amounts for 2011 includes a $0.4 million recovery of regulatory penalties.

 

(9) 

The amounts for all periods presented include the operations in Spain and Argentina, which were sold in 2012 and 2010, respectively.

 

(10) 

The amounts include the gain (loss) on sale of the operations in Spain in 2012 and Argentina in 2011.

 

(11) 

The Company has not declared cash dividends per common share for any of the five years presented.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and the notes thereto that appear elsewhere in this Annual Report on Form 10-K. The following discussion and analysis compares the year ended December 31, 2015 (“2015”) to the year ended December 31, 2014 (“2014”), and 2014 to the year ended December 31, 2013 (“2013”).

The following discussion and analysis and other sections of this document contain forward-looking statements that involve risks and uncertainties. Words such as “may,” “expects,” “projects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” 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. Future events and actual results could differ materially from the results reflected in these forward-looking statements, as a result of certain of the factors set forth below and elsewhere in this analysis and in this Annual Report on Form 10-K for the year ended December 31, 2015 in Item 1.A., “Risk Factors.”

Executive Summary

We provide comprehensive customer contact management solutions and services to a wide range of clients including Global 2000 companies, medium-sized businesses and public institutions around the world, primarily in the communications, financial services, technology/consumer, transportation and leisure and healthcare 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 98.1% of consolidated revenues in 2015, are delivered through multiple communication channels encompassing phone, e-mail, social media, text messaging, chat and digital self-service. We also provide various enterprise support services in the United States (“U.S.”) that include services for our clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment services, which includes order processing via the Internet and phone, 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, Australia, the Asia Pacific Rim and Africa.

Revenues from these services is recognized as the services are performed, which is based on either a per minute, per hour, per call, per transaction or per time and material basis, under a fully executed contractual agreement, and we record reductions to revenues for contractual penalties and holdbacks for a failure to meet specified minimum service levels and other performance based contingencies. Revenue recognition is limited to the amount that is not contingent upon delivery of any future product or service or meeting other specified performance conditions. Product sales, accounted for within our fulfillment services, are recognized upon shipment to the customer and satisfaction of all obligations.

Direct salaries and related costs include direct personnel compensation, severance, statutory and other benefits associated with such personnel and other direct costs associated with providing services to customers.

General and administrative costs include administrative, sales and marketing, occupancy and other costs.

Depreciation, net represents depreciation on property and equipment, net of the amortization of deferred property grants.

Amortization of intangibles represents amortization of finite-lived intangible assets.

The net gain (loss) on disposal of property and equipment represents the difference between the amount of proceeds received, if any, and the carrying value of the asset.

Interest income primarily relates to interest earned on cash and cash equivalents.

Interest (expense) includes interest on outstanding borrowings, commitment fees charged on the unused portion of our revolving credit facility and contingent consideration, as more fully described in this Item 7, under “Liquidity and Capital Resources.”

 

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Other (expense) includes gains and losses on foreign currency derivative instruments not designated as hedges, foreign currency transaction gains and losses, gains and losses on the liquidation of foreign subsidiaries and other miscellaneous income (expense).

Our effective tax rate for the periods presented includes the effects of state income taxes, net of federal tax benefit, tax holidays, valuation allowance changes, foreign rate differentials, foreign withholding and other taxes, and permanent differences.

Acquisition of Qelp B.V.

In July 2015, the Company completed the acquisition of Qelp B.V. and its subsidiary (together, known as “Qelp”), pursuant to definitive Share Sale and Purchase Agreement, dated July 2, 2015. The total purchase price of $15.8 million was funded by $9.8 million in cash on hand, net of working capital adjustments, and $6.0 million of contingent consideration. The results of operations of Qelp have been reflected in the accompanying Consolidated Statement of Operations for the period from July 2, 2015 to December 31, 2015.

Results of Operations

The following table sets forth, for the years indicated, the amounts reflected in the accompanying Consolidated Statements of Operations as well as the changes between the respective years:

 

     Years Ended December 31,  
                 2015           2014  
(in thousands)    2015     2014     $ Change     2013     $ Change  

Revenues

   $ 1,286,340      $ 1,327,523      $ (41,183   $ 1,263,460      $ 64,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Direct salaries and related costs

     836,516        892,110        (55,594     855,266        36,844   

General and administrative

     297,257        298,129        (872     297,519        610   

Depreciation, net

     43,752        45,363        (1,611     42,084        3,279   

Amortization of intangibles

     14,170        14,396        (226     14,863        (467

Net (gain) loss on disposal of property and equipment

     381        (2,030     2,411        201        (2,231
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,192,076        1,247,968        (55,892     1,209,933        38,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     94,264        79,555        14,709        53,527        26,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest income

     668        958        (290     866        92   

Interest (expense)

     (2,465     (2,011     (454     (2,307     296   

Other (expense)

     (2,484     (1,343     (1,141     (761     (582
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (4,281     (2,396     (1,885     (2,202     (194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     89,983        77,159        12,824        51,325        25,834   

Income taxes

     21,386        19,368        2,018        14,065        5,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 68,597      $ 57,791      $ 10,806      $ 37,260      $ 20,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth, for the years indicated, the amounts presented in the accompanying Consolidated Statements of Operations as a percentage of revenues:

 

     Years Ended December 31,  
           2015                 2014                 2013        

Percentage of Revenues:

      

Revenues

     100.0     100.0     100.0

Direct salaries and related costs

     65.0        67.2        67.7   

General and administrative

     23.1        22.5        23.5   

Depreciation, net

     3.4        3.4        3.3   

Amortization of intangibles

     1.1        1.1        1.2   

Net (gain) loss on disposal of property and equipment

     0.0        (0.2     0.0   
  

 

 

   

 

 

   

 

 

 

Income from operations

     7.4        6.0        4.3   

Interest income

     0.0        0.1        0.1   

Interest (expense)

     (0.2     (0.2     (0.2

Other (expense)

     (0.2     (0.1     (0.1
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     7.0        5.8        4.1   

Income taxes

     1.7        1.5        1.1   
  

 

 

   

 

 

   

 

 

 

Net income

     5.3     4.3     3.0
  

 

 

   

 

 

   

 

 

 

2015 Compared to 2014

Revenues

 

     Years Ended December 31,        
     2015     2014        
            % of            % of        
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change  

Americas

   $ 1,045,415         81.3   $ 1,070,824         80.7   $ (25,409

EMEA

     240,826         18.7     256,699         19.3     (15,873

Other

     99         0.0     —           0.0     99   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consolidated

   $ 1,286,340         100.0   $ 1,327,523         100.0   $ (41,183
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consolidated revenues decreased $41.2 million, or 3.1%, in 2015 from 2014.

The decrease in Americas’ revenues was primarily due to end-of-life client programs of $82.1 million and the negative foreign currency impact of $23.6 million, partially offset by higher volumes from existing contracts of $67.3 million and new contract sales of $13.0 million. Revenues from our offshore operations represented 44.5% of Americas’ revenues, compared to 38.9% in 2014.

The decrease in EMEA’s revenues was primarily due to the negative foreign currency impact of $43.4 million and end-of-life client programs of $4.5 million, partially offset by higher volumes from existing contracts of $26.6 million and new contract sales of $5.4 million.

On a consolidated basis, we had 41,100 brick-and-mortar seats as of December 31, 2015, an increase of 100 seats from 2014. The capacity utilization rate on a combined basis remained unchanged at 79% in 2015 and 2014.

On a geographic segment basis, 35,100 seats were located in the Americas, an increase of 600 seats from 2014, and 6,000 seats were located in EMEA, a decrease of 500 seats from 2014. The capacity utilization rate for the Americas as of December 31, 2015 was 79%, compared to 77% as of December 31, 2014, up primarily due to growth within new and existing clients. The capacity utilization rate for EMEA as of December 31, 2015 was 85%, compared to 90% as of December 31, 2014, down primarily due to lower demand in certain existing clients and the rationalization of seats in a highly utilized center due to a planned program expiration. We strive to attain a capacity utilization of 85% at each of our locations.

 

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We plan to add 1,600 seats on a gross basis in the first quarter of 2016, with total gross seats of 5,700 planned for the full year. However, we plan to rationalize 1,600 seats in 2016, with 500 expected in the first quarter of 2016. Total seat count on a net basis for the full year is expected to increase by 4,100 seats in 2016 versus 2015.

Direct Salaries and Related Costs

 

     Years Ended December 31,              
     2015     2014              
            % of            % of           Change in % of  
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change     Revenues  

Americas

   $ 664,976         63.6   $ 707,181         66.0   $ (42,205     -2.4

EMEA

     171,540         71.2     184,929         72.0     (13,389     -0.8
  

 

 

      

 

 

      

 

 

   

Consolidated

   $ 836,516         65.0   $ 892,110         67.2   $ (55,594     -2.2
  

 

 

      

 

 

      

 

 

   

The decrease of $55.6 million in direct salaries and related costs included a positive foreign currency impact of $25.8 million in the Americas and a positive foreign currency impact of $31.0 million in EMEA.

The decrease in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to lower compensation costs of 2.2% driven by increased agent productivity within the communications, financial services and technology verticals in the current period, and lower communication costs of 0.2%.

The decrease in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to lower compensation costs of 1.7% driven by increased agent productivity in the current period combined with the ramp up in the prior period for new and existing client programs principally in the communications vertical, lower billable supply costs of 0.4%, lower postage costs of 0.3% and lower other costs of 0.2%, partially offset by higher fulfillment materials costs of 1.8% driven by higher demand in a new client program.

General and Administrative

 

     Years Ended December 31,              
     2015     2014              
            % of            % of           Change in % of  
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change     Revenues  

Americas

   $ 192,933         18.5   $ 197,167         18.4   $ (4,234     0.1

EMEA

     49,025         20.4     50,760         19.8     (1,735     0.6

Other

     55,299         —          50,202         —          5,097        —     
  

 

 

      

 

 

      

 

 

   

Consolidated

   $ 297,257         23.1   $ 298,129         22.5   $ (872     0.6
  

 

 

      

 

 

      

 

 

   

The decrease of $0.9 million in general and administrative expenses included a positive foreign currency impact of $6.0 million in the Americas and a positive foreign currency impact of $8.7 million in EMEA.

The increase in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to higher compensation costs of 0.2% and higher other costs of 0.3%, partially offset by lower legal and professional fees of 0.3% and lower communication costs of 0.1%.

The increase in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to higher facility-related costs of 0.2%, higher severance costs of 0.2% and higher consulting costs of 0.2%.

The increase of $5.1 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher compensation costs of $4.3 million, higher consulting costs of $1.2 million, higher software maintenance costs of $1.0 million, higher travel costs of $0.7 million and higher merger and integration costs of $0.5 million, partially offset by lower charitable contributions costs of $1.4 million and lower other costs of $1.2 million.

 

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Depreciation, Amortization and Net (Gain) Loss on Disposal of Property and Equipment

 

     Years Ended December 31,              
     2015     2014              
           % of           % of           Change in % of  
(in thousands)    Amount     Revenues     Amount     Revenues     $ Change     Revenues  

Depreciation, net:

            

Americas

   $ 37,842        3.6   $ 40,557        3.8   $ (2,715     -0.2

EMEA

     4,559        1.9     4,806        1.9     (247     0.0

Other

     1,351        —          —          —          1,351        —     
  

 

 

     

 

 

     

 

 

   

Consolidated

   $ 43,752        3.4   $ 45,363        3.4   $ (1,611     0.0
  

 

 

     

 

 

     

 

 

   

Amortization of intangibles:

            

Americas

   $ 13,648        1.3   $ 14,396        1.3   $ (748     0.0

EMEA

     522        0.2     —          0.0     522        0.2

Other

     —          —          —          —          —          —     
  

 

 

     

 

 

     

 

 

   

Consolidated

   $ 14,170        1.1   $ 14,396        1.1   $ (226     0.0
  

 

 

     

 

 

     

 

 

   

Net (gain) loss on disposal of property and equipment:

            

Americas

   $ 573        0.1   $ (2,026     -0.2   $ 2,599        0.3

EMEA

     (156     -0.1     (4     0.0     (152     -0.1

Other

     (36     —          —          —          (36     —     
  

 

 

     

 

 

     

 

 

   

Consolidated

   $ 381        0.0   $ (2,030     -0.2   $ 2,411        0.2
  

 

 

     

 

 

     

 

 

   

The decrease in depreciation was primarily due to certain fully depreciated net fixed assets.

The decrease in amortization was primarily due to certain fully amortized intangible assets.

The net (gain) on disposal of property and equipment in 2014 primarily related to the sale of land, a building and fixed assets located in Bismarck, North Dakota. See Note 12, Property and Equipment, of the “Notes to Consolidated Financial Statements” for further information.

Other Income (Expense)

 

     Years Ended December 31,        
(in thousands)          2015                 2014                 $ Change        

Interest income

   $ 668      $ 958      $ (290
  

 

 

   

 

 

   

 

 

 

Interest (expense)

   $ (2,465   $ (2,011   $ (454
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Foreign currency transaction gains (losses)

   $ (2,924   $ (1,740   $ (1,184

Gains (losses) on foreign currency derivative instruments not designated as hedges

     1,374        (44     1,418   

Gains (losses) on liquidation of foreign subsidiaries

     (647     —          (647

Other miscellaneous income (expense)

     (287     441        (728
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (2,484   $ (1,343   $ (1,141
  

 

 

   

 

 

   

 

 

 

The decrease in interest income reflects lower average interest rates on invested balances of interest-bearing investments in cash and cash equivalents in 2015 compared to 2014.

The increase in interest (expense) was primarily due to interest accretion on the contingent consideration related to the July 2015 Qelp acquisition.

The (loss) on liquidation of foreign subsidiaries in 2015 was due to the substantial liquidation of operations in a foreign entity.

 

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Income Taxes

 

     Years Ended December 31,        
(in thousands)    2015     2014     $ Change  

Income from continuing operations before income taxes

   $ 89,983      $ 77,159      $ 12,824   

Income taxes

   $ 21,386      $ 19,368      $ 2,018   
                 % Change  

Effective tax rate

     23.8     25.1     -1.3

The decrease in the effective tax rate in 2015 compared to 2014 is primarily due to the recognition of a $2.2 million previously unrecognized tax benefit and a $1.3 million reversal of a valuation allowance on deferred tax assets where it is more likely than not the assets will be realized. This decrease was partially offset by a $3.0 million increase in tax provision due to a $12.6 million income increase in a high tax rate jurisdiction. The change in the effective tax rate was also affected by several other factors, including fluctuations in earnings among the various jurisdictions in which we operate, none of which are individually material.

2014 Compared to 2013

Revenues

 

     Years Ended December 31,        
     2014     2013        
            % of            % of        
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change  

Americas

   $ 1,070,824         80.7   $ 1,050,813         83.2   $ 20,011   

EMEA

     256,699         19.3     212,647         16.8     44,052   

Other

     —           0.0     —           0.0     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consolidated

   $ 1,327,523         100.0   $ 1,263,460         100.0   $ 64,063   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consolidated revenues increased $64.1 million, or 5.1%, in 2014 from 2013.

The increase in Americas’ revenues was primarily due to higher volumes from existing contracts of $89.9 million and new contract sales of $4.3 million, partially offset by end-of-life client programs of $50.4 million and the negative foreign currency impact of $23.8 million. Revenues from our offshore operations represented 38.9% of Americas’ revenues, compared to 39.5% in 2013.

The increase in EMEA’s revenues was primarily due to higher volumes from existing contracts of $49.6 million and new contract sales of $2.2 million, partially offset by end-of-life client programs of $4.6 million and the negative foreign currency impact of $3.1 million.

Direct Salaries and Related Costs

 

     Years Ended December 31,               
     2014     2013               
            % of            % of            Change in % of  
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change      Revenues  

Americas

   $ 707,181         66.0   $ 699,797         66.6   $ 7,384         -0.6

EMEA

     184,929         72.0     155,469         73.1     29,460         -1.1
  

 

 

      

 

 

      

 

 

    

Consolidated

   $ 892,110         67.2   $ 855,266         67.7   $ 36,844         -0.5
  

 

 

      

 

 

      

 

 

    

The increase of $36.8 million in direct salaries and related costs included a positive foreign currency impact of $23.1 million in the Americas and a positive foreign currency impact of $2.1 million in EMEA.

The decrease in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to lower auto tow claim costs of 0.3%, lower compensation costs of 0.2% and lower other costs of 0.1%.

The decrease in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to lower compensation costs of 1.6% driven by the increase in new client program ramp up costs in the prior period in the communications vertical as well as new client program growth within the technology vertical, and lower billable

supply costs of 0.2%, partially offset by higher communications costs of 0.3%, higher fulfillment materials costs of 0.3% and higher other costs of 0.1%.

 

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General and Administrative

 

     Years Ended December 31,              
     2014     2013              
            % of            % of           Change in % of  
(in thousands)    Amount      Revenues     Amount      Revenues     $ Change     Revenues  

Americas

   $ 197,167         18.4   $ 204,321         19.4   $ (7,154     -1.0

EMEA

     50,760         19.8     46,667         21.9     4,093        -2.1

Other

     50,202         —          46,531         —          3,671        —     
  

 

 

      

 

 

      

 

 

   

Consolidated

   $ 298,129         22.5   $ 297,519         23.5   $ 610        -1.0
  

 

 

      

 

 

      

 

 

   

The increase of $0.6 million in general and administrative expenses included a positive foreign currency impact of $5.5 million in the Americas and a positive foreign currency impact of $0.4 million in EMEA.

The decrease in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to lower facility-related costs of 0.6%, lower merger and integration costs of 0.1% and lower other costs of 0.3%.

The decrease in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to lower facility-related costs of 0.9%, lower compensation costs of 0.5%, lower travel costs of 0.3%, lower communications costs of 0.2% and lower other costs of 0.2%.

The increase of $3.7 million in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher compensation costs of $1.9 million, higher charitable contributions of $1.4 million, higher legal and professional fees of $0.7 million, higher consulting costs of $0.5 million, higher facility-related costs of $0.2 million and higher insurance costs of $0.2 million, partially offset by lower merger and integration costs of $0.6 million, lower software maintenance costs of $0.4 million and lower other costs of $0.2 million.

Depreciation, Amortization and Net (Gain) Loss on Disposal of Property

 

     Years Ended December 31,              
     2014     2013              
           % of            % of           Change in % of  
(in thousands)    Amount     Revenues     Amount      Revenues     $ Change     Revenues  

Depreciation, net:

             

Americas

   $ 40,557        3.8   $ 37,818         3.6   $ 2,739        0.2

EMEA

     4,806        1.9     4,266         2.0     540        -0.1

Other

     —          —          —           —          —          —     
  

 

 

     

 

 

      

 

 

   

Consolidated

   $ 45,363        3.4   $ 42,084         3.3   $ 3,279        0.1
  

 

 

     

 

 

      

 

 

   

Amortization of intangibles:

             

Americas

   $ 14,396        1.3   $ 14,863         1.4   $ (467     -0.1

EMEA

     —          0.0     —           0.0     —          0.0

Other

     —          —          —           —          —          —     
  

 

 

     

 

 

      

 

 

   

Consolidated

   $ 14,396        1.1   $ 14,863         1.2   $ (467     -0.1
  

 

 

     

 

 

      

 

 

   

Net (gain) loss on disposal of property and equipment:

             

Americas

   $ (2,026     -0.2   $ 8         0.0   $ (2,034     -0.2

EMEA

     (4     0.0     193         0.1     (197     -0.1

Other

     —          —          —           —          —          —     
  

 

 

     

 

 

      

 

 

   

Consolidated

   $ (2,030     -0.2   $ 201         0.0   $ (2,231     -0.2
  

 

 

     

 

 

      

 

 

   

The increase in depreciation was primarily due to net fixed asset additions.

The decrease in amortization was primarily due to certain fully amortized intangible assets.

 

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The net (gain) on disposal of property and equipment in 2014 primarily related to the sale of land, a building and fixed assets located in Bismarck, North Dakota. See Note 12, Property and Equipment, of the “Notes to Consolidated Financial Statements” for further information.

Other Income (Expense)

 

     Years Ended December 31,        
(in thousands)          2014                 2013           $ Change  

Interest income

   $ 958      $ 866      $ 92   
  

 

 

   

 

 

   

 

 

 

Interest (expense)

   $ (2,011   $ (2,307   $ 296   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Foreign currency transaction gains (losses)

   $ (1,740   $ (5,962   $ 4,222   

Gains (losses) on foreign currency derivative instruments not designated as hedges

     (44     4,216        (4,260

Gains (losses) on liquidation of foreign subsidiaries

     —          —          —     

Other miscellaneous income (expense)

     441        985        (544
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (1,343   $ (761   $ (582
  

 

 

   

 

 

   

 

 

 

The increase in interest income was primarily due to an increase in the amount of average invested funds in 2014 compared to 2013.

The decrease in interest (expense) was primarily due to a decrease in the amount of average outstanding borrowings in 2014 compared to 2013.

Income Taxes

 

     Years Ended December 31,        
(in thousands)    2014     2013     $ Change  

Income from continuing operations before income taxes

   $ 77,159      $ 51,325      $ 25,834   

Income taxes

   $ 19,368      $ 14,065      $ 5,303   
                 % Change  

Effective tax rate

     25.1     27.4     -2.3

The decrease in the effective income tax rate in 2014 compared to 2013 is primarily due to a $23.0 million increase in income in a high tax rate jurisdiction which increased the tax provision by $6.3 million. This increase was partially offset by a decrease of $2.3 million in foreign withholding taxes recognized in 2014. The remaining change is due to several factors, including fluctuations in earnings among the various other jurisdictions in which we operate, none of which are individually material.

 

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Quarterly Results

The following information presents our unaudited quarterly operating results for 2015 and 2014. The data has been prepared on a basis consistent with the accompanying Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, and includes all adjustments, consisting of normal recurring accruals, that we consider necessary for a fair presentation thereof.

 

(in thousands, except per share data)   12/31/2015     9/30/2015     6/30/2015     3/31/2015     12/31/2014     9/30/2014     6/30/2014     3/31/2014  

Revenues

  $ 337,278      $ 317,924      $ 307,453      $ 323,685      $ 349,925      $ 332,671      $ 320,498      $ 324,429   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Direct salaries and related costs

    214,307        206,139        202,143        213,927        227,802        221,598        221,085        221,625   

General and administrative (1,2)

    79,337        72,647        72,566        72,707        77,074        73,732        73,994        73,329   

Depreciation, net

    10,748        10,938        11,007        11,059        11,227        11,516        11,322        11,298   

Amortization of intangibles

    3,666        3,638        3,435        3,431        3,489        3,597        3,659        3,651   

Net (gain) loss on disposal of property and equipment (3)

    221        55        85        20        (2,225     136        11        48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    308,279        293,417        289,236        301,144        317,367        310,579        310,071        309,951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    28,999        24,507        18,217        22,541        32,558        22,092        10,427        14,478   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

               

Interest income

    189        162        151        166        241        249        237        231   

Interest (expense) (4)

    (938     (478     (610     (439     (496     (464     (552     (499

Other income (expense) (5)

    (617     (871     (167     (829     (1,201     (406     (399     663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (1,366     (1,187     (626     (1,102     (1,456     (621     (714     395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    27,633        23,320        17,591        21,439        31,102        21,471        9,713        14,873   

Income taxes

    7,597        3,310        4,679        5,800        8,599        4,833        1,376        4,560   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 20,036      $ 20,010      $ 12,912      $ 15,639      $ 22,503      $ 16,638      $ 8,337      $ 10,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share (6) :

               

Basic

  $ 0.48      $ 0.48      $ 0.31      $ 0.37      $ 0.53      $ 0.39      $ 0.20      $ 0.24   

Diluted

  $ 0.48      $ 0.48      $ 0.31      $ 0.37      $ 0.53      $ 0.39      $ 0.19      $ 0.24   

Weighted average shares:

               

Basic

    41,630        41,783        42,008        42,181        42,280        42,704        42,711        42,739   

Diluted

    42,117        42,084        42,216        42,440        42,533        42,837        42,810        42,837   

 

(1) 

The quarter ended September 30, 2015 includes $0.5 million in Qelp acquisition-related costs and a $0.9 million net gain on insurance settlement. See Note 2, Acquisitions, and Note 12, Property and Equipment, for further information.

 

(2) 

The quarters ended September 30, 2014 and June 30, 2014 include $(0.1) million and $(0.2) million, respectively, related to the Exit Plans. See Note 3, Costs Associated with Exit or Disposal Activities, for further information.

 

(3) 

The quarter ended December 31, 2014 includes a $2.6 million (gain) on the sale of fixed assets, land and building located in Bismarck, North Dakota. See Note 12, Property and Equipment, for further information.

 

(4) 

The quarter ended December 31, 2015 includes $(0.4) million of interest accretion on contingent consideration. See Note 4, Fair Value, for further information.

 

(5) 

The quarter ended December 31, 2015 includes a $(0.6) million loss on liquidation of a foreign subsidiary. See Note 26, Other Income (Expense), for further information.

 

(6) 

Net income per basic and diluted common share is computed independently for each of the quarters presented and, therefore, may not sum to the total for the year.

 

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Business Outlook

For the three months ended March 31, 2016, we anticipate the following financial results:

 

   

Revenues in the range of $318.0 million to $323.0 million;

 

   

Effective tax rate of approximately 33%;

 

   

Fully diluted share count of approximately 42.1 million;

 

   

Diluted earnings per share in the range of $0.30 to $0.33; and

 

   

Capital expenditures in the range of $15.0 million to $20.0 million

For the twelve months ended December 31, 2016, we anticipate the following financial results:

 

   

Revenues in the range of $1,336.0 million to $1,354.0 million;

 

   

Effective tax rate of approximately 31%;

 

   

Fully diluted share count of approximately 42.4 million;

 

   

Diluted earnings per share in the range of $1.49 to $1.59; and

 

   

Capital expenditures in the range of $60.0 million to $70.0 million

We continue to monitor the recent macro-economic volatility and assess its impact on consumer sentiment, final demand and client forecasts. Client forecasts, on balance, thus far indicate acceleration in demand in 2016 compared to 2015. At a broad level, this increased demand is being driven by a shift to outsourcing and share gains from competition, coupled with lower program completions. More specifically, it is manifesting mostly within existing clients and programs across the financial services, communications, technology and healthcare verticals. To service this demand, we anticipate adding seat capacity in 2016, roughly two-thirds of which is expected in the first half of 2016. In accordance with the front-end loaded capacity additions, the Company expects program ramp costs to disproportionately impact operating margins in the first half of 2016. The business outlook also reflects the impact of foreign exchange volatility, which is expected to negatively impact revenues by approximately $30 million for the full-year of 2016 versus 2015. Diluted earnings per share for 2016 reflect a materially higher effective tax rate relative to 2015 partly due to discrete adjustments, which lowered the effective tax rate in 2015. In addition, the higher effective tax rate in 2016 also reflects a shift in the mix of pre-tax income to higher tax rate jurisdictions.

Our revenues and earnings per share assumptions for the first quarter and full-year 2016 are based on foreign exchange rates as of February 2016. Therefore, the continued volatility in foreign exchange rates between the U.S. Dollar and the functional currencies of the markets we serve could have a further impact, positive or negative, on revenues and earnings per share relative to the business outlook for the first quarter and full-year, as discussed above.

We anticipate total other interest income (expense), net of approximately $(1.0) million for the first quarter and $(4.0) million for the full year 2016. These amounts include the interest accretion on the contingent consideration, which is expected to be $(0.2) million in the first quarter of 2016 and approximately $(1.0) million for the year. The amounts, however, exclude the potential impact of any future foreign exchange gains or losses in other income (expense).

Not included in this guidance is the impact of any future acquisitions, share repurchase activities or a potential sale of previously exited customer contact management centers.

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 facility. 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 acquisitions. In future periods, we intend similar uses of these funds.

On August 18, 2011, the Board authorized us to purchase up to 5.0 million shares of our outstanding common stock (the “2011 Share Repurchase Program”). A total of 4.9 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.

During 2015, cash increased $120.5 million from operating activities, $0.6 million from the proceeds from sale of property and equipment, $1.5 million proceeds from insurance settlement, $5.0 million proceeds from the issuance of long-term debt, $0.4 million in excess tax benefits from stock compensation and $0.7 million from proceeds from grants. Further, we used $49.7 million for capital expenditures, $9.4 million for the Qelp acquisition, $10.0 million to repay long-term debt, $20.9 million to repurchase our common stock, $0.3 million to repay short-term debt, $3.3 million to repurchase stock for minimum tax withholding on equity awards and $1.0 million for loan fees related to long-term debt, resulting in a $20.2 million increase in available cash (including the unfavorable effects of foreign currency exchange rates on cash of $13.9 million).

Net cash flows provided by operating activities for 2015 were $120.5 million, compared to $94.3 million in 2014. The $26.2 million increase in net cash flows from operating activities was due to a $10.8 million increase in net income, a net increase of $14.7 million in cash flows from assets and liabilities and a $0.7 million increase in non-cash reconciling items such as depreciation and amortization, (gain) loss on the sale of discontinued operations, net (gain) loss on disposal of property and equipment, impairment losses and unrealized foreign currency transaction (gains) losses, net. The $14.7 million increase in cash flows from assets and liabilities was principally a result of a $42.8 million decrease in accounts receivable, partially offset by a $9.8 million decrease in other liabilities, an $8.3 million decrease in taxes payable, a $5.3 million increase in other assets and a $4.7 million decrease in deferred revenue. The $42.8 million decrease in the change in accounts receivable is primarily due to the timing of billings and collections in 2015 over 2014.

 

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Capital expenditures, which are generally funded by cash generated from operating activities, available cash balances and borrowings available under our credit facilities, were $49.7 million for 2015, compared to $44.7 million for 2014, an increase of $5.0 million. In 2016, we anticipate capital expenditures in the range of $60.0 million to $70.0 million, primarily for new seat additions, Enterprise Resource Planning upgrades, facility upgrades, maintenance and systems infrastructure.

On May 12, 2015, we entered into a $440 million revolving credit facility (the “2015 Credit Agreement”) with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”). The 2015 Credit Agreement replaced our previous $245 million revolving credit facility dated May 3, 2012, as amended, which agreement was terminated simultaneous with entering into the 2015 Credit Agreement. The 2015 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. At December 31, 2015, we were in compliance with all loan requirements of the 2015 Credit Agreement and had $70.0 million of outstanding borrowings under this facility as of December 31, 2015.

Our credit agreements had an average daily utilization of $70.0 million, $85.9 million and $102.5 million during the years ended December 31, 2015, 2014 and 2013, respectively. During the years ended December 31, 2015, 2014, and 2013, the related interest expense, including the commitment fee and excluding the amortization of deferred loan fees, was $1.3 million, $1.4 million and $1.8 million, respectively, which represented weighted average interest rates of 1.9%, 1.7% and 1.7%, respectively.

The 2015 Credit Agreement includes a $200 million alternate-currency sub-facility, a $10 million swingline sub-facility and a $35 million letter of credit sub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. We are not currently aware of any inability of our lenders to provide access to the full commitment of funds that exist under the 2015 Credit Agreement, if necessary. However, there can be no assurance that such facility will be available to us, even though it is a binding commitment of the financial institutions. The 2015 Credit Agreement will mature on May 12, 2020.

Borrowings under the 2015 Credit Agreement will bear interest at either LIBOR or the base rate plus, in each case, an applicable margin based on the Company’s leverage ratio. The applicable interest rate will be determined quarterly based on the Company’s leverage ratio at such time. The base rate is a rate per annum equal to the greatest of (i) the rate of interest established by KeyBank, from time to time, as its “prime rate”; (ii) the Federal Funds effective rate in effect from time to time, plus 1/2 of 1% per annum; and (iii) the then-applicable LIBOR rate for one month interest periods, plus 1.00%. Swingline loans will bear interest only at the base rate plus the base rate margin.

In addition, we are required to pay certain customary fees, including a commitment fee of 0.125%, which is due quarterly in arrears and calculated on the average unused amount of the 2015 Credit Agreement.

The 2015 Credit Agreement is guaranteed by all of our existing and future direct and indirect material U.S. subsidiaries and secured by a pledge of 100% of the non-voting and 65% of the voting capital stock of all of our direct foreign subsidiaries and those of the guarantors.

We are currently under audit in several tax jurisdictions. We received assessments for the Canadian 2003-2009 audit. Requests for Competent Authority Assistance were filed with both the Canadian Revenue Agency and the U.S. Internal Revenue Service and we paid mandatory security deposits to Canada as part of this process. The total amount of deposits, net of the effects of foreign exchange rate adjustments, were $13.4 million and $15.9 million as of December 31, 2015 and 2014, respectively, and are included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheets. Although the outcome of examinations by taxing authorities is always uncertain, we believe we are adequately reserved for these audits and that resolution is not expected to have a material impact on our financial condition and results of operations.

As of December 31, 2015, we had $235.4 million in cash and cash equivalents, of which approximately 94.2%, or $221.7 million, was held in international operations and is deemed to be indefinitely reinvested offshore. These funds may be subject to additional taxes if repatriated to the United States, including withholding tax applied by the country of origin and an incremental U.S. income tax, net of allowable foreign tax credits. There are circumstances where we may be unable to repatriate some of the cash and cash equivalents held by our international operations due to country restrictions. We do not intend nor currently foresee a need to repatriate these funds. We expect our current domestic cash levels and cash flows from operations to be adequate to meet our domestic anticipated

 

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working capital needs, including investment activities such as capital expenditures and debt repayment for the next twelve months and the foreseeable future. However, from time to time, we may borrow funds under our 2015 Credit Agreement as a result of the timing of our working capital needs, including capital expenditures. Additionally, we expect our current foreign cash levels and cash flows from foreign operations to be adequate to meet our foreign anticipated working capital needs, including investment activities such as capital expenditures for the next twelve months and the foreseeable future.

If we should require more cash in the U.S. than is provided by our domestic operations for significant discretionary unforeseen activities such as acquisitions of businesses and share repurchases, we could elect to repatriate future foreign earnings and/or raise capital in the U.S through additional borrowings or debt/equity issuances. These alternatives could result in higher effective tax rates, interest expense and/or dilution of earnings. We have borrowed funds domestically and continue to have the ability to borrow additional funds domestically at reasonable interest rates.

Our cash resources could also be affected by various risks and uncertainties, including but not limited to, the risks detailed in Item 1A, Risk Factors.

Off-Balance Sheet Arrangements and Other

At December 31, 2015, we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships 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 officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, 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 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 Consolidated Balance Sheets with respect to any client contracts under which we have or may have unlimited liability.

 

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Contractual Obligations

The following table summarizes our contractual cash obligations at December 31, 2015, and the effect these obligations are expected to have on liquidity and cash flow in future periods (in thousands):

 

     Payments Due By Period  
     Total      Less Than
1 Year
     1 - 3 Years      3 - 5 Years      After 5
Years
     Other  

Operating leases(1)

   $ 169,758       $ 38,318       $ 61,564       $ 38,903       $ 30,973       $ —     

Purchase obligations(2)

     62,303         41,806         17,693         2,334         470         —     

Accounts payable (3)

     23,255         23,255         —           —           —           —     

Accrued employee compensation and benefits (3)

     77,234         77,234         —           —           —           —     

Income taxes payable (4)

     1,959         1,959         —           —           —           —     

Other accrued expenses and current liabilities (5)

     21,247         21,247         —           —           —           —     

Long-term debt (6)

     70,000         —           —           70,000         —           —     

Long-term tax liabilities (7)

     5,094         —           —           —           —           5,094   

Other long-term liabilities (8)

     12,944         143         5,513         4,541         2,747         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 443,794       $ 203,962       $ 84,770       $ 115,778       $ 34,190       $ 5,094   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts represent the expected cash payments under our operating leases.

 

(2) 

Amounts represent the expected cash payments under our purchase obligations, which include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

 

(3) 

Accounts payable and accrued employee compensation and benefits, which represent amounts due vendors and employees payable within one year.

 

(4) 

Income taxes payable, which represents amounts due taxing authorities payable within one year.

 

(5) 

Other accrued expenses and current liabilties, which exclude deferred grants, include amounts primarily related to restructuring costs, legal and professional fees, telephone charges, rent, derivative contracts and other accruals.

 

(6) 

Amount represents total outstanding borrowings. See Note 18, Borrowings, to the accompanying Consolidated Financial Statements.

 

(7) 

Long-term tax liabilities include uncertain tax positions and related penalties and interest as discussed in Note 20, Income Taxes, to the accompanying Consolidated Financial Statements, included in “Long-term income tax liabilities” in the accompanying Consolidated Balance Sheet. The amount in the table has been reduced by Canadian mandatory security deposits of $13.4 million, which are included in “Deferred charges and other assets” in the accompanying Consolidated Balance Sheet. We cannot make reasonably reliable estimates of the cash settlement of $5.1 million of the long-term liabilities with the taxing authority; therefore, amounts have been excluded from payments due by period.

 

(8) 

Other long-term liabilities, which exclude deferred income taxes and other non-cash long-term liabilities, represent the expected cash payments for contingent consideration related to the Qelp acquisition, cash payments due under restructuring accruals for lease obligations and pension obligations. See Note 2, Acquisitions, Note 3, Costs Associated with Exit or Disposal Activities, and Note 23, Defined Benefit Pension Plan and Postretirement Benefits, to the accompanying Consolidated Financial Statements.

Critical Accounting 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. Unless we need to clarify a point to readers, we will refrain from citing specific section references when discussing the application of accounting principles or addressing new or pending accounting rule changes.

Recognition of Revenue

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

 

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Revenues from fulfillment services account for 1.6%, 1.4% and 1.3% of total consolidated revenues for the years ended December 31, 2015, 2014 and 2013, respectively, some of which contain multiple-deliverables. The service offerings for these fulfillment service contracts typically include pick-pack-and-ship, warehousing, process management, finished goods assembly and pass-through costs. In accordance with ASC 605-25 “Revenue Recognition — Multiple-Element Arrangements” (“ASC 605-25”) (as amended by Accounting Standards Update (“ASU”) 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force”) (“ASU 2009-13”), we determine if the services provided under these contracts with multiple-deliverables represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenues from these services are recognized as the services are performed under a fully executed contractual agreement. If those deliverables are not determined to be separate units of accounting, revenue for the delivered services are bundled into a single unit of accounting and recognized on the proportional performance method using the straight-line basis over the contract period, or the actual number of operational seats used to serve the client, as appropriate.

We allocate revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence (“VSOE”), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on our best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once we allocate revenue to each deliverable, we recognize revenue when all revenue recognition criteria are met. As of December 31, 2015, our fulfillment contracts with multiple-deliverables met the separation criteria as outlined in ASC 605-25 and the revenue was accounted for accordingly. Other than these fulfillment contracts, we have no other contracts that contain multiple-deliverables as of December 31, 2015.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts, $3.6 million as of December 31, 2015, or 1.3% of trade account receivables, for estimated losses arising from the inability of our customers to make required payments. Our estimate is based on qualitative and quantitative analyses, including credit risk measurement tools and methodologies using the publicly available credit and capital market information, a review of the current status of our trade accounts receivable and historical collection experience of our clients. It is reasonably possible that our estimate of the allowance for doubtful accounts will change if the financial condition of our customers were to deteriorate, resulting in a reduced ability to make payments.

Income Taxes

We reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that 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. Establishment or reversal of certain valuation allowances may have a significant impact on both current and future results.

As of December 31, 2015, we determined that a total valuation allowance of $30.1 million was necessary to reduce U.S. deferred tax assets by $0.7 million and foreign deferred tax assets by $29.4 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 $9.1 million as of December 31, 2015 is dependent upon future profitability within each tax jurisdiction. As of December 31, 2015, 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 assets will be realized.

A provision for income taxes has not been made for the undistributed earnings of foreign subsidiaries of approximately $399.0 million as of December 31, 2015, as the earnings are indefinitely reinvested in foreign business operations. If these earnings are repatriated or otherwise become taxable in the U.S, we would be subject

 

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to an incremental U.S. tax expense net of any allowable foreign tax credits, in addition to any applicable foreign withholding tax expense. Determination of any unrecognized deferred tax liability related to investments in foreign subsidiaries is not practicable due to the inherent complexity of the multi-national tax environment in which we operate.

We evaluate tax positions that have been taken or are expected to be taken in our tax returns, and record a liability for uncertain tax positions in accordance with ASC 740. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

As of December 31, 2015, we had $8.1 million of unrecognized tax benefits, a net decrease of $5.2 million from $13.3 million as of December 31, 2014. Had we recognized these tax benefits, approximately $8.1 million and $13.3 million and the related interest and penalties would favorably impact the effective tax rate in 2015 and 2014, respectively. We do not anticipate that any of the unrecognized tax benefits will be recognized in the next twelve months.

Our provision for income taxes is subject to volatility and is impacted by the distribution of earnings in the various domestic and international jurisdictions in which we operate. Our effective tax rate could be impacted by earnings being either proportionally lower or higher in foreign countries where we have tax rates lower than the U.S. tax rates. In addition, we have been granted tax holidays in several foreign tax jurisdictions, which have various expiration dates ranging from 2016 through 2028. If we are unable to renew a tax holiday in any of these jurisdictions, our effective tax rate could be adversely impacted. In some cases, the tax holidays expire without possibility of renewal. In other cases, we expect to renew these tax holidays, but there are no assurances from the respective foreign governments that they will permit a renewal. The tax holidays decreased the provision for income taxes by $4.0 million, $2.7 million and $4.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. Our effective tax rate could also be affected by several additional factors, including changes in the valuation of our deferred tax assets or liabilities, changing legislation, regulations, and court interpretations that impact tax law in multiple tax jurisdictions in which we operate, as well as new requirements, pronouncements and rulings of certain tax, regulatory and accounting organizations.

Impairment of Long-Lived Assets

We evaluate the carrying value of property and equipment and definite-lived intangible assets, which had a carrying value of $162.9 million as of December 31, 2015, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the forecasted undiscounted cash flows of an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates. 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.

Impairment of Goodwill

We evaluate goodwill, which had a carrying value of $195.7 million as of December 31, 2015, for impairment at least annually, during the third quarter of each year, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. To assess the realizability of goodwill, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We may elect to forgo this option and proceed to the annual two-step goodwill impairment test.

 

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If we elect to perform the qualitative assessment and it indicates that a significant decline to fair value of a reporting unit is more likely than not, or if a reporting unit’s fair value has historically been closer to its carrying value, or we elect to forgo this qualitative assessment, we will proceed to Step 1 testing where we calculate the fair value of a reporting unit based on discounted future probability-weighted cash flows. If Step 1 indicates that the carrying value of a reporting unit is in excess of its fair value, we will proceed to Step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as it would in a business combination. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in Step 2.

We estimate fair value using discounted cash flows of the reporting units. The most significant assumptions used in these analyses are those made in estimating future cash flows. In estimating future cash flows, we use financial assumptions in our internal forecasting model such as projected capacity utilization, projected changes in the prices we charge for our services, projected labor costs, as well as contract negotiation status. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate. We use a discount rate we consider appropriate for the country where the services are being provided. If actual results differ substantially from the assumptions used in performing the impairment test, the fair value of the reporting units may be significantly lower, causing the carrying value to exceed the fair value and indicating an impairment has occurred.

Contingencies

We record a liability for pending litigation and claims where losses are both probable and reasonably estimable. Each quarter, management reviews all litigation and claims on a case-by-case basis and assigns probability of loss and range of loss.

Other

We have made certain other estimates that, while not involving the same degree of judgment, are important to understanding our financial statements. These estimates are in the areas of measuring our obligations related to our defined benefit plans and self-insurance accruals.

New Accounting Standards Not Yet Adopted

See Note 1, Overview and Summary of Significant Accounting Policies, of the accompanying “Notes to Consolidated Financial Statements” for information related to recent accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

Our earnings and cash flows are subject to fluctuations due to changes in currency exchange rates. We are exposed to foreign currency exchange rate fluctuations when subsidiaries with functional currencies other than the U.S. Dollar (“USD”) are translated into our USD consolidated financial statements. As exchange rates vary, those results, when translated, may vary from expectations and adversely impact profitability. The cumulative translation effects for subsidiaries using functional currencies other than USD are included in “Accumulated other comprehensive income (loss)” in shareholders’ equity. Movements in non-USD currency exchange rates may negatively or positively affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors.

We employ a foreign currency risk management program that periodically utilizes derivative instruments to protect against unanticipated fluctuations in certain earnings and cash flows caused by volatility in foreign currency exchange (“FX”) rates. We also utilize derivative contracts to hedge intercompany receivables and payables that are denominated in a foreign currency and to hedge net investments in foreign operations.

We serve a number of U.S.-based clients using customer contact management center capacity in The Philippines and Costa Rica, which are within our Americas segment. Although the contracts with these clients are priced in USDs, a substantial portion of the costs incurred to render services under these contracts are denominated in Philippine Pesos (“PHP”) and Costa Rican Colones (“CRC”), which represent FX exposures. Additionally, our EMEA segment services clients in Hungary and Romania where the contracts are priced in Euros (“EUR”), with a substantial portion of the costs incurred to render services under these contracts denominated in Hungarian Forints and Romanian Leis.

 

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In order to hedge a portion of our anticipated cash flow requirements denominated in PHP and CRC, we had outstanding forward contracts and options as of December 31, 2015 with counterparties through December 2016 with notional amounts totaling $106.3 million. As of December 31, 2015, we had net total derivative assets associated with these contracts with a fair value of $0.1 million, which will settle within the next 12 months. If the USD was to weaken against the PHP and CRC by 10% from current period-end levels, we would incur a loss of approximately $8.4 million on the underlying exposures of the derivative instruments. However, this loss would be mitigated by corresponding gains on the underlying exposures.

We entered into forward exchange contracts with notional amounts totaling $63.5 million to hedge net investments in our foreign operations. The purpose of these derivative instruments is to protect against the risk that the net assets of certain foreign subsidiaries will be adversely affected by changes in exchange rates and economic exposures related to our foreign currency-based investments in these subsidiaries. As of December 31, 2015, the fair value of these derivatives was a net asset of $10.2 million. The potential loss in fair value at December 31, 2015, for these contracts resulting from a hypothetical 10% adverse change in the foreign currency exchange rates is approximately $5.3 million. However, this loss would be mitigated by corresponding gains on the underlying exposures.

We also entered into forward exchange contracts with notional amounts totaling $50.6 million that are not designated as hedges. The purpose of these derivative instruments is to protect against FX volatility pertaining to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than our subsidiaries’ functional currencies. As of December 31, 2015, the fair value of these derivatives was a net liability of $0.2 million. The potential loss in fair value at December 31, 2015, for these contracts resulting from a hypothetical 10% adverse change in the foreign currency exchange rates is approximately $3.5 million. However, this loss would be mitigated by corresponding gains on the underlying exposures.

We evaluate the credit quality of potential counterparties to derivative transactions and only enter into contracts with those considered to have minimal credit risk. We periodically monitor changes to counterparty credit quality as well as our concentration of credit exposure to individual counterparties.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.

As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue from the local currency services substantially offsets the local currency denominated operating expenses.

Interest Rate Risk

Our exposure to interest rate risk results from variable debt outstanding under our revolving credit facility. We pay interest on outstanding borrowings at interest rates that fluctuate based upon changes in various base rates. As of December 31, 2015, we had $70.0 million in borrowings outstanding under the revolving credit facility. Based on our level of variable rate debt outstanding during the year ended December 31, 2015, a one-point increase in the weighted average interest rate, which generally equals the LIBOR rate plus an applicable margin, would have had a $0.7 million impact on our results of operations.

We have not historically used derivative instruments to manage exposure to changes in interest rates.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required by this item are located beginning on page 50 and page 32 of this report, respectively.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

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Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management believes that, as of December 31, 2015, our internal control over financial reporting was effective.

Attestation Report of Independent Registered Public Accounting Firm

Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page 42.

Changes to Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sykes Enterprises, Incorporated

Tampa, Florida

We have audited the internal control over financial reporting of Sykes Enterprises, Incorporated and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2015 of the Company and our report dated February 29, 2016 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ Deloitte & Touche LLP

Tampa, Florida

February 29, 2016

 

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Item 9B. Other Information

None.

PART III

Item s 10. through 14.

All information required by Items 10 through 14, with the exception of information on Executive Officers which appears in this report in Item 1 under the caption “Executive Officers”, is incorporated by reference to SYKES’ Proxy Statement for the 2016 Annual Meeting of Shareholders.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules

The following documents are filed as part of this report:

Consolidated Financial Statements

The Index to Consolidated Financial Statements is set forth on page 50 of this report.

Financial Statements Schedule

Schedule II — Valuation and Qualifying Accounts is set forth on page 102 of this report.

Other schedules have been omitted because they are not required or applicable or the information is included in the Consolidated Financial Statements or notes thereto.

Exhibits:

 

Exhibit

Number

  

Exhibit Description

  2.1

   Articles of Merger between Sykes Enterprises, Incorporated, a North Carolina Corporation, and Sykes Enterprises, Incorporated, a Florida Corporation, dated March 1, 1996. (1)

  2.2

   Agreement and Plan of Merger, dated as of October 5, 2009, among ICT Group, Inc., Sykes Enterprises, Incorporated, SH Merger Subsidiary I, Inc., and SH Merger Subsidiary II, LLC (15)

  2.3

   Agreement and Plan of Merger, dated as of July 27, 2012, by and among Sykes Enterprises, Incorporated, Sykes Acquisition Subsidiary II, Inc., Alpine Access, Inc., and Shareholder Representative Services LLC. (22)

  3.1

   Articles of Incorporation of Sykes Enterprises, Incorporated, as amended. (2)

  3.2

   Articles of Amendment to Articles of Incorporation of Sykes Enterprises, Incorporated, as amended. (3)

  3.3

   Bylaws of Sykes Enterprises, Incorporated, as amended. (7)

  3.4

   Amendment to Bylaws of Sykes Enterprises, Incorporated. (24)

  4.1

   Specimen certificate for the Common Stock of Sykes Enterprises, Incorporated. (1)

  10.1

   2004 Non-Employee Directors’ Fee Plan. (5)*

  10.2

   First Amended and Restated 2004 Non-Employee Director’s Fee Plan. (12)*

  10.3

   Second Amended and Restated 2004 Non-Employee Director’s Fee Plan. (14)*

  10.4

   Third Amended and Restated 2004 Non-Employee Director’s Fee Plan. (16)*

  10.5

   Fourth Amended and Restated 2004 Non-Employee Director Fee Plan. (20)*

  10.6

   Fifth Amended and Restated 2004 Non-Employee Director Fee Plan. (26)*

  10.7

   Form of Split Dollar Plan Documents. (1)*

  10.8

   Form of Split Dollar Agreement. (1)*

 

44


Table of Contents

Exhibit

Number

  

Exhibit Description

  10.9

   Form of Indemnity Agreement between Sykes Enterprises, Incorporated and directors & executive officers. (1)

  10.10

   2001 Equity Incentive Plan. (4)*

  10.11

   Form of Restricted Share And Stock Appreciation Right Award Agreement dated as of March 29, 2006. (8)*

  10.12

   Form of Restricted Share And Bonus Award Agreement dated as of March 29, 2006. (8)*

  10.13

   Form of Restricted Share Award Agreement dated as of May 24, 2006. (9)*

  10.14

   Form of Restricted Share And Stock Appreciation Right Award Agreement dated as of January 2, 2007. (10)*

  10.15

   Form of Restricted Share Award Agreement dated as of January 2, 2007. (10)*

  10.16

   Form of Restricted Share and Stock Appreciation Right Award Agreement dated as of January 2, 2008. (11)*

  10.17

   2011 Equity Incentive Plan. *

  10.18

   Founder’s Retirement and Consulting Agreement dated December 10, 2004 between Sykes Enterprises, Incorporated and John H. Sykes. (6)*

  10.19

   Amended and Restated Employment Agreement dated as of December 30, 2008 between Sykes Enterprises, Incorporated and Charles E. Sykes. (17)*

  10.20

   Amended and Restated Employment Agreement dated as of December 30, 2008 between Sykes Enterprises, Incorporated and W. Michael Kipphut. (17)*

  10.21

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and Jenna R. Nelson. (17)*

  10.22

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and James T. Holder. (17)*

  10.23

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and William N. Rocktoff. (17)*

  10.24

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and James Hobby, Jr. (17)*

  10.25

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and Daniel L. Hernandez. (17)*

  10.26

   Amended and Restated Employment Agreement dated as of December 29, 2008 between Sykes Enterprises, Incorporated and David L. Pearson. (17)*

  10.27

   Lease Agreement, dated January 25, 2008, Lease Amendment Number One and Lease Amendment Number Two dated February 12, 2008 and May 28, 2008 respectively, between Sykes Enterprises, Incorporated and Kingstree Office One, LLC. (13)

  10.28

   Stock Purchase Agreement between Sykes Enterprises, Incorporated (not as a Seller), SEI International Services S.a.r.l. (as Seller), Sykes Enterprises Incorporated Holdings, BV (as Seller) and Antonio Marcelo Cid, Humberto Daniel Sahade as Buyers, dated December 13, 2010. (18)

 

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Table of Contents

Exhibit

Number

  

Exhibit Description

  10.29

   Stock Purchase Agreement between Sykes Enterprises, Incorporated (not as a Seller), ICT Group Netherlands B.V. (as Seller), ICT Group Netherlands Holdings, B.V. (as Seller) and Carolina Gaito, Claudio Martin, Fernando A. Berrondo, Gustavo Rosetti as Buyers, dated December 24, 2010. (19)

  10.30

   Credit Agreement, dated May 12, 2015, between Sykes Enterprises, Incorporated, the lenders party thereto and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent. (21)

  10.31

   Business Sale and Purchase Agreement, dated as of March 29, 2012, between Sykes Enterprises, Incorporated and Iberphone, S.A.U. (22)

  10.32

   Stock Purchase Agreement, dated as of March 30, 2012, by and among Sykes Enterprises, Incorporated (not as a Seller), SEI International Services S.a.r.l. (as Seller) and Eugenio Arceu Garcia as Buyer. (22)

  10.33

   Employment Agreement, dated as of September 13, 2012, between Sykes Enterprises, Incorporated and Lawrence R. Zingale. (23)*

  10.34

   Employment Agreement, dated as of September 13, 2012, between Sykes Enterprises, Incorporated and Christopher Carrington. (23)*

  10.35

   Sykes Enterprises, Incorporated Deferred Compensation Plan Amended and Restated as of January 1, 2014. (28)*

  10.36

   Employment Agreement, dated as of April 15, 2014, between Sykes Enterprises, Incorporated and John Chapman. (25)*

  10.37

   Employment Agreement, dated as of October 29, 2014, between Sykes Enterprises, Incorporated and Andrew Blanchard. (28)*

  14.1

   Code of Ethics. (27)

  21.1

   List of subsidiaries of Sykes Enterprises, Incorporated.

  23.1

   Consent of Independent Registered Public Accounting Firm.

  24.1

   Power of Attorney relating to subsequent amendments (included on the signature page of this report).

  31.1

   Certification of Chief Executive Officer, pursuant to Rule 13a-14(a).

  31.2

   Certification of Chief Financial Officer, pursuant to Rule 13a-14(a).

  32.1

   Certification of Chief Executive Officer, pursuant to Section 1350.

  32.2

   Certification of Chief Financial Officer, pursuant to Section 1350.

101.INS

   XBRL Instance Document

101.SCH

   XBRL Taxonomy Extension Schema Document

101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

   XBRL Taxonomy Extension Label Linkbase Document

101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

   XBRL Taxonomy Extension Definition Linkbase Document

 

*

Indicates management contract or compensatory plan or arrangement.

 

46


Table of Contents
(1)

Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-2324) and incorporated herein by reference.

 

(2)

Filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-3 filed with the Commission on October 23, 1997, and incorporated herein by reference.

 

(3)

Filed as Exhibit 3.2 to the Registrant’s Form 10-K filed with the Commission on March 29, 1999, and incorporated herein by reference.

 

(4)

Filed as Exhibit 10.32 to Registrant’s Form 10-Q filed with the Commission on May 7, 2001, and incorporated herein by reference.

 

(5)

Filed as an Exhibit to Registrant’s Form 10-Q filed with the Commission on August 9, 2004, and incorporated herein by reference.

 

(6)

Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed with the Commission on December 16, 2004, and incorporated herein by reference.

 

(7)

Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on March 22, 2005, and incorporated herein by reference.

 

(8)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on April 4, 2006, and incorporated herein by reference.

 

(9)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on May 31, 2006, and incorporated herein by reference.

 

(10)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on December 28, 2006, and incorporated herein by reference.

 

(11)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on January 8, 2008, and incorporated herein by reference.

 

(12)

Filed as an Exhibit to the Registrant’s Form 10-Q filed with the Commission on May 7, 2008, and incorporated herein by reference.

 

(13)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on May 29, 2008, and incorporated herein by reference.

 

(14)

Filed as an Exhibit to the Registrant’s Form 10-Q filed with the Commission on November 5, 2008, and incorporated herein by reference.

 

(15)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2009, and incorporated herein by reference.

 

(16)

Filed as an Exhibit to the Registrant’s Proxy Statement for the 2009 annual meeting of shareholders filed with the Commission on April 22, 2009, and incorporated herein by reference.

 

(17)

Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 10, 2009, and incorporated herein by reference.

 

(18)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on December 22, 2010, and incorporated herein by reference.

 

(19)

Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on December 30, 2010, and incorporated herein by reference.

 

(20)

Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011, and incorporated herein by reference.

 

(21)

Filed as an Exhibit to the Registrant’s Form 8-K filed with the Commission on May 13, 2015, and incorporated herein by reference.

 

(22)

Filed as an Exhibit to the Registrant’s Form 8-K filed with the Commission on July 30, 2012, and incorporated herein by reference.

 

(23)

Filed as an Exhibit to the Registrant’s Form 8-K filed with the Commission on September 19, 2012, and incorporated herein by reference.

 

(24)

Filed as an Exhibit to the Registrant’s Form 8-K filed with the Commission on March 24, 2014, and incorporated herein by reference.

 

(25)

Filed as an Exhibit to the Registrant’s Form 8-K filed with the Commission on April 15, 2014, and incorporated herein by reference.

 

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Table of Contents
(26)

Filed as an Exhibit to the Registrant’s Proxy Statement for the 2012 annual meeting of shareholders filed with the Commission on April 14, 2012, and incorporated herein by reference.

 

(27)

Available on the Registrant’s website at www.sykes.com, by clicking on “Investor Relations” and then “Corporate Governance” under the heading “Corporate Governance.”

 

(28)

Filed as an Exhibit to Registrant’s Form 10-K filed with the Commission on February 19, 2015, and incorporated herein by reference.

 

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Table of Contents

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Tampa, and State of Florida, on this 29th day of February 2016.

 

SYKES ENTERPRISES, INCORPORATED
(Registrant)
By:     /s/ John Chapman
  John Chapman
 

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below constitutes and appoints John Chapman his true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or should do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof.

 

Signature

  

Title

 

Date

/s/ Paul L. Whiting

Paul L. Whiting

   Chairman of the Board   February 29, 2016

/s/ Charles E. Sykes

Charles E. Sykes

   President and Chief Executive Officer and Director (Principal Executive Officer)   February 29, 2016

/s/ Lt. Gen. Michael P. Delong (Ret.)

Lt. Gen. Michael P. Delong (Ret.)

   Director   February 29, 2016

/s/ Lorraine L. Lutton

Lorraine L. Lutton

   Director   February 29, 2016

/s/ Iain A. Macdonald

Iain A. Macdonald

   Director   February 29, 2016

/s/ James S. MacLeod

James S. MacLeod

   Director   February 29, 2016

/s/ William J. Meurer

William J. Meurer

   Director   February 29, 2016

/s/ William D. Muir, Jr.

William D. Muir, Jr.

   Director   February 29, 2016

/s/ John Chapman

John Chapman

   Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   February 29, 2016

 

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Table of Contents

Table of Contents

 

     Page No.  

Report of Independent Registered Public Accounting Firm

     51   

Consolidated Balance Sheets as of December 31, 2015 and 2014

     52   

Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013

     53   

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December  31, 2015, 2014 and 2013

     54   

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December  31, 2015, 2014 and 2013

     55   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013

     56   

Notes to Consolidated Financial Statements

     58   

 

50


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sykes Enterprises, Incorporated

Tampa, Florida

We have audited the accompanying consolidated balance sheets of Sykes Enterprises, Incorporated and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sykes Enterprises, Incorporated and subsidiaries as of December 31, 2015 and 2014 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Tampa, Florida

February 29, 2016

 

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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES

Consolidated Balance Sheets

 

(in thousands, except per share data)    December 31, 2015     December 31, 2014  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 235,358      $ 215,137   

Receivables, net

     277,096        290,397   

Prepaid expenses

     17,321        14,896   

Other current assets

     33,262        29,656   
  

 

 

   

 

 

 

Total current assets

     563,037        550,086   

Property and equipment, net

     111,962        109,880   

Goodwill, net

     195,733        193,831   

Intangibles, net

     50,896        60,620   

Deferred charges and other assets

     26,144        30,083   
  

 

 

   

 

 

 
   $ 947,772      $ 944,500   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 23,255      $ 25,523   

Accrued employee compensation and benefits

     77,246        82,072   

Current deferred income tax liabilities

     1,120        144   

Income taxes payable

     1,959        3,662   

Deferred revenue

     28,119        34,245   

Other accrued expenses and current liabilities

     21,476        22,216   
  

 

 

   

 

 

 

Total current liabilities

     153,175        167,862   

Deferred grants

     4,810        5,110   

Long-term debt

     70,000        75,000   

Long-term income tax liabilities

     18,512        20,630   

Other long-term liabilities

     22,595        17,680   
  

 

 

   

 

 

 

Total liabilities

     269,092        286,282   
  

 

 

   

 

 

 

Commitments and loss contingency (Note 22)

    

Shareholders’ equity:

    

Preferred stock, $0.01 par value per share, 10,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.01 par value per share, 200,000 shares authorized;

    

42,785 and 43,291 shares issued, respectively

     428        433   

Additional paid-in capital

     275,380        279,288   

Retained earnings

     458,325        400,514   

Accumulated other comprehensive income (loss)

     (53,662     (20,561

Treasury stock at cost: 113 and 132 shares, respectively

     (1,791     (1,456
  

 

 

   

 

 

 

Total shareholders’ equity

     678,680        658,218   
  

 

 

   

 

 

 
   $ 947,772      $ 944,500   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Operations

 

     Years Ended December 31,  
(in thousands, except per share data)    2015     2014     2013  

Revenues

   $ 1,286,340      $ 1,327,523      $ 1,263,460   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Direct salaries and related costs

     836,516        892,110        855,266   

General and administrative

     297,257        298,129        297,519   

Depreciation, net

     43,752        45,363        42,084   

Amortization of intangibles

     14,170        14,396        14,863   

Net (gain) loss on disposal of property and equipment

     381        (2,030     201   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,192,076        1,247,968        1,209,933   
  

 

 

   

 

 

   

 

 

 

Income from operations

     94,264        79,555        53,527   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     668        958        866   

Interest (expense)

     (2,465     (2,011     (2,307

Other income (expense)

     (2,484     (1,343     (761
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (4,281     (2,396     (2,202
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     89,983        77,159        51,325   

Income taxes

     21,386        19,368        14,065   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 68,597      $ 57,791      $ 37,260   
  

 

 

   

 

 

   

 

 

 

Net income per common share:

      

Basic

   $ 1.64      $ 1.36      $ 0.87   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.62      $ 1.35      $ 0.87   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

      

Basic

     41,899        42,609        42,877   

Diluted

     42,447        42,814        42,925   

See accompanying Notes to Consolidated Financial Statements.

 

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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

 

     Years Ended December 31,  
(in thousands)    2015     2014     2013  

Net income

   $ 68,597      $ 57,791      $ 37,260   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes:

      

Foreign currency translation gain (loss), net of taxes

     (36,525     (34,827     (3,332

Unrealized gain (loss) on net investment hedges, net of taxes

     3,894        3,959        (1,118

Unrealized actuarial gain (loss) related to pension liability, net of taxes

     21        (142     (263

Unrealized gain (loss) on cash flow hedging instruments, net of taxes

     (416     2,424        (1,965

Unrealized gain (loss) on postretirement obligation, net of taxes

     (75     28        (181
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes

     (33,101     (28,558     (6,859
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 35,496      $ 29,233      $ 30,401   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

 

     Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
(in thousands)    Shares
Issued
    Amount            

Balance at January 1, 2013

     43,790      $ 438      $ 277,192      $ 315,187      $ 14,856      $ (1,409   $ 606,264   

Issuance of common stock

     10        —          59        —          —          —          59   

Stock-based compensation expense

     —          —          4,873        —          —          —          4,873   

Excess tax benefit (deficiency) from stock-based compensation

     —          —          (187     —          —          —          (187

Issuance of common stock under equity award plans, net of shares withheld for employee taxes

     538        5        (29     —          —          (203     (227

Repurchase of common stock

     —          —          —          —          —          (5,479     (5,479

Retirement of treasury stock

     (341     (3     (2,395     (3,081     —          5,479        —     

Comprehensive income (loss)

     —          —          —          37,260        (6,859     —          30,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     43,997        440        279,513        349,366        7,997        (1,612     635,704   

Stock-based compensation expense

     —          —          6,381        —          —          —          6,381   

Excess tax benefit (deficiency) from stock-based compensation

     —          —          (82     —          —          —          (82

Issuance of common stock under equity award plans, net of shares withheld for employee taxes

     (76     (1     (592     —          —          156        (437

Repurchase of common stock

     —          —          —          —          —          (12,581     (12,581

Retirement of treasury stock

     (630     (6     (5,932     (6,643     —          12,581        —     

Comprehensive income (loss)

     —          —          —          57,791        (28,558     —          29,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     43,291        433        279,288        400,514        (20,561     (1,456     658,218   

Stock-based compensation expense

     —          —          8,749        —          —          —          8,749   

Excess tax benefit (deficiency) from stock-based compensation

     —          —          422        —          —          —          422   

Issuance of common stock under equity award plans, net of shares withheld for employee taxes

     348        4        (3,159     —          —          (171     (3,326

Repurchase of common stock

     —          —          —          —