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SYKE Sykes Enterprises

Filed: 9 Aug 21, 4:04pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2021

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ____________ to ____________

 

Commission File No.          0-28274

 

 

 

Sykes Enterprises, Incorporated

 

(Exact name of Registrant as specified in its charter)

 

Florida

 

56-1383460

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

400 North Ashley Drive, Suite 2800, Tampa, FL     33602

(Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code:  (813) 274-1000

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

SYKE

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   No

 

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

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

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

 

As of July 15, 2021, there were 39,797,116 outstanding shares of common stock.

 

 

 


 

Sykes Enterprises, Incorporated and Subsidiaries

 

Form 10-Q

 

INDEX

 

PART I.  FINANCIAL INFORMATION

 

3

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets – June 30, 2021 and December 31, 2020 (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

5

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2021 and 2020 (Unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

Item 2.

 

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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

Item 4.

 

Controls and Procedures

 

42

 

 

 

Part II.  OTHER INFORMATION

 

42

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

Item 3.

 

Defaults Upon Senior Securities

 

44

Item 4.

 

Mine Safety Disclosures

 

44

Item 5.

 

Other Information

 

44

Item 6.

 

Exhibits

 

45

 

 

SIGNATURE

 

46

 

 

 

2


 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)

June 30, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

103,209

 

 

$

103,077

 

Receivables, net of allowance of $4.8 million and $4.8 million, respectively

 

418,105

 

 

 

415,746

 

Prepaid expenses

 

22,690

 

 

 

21,348

 

Other current assets

 

22,802

 

 

 

19,718

 

Total current assets

 

566,806

 

 

 

559,889

 

Property and equipment, net

 

116,797

 

 

 

121,084

 

Operating lease right-of-use assets

 

132,032

 

 

 

158,866

 

Goodwill, net

 

299,669

 

 

 

299,409

 

Intangibles, net

 

227,891

 

 

 

233,975

 

Deferred charges and other assets

 

63,249

 

 

 

62,582

 

 

$

1,406,444

 

 

$

1,435,805

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

30,277

 

 

$

32,049

 

Accrued employee compensation and benefits

 

138,810

 

 

 

147,212

 

Income taxes payable

 

1,745

 

 

 

3,521

 

Deferred revenue and customer liabilities

 

24,270

 

 

 

24,802

 

Operating lease liabilities

 

48,321

 

 

 

55,928

 

Other accrued expenses and current liabilities

 

36,401

 

 

 

31,994

 

Total current liabilities

 

279,824

 

 

 

295,506

 

Long-term debt

 

23,000

 

 

 

63,000

 

Long-term income tax liabilities

 

19,607

 

 

 

21,586

 

Long-term operating lease liabilities

 

100,342

 

 

 

126,336

 

Other long-term liabilities

 

39,028

 

 

 

35,723

 

Total liabilities

 

461,801

 

 

 

542,151

 

 

 

 

 

 

 

 

 

Commitments and loss contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 10,000 shares authorized;

   0 shares issued and outstanding

 

 

 

 

 

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

   39,797 and 39,614 shares issued, respectively

 

398

 

 

 

396

 

Additional paid-in capital

 

303,065

 

 

 

298,037

 

Retained earnings

 

687,158

 

 

 

639,000

 

Accumulated other comprehensive income (loss)

 

(42,786

)

 

 

(40,999

)

Treasury stock at cost: 144 and 135 shares, respectively

 

(3,192

)

 

 

(2,780

)

Total shareholders' equity

 

944,643

 

 

 

893,654

 

 

$

1,406,444

 

 

$

1,435,805

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share data)

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenues

$

448,885

 

 

$

416,833

 

 

$

906,771

 

 

$

827,999

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

 

292,086

 

 

 

268,433

 

 

 

591,563

 

 

 

535,378

 

General and administrative

 

110,924

 

 

 

102,664

 

 

 

220,551

 

 

 

205,911

 

Depreciation, net

 

12,809

 

 

 

12,630

 

 

 

25,924

 

 

 

25,091

 

Amortization of intangibles

 

2,959

 

 

 

4,093

 

 

 

5,946

 

 

 

8,212

 

Impairment of long-lived assets

 

386

 

 

 

1,800

 

 

 

1,536

 

 

 

1,800

 

Total operating expenses

 

419,164

 

 

 

389,620

 

 

 

845,520

 

 

 

776,392

 

Income from operations

 

29,721

 

 

 

27,213

 

 

 

61,251

 

 

 

51,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

103

 

 

 

165

 

 

 

201

 

 

 

428

 

Interest (expense)

 

(382

)

 

 

(560

)

 

 

(805

)

 

 

(1,280

)

Other income (expense), net

 

92

 

 

 

1,797

 

 

 

(230

)

 

 

(2,996

)

Total other income (expense), net

 

(187

)

 

 

1,402

 

 

 

(834

)

 

 

(3,848

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

29,534

 

 

 

28,615

 

 

 

60,417

 

 

 

47,759

 

Income taxes

 

6,354

 

 

 

6,385

 

 

 

12,259

 

 

 

11,611

 

Net income

$

23,180

 

 

$

22,230

 

 

$

48,158

 

 

$

36,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.58

 

 

$

0.55

 

 

$

1.21

 

 

$

0.89

 

Diluted

$

0.58

 

 

$

0.55

 

 

$

1.21

 

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

39,779

 

 

 

40,318

 

 

 

39,711

 

 

 

40,726

 

Diluted

 

39,942

 

 

 

40,380

 

 

 

39,951

 

 

 

40,857

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

$

23,180

 

 

$

22,230

 

 

$

48,158

 

 

$

36,148

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,511

 

 

 

8,311

 

 

 

(2,952

)

 

 

(13,039

)

Unrealized gain (loss) on cash flow hedging

   instruments, net of taxes

 

186

 

 

 

(253

)

 

 

1,177

 

 

 

(1,595

)

Unrealized actuarial gain (loss) related to pension

   liability, net of taxes

 

(5

)

 

 

16

 

 

 

(12

)

 

 

(1

)

Unrealized gain (loss) on postretirement obligation,

   net of taxes

 

 

 

 

(22

)

 

 

 

 

 

(44

)

Other comprehensive income (loss),

   net of taxes

 

1,692

 

 

 

8,052

 

 

 

(1,787

)

 

 

(14,679

)

Comprehensive income (loss)

$

24,872

 

 

$

30,282

 

 

$

46,371

 

 

$

21,469

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

(in thousands)

Shares

Issued

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

Balance at December 31, 2020

 

39,614

 

 

$

396

 

 

$

298,037

 

 

$

639,000

 

 

$

(40,999

)

 

$

(2,780

)

 

$

893,654

 

Stock-based compensation expense

 

 

 

 

 

 

 

4,751

 

 

 

 

 

 

 

 

 

 

 

 

4,751

 

Issuance of common stock under equity

   award plans, net of forfeitures

 

241

 

 

 

2

 

 

 

287

 

 

 

 

 

 

 

 

 

(289

)

 

 

 

Shares withheld for taxes paid related to net

   share settlement of equity awards

 

(76

)

 

 

(1

)

 

 

(3,440

)

 

 

 

 

 

 

 

 

 

 

 

(3,441

)

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

24,978

 

 

 

(3,479

)

 

 

 

 

 

21,499

 

Balance at March 31, 2021

 

39,779

 

 

 

397

 

 

 

299,635

 

 

 

663,978

 

 

 

(44,478

)

 

 

(3,069

)

 

 

916,463

 

Stock-based compensation expense

 

 

 

 

 

 

 

3,618

 

 

 

 

 

 

 

 

 

 

 

 

3,618

 

Issuance of common stock under equity

   award plans, net of forfeitures

 

25

 

 

 

1

 

 

 

122

 

 

 

 

 

 

 

 

 

(123

)

 

 

 

Shares withheld for taxes paid related to net

   share settlement of equity awards

 

(7

)

 

 

 

 

 

(310

)

 

 

 

 

 

 

 

 

 

 

 

(310

)

Retirement of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

23,180

 

 

 

1,692

 

 

 

 

 

 

24,872

 

Balance at June 30, 2021

 

39,797

 

 

$

398

 

 

$

303,065

 

 

$

687,158

 

 

$

(42,786

)

 

$

(3,192

)

 

$

944,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

(in thousands)

Shares

Issued

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

Balance at December 31, 2019

 

41,549

 

 

$

416

 

 

$

288,935

 

 

$

634,668

 

 

$

(47,001

)

 

$

(2,543

)

 

$

874,475

 

Stock-based compensation expense

 

 

 

 

 

 

 

1,860

 

 

 

 

 

 

 

 

 

 

 

 

1,860

 

Issuance of common stock under equity

   award plans, net of forfeitures

 

(146

)

 

 

(2

)

 

 

69

 

 

 

 

 

 

 

 

 

(67

)

 

 

 

Shares withheld for taxes paid related to net

   share settlement of equity awards

 

(39

)

 

 

 

 

 

(1,009

)

 

 

 

 

 

 

 

 

 

 

 

(1,009

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,909

)

 

 

(22,909

)

Retirement of treasury stock

 

(860

)

 

 

(9

)

 

 

(26

)

 

 

(22,874

)

 

 

 

 

 

22,909

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

13,918

 

 

 

(22,731

)

 

 

 

 

 

(8,813

)

Balance at March 31, 2020

 

40,504

 

 

 

405

 

 

 

289,829

 

 

 

625,712

 

 

 

(69,732

)

 

 

(2,610

)

 

 

843,604

 

Stock-based compensation expense

 

 

 

 

 

 

 

2,042

 

 

 

 

 

 

 

 

 

 

 

 

2,042

 

Issuance of common stock under equity

   award plans, net of forfeitures

 

57

 

 

 

1

 

 

 

82

 

 

 

 

 

 

 

 

 

(83

)

 

 

 

Shares withheld for taxes paid related to net

   share settlement of equity awards

 

(6

)

 

 

 

 

 

(124

)

 

 

 

 

 

 

 

 

 

 

 

(124

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,019

)

 

 

(13,019

)

Retirement of treasury stock

 

(500

)

 

 

(5

)

 

 

(15

)

 

 

(12,999

)

 

 

 

 

 

13,019

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

22,230

 

 

 

8,052

 

 

 

 

 

 

30,282

 

Balance at June 30, 2020

 

40,055

 

 

$

401

 

 

$

291,814

 

 

$

634,943

 

 

$

(61,680

)

 

$

(2,693

)

 

$

862,785

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

Six Months Ended June 30,

 

(in thousands)

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

48,158

 

 

$

36,148

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

25,948

 

 

 

25,206

 

Amortization of intangibles

 

5,946

 

 

 

8,212

 

Amortization of deferred grants

 

(480

)

 

 

(170

)

Impairment losses

 

1,536

 

 

 

1,800

 

Unrealized foreign currency transaction (gains) losses, net

 

1,948

 

 

 

510

 

Stock-based compensation expense

 

8,369

 

 

 

3,902

 

Deferred income tax provision (benefit)

 

(846

)

 

 

564

 

Net (gain) loss on lease termination

 

(1,670

)

 

 

 

Bad debt expense (reversals)

 

236

 

 

 

1,129

 

Unrealized (gains) losses and premiums on financial instruments, net

 

(521

)

 

 

665

 

(Earnings) losses from equity method investees

 

1,535

 

 

 

547

 

Other

 

1,011

 

 

 

(104

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Receivables, net

 

(6,793

)

 

 

294

 

Prepaid expenses

 

(1,364

)

 

 

(239

)

Other current assets

 

(1,097

)

 

 

(263

)

Deferred charges and other assets

 

(943

)

 

 

238

 

Accounts payable

 

(4,702

)

 

 

(4,184

)

Income taxes receivable / payable

 

(3,481

)

 

 

2,324

 

Accrued employee compensation and benefits

 

(6,731

)

 

 

6,998

 

Other accrued expenses and current liabilities

 

6,241

 

 

 

(279

)

Deferred revenue and customer liabilities

 

(938

)

 

 

(1,666

)

Other long-term liabilities

 

676

 

 

 

6,585

 

Operating lease assets and liabilities

 

(6,138

)

 

 

(1,575

)

Net cash provided by operating activities

 

65,900

 

 

 

86,642

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(19,103

)

 

 

(22,880

)

Cash paid for business acquisitions, net of cash acquired

 

(165

)

 

 

 

Purchase of intangible assets

 

(252

)

 

 

 

Sale of intangible assets

 

200

 

 

 

 

Other

 

59

 

 

 

592

 

Net cash (used for) investing activities

 

(19,261

)

 

 

(22,288

)

7


 

 

Sykes Enterprises, Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Continued)

 

 

Six Months Ended June 30,

 

(in thousands)

2021

 

 

2020

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of long-term debt

 

(40,000

)

 

 

(47,000

)

Proceeds from issuance of long-term debt

 

 

 

 

23,000

 

Cash paid for repurchase of common stock

 

 

 

 

(35,928

)

Taxes paid related to net share settlement of equity awards

 

(3,751

)

 

 

(1,133

)

Net cash (used for) financing activities

 

(43,751

)

 

 

(61,061

)

Effects of exchange rates on cash, cash equivalents and restricted cash

 

(2,819

)

 

 

(1,795

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

69

 

 

 

1,498

 

Cash, cash equivalents and restricted cash – beginning

 

104,396

 

 

 

129,185

 

Cash, cash equivalents and restricted cash – ending

$

104,465

 

 

$

130,683

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities

$

35,307

 

 

$

31,484

 

Cash paid during period for interest

$

584

 

 

$

1,009

 

Cash paid during period for income taxes

$

17,457

 

 

$

8,947

 

Non-cash transactions:

 

 

 

 

 

 

 

Net right-of-use assets arising from new or remeasured operating lease liabilities

$

1,836

 

 

$

12,976

 

Capital expenditures incurred but not yet paid

$

9,187

 

 

$

4,978

 

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

   accumulated other comprehensive income (loss)

$

 

 

$

(44

)

Property and equipment acquired under grant agreement

$

2,136

 

 

$

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

8


 

Sykes Enterprises, Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Six Months Ended June 30, 2021 and 2020

(Unaudited)

Note 1. Overview and Basis of Presentation

Business Sykes Enterprises, Incorporated and consolidated subsidiaries (“SYKES” or the “Company”) is a leading full lifecycle provider of global customer experience management services, multichannel demand generation and digital transformation. The Company provides differentiated full lifecycle customer experience management solutions and services primarily to Global 2000 companies and their end customers principally in the financial services, technology, communications, transportation & leisure and healthcare industries. The Company’s differentiated full lifecycle services platform effectively engages customers at every touchpoint within the customer journey, including digital media and acquisition, sales expertise, customer service, technical support and retention, many of which can be optimized through a suite of digital transformation capabilities under its SYKES Digital Services (“SDS”) group, which spans robotic process automation (“RPA”), self-service, insight analytics and digital learning.  In addition to digital transformation, the Company also provides artificial intelligence (“AI”) solutions that can be embedded and leveraged across its lifecycle offerings. Utilizing SYKES’ integrated onshore/offshore global delivery model, the Company provides its services through multiple communication channels including phone, e-mail, social media, text messaging, chat and digital self-service. The Company also provides various enterprise support services in the United States that include services for its clients’ internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, SYKES also provides fulfillment services, which include order processing, payment processing, inventory control, product delivery and product returns handling. Additionally, through the Company’s acquisition of RPA provider Symphony Ventures Ltd (“Symphony”) coupled with its investment in AI through XSell Technologies, Inc. (“XSell”), the Company also provides a suite of solutions such as consulting, implementation, hosting and managed services that optimizes its differentiated full lifecycle management services platform. The Company has operations in 2 reportable segments entitled (1) the Americas, in which the client base is primarily companies in the United States that are using the Company’s services to support their customer management needs, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim; and (2) EMEA, which includes Europe, the Middle East and Africa.

 

Proposed Transaction with Sitel Group

 

On June 17, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sitel Worldwide Corporation, a Delaware corporation (“Parent”), and Florida Mergersub, Inc., a Florida corporation and wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are subsidiaries of Sitel Group, a global provider of customer experience products and solutions. Pursuant to the Merger Agreement, and subject to the terms thereof, Parent will acquire each share of the Company’s common stock (“Company Common Stock”) issued and outstanding immediately prior to the effective time of the merger contemplated by the Merger Agreement for $54.00 in cash, without interest and subject to any required tax withholding (the “Merger”).

 

Consummation of the Merger is subject to customary closing conditions, including, among others, (i) the absence of certain legal impediments that prohibit the consummation of the Merger and the other transactions contemplated by the Merger Agreement, (ii) receipt of certain regulatory clearances, including, the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the adoption of the Merger Agreement by the holders of a majority of the issued and outstanding shares of Company Common Stock and (iv) all consents, approvals, clearances and other authorizations of any governmental entity.

 

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 21, 2021.

 

In connection with the Merger, the Company has incurred, and will continue to incur, merger-related legal and advisory costs, some of which are contingent on the closing of the Merger. Transaction expenses associated with the proposed Merger of $3.5 million were recorded in “General and administrative” costs in the Other segment in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021. The Company expects the Merger to close in the second half of 2021.

 

9


 

 

Coronavirus

On March 11, 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) a pandemic. The global nature, rapid spread and continually evolving response by governments throughout the world to combat the spread has had a negative impact on the global economy. Certain of the Company’s customer experience management centers have been impacted by local government actions restricting facility access or are operating at lower capacity utilization levels to achieve social distancing. The Company is committed to the health and safety of its workforce and ensuring business continuity for the brands it serves. In response, the Company has shifted as many employees as possible to a work-at-home model. As of the middle of July 2021, approximately 69% of agents assigned to the Company’s brick-and-mortar facilities have temporarily transitioned to a work-at-home model, 30% are working in centers and 1% of the Company’s agents are idle primarily due to the lack of technical infrastructure to work from home. The Company’s operations in the Philippines, El Salvador and Mexico have been most impacted by the governmental restrictions.

The Company continues to closely monitor the prevalence of COVID-19 and the vaccination rates in the communities where its centers are located as well as guidance from public health authorities, federal and local agencies and municipalities. The Company will work with employees and clients to transition agents back to its centers based on that guidance, but risk further disruption to the business as a result of COVID-19 and government-imposed restrictions. Over time, the Company anticipates a permanent transition to a work-at-home or hybrid model for a portion of its workforce.

Exit of Leased Space

The Company continues to reevaluate its real estate footprint in connection with the transition of a portion of its workforce to a permanent remote working environment in both the Americas and EMEA. Since April 2020, the Company has decided to terminate, sublease or abandon leases prior to the end of their lease terms at certain of its sites as approximately 4,200 seats transitioned from brick and mortar to at home agents. As such, the Company recorded cumulative impairments of right-of-use (“ROU”) assets of $13.4 million and impairments of property and equipment of $7.6 million related to these actions since the initiation of its reevaluation in April 2020, of which $0.7 million of ROU assets and $0.5 million of property and equipment impairments were recorded during the six months ended June 30, 2021. See Note 4, Fair Value, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

 

Taylor Media Corp. Acquisition

On December 31, 2020, through its wholly-owned subsidiary, Clear Link Technologies, LLC, the Company completed the acquisition of Taylor Media Corp. (“TMC”), a personal finance digital media company and owner of The Penny Hoarder. Of the total initial purchase price of $104.9 million, $87.2 million was paid upon closing using $63.0 million of additional borrowings under our credit agreement as well as cash on hand. Of the remaining $17.7 million of the purchase price, $0.2 million was used to repay outstanding debt and $17.5 million of the purchase price was deferred and is payable on December 31, 2027, the seventh anniversary of the closing. In the event TMC’s previous owner remains employed by the Company or one of its subsidiaries on December 31, 2022, the second anniversary of the closing, the deferred payment will be accelerated and due at that time. The deferred purchase price was included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.

 

The Company accounted for the TMC acquisition in accordance with ASC 805, Business Combinations (“ASC 805”), whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the closing date. The Company completed its final purchase price allocation of the assets acquired and liabilities assumed during the three months ended June 30, 2021 and no entries were recorded as a result. The final purchase price allocation resulted in $2.2 million of cash, $6.7 million of accounts receivable, $87.9 million of intangible assets, primarily domain names, content library and customer relationships, $4.2 million of other assets, $9.0 million of goodwill and $5.1 million of liabilities.

 

10


 

 

The Company has reflected TMC’s assets and liabilities in its consolidated balance sheet as of December 31, 2020 and the results of TMC’s operations have been reflected in its consolidated financial statements in the Americas segment since January 1, 2021.

 

Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for any future quarters or the year ending December 31, 2021. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.

 

Principles of Consolidation The condensed consolidated financial statements include the accounts of SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions and balances have been eliminated in consolidation.  

 

Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Other than where noted, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date and time of issuance of the condensed consolidated financial statements. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

 

Subsequent Events Subsequent events or transactions have been evaluated through the date and time of issuance of the condensed consolidated financial statements. There were no material subsequent events that required recognition or disclosure in the accompanying condensed consolidated financial statements.

 

Cash, Cash Equivalents and Restricted Cash — Cash and cash equivalents consist of cash and highly liquid short-term investments, primarily held in non-interest-bearing investments which have original maturities of less than 90 days. Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations.  

 

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheets that sum to the amounts reported in the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

December 31, 2019

 

Cash and cash equivalents

$

103,209

 

 

$

103,077

 

 

$

129,050

 

 

$

127,246

 

Restricted cash included in "Other current assets"

 

290

 

 

 

355

 

 

 

318

 

 

 

568

 

Restricted cash included in "Deferred charges and

   other assets"

 

966

 

 

 

964

 

 

 

1,315

 

 

 

1,371

 

 

$

104,465

 

 

$

104,396

 

 

$

130,683

 

 

$

129,185

 

 

Allowance for Doubtful Accounts — The Company recorded a $0.2 million and $1.1 million increase to the allowance for credit losses related to its short-term trade receivables primarily as a result of deterioration in certain clients’ credit ratings reflecting current and expected economic conditions during the six months ended June 30, 2021 and 2020, respectively, and wrote off $0.2 million and $0.4 million of the allowance for credit losses related to certain short-term trade receivables deemed to be uncollectible during the six months ended June 30, 2021 and 2020,

11


 

respectively. The Company recorded a $0.1 million increase to the allowance for credit losses related to its long-term trade receivables during the six months ended June 30, 2021 (0ne in 2020).

 

Customer-Acquisition Advertising Costs — The Company’s advertising costs are expensed as incurred. Total advertising costs included in “Direct salaries and related costs” in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Customer-acquisition advertising costs

 

21,297

 

 

 

9,826

 

 

$

40,862

 

 

$

20,008

 

 

New Accounting Standards Not Yet Adopted

 

Reference Rate Reform

 

In March 2020, the FASB issued ASU 2020-04, Compensation – Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (“LIBOR”).  These amendments are effective for all entities as of March 12, 2020 and an entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of the transition from LIBOR to alternative reference interest rates but does not expect a material impact on its financial position, results of operations or cash flows.

 

New Accounting Standards Recently Adopted

 

Income Taxes

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). These amendments simplify the accounting for income taxes by eliminating certain exceptions and also clarifying and amending certain aspects of existing guidance.  These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.  Most of the amendments are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.  Early adoption was permitted, including adoption in any interim period for which financial statements had not yet been issued. The Company’s adoption of ASU 2019-12 on January 1, 2021 did not have a material impact on its financial position, results of operations, cash flows or disclosures.

 

Significant Accounting Policies

 

There have been no new or material changes to the significant accounting policies disclosed in Note 1, Overview and Summary of Significant Accounting Policies, in the “Notes to the Consolidated Financial Statements” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Note 2. Revenues

Revenues from Contracts with Customers

Revenues for customer experience management solutions and services are recognized over time using output methods such as a per minute, per hour, per call, per transaction or per time and materials basis. RPA services revenues are primarily recognized over time using output methods such as per time and materials basis. Revenues from fulfillment services are recognized upon shipment to the customer and satisfaction of all obligations. Revenues from enterprise support services are recognized over time using output methods such as number of positions filled.

Disaggregated Revenues

The Company disaggregates its revenues from contracts with customers by service type and delivery location (see Note 14, Segments and Geographic Information), for each of its reportable segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by economic factors.

12


 

The following table represents revenues from contracts with customers disaggregated by service type and by the reportable segment for each category for the periods indicated (in thousands):

 

 

Three Months Ended June 30,

 

 

2021

 

 

2020

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer experience management solutions

   and services

$

356,108

 

 

79.3%

 

 

$

338,963

 

 

81.3%

 

Other revenues

 

319

 

 

0.1%

 

 

 

309

 

 

0.1%

 

Total Americas

 

356,427

 

 

79.4%

 

 

 

339,272

 

 

81.4%

 

EMEA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer experience management solutions

   and services

 

86,950

 

 

19.4%

 

 

 

73,285

 

 

17.6%

 

Other revenues

 

5,505

 

 

1.2%

 

 

 

4,276

 

 

1.0%

 

Total EMEA

 

92,455

 

 

20.6%

 

 

 

77,561

 

 

18.6%

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

3

 

 

0.0%

 

 

 

 

 

0.0%

 

Total Other

 

3

 

 

0.0%

 

 

 

 

 

0.0%

 

 

$

448,885

 

 

100.0%

 

 

$

416,833

 

 

100.0%

 

The following table represents revenues from contracts with customers disaggregated by service type and by the reportable segment for each category for the periods indicated (in thousands):

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer experience management solutions

   and services

$

719,561

 

 

79.4%

 

 

$

671,577

 

 

81.1%

 

Other revenues

 

585

 

 

0.0%

 

 

 

621

 

 

0.1%

 

Total Americas

 

720,146

 

 

79.4%

 

 

 

672,198

 

 

81.2%

 

EMEA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer experience management solutions

   and services

 

176,286

 

 

19.4%

 

 

 

145,918

 

 

17.6%

 

Other revenues

 

10,336

 

 

1.2%

 

 

 

9,876

 

 

1.2%

 

Total EMEA

 

186,622

 

 

20.6%

 

 

 

155,794

 

 

18.8%

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues

 

3

 

 

0.0%

 

 

 

7

 

 

0.0%

 

Total Other

 

3

 

 

0.0%

 

 

 

7

 

 

0.0%

 

 

$

906,771

 

 

100.0%

 

 

$

827,999

 

 

100.0%

 

13


 

 

 

Trade Accounts Receivable

 

The Company’s noncurrent trade accounts receivable result from contracts with customers that include renewal provisions and contracts with customers under multi-year arrangements. The Company’s trade accounts receivable, net, consisted of the following (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Trade accounts receivable, net, current (1)

$

401,251

 

 

$

398,112

 

Trade accounts receivable, net, noncurrent (2)

 

30,408

 

 

 

30,021

 

 

$

431,659

 

 

$

428,133

 

 

(1) Included in “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets.

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

 

Deferred Revenue and Customer Liabilities

Deferred revenue and customer liabilities consisted of the following (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Deferred revenue

$

3,322

 

 

$

2,916

 

Customer arrangements with termination rights

 

15,479

 

 

 

15,771

 

Estimated refund liabilities

 

5,469

 

 

 

6,115

 

 

$

24,270

 

 

$

24,802

 

 

The Company expects to recognize the majority of its deferred revenue as of June 30, 2021 over the next 180 days. Revenues of $0.1 million and $0.2 million were recognized during the three months ended June 30, 2021 and 2020, respectively, and $2.9 million and $2.9 million were recognized during the six months ended June 30, 2021 and 2020, respectively, from amounts included in deferred revenue at December 31, 2020 and 2019, respectively.

The Company expects to recognize the majority of the customer arrangements with termination rights into revenue as the Company has not historically experienced a high rate of contract terminations.

Estimated refund liabilities are generally resolved within 180 days, once it is determined whether the requisite service levels and client requirements were achieved to settle the contingency.

Note 3. Leases

 

The Company leases facilities for its corporate headquarters, many of its customer experience management centers, several regional support offices and data centers. These leases are classified as operating leases in accordance with ASC 842, Leases, and are included in “Operating lease right-of-use assets,” “Operating lease liabilities” and “Long-term operating lease liabilities” in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2021. The Company has 0 finance leases.

Lease costs, net of sublease income, of $15.3 million and $15.5 million for the three months ended June 30, 2021 and 2020, respectively, and $30.9 million and $31.5 million for the six months ended June 30, 2021 and 2020, respectively, were primarily included in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

Additional supplemental information related to leases was as follows:

 

June 30, 2021

 

 

December 31, 2020

 

Weighted average remaining lease term of operating leases

4.2 years

 

 

4.3 years

 

Weighted average discount rate of operating leases

 

3.4

%

 

 

3.4

%

14


 

 

Maturities of operating lease liabilities as of June 30, 2021 were as follows (in thousands):

 

Amount

 

2021 (remainder of the year)

$

25,367

 

2022

 

47,200

 

2023

 

31,600

 

2024

 

21,999

 

2025

 

14,725

 

2026 and thereafter

 

19,706

 

Total future lease payments

 

160,597

 

Less: Imputed interest

 

11,934

 

Present value of future lease payments

 

148,663

 

Less: Operating lease liabilities

 

48,321

 

Long-term operating lease liabilities

$

100,342

 

 

Exit of Leased Space

The Company continues to reevaluate its real estate footprint in connection with a transition of a portion of its workforce to a permanent remote working environment in both the Americas and EMEA. Since April 2020, the Company decided to terminate, sublease or abandon leases prior to the end of their lease terms at certain of its sites and recorded impairments of ROU assets as a result (see Note 4, Fair Value, for further information). During the three and six months ended June 30, 2021, the Company terminated 2 leases which resulted in a $1.7 million gain on lease terminations which was recorded in “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

Note 4. Fair Value

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Additionally, ASC 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for how these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair value hierarchy:

 

Level 1 Quoted prices for identical instruments in active markets.

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

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

 

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

 

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

 

15


 

 

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

 

Cash, Short-Term and Other Investments and Accounts Payable The carrying values for cash, short-term and other investments, and accounts payable approximate their fair values.

 

Long-Term Debt The carrying value of long-term debt approximates its estimated fair value as the debt bears interest based on variable market rates, as outlined in the debt agreement.

 

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

 

Investments Held in Rabbi Trust The investment assets of the rabbi trust are valued using quoted market prices in active markets, which are classified in Level 1 of the fair value hierarchy. For additional information about the deferred compensation plan, refer to Note 7, Investments Held in Rabbi Trust.

 

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

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

Balance at

 

 

Quoted

Prices in

Active Markets

For Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

June 30, 2021

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts (1)

$

617

 

 

$

0

 

 

$

617

 

 

$

0

 

Equity investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

14,357

 

 

 

14,357

 

 

 

0

 

 

 

0

 

Debt investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

5,242

 

 

 

5,242

 

 

 

0

 

 

 

0

 

 

$

20,216

 

 

$

19,599

 

 

$

617

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts (1)

$

1,076

 

 

$

0

 

 

$

1,076

 

 

$

0

 

 

$

1,076

 

 

$

0

 

 

$

1,076

 

 

$

0

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

Balance at

 

 

Quoted

Prices in

Active Markets

For Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

December 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts (1)

$

337

 

 

$

0

 

 

$

337

 

 

$

0

 

Equity investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

11,263

 

 

 

11,263

 

 

 

0

 

 

 

0

 

Debt investments held in rabbi trust for the

   Deferred Compensation Plan (2)

 

5,517

 

 

 

5,517

 

 

 

0

 

 

 

0

 

 

$

17,117

 

 

$

16,780

 

 

$

337

 

 

$

0

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts (1)

$

2,478

 

 

$

0

 

 

$

2,478

 

 

$

0

 

 

$

2,478

 

 

$

0

 

 

$

2,478

 

 

$

0

 

 

(1) See Note 6, Financial Derivatives, for the classification in the accompanying Condensed Consolidated Balance Sheets.  

(2) Included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheets.  See Note 7, Investments Held in Rabbi Trust.

16


 

 

Non-Recurring Fair Value

 

Certain assets are not required to be measured at fair value on a recurring basis and are reported at their carrying values, including goodwill, other intangible assets, other long-lived assets, ROU assets and equity method investments. The carrying value of these assets is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable (and at least annually for goodwill and indefinite-lived intangible assets), and if applicable, written down to fair value.

 

The following table summarizes the total impairment losses in the accompanying Condensed Consolidated Statements of Operations related to nonrecurring fair value measurements of certain assets (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

$

386

 

 

$

760

 

 

$

442

 

 

$

760

 

Operating lease right-of-use assets

 

 

 

 

1,040

 

 

 

301

 

 

 

1,040

 

 

 

386

 

 

 

1,800

 

 

 

743

 

 

 

1,800

 

EMEA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

 

 

 

 

77

 

 

 

 

Operating lease right-of-use assets

 

 

 

 

 

 

 

398

 

 

 

 

 

 

 

 

 

 

 

 

475

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

 

 

 

 

318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

386

 

 

$

1,800

 

 

$

1,536

 

 

$

1,800

 

 

The Company continues to reevaluate its real estate footprint in connection with a shift of a portion of its workforce to a permanent remote working environment in both the Americas and EMEA and transitioned approximately 4,200 seats from brick and mortar to at home agents since April 2020. The Company decided to terminate, sublease or abandon leases prior to the end of their lease terms at certain of its sites and recorded impairment losses related to the exit of leased facilities and the leasehold improvements, equipment, furniture and fixtures located in these sites which were not recoverable.

 

As the fair value of certain ROU assets was less than the carrying value, the Company recognized an impairment of the applicable ROU assets, reducing the carrying value of the ROU assets to an estimated fair value of $0.4 million and $5.0 million during the six months ended June 30, 2021 and 2020, respectively. The fair value of the ROU assets where the Company intends to sublease was estimated using Level 2 inputs such as market comparables to estimate future cash flows expected from sublease income over the remaining lease terms. Further changes in the estimated amount or timing of cash flows from sublease arrangements could result in additional impairment charges. The impairment of property and equipment reduced the carrying value of the applicable assets to their fair value of $0 during the six months ended June 30, 2021 and 2020, respectively.

 

The Company also recorded an impairment charge of $0.3 million during the six months ended June 30, 2021 related to software that was no longer being utilized.  The impairment of the software reduced the carrying value of the applicable asset to its fair value of $0.

 

17


 

 

Note 5. Goodwill and Intangible Assets

Intangible Assets

The following table presents the Company’s purchased intangible assets as of June 30, 2021 (in thousands):

 

 

Gross

Intangibles

 

 

Accumulated

Amortization

 

 

Net

Intangibles

 

 

Weighted

Average

Amortization

Period (years)

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

195,587

 

 

$

(138,830

)

 

$

56,757

 

 

 

10

 

Trade names and trademarks

 

7,955

 

 

 

(3,743

)

 

 

4,212

 

 

 

8

 

Non-compete agreements

 

1,051

 

 

 

(872

)

 

 

179

 

 

 

3

 

Content library

 

4,835

 

 

 

(965

)

 

 

3,870

 

 

 

5

 

Proprietary software

 

870

 

 

 

(870

)

 

 

 

 

 

5

 

 

 

210,298

 

 

 

(145,280

)

 

 

65,018

 

 

 

9

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domain names

 

162,873

 

 

 

 

 

 

162,873

 

 

N/A

 

 

$

373,171

 

 

$

(145,280

)

 

$

227,891

 

 

 

 

 

 

The following table presents the Company’s purchased intangible assets as of December 31, 2020 (in thousands):

 

 

Gross

Intangibles

 

 

Accumulated

Amortization

 

 

Net

Intangibles

 

 

Weighted

Average

Amortization

Period (years)

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

195,116

 

 

$

(133,689

)

 

$

61,427

 

 

 

10

 

Trade names and trademarks

 

7,918

 

 

 

(3,225

)

 

 

4,693

 

 

 

8

 

Non-compete agreements

 

1,100

 

 

 

(712

)

 

 

388

 

 

 

3

 

Content library

 

4,851

 

 

 

(551

)

 

 

4,300

 

 

 

5

 

Proprietary software

 

870

 

 

 

(835

)

 

 

35

 

 

 

5

 

 

 

209,855

 

 

 

(139,012

)

 

 

70,843

 

 

 

9

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domain names

 

163,132

 

 

 

 

 

 

163,132

 

 

N/A

 

 

$

372,987

 

 

$

(139,012

)

 

$

233,975

 

 

 

 

 

 

The Company’s estimated future amortization expense for the succeeding years relating to the purchased intangible assets resulting from acquisitions completed prior to June 30, 2021 is as follows (in thousands):

 

 

Amount

 

2021 (remainder of the year)

$

5,803

 

2022

 

10,421

 

2023

 

8,311

 

2024

 

8,077

 

2025

 

7,963

 

2026

 

6,982

 

2027 and thereafter

 

17,461

 

 

Goodwill

Changes in goodwill for the six months ended June 30, 2021 consisted of the following (in thousands):

 

 

January 1, 2021

 

 

Acquisition-

Related (1)

 

 

Impairment

 

 

Effect of

Foreign

Currency

 

 

June 30, 2021

 

Americas

$

269,472

 

 

$

176

 

 

$

0

 

 

$

393

 

 

$

270,041

 

EMEA

 

29,937

 

 

 

0

 

 

 

0

 

 

 

(309

)

 

 

29,628

 

 

$

299,409

 

 

$

176

 

 

$

0

 

 

$

84

 

 

$

299,669

 

18


 

 

 

Changes in goodwill for the year ended December 31, 2020 consisted of the following (in thousands):

 

 

January 1, 2020

 

 

Acquisition-

Related (1)

 

 

Impairment (2)

 

 

Effect of

Foreign

Currency

 

 

December 31, 2020

 

Americas

$

259,953

 

 

$

8,851

 

 

$

 

 

$

668

 

 

$

269,472

 

EMEA

 

51,294

 

 

 

 

 

 

(21,792

)

 

 

435

 

 

 

29,937

 

 

$

311,247

 

 

$

8,851

 

 

$

(21,792

)

 

$

1,103

 

 

$

299,409

 

 

(1) The six months ended June 30, 2021 includes the impact of adjustments to acquired goodwill upon refinements of the purchase price allocation of TMC’s assets acquired and liabilities assumed.  The year ended December 31, 2020 includes the goodwill recorded related to the TMC acquisition.

(2) The year ended December 31, 2020 includes the impairment of a portion of the Symphony reporting unit’s goodwill.

 

The Company performs its annual goodwill impairment test during the third quarter, or more frequently if indicators of impairment exist.

For the annual goodwill impairment test, the Company elected to forgo the option to first assess qualitative factors and performed its annual quantitative goodwill impairment test as of July 31, 2020.  Under ASC 350, Intangibles – Goodwill and Other, the carrying value of assets is calculated at the reporting unit level. The quantitative assessment of goodwill includes comparing a reporting unit’s calculated fair value to its carrying value. The calculation of fair value requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the projected long-term growth rate and determination of the Company’s weighted average cost of capital (“WACC”), which are classified as Level 3 inputs. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

The process of evaluating the fair value of the reporting units is highly subjective and requires significant judgment and estimates as the reporting units operate in a number of markets and geographical regions. The Company considered the income and market approaches to determine its best estimates of fair value, which incorporated the following significant assumptions:

Revenue projections, including revenue growth during the forecast periods;

EBITDA margin projections over the forecast periods;

Estimated income tax rates;

Estimated capital expenditures; and

Discount rates based on various inputs, including the risks associated with the specific reporting units as well as their revenue growth and EBITDA margin assumptions.

As of July 31, 2020, the Company had 8 reporting units, seven of which had goodwill. The Company concluded that goodwill was not impaired for six of its 7 of its reporting units with goodwill, based on generally accepted valuation techniques and the significant assumptions outlined above.  The fair values of 3 of the 7 reporting units were substantially in excess of their carrying value. As part of this analysis, the Company considered the ongoing deterioration in general economic and market conditions due to the pandemic and its impact on each of the Company’s reporting units’ performance. The Clearlink, Latin America and Qelp reporting units’ fair value exceeded their respective carrying values, although the fair value cushion was not substantial. The Clearlink, Latin America and Qelp reporting units are at risk of future impairment if projected operating results are not met or other inputs into the fair value measurement model change.

The Symphony reporting unit’s carrying value exceeded its fair value as of the July 31, 2020 annual impairment analysis, which resulted in a non-cash goodwill impairment of $21.8 million. Symphony’s on-site consulting model has been negatively impacted by travel and shelter-in-place restrictions imposed by governments, as well as the shift by businesses to work from home in an attempt to reduce the spread of COVID-19. These restrictions have continued longer than initially anticipated and have resulted in further declines in the cash flow projections at Symphony for 2020 as well as the Company’s projections for 2021 at the time of the annual impairment test. There is significant uncertainty regarding the length of time these restrictions will remain in place. An additional impairment charge may arise in the future if Symphony’s operations experience a protracted delay in the resumption

19


 

of its operations or a significant shift in client demand results from the economic downturn. As of June 30, 2021, the Company believes there was no impairment related to Symphony’s remaining $19.3 million of goodwill as no triggering events were identified during the three and six months ended June 30, 2021.

As of June 30, 2021, the Company believes there were 0 indicators of impairment related to Clearlink’s $83.4 million of goodwill (which includes goodwill from the TMC acquisition), Latin America’s $18.1 million of goodwill and Qelp’s $10.4 million of goodwill. It is possible that future changes in circumstances, including a more prolonged and/or severe pandemic, or future changes in the variable associated with the judgments, assumptions and estimates used in assessing the fair value of the reporting units, could require the Company to record additional non-cash impairment charges.

Note 6. Financial Derivatives

Cash Flow Hedges The Company has derivative assets and liabilities relating to outstanding forward contracts and options, designated as cash flow hedges, as defined under ASC 815, Derivatives and Hedging (“ASC 815”), consisting of Philippine Peso, Costa Rican Colon, Hungarian Forint and Romanian Leu contracts. These foreign currency contracts are entered into to hedge the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction that is attributable to changes in exchange rates.

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

 

 

June 30, 2021

 

 

December 31, 2020

 

Deferred gains (losses) in AOCI

$

(1,017

)

 

$

(2,188

)

Tax on deferred gains (losses) in AOCI

 

3

 

 

 

(3

)

Deferred gains (losses) in AOCI, net of taxes

$

(1,014

)

 

$

(2,191

)

Deferred gains (losses) expected to be reclassified to "Revenues"

   from AOCI during the next twelve months

$

(869

)

 

 

 

 

 

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

Non-Designated Hedges

Foreign Currency Contracts The Company also periodically enters into foreign currency hedge contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to protect the Company’s interests against adverse foreign currency moves relating primarily to intercompany receivables and payables, and other assets and liabilities that are denominated in currencies other than the Company’s subsidiaries’ functional currencies.  

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

 

 

June 30, 2021

 

December 31, 2020

 

Contract Type

Notional

Amount

in USD

 

 

Settle

Through

Date

 

Notional

Amount

in USD

 

 

Settle

Through

Date

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

US Dollars/Philippine Pesos

$

40,000

 

 

April 2022

 

$

12,000

 

 

June 2021

 

Forwards:

 

 

 

 

 

 

 

 

 

 

 

 

 

US Dollars/Philippine Pesos

$

2,000

 

 

August 2021

 

 

 

 

 

 

US Dollars/Costa Rican Colones

 

34,000

 

 

August 2022

 

 

36,000

 

 

December 2021

 

Euros/Hungarian Forints

 

1,138

 

 

December 2021

 

 

 

 

 

 

Euros/Romanian Leis

 

7,514

 

 

December 2021

 

 

 

 

 

 

Non-designated hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

$

8,693

 

 

November 2021

 

$

12,439

 

 

November 2021

 

 

Master netting agreements exist with each respective counterparty to reduce credit risk by permitting net settlement of derivative positions. In the event of default by the Company or one of its counterparties, these agreements include

20


 

a set-off clause that provides the non-defaulting party the right to net settle all derivative transactions, regardless of the currency and settlement date.  The maximum amount of loss due to credit risk that, based on gross fair value, the Company would incur if parties to the derivative transactions that make up the concentration failed to perform according to the terms of the contracts was $0.6 million and $0.3 million as of June 30, 2021 and December 31, 2020, respectively. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions are asset positions of $0.5 million and $0.3 million as of June 30, 2021 and December 31, 2020, respectively, and liability positions of $1.0 million and $2.4 million as of June 30, 2021 and December 31, 2020, respectively.

Although legally enforceable master netting arrangements exist between the Company and each counterparty, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in the accompanying Condensed Consolidated Balance Sheets. Additionally, the Company is not required to pledge, nor is it entitled to receive, cash collateral related to these derivative transactions.

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

 

 

 

 

 

Derivative Assets

 

 

 

Balance Sheet Location

 

June 30, 2021

 

 

December 31, 2020

 

Derivatives designated as cash

   flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other current assets

 

$

341

 

 

$

154

 

Derivatives not designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other current assets

 

 

276

 

 

 

183

 

Total derivative assets

 

 

 

$

617

 

 

$

337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

 

 

Balance Sheet Location

 

June 30, 2021

 

 

December 31, 2020

 

Derivatives designated as cash

   flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other accrued expenses and current liabilities

 

$

905

 

 

$

2,253

 

Foreign currency contracts

 

Other long-term liabilities

 

 

148

 

 

 

 

 

 

 

 

 

1,053

 

 

 

2,253

 

Derivatives not designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other accrued expenses and current liabilities

 

 

23

 

 

 

225

 

Total derivative liabilities

 

 

 

$

1,076

 

 

$

2,478

 

 

The following table presents the effect of the Company’s derivative instruments included in the accompanying condensed consolidated financial statements (in thousands):

 

 

 

Location of Gains (Losses) in

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

Net Income

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenues

 

 

 

$

448,885

 

 

$

416,833

 

 

$

906,771

 

 

$

827,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash

   flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Gains (losses) recognized in AOCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Foreign currency contracts

 

 

 

$

(504

)

 

$

1,179

 

 

 

(296

)

 

 

868

 

   Gains (losses) reclassified from AOCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Foreign currency contracts

 

Revenues

 

$

(676

)

 

$

1,438

 

 

 

(1,433

)

 

 

2,364

 

Derivatives not designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Gains (losses) recognized from foreign

      currency contracts

 

Other income (expense), net

 

$

(42

)

 

$

(164

)

 

$

(7

)

 

$

(410

)

21


 

 

 

Note 7.  Investments Held in Rabbi Trust

 

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

 

 

June 30, 2021

 

 

December 31, 2020

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Mutual funds

$

11,560

 

 

$

19,599

 

 

$

10,332

 

 

$

16,780

 

 

The mutual funds held in rabbi trust were 73% equity-based and 27% debt-based as of June 30, 2021. Net investment gains (losses) included in “Other income (expense), net” in the accompanying Condensed Consolidated Statements of Operations consists of the following (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net realized gains (losses) from sale of trading

   securities

$

309

 

 

$

12

 

 

$

734

 

 

$

62

 

Dividend and interest income

 

41

 

 

 

48

 

 

 

73

 

 

 

81

 

Net unrealized holding gains (losses)

 

773

 

 

 

1,756

 

 

 

841

 

 

 

(384

)

 

$

1,123

 

 

$

1,816

 

 

$

1,648

 

 

$

(241

)

 

Note 8. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) consist of the following (in thousands):

 

 

Foreign

Currency

Translation

Adjustments

 

 

Unrealized

Gain

(Loss) on

Net

Investment

Hedge

 

 

Unrealized

Gain (Loss)

on

Cash Flow

Hedging

Instruments

 

 

Unrealized

Actuarial

Gain

(Loss)

Related

to Pension

Liability

 

 

Unrealized

Gain

(Loss) on

Postretirement

Obligation

 

 

Total

 

Balance at January 1, 2020

$

(52,749

)

 

$

1,046

 

 

$

2,290

 

 

$

2,324

 

 

$

88

 

 

$

(47,001

)

Pre-tax amount

 

12,461

 

 

 

 

 

 

(839

)

 

 

(1,914

)

 

 

 

 

 

9,708

 

Tax (provision) benefit

 

 

 

 

 

 

 

(253

)

 

 

182

 

 

 

 

 

 

(71

)

Reclassification of (gain) loss to net income

 

 

 

 

 

 

 

(3,418

)

 

 

(129

)

 

 

(88

)

 

 

(3,635

)

Foreign currency translation

 

(162

)

 

 

 

 

 

29

 

 

 

133

 

 

 

 

 

 

 

Balance at December 31, 2020

 

(40,450

)

 

 

1,046

 

 

 

(2,191

)

 

 

596

 

 

 

 

 

 

(40,999

)

Pre-tax amount

 

(2,927

)

 

 

 

 

 

(296

)

 

 

 

 

 

 

 

 

(3,223

)

Tax (provision) benefit

 

 

 

 

 

 

 

11

 

 

 

1

 

 

 

 

 

 

12

 

Reclassification of (gain) loss to net income

 

 

 

 

 

 

 

1,428

 

 

 

(4

)

 

 

 

 

 

1,424

 

Foreign currency translation

 

(25

)

 

 

 

 

 

34

 

 

 

(9

)

 

 

 

 

 

 

Balance at June 30, 2021

$

(43,402

)

 

$

1,046

 

 

$

(1,014

)

 

$

584

 

 

$

 

 

$

(42,786

)

 

22


 

 

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Statements of

Operations

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Location

Gain (loss) on cash flow hedging

   instruments: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax amount

$

(676

)

 

$

1,438

 

 

$

(1,433

)

 

$

2,364

 

 

Revenues

Tax (provision) benefit

 

4

 

 

 

(42

)

 

 

5

 

 

 

(70

)

 

Income taxes

Reclassification to net income

 

(672

)

 

 

1,396

 

 

 

(1,428

)

 

 

2,294

 

 

 

Actuarial gain (loss) related to

   pension liability: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax amount

 

2

 

 

 

23

 

 

 

3

 

 

 

46

 

 

Other income (expense), net

Tax (provision) benefit

 

1

 

 

 

4

 

 

 

1

 

 

 

7

 

 

Income taxes

Reclassification to net income

 

3

 

 

 

27

 

 

 

4

 

 

 

53

 

 

 

Gain (loss) on postretirement

   obligation: (2)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to net income

 

 

 

 

22

 

 

 

 

 

 

44

 

 

Other income (expense), net

 

$

(669

)

 

$

1,445

 

 

$

(1,424

)

 

$

2,391

 

 

 

 

(1) See Note 6, Financial Derivatives, for further information.

(2) See Note 12, Defined Benefit Pension Plan and Postretirement Benefits, for further information.

(3) No related tax (provision) benefit.

The Company has accrued income taxes on earnings which it plans to repatriate to the U.S. Any remaining earnings as well as other outside basis differences associated with the Company’s investments in its foreign subsidiaries are considered to be indefinitely reinvested and no provision for income taxes on those earnings or translation adjustments has been provided. See Note 9, Income Taxes, for further information.

Note 9. Income Taxes

The Company’s effective tax rates were as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Effective tax rate

 

21.5

%

 

 

22.3

%

 

 

20.3

%

 

 

24.3

%

The decrease in the effective tax rate for the three months ended June 30, 2021 as compared to 2020 was primarily due to a $1.0 million discrete tax benefit relating to changes in the Company’s valuation allowances, which was partially offset by the UK tax rate change during the three months ended June 30, 2021. The decrease was also affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which were individually material, also impacted the rate. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the tax impact of permanent differences, state income and foreign withholding taxes, partially offset by the recognition of net tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits.

The decrease in the effective tax rate for the six months ended June 30, 2021 as compared to 2020 was primarily due to $2.0 million in discrete tax benefits relating to changes in the Company’s valuation allowances, the Philippines tax law change and stock compensation recognized, partially offset by the UK tax rate change during the six months ended June 30, 2021. The decrease was also affected by shifts in earnings among the various jurisdictions in which the Company operates. Several additional factors, none of which were individually material, also impacted the rate. The difference between the Company’s effective tax rate as compared to the U.S. statutory federal tax rate of 21.0% was primarily due to the recognition of net tax benefits resulting from foreign tax rate differentials, income earned in certain tax holiday jurisdictions and tax credits, partially offset by the tax impact of permanent differences, state income and foreign withholding taxes.

 

The Company provides U.S. income taxes on the earnings of foreign subsidiaries unless they are exempted from taxation. No additional income taxes have been provided for any indefinitely reinvested earnings or outside basis differences. Determining the amount of unrecognized deferred tax liability related to any remaining outside basis

23


 

difference in these entities is not practicable due to the inherent complexity of the multi-jurisdictional tax environment in which the Company operates.

The Company is currently under audit in several tax jurisdictions. The Company believes it has adequate reserves related to all matters pertaining to these audits. Should the Company experience unfavorable outcomes from these audits, such outcomes could have a significant impact on its financial condition, results of operations and cash flows.

Note 10. Earnings Per Share

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

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

39,779

 

 

 

40,318

 

 

 

39,711

 

 

 

40,726

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock appreciation rights, restricted

   stock, restricted stock units and shares held in

   rabbi trust

 

163

 

 

 

62

 

 

 

240

 

 

 

131

 

Total weighted average diluted shares outstanding

 

39,942

 

 

 

40,380

 

 

 

39,951

 

 

 

40,857

 

Anti-dilutive shares excluded from the diluted earnings

   per share calculation

 

86

 

 

 

101

 

 

 

52

 

 

 

51

 

 

On August 18, 2011, the Company’s Board of Directors (the “Board”) authorized the Company to purchase up to 5.0 million shares of its outstanding common stock (the “2011 Share Repurchase Program”). On March 16, 2016, the Board authorized an increase of 5.0 million shares to the 2011 Share Repurchase Program for a total of 10.0 million shares.  A total of 8.3 million shares have been repurchased under the 2011 Share Repurchase Program since inception. The shares are purchased, from time to time, through open market purchases or in negotiated private transactions, and the purchases are based on factors, including but not limited to, the stock price, management discretion and general market conditions. The 2011 Share Repurchase Program has no expiration date.  

The shares repurchased under the Company’s 2011 Share Repurchase Program were as follows (none in 2021) (in thousands, except per share amounts):

 

 

 

Total Number of

 

 

 

 

 

Total Cost of

 

 

 

Shares

 

 

Range of Prices Paid Per Share

 

 

Shares

 

 

 

Repurchased

 

 

Low

 

 

High

 

 

Repurchased

 

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

500

 

 

$

23.90

 

 

$

27.94

 

 

$

13,019

 

Six Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

1,360

 

 

$

23.33

 

 

$

31.91

 

 

$

35,928

 

 

24


 

 

Note 11. Commitments and Loss Contingencies

Purchase Commitments

 

The Company enters into various purchase commitment agreements with third-party vendors in the ordinary course of business whereby the Company commits to purchase goods and services used in its normal operations. These agreements generally are not cancelable, range from one to five-year periods and may contain fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the minimum annual commitments.    

 

Loss Contingencies

Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with ASC 450, Contingencies (“ASC 450”). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450.

The Company received a state audit assessment and is currently rebutting the position. The Company has determined that the likelihood of a liability is reasonably possible and developed a range of possible loss up to $2.0 million, net of federal benefit, as of June 30, 2021.

 

Two lawsuits relating to the Merger, each filed by an individual shareholder, have been filed in the United States District Court for the Southern District of New York, captioned Shiva Stein v. Sykes Enterprises, Incorporated, et al., Case No. 1:21-cv-06043, and Matthew Whitfield v. Sykes Enterprises, Incorporated, et al., Case No. 1:21-cv-06163.

 

The Company and individual members of its Board of Directors are named as defendants in each complaint. The complaints generally allege that the defendants violated the Exchange Act by making untrue statements in, or failing to disclose material information in, the Company’s preliminary proxy statement filed on July 12, 2021, and generally seeks, among other things, injunctive relief prohibiting consummation of the Merger and unspecified damages and attorneys’ fees.

The defendants deny the allegations made in the complaints. Additional complaints arising out of or relating to the Merger Agreement and the transactions contemplated thereby may be filed in the future. If additional similar complaints are filed, absent new or different allegations that are material, the Company will not necessarily announce such additional filings.

The Company, from time to time, is involved in legal actions arising in the ordinary course of business. With respect to any such other currently pending matters, management believes that the Company has adequate legal defenses and/or, when possible and appropriate, has provided adequate accruals related to those matters such that the ultimate outcome will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.  

25


 

Note 12. Defined Benefit Pension Plan and Postretirement Benefits

Defined Benefit Pension Plans

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Service cost (1)

$

183

 

 

$

108

 

 

$

364

 

 

$

213

 

Interest cost (2)

 

61

 

 

 

52

 

 

 

122

 

 

 

103

 

Recognized actuarial (gains) (2)

 

(2

)

 

 

(23

)

 

 

(3

)

 

 

(46

)

 

$

242

 

 

$

137

 

 

$

483

 

 

$

270

 

 

(1) Included in "Direct salaries and related costs" and “General and administrative” costs in the accompanying Condensed Consolidated Statements of Operations.

(2) Included in "Other income (expense), net" in the accompanying Condensed Consolidated Statements of Operations.

Employee Retirement Savings Plans

The Company maintains a 401(k) plan covering defined employees who meet established eligibility requirements. The Company’s contributions included in the accompanying Condensed Consolidated Statements of Operations were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

401(k) plan contributions

$

801

 

 

$

711

 

 

$

1,652

 

 

$

1,491

 

 

Note 13. Stock-Based Compensation

The following table summarizes the stock-based compensation expense (primarily in the Americas) and income tax benefits related to the stock-based compensation, both plan and non-plan related (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock-based compensation (expense) (1)

$

(3,618

)

 

$

(2,042

)

 

$

(8,369

)

 

$

(3,902

)

Income tax benefit (2)

 

869

 

 

 

490

 

 

 

2,009

 

 

 

936

 

 

(1) Included in "General and administrative" costs in the accompanying Condensed Consolidated Statements of Operations.

(2) Included in "Income taxes" in the accompanying Condensed Consolidated Statements of Operations.

During the six months ended June 30, 2021, the Company granted 0.3 million performance-based restricted shares/restricted stock units and 0.1 million service-based restricted shares/restricted stock units under the Company’s 2019 Plan, all at a weighted average grant-date fair value of $44.79 per share.

Note 14. Segments and Geographic Information

The Company operates within 2 regions, the Americas and EMEA. Each region represents a reportable segment comprised of aggregated regional operating segments, which portray similar economic characteristics. The Company aligns its business into 2 segments to effectively manage the business and support the customer care needs of every client and to respond to the demands of the Company’s global customers.

The reportable segments consist of (1) the Americas, which includes the United States, Canada, Latin America, Australia and the Asia Pacific Rim, and provides outsourced customer experience management solutions and services (with an emphasis on inbound technical support, digital support and demand generation, and customer service) and technical staffing and (2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer experience management solutions and services (with an emphasis on technical support and customer service) and fulfillment services. The sites within Latin America, Australia and the Asia Pacific Rim are included in the Americas segment given the nature of the business and client profile, which is primarily made up of U.S.-based companies that are using the Company’s services in these locations to support their customer experience management needs.  

26


 

Information about the Company’s reportable segments is as follows (in thousands):

 

 

Americas

 

 

EMEA

 

 

Other (1)

 

 

Consolidated

 

Three Months Ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

356,427

 

 

$

92,455

 

 

$

3

 

 

$

448,885

 

Percentage of revenues

 

79.4

%

 

 

20.6

%

 

 

0.0

%

 

 

100.0

%

Depreciation, net

$

9,864

 

 

$

2,212

 

 

$

733

 

 

$

12,809

 

Amortization of intangibles

$

2,061

 

 

$

898

 

 

$

 

 

$

2,959

 

Income (loss) from operations

$

47,275

 

 

$

4,593

 

 

$

(22,147

)

 

$

29,721

 

Total other income (expense), net

 

 

 

 

 

 

 

 

 

(187

)

 

 

(187

)

Income taxes

 

 

 

 

 

 

 

 

 

(6,354

)

 

 

(6,354

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

$

23,180

 

Three Months Ended June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

339,272

 

 

$

77,561

 

 

$

 

 

$

416,833

 

Percentage of revenues

 

81.4

%

 

 

18.6

%

 

 

0.0

%

 

 

100.0

%

Depreciation, net

$

10,088

 

 

$

1,818

 

 

$

724

 

 

$

12,630

 

Amortization of intangibles

$

3,281

 

 

$

812

 

 

$

 

 

$

4,093

 

Income (loss) from operations

$

40,479

 

 

$

4,078

 

 

$

(17,344

)

 

$

27,213

 

Total other income (expense), net

 

 

 

 

 

 

 

 

 

1,402

 

 

 

1,402

 

Income taxes

 

 

 

 

 

 

 

 

 

(6,385

)

 

 

(6,385

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

22,230

 

Six Months Ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

720,146

 

 

$

186,622

 

 

$

3

 

 

$

906,771

 

Percentage of revenues

 

79.4

%

 

 

20.6

%

 

 

0.0

%

 

 

100.0

%

Depreciation, net

$

20,085

 

 

$

4,368

 

 

$

1,471

 

 

$

25,924

 

Amortization of intangibles

$

4,157

 

 

$

1,789

 

 

$

 

 

$

5,946

 

Income (loss) from operations

$

92,147

 

 

$

11,261

 

 

$

(42,157

)

 

$

61,251

 

Total other income (expense), net

 

 

 

 

 

 

 

 

 

(834

)

 

 

(834

)

Income taxes

 

 

 

 

 

 

 

 

 

(12,259

)

 

 

(12,259

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

48,158

 

Six Months Ended June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

672,198

 

 

$

155,794

 

 

$

7

 

 

$

827,999

 

Percentage of revenues

 

81.2

%

 

 

18.8

%

 

 

0.0

%

 

 

100.0

%

Depreciation, net

$

20,121

 

 

$

3,523

 

 

$

1,447

 

 

$

25,091

 

Amortization of intangibles

$

6,567

 

 

$

1,645

 

 

$

 

 

$

8,212

 

Income (loss) from operations

$

76,258

 

 

$

7,258

 

 

$

(31,909

)

 

$

51,607

 

Total other income (expense), net

 

 

 

 

 

 

 

 

 

(3,848

)

 

 

(3,848

)

Income taxes

 

 

 

 

 

 

 

 

 

(11,611

)

 

 

(11,611

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

36,148

 

 

(1) Other items (including corporate and other costs, other income and expense, and income taxes) are included for purposes of reconciling to the Company’s consolidated totals as shown in the tables above for the periods shown.  Inter-segment revenues are not material to the Americas and EMEA segment results.

The Company’s reportable segments are evaluated regularly by its chief operating decision maker to decide how to allocate resources and assess performance. The chief operating decision maker evaluates performance based upon reportable segment revenue and income (loss) from operations. Because assets by segment are not reported to or used by the Company’s chief operating decision maker to allocate resources, or to assess performance, total assets by segment are not disclosed.

27


 

The following table represents a disaggregation of revenue from contracts with customers by delivery location and by the reportable segment (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

157,174

 

 

$

164,773

 

 

$

327,178

 

 

$

322,437

 

The Philippines

 

70,076

 

 

 

62,567

 

 

 

138,070

 

 

 

127,006

 

Costa Rica

 

36,722

 

 

 

39,250

 

 

 

74,248

 

 

 

74,131

 

Canada

 

29,392

 

 

 

22,955

 

 

 

57,379

 

 

 

48,196

 

El Salvador

 

19,368

 

 

 

16,902

 

 

 

37,364

 

 

 

35,622

 

Other

 

43,695

 

 

 

32,825

 

 

 

85,907

 

 

 

64,806

 

Total Americas

 

356,427

 

 

 

339,272

 

 

 

720,146

 

 

 

672,198

 

EMEA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

27,252

 

 

 

24,116

 

 

 

56,275

 

 

 

48,767

 

Other

 

65,203

 

 

 

53,445

 

 

 

130,347

 

 

 

107,027

 

Total EMEA

 

92,455

 

 

 

77,561

 

 

 

186,622

 

 

 

155,794

 

Total Other

 

3

 

 

 

 

 

 

3

 

 

 

7

 

 

$

448,885

 

 

$

416,833

 

 

$

906,771

 

 

$

827,999

 

 

Note 15. Other Income (Expense)

 

Other income (expense), net consists of the following (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Foreign currency transaction gains (losses)

$

(72

)

 

$

48

 

 

$

(257

)

 

$

(1,558

)

Gains (losses) on derivative instruments not designated

   as hedges

 

(42

)

 

 

(164

)

 

 

(7

)

 

 

(410

)

Net investment gains (losses) on investments held in

   rabbi trust

 

1,123

 

 

 

1,816

 

 

 

1,648

 

 

 

(241

)

Other miscellaneous income (expense)

 

(917

)

 

 

97

 

 

 

(1,614

)

 

 

(787

)

 

$

92

 

 

$

1,797

 

 

$

(230

)

 

$

(2,996

)

 

Note 16. Related Party Transactions

In January 2008, the Company entered into a lease for a customer experience management center located in Kingstree, South Carolina. The landlord, Kingstree Office One, LLC, is an entity controlled by John H. Sykes, the founder, former Chairman and former Chief Executive Officer of the Company and the father of Charles Sykes, President and Chief Executive Officer of the Company. The lease payments on the 20-year lease were negotiated at or below market rates, and the lease is cancellable at the option of the Company. Upon giving notice in September 2020, the Company paid a lease termination penalty of $0.1 million and the Company vacated the space as of March 31, 2021.  The Company paid $0.1 million to the landlord during the three months ended June 30, 2020 (NaN in the three months ended June 30, 2021), $0.1 million during the six months ended June 30, 2021 and $0.2 million during the six months ended June 30, 2020, under the terms of the lease.

28


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Sykes Enterprises, Incorporated

400 North Ashley Drive

Tampa, Florida

 

Results of Review of Interim Financial Information

 

We have reviewed the accompanying condensed consolidated balance sheet of Sykes Enterprises, Incorporated and subsidiaries (the "Company") as of June 30, 2021, the related condensed consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity for the three-month and six-month periods ended June 30, 2021 and 2020, and of cash flows for the six-month periods ended June 30, 2021 and 2020, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

 

This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP

Tampa, Florida

 

August 9, 2021

29


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the Sykes Enterprises, Incorporated (“SYKES,” “our,” “we” or “us”) Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”).

Our discussion and analysis may contain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, and projections about SYKES, our beliefs, and assumptions made by us, including our belief that our operations have not been materially impacted by the April 2020 cyber incident, as discussed in our Form 10-Q for the three months ended March 31, 2020, as filed with the SEC, or the October 2020 cyber incident, as discussed in Note 18, Subsequent Event, in our Form 10-Q for the three and nine months ended September 30, 2020, as filed with the SEC. In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time. Words such as "believe," "estimate," "project," "expect," “intend,” “may," "anticipate," "plan," "seek," variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives, or goals also are forward-looking statements. Further, statements about the effects of the novel coronavirus (“COVID-19”) pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our clients, third parties and us.  These statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this report. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any such forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the impact of economic recessions in the U.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (iv) the timing of significant orders for our products and services, (v) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (vi) changes in applicable accounting principles or interpretations of such principles, (vii) difficulties or delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing and other objectives, (ix) construction delays of new or expansion of existing customer experience management centers, (x) delays in our ability to develop new products and services and market acceptance of new products and services, (xi) rapid technological change, (xii) loss or addition of significant clients, (xiii) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel, (xv) our ability to continue the growth of our support service revenues through additional technical and customer experience management centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on the demand for outsourcing, (xxii) risk of interruption of technical and customer experience management center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with acquisitions not being realized, or not being realized within the anticipated time period, (xxvii) risks related to the integration of the acquisitions and the impairment of any related goodwill, (xxviii) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement and (xxix) other risk factors that are identified herein and in our most recent Annual Report on Form 10-K for the year ended December 31, 2020, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

30


 

Executive Summary

We are a leading full lifecycle provider of global customer experience management services, multichannel demand generation and digital transformation. We provide differentiated full lifecycle customer experience management solutions and services primarily to Global 2000 companies and their end customers principally in the financial services, technology, communications, transportation & leisure and healthcare industries. Our differentiated full lifecycle services platform effectively engages customers at every touchpoint within the customer journey, including digital media and acquisition, sales expertise, customer service, technical support and retention, many of which can be optimized by a suite of digital transformation capabilities under our SYKES Digital Services (“SDS”) group, which spans robotic process automation (“RPA”), self-service, insight analytics and digital learning. In addition to digital transformation, we also provide artificial intelligence (“AI”) solutions that can be embedded and leveraged across our lifecycle offerings. 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 experience management solutions and services with an emphasis on inbound multichannel demand generation, customer service and technical support to our clients’ customers. These services, which represented 98.7% and 98.9% of consolidated revenues during the three months ended June 30, 2021 and 2020, respectively, and 98.8% and 98.7% of consolidated revenues during the six months ended June 30, 2021 and 2020, respectively, 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 (“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 include order processing, payment processing, inventory control, product delivery and product returns handling. Additionally, through our acquisition of RPA provider Symphony Ventures Ltd (“Symphony”) coupled with our investment in AI through XSell Technologies, Inc. (“XSell”), we also provide a suite of digital transformation capabilities that optimizes our differentiated full lifecycle management services platform. 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 experience management centers across six continents, including North America, South America, Europe, Asia, Australia and Africa. We deliver cost-effective solutions that generate demand, enhance the customer service experience, promote stronger brand loyalty, and bring about high levels of performance and profitability.

Recent Developments

 

Proposed Transaction with Sitel Global

 

On June 17, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sitel Worldwide Corporation, a Delaware corporation (“Parent”), and Florida Mergersub, Inc., a Florida corporation and wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are subsidiaries of Sitel Group, a global provider of customer experience products and solutions. Pursuant to the Merger Agreement, and subject to the terms thereof, Parent will acquire each share of the Company’s common stock (“Company Common Stock”) issued and outstanding immediately prior to the effective time of the merger contemplated by the Merger Agreement for $54.00 in cash, without interest and subject to any required tax withholding (the “Merger”). Consummation of the Merger is subject to customary closing conditions, including, among others, (i) the absence of certain legal impediments that prohibit the consummation of the Merger and the other transactions contemplated by the Merger Agreement, (ii) receipt of certain regulatory clearances, including, the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the adoption of the Merger Agreement by the holders of a majority of the issued and outstanding shares of Company Common Stock and (iv) all consents, approvals, clearances and other authorizations of any governmental entity.

 

The full text of the Merger Agreement was filed as Exhibit 2.1 to our Current Report on Form 8-K filed on June 21, 2021.

31


 

 

In connection with the Merger, we have incurred, and will continue to incur, merger-related legal and advisory costs, some of which are contingent on the closing of the Merger. Transaction expenses associated with the proposed Merger of $3.5 million were recorded in “General and administrative” costs in the Other segment in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021. We expect the Merger to close in the second half of 2021.

Coronavirus

On March 11, 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) a pandemic. The global nature, rapid spread and continually evolving response by governments throughout the world to combat the spread has had a negative impact on the global economy. Certain of our customer experience management centers have been impacted by local government actions restricting facility access or are operating at lower capacity utilization levels to achieve social distancing. We are committed to the health and safety of our workforce and ensuring business continuity for the brands we serve. In response, we have shifted as many employees as possible to a work-at-home model. As of the middle of July 2021, approximately 69% of agents assigned to our brick-and-mortar have temporarily transitioned to a work-at-home model, 30% are working in our centers and 1% of our agents are idle primarily due to the lack of technical infrastructure to work from home. Our operations in the Philippines, El Salvador and Mexico have been most impacted by the governmental restrictions.

We continue to closely monitor the prevalence of COVID-19 and the vaccination rates in the communities where our centers are located as well as guidance from public health authorities, federal and local agencies and municipalities. We will work with employees and clients to transition agents back to our centers based on that guidance, but risk further disruption to our business as a result of COVID-19 and government-imposed restrictions. Over time, we anticipate a permanent transition to a work-at-home or hybrid model for a portion of our workforce.

Exit of Leased Space

We continue to reevaluate our real estate footprint in connection with the transition of a portion of our workforce to a permanent remote working environment in both the Americas and EMEA. Since April 2020, we have decided to terminate, sublease or abandon leases prior to the end of their lease terms at certain of our sites as approximately 4,200 seats transitioned from brick and mortar to at home agents. As such, we recorded impairments of right-of-use (“ROU”) assets of $13.4 million and impairments of property and equipment of $7.6 million since the initiation of our reevaluation in April 2020, of which $0.7 million of ROU assets and $0.5 million of property and equipment impairments were recorded during the six months ended June 30, 2021. See Note 4, Fair Value, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information. Annualized lease expense savings of $0.7 million is expected from the actions in 2021, of which approximately 70% is anticipated to be realized as cash savings.  

Taylor Media Corp. Acquisition

On December 31, 2020, through our wholly-owned subsidiary, Clear Link Technologies, LLC, we completed the acquisition of Taylor Media Corp. (“TMC”), a personal finance digital media company and owner of The Penny Hoarder. Of the total initial purchase price of $104.9 million, $87.2 million was paid upon closing using $63.0 million of additional borrowings under our credit agreement as well as cash on hand. Of the remaining $17.7 million of the purchase price, $0.2 million was used to repay outstanding debt and $17.5 million of the purchase price was deferred and is payable on December 31, 2027, the seventh anniversary of the closing. In the event TMC’s previous owner remains employed by the Company or one of its subsidiaries on December 31, 2022, the second anniversary of the closing, the deferred payment will be accelerated and due at that time. TMC’s assets and liabilities have been reflected in our consolidated balance sheet as of December 31, 2020 in the Americas segment and the results of TMC’s operations have been reflected in our consolidated financial statements since January 1, 2021.

32


 

Results of Operations

The following table sets forth, for the periods indicated, the amounts presented in the accompanying Condensed Consolidated Statements of Operations as well as the change between the periods:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

2021

 

 

2020

 

 

$ Change

 

 

2021

 

 

2020

 

 

$ Change

 

Revenues

$

448,885

 

 

$

416,833

 

 

$

32,052

 

 

$

906,771

 

 

$

827,999

 

 

$

78,772

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct salaries and related costs

 

292,086

 

 

 

268,433

 

 

 

23,653

 

 

 

591,563

 

 

 

535,378

 

 

 

56,185

 

General and administrative

 

110,924

 

 

 

102,664

 

 

 

8,260

 

 

 

220,551

 

 

 

205,911

 

 

 

14,640

 

Depreciation, net

 

12,809

 

 

 

12,630

 

 

 

179

 

 

 

25,924

 

 

 

25,091

 

 

 

833

 

Amortization of intangibles

 

2,959

 

 

 

4,093

 

 

 

(1,134

)

 

 

5,946

 

 

 

8,212

 

 

 

(2,266

)

Impairment of long-lived assets

 

386

 

 

 

1,800

 

 

 

(1,414

)

 

 

1,536

 

 

 

1,800

 

 

 

(264

)

Total operating expenses

 

419,164

 

 

 

389,620

 

 

 

29,544

 

 

 

845,520

 

 

 

776,392

 

 

 

69,128

 

Income from operations

 

29,721

 

 

 

27,213

 

 

 

2,508

 

 

 

61,251

 

 

 

51,607

 

 

 

9,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

103

 

 

 

165

 

 

 

(62

)

 

 

201

 

 

 

428

 

 

 

(227

)

Interest (expense)

 

(382

)

 

 

(560

)

 

 

178

 

 

 

(805

)

 

 

(1,280

)

 

 

475

 

Other income (expense), net

 

92

 

 

 

1,797

 

 

 

(1,705

)

 

 

(230

)

 

 

(2,996

)

 

 

2,766

 

Total other income (expense), net

 

(187

)

 

 

1,402

 

 

 

(1,589

)

 

 

(834

)

 

 

(3,848

)

 

 

3,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

29,534

 

 

 

28,615

 

 

 

919

 

 

 

60,417

 

 

 

47,759

 

 

 

12,658

 

Income taxes

 

6,354

 

 

 

6,385

 

 

 

(31

)

 

 

12,259

 

 

 

11,611

 

 

 

648

 

Net income

$

23,180

 

 

$

22,230

 

 

$

950

 

 

$

48,158

 

 

$

36,148

 

 

$

12,010

 

 

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Revenues

 

 

Three Months Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

Americas

$

356,427

 

 

79.4%

 

 

$

339,272

 

 

81.4%

 

 

$

17,155

 

EMEA

 

92,455

 

 

20.6%

 

 

 

77,561

 

 

18.6%

 

 

 

14,894

 

Other

 

3

 

 

0.0%

 

 

 

 

 

0.0%

 

 

 

3

 

Consolidated

$

448,885

 

 

100.0%

 

 

$

416,833

 

 

100.0%

 

 

$

32,052

 

 

Consolidated revenues increased $32.1 million, or 7.7%, for the three months ended June 30, 2021 from the comparable period in 2020.

The increase in Americas’ revenues was due to higher volumes from existing clients of $12.8 million, new clients of $19.5 million and a favorable foreign currency impact of $5.8 million, partially offset by end-of-life client programs of $20.9 million primarily in the communications and technology verticals. Revenues from our offshore operations represented 44.9% of Americas’ revenues in 2021, compared to 42.6% for the comparable period in 2020.

The increase in EMEA’s revenues was due to higher volumes from existing clients of $6.4 million, new clients of $2.5 million and a favorable foreign currency impact of $8.8 million, partially offset by end-of-life client programs of $2.8 million primarily in the communications and technology verticals.

On a consolidated basis, we had 44,600 brick-and-mortar seats as of June 30, 2021, a decrease of 4,000 seats from the comparable period in 2020, driven by decisions made by certain clients to permanently alter their delivery mix away from brick and mortar to a home agent solution due to COVID-19, coupled with the consolidation of underutilized facilities in both the Americas and EMEA. On a segment basis, 37,100 seats were located in the Americas, a decrease of 3,300 seats from the comparable period in 2020, and 7,500 seats were located in EMEA, a decrease of 700 seats from the comparable period in 2020.

On a consolidated basis, the capacity utilization rate was 73%, compared to 73% in the comparable period in 2020. As of the middle of July 2021, approximately 69% of agents who typically work in our brick-and-mortar facilities

33


 

have temporarily transitioned to work at home, 30% are working in our centers and the remaining 1% of agents are at home but idle.

The capacity utilization rate for the Americas was 73% in 2021 and in the comparable period in 2020. The capacity utilization rate for EMEA in 2021 was 72%, compared to 69% in the comparable period in 2020. We strive to attain a capacity utilization rate of 85% at each of our locations.  Capacity utilization is measured by taking the number of agents and indirect support headcount and dividing it by the number of seats provisioned for utilization. Agents assigned to brick-and-mortar facilities but temporarily working from home to meet social distancing requirements resulting from the COVID-19 pandemic are included as if they were working in a center.  Capacity utilization is a critical metric for us as it is used as an input to the pricing, revenue and margin drivers of our business as well as capital allocation.

Direct Salaries and Related Costs

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Americas

$

226,429

 

 

63.5%

 

 

$

214,606

 

 

63.3%

 

 

$

11,823

 

 

0.2%

 

EMEA

 

65,657

 

 

71.0%

 

 

 

53,827

 

 

69.4%

 

 

 

11,830

 

 

1.6%

 

Consolidated

$

292,086

 

 

65.1%

 

 

$

268,433

 

 

64.4%

 

 

$

23,653

 

 

0.7%

 

 

The increase of $23.7 million in direct salaries and related costs included an unfavorable foreign currency impact of $5.0 million in the Americas and an unfavorable foreign currency impact of $6.5 million in EMEA.

The increase in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher customer-acquisition advertising costs of 2.9% driven primarily by the activity at recently acquired TMC in the current period and higher auto tow claim costs of 0.4%, partially offset by lower compensation costs of 1.7% primarily due to higher agent productivity in the healthcare and financial services verticals, lower travel costs of 1.2% primarily driven by employee transportation costs during the pandemic in the prior period and lower other costs of 0.2%.

The increase in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher compensation costs of 1.1% primarily driven by lower agent productivity in the financial services, communications and technology verticals and higher fulfillment materials costs of 1.0%, partially offset by lower communications costs of 0.4% and lower other costs of 0.1%.

General and Administrative

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Americas

$

70,412

 

 

19.8%

 

 

$

69,018

 

 

20.3%

 

 

$

1,394

 

 

-0.5%

 

EMEA

 

19,095

 

 

20.7%

 

 

 

17,026

 

 

22.0%

 

 

 

2,069

 

 

-1.3%

 

Other

 

21,417

 

 

-

 

 

 

16,620

 

 

-

 

 

 

4,797

 

 

-

 

Consolidated

$

110,924

 

 

24.7%

 

 

$

102,664

 

 

24.6%

 

 

$

8,260

 

 

0.1%

 

 

The increase of $8.3 million in general and administrative expenses included an unfavorable foreign currency impact of $1.2 million in the Americas and an unfavorable foreign currency impact of $1.8 million in EMEA.

The decrease in Americas’ general and administrative expenses, as a percentage of revenues, was primarily attributable to a higher net gain on lease terminations of 0.6%, lower merger and integration costs of 0.4% and lower facility-related costs of 0.3%, partially offset by higher compensation costs of 0.4%, higher software and maintenance costs of 0.2% and higher legal and professional fees of 0.2%.

The decrease in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to lower compensation costs of 0.9% and lower facility-related costs of 0.8%, partially offset by higher severance costs of 0.4%.

34


 

The increase in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher merger and integration costs of $3.7 million resulting primarily from the proposed Merger with Sitel Group and higher compensation costs of $1.3 million driven by higher long-term and annual performance-based compensation in the current period, partially offset by lower other costs of $0.2 million.

Depreciation, Amortization and Impairment of Long-Lived Assets

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Depreciation, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

9,864

 

 

2.8%

 

 

$

10,088

 

 

3.0%

 

 

$

(224

)

 

-0.2%

 

EMEA

 

2,212

 

 

2.4%

 

 

 

1,818

 

 

2.3%

 

 

 

394

 

 

0.1%

 

Other

 

733

 

 

-

 

 

 

724

 

 

-

 

 

 

9

 

 

-

 

Consolidated

$

12,809

 

 

2.9%

 

 

$

12,630

 

 

3.0%

 

 

$

179

 

 

-0.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

2,061

 

 

0.6%

 

 

$

3,281

 

 

1.0%

 

 

$

(1,220

)

 

-0.4%

 

EMEA

 

898

 

 

1.0%

 

 

 

812

 

 

1.0%

 

 

 

86

 

 

0.0%

 

Other

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Consolidated

$

2,959

 

 

0.7%

 

 

$

4,093

 

 

1.0%

 

 

$

(1,134

)

 

-0.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of long-lived

   assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

386

 

 

0.1%

 

 

$

1,800

 

 

0.5%

 

 

$

(1,414

)

 

-0.4%

 

EMEA

 

 

 

0.0%

 

 

 

 

 

0.0%

 

 

 

 

 

0.0%

 

Other

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Consolidated

$

386

 

 

0.1%

 

 

$

1,800

 

 

0.4%

 

 

$

(1,414

)

 

-0.3%

 

 

The increase in depreciation was primarily due to new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades as well as accelerated depreciation related to certain site exits, partially offset by the impact since the prior period of certain fully depreciated fixed assets as well as assets that were impaired.

 

The decrease in amortization was primarily due to the impact since the prior period of certain fully amortized intangible assets.

See Note 4, Fair Value, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information on the impairment of long-lived assets.

Other Income (Expense)

 

 

Three Months Ended June 30,

 

 

 

 

 

(in thousands)

2021

 

 

2020

 

 

$ Change

 

Interest income

$

103

 

 

$

165

 

 

$

(62

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense)

$

(382

)

 

$

(560

)

 

$

178

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency transaction gains (losses)

$

(72

)

 

$

48

 

 

$

(120

)

Gains (losses) on derivative instruments not

   designated as hedges

 

(42

)

 

 

(164

)

 

 

122

 

Gains (losses) on investments held in rabbi trust

 

1,123

 

 

 

1,816

 

 

 

(693

)

Other miscellaneous income (expense)

 

(917

)

 

 

97

 

 

 

(1,014

)

Total other income (expense), net

$

92

 

 

$

1,797

 

 

$

(1,705

)

 

The decrease in interest income was primarily due to lower invested balances and interest rates than in the comparable period.

 

35


 

 

The decrease in interest (expense) was primarily due to lower average outstanding borrowings and interest rates than in the comparable period.

 

The change in other income (expense), net, was primarily due to an increase in losses from XSell, our equity method investee, and a decrease in the value of investments held in rabbi trust. See Note 7, Investments Held in Rabbi Trust, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

Income Taxes

 

 

Three Months Ended June 30,

 

 

 

 

 

(in thousands)

2021

 

 

2020

 

 

$ Change

 

Income before income taxes

$

29,534

 

 

$

28,615

 

 

$

919

 

Income taxes

 

6,354

 

 

 

6,385

 

 

 

(31

)

 

 

 

 

 

 

 

 

 

% Change

 

Effective tax rate

 

21.5

%

 

 

22.3

%

 

 

-0.8

%

 

The decrease in the effective tax rate in 2021 compared to 2020 was primarily due to a $1.0 million discrete tax benefit relating to changes in the Company’s valuation allowances, which was partially offset by the UK tax rate change in the current period. The decrease was also affected by shifts in earnings among the various jurisdictions in which we operate. Several additional factors, none of which are individually material, also impacted the rate.

 

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Revenues

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

Americas

$

720,146

 

 

79.4%

 

 

$

672,198

 

 

81.2%

 

 

$

47,948

 

EMEA

 

186,622

 

 

20.6%

 

 

 

155,794

 

 

18.8%

 

 

 

30,828

 

Other

 

3

 

 

0.0%

 

 

 

7

 

 

0.0%

 

 

 

(4

)

Consolidated

$

906,771

 

 

100.0%

 

 

$

827,999

 

 

100.0%

 

 

$

78,772

 

 

Consolidated revenues increased $78.8 million, or 9.5%, for the six months ended June 30, 2021 from the comparable period in 2020.

The increase in Americas’ revenues was due to higher volumes from existing clients of $47.9 million, new clients of $35.6 million and a favorable foreign currency impact of $9.2 million, partially offset by end-of-life client programs of $44.8 million primarily in the communications, technology and financial services verticals. Revenues from our offshore operations represented 43.8% of Americas’ revenues in 2021, compared to 42.7% for the comparable period in 2020.

The increase in EMEA’s revenues was due to higher volumes from existing clients of $15.6 million, new clients of $4.1 million and a favorable foreign currency impact of $16.9 million, partially offset by end-of-life client programs of $5.8 million primarily in the communications and technology verticals.

Direct Salaries and Related Costs

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Americas

$

460,926

 

 

64.0%

 

 

$

427,234

 

 

63.6%

 

 

$

33,692

 

 

0.4%

 

EMEA

 

130,637

 

 

70.0%

 

 

 

108,144

 

 

69.4%

 

 

 

22,493

 

 

0.6%

 

Consolidated

$

591,563

 

 

65.2%

 

 

$

535,378

 

 

64.7%

 

 

$

56,185

 

 

0.5%

 

 

The increase of $56.2 million in direct salaries and related costs included an unfavorable foreign currency impact of $7.5 million in the Americas and an unfavorable foreign currency impact of $12.1 million in EMEA.

The increase in Americas’ direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher customer-acquisition advertising costs of 2.5% driven primarily by the activity at recently acquired TMC in

36


 

the current period, partially offset by lower compensation costs of 0.9%, lower travel costs of 0.8%, lower communication costs of 0.2% and lower recruiting costs of 0.2%.

The increase in EMEA’s direct salaries and related costs, as a percentage of revenues, was primarily attributable to higher fulfillment materials costs of 0.8% and higher compensation costs of 0.7%, partially offset by lower software purchased for resale of 0.2%, lower rebillable costs of 0.2% and lower other costs of 0.5%.

General and Administrative

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Americas

$

142,088

 

 

19.7%

 

 

$

140,218

 

 

20.9%

 

 

$

1,870

 

 

-1.2%

 

EMEA

 

38,092

 

 

20.4%

 

 

 

35,224

 

 

22.6%

 

 

 

2,868

 

 

-2.2%

 

Other

 

40,371

 

 

-

 

 

 

30,469

 

 

-

 

 

 

9,902

 

 

-

 

Consolidated

$

220,551

 

 

24.3%

 

 

$

205,911

 

 

24.9%

 

 

$

14,640

 

 

-0.6%

 

 

The increase of $14.6 million in general and administrative expenses included an unfavorable foreign currency impact of $1.9 million in the Americas and an unfavorable foreign currency impact of $3.3 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%, a higher net gain on lease terminations of 0.3%, lower merger and integration costs of 0.3%, lower travel costs of 0.2% and lower other costs of 0.2%, partially offset by higher compensation costs of 0.2% and higher software and maintenance costs of 0.2%.

The decrease in EMEA’s general and administrative expenses, as a percentage of revenues, was primarily attributable to lower compensation costs of 0.9%, lower facility-related costs of 0.9% and lower travel costs of 0.4%.

The increase in Other general and administrative expenses, which includes corporate and other costs, was primarily attributable to higher compensation costs of $7.4 million driven by higher long-term and annual performance-based compensation and mark-to-market adjustment of executive deferred compensation in the current period and higher merger and integration costs of $3.8 million resulting primarily from the proposed Merger with Sitel Group, partially offset by lower insurance costs of $0.6 million, lower legal and professional fees of $0.4 million and lower travel costs of $0.3 million.

Depreciation, Amortization and Impairment of Long-Lived Assets

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

(in thousands)

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

$ Change

 

 

Change in % of Revenues

 

Depreciation, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

20,085

 

 

2.8%

 

 

$

20,121

 

 

3.0%

 

 

$

(36

)

 

-0.2%

 

EMEA

 

4,368

 

 

2.3%

 

 

 

3,523

 

 

2.3%

 

 

 

845

 

 

0.0%

 

Other

 

1,471

 

 

-

 

 

 

1,447

 

 

-

 

 

 

24

 

 

-

 

Consolidated

$

25,924

 

 

2.9%

 

 

$

25,091

 

 

3.0%

 

 

$

833

 

 

-0.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

4,157

 

 

0.6%

 

 

$

6,567

 

 

1.0%

 

 

$

(2,410

)

 

-0.4%

 

EMEA

 

1,789

 

 

1.0%

 

 

 

1,645

 

 

1.1%

 

 

 

144

 

 

-0.1%

 

Other

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Consolidated

$

5,946

 

 

0.7%

 

 

$

8,212

 

 

1.0%

 

 

$

(2,266

)

 

-0.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of long-lived

   assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

743

 

 

0.1%

 

 

$

1,800

 

 

0.3%

 

 

$

(1,057

)

 

-0.2%

 

EMEA

 

475

 

 

0.3%

 

 

 

 

 

0.0%

 

 

 

475

 

 

0.3%

 

Other

 

318

 

 

-

 

 

 

 

 

-

 

 

 

318

 

 

-

 

Consolidated

$

1,536

 

 

0.2%

 

 

$

1,800

 

 

0.2%

 

 

$

(264

)

 

0.0%

 

37


 

 

 

The increase in depreciation was primarily due to new depreciable fixed assets placed into service supporting site expansions and infrastructure upgrades as well as accelerated depreciation related to certain site exits, partially offset by the impact since the prior period of certain fully depreciated fixed assets as well as assets that were impaired.

 

The decrease in amortization was primarily due to the impact since the prior period of certain fully amortized intangible assets.

See Note 4, Fair Value, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information on the impairment of long-lived assets.

Other Income (Expense)

 

 

Six Months Ended June 30,

 

 

 

 

 

(in thousands)

2021

 

 

2020

 

 

$ Change

 

Interest income

$

201

 

 

$

428

 

 

$

(227

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense)

$

(805

)

 

$

(1,280

)

 

$

475

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency transaction gains (losses)

$

(257

)

 

$

(1,558

)

 

$

1,301

 

Gains (losses) on derivative instruments not

   designated as hedges

 

(7

)

 

 

(410

)

 

 

403

 

Gains (losses) on investments held in rabbi trust

 

1,648

 

 

 

(241

)

 

 

1,889

 

Other miscellaneous income (expense)

 

(1,614

)

 

 

(787

)

 

 

(827

)

Total other income (expense), net

$

(230

)

 

$

(2,996

)

 

$

2,766

 

 

The decrease in interest income was primarily due to lower invested balances and interest rates than in the comparable period.

 

The decrease in interest (expense) was primarily due to lower average outstanding borrowings and interest rates than in the comparable period.

 

The change in other income (expense), net, was primarily due to an increase in the value of investments held in rabbi trust, partially offset by an increase in losses from XSell. See Note 7, Investments Held in Rabbi Trust, in the accompanying “Notes to Condensed Consolidated Financial Statements” for further information.

Income Taxes

 

 

Six Months Ended June 30,

 

 

 

 

 

(in thousands)

2021

 

 

2020

 

 

$ Change

 

Income before income taxes

$

60,417

 

 

$

47,759

 

 

$

12,658

 

Income taxes

 

12,259

 

 

 

11,611

 

 

 

648

 

 

 

 

 

 

 

 

 

 

% Change

 

Effective tax rate

 

20.3

%

 

 

24.3

%

 

 

-4.0

%

 

The decrease in the effective tax rate in 2021 compared to 2020 was primarily due to $2.0 million in discrete tax benefits relating to changes in the Company’s valuation allowances, Philippines tax law changes and stock compensation recognized, partially offset by the UK tax rate change in the current period. The decrease was also affected by shifts in earnings among the various jurisdictions in which we operate. Several additional factors, none of which are individually material, also impacted the rate.

 

Client Concentration

Our top ten clients accounted for 38.6% and 45.9% of our consolidated revenues in the three months ended June 30, 2021 and 2020, respectively, and 39.4% and 45.3% of our consolidated revenues in the six months ended June 30, 2021 and 2020, respectively.

38


 

Total revenues by segment from our largest client in each of the periods, which was in the financial services vertical for the three and six months ended June 30, 2021 and 2020, were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

Americas

$

26,413

 

 

7.4%

 

 

$

32,123

 

 

9.5%

 

 

$

58,749

 

 

8.2%

 

 

$

61,726

 

 

9.2%

 

EMEA

 

 

 

0.0%

 

 

 

 

 

0.0%

 

 

 

 

 

0.0%

 

 

 

 

 

0.0%

 

 

$

26,413

 

 

5.9%

 

 

$

32,123

 

 

7.7%

 

 

$

58,749

 

 

6.5%

 

 

$

61,726

 

 

7.5%

 

 

Total revenues by segment of our clients that each individually represents 10% or greater of that segment’s revenues in each of the periods were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

 

Amount

 

 

% of Revenues

 

Americas

$

 

 

0.0%

 

 

$

 

 

0.0%

 

 

$

 

 

0.0%

 

 

$

 

 

0.0%

 

EMEA

 

32,982

 

 

35.7%

 

 

 

17,683

 

 

22.8%

 

 

 

67,297

 

 

36.1%

 

 

 

35,156

 

 

22.6%

 

 

$

32,982

 

 

7.3%

 

 

$

17,683

 

 

4.2%

 

 

$

67,297

 

 

7.4%

 

 

$

35,156

 

 

4.2%

 

Liquidity and Capital Resources

Our primary sources of liquidity are typically 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 experience management services, invest in technology applications and tools to further develop our service offerings and for working capital and other general corporate purposes, including the repurchase of our common stock in the open market and to fund acquisitions. In future periods, we intend similar uses of these funds.

Our Board of Directors authorized us to purchase up to 10.0 million shares of our outstanding common stock (the “2011 Share Repurchase Program”) on August 18, 2011, as amended on March 16, 2016. A total of 8.3 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 the six months ended June 30, 2021, cash increased due to $65.9 million from operating activities, $0.2 million from the sale of intangible assets and $0.2 million of other miscellaneous cash inflows, partially offset by $40.0 million used to repay long-term debt, $19.1 million used for capital expenditures, $3.8 million used to pay taxes related to net share settlement of equity awards, $0.3 million to purchase intangible assets and $0.2 million related to paying for an acquisition, resulting in a $0.1 million increase in available cash, cash equivalents and restricted cash (including the unfavorable effects of foreign currency exchange rates on cash, cash equivalents and restricted cash of $2.8 million).

Net cash flows provided by operating activities for the six months ended June 30, 2021 were $65.9 million, compared to $86.6 million for the comparable period in 2020. The $20.7 million decrease in net cash flows from operating activities was due to a $33.5 million decrease in cash flows from assets and liabilities, partially offset by a $12.0 million increase in net income and a net increase of $0.8 million in non-cash reconciling items, such as stock compensation, impairment, depreciation, amortization, deferred income taxes, unrealized foreign currency transaction gains (losses), net unrealized gains (losses) and premiums on financial instruments, and net gains (losses) on lease terminations. The $33.5 million decrease in 2021 from 2020 in cash flows from assets and liabilities was principally a result of a $13.6 million decrease in other liabilities, a $7.1 million increase in accounts receivable, a $5.8 million change in net taxes payable, a $4.6 million change in operating lease assets and liabilities and a $3.1 million increase in other assets, partially offset by a $0.7 million increase in deferred revenue and customer liabilities. The $13.6 million decrease in the change in other liabilities was primarily due to a $13.7 million decrease principally related to accrued employee compensation and benefits driven by an increase in annual performance-based compensation and the timing of payroll as well as a $5.9 million decrease principally related to the timing of other long-term liabilities driven by the deferral of our portion of social security taxes in the prior period as

39


 

permitted by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, partially offset by a $6.5 million increase principally related to the timing of other accrued expenses and current liabilities. The $7.1 million decrease in the change in accounts receivable was primarily due to the timing of billing and collections. The $5.8 million decrease in net taxes payable was primarily due to extensions of payment deadlines in the prior period granted by several jurisdictions. The $4.6 million change in operating lease assets and liabilities was primarily due to the timing of rent payments as compared to timing of ROU asset amortization. The $3.1 million increase in the change in other assets was primarily due to a $1.2 million increase in deferred charges and other assets and a $1.1 million increase in prepaid expenses.

Capital expenditures, which are generally funded by cash generated from operating activities, available cash balances and borrowings available under our credit facilities, were $19.1 million for the six months ended June 30, 2021, compared to $22.9 million for the comparable period in 2020, a decrease of $3.8 million. In 2021, we anticipate capital expenditures in the range of $47.0 million to $53.0 million, primarily for systems infrastructure upgrades and additions as well as new seat additions.

On February 14, 2019, we entered into a $500 million senior revolving credit facility (the “2019 Credit Agreement”) with a group of lenders, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender (“KeyBank”), the lenders named therein, and KeyBanc Capital Markets Inc. as Lead Arranger and Sole Book Runner. The 2019 Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. We are not currently aware of any inability of our lenders to provide access to the full commitment of funds that exist under the 2019 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 2019 Credit Agreement will mature on February 14, 2024. As of June 30, 2021, we were in compliance with all loan requirements of the 2019 Credit Agreement and had $23.0 million of outstanding borrowings under this facility. For additional discussion of our credit agreements, see Note 18, Borrowings in the “Notes to the Consolidated Financial Statements” section of our Annual Report on Form 10-K for the year ended December 31, 2020.

Our credit agreements had an average daily utilization of $44.8 million and $71.4 million during the three months ended June 30, 2021 and 2020, respectively, and $49.4 million and $67.6 million during the six months ended June 30, 2021 and 2020, respectively. During the three months ended June 30, 2021 and 2020, the related interest expense, excluding the commitment fee and the amortization of deferred loan fees, was $0.1 million and $0.3 million, respectively, which represented weighted average interest rates of 1.1% and 1.5%, respectively.  During the six months ended June 30, 2021 and 2020, the related interest expense, excluding the commitment fee and the amortization of deferred loan fees, was $0.3 million and $0.7 million, respectively, which represented weighted average interest rates of 1.2% and 2.1%, respectively.

We repaid $40.0 million, net, of long-term debt outstanding under the 2019 Credit Agreement during the six months ended June 30, 2021.  Our future interest expense for the remainder of 2021 will vary based on our usage of the 2019 Credit Agreement and market interest rates.

We are currently under audit in several tax jurisdictions. We believe we have adequate reserves related to all matters pertaining to these audits. Should we experience unfavorable outcomes from these audits, such outcomes could have a significant impact on our financial condition, results of operations and cash flows.

As part of the July 1, 2018 WhistleOut Pty Ltd acquisition, an AUD 14.0 million three-year retention bonus was payable in installments on or around July 1, 2019, 2020 and 2021. We paid the first installment of AUD 6.0 million ($4.2 million) in July 2019. We accelerated the 2021 installment of the retention bonus and paid AUD 8.0 million ($5.6 million) in July 2020, which represented both the 2020 and 2021 installments. No further amounts are due. As part of the Symphony acquisition on November 1, 2018, a portion of the purchase price, with an acquisition date present value of GBP 7.9 million ($10.0 million), was deferred and is payable in equal installments over three years, on or around November 1, 2019, 2020 and 2021. We paid the first installment of GBP 2.7 million ($3.3 million) in October 2019 and the second installment of GBP 2.7 million ($3.4 million) in October 2020. The Symphony deferred purchase price was included in “Other accrued expenses and current liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020. Also, as part of the December 31, 2020 TMC acquisition, $17.4 million of the purchase price was deferred and is payable on December 31, 2027, the seventh anniversary of the closing. In the event TMC’s previous owner remains employed by us or one of our subsidiaries on December 31, 2022, the second anniversary of the closing, the deferred payment will be accelerated and due at that time. The TMC deferred purchase price was included in “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.

40


 

As of June 30, 2021, we had $103.2 million in cash and cash equivalents, of which approximately 84.8%, or $87.5 million, was held in international operations. Most of these funds will not be subject to additional taxes in the United States if repatriated; however, certain jurisdictions may impose additional withholding taxes. 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 expect our current cash levels and cash flows from operations to be adequate to meet our anticipated 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 2019 Credit Agreement as a result of the timing of our working capital needs, including capital expenditures.

Our cash resources could also be affected by various risks and uncertainties, including but not limited to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

As of June 30, 2021, 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.

Contractual Obligations

There have not been any material changes to the outstanding contractual obligations outside of the ordinary course of business from the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Estimates

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our critical accounting estimates, including a description of the methods and key assumptions used and how the key assumptions were determined.

New Accounting Standards Not Yet Adopted

See Note 1, Overview and Basis of Presentation, in the accompanying “Notes to Condensed Consolidated Financial Statements” for information related to recent accounting pronouncements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk in the normal course of business due primarily to our borrowings and cash-management activities, which are subject to interest rate risk, and to our foreign business operations, which are subject to foreign exchange rate risk.  Our market risk disclosures set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 have not otherwise changed significantly.

For a discussion of current market conditions resulting from the COVID-19 pandemic, refer to Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, “Risk Factors.”

Fluctuations in Quarterly Results

For the year ended December 31, 2020, quarterly revenues as a percentage of total consolidated annual revenues were approximately 24%, 25%, 25% and 26%, respectively, for each of the respective quarters of the year. We have experienced and anticipate that in the future we will experience variations in quarterly revenues. The variations are due to the timing of new contracts and renewal of existing contracts, the timing and frequency of client spending for customer experience management services, non-U.S. currency fluctuations, and the seasonal pattern of customer experience management support and fulfillment services.  

41


 

Item 4.  Controls and Procedures

As of June 30, 2021, under the direction of our Chief Executive Officer and Chief Finance Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Finance Officer, as appropriate to allow timely decisions regarding required disclosure. We concluded that, as of June 30, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except for the change discussed under “Change in Internal Control over Financial Reporting” below.

Change in Internal Control over Financial Reporting

On December 31, 2020, we acquired TMC. We have excluded TMC from our assessment of the effectiveness of our internal control over financial reporting as of June 30, 2021 as we are currently integrating policies, processes, people, technology and operations for the combined companies.  Management will continue to evaluate our internal control over financial reporting as we execute on our integration activities.

 

Part II.  OTHER INFORMATION

 

Two lawsuits relating to the Merger, each filed by an individual shareholder, have been filed in the United States District Court for the Southern District of New York, captioned Shiva Stein v. Sykes Enterprises, Incorporated, et al., Case No. 1:21-cv-06043, and Matthew Whitfield v. Sykes Enterprises, Incorporated, et al., Case No. 1:21-cv-06163.

 

SYKES and individual members of the Board of Directors are named as defendants in each complaint. The complaints generally allege that the defendants violated the Exchange Act by making untrue statements in, or failing to disclose material information in, our preliminary proxy statement filed on July 12, 2021, and generally seeks, among other things, injunctive relief prohibiting consummation of the Merger and unspecified damages and attorneys’ fees.

 

The defendants deny the allegations made in the complaints. Additional complaints arising out of or relating to the Merger Agreement and the transactions contemplated thereby may be filed in the future. If additional similar complaints are filed, absent new or different allegations that are material, we will not necessarily announce such additional filings.

From time to time, we are involved in legal actions arising in the ordinary course of business. With respect to any such other currently pending 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 1A.  Risk Factors

For risk factors, see Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2020. During the three and six months ended June 30, 2021, we added the following risk factors to address the risks and uncertainties related to the proposed Merger between us and Sitel Group.

 

Risks Related to the Merger

 

The Merger is subject to various closing conditions and other risks which may cause the Merger to be delayed or not completed at all or have other adverse consequences.

 

The Merger is subject to customary closing conditions that must be satisfied or waived to complete the Merger.

 

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Failure to satisfy or obtain waivers of any closing condition may jeopardize or delay the completion of the Merger and result in additional expenditures of money and resources (including the potential payment of termination fees and other costs). There can be no assurance that these conditions will be satisfied or waived or that the Merger will be completed in a timely manner or at all. The Merger is also subject to approval by the Company’s shareholders. There is no assurance that the Company’s shareholders will approve the Merger. The governmental agencies from which the parties have sought or are seeking certain approvals in connection with the Merger have broad discretion in administering applicable governing regulations, and may impose requirements, limitations or costs, require divestitures or place restrictions on the conduct of the combined company’s business after the closing.

 

If the Merger is not completed for any reason, the price of our Common Stock may decline to the extent that the current market price reflects an assumption that the Merger will be consummated. Furthermore, if the Merger is not completed for any reason, our ongoing business and financial results would be subject to a number of risks, including negative reactions from analysts, media and financial markets, negative reactions from customers or employees, distraction of management attention, and litigation related to the Merger or the Company’s failure to perform its obligations under the Merger Agreement. In addition, we may elect to terminate the Merger Agreement in certain circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the consummation of the Merger.

 

Uncertainty among our employees about their future roles after the completion of the Merger may impair our ability to attract, retain and motivate key personnel, and the pendency of the Merger may disrupt our business relationships with our existing and potential customers, suppliers, vendors, landlords, and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. The adverse consequence of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

 

We have incurred and are expected to continue to incur significant costs, expenses and fees for professional services and other transaction costs, which may be in excess of what we expected.

 

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

 

While the Merger Agreement is in effect, we are generally required to operate our business in the ordinary course and are subject to restrictions on the business activities we may engage in without the prior written consent of Parent. These restrictions could affect our ability to pursue strategic business opportunities, take actions with respect to our business that we may consider advantageous and respond effectively and/or timely to competitive pressures and industry developments, which may as a result materially adversely affect our business, results of operations and financial condition.

 

Our shareholders are not entitled to appraisal rights in the Merger.

 

Under the Florida Business Corporation Act, so long as our common stock continues to be listed on the NASDAQ, appraisal rights will not be available to our shareholders in connection with the Merger.

 

The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger, may discourage certain other companies from making a favorable alternative transaction proposal and, in specified circumstances, could require us to pay the other party a termination fee.

 

Under the Merger Agreement, we are subject to certain restrictions on our ability to solicit alternative business combination proposals from third parties, engage in discussion or negotiations with respect to such proposals or provide information in connection with such proposals, subject to certain customary exceptions. We may terminate the Merger Agreement and enter into an agreement providing for a superior proposal only if specified conditions have been satisfied, and such a termination would result in us being required to pay Parent a termination fee equal to $66 million.

 

We may be targets of legal proceedings that could result in substantial costs and may delay or prevent the Transaction from being completed.

 

Legal proceedings instituted against the Company and others relating to the Merger Agreement also could delay or prevent the Merger from becoming effective within the agreed upon timeframe. As discussed above, two lawsuits relating to the Merger have been filed. Securities class action lawsuits, derivative lawsuits and other legal

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proceedings, such as the foregoing two lawsuits, are often brought against public companies that have entered into merger agreements. Even if such legal proceedings are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, such injunction may delay or prevent the Merger from being completed, or from being completed within the expected timeframe, which may adversely affect our business, financial position and results of operation.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 18, 2011, as amended on March 16, 2016, the Company’s Board of Directors approved the 2011 Share Repurchase program with no stated expiration date. The Company is authorized to repurchase 10.0 million shares, of which 8.3 million shares have been repurchased to date. There were no share repurchases during the three months ended June 30, 2021.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

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Item 6.  Exhibits

 

The following documents are filed as an exhibit to this Report:

 

No.

 

Description

 

 

 

2.1

 

Agreement and Plan of Merger dated June 17, 2021, among Sykes Enterprises, Incorporated, Sitel Worldwide Corporation and Florida Mergersub, Inc. (Incorporated herein by reference from Exhibit 2.1 to Form 8-K filed on June 21, 2021.)

 

 

 

10.1#

 

Employment agreement, dated as of May 15, 2017, between Sykes Enterprises, Incorporated and Kelly J. Morgan.

 

 

 

15

 

Awareness letter.

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1*

 

Certification of Chief Executive Officer, pursuant to 18 U.S.C. §1350.

 

 

 

32.2*

 

Certification of Chief Finance Officer, pursuant to 18 U.S.C. §1350.

 

 

 

101.INS+

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH+

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL+

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB+

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE+

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF+

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

104+

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL (included in Exhibit 101)

 

 

 

#

 

Indicates management contract or compensatory plan or arrangement.

*

 

Furnished herewith as an Exhibit.

+

 

Submitted electronically with this Quarterly Report.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SYKES ENTERPRISES, INCORPORATED

 

(Registrant)

 

 

Date: August 9, 2021

By:

/s/ John Chapman

 

John Chapman

 

Chief Finance Officer

 

(Principal Financial and Accounting Officer)

 

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