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TMCNet:  SYKES ENTERPRISES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 09, 2012]

SYKES ENTERPRISES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the Sykes Enterprises, Incorporated ("SYKES," "our," "we" or "us") Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission ("SEC").



Our discussion and analysis may contain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, and projections about SYKES, our beliefs, and assumptions made by us. In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time.

Words such as "believe," "estimate," "project," "expect," "intend," "may," "anticipate," "plan," "seek," variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives, or goals also are forward-looking statements. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this report. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any such forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) the impact of economic recessions in the U.S. and other parts of the world, (ii) fluctuations in global business conditions and the global economy, (iii) currency fluctuations, (iv) the timing of significant orders for our products and services, (v) variations in the terms and the elements of services offered under our standardized contract including those for future bundled service offerings, (vi) changes in applicable accounting principles or interpretations of such principles, (vii) difficulties or delays in implementing our bundled service offerings, (viii) failure to achieve sales, marketing and other objectives, (ix) construction delays of new or expansion of existing customer contact management centers, (x) delays in our ability to develop new products and services and market acceptance of new products and services, (xi) rapid technological change, (xii) loss or addition of significant clients, (xiii) political and country-specific risks inherent in conducting business abroad, (xiv) our ability to attract and retain key management personnel, (xv) our ability to continue the growth of our support service revenues through additional technical and customer contact management centers, (xvi) our ability to further penetrate into vertically integrated markets, (xvii) our ability to expand our global presence through strategic alliances and selective acquisitions, (xviii) our ability to continue to establish a competitive advantage through sophisticated technological capabilities, (xix) the ultimate outcome of any lawsuits, (xx) our ability to recognize deferred revenue through delivery of products or satisfactory performance of services, (xxi) our dependence on trend toward outsourcing, (xxii) risk of interruption of technical and customer contact management center operations due to such factors as fire, earthquakes, inclement weather and other disasters, power failures, telecommunication failures, unauthorized intrusions, computer viruses and other emergencies, (xxiii) the existence of substantial competition, (xxiv) the early termination of contracts by clients, (xxv) the ability to obtain and maintain grants and other incentives (tax or otherwise), (xxvi) the potential of cost savings/synergies associated with the ICT and Alpine acquisitions not being realized, or not being realized within the anticipated time period, (xxvii) risks related to the integration of the businesses of SYKES and ICT and Alpine and (xxviii) other risk factors which are identified in our most recent Annual Report on Form 10-K, including factors identified under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview We provide comprehensive customer contact management solutions and services to a wide range of clients including Fortune 1000 companies, medium-sized businesses, and public institutions around the world, primarily in the communications, financial services, technology/consumer, transportation and leisure, healthcare and other industries. We serve our clients through two geographic operating regions: the Americas (United States, Canada, Latin America, Australia and the Asia Pacific Rim) and EMEA (Europe, the Middle East and Africa). Our Americas and EMEA groups primarily provide customer contact management services (with an emphasis on inbound technical support and customer service), which include customer assistance, healthcare and roadside assistance, technical support and product sales to our clients' customers. These services, which represented 98% of consolidated revenues during both the three and nine months ended September 30, 2012, are delivered through multiple communication channels encompassing phone, e-mail, Internet, text messaging and chat. We also provide various 47 -------------------------------------------------------------------------------- Table of Contents enterprise support services in the United States ("U.S.") that include services for our client's internal support operations, from technical staffing services to outsourced corporate help desk services. In Europe, we also provide fulfillment services including multilingual sales order processing via the Internet and phone, payment processing, inventory control, product delivery, and product returns handling. Our complete service offering helps our clients acquire, retain and increase the lifetime value of their customer relationships.

We have developed an extensive global reach with customer contact management centers throughout the United States, Canada, Europe, Latin America, Asia, India and Africa.

Acquisition of Alpine Access, Inc.

On August 20, 2012, we completed the acquisition of Alpine Access, Inc.

("Alpine"), a Delaware corporation and an industry leader in the at-home agent space - recruiting, training, managing and delivering award-winning customer contact management services through a secured and proprietary virtual call center environment with its operations located in the United States and Canada.

We refer to such acquisition herein as the "Alpine acquisition." The total purchase price of $149.0 million was funded by $41.0 million in cash on hand and borrowings of $108.0 million under our credit agreement with KeyBank National Association, dated May 3, 2012. We repaid $10.0 million and now have $147.0 million available for future borrowings under our New Credit Agreement.

See "Liquidity & Capital Resources" later in this Item 2 and Note 12, Borrowings, of "Notes to Condensed Consolidated Financial Statements" for further information.

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

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

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

48 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Operations and certain of such data expressed as a percentage of revenues (in thousands, except percentage amounts): Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenues $ 280,526 $ 293,310 $ 823,426 $ 893,033 Percentage of revenues 100.0 % 100.0 % 100.0 % 100.0 % Direct salaries and related costs $ 183,628 $ 189,082 $ 536,758 $ 581,952 Percentage of revenues 65.5 % 64.5 % 65.2 % 65.2 % General and administrative $ 87,905 $ 82,116 $ 254,247 $ 259,019 Percentage of revenues 31.3 % 28.0 % 30.9 % 29.0 % Net (gain) loss on disposal of property and equipment $ 199 $ (8 ) $ 83 $ (3,432 ) Percentage of revenues 0.1 % (0.0 )% 0.0 % (0.4 )% Impairment of long-lived assets $ 122 $ 38 $ 271 $ 764 Percentage of revenues 0.0 % 0.0 % 0.0 % 0.1 % Income from continuing operations $ 8,672 $ 22,082 $ 32,067 $ 54,730 Percentage of revenues 3.1 % 7.5 % 3.9 % 6.1 % The following table summarizes our revenues for the periods indicated, by reporting segment (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Americas $ 237,541 84.7 % $ 241,481 82.3 % $ 688,841 83.7 % $ 735,559 82.4 % EMEA 42,985 15.3 % 51,829 17.7 % 134,585 16.3 % 157,474 17.6 % Consolidated $ 280,526 100.0 % $ 293,310 100.0 % $ 823,426 100.0 % $ 893,033 100.0 % 49 -------------------------------------------------------------------------------- Table of Contents The following table summarizes certain amounts and percentages of revenues for the periods indicated, by reporting segment (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Direct salaries and related costs: Americas $ 154,292 65.0 % $ 152,827 63.3 % $ 440,335 63.9 % $ 468,330 63.7 % EMEA 29,336 68.2 % 36,255 70.0 % 96,423 71.6 % 113,622 72.2 % Consolidated $ 183,628 65.5 % $ 189,082 64.5 % $ 536,758 65.2 % $ 581,952 65.2 % General and administrative: Americas $ 61,261 25.8 % $ 57,674 23.9 % $ 178,739 25.9 % $ 180,549 24.5 % EMEA 11,303 26.3 % 13,681 26.4 % 36,326 27.0 % 42,676 27.1 % Corporate 15,341 - 10,761 - 39,182 - 35,794 - Consolidated $ 87,905 31.3 % $ 82,116 28.0 % $ 254,247 30.9 % $ 259,019 29.0 % Net (gain) loss on disposal of property and equipment: Americas $ 212 0.1 % $ (8 ) (0.0 )% $ 108 0.0 % $ (3,439 ) (0.5 )% EMEA (13 ) (0.0 )% - 0.0 % (25 ) (0.0 )% 7 0.0 % Consolidated $ 199 0.1 % $ (8 ) (0.0 )% $ 83 0.0 % $ (3,432 ) (0.4 )% Impairment of long-lived assets: Americas $ 122 0.1 % $ 38 0.0 % $ 271 0.0 % $ 764 0.1 % EMEA - 0.0 % - 0.0 % - 0.0 % - 0.0 % Consolidated $ 122 0.0 % $ 38 0.0 % $ 271 0.0 % $ 764 0.1 % Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011 Revenues For the three months ended September 30, 2012, we recognized consolidated revenues of $280.5 million, a decrease of $12.8 million or 4.4%, from $293.3 million of consolidated revenues for the comparable period in 2011.

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

Revenues from the EMEA region, including Europe, the Middle East and Africa represented 15.3%, or $43.0 million, for the three months ended September 30, 2012 compared to 17.7%, or $51.8 million, for the comparable period in 2011.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Impairment of Long-Lived Assets Impairment of long-lived assets was $0.1 million and less than $0.1 million for the three months ended September 30, 2012 and 2011, respectively, in the Americas segment. The impairment losses represented the amount by which the carrying value of the assets exceeded the estimated fair value of those assets which cannot be redeployed to other locations. See Note 5, Fair Value, of the "Notes to Condensed Consolidated Financial Statements" for further information.

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

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

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

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

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

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

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

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

Revenues from the EMEA region, including Europe, the Middle East and Africa represented 16.3%, or $134.6 million, for the nine months ended September 30, 2012 compared to 17.6%, or $157.5 million, for the comparable period in 2011.

Americas' revenues decreased $46.7 million, including the negative foreign currency impact of $4.3 million, for the nine months ended September 30, 2012 from the comparable period in 2011. The remaining decrease of $42.4 million was primarily due to end-of-life client programs of $71.3 million and lower volumes from existing contracts of $21.4 million, partially offset by new contract sales of $40.2 million and Alpine acquisition revenues of $10.1 million. Revenues from our offshore operations represented 48.7% of Americas' revenues, compared to 47.4% for the comparable period in 2011. While operating margins generated offshore are generally comparable to those in the United States, our ability to maintain these offshore operating margins longer term is difficult to predict due to potential increased competition for the available workforce, the trend of higher occupancy costs and costs of functional currency fluctuations in offshore markets. We weight these factors in our continual focus to re-price or replace certain sub-profitable target client programs.

EMEA's revenues decreased $22.9 million, including the negative foreign currency impact of $10.9 million, for the nine months ended September 30, 2012 from the comparable period in 2011. The remaining decrease of $12.0 million was primarily due to end-of-life client programs of $28.0 million, partially offset by new contract sales of $12.4 million and higher volumes from existing contracts of $3.6 million.

Direct Salaries and Related Costs Direct salaries and related costs decreased $45.2 million, or 7.8%, to $536.8 million for the nine months ended September 30, 2012 from $582.0 million in the comparable period in 2011.

On a reporting segment basis, direct salaries and related costs from the Americas segment decreased $28.0 million, including the positive foreign currency impact of $2.2 million, for the nine months ended September 30, 2012 from the comparable period in 2011. Direct salaries and related costs from the EMEA segment decreased $17.2 million, including the positive foreign currency impact of $7.6 million, for the nine months ended September 30, 2012 from the comparable period in 2011.

In the Americas segment, as a percentage of revenues, direct salaries and related costs increased to 63.9% for the nine months ended September 30, 2012 from 63.7% in the comparable period in 2011. This increase of 0.2%, as a percentage of revenues, was primarily attributable to higher compensation costs of 0.2%, higher travel costs of 0.1% and higher other costs of 0.2%, partially offset by lower communication costs of 0.3%.

53-------------------------------------------------------------------------------- Table of Contents In the EMEA segment, as a percentage of revenues, direct salaries and related costs remained decreased to 71.6% for the nine months ended September 30, 2012 from 72.2% in the comparable period in 2011. This decrease of 0.6%, as a percentage of revenues, was primarily attributable to lower compensation costs of 0.5%, lower billable supply costs of 0.3% and lower other costs of 0.4%, partially offset by higher fulfillment materials costs of 0.3% and higher severance costs of 0.3%.

General and Administrative General and administrative expenses decreased $4.8 million, or 1.9%, to $254.2 million for the nine months ended September 30, 2012 from $259.0 million in the comparable period in 2011.

On a reporting segment basis, general and administrative expenses from the Americas segment decreased $1.8 million, including the positive foreign currency impact of $0.7 million, for the nine months ended September 30, 2012 from the comparable period in 2011. General and administrative expenses from the EMEA segment decreased $6.4 million, including the positive foreign currency impact of $2.8 million, for the nine months ended September 30, 2012 from the comparable period in 2011. Corporate general and administrative expenses increased $3.4 million for the nine months ended September 30, 2012 from the comparable period in 2011. This increase of $3.4 million was primarily attributable to higher merger and acquisition costs of $2.5 million, higher compensation costs of $1.1 million, higher legal and professional fees of $0.9 million, higher consulting costs of $0.3 million and higher other costs of $0.1 million, partially offset by lower charitable contributions of $1.2 million and lower facility-related costs of $0.3 million.

In the Americas segment, as a percentage of revenues, general and administrative expenses increased to 25.9% for the nine months ended September 30, 2012 from 24.5% in the comparable period in 2011. This increase of 1.4%, as a percentage of revenues, was primarily attributable to higher facility-related costs of 0.5% due to the closure of certain sites in connection with the Fourth Quarter 2011 Exit Plan, higher compensation costs of 0.5% primarily related to lower demand without a commensurate reduction in labor costs, higher taxes of 0.2%, higher depreciation and amortization of 0.2%, higher communication costs of 0.1% and higher other costs of 0.1%, partially offset by lower equipment and maintenance costs of 0.2%.

In the EMEA segment, as a percentage of revenues, general and administrative expenses decreased to 27.0% for the nine months ended September 30, 2012 from 27.1% in the comparable period in 2011. This decrease of 0.1%, as a percentage of revenues, was primarily attributable to lower merger and acquisition costs of 0.3%, lower equipment and maintenance costs of 0.2% and lower depreciation and amortization of 0.2%, partially offset by higher facility-related costs of 0.4% due primarily to lower demand without a commensurate reduction in these costs and higher severance-related costs of 0.2%.

Net (Gain) Loss on Disposal of Property and Equipment Net (gain) loss on disposal of property and equipment was $0.1 million for the nine months ended September 30, 2012, compared to $(3.4) million for the comparable 2011 period. The gain in the 2011 period primarily related to the sale of land and a building located in Minot, North Dakota in 2011.

Impairment of Long-Lived Assets Impairment of long-lived assets was $0.3 million and $0.8 million for the nine months ended September 30, 2012 and 2011, respectively, in the Americas segment.

The impairment losses represented the amount by which the carrying value of the assets exceeded the estimated fair value of those assets which cannot be redeployed to other locations. See Note 5, Fair Value, of the "Notes to Condensed Consolidated Financial Statements" for further information.

Interest Income Interest income remained unchanged at $1.0 million for the nine months ended September 30, 2012 and 2011.

54 -------------------------------------------------------------------------------- Table of Contents Interest (Expense) Interest (expense) was $(1.0) million for the nine months ended September 30, 2012, compared to $(0.8) million in the same period in 2011. The increase of $0.2 million reflects interest and fees on borrowings related to the late August acquisition of Alpine in the 2012 period.

Other (Expense) Other (expense), net, was $(1.8) million for the nine months ended September 30, 2012, compared to $(2.3) million in the same period in 2011. The net decrease in other (expense), net, of $(0.5) million was primarily attributable to an decrease of $0.4 million in realized and unrealized foreign currency transaction losses, net of gains and an increase of $1.3 million in other miscellaneous income, net, partially offset by an increase of $1.2 million in foreign currency forward contract losses (which were not designated as hedging instruments).

Other (expense), net, excludes the cumulative translation effects and unrealized gains (losses) on financial derivatives that are included in "Accumulated other comprehensive income" in shareholders' equity in the accompanying Condensed Consolidated Balance Sheets.

Income Taxes Income tax expense of $3.6 million for the nine months ended September 30, 2012, reflects the recognition of tax benefits for acquisition and integration costs incurred for Alpine, and was based upon pre-tax book income of $30.2 million.

Income tax expense of $6.2 million for the nine months ended September 30, 2011 reflects the recognition of a net $3.2 million tax benefit primarily related to a favorable resolution of a tax audit, and was based upon pre-tax book income of $52.6 million. The effective tax rate remained unchanged at 11.8% for the nine months ended September 30, 2012 and 2011.

(Loss) from Discontinued Operations We sold our Spanish operations in March 2012 and, accordingly, we reclassified the results of operations for the nine months ended September 30, 2011 to discontinued operations. The loss from discontinued operations, net of taxes, totaled $0.8 million and $3.1 million for the nine months ended September 30, 2012 and 2011, respectively. The loss on sale of discontinued operations, net of taxes, totaled $10.7 million for the nine months ended September 30, 2012. There was no tax impact on either the loss from discontinued operations or the loss on sale of discontinued operations.

Net Income As a result of the foregoing, we reported income from continuing operations for the nine months ended September 30, 2012 of $32.1 million, a decrease of $22.6 million from the comparable period in 2011. This decrease was principally attributable to a $69.6 million decrease in revenues and a $3.5 million decrease in net gain on disposal of property and equipment, partially offset by a $45.2 million decrease in direct salaries and related costs, a $4.8 million decrease in general and administrative expenses and a $0.5 million decrease in the impairment of long-lived assets. In addition to the $22.6 million decrease in income from continuing operations, we experienced a $10.7 million loss on the sale of discontinued operations and a $0.2 million increase in interest (expense), partially offset by a $2.6 million decrease in income taxes, a $2.3 million decrease in loss from discontinued operations and a $0.5 million decrease in other (expense), net, resulting in net income of $15.1 million for the nine months ended September 30, 2012, a decrease of $28.1 million compared to the same period in 2011.

Client Concentration Our top ten clients accounted for approximately 48.5% and 48.7% of our consolidated revenues in the three and nine months ended September 30, 2012, respectively, up from approximately 45.3% and 44.3% of our consolidated revenues in the three and nine months ended September 30, 2011.

Total consolidated revenues included $36.8 million, or 13.1%, and $97.9 million, or 11.9%, of consolidated revenues, for the three and nine months ended September 30, 2012, respectively, from AT&T Corporation, a major provider of communication services for which we provide various customer support services over several distinct lines of AT&T business. This included $36.0 million and $95.7 million in revenue from the Americas for the three and nine months ended September 30, 2012, respectively, and $0.8 million and $2.2 million in revenue from EMEA 55 -------------------------------------------------------------------------------- Table of Contents for the three and nine months ended September 30, 2012, respectively. Our next largest client, which is in the financial services vertical market, accounted for $18.7 million, or 6.7%, and $51.9 million, or 6.3%, of consolidated revenues, for the three and nine months ended September 30, 2012, respectively.

The total consolidated revenues for the comparable periods as it relates to our largest client were $33.6 million, or 11.5%, and $100.7 million, or 11.3%, of consolidated revenues, for the three and nine months ended September 30, 2011, respectively. This included $32.8 million and $98.2 million in revenue from the Americas for the three and nine months ended September 30, 2011, respectively, and $0.8 million and $2.5 million in revenue from EMEA for the three and nine months ended September 30, 2011, respectively. Our next largest client, which is in the financial services vertical market, accounted for $14.8 million, or 5.1%, and $38.0 million, or 4.3%, of consolidated revenues, for the three and nine months ended September 30, 2011, respectively.

We have multiple distinct contracts with AT&T spread across multiple lines of businesses, which expire between 2012 and 2015. We have historically renewed most of these contracts. However, there is no assurance that these contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts. Each line of business is governed by separate business terms, conditions and metrics. Each line of business also has a separate decision maker such that a loss of one line of business would not necessarily impact our relationship with the client and decision makers on other lines of business. The loss of (or the failure to retain a significant amount of business with) any of our key clients, including AT&T, could have a material adverse effect on our performance. Many of our contracts contain penalty provisions for failure to meet minimum service levels and are cancelable by the client at any time or on short notice. Also, clients may unilaterally reduce their use of our services under our contracts without penalty.

Business Outlook For the twelve months ended December 31, 2012, we anticipate the following financial results: • Revenues in the range of $1,123.0 million to $1,128.0 million; • Effective tax rate of approximately 14%; • Fully diluted share count of approximately 43.1 million; • Diluted earnings per share of approximately $0.80 to $0.85; and • Capital expenditures in the range of $40.0 million to $44.0 million Not included in this guidance is the impact of any future acquisitions or share repurchase activities.

Liquidity and Capital Resources Our primary sources of liquidity are generally cash flows generated by operating activities and from available borrowings under our revolving credit facility. We utilize these capital resources to make capital expenditures associated primarily with our customer contact management services, invest in technology applications and tools to further develop our service offerings and for working capital and other general corporate purposes, including repurchase of our common stock in the open market and to fund acquisitions. In future periods, we intend similar uses of these funds.

On August 18, 2011, our Board authorized us to purchase up to 5.0 million shares of our outstanding common stock (the "2011 Share Repurchase Program"). During the nine months ended September 30, 2012, we repurchased 0.5 million common shares under the 2011 Share Repurchase Program at prices ranging from $13.85 to $15.00 per share for a total cost of $7.9 million. As of September 30, 2012, a total of 3.0 million shares have been repurchased under the 2011 Share Repurchase Program. 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. From time to time, we will make additional discretionary stock repurchases under this program in 2012.

During the nine months ended September 30, 2012, cash increased $55.3 million from operating activities, $108.0 million due to proceeds from the issuance of long-term debt, $0.4 million from the proceeds from sale of property and equipment, $0.4 million due to a release of restricted cash and $0.3 million of other. Further, we paid $147.1 million for the Alpine acquisition, used $26.4 million for capital expenditures, used $10.0 million to repay long-term debt, divested cash of $9.1 million in conjunction with the sale of discontinued operations in Spain, used 56 -------------------------------------------------------------------------------- Table of Contents $7.9 million to repurchase our stock, used $1.4 million to repurchase stock for minimum tax withholding on equity awards and paid $0.9 million for loan fees, resulting in a $34.6 million decrease in available cash (including the favorable effects of foreign currency exchange rates on cash of $3.8 million).

Net cash flows provided by operating activities for the nine months ended September 30, 2012 were $55.3 million, compared to $79.9 million for the comparable 2011 period. The $24.6 million decrease in net cash flows from operating activities was due to an $28.1 million decrease in net income and a net decrease of $3.2 million in cash flows from assets and liabilities, partially offset by a $6.7 million increase in non-cash reconciling items such as depreciation and amortization, loss on the sale of discontinued operations, net (gain) loss on disposal of property and equipment and unrealized foreign currency transaction (gains) losses, net. The $3.2 million decrease in cash flows from assets and liabilities was principally a result of a $16.3 million increase in accounts receivable, partially offset by a $6.1 million increase in other liabilities, a $5.2 million increase in taxes payable, a $1.4 million decrease in other assets and a $0.4 million increase in deferred revenue. The decrease in cash flows from assets and liabilities primarily relates to the timing of receivables' billings and subsequent payments of those billings, partially offset by a reduction in revenues in the nine months ended September 30, 2012 over the comparable period in 2011.

During March 2012, we committed to a plan and sold our operations in Spain (the "Spanish operations"). Cash flows from discontinued operations were as follows (in millions): Nine Months Ended September 30, 2012 2011Cash (used for) provided by operating activities of discontinued operations $ (4,530 ) $ 2,538 Cash (used for) investing activities of discontinued operations (8,887 ) (692 ) Cash provided by financing activities of discontinued operations 12,568 0 Cash (used for) operating activities of discontinued operations primarily represents cash used by the Spanish operations during the nine months ended September 30, 2012. Cash (used for) investing activities of discontinued operations for the nine months ended September 30, 2012 primarily represents the cash divested upon the sale of the Spanish operations. Cash provided by financing activities of discontinued operations for the nine months ended September 30, 2012 primarily represents our cash capital contributions made prior to the sale of the Spanish operations. We do not expect the sale of our Spanish operations to negatively affect our future liquidity and capital resources.

Capital expenditures, which are generally funded by cash generated from operating activities, available cash balances and borrowings available under our credit facilities, were $26.4 million for the nine months ended September 30, 2012, compared to $21.8 million for the comparable period in 2011, an increase of $4.6 million. In 2012, we anticipate capital expenditures in the range of $40.0 million to $44.0 million, primarily for maintenance and systems infrastructure.

On May 3, 2012, we entered into a $245 million revolving credit facility (the "New Credit Agreement") with a group of lenders and KeyBank National Association, as Lead Arranger, Sole Book Runner and Administrative Agent ("KeyBank"). The New Credit Agreement replaces our previous $75 million revolving credit facility dated February 2, 2010, as amended, which agreement was terminated simultaneous with entering into the New Credit Agreement. The New Credit Agreement is subject to certain borrowing limitations and includes certain customary financial and restrictive covenants. At September 30, 2012, we were in compliance with all loan requirements of the New Credit Agreement and had $98.0 million of outstanding borrowings under this facility.

The New Credit Agreement includes a $184 million alternate-currency sub-facility, a $10 million swingline sub-facility and a $35 million letter of credit sub-facility, and may be used for general corporate purposes including acquisitions, share repurchases, working capital support and letters of credit, subject to certain limitations. We are not currently aware of any inability of our lenders to provide access to the full commitment of funds that exist under the New 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 New Credit Agreement will mature on May 2, 2017.

Borrowings under the New Credit Agreement will bear interest at either LIBOR or the base rate plus, in each case, an applicable margin based on our leverage ratio. The applicable interest rate will be determined quarterly based on our leverage ratio at such time. The base rate is a rate per annum equal to the greatest of (i) the rate of interest established by KeyBank, from time to time, as its "prime rate"; (ii) the Federal Funds effective rate in effect from 57-------------------------------------------------------------------------------- Table of Contents time to time, plus 1/2 of 1% per annum; and (iii) the then-applicable LIBOR rate for one month interest periods, plus 1.00%. Swingline loans will bear interest only at the base rate plus the base rate margin. In addition, we are required to pay certain customary fees, including a commitment fee of 0.175%, which is due quarterly in arrears and calculated on the average unused amount of the New Credit Agreement.

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

As of September 30, 2012, we had $176.6 million in cash and cash equivalents, of which approximately 96.0% or $169.5 million, was held in international operations and may be subject to additional taxes if repatriated to the United States, including withholding tax applied by the country of origin and an incremental U.S. income tax, net of allowable foreign tax credits. There are circumstances where we may be unable to repatriate some of the cash and cash equivalents held by our international operations due to country restrictions.

In April 2012, we received an assessment for the Canadian 2003-2006 audit for which we filed a Notice of Objection in July 2012. As required by the Notice of Objection process, we paid mandatory security deposits in the amount of $14.2 million to the Canadian Revenue Agency and $0.4 million to the Province of Ontario. This process will allow us to submit the case to the U.S. and Canada Competent Authority for ultimate resolution. Although the outcome of examinations by taxing authorities is always uncertain, we believe we are adequately reserved for this audit and that resolution is not expected to have a material impact on our financial condition and results of operations.

On August 20, 2012, we completed the acquisition of Alpine Access, Inc.

("Alpine"), a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated July 27, 2012. The purchase price of $149.0 million was funded through cash on hand of $41.0 million and borrowings of $108.0 million under the Company's credit agreement, dated May 3, 2012. The purchase price is subject to increase based on the amount of Alpine's cash and cash equivalents at the closing of the merger, subject to decrease based on the amount of certain indebtedness at the closing of the merger, and subject to certain post-closing adjustments relating to Alpine's working capital at the closing of the merger.

Twelve million dollars of the purchase price was placed in an escrow account as security for the indemnification obligations of Alpine's stockholders under the merger agreement.

We believe that our current cash levels, accessible funds under our credit facilities and cash flows generated from future operations will be adequate to meet anticipated working capital needs, any future debt repayment requirements, continued expansion objectives, funding of potential acquisitions, anticipated levels of capital expenditures and contractual obligations for the next twelve months and any stock repurchases. 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, 2011.

Off-Balance Sheet Arrangements and Other At September 30, 2012, 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.

58 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table summarizes the material changes to our contractual cash obligations as of September 30, 2012 and the effect these obligations are expected to have on liquidity and cash flow in future periods (in thousands): Payments Due By Period Less Than After 5 Total 1 Year 1 - 3 Years 3 - 5 Years Years Other Operating leases(1) $ 20,320 $ 1,458 $ 10,716 $ 3,032 $ 5,114 $ - Purchase obligations(2) 6,531 1,703 4,543 236 49 - Long-term tax liabilities (3) 11,752 - - - - 11,752 $ 38,603 $ 3,161 $ 15,259 $ 3,268 $ 5,163 $ 11,752 (1) Amounts represent the expected cash payments under our operating leases.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

(3) Long-term tax liabilities include uncertain tax positions and related penalties and interest as discussed in Note 14 to the accompanying Condensed Consolidated Financial Statements. The amount in the table has been reduced by a $14.2 million mandatory security deposit paid to the Canadian Revenue Agency and the $0.4 million deposit paid to the Province of Ontario during the nine months ended September 30, 2012, which are included in "Deferred charges and other assets" in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012. We cannot make reasonably reliable estimates of the cash settlement of $11.8 million of the long-term liabilities with the taxing authority; therefore, amounts have been excluded from payments due by period.

Except for the contractual obligations mentioned above, there have not been any material changes to the outstanding contractual obligations from the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2011.

Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires estimations and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

We believe the following accounting policies are the most critical since these policies require significant judgment or involve complex estimations that are important to the portrayal of our financial condition and operating results: Recognition of Revenue - We recognize revenue in accordance with ASC 605 "Revenue Recognition". We primarily recognize revenues from services as the services are performed, which is based on either a per minute, per call or per transaction basis, under a fully executed contractual agreement and record reductions to revenues for contractual penalties and holdbacks for failure to meet specified minimum service levels and other performance based contingencies.

Revenue recognition is limited to the amount that is not contingent upon delivery of any future product or service or meeting other specified performance conditions. Product sales, accounted for within our fulfillment services, are recognized upon shipment to the customer and satisfaction of all obligations.

Revenues from fulfillment services account for 1.4% and 1.5% of total consolidated revenues for the nine months ended September 30, 2012 and 2011, respectively, some of which contain multiple-deliverables. The service offerings for these fulfillment service contracts typically include pick-pack-and-ship, warehousing, process management, finished goods assembly and pass-through costs.

In accordance with ASC 605-25 "Revenue Recognition - Multiple-Element Arrangements" ("ASC 605-25") (as amended by Accounting Standards Update ("ASU") 2009-13 "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force") ("ASU 2009-13"), we determine if the services provided under these contracts with multiple-deliverables represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within our control. If those deliverables are determined to be separate units of accounting, revenues from these services are recognized as the services are performed under a fully executed contractual agreement. If those deliverables are not determined to be separate units of accounting, 59 -------------------------------------------------------------------------------- Table of Contents revenue for the delivered services are bundled into a single unit of accounting and recognized on the proportional performance method using the straight-line basis over the contract period, or the actual number of operational seats used to serve the client, as appropriate.

As a result of the adoption of ASU 2009-13, the Company allocates revenue to each of the deliverables based on a selling price hierarchy of vendor specific objective evidence ("VSOE"), third-party evidence, and then estimated selling price. VSOE is based on the price charged when the deliverable is sold separately. Third-party evidence is based on largely interchangeable competitor services in standalone sales to similarly situated customers. Estimated selling price is based on our best estimate of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies, service offerings, and customer classifications. Once we allocate revenue to each deliverable, we recognize revenue when all revenue recognition criteria are met. As of September 30, 2012, our fulfillment contracts with multiple-deliverables met the separation criteria as outlined in ASC 605-25 and the revenue was accounted for accordingly. We have no other contracts that contain multiple-deliverables as of September 30, 2012.

Allowance for Doubtful Accounts We maintain allowances for doubtful accounts, $4.9 million as of September 30, 2012 or 2.0% of trade account receivables, for estimated losses arising from the inability of our customers to make required payments. Our estimate is based on qualitative and quantitative analyses, including credit risk measurement tools and methodologies using the publicly available credit and capital market information, a review of the current status of our trade accounts receivable and historical collection experience of our clients. It is reasonably possible that our estimate of the allowance for doubtful accounts will change if the financial condition of our customers were to deteriorate, resulting in a reduced ability to make payments.

Income Taxes We reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some portion or all of such deferred tax assets will not be realized. The valuation allowance for a particular tax jurisdiction is allocated between current and noncurrent deferred tax assets for that jurisdiction on a pro rata basis. Available evidence which is considered in determining the amount of valuation allowance required includes, but is not limited to, our estimate of future taxable income and any applicable tax-planning strategies. Establishment or reversal of certain valuation allowances may have a significant impact on both current and future results.

As of December 31, 2011, we determined that a total valuation allowance of $38.5 million was necessary to reduce U.S. deferred tax assets by $4.7 million and foreign deferred tax assets by $33.8 million, where it was more likely than not that some portion or all of such deferred tax assets will not be realized. The recoverability of the remaining net deferred tax asset of $22.8 million as of December 31, 2011 is dependent upon future profitability within each tax jurisdiction. As of September 30, 2012, based on our estimates of future taxable income and any applicable tax-planning strategies within various tax jurisdictions, we believe that it is more likely than not that the remaining net deferred tax assets will be realized.

In April 2012, we received an assessment for the Canadian 2003-2006 audit for which we filed a Notice of Objection in July 2012. As required by the Notice of Objection process, we paid mandatory security deposits in the amount of $14.2 million to the Canadian Revenue Agency and $0.4 million to the Province of Ontario, which are included in "Deferred charges and other assets" in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and "Cash paid during period for income taxes" in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012. This process will allow us to submit the case to the U.S. and Canada Competent Authority for ultimate resolution. Although the outcome of examinations by taxing authorities is always uncertain, we believe we are adequately reserved for this audit and that resolution is not expected to have a material impact on our financial condition and results of operations.

Generally, earnings associated with the investments in our foreign subsidiaries are considered to be indefinitely invested outside of the U.S. Therefore, a U.S.

provision for income taxes on those earnings or translation adjustments has not been recorded, as permitted by criterion outlined in ASC 740 "Income Taxes" ("ASC 740"). Determination of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries that are essentially permanent in nature is not practicable.

60-------------------------------------------------------------------------------- Table of Contents The U.S. Department of the Treasury released the "General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals" in February 2012. These proposals represent a significant shift in international tax policy, which may materially impact U.S. taxation of international earnings. We continue to monitor these proposals and are currently evaluating their potential impact on our financial condition, results of operations, and cash flows.

We evaluate tax positions that have been taken or are expected to be taken in our tax returns, and record a liability for uncertain tax positions in accordance with ASC 740. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. We had $17.3 million and $17.1 million of unrecognized tax benefits as of September 30, 2012 and December 31, 2011, respectively.

Our provision for income taxes is subject to volatility and is impacted by the distribution of earnings in the various domestic and international jurisdictions in which we operate. Our effective tax rate could be impacted by earnings being either proportionally lower or higher in foreign countries where we have tax rates lower than the U.S. tax rates. In addition, we have been granted tax holidays in several foreign tax jurisdictions, which have various expiration dates ranging from 2012 through 2023. If we are unable to renew a tax holiday in any of these jurisdictions, our effective tax rate could be adversely impacted.

In some cases, the tax holidays expire without possibility of renewal. In other cases, we expect to renew these tax holidays, but there are no assurances from the respective foreign governments that they will permit a renewal. Our effective tax rate could also be affected by several additional factors, including, but not limited to, changes in the valuation of our deferred tax assets or liabilities, changing legislation, regulations, and court interpretations that impact tax law in multiple tax jurisdictions in which we operate, as well as new requirements, pronouncements and rulings of certain tax, regulatory and accounting organizations.

Impairment of Goodwill, Intangibles and Other Long-Lived Assets We review long-lived assets, which had a carrying value of $400.4 million as of September 30, 2012, including goodwill, intangibles and property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable and at least annually for impairment testing of goodwill. An asset is considered to be impaired when the carrying amount exceeds the fair value. Upon determination that the carrying value of the asset is impaired, we would record an impairment charge, or loss, to reduce the asset to its fair value. Future adverse changes in market conditions or poor operating results of the underlying investment could result in losses or an inability to recover the carrying value of the investment and, therefore, might require an impairment charge in the future.

New Accounting Standards Not Yet Adopted In December 2011, the FASB issued ASU 2011-11 "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). The amendments in ASU 2011-11 will enhance disclosures by requiring improved information about financial and derivative instruments that are either 1) offset (netting assets and liabilities) in accordance with Section 210-20-45 or Section 815-10-45 of the FASB Accounting Standards Codification or 2) subject to an enforceable master netting arrangement or similar agreement. The amendments in ASU 2011-11 are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect the adoption of ASU 2011-11 to materially impact our financial condition, results of operations and cash flows.

In July 2012, the FASB issued ASU 2012-02 "Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). The amendments in ASU 2012-02 provide entities with the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of 61 -------------------------------------------------------------------------------- Table of Contents events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. Under the amendments in ASU 2012-02, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of ASU 2012-02 to materially impact our financial condition, results of operations and cash flows.

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

U.S. Healthcare Reform Acts In March 2010, the President of the United States signed into law comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (the "Acts"). The Acts contain provisions that could materially impact the Company's healthcare costs in the future, thus adversely affecting the Company's profitability. We are currently evaluating the potential impact of the Acts, if any, on our financial condition, results of operations and cash flows. Preliminary analyses indicate that the increased cost of providing healthcare benefits in the future may not materially affect the Company's profitability; however there are many provisions of the legislation that have yet to be defined and which may be affected by the 2012 national elections. The effect on the Company's healthcare costs in the future may not be known for some time.

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