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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
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enterprise support services in the United States ("U.S.") that include services
for our client's internal support operations, from technical staffing services
to outsourced corporate help desk services. In Europe, we also provide
fulfillment services including multilingual sales order processing via the
Internet and phone, payment processing, inventory control, product delivery, and
product returns handling. Our complete service offering helps our clients
acquire, retain and increase the lifetime value of their customer relationships.
We have developed an extensive global reach with customer contact management
centers throughout the United States, Canada, Europe, Latin America, Asia, India
and Africa.
Acquisition of Alpine Access, Inc.
On August 20, 2012, we completed the acquisition of Alpine Access, Inc.
("Alpine"), a Delaware corporation and an industry leader in the at-home agent
space - recruiting, training, managing and delivering award-winning customer
contact management services through a secured and proprietary virtual call
center environment with its operations located in the United States and Canada.
We refer to such acquisition herein as the "Alpine acquisition."
The total purchase price of $149.0 million was funded by $41.0 million in cash
on hand and borrowings of $108.0 million under our credit agreement with KeyBank
National Association, dated May 3, 2012. We repaid $10.0 million and now have
$147.0 million available for future borrowings under our New Credit Agreement.
See "Liquidity & Capital Resources" later in this Item 2 and Note 12,
Borrowings, of "Notes to Condensed Consolidated Financial Statements" for
further information.
The results of operations of Alpine have been reflected in the accompanying
Condensed Consolidated Statement of Operations since August 20, 2012.
Discontinued Operations
In November 2011, as authorized by the Finance Committee of our Board of
Directors, we decided to pursue a buyer for our operations located in Spain (the
"Spanish operations") as these operations were no longer consistent with the our
strategic direction. We sold our Spanish operations, pursuant to an asset
purchase agreement dated March 29, 2012 and a stock purchase agreement dated
March 30, 2012. We have reflected the operating results related to the
operations in Spain as discontinued operations in the accompanying Consolidated
Statements of Operations for all periods presented. The assets and related
liabilities of Spain are presented as held for sale in the accompanying
Consolidated Balance Sheet as of December 31, 2011. This business was
historically reported as part of the EMEA segment.
See "Results of Operations - Discontinued Operations" later in this Item 2 for
more information. Unless otherwise noted, discussions below pertain only to our
continuing operations.
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Results of Operations
The following table sets forth, for the periods indicated, certain data derived
from our Condensed Consolidated Statements of Operations and certain of such
data expressed as a percentage of revenues (in thousands, except percentage
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Revenues $ 280,526 $ 293,310 $ 823,426 $ 893,033
Percentage of revenues 100.0 % 100.0 % 100.0 % 100.0 %
Direct salaries and related costs $ 183,628 $ 189,082 $ 536,758 $ 581,952
Percentage of revenues 65.5 % 64.5 % 65.2 % 65.2 %
General and administrative $ 87,905 $ 82,116 $ 254,247 $ 259,019
Percentage of revenues 31.3 % 28.0 % 30.9 % 29.0 %
Net (gain) loss on disposal of property
and equipment $ 199 $ (8 ) $ 83 $ (3,432 )
Percentage of revenues 0.1 % (0.0 )% 0.0 % (0.4 )%
Impairment of long-lived assets $ 122 $ 38 $ 271 $ 764
Percentage of revenues 0.0 % 0.0 % 0.0 % 0.1 %
Income from continuing operations $ 8,672 $ 22,082 $ 32,067 $ 54,730
Percentage of revenues 3.1 % 7.5 % 3.9 % 6.1 %
The following table summarizes our revenues for the periods indicated, by
reporting segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Americas $ 237,541 84.7 % $ 241,481 82.3 % $ 688,841 83.7 % $ 735,559 82.4 %
EMEA 42,985 15.3 % 51,829 17.7 % 134,585 16.3 % 157,474 17.6 %
Consolidated $ 280,526 100.0 % $ 293,310 100.0 % $ 823,426 100.0 % $ 893,033 100.0 %
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The following table summarizes certain amounts and percentages of revenues for
the periods indicated, by reporting segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Direct salaries and related costs:
Americas $ 154,292 65.0 % $ 152,827 63.3 % $ 440,335 63.9 % $ 468,330 63.7 %
EMEA 29,336 68.2 % 36,255 70.0 % 96,423 71.6 % 113,622 72.2 %
Consolidated $ 183,628 65.5 % $ 189,082 64.5 % $ 536,758 65.2 % $ 581,952 65.2 %
General and administrative:
Americas $ 61,261 25.8 % $ 57,674 23.9 % $ 178,739 25.9 % $ 180,549 24.5 %
EMEA 11,303 26.3 % 13,681 26.4 % 36,326 27.0 % 42,676 27.1 %
Corporate 15,341 - 10,761 - 39,182 - 35,794 -
Consolidated $ 87,905 31.3 % $ 82,116 28.0 % $ 254,247 30.9 % $ 259,019 29.0 %
Net (gain) loss on disposal of
property and equipment:
Americas $ 212 0.1 % $ (8 ) (0.0 )% $ 108 0.0 % $ (3,439 ) (0.5 )%
EMEA (13 ) (0.0 )% - 0.0 % (25 ) (0.0 )% 7 0.0 %
Consolidated $ 199 0.1 % $ (8 ) (0.0 )% $ 83 0.0 % $ (3,432 ) (0.4 )%
Impairment of long-lived assets:
Americas $ 122 0.1 % $ 38 0.0 % $ 271 0.0 % $ 764 0.1 %
EMEA - 0.0 % - 0.0 % - 0.0 % - 0.0 %
Consolidated $ 122 0.0 % $ 38 0.0 % $ 271 0.0 % $ 764 0.1 %
Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
Revenues
For the three months ended September 30, 2012, we recognized consolidated
revenues of $280.5 million, a decrease of $12.8 million or 4.4%, from
$293.3 million of consolidated revenues for the comparable period in 2011.
On a geographic segment basis, revenues from the Americas region, including the
United States, Canada, Latin America, Australia and the Asia Pacific Rim,
represented 84.7%, or $237.5 million, for the three months ended September 30,
2012 compared to 82.3%, or $241.5 million, for the comparable period in 2011.
Revenues from the EMEA region, including Europe, the Middle East and Africa
represented 15.3%, or $43.0 million, for the three months ended September 30,
2012 compared to 17.7%, or $51.8 million, for the comparable period in 2011.
Americas' revenues decreased $4.0 million, including the negative foreign
currency impact of $0.7 million, for the three months ended September 30, 2012
from the comparable period in 2011. The remaining decrease of $3.3 million was
primarily due to end-of-life client programs of $19.5 million and lower volumes
from existing contracts of $14.0 million, partially offset by new contract sales
of $20.1 million and Alpine acquisition revenues of $10.1 million. Revenues from
our offshore operations represented 47.2% of Americas' revenues, compared to
48.9% for the comparable period in 2011. While operating margins generated
offshore are generally comparable to those in the United States, our ability to
maintain these offshore operating margins longer term is difficult to predict
due to potential increased competition for the available workforce, the trend of
higher occupancy costs and costs of functional currency fluctuations in offshore
markets. We weight these factors in our continual focus to re-price or replace
certain sub-profitable target client programs.
EMEA's revenues decreased $8.8 million, including the negative foreign currency
impact of $4.1 million, for the three months ended September 30, 2012 from the
comparable period in 2011. The remaining decrease of $4.7 million was primarily
due to end-of-life client programs of $7.5 million (including programs exited
relating to the closure of certain sites in connection with the Fourth Quarter
2011 Exit Plan) and lower volumes from existing contracts of $2.9 million,
partially offset by new contract sales of $5.7 million.
On a consolidated basis, we had 40,200 brick-and-mortar seats as of
September 30, 2012, a decrease of 1,600 seats from the comparable period in
2011. The capacity utilization rate on a combined basis was 73% compared to 72%
from the comparable period in 2011. This increase was primarily due to a
combination of seat rationalizations associated with the strategic actions in
connection with the Fourth Quarter 2011 Exit Plan (see Note 4, Costs Associated
with Exit or Disposal Activities, of "Notes to Condensed Consolidated Financial
Statements").
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On a geographic segment basis, 34,900 seats were located in the Americas, a
decrease of 1,000 seats from the comparable period in 2011, and 5,300 seats were
located in EMEA, a decrease of 600 seats from the comparable period in 2011. The
consolidated offshore seat count as of September 30, 2012 was 22,400, or 56%, of
our total seats, a decrease of 200 seats, or 1%, from the comparable period in
2011. Capacity utilization rates as of September 30, 2012 were 72% for the
Americas and 78% for EMEA, compared to 73% and 70%, respectively, as of
September 30, 2011, primarily due to seat rationalizations associated with the
strategic actions in connection with the Fourth Quarter 2011 Exit Plan.
We achieved our 2012 gross seat addition target of approximately 3,700 seats at
the end of the third quarter of 2012. For the year ended December 31, 2012, the
total seat count on a net basis is expected to decline by approximately 2,000
seats from 2011, primarily due to the strategic actions outlined in the Fourth
Quarter 2011 Exit Plan.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $5.5 million, or 2.9%, to
$183.6 million for the three months ended September 30, 2012 from $189.1 million
in the comparable period in 2011.
On a reporting segment basis, direct salaries and related costs from the
Americas segment increased $1.5 million, including the positive foreign currency
impact of $0.1 million, for the three months ended September 30, 2012 from the
comparable period in 2011. Direct salaries and related costs from the EMEA
segment decreased $7.0 million, including the positive foreign currency impact
of $2.7 million, for the three months ended September 30, 2012 from the
comparable period in 2011.
In the Americas segment, as a percentage of revenues, direct salaries and
related costs increased to 65.0% for the three months ended September 30, 2012
from 63.3% in the comparable period in 2011. This increase of 1.7%, as a
percentage of revenues, was primarily attributable to higher compensation costs
of 1.8% principally driven by lower demand without a commensurate reduction in
labor costs and higher other costs of 0.2%, partially offset by lower
communication costs of 0.3%.
In the EMEA segment, as a percentage of revenues, direct salaries and related
costs decreased to 68.2% for the three months ended September 30, 2012 from
70.0% in the comparable period of 2011. This decrease of 1.8%, as a percentage
of revenues, was primarily attributable to lower billable supply costs of 1.2%,
lower compensation costs of 0.7% due to a workforce reduction in connection with
the Fourth Quarter 2011 Exit Plan, lower communication costs of 0.2% and lower
other costs of 0.3%, partially offset by higher fulfillment materials costs of
0.4% and higher travel costs of 0.2%.
General and Administrative
General and administrative expenses increased $5.8 million, or 7.1%, to
$87.9 million for the three months ended September 30, 2012 from $82.1 million
in the comparable period in 2011.
On a reporting segment basis, general and administrative expenses from the
Americas segment increased $3.6 million, including the positive foreign currency
impact of $0.1 million, for the three months ended September 30, 2012 from the
comparable period in 2011. General and administrative expenses from the EMEA
segment decreased $2.4 million, including the positive foreign currency impact
of $1.0 million, for the three months ended September 30, 2012 from the
comparable period in 2011. Corporate general and administrative expenses
increased $4.6 million for the three months ended September 30, 2012 from the
comparable period in 2011. This increase of $4.6 million was primarily
attributable to higher merger and acquisition costs of $3.4 million related to
the Alpine acquisition, higher compensation costs of $1.4 million and higher
consulting costs of $0.3 million, partially offset by lower facility-related
charges of $0.4 million and lower other costs of $0.1 million.
In the Americas segment, as a percentage of revenues, general and administrative
expenses increased to 25.8% for the three months ended September 30, 2012 from
23.9% in the comparable period in 2011. This increase of 1.9%, as a percentage
of revenues, was primarily attributable to higher compensation costs of 0.7%
primarily related to lower demand without a commensurate reduction in labor
costs, higher software maintenance costs of 0.3%, higher legal and professional
fees of 0.3%, higher facility-related costs of 0.2%, higher insurance costs of
0.2%, higher taxes of 0.1%, higher communications costs of 0.1% and higher other
costs of 0.4%, partially offset by lower equipment and maintenance costs of
0.4%.
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In the EMEA segment, as a percentage of revenues, general and administrative
expenses decreased to 26.3% for the three months ended September 30, 2012 from
26.4% in the comparable period in 2011. This decrease of 0.1%, as a percentage
of revenues, was primarily attributable to lower legal and professional fees of
0.2% and lower severance-related costs of 0.2%, partially offset by higher
compensation costs of 0.2% and higher other costs of 0.1%.
Net (Gain) Loss on Disposal of Property and Equipment
Net (gain) loss on disposal of property and equipment was $0.2 million for the
three months ended September 30, 2012, compared to less than $(0.1) million for
the comparable 2011 period.
Impairment of Long-Lived Assets
Impairment of long-lived assets was $0.1 million and less than $0.1 million for
the three months ended September 30, 2012 and 2011, respectively, in the
Americas segment. The impairment losses represented the amount by which the
carrying value of the assets exceeded the estimated fair value of those assets
which cannot be redeployed to other locations. See Note 5, Fair Value, of the
"Notes to Condensed Consolidated Financial Statements" for further information.
Interest Income
Interest income was $0.3 million for the three months ended September 30, 2012,
compared to $0.4 million in the same period in 2011, reflecting lower average
invested balances of interest bearing investments in cash and cash equivalents.
Interest (Expense)
Interest (expense) was $(0.4) million for the three months ended September 30,
2012, compared to $(0.3) million in the same period in 2011. The increase of
$0.1 million primarily reflects interest and fees on borrowings related to the
late August acquisition of Alpine in the 2012 period.
Other (Expense)
Other (expense), net, was $(0.7) million for the three months ended
September 30, 2012, compared to $(0.3) million in the same period in 2011. The
net increase in other (expense), net, of $(0.4) million was primarily
attributable to an increase of $4.7 million in foreign currency forward contract
losses (which were not designated as hedging instruments), partially offset by a
decrease of $3.4 million in realized and unrealized foreign currency transaction
losses, net of gains and an increase of $0.9 million in other miscellaneous
income, net. Other (expense), net, excludes the cumulative translation effects
and unrealized gains (losses) on financial derivatives that are included in
"Accumulated other comprehensive income" in shareholders' equity in the
accompanying Condensed Consolidated Balance Sheets.
Income Taxes
Income tax (benefit) of $(0.3) million for the three months ended September 30,
2012, was based upon pre-tax book income of $7.8 million. Income tax expense of
$3.0 million for the three months ended September 30, 2011, was based upon
pre-tax book income of $21.8 million. The effective tax rate for the three
months ended September 30, 2012 was (3.9)% compared to an effective tax rate of
13.6% for the same period in 2011. The decrease in the effective tax rate is
primarily due to the recognition of tax benefits for acquisition and integration
costs incurred for Alpine.
(Loss) from Discontinued Operations
We sold our Spanish operations in March 2012 and accounted for this transaction
in accordance with Accounting Standards Codification ("ASC") 205-20
"Discontinued Operation". Accordingly, we reclassified the results of operations
for the three months ended September 30, 2011 to discontinued operations. The
loss from discontinued operations, net of taxes, totaled $0.8 million for the
three months ended September 30, 2011. There was no tax impact on the loss from
discontinued operations.
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Net Income
As a result of the foregoing, we reported income from continuing operations for
the three months ended September 30, 2012 of $8.7 million, a decrease of $13.4
million from the comparable period in 2011. This decrease was principally
attributable to a $12.8 million decrease in revenues and a $5.8 million increase
in general and administrative expenses and a $0.3 million increase in net loss
on disposal of property and equipment, partially offset by a $5.5 million
decrease in direct salaries and related costs. In addition to the $13.4 million
decrease in income from continuing operations, we experienced a $0.4 million
increase in other (expense), net, a decrease in interest income of $0.1 million
and increase in interest (expense) of $0.1 million, partially offset by a $3.3
million decrease in income taxes and a decrease of $0.8 million in loss from
discontinued operations, resulting in net income of $8.1 million for the three
months ended September 30, 2012, a decrease of $9.9 million compared to the same
period in 2011.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011
Revenues
For the nine months ended September 30, 2012, we recognized consolidated
revenues of $823.4 million, a decrease of $69.6 million, or 7.8%, from
$893.0 million of consolidated revenues for the comparable period in 2011.
On a geographic segment basis, revenues from the Americas region, including the
United States, Canada, Latin America, Australia and the Asia Pacific Rim,
represented 83.7%, or $688.8 million, for the nine months ended September 30,
2012 compared to 82.4%, or $735.5 million, for the comparable period in 2011.
Revenues from the EMEA region, including Europe, the Middle East and Africa
represented 16.3%, or $134.6 million, for the nine months ended September 30,
2012 compared to 17.6%, or $157.5 million, for the comparable period in 2011.
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%.
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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.
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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
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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
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$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
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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.
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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,
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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.
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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
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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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