DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2011

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

6.  DERIVATIVE INSTRUMENTS

We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency exchange contracts to hedge our anticipated operating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are principally unsecured foreign exchange contracts.  The market risk exposure is essentially limited to risk related to currency rate movements.  We operate in Canada, the Philippines, Costa Rica and Honduras.  The functional currencies of our Canadian and Philippine operations are the Canadian dollar and the Philippine peso, respectively, which are used to pay labor and other operating costs in those countries. However, our client contracts primarily generate revenues which are paid to us in U.S. dollars.  In Costa Rica and Honduras, our functional currency is the U.S. dollar and the majority of our costs are denominated in U.S. dollars.  We have elected to follow cash flow hedge accounting in order to associate the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss is recorded in accumulated other comprehensive income (“AOCI”) as a component of stockholders’ equity and will be re-classified to operations as the forecasted expenses are incurred, typically within one year.  During the three and nine months ended September 30, 2011 and 2010, our cash flow hedges were highly effective and there were no amounts charged to the Condensed Consolidated Statements of Operations for hedge ineffectiveness.

During the three and nine months ended September 30, 2011, we entered into forward contracts with respect to the Canadian dollar for a notional amount of 12,120 and 25,220 Canadian dollars, respectively, to hedge our foreign currency risk with respect to labor costs in Canada.  During the three and nine months ended September 30, 2011, we entered into non-deliverable forward currency contracts with respect to the Philippine peso for a notional amount of 912,000 and 1,716,000 Philippine pesos, respectively, to hedge our foreign currency risk with respect to labor costs in the Philippines.  The following table shows the notional principal of our derivative instruments as of September 30, 2011:

	Currency	Notional Principal
Instruments qualifying as accounting hedges:
Foreign exchange contracts	Canadian dollar	CDN 17,220
Foreign exchange contracts	Philippine peso	PHP 1,272,000

The Canadian dollar foreign exchange contracts are to be delivered periodically through September 2012 at a purchase price of approximately $17,329, and the Philippine peso foreign exchange contracts are to be delivered periodically through September 2012 at a purchase price of approximately $29,462.  As of September 30, 2011, we have not entered into any arrangements to hedge our exposure to fluctuations in the Costa Rican colon relative to the U.S. dollar.  We expect unrealized gains and losses reported in AOCI will be reclassified to earnings during the next twelve months.  The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of September 30, 2011.  Refer to Note 7, “Fair Value Measurements,” of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value in the Condensed Consolidated Financial Statements.

The following table shows our derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010:

	As of
	September 30, 2011		December 31, 2010
Derivative assets:
Foreign exchange contracts	$	12	$	1,078
Derivative liabilities:
Foreign exchange contracts	$	924	$	91

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended
	September 30, 2011					September 30, 2010
	Loss			Gain		Gain		Gain
	Recognized in			Reclassified		Recognized in		Reclassified		Location of Gain
	AOCI, net of			from AOCI into		AOCI, net of		from AOCI into		Reclassified from
	tax			Income		tax		Income		AOCI into Income
Cash flow hedges:
Foreign exchange contracts	$	(1,016	)	$	166	$	1,100	$	267	Cost of services

	Nine Months Ended
	September 30, 2011					September 30, 2010
	Loss			Gain		Loss			Gain
	Recognized in			Reclassified		Recognized in			Reclassified		Location of Gain
	AOCI, net of			from AOCI into		AOCI, net of			from AOCI into		Reclassified from
	tax			Income		tax			Income		AOCI into Income
Cash flow hedges:
Foreign exchange contracts	$	(3,363	)	$	1,464	$	(300	)	$	1,138	Cost of services