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EXCEL - IDEA: XBRL DOCUMENT - SAPIENT CORP | Financial_Report.xls |
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EX-32.1 - EX-32.1 - SAPIENT CORP | b82859exv32w1.htm |
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EX-32.2 - EX-32.2 - SAPIENT CORP | b82859exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-28074
SAPIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 04-3130648 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
131 Dartmouth St, Boston, MA | 02116 | |
(Address of principal executive offices) | (Zip Code) |
617-621-0200
(Registrants telephone number, including area code)
(none)
(Registrants telephone number, including area code)
(none)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Class | Outstanding at November 1, 2010 | |
Common Stock, $0.01 par value per share | 136,481,926 shares |
SAPIENT CORPORATION
INDEX
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements included in this Quarterly Report, including those related to our cash and liquidity
resources and our cash expenditures relating to dividend payments and restructuring, as well as any
statement other than statements of historical facts regarding our strategy, future operations,
financial position, estimated revenues, projected costs, prospects, plans and objectives are
forward-looking statements. When used in this Quarterly Report, the words will, believe,
anticipate, intend, estimate, expect, project and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee future results, levels of activity, performance or
achievements and you should not place undue reliance on our forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including the risks described below in Part II, Item 1A, Risk Factors
in this Quarterly Report. Our forward-looking statements do not reflect the potential impact of any
future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition,
any forward-looking statements represent our expectation only as of the day this Quarterly Report
was first filed with the Securities and Exchange Commission (SEC) and should not be relied on as
representing our expectations as of any subsequent date. While we may elect to update
forward-looking statements at some point in the future, we specifically disclaim any obligation to
do so, even if our expectations change.
2
Table of Contents
SAPIENT CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED AND CONDENSED BALANCE SHEETS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands, except | ||||||||
per share and share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 189,928 | $ | 195,678 | ||||
Marketable securities, current portion |
| 16,082 | ||||||
Restricted cash, current portion |
439 | 393 | ||||||
Accounts receivable, less allowance for doubtful accounts of $347 and $610
at September 30, 2010 and December 31, 2009, respectively |
121,158 | 111,987 | ||||||
Unbilled revenues |
66,500 | 47,426 | ||||||
Deferred tax assets, current portion |
22,657 | 27,616 | ||||||
Prepaid expenses and other current assets |
29,905 | 24,893 | ||||||
Total current assets |
430,587 | 424,075 | ||||||
Marketable securities, net of current portion |
1,258 | 1,362 | ||||||
Restricted cash, net of current portion |
2,265 | 2,308 | ||||||
Property and equipment, net |
35,196 | 29,229 | ||||||
Purchased intangible assets, net |
18,981 | 23,061 | ||||||
Goodwill |
78,362 | 76,004 | ||||||
Deferred tax assets, net of current portion |
35,733 | 33,521 | ||||||
Other assets |
6,853 | 5,359 | ||||||
Total assets |
$ | 609,235 | $ | 594,919 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 22,620 | $ | 19,238 | ||||
Accrued compensation |
60,635 | 49,147 | ||||||
Accrued restructuring costs, current portion |
3,819 | 3,727 | ||||||
Deferred revenues, current portion |
15,368 | 19,544 | ||||||
Other current accrued liabilities |
62,196 | 55,855 | ||||||
Total current liabilities |
164,638 | 147,511 | ||||||
Accrued restructuring costs, net of current portion |
405 | 2,994 | ||||||
Deferred tax liabilites, net of current portion |
1,566 | 1,579 | ||||||
Other long-term liabilities |
19,677 | 16,634 | ||||||
Total liabilities |
186,286 | 168,718 | ||||||
Commitments and contingencies (Note 6) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized and none issued
or outstanding at September 30, 2010 and December 31, 2009 |
| | ||||||
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 136,900,380
and 133,272,997 shares issued at September 30, 2010 and
December 31, 2009, respectively |
1,369 | 1,333 | ||||||
Additional paid-in capital |
549,225 | 583,291 | ||||||
Treasury stock, at cost, 458,664 and 444,418 shares at September 30, 2010 and December 31, 2009, respectively |
(2,466 | ) | (2,316 | ) | ||||
Accumulated other comprehensive loss |
(9,816 | ) | (12,626 | ) | ||||
Accumulated deficit |
(115,363 | ) | (143,481 | ) | ||||
Total stockholders equity |
422,949 | 426,201 | ||||||
Total liabilities and stockholders equity |
$ | 609,235 | $ | 594,919 | ||||
The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.
3
Table of Contents
SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Service revenues |
$ | 217,057 | $ | 165,541 | $ | 600,631 | $ | 455,434 | ||||||||
Reimbursable expenses |
11,525 | 6,919 | 30,375 | 19,942 | ||||||||||||
Total gross revenues |
228,582 | 172,460 | 631,006 | 475,376 | ||||||||||||
Operating expenses: |
||||||||||||||||
Project personnel expenses |
148,003 | 114,219 | 415,115 | 316,336 | ||||||||||||
Reimbursable expenses |
11,525 | 6,919 | 30,375 | 19,942 | ||||||||||||
Total project personnel
expenses and
reimbursable expenses |
159,528 | 121,138 | 445,490 | 336,278 | ||||||||||||
Selling and marketing expenses |
9,298 | 8,055 | 28,170 | 22,471 | ||||||||||||
General and administrative expenses |
38,443 | 30,207 | 110,821 | 84,325 | ||||||||||||
Restructuring and other related charges |
34 | 2,518 | 448 | 4,821 | ||||||||||||
Amortization of purchased intangible assets |
1,301 | 1,681 | 4,127 | 3,446 | ||||||||||||
Acquisition costs and other related charges |
| 1,110 | 111 | 2,783 | ||||||||||||
Total operating expenses |
208,604 | 164,709 | 589,167 | 454,124 | ||||||||||||
Income from operations |
19,978 | 7,751 | 41,839 | 21,252 | ||||||||||||
Interest and other income, net |
942 | 652 | 2,487 | 2,467 | ||||||||||||
Income before income taxes |
20,920 | 8,403 | 44,326 | 23,719 | ||||||||||||
Provision for income taxes |
6,645 | 2,470 | 16,208 | 5,692 | ||||||||||||
Net income |
$ | 14,275 | $ | 5,933 | $ | 28,118 | $ | 18,027 | ||||||||
Basic net income per share |
$ | 0.11 | $ | 0.05 | $ | 0.21 | $ | 0.14 | ||||||||
Diluted net income per share |
$ | 0.10 | $ | 0.04 | $ | 0.20 | $ | 0.14 | ||||||||
Weighted average common shares |
132,774 | 128,582 | 131,517 | 127,530 | ||||||||||||
Weighted average dilutive common share equivalents |
6,469 | 6,739 | 6,796 | 4,185 | ||||||||||||
Weighted average common shares and dilutive common share equivalents |
139,243 | 135,321 | 138,313 | 131,715 | ||||||||||||
The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.
4
Table of Contents
SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 28,118 | 18,027 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Loss (gain) recognized on disposition of fixed assets |
240 | (42 | ) | |||||
Unrealized loss on financial instruments |
167 | 61 | ||||||
Realized gain on investments |
(132 | ) | (103 | ) | ||||
Depreciation expense |
11,910 | 12,035 | ||||||
Amortization of purchased intangible assets |
4,127 | 3,446 | ||||||
Deferred income taxes |
2,761 | 1,702 | ||||||
Provision for doubtful accounts, net |
| 829 | ||||||
Stock-based compensation expense |
13,924 | 10,928 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(9,454 | ) | 8,681 | |||||
Unbilled revenues |
(18,835 | ) | (3,226 | ) | ||||
Prepaid expenses and other current assets |
(6,612 | ) | (12,770 | ) | ||||
Sales of trading marketable securities |
16,425 | | ||||||
Other assets |
(1,381 | ) | 1,085 | |||||
Accounts payable |
1,104 | 3,680 | ||||||
Accrued compensation |
1,334 | (21,076 | ) | |||||
Accrued restructuring costs |
(2,457 | ) | 242 | |||||
Deferred revenues |
(4,166 | ) | (838 | ) | ||||
Other accrued liabilities |
3,435 | (5,898 | ) | |||||
Other long-term liabilities |
2,775 | 954 | ||||||
Net cash provided by operating activities |
43,283 | 17,717 | ||||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisitions, net of cash acquired |
(3,163 | ) | (14,169 | ) | ||||
Purchases of property and equipment and capitalization of internally developed software costs |
(15,019 | ) | (6,930 | ) | ||||
Sales and maturities of available-for-sale marketable securities |
881 | 3,796 | ||||||
Cash received on financial instruments, net |
535 | 298 | ||||||
Restricted cash |
(27 | ) | (130 | ) | ||||
Net cash used in investing activities |
(16,793 | ) | (17,135 | ) | ||||
Cash flows from financing activities: |
||||||||
Principal payments under capital lease obligations |
(62 | ) | (8 | ) | ||||
Proceeds from credit facilities |
3,050 | | ||||||
Proceeds from stock option and purchase plans |
5,943 | 911 | ||||||
Dividends paid on common stock |
(46,832 | ) | | |||||
Net cash (used in) provided by financing activities |
(37,901 | ) | 903 | |||||
Effect of exchange rate changes on cash and cash equivalents |
5,661 | 4,844 | ||||||
(Decrease) increase in cash and cash equivalents |
(5,750 | ) | 6,329 | |||||
Cash and cash equivalents, at beginning of period |
195,678 | 169,340 | ||||||
Cash and cash equivalents, at end of period |
$ | 189,928 | $ | 175,669 | ||||
Supplemental Cash Flow Information: |
||||||||
Non-cash investing transaction: |
||||||||
Contingent earnout consideration associated with acquisition |
$ | 2,371 | $ | 2,363 | ||||
Issuance of
common stock associated with acquisition of Nitro Ltd. |
$ | | $ | 11,800 | ||||
The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.
5
Table of Contents
NOTES TO UNAUDITED CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated and condensed financial statements have been prepared
by Sapient Corporation pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States
of America for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December 31, 2009 included
in the Companys Annual Report on Form 10-K. These financial statements reflect all adjustments
(consisting solely of normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented. The results of
operations for the three and nine months ended September 30, 2010, are not necessarily indicative
of the results to be expected for any future period or the full fiscal year.
In the first quarter of 2010, the Company realigned its North America and Europe business
units and internal reporting systems to better align its services with its business and operational
strategy. As such, the results of operations in Note 10, Segment Information, reflect the Companys
current business units: SapientNitro (new), Sapient Global Markets (new) and Sapient Government
Services. SapientNitro is our customer experience business that combines multi-channel marketing,
multi-channel commerce and the technology that binds them to help clients grow their businesses and
create brand advocates. Sapient Global Markets provides advisory, analytics, technology, and
operations solutions to todays evolving financial and commodity markets. Sapient Government
Services provides consulting, technology, and marketing services to a wide array of U.S.
governmental agencies. Interim 2009 segment information has been recast to conform to the current
structure. The Company has reclassified $2.1 million in expense from centrally managed functions to
direct expenses for the three months ended September 30, 2009 in Note 10, Segment Information, in
order to conform to current presentation.
During the third quarter of 2010, the Company identified errors totaling $0.8 million in the
recording of project personnel expenses and reimbursable expenses of which approximately $0.4
million understated income in the fourth quarter of 2009. The remaining errors were spread across
multiple quarters with no other quarter impact being greater than $0.1 million. The Company
recorded a reduction to project personnel expenses of $0.8 million in the third quarter of 2010 to
correct the error. Management has concluded that the impact of these errors is not material to the
affected prior periods or the three and nine months ended September 30, 2010.
Unless the context requires otherwise, references in this Quarterly Report to Sapient, the
Company, we, us or our refer to Sapient Corporation and its consolidated subsidiaries.
2. Acquisitions
Nitro Limited
On July 1, 2009 the Company completed its acquisition of Nitro Ltd. (Nitro), a global
advertising network. Nitro operates across North America, Europe, Australia and Asia. The
acquisition added approximately 300 employees. The Company acquired Nitro to leverage Nitros
traditional advertising services with the Companys digital commerce and marketing technology
services. Nitros results of operations are reflected in the Companys consolidated statements of
operations as of July 1, 2009. The Nitro transaction was accounted for using the acquisition
method.
The purchase price, net of cash acquired, was $31.0 million for the acquisition of 100% of
Nitros outstanding shares. The $31.0 million consisted of $11.1 million in cash, net of cash
acquired, deferred consideration with an estimated fair value of $8.1 million and the issuance of
3.3 million shares of restricted common stock valued at $11.8 million. The value of common stock
was determined as $6.27 per share, the value of the Companys common stock on the acquisition date,
less $8.7 million. The $8.7 million reduction in purchase price reflects the impact of the selling
restrictions on the shares of $7.1 million. The remaining $1.6 million reduction reflects the value
of shares transferred as consideration that are also tied to the sellers continued employment. The
$1.6 million is being accounted for as compensation expense over the associated vesting period.
The Company acquired a deferred consideration obligation of $8.0 million. The obligation is
denominated in a foreign currency. Pursuant to the purchase agreement, the seller agreed to
indemnify the Company for payments in excess of $8.0 million. The Company paid $4.6 million in the
fourth quarter of 2009 and $3.2 million in 2010 to settle this obligation. At September 30, 2010
the Company had a deferred consideration obligation of $1.3 million, offset by an indemnification
asset of $1.1 million.
The former shareholders of Nitro could have received additional consideration of up to $3.0
million, which was contingent on certain financial performance conditions during the twelve month
period from October 1, 2009 to September 30, 2010, and was payable in either cash or stock at the
Companys discretion. Nitro did not achieve the prescribed performance targets and as a result the
Company did not record a liability as of the acquisition date and as of September 30, 2010.
Furthermore, if Nitros financial performance did not meet certain minimum revenue thresholds for
the twelve months ended June 30, 2010, the Company could have clawed-back shares from the former
shareholders of Nitro. Nitros financial performance met the prescribed target and the Company did
not record an asset for this contingency. The Company clawed back 14,246 shares from the seller to
satisfy a $0.2 million
indemnification asset during the quarter. The following unaudited, pro forma information assumes
the Nitro acquisition occurred at the beginning of the periods presented (in thousands, except per
share amounts):
6
Table of Contents
Nine Months Ended | ||||
September 30, | ||||
2009 | ||||
(unaudited) | ||||
Service revenues |
$ | 479,739 | ||
Net income |
$ | 12,264 | ||
Basic net income per share |
$ | 0.10 | ||
Diluted net income per share |
$ | 0.09 | ||
Derivatives Consulting Group Limited
On August 6, 2008 the Company acquired 100% of the outstanding shares of Derivatives
Consulting Group Limited (DCG). Aggregate initial consideration for the acquisition totaled $31.3
million, which consisted of: (i) cash consideration of $21.9 million, (ii) stock consideration of
307,892 shares, issued on the acquisition date, valued at $2.3 million, (iii) deferred stock
consideration of 395,125 shares, valued at $4.5 million, which were issued in February 2010, and
(iv) transaction costs of $2.6 million.
Pursuant to the agreement, DCG could earn additional consideration subject to achieving
certain operating objectives in years one, two and three, ending March 31, 2009, 2010 and 2011,
respectively. The year one operating objectives were partially achieved and, as a result, the
Company paid approximately $5.6 million in contingent consideration in 2009 which comprised $2.4
million in stock and $3.2 million in cash. The Company determined the amount of contingent
consideration due to achievement of year two performance objectives was $2.4 million, which was
paid by issuing 235,744 common shares during the second quarter of 2010. The maximum potential
future consideration for the year three performance objectives, to be resolved over the next year,
is £6.0 million (approximately $9.5 million at September 30, 2010 exchange rate) payable in cash or
common stock. As the DCG acquisition was completed in 2008, it is accounted for as a business
combination under the purchase method. Accordingly, any future contingent consideration payments
will result in an increase in goodwill at the time the contingent consideration is earned.
During the first quarter of 2009, the Company finalized an integration plan for DCG, which was
initiated at the date of acquisition, which resulted in the termination of certain employees. The
total cost of this plan was $0.5 million, which is for employee severance costs. The total cost of
$0.5 million was recorded as an increase to goodwill and accrued in other current liabilities, and
as of March 31, 2010 all amounts had been paid.
3. Marketable Securities, Put Right and Fair Value Disclosures
Marketable Securities and Put Right
At September 30, 2010 the estimated fair value of the Companys marketable securities
classified as available-for-sale securities was $1.3 million. At December 31, 2009 the estimated
fair value of the Companys marketable securities classified as available-for-sale securities and
trading securities were $2.1 million and $15.3 million, respectively. The Company sold, at
amortized cost, $16.4 million of ARS classified as trading securities and $0.1 million of auction
rate securities (ARS) classified as available-for-sale during the first nine months of 2010.
The following tables summarize the Companys marketable securities (in thousands):
7
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Available-for-Sale Securities as of September 30, 2010 | ||||||||||||||||
Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction rate securities |
$ | 1,400 | $ | | $ | (142 | ) | $ | 1,258 | |||||||
Available-for-Sale Securities as of December 31, 2009 | ||||||||||||||||
Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction rate securities |
$ | 1,500 | $ | | $ | (138 | ) | $ | 1,362 | |||||||
Short-term: |
||||||||||||||||
Money market fund deposits |
940 | | (186 | ) | 754 | |||||||||||
Total |
$ | 2,440 | $ | | $ | (324 | ) | $ | 2,116 | |||||||
Trading Securities as of December 31, 2009 | ||||||||||||||||
Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Short-term: |
||||||||||||||||
Auction rate securities |
$ | 16,425 | $ | | $ | (1,097 | ) | $ | 15,328 | |||||||
The Companys available-for-sale and trading securities are ARS . As of September
30, 2010 all of the Companys available-for-sale ARS have been in an unrealized loss position for
more than twelve months. The Companys trading ARS were stated at fair value at December 31, 2009.
Using a discounted cash flow analysis, the Company has assessed that the fair value of its ARS
classified as available-for-sale securities is $142,000 less than their amortized cost at September
30, 2010 compared to $138,000 less than amortized cost at December 31, 2009. The Company has
recorded the change in valuation, a loss of $4,000, in the accumulated other comprehensive loss
section on its consolidated and condensed balance sheets. The Company does not intend to sell its
ARS classified as available-for-sale until a successful auction occurs and these ARS investments
are liquidated at amortized cost, nor does the Company expect to be required to sell these ARS
before a successful auction occurs.
At December 31, 2009 the amortized cost of the Companys investment in the Primary Fund, a
mutual fund that suspended redemptions, was $0.8 million. Due to events in 2009 that limited the
liquidity of this investment the Company recorded an impairment of $0.2 million in 2009. In January
2010 the Company received the remaining $0.8 million balance.
The following table reconciles the total other-than-temporary impairment losses to other-than
temporary losses reflected in earnings for the Companys available-for-sale securities for the
three and nine months ended September 30, 2010 and 2009 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total other-than-temporary losses |
$ | | $ | | $ | (4 | ) | $ | (324 | ) | ||||||
Less: portion of loss recognized in other comprehensive loss |
| | (4 | ) | (119 | ) | ||||||||||
Net impairment losses recognized in earnings |
$ | | $ | | $ | | $ | (205 | ) | |||||||
At December 31, 2009 the Company recorded its ARS classified as trading securities
at their amortized cost. The fair value of the ARS classified as trading securities was $1.1
million less than their amortized cost. The Company recorded the change in the other-than-temporary
impairment in interest and other income, net. All of the Companys ARS classified as trading
securities were held with UBS, one of the Companys brokers. On November 5, 2008 the Company
accepted an offer from UBS which provided the Company with rights, the Put Right, to sell UBS its
ARS investments at par at any time during a two-year period beginning June 30, 2010. The Put Right
was initially measured at its fair value and changes in fair value of the Put Right were reflected
in earnings. As the Company exercised the Put Right on June 30, 2010 and on July 1, 2010 sold at
amortized cost the remaining $6.8 million held with UBS as of June 30, 2010, back to UBS the Put
Right no longer held any significant value and the Company recorded the
change in fair value of the Put Right, a loss of $1.1 million compared to its valuation as of
December 31, 2009, in interest and other
8
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income, net. This loss was offset by a $1.1 million gain in fair value on the UBS ARS compared to
their valuation as of December 31, 2009 as they were all sold at amortized cost.
Actual maturities of our marketable securities may differ from contractual maturities because
some borrowers have the right to call or prepay obligations. Gross realized gains and losses on the
sale of securities are calculated using the specific identification method, and were not material
to the Companys operations for the three and nine months ended September 30, 2010 and 2009.
Fair Value Disclosures
The Company accounts for certain assets and liabilities at fair value. The following tables
represent the Companys fair value hierarchy for its cash equivalents, marketable securities,
foreign exchange option contracts and acquired assets and liabilities measured at fair value on a
recurring basis as of September 30, 2010 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial assets: |
||||||||||||||||
Auction rate securities |
$ | | $ | | $ | 1,258 | $ | 1,258 | ||||||||
Bank time deposits |
| 71,770 | | 71,770 | ||||||||||||
Foreign exchange option contracts, net |
| 223 | | 223 | ||||||||||||
Money market fund deposits |
24,572 | | | 24,572 | ||||||||||||
Indemnification assets acquired |
| | 1,078 | 1,078 | ||||||||||||
Total |
$ | 24,572 | $ | 71,993 | $ | 2,336 | $ | 98,901 | ||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial liabilities: |
||||||||||||||||
Foreign exchange option contracts, net |
$ | | $ | 236 | $ | | $ | 236 | ||||||||
Deferred consideration acquired |
| | 231 | 231 | ||||||||||||
Other long-term liabilities acquired |
| | 1,395 | 1,395 | ||||||||||||
Total |
$ | | $ | 236 | $ | 1,626 | $ | 1,862 | ||||||||
In January 2010 the Financial Accounting Standards Board (FASB) issued guidance
related to disclosures of fair value measurements. The guidance requires gross presentation of
activity within the Level 3 measurement roll-forward (below) and details of transfers in and out of
Level 1 and 2 measurements. It also clarifies two existing disclosure requirements on the level of
disaggregation of fair value measurements and disclosures on inputs and valuation techniques. A
change in the hierarchy of an investment from its current level will be reflected in the period
during which the pricing methodology of such investment changes. Disclosure of the transfer of
securities from Level 1 to Level 2 or Level 3 will be made in the event that the related security
is significant to total cash and investments. The Company did not have any transfers of assets and
liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the nine
months ended September 30, 2010.
Level 1 assets consist of money market fund deposits that are traded in an active market with
sufficient volume and frequency of transactions. The fair value of these assets was determined from
quoted prices in active markets for identical assets.
Level 2 assets consist of bank time deposits and foreign exchange option contracts and Level 2
liabilities include foreign exchange option contracts. The fair value of these assets was
determined from inputs that are observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data.
Level 3 assets consist of ARS investments structured with short-term interest rate reset dates
of generally less than ninety days but with contractual maturities that can be well in excess of
ten years. At the end of each reset period, which occurs every seven to thirty-five days, investors
can continue to hold the investments at par or sell the securities at auction provided there are
willing buyers to make the auction successful. The ARS investments the Company holds are
collateralized by student loans and municipal debt and have experienced failed auctions. Level 3
assets also include the following assumed, financial assets and liabilities as a result of the
Nitro acquisition: (i) indemnification assets, (ii) deferred consideration and (iii) other
long-term liability.
The following table provides a summary of changes in fair value of the Companys Level 3
financial assets measured on a recurring basis for the nine months ended September 30, 2010 (in
thousands):
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Level 3 Inputs | ||||||||
Assets | Liabilities | |||||||
Balance at December 31, 2009 |
$ | 20,847 | $ | 5,736 | ||||
Settlement of indemnification asset related to currency transaction
loss on deferred consideration(1) |
(1,079 | ) | (1,079 | ) | ||||
Settlement of other indemnification asset related to Nitro acquisition |
(150 | ) | | |||||
Loss on increase in fair value of deferred consideration acquired included
in acquisition costs and other related charges |
| 36 | ||||||
Loss on increase in fair value of other long-term liability acquired included
in general and administrative expenses |
| 96 | ||||||
Payment of acquired deferred consideration(1) |
| (3,163 | ) | |||||
Unrealized loss included in accumulated other comprehensive loss |
(4 | ) | | |||||
Realized loss included in other income, net |
(1,096 | ) | | |||||
Realized gain included in other income, net |
1,096 | | ||||||
Sales of marketable securities |
(17,278 | ) | | |||||
Balance at September 30, 2010 |
$ | 2,336 | $ | 1,626 | ||||
(1) | Deferred consideration acquired in Nitro transaction is denominated in a foreign currency. Pursuant to the purchase agreement, the Company is indemnified against all currency transaction losses related to the deferred consideration. In the first nine months of 2010 the Company paid $3,163 and applied the $1,079 currency loss indemnification asset against the $4,437 accrued as of December 31, 2009. |
Included in the Companys cash and cash equivalents balance of $189.9 million
as of September 30, 2010, were $71.8 million of time deposits with maturities of less than or equal
to 90 days and money market fund deposits of $24.6 million. Included in the Companys cash and cash
equivalents balance of $195.7 million as of December 31, 2009 were $56.2 million of time deposits
with maturities of less than or equal to 90 days and money market fund deposits of $44.6 million.
4. Stock-Based Compensation
The Company recorded $4.3 million and $3.8 million of stock-based compensation expense for the
three months ended September 30, 2010 and 2009, respectively, and $13.9 million and $10.9 million
for the nine months ended September 30, 2010 and 2009, respectively. Project personnel expenses,
selling and marketing expenses and general and administrative expenses appearing in the
consolidated and condensed statements of operations include the following stock-based compensation
amounts (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Project personnel expenses |
$ | 2,844 | $ | 2,130 | $ | 7,948 | $ | 6,138 | ||||||||
Selling and marketing expenses |
(7 | ) | 305 | 844 | 1,128 | |||||||||||
General and administrative expenses |
1,452 | 1,347 | 5,132 | 3,662 | ||||||||||||
Total stock-based compensation |
$ | 4,289 | $ | 3,782 | $ | 13,924 | $ | 10,928 | ||||||||
Stock-based compensation expense capitalized related to individuals working on internally
developed software was immaterial. The Company values restricted stock units (RSUs) based on
performance conditions and RSUs contingent on employment based on the fair market value on the date
of grant, which is equal to the quoted market price of the Companys common stock on the date of
grant.
The Company recognizes stock-based compensation expense net of a forfeiture rate and
recognizes expense for only those shares expected to vest on a straight-line basis over
the requisite service period of the award when the only condition to vesting is continued
employment. If vesting is subject to a market, vesting is based on the derived service period. The
Company estimates its forfeiture rate based on its historical experience.
During the first quarter of 2010, the Company granted a special dividend equivalent payment of
$0.35 per RSU for each outstanding RSU award as of March 1, 2010, to be paid in shares when the
underlying award vests. If the underlying RSU does not vest, the dividend equivalent is forfeited.
As the dividend declared on outstanding RSUs is a modification of the original awards, the cost of
the dividend equivalent will be recognized as stock-based compensation in the same manner the
Company recognizes stock-based compensation for RSUs. The Company estimated the total additional
stock-based compensation expense related to the special dividend equivalent on RSUs, net of
forfeitures, to be approximately $2.0 million. This expense will be recognized through March 1,
2014, the amounts recorded in each period to be commensurate with the vesting of the underlying
awards.
During the second quarter, the Company granted RSU with service period and performance
conditions to its Chief Executive Officer (CEO). Up to 150,000 units will vest on March 1, 2013
if the performance conditions are met. The performance conditions
10
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for 100,000 of the RSUs have vesting based on the Company achieving certain financial measures
for the three year period ending December 31, 2012. The remaining 50,000 RSUs will vest if the CEO
meets certain strategic objectives set by the Board of Directors over the same three year period.
The following table summarizes activity relating to stock options under all stock option plans
for the nine months ended September 30, 2010 (in thousands, except prices):
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding as of December 31, 2009 |
5,810 | $ | 12.55 | |||||
Options exercised |
(1,207 | ) | $ | 4.85 | ||||
Options forfeited/cancelled |
(925 | ) | $ | 45.38 | ||||
Outstanding as of September 30, 2010 |
3,678 | $ | 6.82 | |||||
Vested and expected to vest as of September 30, 2010 |
3,678 | $ | 6.82 | |||||
Options exercisable as of September 30, 2010 |
3,674 | $ | 6.82 | |||||
Aggregate intrinsic value of outstanding |
$ | 20,811 | ||||||
Aggregate intrinsic value of vested and expected to vest |
$ | 20,811 | ||||||
Aggregate intrinsic value of exerciseable |
$ | 20,802 |
The aggregate intrinsic value of stock options exercised in the nine months ended
September 30, 2010 and 2009 was $6.1 million and less than $1.0 million, respectively, determined
at the date of exercise. As of September 30, 2010 there remained less than $0.1 million of
compensation expense, net of estimated forfeitures related to non-vested stock options to be
recognized as expense over a weighted average period of less than one year.
The table below summarizes activity relating to RSUs for the nine months ended September 30,
2010 (in thousands, except prices):
Number of Shares | Weighted | |||||||
Underlying | Average Grant | |||||||
Restricted Units | Date Fair Value | |||||||
Unvested as of December 31, 2009 |
6,629 | $ | 6.23 | |||||
Restricted units granted |
2,687 | $ | 9.40 | |||||
Restricted units vested |
(2,580 | ) | $ | 6.55 | ||||
Restricted units forfeited/cancelled |
(260 | ) | $ | 6.91 | ||||
Unvested as of September 30, 2010 |
6,476 | $ | 7.39 | |||||
Expected to vest as of September 30, 2010 |
5,914 | $ | 7.39 | |||||
The weighted average grant date fair value of RSUs granted for the nine months ended
September 30, 2010 and 2009 was $9.40 and $6.00, respectively. The aggregate intrinsic value of the
RSUs vested in the nine months ended September 30, 2010 and 2009, was $26.8 million and $14.3
million, respectively. The intrinsic value of the non-vested RSUs, net of forfeitures, as of
September 30, 2010, was $77.5 million. As of September 30, 2010 there remained $40.6 million of
compensation expense related to non-vested RSUs to be recognized as expense over a weighted average
period of approximately 2.8 years.
5. Net Income Per Share
The following information presents the Companys computation of basic and diluted net income
per share for the periods presented in the consolidated and condensed statements of operations (in
thousands, except per share amounts):
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited) | ||||||||||||||||
Net income |
$ | 14,275 | $ | 5,933 | $ | 28,118 | $ | 18,027 | ||||||||
Basic net income per share: |
||||||||||||||||
Weighted average common shares outstanding |
132,774 | 128,582 | 131,517 | 127,530 | ||||||||||||
Basic net income per share |
$ | 0.11 | $ | 0.05 | $ | 0.21 | $ | 0.14 | ||||||||
Diluted net income per share: |
||||||||||||||||
Weighted average common shares outstanding |
132,774 | 128,582 | 131,517 | 127,530 | ||||||||||||
Weighted average dilutive common share equivalents |
6,469 | 6,739 | 6,796 | 4,185 | ||||||||||||
Weighted average common shares and dilutive common share equivalents |
139,243 | 135,321 | 138,313 | 131,715 | ||||||||||||
Diluted net income per share |
$ | 0.10 | $ | 0.04 | $ | 0.20 | $ | 0.14 | ||||||||
Anti-dilutive options and share based awards not included in the calculation |
590 | 3,416 | 1,634 | 5,589 | ||||||||||||
Included in weighted average dilutive common share equivalents for 2010 are
restricted shares associated with the Nitro acquisition. These shares are reflected in weighted
average dilutive common share equivalents as they were contingent shares during the period
presented.
6. Commitments and Contingencies
The Company has certain contingent liabilities that arise in the ordinary course of its
business activities. The Company accrues contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. The Company is subject
to various legal claims that have arisen in the course of its business and that have not been fully
adjudicated in which the damages claimed under such actions, in the aggregate, total approximately
$2.6 million as of September 30, 2010. The Company has accrued at September 30, 2010, approximately
$0.7 million related to certain of these items. The Company intends to defend these matters
vigorously, however the ultimate outcome of these items is uncertain and the potential loss, if
any, may be significantly higher or lower than the amounts that the Company has accrued. Should the
Company fail to prevail in any of these legal matters or should several of these legal matters be
resolved against the Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected.
7. Restructuring and Other Related Charges
2010 Restructure Event
In the first quarter of 2010, we consolidated our UK operations into one office space. As
such, the Company restructured one lease which ends in March 2011. Estimated costs for the
consolidation of facilities included contractual rental commitments and related costs. The Company
recorded $0.8 million in restructuring expense in the first quarter of 2010. These charges were not
recorded to a segment because they impacted areas of the business that supported the business units
and are reflected in Reconciling Items in Note 10, Segment Information. The following table shows
activity during the nine months ended September 30, 2010, related to the 2010 restructuring event
(in thousands):
Facilities | ||||
2010 provision |
$ | 846 | ||
Cash utilized |
(358 | ) | ||
Balance, September 30, 2010 |
$ | 488 | ||
The remaining $0.5 million accrued restructuring as of September 30, 2010 is expected to be
paid by March 2011.
2009 Restructure Event
In February 2009, in response to the impact of current global economic conditions on its
demand environment, the Company implemented a restructuring plan to reduce its peoplecount during
the first quarter of 2009. For the nine months ended September 30, 2009, 392 employees were
terminated in connection with this restructuring plan and the Company recorded restructuring
charges of $2.0 million in its consolidated and condensed statements of operations. These charges
consisted of $1.9 million in employee cash severance payments and the remaining charges consisted
of outplacement assistance fees and other associated costs. Of the $2.0 million restructuring
charge, $1.2 million and $0.6 million were recorded to the Companys SapientNitro and Sapient
Global Markets operating segments. The remaining $0.2 million was not recorded to a segment because
they impacted areas of the business that supported the business units and are reflected in
Reconciling Items in Note 10, Segment Information. There were no amounts accrued for this
restructuring event as of December 31, 2009.
2001, 2002, 2003 Restructure Events
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As a result of the decline in the demand for advanced technology consulting services that
began in 2000, the Company restructured its workforce and operations in 2001, 2002 and 2003. These
charges were not recorded to a segment because they impacted areas of the business that supported
the business units, but are included in Reconciling Items in Note 10, Segment Information. The
restructuring consisted of ceasing operations and consolidating or closing excess offices.
Estimated costs for the consolidation of facilities included contractual rental commitments or
lease buy-outs for office space vacated and related costs, offset by estimated sub-lease income.
For the nine months ended September 30, 2010 the Company recorded a net restructuring
benefit associated with the 2001, 2002 and 2003 events of approximately $0.4 million in its
consolidated and condensed statements of operations principally related changes in the Companys
estimated operating expenses to be incurred and sub-lease income in connection with a previously
restructured lease, which ends in 2011.
For the nine months ended September 30, 2009, the Company recorded net restructuring and
other related charges of approximately $2.8 million in its consolidated and condensed statements of
operations principally related to one item. The item involved recording a restructuring charge
associated with a change of estimated operating expenses to be incurred in connection with three
previously restructured leases.
The following table shows activity during the nine months ended September 30, 2010
related to 2001, 2002 and 2003 restructuring events (in thousands):
Facilities | ||||
Balance, December 31, 2009 |
$ | 6,721 | ||
Benefits, net |
(398 | ) | ||
Cash utilized |
(2,587 | ) | ||
Balance, September 30, 2010 |
$ | 3,736 | ||
The total remaining accrued restructuring for the 2001, 2002 and 2003 events is
$3.7 million at September 30, 2010 of which the cash outlay over the next 12 months is expected to
be $3.3 million, and the remaining $0.4 million will be paid by November 2011.
8. Income Taxes
For the three months ended September 30, 2010 the Company recorded an income tax
provision of $6.6 million compared to $2.5 million in 2009. For the nine months ended September 30,
2010 and 2009, the Company recorded an income tax provision of $16.2 million and $5.7 million,
respectively. Income tax is related to foreign, federal and state tax obligations. The increase is
primarily due to a higher effective tax rate on the Companys U.S. income because of the release of
its valuation allowance on a substantial portion of its U.S. deferred taxes in the fourth quarter
of 2009. Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of
available positive and negative evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. At December 31, 2008 all of the Companys U.S.
deferred tax assets had a full valuation allowance of $112.1 million. Based upon operating results
for the years immediately preceding and through December 31, 2009, as well as an assessment of
expected future results of operations in the U.S., at December 31, 2009 the Company determined that
it had become more likely than not that it would realize a substantial portion of its deferred tax
assets in the U.S. As a result, the Company released its valuation allowances on a substantial
portion of its U.S. deferred tax assets in the fourth quarter of 2009. On September 30, 2010 the
Company continues to provide a valuation allowance against certain
deferred tax assets for one of the
Companys European subsidiaries as the Company determined that it is more likely than not that the
deferred tax assets may not be realized. At September 30, 2010 a valuation allowance remains on
certain state tax net operating loss carry forwards, as well as a portion of the net operating loss
carry forwards relating to certain stock-based compensation deductions. The Company continues to
believe that deferred tax assets in various other foreign jurisdictions are more likely than not to
be realized and, therefore, no valuation allowance has been recorded against these assets.
The Company has gross unrecognized tax benefits, including interest and penalties, of
approximately $10.4 million as of September 30, 2010 and $8.9 million as of December 31, 2009.
These amounts represent the amount of unrecognized tax benefits that, if recognized,
would result in a reduction of the Companys effective tax rate. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits in the provision for income
taxes. As of September 30, 2010 and December 31, 2009 interest accrued was approximately
$2.2 million and $1.6 million, respectively.
The Company conducts business globally and, as a result, one or more of its subsidiaries
files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business the Company is subject to examination by taxing
authorities throughout the world. Although the Company believes its estimates are appropriate, the
final determination of tax filings could result in favorable or unfavorable changes in an estimate.
During the first nine months of 2010, a favorable determination resulted in a decrease to
unrecognized tax benefits of $0.7 million. We anticipate the settlement of tax filings in the next
twelve months and the expiration of the relevant statute of limitations could result in an
additional decrease in unrecognized tax benefits between $0.4 million and $1.0 million.
13
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9. Comprehensive Income
The components of comprehensive income are presented below for the periods presented in
the consolidated and condensed statements of operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 14,275 | $ | 5,933 | $ | 28,118 | $ | 18,027 | ||||||||
Foreign currency translation gain (loss) |
8,889 | (1,419 | ) | 2,814 | 9,208 | |||||||||||
Unrealized (loss) gain on available-for-sale securities |
| | (4 | ) | 39 | |||||||||||
Comprehensive income |
$ | 23,164 | $ | 4,514 | $ | 30,928 | $ | 27,274 | ||||||||
10. Segment Information
The Company has discrete financial data by operating segments available based on its
method of internal reporting, which disaggregates its operations. Operating segments are defined as
components of the Company for which separate financial information is available to manage resources
and evaluate performance.
Beginning in 2010, the Company realigned its North America and Europe business units and
internal reporting systems to better align its services with the Companys business and operational
strategy. The new business units are: SapientNitro (new), Sapient Global Markets (new) and Sapient
Government Services. As such, results by operating segment for the three and nine months ended
September 30, 2009 have been recast to reflect the new business unit structure.
The Company does not allocate certain marketing and general and administrative expenses
to its business unit segments because these activities are managed separately from the business
units. The Company allocated $1.2 million and $0.6 million of $2.0 million related to its first
quarter 2009 reduction in workforce to the SapientNitro and Sapient Global Markets segments,
respectively. The Company did not allocate the remaining $0.2 million of costs associated with the
2009 restructuring activity or any costs associated with the 2001, 2002, 2003 and 2010
restructuring events across its operating segments for internal measurement purposes, because the
substantial majority of these restructuring costs impacted areas of the business that supported the
business units and, specifically in the case of our 2001, 2002, 2003 and 2010 events, were related
to the initiative to reengineer general and administrative activities and the consolidation of
facilities. Management does not allocate stock-based compensation to the segments for the review of
results for the Chief Operating Decision Maker (CODM). Asset information by operating segment is
not reported to or reviewed by the CODM, and therefore, the Company has not disclosed asset
information for each operating segment.
The tables below present the service revenues and income before income taxes attributable
to these operating segments for the periods presented (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service Revenues: |
||||||||||||||||
SapientNitro |
$ | 134,840 | $ | 103,380 | $ | 376,079 | $ | 288,116 | ||||||||
Sapient Global Markets |
69,135 | 51,984 | 188,431 | 140,863 | ||||||||||||
Sapient Government Services |
13,082 | 10,177 | 36,121 | 26,455 | ||||||||||||
Total |
$ | 217,057 | $ | 165,541 | $ | 600,631 | $ | 455,434 | ||||||||
Income Before Income Taxes: |
||||||||||||||||
SapientNitro |
$ | 41,359 | $ | 28,623 | $ | 106,339 | $ | 75,699 | ||||||||
Sapient Global Markets |
21,637 | 19,043 | 61,631 | 47,065 | ||||||||||||
Sapient Government Services |
3,732 | 3,619 | 10,130 | 7,658 | ||||||||||||
Total reportable segments (1) |
66,728 | 51,285 | 178,100 | 130,422 | ||||||||||||
Less reconciling items (2) |
(45,808 | ) | (42,882 | ) | (133,774 | ) | (106,703 | ) | ||||||||
Consolidated Income Before Income Taxes |
$ | 20,920 | $ | 8,403 | $ | 44,326 | $ | 23,719 | ||||||||
(1) | Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments. | |
(2) | Adjustments that are made to the total of the segments operating income to arrive at consolidated income before income taxes include the following (in thousands): |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Centrally managed functions |
$ | 41,126 | $ | 34,443 | $ | 117,952 | $ | 89,972 | ||||||||
Restructuring and other related charges |
34 | 2,518 | 448 | 3,033 | ||||||||||||
Amortization of purchased intangible assets |
1,301 | 1,681 | 4,127 | 3,446 | ||||||||||||
Stock-based compensation expense |
4,289 | 3,782 | 13,924 | 10,928 | ||||||||||||
Interest and other income, net |
(942 | ) | (652 | ) | (2,487 | ) | (2,467 | ) | ||||||||
Acquisition expense and other related charges |
| 1,110 | 111 | 2,783 | ||||||||||||
Unallocated expenses (a) |
| | (301 | ) | (992 | ) | ||||||||||
Total |
$ | 45,808 | $ | 42,882 | $ | 133,774 | $ | 106,703 | ||||||||
(a) | Reflects stock-option restatement related benefits. |
11. Geographic Data
Data for the geographic regions in which the Company operates is presented below for the
periods presented in the consolidated and condensed statements of operations and the consolidated
and condensed balance sheets (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service revenues: |
||||||||||||||||
United States |
$ | 128,315 | $ | 88,876 | $ | 352,265 | $ | 253,802 | ||||||||
International |
88,742 | 76,665 | 248,366 | 201,632 | ||||||||||||
Total service revenues |
$ | 217,057 | $ | 165,541 | $ | 600,631 | $ | 455,434 | ||||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Long-lived assets: |
||||||||
United States |
$ | 15,198 | $ | 14,844 | ||||
International |
19,998 | 14,385 | ||||||
Total long-lived assets (1) |
$ | 35,196 | $ | 29,229 | ||||
(1) | Reflects net book value of the Companys property and equipment |
12. Goodwill and Purchased Intangible Assets
As a result of the Company realigning its North America and Europe business units,
creating two new business units, SapientNitro and Sapient Global Markets, the Companys goodwill
balance as of December 31, 2009 has been allocated among the new business units based on the
business units relative fair value as estimated by the Company. The following is a summary of
goodwill allocated to the Companys business segments as of September 30, 2010 and December 31,
2009 (in thousands):
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Government | ||||||||||||||||
North America | Europe | Services | Total | |||||||||||||
Balance as of December 31, 2009 |
$ | 43,286 | $ | 32,718 | $ | | $ | 76,004 | ||||||||
Allocation to SapientNitro |
(31,797 | ) | (21,477 | ) | | (53,274 | ) | |||||||||
Allocation to Sapient Global Markets |
(11,489 | ) | (11,241 | ) | | (22,730 | ) | |||||||||
Balance after allocation |
$ | | $ | | $ | | $ | | ||||||||
Sapient | ||||||||||||||||
Sapient Global | Government | |||||||||||||||
SapientNitro | Markets | Services | Total | |||||||||||||
Allocation of December 31, 2009 goodwill balance
to new operating segments |
$ | 53,274 | $ | 22,730 | $ | | $ | 76,004 | ||||||||
Contingent consideration recorded during the period |
| 2,371 | | 2,371 | ||||||||||||
Exchange rate effect |
(4 | ) | (9 | ) | | (13 | ) | |||||||||
Goodwill as of September 30, 2010 |
$ | 53,270 | $ | 25,092 | $ | | $ | 78,362 | ||||||||
The following is a summary of intangible assets as of September 30, 2010, and
December 31, 2009 (in thousands, the gross carrying amounts of local currency denominated purchased
intangible assets are reflected at the respective balance sheet date exchange rate):
September 30, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Book | ||||||||||
Amount | Amortization | Value | ||||||||||
Customer lists and customer relationships |
$ | 22,890 | $ | (11,399 | ) | $ | 11,491 | |||||
Non-compete agreements |
8,539 | (2,760 | ) | 5,779 | ||||||||
Tradename |
3,137 | (1,426 | ) | 1,711 | ||||||||
Total purchased intangible assets |
$ | 34,566 | $ | (15,585 | ) | $ | 18,981 | |||||
December 31, 2009 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Book | ||||||||||
Amount | Amortization | Value | ||||||||||
Customer lists and customer relationships |
$ | 22,927 | $ | (8,804 | ) | $ | 14,123 | |||||
Non-compete agreements |
8,554 | (1,716 | ) | 6,838 | ||||||||
Tradename |
3,144 | (1,044 | ) | 2,100 | ||||||||
Total purchased intangible assets |
$ | 34,625 | $ | (11,564 | ) | $ | 23,061 | |||||
Amortization expense related to the purchased intangible assets was $1.3 million and
$1.7 million for the three months ended September 30, 2010 and 2009, respectively. Amortization
expense related to the purchased intangible assets was $4.1 million and $3.4 million for the nine
months ended September 30, 2010 and 2009, respectively. Please see Note 2, Acquisitions, for a
discussion of contingent consideration recorded during the period related to DCG.
13. Foreign Currency Translation and Derivative Instruments
Foreign exchange losses for the three months ended September 30, 2010 were $0.4 million
and foreign exchange gains for the three months ended September 30, 2009 were $0.5 million.
Foreign exchange losses of $1.2 million and foreign exchange gains of $0.3 million were recorded
for the nine months ended September 30, 2010 and 2009, respectively. Foreign exchange gains and
losses are included in general and administrative expenses in the consolidated and condensed
statements of operations. These gains and losses were primarily related to intercompany foreign
currency transactions that are of a short-term nature.
Approximately 15% of the Companys operating expenses for the nine months ended September
30, 2010 were denominated in Indian rupees. Approximately 20% and 5% of service revenues
for the nine months ended September 30, 2010 were denominated in British pounds sterling and euros,
respectively. As the Company has minimal associated revenues in Indian rupees, any movement in the
exchange rate between the U.S. dollar and the rupee has a significant impact on its operating
expenses and operating profit. Any significant movement in the exchange rate between the U.S.
dollar and the British pound sterling and the U.S. dollar and the euro has a significant impact on
the Companys service revenues and operating income. The Company manages this exposure through a
risk management program that partially mitigates its exposure to operating expenses denominated in
the Indian rupee and operating margins denominated in the British pound sterling and the euro that
includes the use of derivative financial instruments which are not
16
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designated as accounting hedges.
The Company uses foreign exchange option contracts to partially protect its foreign currency
exposure to: (i) Indian rupee denominated operating expenses against appreciation in the rupee
relative to the U.S. dollar, (ii) British pound sterling denominated revenues against the
appreciation of the U.S. dollar relative to the pound sterling and (iii) euro denominated revenues
against the appreciation of the U.S. dollar relative to the euro. Currently, the Company enters
into 30 day average rate instruments covering a rolling 90 day period with notional amounts of
350 million rupees (approximately $7.8 million),
two million pounds sterling (approximately $3.2 million) and one million euros (approximately
$1.4 million) per month. As these instruments are option collars that are settled on a net basis
with the bank, the Company has not recorded the gross underlying notional amounts in its
consolidated and condensed balance sheets as of September 30, 2010.
The following table reflects the fair value of the Companys derivative assets and
liabilities on its consolidated and condensed balance sheets as of September 30, 2010 and
December 31, 2009 (in thousands):
Derivative Assets Reported in Other | Derivative Liabilities Reported in Other | |||||||||||||||
Current Assets | Current Accrued Liabilities | |||||||||||||||
September 30, 2010 |
December 31, 2009 |
September 30, 2010 |
December 31, 2009 |
|||||||||||||
Foreign exchange
option contracts
not designated |
$ | 223 | $ | 238 | $ | 236 | $ | 21 | ||||||||
Realized and unrealized losses on the Companys foreign exchange option contracts
are included in general and administrative expenses in the consolidated and condensed statements of
operations. The following table shows the effect of realized and unrealized gains and losses, net,
of the Companys foreign exchange option contracts on its results of operations for the three and
nine months ended September 30, 2010 and 2009 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Loss) gain on
foreign exchange
option contracts
not designated |
$ | (225 | ) | $ | 295 | $ | 367 | $ | (179 | ) | ||||||
14. Dividend Payment
On February 18, 2010 the Company announced a special dividend of $0.35 per common share
for shareholders as of the record date March 1, 2010, which was paid on March 15, 2010. The
dividend was a return of excess capital to shareholders. The $46.8 million in cash paid for the
dividend is reflected as cash used in financing activities on the consolidated and condensed
statements of cash flows.
15. Debt
In May 2010, Sapient Consulting Pvt. Limited (a subsidiary of the Company in India)
entered into a $10,000,000 uncommitted revolving credit facility. The facility matures in May 2011
and can be used to finance working capital requirements, capital expenditures or any other purpose
which may be permissible under local regulations. Borrowings in U.S. dollars bear interest at the
six-month LIBOR plus 2%. Short-term loans denominated in Indian rupees are also permissible and
bear interest at prevailing local borrowing rates, currently between 6.0% and 8.85%, dependant on
the payback period selected at the time of borrowing. There are no covenants based on financial
measures governing this facility. At September 30, 2010 the Company has two 30-day short-term loans
outstanding. Both loans are at an interest rate of 8.2%. A loan for 100 million rupees
(approximately $2.2 million) has a maturity date of October 25, 2010 and a loan for 40 million
rupees (approximately $0.9 million) has a maturity date of October 29, 2010. These borrowings are
reflected in other current accrued liabilities on the consolidated and condensed balance sheets.
16. Recent Accounting Pronouncements
On January 1, 2010 the Company early adopted the provisions of Accounting Standards
Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements
(ASU 2009-13). Prior to the adoption of ASU 2009-13, revenues from contracts with multiple
elements (deliverables) were accounted for as follows:
The Company would evaluate all of the deliverables in a revenue arrangement to determine
whether they represent separate units of accounting. The delivered item(s) would be considered a
separate unit of accounting if all of the following criteria are met:
| The delivered item(s) has value to the customer on a standalone basis; | ||
| There is objective and reliable evidence of the fair value of the undelivered item(s); and | ||
| If the arrangement includes a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in control of the company. |
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If one of the above criteria is not met, the total arrangement fee must be recognized as
one unit of accounting. However, if all of the criteria are met, the total value of the arrangement
would be allocated to the separate units based on the estimated fair value of each deliverable.
When fair value existed for the undelivered element but not for the delivered element, the residual
method was used whereby any discount was allocated to the delivered element.
ASU 2009-13 replaces the term fair value with the term selling price and establishes a
selling price hierarchy for determining the selling price of a deliverable. The hierarchy for
determining selling price of a deliverable is: (i) vendor-specific objective evidence
(VSOE), (ii) third-party evidence (TPE) when VSOE is not available or (iii) an estimated
selling price (ESP) when neither VSOE nor TPE is available (determination of VSOE, TPE and ESP is
described further below). In addition, ASU 2009-13 eliminated both the combination of delivered and
undelivered elements into one unit of accounting and the use of the residual method. Under ASU
2009-13, the delivered item(s) must still have value to the customer on a standalone basis and if
the arrangement includes a general right of return relative to the delivered item, delivery or
performance of the undelivered item(s) is considered probable and substantially in control of the
Company in order to be considered for separate units of accounting. If neither of those criteria is
met, all elements are recognized as one unit of accounting.
To determine the selling price in multiple-element arrangements, we establish VSOE of
selling price using the price charged for a deliverable when it is sold on a stand-alone basis. TPE
is established by evaluating similar and interchangeable competitor services in stand-alone
arrangements with similarly situated customers. The Company determines ESP for the purpose of
allocating selling price to a deliverable within a multiple-deliverable arrangement by considering
several internal and external factors including, but not limited to, pricing practices, profit
margin objectives, competition, the geographies in which the Company offers its services and
internal costs. The determination of ESP is made through consultation with an approval by
management, taking into account the Companys go-to-market strategy.
Selling prices are analyzed on an annual basis or more frequently if the Company
experiences significant changes in selling prices. The adoption of ASU 2009-13 did not have a
material effect on the recognition of service revenues during the three and nine months ended
September 30, 2010. In addition, the retrospective application of ASU 2009-13 would not have a
material effect on services revenues for the year ended 2009.
In January 2010, the Company adopted ASU No. 2010-06 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This standard amends
the disclosure guidance with respect to fair value measurements for both interim and annual
reporting periods. Specifically, this standard requires new disclosures for significant transfers
of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate
disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross,
rather than net basis; and more robust disclosure of the valuation techniques and inputs used to
measure Level 2 and Level 3 assets and liabilities. The Company included these new disclosures, as
applicable, in Note 3.
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SAPIENT CORPORATION
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company
Sapient Corporation (Sapient or the Company), a global services firm, helps clients
transform in the areas of business, marketing, and technology and succeed in an increasingly
complex marketplace. We market our services through three primary business units SapientNitro,
Sapient Global Markets, and Sapient Government Services positioned at the intersection of
marketing, business and technology. SapientNitro, one of the worlds largest independent
digitally-led, integrated marketing services firms, provides multi-channel marketing and commerce
services that span brand and marketing strategy, digital/broadcast/print advertising creative, web
design and development, e-commerce, media planning and buying, and emerging platforms, such as
social media and mobile. Through SapientNitro we offer a complete, multi-channel marketing and
commerce solution that strengthens relationships between our clients customers and their brands.
For simplicity of operations, SapientNitro also includes our traditional IT consulting services,
which is currently, and is expected to remain, below 10% of our total revenues. Our Sapient Global
Markets segment provides business and IT strategy, process and system design, program management,
custom development and package implementation, systems integration and outsourced services to
financial services and energy services market leaders. A core focus area within Sapient Global
Markets is trading and risk management, to which we bring more than 15 years of experience. With
our 2008 acquisition of Derivatives Consulting Group Ltd. (DCG), a leading provider of
derivatives consulting and outsourcing services, we added a globally integrated service in
derivatives processing to our capabilities. Sapient Government Services provides consulting,
technology, and marketing services to a wide array of U.S. governmental agencies. Focused on
driving long-term change and transforming the citizen experience, we use technology to help
government agencies become more accessible, efficient, and transparent.
Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global
presence with offices around the world. We utilize our proprietary Global Distributed Delivery
(GDD) model in support of our SapientNitro and Sapient Global Markets segments. Our GDD model
enables us to provide high-quality, cost-effective solutions under accelerated project schedules.
By engaging Indias highly skilled technology specialists, we can provide services at lower total
costs as well as offer a continuous delivery capability resulting from time differences between
India and the countries we serve. We also employ our GDD model to provide application management
services.
Summary of Results of Operations
Our service revenues for the three months ended September 30, 2010 were $217.1 million, a
31% increase compared to service revenues for same period in 2009. Our service revenues for the
nine months ended September 30, 2010 were $600.6 million, a 32% increase compared to service
revenues for same period in 2009. The increase in service revenues is primarily due to an increase
in demand for our services compared to 2009, and to a lesser extent, revenue from our acquisition
of Nitro Ltd (Nitro). Nitros results of operations are reflected in ours as of July 1, 2009.
During the first quarter of 2010 we realigned our North America and Europe business units and
internal reporting systems to better align our services with our business and operational strategy.
The new business units are: SapientNitro (new), Sapient Global Markets (new) and Sapient Government
Services (see Segment Information).
For the three months ended September 30, 2010 we reported income from operations of
$20.0 million, a 158% increase, compared to $7.8 million for the same period in 2009. For the nine
months ended September 30, 2010 we reported income from operations of $41.8 million, a 97%
increase, compared to $21.3 million for the same period in 2009. The increase in operating income
is due to the increase in demand for our services, our management of project personnel, sales and
marketing, and general and administrative expenses and a reduction in restructuring and acquisition
related charges..
For the three months ended September 30, 2010 we reported net income of $14.3 million, a
141% increase, compared to $5.9 million for the same period in 2009. For the nine months ended
September 30, 2010 we reported net income of $28.1 million, a 56% increase, compared to $18.0
million for the same period in 2009. The increase in service revenues and the fact that project
personnel, sales and marketing and general and administrative expenses have remained consistent as
a percentage of revenue is offset by a higher effective tax rate in 2010 compared to 2009. The
reason for the increase in tax rate is the release of the Companys valuation allowance on a
substantial portion of its U.S. deferred tax assets in the fourth quarter of 2009.
During the third quarter of 2010, we identified errors totaling $0.8 million in the recording
of project personnel expenses and reimbursable expenses of which approximately $0.4 million
understated income in the fourth quarter of 2009. The remaining errors were spread across multiple
quarters with no other quarter impact being greater than $0.1 million. We recorded a reduction to
project personnel expenses of $0.8 million in the third quarter of 2010 to correct the error.
Management has concluded that the impact of these errors is not
material to the affected prior
periods or the three and nine months ended September 30, 2010.
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Non-GAAP Financial Measures
In our quarterly earnings press releases and conference calls we discuss two key measures
that are not calculated according to generally accepted accounting principles (GAAP). The first
non-GAAP measure is operating income, as reported on our consolidated and condensed statements of
operations, excluding certain expenses and benefits, which we call non-GAAP income from
operations. The second measure calculates non-GAAP income from operations as a percentage of
reported services revenues, which we call non-GAAP operating margin. We believe that non-GAAP
measures help illustrate underlying trends in our business, and use the measures to
establish budgets and operational goals, communicated internally and externally, for managing our
business and evaluating our performance. We exclude certain expenses from our non-GAAP operating
income that we believe are not reflective of these underlying business trends or useful measures
for determining our operational performance and overall business strategy. The following table
reconciles income from operations as reported on our consolidated and condensed statements of
operations to non-GAAP income from operations and non-GAAP operating margin for the three and nine
months ended September 30, 2010 and 2009 (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service revenues |
$ | 217,057 | $ | 165,541 | $ | 600,631 | $ | 455,434 | ||||||||
GAAP income from operations |
$ | 19,978 | $ | 7,751 | $ | 41,839 | $ | 21,252 | ||||||||
Stock-based compensation expense |
4,289 | 3,782 | 13,924 | 10,928 | ||||||||||||
Restructuring and other related charges |
34 | 2,518 | 448 | 4,821 | ||||||||||||
Amortization of purchased intangible assets |
1,301 | 1,681 | 4,127 | 3,446 | ||||||||||||
Acquisition costs and other related charges |
| 1,110 | 111 | 2,783 | ||||||||||||
Stock-based compensation review and restatement benefit |
| | (301 | ) | (992 | ) | ||||||||||
Non-GAAP income from operations |
$ | 25,602 | $ | 16,842 | $ | 60,148 | $ | 42,238 | ||||||||
GAAP operating margin |
9.2 | % | 4.7 | % | 7.0 | % | 4.7 | % | ||||||||
Effect of adjustments detailed above |
2.6 | % | 5.5 | % | 3.0 | % | 4.6 | % | ||||||||
Non-GAAP operating margin |
11.8 | % | 10.2 | % | 10.0 | % | 9.3 | % | ||||||||
Non-GAAP income from operations increased in the three and nine months ended
September 30, 2010 compared to 2009 due to the improvement in reported income from operations.
Please see our Results of Operations section for a more detailed discussion and analysis of the
excluded items.
When important to managements analysis operating results are compared in constant
currency terms, which excludes the effect of foreign exchange rate fluctuations, a non-GAAP
measure. The effect is excluded by translating the current periods local currency service revenues
and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For
a discussion of our exposure to exchange rates see Item 7a. Quantitative and Qualitative
Disclosures About Market Risk.
Summary of Critical Accounting Policies; Significant Judgments and Estimates
We have identified the accounting policies which are critical to understanding our
business and our results of operations. Excluding revenue recognition, described further below,
management believes that there have been no significant changes during 2010 to the items disclosed
in our summary of critical accounting policies, significant judgments and estimates in Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2009.
Revenue Recognition
On January 1, 2010 we early adopted the provisions of Accounting Standards Update
No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (ASU
2009-13). Prior to our adoption of ASU 2009-13, revenues from contracts with multiple elements
(deliverables) were accounted for as follows:
The Company would evaluate all of the deliverables in a revenue arrangement to determine
whether they represent separate units of accounting. The delivered item(s) would be considered a
separate unit of accounting if all of the following criteria are met:
| The delivered item(s) has value to the customer on a standalone basis; | ||
| There is objective and reliable evidence of the fair value of the undelivered item(s); and | ||
| If the arrangement includes a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in control of the Company. |
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If one of the above criteria is not met, the total arrangement fee must be recognized as
one unit of accounting. However, if all of the criteria are met, the total value of the arrangement
would be allocated to the separate units based on the estimated fair value of each deliverable.
When fair value existed for the undelivered element but not for the delivered element, the residual
method was used whereby any discount was allocated to the delivered element.
ASU 2009-13 replaces the term fair value with the term selling price and establishes a
selling price hierarchy for determining the selling price of a deliverable. The hierarchy for
determining selling price of a deliverable is: (i) vendor-specific objective evidence
(VSOE), (ii) third-party evidence (TPE) when VSOE is not available or (iii) an estimated
selling price (ESP) when neither VSOE nor TPE is available (determination of VSOE, TPE and ESP is
described further below). In addition, ASU 2009-13 eliminated both the combination of delivered and
undelivered elements into one unit of accounting and the use of the residual method. Under ASU
2009-13, the delivered item(s) must still have value to the customer on a standalone basis and if
the arrangement includes a general right of return relative to the delivered item, delivery or
performance of the undelivered item(s) is considered probable and substantially in control of the
company in order to be considered for separate units of accounting. If neither of those criteria is
met, all elements are recognized as one unit of accounting.
To determine the selling price in multiple-element arrangements, we establish VSOE of
selling price using the price charged for a deliverable when it is sold on a stand-alone basis. TPE
is established by evaluating similar and interchangeable competitor services in stand-alone
arrangements with similarly situated customers. We determine ESP for the purpose of allocating
selling price to a deliverable within a multiple-deliverable arrangement by considering several
internal and external factors including, but not limited to, pricing practices, profit margin
objectives, competition, the geographies in which we offer our services and internal costs. The
determination of ESP is made through consultation with an approval by our management, taking into
account our go-to-market strategy.
Selling prices are analyzed on an annual basis or more frequently if we experience
significant changes in our selling prices. The adoption of ASU 2009-13 did not have a material
effect on our recognition of service revenues during the three and nine months ended September 30,
2010. In addition, the retrospective application of ASU 2009-13 would not have a material effect on
our services revenues for the year ended 2009.
Results of Operations
The following table sets forth the percentage of our service revenues of items included
in our consolidated and condensed statements of operations:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Service revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Reimbursable expenses |
5 | % | 4 | % | 5 | % | 3 | % | ||||||||
Total gross revenues |
105 | % | 104 | % | 105 | % | 103 | % | ||||||||
Operating expenses: |
||||||||||||||||
Project personnel expenses |
68 | % | 69 | % | 69 | % | 69 | % | ||||||||
Reimbursable expenses |
5 | % | 4 | % | 5 | % | 3 | % | ||||||||
Total project personnel
expenses and
reimbursable expenses |
73 | % | 73 | % | 74 | % | 73 | % | ||||||||
Selling and marketing expenses |
4 | % | 5 | % | 5 | % | 5 | % | ||||||||
General and administrative expenses |
18 | % | 18 | % | 18 | % | 19 | % | ||||||||
Restructuring and other related charges |
0 | % | 2 | % | 0 | % | 1 | % | ||||||||
Amortization of purchased intangible assets |
1 | % | 1 | % | 1 | % | 1 | % | ||||||||
Acquisition costs and other related charges |
0 | % | 1 | % | 0 | % | 1 | % | ||||||||
Total operating expenses |
96 | % | 100 | % | 98 | % | 99 | % | ||||||||
Income from operations |
9 | % | 4 | % | 7 | % | 5 | % | ||||||||
Interest and other income, net |
1 | % | 0 | % | 0 | % | 0 | % | ||||||||
Income before income taxes |
10 | % | 5 | % | 7 | % | 5 | % | ||||||||
Provision for income taxes |
3 | % | 1 | % | 3 | % | 1 | % | ||||||||
Net Income |
7 | % | 4 | % | 5 | % | 4 | % | ||||||||
Three and nine months ended September 30, 2010 compared to the three and nine months ended
September 30, 2009
Service Revenues
Our service revenues for the three and nine months ended September 30, 2010 and 2009 were
as follows (in thousands, except percentages):
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Three Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Service revenues |
$ | 217,057 | $ | 165,541 | $ | 51,516 | 31 | % |
Nine Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Service revenues |
$ | 600,631 | $ | 455,434 | $ | 145,197 | 32 | % |
The increase in service revenues for the three months ended September 30, 2010 is
primarily due to an increase in demand for our services compared to 2009. The following table
compares our third quarter 2010 service revenues by industry sector to 2009 (in millions, except
percentages):
Percentage | ||||||||||||||||
Three Months Ended September 30, | Increase / | |||||||||||||||
Industry Sector | 2010 | 2009 | Increase | (Decrease) | ||||||||||||
Financial Services |
$ | 71.6 | $ | 53.0 | $ | 18.6 | 35 | % | ||||||||
Consumer, Travel &
Automotive |
68.7 | 42.1 | 26.6 | 63 | % | |||||||||||
Technology & Communications |
30.9 | 23.9 | 7.0 | 29 | % | |||||||||||
Government, Health &
Education |
25.1 | 24.0 | 1.1 | 5 | % | |||||||||||
Energy Services |
20.8 | 22.5 | (1.7 | ) | -8 | % | ||||||||||
Total |
$ | 217.1 | $ | 165.5 | $ | 51.6 | 31 | % | ||||||||
The increases in all the sectors are due to an increase in demand for our services in these
industries. The decrease in the Energy Services sector is due to a decrease in demand. In constant
currency terms, service revenues increased 32% compared to the same period in 2009 as the U.S.
dollar has appreciated in value against the local currencies in certain geographies our foreign
subsidiaries operate in compared to the same period in 2009.
The increase in demand across the majority of industry sectors caused our average project
personnel peoplecount to increase 29% for the three months ended September 30, 2010 compared to the
same period in 2009. Utilization represents the percentage of our project personnels time spent on
billable client work. Our utilization of 75% was lower than the 80% rate we had for the same period
in 2009. We also increased our use of external contractors and consultants by 18% compared to 2009
as demand for our services concentrated in specialized areas increased.
Our five largest customers, in the aggregate, accounted for approximately 20% of our service
revenues for the three months ended September 30, 2010 compared to 21% for the same period in 2009.
No customer accounted for more than 10% of our service revenues. Our Long-Term and Retainer
revenues were 46% of our service revenues for the three months ended September 30, 2010 compared to
43% for the same period in 2009. Long-Term and Retainer Revenue are revenue contracts with duration
of at least twelve months, applications management and long-term support projects, which are
cancelable.
The increase in service revenues for the nine months ended September 30, 2010 is primarily due
to an increase in demand for our services compared to 2009, and to a lesser extent, incremental
revenue from our Nitro acquisition. The following table compares our service revenues by industry
sector for the nine months ended September 30, 2010 and 2009 (in millions, except percentages):
Nine Months Ended September 30, | Percentage | |||||||||||||||
Industry Sector | 2010 | 2009 | Increase | Increase | ||||||||||||
Financial Services |
$ | 191.4 | $ | 153.7 | $ | 37.7 | 25 | % | ||||||||
Consumer, Travel &
Automotive |
182.7 | 103.0 | 79.7 | 77 | % | |||||||||||
Technology & Communications |
86.3 | 72.3 | 14.0 | 19 | % | |||||||||||
Government, Health &
Education |
79.0 | 66.9 | 12.1 | 18 | % | |||||||||||
Energy Services |
61.2 | 59.5 | 1.7 | 3 | % | |||||||||||
Total | $ | 600.6 | $ | 455.4 | $ | 145.2 | 32 | % | ||||||||
The increases in the Financial Services, Government, Health and Education, Technology and
Communications, and Energy Services sectors are due to an increase in demand for our services in
these industries. The increase in the Consumer, Travel, and Automotive sector was due to
an increase in demand for our services and revenue from our Nitro acquisition. In constant currency
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terms, service revenues increased 31% compared to the same period in 2009 as the U.S. dollar has
depreciated in value against the local currencies in certain geographies our foreign subsidiaries
operate in compared to the same period in 2009.
The increase in demand across all industry sectors caused our average project personnel
peoplecount to increase 29% for the nine months ended September 30, 2010 compared to the same
period in 2009. Our utilization of 76% was lower than the 78% rate we had for the same period in
2009. We also increased our use of external contractors and consultants by 21% compared to 2009 as
demand for our services concentrated in specialized areas increased.
Our five largest customers, in the aggregate, accounted for approximately 20% of our service
revenues for the nine months ended September 30, 2010 compared to 22% for the same period in 2009.
No customer accounted for more than 10% of our service revenues. Our Long-Term and Retainer
revenues were 45% of our service revenues for the nine months ended September 30, 2010 compared to
42% for the same period in 2009.
Project Personnel Expenses
Project personnel expenses consist principally of salaries and employee benefits for personnel
dedicated to client projects, external contractors and direct expenses incurred to complete
projects that were not reimbursed by the client. These costs represent the most significant expense
we incur in providing our services. Our project personnel expenses for the three and nine months
ended September 30, 2010 and 2009 were as follows (in thousands, except percentages):
Three Months Ended | ||||||||||||||||
September 30, | September 30, | Increase/ | Percentage | |||||||||||||
2010 | 2009 | (Decrease) | Increase | |||||||||||||
Project personnel expenses |
$ | 148,003 | $ | 114,219 | $ | 33,784 | 30 | % | ||||||||
Project personnel expenses as a percentage
of service revenues |
68 | % | 69 | % | (1 point) |
Nine Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Project personnel expenses |
$ | 415,115 | $ | 316,336 | $ | 98,779 | 31 | % | ||||||||
Project personnel expenses as a percentage
of service revenues |
69 | % | 69 | % | |
The increase for the three months ended September 30, 2010 was primarily due to the
increase in project personnel peoplecount. Compensation expense increased $29.3 million due to the
increase in peoplecount. Use of external contractors and consultants increased $3.1 million due to
an increase in demand for our services in specialized areas. The remaining increase was due to
increases in various other project personnel expenses.
The increase in project personnel expenses for the nine months ended September 30, 2010 was
also due to the increase in peoplecount and, to a lesser extent, incremental expense from Nitro.
Compensation expense increased $81.8 million due to the increase in peoplecount and Nitro. Use of
external contractors and consultants increased $9.7 million due to an increase in demand for our
services in specialized areas. The remaining increase was due to increases in various other project
personnel expenses.
Selling and Marketing Expenses
Selling and marketing expenses consist principally of salaries, employee benefits and travel
expenses of selling and marketing personnel, and promotional expenses. Our selling and marketing
expenses for the three and nine months ended September 30, 2010 and 2009 were as follows (in
thousands, except percentages):
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Three Months Ended | ||||||||||||||||
September 30, | September 30, | Increase/ | Percentage | |||||||||||||
2010 | 2009 | (Decrease) | Increase | |||||||||||||
Selling and marketing expenses |
$ | 9,298 | $ | 8,055 | $ | 1,243 | 15 | % | ||||||||
Selling and marketing expenses as a percentage
of service revenues |
4 | % | 5 | % | (1 point) |
Nine Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Selling and marketing expenses |
$ | 28,170 | $ | 22,471 | $ | 5,699 | 25 | % | ||||||||
Selling and marketing expenses as a percentage |
||||||||||||||||
of service revenues |
5 | % | 5 | % | |
The increase for the three months ended September 30, 2010 in sales and marketing
expenses was primarily due to costs incurred to support the 31% increase in service revenues, and
to a lesser extent an increase in sales and marketing peoplecount. Compensation expense increased
$1.1 million due to increases in peoplecount. External consultant expense increased $1.0 million
due to the increase in service revenues as this required more general sales support in addition to
costs associated with specific projects that required the use of external consultants. These
increases were offset by a $0.3 million decrease in stock-based compensation expense, due to
forfeitures, and a decrease in various other selling and marketing expenses.
The increase for the nine months ended September 30, 2010 in sales and marketing expenses was
also due to costs incurred to support the 32% increase in service revenues, and an increase in
sales and marketing peoplecount. External consultant expense increased $2.5 million and travel
expense increased $0.5 million due to the increase in service revenues as this required more
general sales support. Compensation expense increased $2.3 million, primarily due to an increase
in selling and marketing peoplecount. A $0.3 million decrease in stock-based compensation expense
was offset by an increase in various other sales and marketing expenses.
General and Administrative Expenses
General and administrative expenses relate principally to salaries and employee benefits
associated with our management, legal, finance, information technology, hiring, training and
administrative groups, and depreciation and occupancy expenses. Our general and administrative
expenses for the three and nine months ended September 30, 2010 and 2009 were as follows (in
thousands, except percentages):
Three Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
General and administrative expenses |
$ | 38,443 | $ | 30,207 | $ | 8,236 | 27 | % | ||||||||
General and administrative expenses as a
percentage |
||||||||||||||||
of service revenues |
18 | % | 18 | % | |
Nine Months Ended | ||||||||||||||||
September 30, | September 30, | Increase/ | Percentage | |||||||||||||
2010 | 2009 | (Decrease) | Increase | |||||||||||||
General and administrative expenses |
$ | 110,821 | $ | 84,325 | $ | 26,496 | 31 | % | ||||||||
General and administrative expenses as a
percentage
of service revenues |
18 | % | 19 | % | (1 point) |
The increase for the three months ended September 30, 2010 was due to multiple
factors: (i) facilities expenses increased $2.4 million due to the opening of a new office in India
in the first quarter of 2010, (ii) compensation expense increased $1.6 million due to an increase
in general and administrative peoplecount (iii) employment agency fees increased $0.7 million due
to the overall increase in peoplecount for the Company, as total employees increased from
approximately 7,800 in the second quarter of 2010 to over 8,500 in the current period, (iv) a
currency loss of $0.4 million was recognized in 2010 and a currency gain of $0.5 million was
recognized in 2009 as currency rates fluctuated on our short-term transactions, (v) travel costs
increased $0.9 million as the Company recognized greater transportation costs due to an increased
peoplecount, (vi) insurance costs increased $1.0 million as the Company recognized greater
insurance costs due to an increased peoplecount. The remaining difference was due to increases in
various other general and administrative expenses.
The increase for the nine months ended September 30, 2010 was due to multiple factors: (i)
facilities expenses increased $7.4 million due to the acquisition of Nitro, opening a new office in
India in the first quarter of 2010 and our move to new office space
24
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in the United Kingdom in the
second quarter of 2009, (ii) external consultant expenses increased $2.9 million due to internal
projects and supporting our staffing efforts, (iii) compensation expense increased $5.7 million due
to an increase in general and administrative peoplecount, including Nitro, (iv) employment agency
fees increased $1.8 million due to the overall increase in peoplecount for the Company, as total
employees increased compared to 2009, (v) legal fees increased $1.4 million, (vi) stock-based
compensation expense increased $1.5 million primarily related to the Nitro acquisition and (vii)
foreign exchange losses of $1.2 million were recognized in 2010 compared to a gain of $0.3 million
in 2009. For a discussion of our exposure to exchange rates see Item 7a. Quantitative and
Qualitative Disclosures About Market Risk. The remaining increase was due to increases in various
other general and administrative expenses.
Restructuring and Other Related Charges
Restructuring and other related charges were immaterial for the three months ended September
30, 2010 compared to $2.5 million during the same period in 2009. The Company recorded the $2.5
million charge for the three months ended September 30, 2009 as a result of a change in estimated
sub-lease income associated with one previously restructured lease, which ends in 2011.
Restructuring and other related charges decreased $4.4 million for the nine months ended September
30, 2010 compared to the same period in 2009. The reason for the decrease for the nine months
ended September 30, 2010 was due to the first quarter of 2009 reflecting $2.0 million in expense
associated with a reduction in workforce as a result of the global economic downturn in 2009 and
the $2.5 million charge as a result of a change in estimated sub-lease income recorded in the third
quarter of 2009.
Amortization of Intangible Assets
Amortization of intangible assets consists of non-compete and non-solicitation agreements,
customer lists, and tradenames acquired in business combinations. Amortization expense related to
intangible assets was $1.3 million and $4.1 million for the three and nine months ended September
30, 2010, respectively, compared to $1.7 million and $3.4 million for the same periods in 2009.
The expense for the three months ended September 30, 2010 compared to the three months ended
September 30, 2009 decreased as certain intangible assets from previous acquisitions have been
fully amortized. The expense for the nine months ended September 30, 2010 compared to the same
period in 2009 increased due to the amortization of intangible assets acquired in the Nitro
acquisition.
Acquisition Costs and Other Related Charges
Acquisition costs and other related charges are costs are associated with third-party
professional services we incur related to our evaluation process of potential acquisition
opportunities. Though we may incur acquisition costs and other related charges it is not indicative
that any transaction will be consummated. Acquisition costs and other related expenses were zero
and $0.1 million for the three and nine months ended September 30, 2010, respectively, compared to
$1.1 million and $2.8 million for the same periods in 2009. The decrease is due to the Nitro
acquisition which was completed in 2009.
Interest and Other Income, Net
Interest and other income are derived primarily from investments in bank time deposits, money
market funds, commercial paper and auction rate securities. Our interest and other income, net for
the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands, except
percentages):
Three Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Interest and other income, net |
$ | 942 | $ | 652 | $ | 290 | 44 | % |
Nine Months Ended | ||||||||||||||||
September 30, | September 30, | Percentage | ||||||||||||||
2010 | 2009 | Increase | Increase | |||||||||||||
Interest and other income, net |
$ | 2,487 | $ | 2,467 | $ | 20 | 1 | % |
Interest and other income increased for the three and nine months ended September
30, 2010 compared to the same period in 2009 due to higher interest income. This increase in
interest income is due to an increase in local interest rates on our foreign currency cash and
equivalents and higher average cash balances for the three and nine months ended September 30,
2010.
Provision for Income Taxes
For the three and nine months ended September 30, 2010, we recorded an income tax provision of
$6.6 million and $16.2 million, respectively, compared to $2.5 million and $5.7 million for the
same period in 2009. Our income tax is related to foreign, federal and state tax obligations. The
increase is primarily due to a higher tax expense rate on our U.S. income due to the release of our
valuation allowance on a substantial portion of our U.S. deferred taxes in the fourth quarter of
2009. Deferred tax assets are to be reduced by a
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valuation allowance if, based on the weight of
available positive and negative evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. At December 31, 2008 all of our U.S. deferred
tax assets had a full valuation allowance of $112.1 million. Based upon our operating results for
the years immediately preceding and through December 31, 2009, as well as an assessment of our
expected future results of operations in the U.S., at December 31, 2009 we determined that it had
become more likely than not that we would realize a substantial portion of our deferred tax assets
in the U.S. As a result, we released our valuation allowances on a substantial portion of our U.S.
deferred tax assets in the fourth quarter of 2009. On September 30, 2010 we continue to provide a
valuation allowance against certain deferred tax assets for one of our European subsidiaries as we
determined that it is more likely than not that the deferred tax assets may not be realized. The
establishment of valuation allowance against certain European deferred tax assets also contributed
to a higher tax provision for the three and nine months ended September 30, 2010, though to a
lesser extent than the 2009 aforementioned release of our valuation allowance against U.S. deferred
tax assets. At September 30, 2010 a valuation allowance remains on certain state tax net operating
loss carry forwards, as well as a portion of the net operating loss carry forwards relating to
certain stock-based compensation deductions. We continue to believe that deferred tax assets in
various other foreign jurisdictions are more likely than not to be realized and, therefore, no
valuation allowance has been recorded against these assets.
We have gross unrecognized tax benefits, including interest and penalties, of approximately
$10.4 million as of September 30, 2010 and $8.9 million as of December 31, 2009. These amounts
represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction
of our effective tax rate. We recognize interest and penalties accrued related to unrecognized tax
benefits in the provision for income taxes. As of September 30, 2010 interest accrued was
approximately $2.2 million.
We conduct business globally and, as a result, one or more of our subsidiaries files income
tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the
normal course of business we are subject to examination by taxing
authorities throughout the world.
Our effective tax rate may vary from period to period based on changes in estimated taxable
income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or
foreign tax laws, future expansion into areas with varying country, state, and local income tax
rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions.
Results by Operating Segment
We have discrete financial data by operating segments available based on our method of
internal reporting, which disaggregates our operations. Operating segments are defined as
components of the Company for which separate financial information is available to manage resources
and evaluate performance.
Beginning in 2010, we realigned our North America and Europe business units and internal
reporting systems to better align our services with our business and operational strategy. The new
business units are: SapientNitro (new), Sapient Global Markets (new) and Sapient Government
Services. As such, results by operating segment for the three and nine months ended September 30,
2009 have been recast to reflect the new business unit structure.
We do not allocate certain marketing and general and administrative expenses to our business
unit segments because these activities are managed separately from the business units. We allocated
$1.2 million and $0.6 million of $2.0 million related to our first quarter 2009 reduction in
workforce to our SapientNitro and Sapient Global Markets segments, respectively. We did not
allocate the remaining $0.2 million in costs associated with our 2009 restructuring activity or any
costs associated with our 2001, 2002, 2003 and 2010 restructuring events across our operating
segments for internal measurement purposes because the substantial majority of these restructuring
costs impacted areas of the business that supported the business units and, specifically in the
case of our 2001, 2002, 2003 and 2010 events, were related to the initiative to reengineer general
and administrative activities and the consolidation of facilities. Management does not allocate
stock-based compensation to the segments for the review of results for the Chief Operating Decision
Maker (CODM). Asset information by operating segment is not reported to or reviewed by the CODM,
and therefore, the Company has not disclosed asset information for each operating segment.
The tables below present the service revenues and income before income taxes attributable to
these operating segments for the periods presented (in thousands):
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service Revenues: |
||||||||||||||||
SapientNitro |
$ | 134,840 | $ | 103,380 | $ | 376,079 | $ | 288,116 | ||||||||
Sapient Global Markets |
69,135 | 51,984 | 188,431 | 140,863 | ||||||||||||
Sapient Government Services |
13,082 | 10,177 | 36,121 | 26,455 | ||||||||||||
Total |
$ | 217,057 | $ | 165,541 | $ | 600,631 | $ | 455,434 | ||||||||
Income Before Income Taxes: |
||||||||||||||||
SapientNitro |
$ | 41,359 | $ | 28,623 | $ | 106,339 | $ | 75,699 | ||||||||
Sapient Global Markets |
21,637 | 19,043 | 61,631 | 47,065 | ||||||||||||
Sapient Government Services |
3,732 | 3,619 | 10,130 | 7,658 | ||||||||||||
Total reportable segments (1) |
66,728 | 51,285 | 178,100 | 130,422 | ||||||||||||
Less reconciling items (2) |
(45,808 | ) | (42,882 | ) | (133,774 | ) | (106,703 | ) | ||||||||
Consolidated Income Before Income Taxes |
$ | 20,920 | $ | 8,403 | $ | 44,326 | $ | 23,719 | ||||||||
(1) | Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments. | |
(2) | Adjustments that are made to the total of the segments operating income to arrive at consolidated income before income taxes include the following (in thousands): |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Centrally managed functions |
$ | 41,126 | $ | 34,443 | $ | 117,952 | $ | 89,972 | ||||||||
Restructuring and other related charges |
34 | 2,518 | 448 | 3,033 | ||||||||||||
Amortization of purchased intangible assets |
1,301 | 1,681 | 4,127 | 3,446 | ||||||||||||
Stock-based compensation expense |
4,289 | 3,782 | 13,924 | 10,928 | ||||||||||||
Interest and other income, net |
(942 | ) | (652 | ) | (2,487 | ) | (2,467 | ) | ||||||||
Acquisition expense and other related charges |
| 1,110 | 111 | 2,783 | ||||||||||||
Unallocated expenses (a) |
| | (301 | ) | (992 | ) | ||||||||||
Total |
$ | 45,808 | $ | 42,882 | $ | 133,774 | $ | 106,703 | ||||||||
(a) | Reflects stock-option restatement related benefits. |
The increase in SapientNitro service revenues for the three and nine months ended
September 30, 2010 was primarily due to an increase in demand for our services in the majority of
the industry sectors we operate in and, to a lesser extent for the nine months ended September 30,
2010, revenues from our Nitro acquisition. The following table compares SapientNitro service
revenues by industry sector for the three and nine months ended September 30, 2010 compared to the
same periods in 2009 (in millions, except percentages):
Percentage | ||||||||||||||||
Three Months Ended September 30, | Increase / | Increase / | ||||||||||||||
Industry Sector | 2010 | 2009 | (Decrease) | (Decrease) | ||||||||||||
Consumer, Travel &
Automotive |
$ | 68.7 | $ | 42.1 | $ | 26.6 | 63 | % | ||||||||
Technology & Communications |
30.9 | 23.9 | 7.0 | 29 | % | |||||||||||
Financial Services |
20.9 | 19.4 | 1.5 | 8 | % | |||||||||||
Government, Health &
Education |
12.0 | 13.9 | (1.9 | ) | -14 | % | ||||||||||
Energy Services |
2.3 | 4.1 | (1.8 | ) | -44 | % | ||||||||||
Total |
$ | 134.8 | $ | 103.4 | $ | 31.4 | 30 | % | ||||||||
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Percentage | ||||||||||||||||
Nine Months Ended September 30, | Increase / | Increase / | ||||||||||||||
Industry Sector | 2010 | 2009 | (Decrease) | (Decrease) | ||||||||||||
Consumer, Travel &
Automotive |
$ | 182.7 | $ | 103.0 | $ | 79.7 | 77 | % | ||||||||
Technology & Communications |
86.3 | 72.3 | 14.0 | 19 | % | |||||||||||
Financial Services |
57.1 | 59.1 | (2.0 | ) | -3 | % | ||||||||||
Government, Health &
Education |
42.8 | 40.5 | 2.3 | 6 | % | |||||||||||
Energy Services |
7.1 | 13.2 | (6.1 | ) | -46 | % | ||||||||||
Total |
$ | 376.0 | $ | 288.1 | $ | 87.9 | 31 | % | ||||||||
For the three months ended September 30, 2010 increase in sector service revenues was
primarily due to an increase in demand in these sectors, while decreases were due to decreased
demand. For the nine months ended September 30, 2010, service revenues in the Consumer, Travel and
Automotive sector increased due to an increase in demand for our services and incremental revenue
from Nitro. Service revenues in the Energy Services and Financial services sectors decreased due to
a decrease in demand for our services. The increase in revenues for the remaining sectors was due
to an increase in demand for our services. In constant currency terms, SapientNitro services
revenues increased 31% for the three months ended September 30, 2010 and 29% for the nine months
ended September 30, 2010 compared to 2009. The overall increase in demand for our services
contributed to SapientNitros average project personnel peoplecount increasing compared to 2009.
The increase in Sapient Global Markets revenue for the three and nine months ended September
30, 2010 was due to an increase in demand for our service compared to 2009. The following table
compares Sapient Global Markets service revenues by industry sector for the three and nine months
ended September 30, 2010 compared to the same periods in 2009 (in millions, except percentages):
Three Months Ended September 30, | Percentage | |||||||||||||||
Industry Sector | 2010 | 2009 | Increase | Increase | ||||||||||||
Financial Services |
$ | 50.7 | $ | 33.6 | $ | 17.1 | 51 | % | ||||||||
Energy Services |
18.5 | 18.4 | 0.1 | 1 | % | |||||||||||
Total |
$ | 69.2 | $ | 52.0 | $ | 17.2 | 33 | % | ||||||||
Nine Months Ended September 30, | Percentage | |||||||||||||||
Industry Sector | 2010 | 2009 | Increase | Increase | ||||||||||||
Financial Services |
$ | 134.3 | $ | 94.6 | $ | 39.7 | 42 | % | ||||||||
Energy Services |
54.1 | 46.3 | 7.8 | 17 | % | |||||||||||
Total |
$ | 188.4 | $ | 140.9 | $ | 47.5 | 34 | % | ||||||||
The increase in both industry sectors was due to an increase in demand for our services. In
constant currency terms, Sapient Global Markets service revenues increased 35% for the three months
ended September 30, 2010 and 33% for the nine months ended September 30, 2010 compared to 2009. The
increase in demand for our services contributed to Sapient Global Markets average project
personnel peoplecount increasing compared to the same period in 2009.
Service revenues for our Sapient Government Services operating segment increased during the
three and nine months ended September 30, 2010 compared to the same periods in 2009 due to an
increase in demand for our services in this segment. The increased demand contributed to Sapient
Government Services average project personnel peoplecount increasing compared to the same period
in 2009.
Operating Income by Operating Segments
SapientNitros operating income increased as a percentage of related service revenues to 31%
for the three months ended September 30, 2010 compared to 28% for 2009. The increase is primarily
due to a decrease in consultant expense as a percentage of revenue compared to 2009. SapientNitros
operating income increased as a percentage of revenue to 28% for the nine months ended September
30, 2010 compared to 26% for 2009. The increase was primarily due to the growth in revenues in
addition to management of certain direct expenses and keeping consultant usage constant, in
dollars, compared to 2009.
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Sapient Global Markets operating income decreased as a percentage of related service
revenues to 31% for the three months ended September 30, 2010 compared to 37% for 2009. The
decrease is primarily due to an increase in consultant usage as a percentage of revenue compared to
2009 as demand for our services in specialized areas increased. Sapient Global Markets operating
income as a percentage of related service revenue remained constant at 33% for the nine months
ended September 30, 2010 and 2009.
Sapient Government Services operating income decreased as a percentage of related service
revenues for the three and nine months ended September 30, 2010 compared to 2009 due to an increase
in consultant usage in the current quarter.
Liquidity and Capital Resources
We invest our excess cash predominantly in money market funds, time deposits with maturities
of less than or equal to 90 days and other cash equivalents. At September 30, 2010 we had
approximately $193.9 million in cash, cash equivalents, restricted cash and marketable securities,
compared to $215.8 million at December 31, 2009.
We have approximately $2.7 million with various banks as collateral for letters of credit and
performance bonds and have classified this cash as restricted on our consolidated and condensed
balance sheet at September 30, 2010.
Cash provided by operating activities was $43.3 million for the nine months ended September
30, 2010. This resulted from net income, the addition of non-cash charges and the sale of $16.4
million in trading marketable securities. These increases in operating cash flow were offset by
increases in unbilled revenues and accounts receivable. The increase in unbilled revenues is due to
an increase in revenues derived from time and materials arrangements, which we discuss below, and
the timing of achieving certain project milestones. Cash provided by operating activities
increased compared to the same period in 2009 due to lower bonus payment of prior year bonuses
as bonuses based on 2009 results were lower than those paid in the first quarter of 2009 which were
based on 2008 results and, to a lesser extent, sales of trading marketable securities.
Days sales outstanding (DSO) is calculated based on actual nine months of total revenue and
period end receivables, unbilled and deferred revenue balances. Our DSO increased 3% to 68 days for
the third quarter of 2010 as compared to our DSO of 66 days as of December 31, 2009. DSO increased
primarily due to the increase in unbilled revenues, specifically the timing of achieving certain
project milestones and an increase in the percentage of revenue derived from time and materials
arrangements. Time and materials arrangements have longer billing cycles than fixed-price
contracts, which increase DSO. Approximately 56% of our services revenue for the first nine months
of 2010 was derived from time and materials arrangements as compared to 53% for the fourth quarter
of 2009. We expect our unbilled revenues to be short-term in nature, with a majority being billed
within 90 days.
Cash used by investing activities was $16.8 million for the nine months ended September 30,
2010. This was due to $3.2 million in payments of deferred consideration related to the Nitro
acquisition and $15.0 million in capital expenditures and the costs of internally developed
software. These uses of cash were offset by $0.8 million in redemptions of available-for-sale
marketable securities and the receipt of $0.5 million on our hedge positions. Cash used by
investing activities decreased slightly compared to the same period in 2009. The current period
reflected more capital expenditures, primarily related to build-out costs for a new India unit
(discussed below) while the majority of investing activities in 2009 were for our Nitro
acquisition.
Cash used by financing activities was $37.9 million for the nine months ended September 30,
2010 as a result of a $46.8 million special dividend payment on all outstanding common stock as of
March 1, 2010 as a return of capital to shareholders. This was offset by $5.9 million in proceeds
associated with the issuance of common stock for stock option exercises and $3.1 million in
proceeds from our credit facility. The difference between the financing activities in the current
period compared to the same period in 2009 is the dividend payment. In addition, we entered into a
$10.0 million revolving credit facility in India, which matures in May 2011, to finance the
build-out of a new India unit in a Special Economic Zone (SEZ) which is eligible for a five year,
100% tax holiday. Management concluded that this short-term credit facility was the most efficient
financing method available.
Non-cash investing activity of $2.4 million reflects the value of common shares issued as part
of contingent consideration in connection with our DCG acquisition.
Our marketable securities comprise of auction rate securities (ARS). Though our ARS
investments have experienced events that limit their liquidity, we do not anticipate the current
lack of liquidity on these investments will affect our ability to operate our business based on our
ability to access our cash, other short term investments and our expected operating cash flows.
Please see Item 3. Quantitative and Qualitative Disclosures About Market Risk for a discussion of
our marketable securities.
We use foreign currency option contracts to partially mitigate the effects of exchange rate
fluctuations on certain revenues and operating expenses denominated in foreign currencies. Please
see Item 3. Quantitative and Qualitative Disclosures About Market Risk for a discussion of our
use of such derivative financial instruments.
We accrue contingent liabilities when it is probable that future expenditures will be made and
such expenditures can be reasonably estimated. We are subject to various legal claims totaling
approximately $2.6 million and various administrative audits, each of which have arisen in the
ordinary course of our business. We have an accrual at September 30, 2010, of approximately $0.7
million related to certain of these items. We intend to defend these matters vigorously, although
the ultimate outcome of these items is uncertain and the potential loss, if any, may be
significantly higher or lower than the amounts that we have previously accrued.
We believe that our existing cash, credit facility and other short-term investments will be
sufficient to meet our working capital and
capital expenditure requirements, investing activities and the expected cash outlay for our
previously recorded restructuring activities for at least the next 12 months.
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New Accounting Pronouncements
In January 2010, we adopted ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. This standard amends the disclosure
guidance with respect to fair value measurements for both interim and annual reporting periods.
Specifically, this standard requires new disclosures for significant transfers of assets or
liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for
purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net
basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2
and Level 3 assets and liabilities. We have included these new disclosures, as applicable, in Note
3 in the Notes to Consolidated and Condensed Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our cash equivalents and our portfolio of marketable securities are subject to market risk due
to changes in interest rates. Fixed rate interest securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or we may suffer losses in
principal if we are forced to sell securities that decline in the market value due to changes in
interest rates. Should the interest rate fluctuate by 10%, the change in value of our marketable
securities would not have been material as of September 30, 2010 and our interest income would not
have changed by a material amount for the three months ended September 30, 2010.
During the quarter we sold $6.8 million, at amortized cost, of our ARS classified as trading
marketable securities and $0.1 million classified as available-for-sale. As of September 30, 2010
we held, at fair value, $1.3 million in ARS classified as available-for-sale. We do not intend to
sell the remaining $1.4 million (amortized cost) in ARS classified as available-for-sale until a
successful auction occurs, nor do we believe that we will be required to sell these securities at
less than amortized cost before a successful auction occurs. The inability to liquidate our
remaining ARS may have a material impact on our income and results of operations.
Exchange Rate Sensitivity
We face exposure to adverse movements in foreign currency exchange rates because a significant
portion of our revenues, expenses, assets, and liabilities are denominated in currencies other than
the U.S. dollar, primarily the British pound sterling, the euro, the Indian rupee and the Canadian
dollar. These exposures may change over time as business practices evolve.
For the three months ended September 30, 2010, approximately 41% of our revenues and approximately
57% of our operating expenses were denominated in foreign currencies, as compared to 46% and 55%,
respectively, during the same period in 2009. For the nine months ended September 30, 2010,
approximately 41% of our revenues and approximately 56% of our operating expenses were denominated
in foreign currencies, as compared to 44% and 55%, respectively, during the same period in 2009. In
addition, 54% of our assets and 57% of our liabilities were subject to foreign currency exchange
fluctuations at September 30, 2010 as compared to 49% and 47% for our assets and liabilities,
respectively, at December 31, 2009. We also have assets and liabilities in certain entities that
are denominated in currencies other than the entitys functional currency.
Approximately 15% of our operating expenses for the nine months ended September 30, 2010 were
denominated in Indian rupees. Because we have minimal associated revenues in Indian rupees, any
movement in the exchange rate between the U.S. dollar and the Indian rupee has a significant impact
on our operating expenses and operating profit. Approximately 20% of our service revenues for the
nine months ended September 30, 2010 are denominated in the British pound sterling. Any movement in
the exchange rate between the U.S. dollar and the British pound has a significant impact on our
revenues and operating income. Approximately 5% of our service revenues for the nine months ended
September 30, 2010 are denominated in the euro. Any movement in the exchange rate between the U.S.
dollar and the euro has a significant impact on our revenues and operating income. We manage this
exposure through a risk management program that partially mitigates our exposure to operating
expenses denominated in the Indian rupee and operating margins denominated in the British pound
sterling and the euro, and that includes the use of derivative financial instruments which are not
designated as accounting hedges. As of September 30, 2010 we had option contracts outstanding in
the notional amount of approximately $24.8 million ($15.6 million for our Indian rupee contracts,
$6.4 million for our British pound sterling contracts and $2.8 million for our euro contracts).
Because these instruments are option collars that are settled on a net basis with the bank, we have
not recorded the gross underlying notional amounts in our assets and liabilities as of September
30, 2010. The following table details our net realized and unrealized gains/losses on these option
contracts for the three and nine months ended September 30, 2010 and 2009 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Loss) gain on
foreign exchange
option contracts
not designated |
$ | (225 | ) | $ | 295 | $ | 367 | $ | (179 | ) | ||||||
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We also performed a sensitivity analysis of the possible loss that could be incurred
on these contracts as a result of movements in the Indian rupee. Changes of 10%, 15% and 20% of the
underlying average exchange rate of our unsettled Indian rupee positions as of September 30, 2010
would result in maximum losses on these positions of $0.7 million, $1.3 million, and $1.9 million,
respectively. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled
British pound sterling positions as of September 30, 2010 would result in maximum losses on these
positions of $0.2 million, $0.3 million, and $0.4 million, respectively. Changes of 10%, 15% and
20% of the underlying average exchange rate of our unsettled euro positions as of September 30,
2010 would result in maximum losses on these positions of $0.1 million, $0.2 million, and $0.2
million, respectively. Positions expire in October and November of 2010 and therefore, any losses
in respect to these positions after September 30, 2010 would be recognized in the three months
ending December 31, 2010.
For additional quantitative and qualitative disclosures about market risk affecting Sapient,
see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), we conducted an evaluation of the
effectiveness, as of September 30, 2010, of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on our evaluation our CEO and CFO have concluded that our
disclosure controls and procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) are effective to ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms and is accumulated and
communicated to management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting occurred during the nine months
ended September 30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have certain contingent liabilities that arise in the ordinary course of our business
activities. We accrue contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. We are subject to various legal claims that
have arisen in the course of our business and that have not been fully adjudicated in which the
damages claimed under such actions, in the aggregate, total approximately $2.6 million as of
September 30, 2010. We have accrued at September 30, 2010, approximately $0.7 million related to
certain of these items. We intend to defend these matters vigorously, however, the ultimate outcome
of these items is uncertain and the potential loss, if any, may be significantly higher or lower
than the amounts that we have accrued. Should we fail to prevail in any of these legal matters or
should several of these legal matters be resolved against us in the same reporting period, the
operating results of a particular reporting period could be materially adversely affected.
Item 1A. Risk Factors
Risk Factors
The following important factors, among others, could cause our actual business and financial
results to differ materially from those contained in forward-looking statements made in this
Quarterly Report or presented elsewhere by management from time to time.
Our business, financial condition and results of operations may be materially impacted by economic
conditions and related fluctuations in customer demand for marketing, business, technology and
other consulting services.
The market for our consulting services and the technologies used in our solutions historically
has tended to fluctuate with economic cycles particularly those cycles in the United States and
Europe, where we earn the majority of our revenues. During economic cycles in which many companies
are experiencing financial difficulties or uncertainty, clients and potential clients may cancel or
delay spending on marketing, technology and other business initiatives. Our efforts to down-size,
when necessary, in a manner intended to mirror downturned economic conditions could be delayed and
costly. A downturn could result in a reduced demand for our services, project cancellations or
delays, lower revenues and operating margins resulting from price reduction pressures for our
services, and payment and collection issues with our clients. Any of these events could materially
and adversely impact our business, financial condition and results of operations.
Our markets are highly competitive and we may not be able to continue to compete effectively.
The markets for the services we provide are highly competitive. We believe that we compete
principally with large systems consulting and implementation firms, offshore outsourcing companies,
interactive and traditional advertising agencies, and clients internal information systems
departments. To a lesser extent, other competitors include boutique consulting firms that maintain
specialized skills and/or are geography based. Regarding our Government Services practice, we both
compete and partner with large defense contractors. Some of our competitors have significantly
greater financial, technical and marketing resources, and generate greater revenues and have
greater name recognition, than we do. Often, these competitors offer a larger and more diversified
suite of products and services than we offer. These competitors may win client engagements by
significantly discounting their services in exchange for a clients promise to purchase other goods
and services from the competitor, either concurrently or in the future. If we cannot keep pace with
the intense competition in our marketplace, our business, financial condition and results of
operations will suffer.
Our international operations and Global Distributed Delivery (GDD) model subject us to increased
risk.
We have offices throughout the world. Our international operations are a significant
percentage of our total revenues, and our GDD model is a key component of our ability to deliver
our services successfully. Our international operations are subject to inherent risks, including:
| economic recessions in foreign countries; | |
| fluctuations in currency exchange rates or impositions of restrictive currency controls; | |
| political instability, war or military conflict; | |
| changes in regulatory requirements; | |
| complexities and costs in effectively managing multi-national operations and associated internal controls and procedures; | |
| significant changes in immigration policies or difficulties in obtaining required immigration approvals for international assignments; |
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| restrictions imposed on the import and export of technologies in countries where we operate; | |
| reduced protection for intellectual property in some countries; and | |
| changes in tax laws. |
In particular, our GDD model depends heavily on our offices in Gurgaon, Bangalore and Noida,
India. Any escalation in the political or military instability in India or Pakistan or the
surrounding countries, or a business interruption resulting from a natural disaster, such as an
earthquake, could hinder our ability to use GDD successfully and could result in material adverse
effects to our business, financial condition and results of operations. Furthermore, the delivery
of our services from remote locations causes us to rely on data, phone, power and other networks
which are not as reliable in India as those in other countries where we operate. Any failures of
these systems, or any failure of our systems generally, could affect the success of our GDD model.
Remote delivery of our services also increases the complexity and risk of delivering our services,
which could affect our ability to satisfy our clients expectations or perform our services within
the estimated time frame and budget for each project. Changes to government structure or policies
in countries in which we operate could negatively impact our operations if such changes were to
limit or cease any benefits that may currently be available to us. For example, although the Indian
government has historically offered generous tax incentives to induce foreign companies to base
operations in India, new taxes have been introduced in recent years that partially offset those
benefits. On April 1, 2009 the income-tax incentive of one of our Software Technology Parks
(STPs) Units in India expired. Beginning April 1, 2011, the income-tax incentives applicable to
our other two STPs Units in India are scheduled to expire. In addition, in 2009 we established a
new India unit in a Special Economic Zone (SEZ) which is eligible for a five year, 100% tax
holiday. This expiration of incentives may adversely affect our cost of operations and increase the
risk of delivering our services on budget for client projects. Expiration of benefits provided to
us by having operations based in India could have a material adverse effect on our business,
financial condition and results of operations.
Our business, financial condition and results of operations may be materially impacted by military
actions, global terrorism, natural disasters and political unrest.
Military actions in Iraq, Afghanistan and elsewhere, global terrorism, natural disasters and
political unrest are among the factors that may adversely impact regional and global economic
conditions and, concomitantly, client investments in our services. In addition to the potential
impact of any of these events on the business of our clients, these events could pose a threat to
our global operations and people. Specifically, our people and operations in India could be
impacted if the recent rise in civil unrest, terrorism and conflicts with bordering countries in
India were to increase significantly. As a result, significant disruptions caused by such events
could materially and adversely affect our business, financial condition and results of operations.
If we do not attract and retain qualified professional staff, we may be unable to perform
adequately our client engagements and could be limited in accepting new client engagements.
Our business is labor intensive, and our success depends upon our ability to attract, retain,
train and motivate highly skilled employees. The improvement in demand for marketing and business
and technology consulting services has further increased the need for employees with specialized
skills or significant experience in marketing, business and technology consulting, particularly at
senior levels. We have been expanding our operations, and these expansion efforts will be highly
dependent on attracting a sufficient number of highly skilled people. We may not be successful in
attracting enough employees to achieve our expansion or staffing plans. Furthermore, the industry
turnover rates for these types of employees are high, and we may not be successful in retaining,
training and motivating the employees we attract. Any inability to attract, retain, train and
motivate employees could impair our ability to manage adequately and complete existing projects and
to bid for or accept new client engagements. Such inability may also force us to increase our
hiring of expensive independent contractors, which may increase our costs and reduce our
profitability on client engagements. We must also devote substantial managerial and financial
resources to monitoring and managing our workforce and other resources. Our future success will
depend on our ability to manage the levels and related costs of our workforce and other resources
effectively.
We earn revenues, incur costs and maintain cash balances in multiple currencies, and currency
fluctuations affect our financial results.
We have significant international operations, and we frequently earn our revenues and incur
our costs in various foreign currencies. Our international service revenues were $248.4 million for
the first nine months of 2010. Doing business in these foreign currencies exposes us to foreign
currency risks in numerous areas, including revenues and receivables, purchases, payroll and
investments. We also have a significant amount of foreign currency operating income and net asset
exposures. Certain foreign currency exposures, to some extent, are naturally offset within an
international business unit, because revenues and costs are denominated in the same foreign
currency, and certain cash balances are held in U.S. dollar denominated accounts. However, due to
the increasing size and importance of our international operations, fluctuations in foreign
currency exchange rates could materially impact our financial results. Our GDD model also subjects
us to increased currency risk because we incur a significant portion of our project costs in Indian
rupees and earn revenue from our clients in other currencies. While we have entered into foreign
currency offsetting option positions that allow the Company partially to hedge certain short-term
translation exposures in Indian rupee, British pound sterling and euro currency, and may in the
future enter into foreign currency exchanges swaps and purchases as well as sales of foreign
currency options, we will continue to experience foreign currency gains and losses in certain
instances where it is not possible or cost effective to hedge foreign
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currencies. There is no guarantee that such hedging activity will be effective or that our
financial condition will not be negatively impacted by the currency exchange rate fluctuations of
the Indian rupee versus the U.S. dollar. Costs for our delivery of services, including labor, could
increase as a result of the decrease in value of the U.S. dollar against the Indian rupee,
affecting our reported results.
Our cash positions include amounts denominated in foreign currencies. We manage our worldwide
cash requirements considering available funds from our subsidiaries and the cost effectiveness with
which these funds can be accessed. The repatriation of cash balances from certain of our
subsidiaries outside the United States could have adverse tax consequences and be limited by
foreign currency exchange controls. However, those balances are generally available without legal
restrictions to fund ordinary business operations. Any fluctuations in foreign currency exchange
rates, or changes in local tax laws, could materially impact the availability and size of these
funds for repatriation or transfer.
We have significant fixed operating costs, which may be difficult to adjust in response to
unanticipated fluctuations in revenues.
A high percentage of our operating expenses, particularly salary expense, rent, depreciation
expense and amortization of intangible assets, are fixed in advance of any particular quarter. As a
result, an unanticipated decrease in the number or average size of, or an unanticipated delay in
the scheduling for, our projects may cause significant variations in operating results in any
particular quarter and could have a material adverse effect on operations for that quarter.
An unanticipated termination or decrease in size or scope of a major project, a clients
decision not to proceed with a project we anticipated or the completion during a quarter of several
major client projects could require us to maintain underutilized employees and could have a
material adverse effect on our business, financial condition and results of operations. Our
revenues and earnings may also fluctuate from quarter to quarter because of such factors as:
| the contractual terms and timing of completion of projects, including achievement of certain business results; | |
| any delays incurred in connection with projects; | |
| the adequacy of provisions for losses and bad debts; | |
| the accuracy of our estimates of resources required to complete ongoing projects; | |
| loss of key highly-skilled personnel necessary to complete projects; and | |
| general economic conditions. |
Changes in our effective tax rate or tax liability may have an adverse effect on our results of
operations.
Our effective tax rate could be adversely impacted by several factors, some of which are
outside our control, including:
| Changes in relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates; | |
| Changes in tax laws and the interpretation of those tax laws; | |
| Changes to our assessments about the realizability of our deferred tax assets which are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies and the economic environment in which we do business; | |
| The outcome of future tax audits and examinations; | |
| Changes in generally accepted accounting principles that affect the accounting for taxes. |
In the ordinary course of our business, many transactions occur where the ultimate tax
determination is uncertain. Significant judgment is required in determining our worldwide provision
for income taxes. Although we believe our tax estimates are reasonable, the final determination
could be materially different from our historical tax provisions and accruals.
Our profits may decrease and/or we may incur significant unanticipated costs if we do not
accurately estimate the costs of fixed-price engagements.
Approximately 44% of our projects are based on fixed-price contracts, rather than contracts in
which payment to us is determined on a time and materials or other basis. Our failure to estimate
accurately the resources and schedule required for a project, or our failure to complete our
contractual obligations in a manner consistent with the project plan upon which our fixed-price
contract was based, could adversely affect our overall profitability and could have a material
adverse effect on our business, financial condition and results of operations. We are consistently
entering into contracts for large projects that magnify this risk. We have been required to commit
unanticipated additional resources to complete projects in the past, which has occasionally
resulted in losses on those contracts. We will likely experience similar situations in the future.
In addition, we may fix the price for some projects at an early stage of the project engagement,
which could result in a fixed price that is too low. Therefore, any changes from our original
estimates could adversely affect our business, financial condition and results of operations.
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Our profitability will be adversely impacted if we are unable to maintain our pricing and
utilization rates as well as control our costs.
Our profitability derives from and is impacted primarily by three factors, primarily: (i) the
prices for our services; (ii) our professionals utilization or billable time, and (iii) our costs.
To achieve our desired level of profitability, our utilization must remain at an appropriate rate,
and we must contain our costs. Should we reduce our prices in the future as a result of pricing
pressures, or should we be unable to achieve our target utilization rates and costs, our
profitability could be adversely impacted and our stock price could decline materially.
We partner with third parties on certain complex engagements in which our performance depends upon,
and may be adversely impacted by, the performance of such third parties.
Certain complex projects may require that we partner with specialized software or systems
vendors or other partners to perform our services. Often in these circumstances, we are liable to
our clients for the performance of these third parties. Should the third parties fail to perform
timely or satisfactorily, our clients may elect to terminate the projects or withhold payment until
the services have been completed successfully. Additionally, the timing of our revenue recognition
may be affected or we may realize lower profits if we incur additional costs due to delays or
because we must assign additional personnel to complete the project. Furthermore, our relationships
with our clients and our reputation generally may suffer harm as a result of our partners
unsatisfactory performance.
Our clients could unexpectedly terminate their contracts for our services.
Most of our contracts can be canceled by the client with limited advance notice and without
significant penalty. A clients termination of a contract for our services could result in a loss
of expected revenues and additional expenses for staff that were allocated to that clients
project. We could be required to maintain underutilized employees who were assigned to the
terminated contract. The unexpected cancellation or significant reduction in the scope of any of
our large projects, or client termination of one or more recurring revenue contracts (see
explanation of Recurring Revenues in Part I, Item 1, above), could have a material adverse effect
on our business, financial condition and results of operations.
We may be liable to our clients for substantial damages caused by our unauthorized disclosures of
confidential information, breaches of data security, failure to remedy system failures or other
material contract breaches.
We frequently receive confidential information from our clients, including confidential
customer data that we use to develop solutions. If any person, including one of our employees,
misappropriates client confidential information, or if client confidential information is
inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, we
may have substantial liabilities to our clients or client customers.
Further, many of our projects involve technology applications or systems that are critical to
the operations of our clients businesses and handle very large volumes of transactions. If we fail
to perform our services correctly, we may be unable to deliver applications or systems to our
clients with the promised functionality or within the promised time frame, or to satisfy the
required service levels for support and maintenance. While we have taken precautionary actions to
create redundancy and back-up systems, any such failures by us could result in claims by our
clients for substantial damages against us.
Although we attempt to limit the amount and type of our contractual liability for our breaches of
confidentiality or data security, defects in the applications or systems we deliver or other
material contract breaches that we may commit during the performance of our services (collectively,
Contract Breaches), in certain circumstances we agree to unlimited liability for Contract
Breaches. Additionally, while we carry insurance that is intended to mitigate our liabilities for
such Contract Breaches, we cannot be assured that our insurance coverages will be applicable and
enforceable in all cases, or sufficient to cover substantial liabilities that we may incur.
Further, we cannot be assured that contractual limitations on liability will be applicable and
enforceable in all cases. Accordingly, even if our insurance coverages or contractual limitations
on liability are found to be applicable and enforceable, our liability to our clients for Contract
Breaches could be material in amount and affect our business, financial condition and results of
operations. Moreover, such claims may harm our reputation and cause us to lose clients.
Our services may infringe the intellectual property rights of third parties, and create liability
for us as well as harm our reputation and client relationships.
The services that we offer to clients may infringe the intellectual property (IP) rights of
third parties and result in legal claims against our clients and Sapient. These claims may damage
our reputation, adversely impact our client relationships and create liability for us. Moreover,
although we generally agree in our client contracts to indemnify the clients for expenses or
liabilities they incur as a result of third party IP infringement claims associated with our
services, the resolution of these claims, irrespective of whether a court determines that our
services infringed another partys IP rights, may be time-consuming, disruptive to our business and
extraordinarily costly. Finally, in connection with an IP infringement dispute, we may be required
to cease using or developing certain IP that we offer to our clients. These circumstances could
adversely impact our ability to generate revenue as well as require us to incur significant expense
to develop alternative or modified services for our clients.
We may be unable to protect our proprietary methodology.
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Our success depends, in part, upon our proprietary methodology and other IP rights. We rely
upon a combination of trade secrets, nondisclosure and other contractual arrangements, and
copyright and trademark laws to protect our proprietary rights. We enter into confidentiality
agreements with our employees, contractors, vendors and clients, and limit access to and
distribution of our proprietary information. We cannot be certain that the steps we take in this
regard will be adequate to deter misappropriation of our proprietary information or that we will be
able to detect unauthorized use and take appropriate steps to enforce our IP rights.
Our stock price is volatile and may result in substantial losses for investors.
The trading price of our common stock has been subject to wide fluctuations, particularly in
the second half of 2008 and the first half of 2009. Our trading price could continue to be subject
to wide fluctuations in response to:
| quarterly variations in operating results and achievement of key business metrics by us or our competitors; | |
| changes in operating results estimates by securities analysts; | |
| any differences between our reported results and securities analysts published or unpublished expectations; | |
| announcements of new contracts or service offerings made by us or our competitors; | |
| announcements of acquisitions or joint ventures made by us or our competitors; and | |
| general economic or stock market conditions. |
In the past, securities class action litigation has often been instituted against companies
following periods of volatility in the market price of their securities. The commencement of this
type of litigation against us could result in substantial costs and a diversion of managements
attention and resources.
Our former Chairmen and Chief Executive Officers have significant voting power and may effectively
control the outcome of any stockholder vote.
Jerry A. Greenberg, our former Co-Chairman of the Board of Directors and Chief Executive
Officer of the Company and current member of our Board of Directors, and J. Stuart Moore, our
former Co-Chairman of the Board of Directors and Co-Chief Executive Officer and current member of
our Board of Directors, own, in the aggregate, approximately 21% of our outstanding common stock as
of November 1, 2010. As a result, they have the ability to substantially influence and may
effectively control the outcome of corporate actions requiring stockholder approval, including the
election of directors. This concentration of ownership may also have the effect of delaying or
preventing a change in control of Sapient, even if such a change in control would benefit other
investors.
We are dependent on our key employees.
Our success depends in large part upon the continued services of a number of key employees.
Our employment arrangements with key personnel provide that employment is terminable at will by
either party. The loss of the services of any of our key personnel could have a material adverse
effect on our business, financial condition and results of operations. In addition, if our key
employees resign from Sapient to join a competitor or to form a competing company, the loss of such
personnel and any resulting loss of existing or potential clients to any such competitor could have
a material adverse effect on our business, financial condition and results of operations. Although,
to the extent permitted by law, we require our employees to sign agreements prohibiting them from
joining a competitor, forming a competing company or soliciting our clients or employees for
certain periods of time, we cannot be certain that these agreements will be effective in preventing
our key employees from engaging in these actions or that courts or other adjudicative entities will
substantially enforce these agreements.
We may be unable to achieve anticipated benefits from acquisitions.
The anticipated benefits from any acquisitions that we may undertake might not be achieved.
For example, if we acquire a company, we cannot be certain that clients of the acquired business
will continue to conduct business with us, or that employees of the acquired business will continue
their employment or integrate successfully into our operations and culture. The identification,
consummation and integration of acquisitions and joint ventures require substantial attention from
management. The diversion of managements attention, as well as any difficulties encountered in the
integration process, could have an adverse impact on our business, financial condition and results
of operations. Further, we may incur significant expenses in completing any such acquisitions, and
we may assume significant liabilities, some of which may be unknown at the time of such
acquisition.
The failure to successfully and timely implement certain financial system changes to improve
operating efficiency and enhance our reporting controls could harm our business.
In parallel with the foregoing operational process redesign and role transition activities, we
have implemented and continue to install several upgrades and enhancements to our financial
systems. We expect these initiatives to enable us to achieve greater operating and financial
reporting efficiency and also enhance our existing control environment through increased levels of
automation of certain processes. Failure to successfully execute these initiatives in a timely,
effective and efficient manner could result in the disruption of our operations, the inability to
comply with our Sarbanes-Oxley obligations and the inability to report our financial
results in a timely and accurate manner.
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A failure to maintain effective internal controls over financial reporting could have a material
adverse impact on the Company.
We are required to maintain internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with generally accepted accounting principles. We
may in the future identify material weaknesses in our internal control over financial reporting.
Further, because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements, regardless of the adequacy of such controls. Should we fail either
to maintain adequate internal controls or implement required new or improved controls, our business
and results of operations could be harmed, we may be unable to report properly or timely the
results of our operations, and investors could lose faith in the reliability of our financial
statements. Consequently, the price of our securities may be adversely and materially impacted.
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SAPIENT CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits
3.1
|
Second Amended and Restated Certificate of Incorporation (1) | |
3.2
|
Amended and Restated Bylaws (2) | |
4.1
|
Specimen Certificate for Shares of Common Stock, $.01 par value, of the Company (3) | |
10.1
|
Employment Agreement between Sapient GmbH and Dr. Christian Oversohl dated August 27, 2010 (4) | |
31.1*
|
Certification of Alan J. Herrick pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Joseph S. Tibbetts, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Alan J. Herrick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2*
|
Certification of Joseph S. Tibbetts, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101*
|
The following materials from Sapient Corporation on Form 10-Q for the quarterly period ended September 30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated and Condensed Statements of Operations, (ii) the Consolidated and Condensed Balance Sheets, (iii) the Consolidated and Condensed Statements of Cash Flows and (iv) Notes to the Consolidated Financial Statements, tagged as blocks of text. |
* | Exhibits filed herewith. | |
(1) | Incorporated herein by reference to the Companys Form 10-Q for the fiscal quarter ended September 30, 2004 (File No. 000-28074). | |
(2) | Incorporated herein by reference to the Companys Form 8-K, filed February 10, 2009. | |
(3) | Incorporated herein by reference to the Companys Registration Statement on Form S-1 (File No. 333-12671). | |
(4) | Incorporated herein by reference to the Companys Form 8-K, filed September 2, 2010. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Signature | Title | Date | ||
/s/ Alan J. Herrick Alan J. Herrick |
President and Chief Executive Officer (Principal Executive Officer) |
November 4, 2010 | ||
/s/ Joseph S. Tibbetts, Jr. Joseph S. Tibbetts, Jr. |
Chief Financial Officer (Principal Financial Officer) |
November 4, 2010 |
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