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file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - SAPIENT CORP | Financial_Report.xls |
EX-31.2 - EX-31.2 - SAPIENT CORP | b85479exv31w2.htm |
EX-32.1 - EX-32.1 - SAPIENT CORP | b85479exv32w1.htm |
EX-31.1 - EX-31.1 - SAPIENT CORP | b85479exv31w1.htm |
EX-10.1 - EX-10.1 - SAPIENT CORP | b85479exv10w1.htm |
EX-32.2 - EX-32.2 - SAPIENT CORP | b85479exv32w2.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 March 31, 2011
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 May 1, 2011 | |
Common Stock, $0.01 par value per share | 137,929,902 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
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In thousands, except | ||||||||
per share and share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 196,386 | $ | 219,448 | ||||
Marketable securities, current portion |
8,962 | 8,861 | ||||||
Restricted cash, current portion |
547 | 1,416 | ||||||
Accounts receivable, less allowance for doubtful accounts of $107 and $91
at March 31, 2011 and December 31, 2010, respectively |
139,817 | 136,300 | ||||||
Unbilled revenues |
80,154 | 49,765 | ||||||
Deferred tax assets, current portion |
21,610 | 23,938 | ||||||
Prepaid expenses and other current assets |
24,225 | 21,256 | ||||||
Total current assets |
471,701 | 460,984 | ||||||
Marketable securities, net of current portion |
1,290 | 1,269 | ||||||
Restricted cash, net of current portion |
3,114 | 3,093 | ||||||
Property and equipment, net |
41,861 | 35,571 | ||||||
Purchased intangible assets, net |
16,560 | 17,629 | ||||||
Goodwill |
83,307 | 77,865 | ||||||
Deferred tax assets, net of current portion |
19,752 | 19,692 | ||||||
Other assets |
8,302 | 7,619 | ||||||
Total assets |
$ | 645,887 | $ | 623,722 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 21,837 | $ | 18,714 | ||||
Accrued expenses |
56,337 | 51,444 | ||||||
Accrued compensation |
50,255 | 66,609 | ||||||
Accrued restructuring costs |
2,305 | 3,129 | ||||||
Income taxes payable |
4,009 | 567 | ||||||
Deferred revenues |
16,723 | 18,558 | ||||||
Total current liabilities |
151,466 | 159,021 | ||||||
Long-term liabilities |
23,839 | 22,396 | ||||||
Total liabilities |
175,305 | 181,417 | ||||||
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 March 31, 2011 and December 31, 2010 |
| | ||||||
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 137,934,046
and 137,307,612 shares issued at March 31, 2011 and December 31, 2010, respectively |
1,379 | 1,373 | ||||||
Additional paid-in capital |
567,275 | 555,562 | ||||||
Treasury stock, at cost, 458,664 shares at March 31, 2011 and December 31, 2010 |
(2,466 | ) | (2,466 | ) | ||||
Accumulated other comprehensive loss |
(8,088 | ) | (12,488 | ) | ||||
Accumulated deficit |
(87,518 | ) | (99,676 | ) | ||||
Total stockholders equity |
470,582 | 442,305 | ||||||
Total liabilities and stockholders equity |
$ | 645,887 | $ | 623,722 | ||||
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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In thousands, except per share amounts) | ||||||||
Revenues: |
||||||||
Service revenues |
$ | 241,340 | $ | 183,223 | ||||
Reimbursable expenses |
8,554 | 8,501 | ||||||
Total gross revenues |
249,894 | 191,724 | ||||||
Operating expenses: |
||||||||
Project personnel expenses |
166,676 | 127,767 | ||||||
Reimbursable expenses |
8,554 | 8,501 | ||||||
Total project personnel expenses and reimbursable expenses |
175,230 | 136,268 | ||||||
Selling and marketing expenses |
10,156 | 8,647 | ||||||
General and administrative expenses |
39,105 | 35,943 | ||||||
Restructuring and other related charges |
5,642 | 286 | ||||||
Amortization of purchased intangible assets |
1,273 | 1,467 | ||||||
Acquisition costs and other related charges |
| 111 | ||||||
Total operating expenses |
231,406 | 182,722 | ||||||
Income from operations |
18,488 | 9,002 | ||||||
Interest and other income, net |
1,459 | 800 | ||||||
Income before income taxes |
19,947 | 9,802 | ||||||
Provision for income taxes |
7,789 | 3,563 | ||||||
Net income |
$ | 12,158 | $ | 6,239 | ||||
Basic net income per share |
$ | 0.09 | $ | 0.05 | ||||
Diluted net income per share |
$ | 0.09 | $ | 0.05 | ||||
Weighted average common shares |
136,293 | 130,054 | ||||||
Weighted average dilutive common share equivalents |
4,272 | 6,743 | ||||||
Weighted average common shares and dilutive common share equivalents |
140,565 | 136,797 | ||||||
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
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 12,158 | $ | 6,239 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Loss recognized on disposition of fixed assets |
1 | 139 | ||||||
Unrealized loss on financial instruments |
120 | 63 | ||||||
Unrealized gain on investments |
| (132 | ) | |||||
Depreciation expense |
4,207 | 4,155 | ||||||
Amortization of purchased intangible assets |
1,273 | 1,467 | ||||||
Deferred income taxes |
1,984 | 2,238 | ||||||
Stock-based compensation expense |
3,876 | 4,231 | ||||||
Non-cash restructuring charges |
4,612 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,512 | ) | 5,371 | |||||
Unbilled revenues |
(29,784 | ) | (16,639 | ) | ||||
Prepaid expenses and other current assets |
(2,933 | ) | 2,176 | |||||
Other assets |
(604 | ) | (68 | ) | ||||
Accounts payable |
1,463 | (2,622 | ) | |||||
Accrued compensation |
(18,101 | ) | (10,240 | ) | ||||
Accrued restructuring costs |
(854 | ) | (262 | ) | ||||
Deferred revenues |
(2,051 | ) | (2,627 | ) | ||||
Other accrued liabilities |
5,573 | (2,140 | ) | |||||
Other long-term liabilities |
1,598 | 661 | ||||||
Net cash used in operating activities |
(18,974 | ) | (7,990 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisitions, net of cash acquired |
| (2,985 | ) | |||||
Purchases of property and equipment and cost of internally developed software |
(8,065 | ) | (2,599 | ) | ||||
Sales and maturities of marketable securities classified as trading |
| 1,850 | ||||||
Sales and maturities of marketable securities not classified as trading |
2,197 | 781 | ||||||
Purchases of marketable securities |
(2,298 | ) | | |||||
Cash (paid) received on financial instruments, net |
(37 | ) | 673 | |||||
Change in restricted cash |
926 | 46 | ||||||
Net cash used in investing activities |
(7,277 | ) | (2,234 | ) | ||||
Cash flows from financing activities: |
||||||||
Principal payments under capital lease obligations |
(21 | ) | (21 | ) | ||||
Proceeds from credit facilities |
1,768 | | ||||||
Repayment of amounts borrowed under credit facilities |
(4,862 | ) | | |||||
Proceeds from stock option and purchase plans |
4,236 | 2,536 | ||||||
Dividends paid on common stock |
| (46,832 | ) | |||||
Net cash provided by (used in) financing activities |
1,121 | (44,317 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
2,068 | 930 | ||||||
Decrease in cash and cash equivalents |
(23,062 | ) | (53,611 | ) | ||||
Cash and cash equivalents, at beginning of period |
219,448 | 195,678 | ||||||
Cash and cash equivalents, at end of period |
$ | 196,386 | $ | 142,067 | ||||
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 audited
consolidated financial statements and notes thereto for the year ended December 31, 2010 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. Certain items for the
three months ended March 31, 2010 have been reclassified to conform to current period presentation.
The results of operations for the three months ended March 31, 2011 are not necessarily indicative
of the results to be expected for any future period or the full fiscal year.
During the first quarter of 2011, the Company re-evaluated its 2010 classification as a
component of operating activities, cash inflows from the sale of
trading auction rate securities (ARS),
pursuant to a nontransferable rights offering (the Put
Right) with UBS AG (UBS), one of its brokers. These securities were originally purchased prior to 2008,
held as available for sale and the cash outflows to purchase the securities were included as a
component of investing activities. When the Company entered into the Put
Right arrangement in
2008, the Company re-classified these securities to trading securities. The Company has determined
that a more appropriate classification relating to the sale of these securities in 2010 would be to
include them as a component of investing activities rather than an as a component of operating
activities.
The
Company will revise, as it files its Form 10-Qs and
Form 10-K for 2011, its statements of cash flows for the fiscal year ended December 31,
2010 and related quarterly periods to classify proceeds from the sale of its trading auction rate
securities as cash inflows from investing activities. The Company will revise the statement of
cash flows information to decrease cash provided by (increase cash used in) operating activities
and decrease cash used in (increase cash provided by) investing activities by $16.4 million for the
year ended December 31, 2010, $16.4 million for the nine months ended September 30, 2010, $9.6
million for the six months ended June 30, 2010 and $1.9 million for the three months ended March
31, 2010. The revision has no impact on the net change in cash and cash equivalents or our total
balance of cash and cash equivalents as previously reported for any of the relevant periods. The
revised statements of cash flows are summarized as follows (in thousands):
Twelve Months | Nine Months | Six Months | Three Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Net cash provided by (used in) operating activities |
$ | 70,885 | $ | 26,858 | $ | 7,200 | $ | (7,990 | ) | |||||||
Net cash (used in) provided by investing activities |
(17,011 | ) | (368 | ) | 730 | (2,234 | ) | |||||||||
Net cash used in financing activities |
(33,856 | ) | (37,901 | ) | (42,633 | ) | (44,317 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
3,752 | 5,661 | 294 | 930 | ||||||||||||
Increase (decrease) in cash and cash equivalents |
23,770 | (5,750 | ) | (34,409 | ) | (53,611 | ) | |||||||||
Cash and cash equivalents, at beginning of period |
195,678 | 195,678 | 195,678 | 195,678 | ||||||||||||
Cash and cash equivalents, at end of period |
$ | 219,448 | $ | 189,928 | $ | 161,269 | $ | 142,067 | ||||||||
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 operated 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.
6
Table of Contents
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 and a $1.6 million reduction for the value of shares
transferred as consideration that were also tied to the sellers continued employment. The $1.6
million has been accounted for as compensation expense over the associated vesting period, which
was originally scheduled to end in June 2013. However, during the three months ended March 31,
2011, the sellers employment with Sapient was terminated. Under the terms of the original
agreement, the seller was entitled to retain the entire $1.6 million value upon termination by the
Company and therefore the unrecognized compensation expense was accelerated, resulting in a $1.0 million charge to
earnings during the three months ended March 31, 2011. This charge is included in Restructuring and other related charges
in the Companys consolidated and condensed statement of operations.
The Company acquired a deferred consideration obligation
of $8.0 million in connection with the acquisition of Nitro. 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 2009
and $3.2 million in 2010 to settle this obligation. At March 31, 2011 the Company had a deferred
consideration obligation of $1.3 million, offset by an indemnification asset of $1.1 million.
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, the former shareholders of 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 Company
determined the amount of contingent consideration due to the achievement of year three performance
objectives was approximately $4.6 million and has therefore recorded additional goodwill for the
same amount as of March 31, 2011. The Company expects to settle this earn-out in the second quarter
of 2011 by issuing approximately 400,000 shares of common stock to the former shareholders of DCG.
As the DCG acquisition was completed in 2008, it was accounted for as a business combination under
the purchase method. Accordingly, all of the aforementioned contingent consideration payments
resulted in increases to goodwill at the time the contingent consideration amounts were earned.
3. Marketable Securities and Fair Value Disclosures
Marketable Securities
At March 31, 2011, the estimated fair value of the Companys marketable securities classified
as available-for-sale securities was $10.3 million. At December 31, 2010 the estimated fair value
of the Companys marketable securities classified as available-for-sale securities was $10.1
million. The Company sold, at amortized cost, $1.9 million of its ARS
classified as trading securities during the first three months of 2010. The remaining $14.6 million
were sold prior to December 31, 2010 and the Company, accordingly, did not have any marketable
securities classified as trading securities at March 31, 2011 or December 31, 2010.
The following tables summarize the Companys marketable securities (in thousands):
7
Table of Contents
Available-for-Sale Securities as of March 31, 2011 | ||||||||||||||||
Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction rate securities |
$ | 1,400 | $ | | $ | (110 | ) | $ | 1,290 | |||||||
Short-term: |
||||||||||||||||
Mutual fund deposits |
8,959 | 3 | | 8,962 | ||||||||||||
Total |
$ | 10,359 | $ | 3 | $ | (110 | ) | $ | 10,252 | |||||||
Available-for-Sale Securities as of December 31, 2010 | ||||||||||||||||
Gross Unrealized | Gross Unrealized | Estimated Fair | ||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Long-term: |
||||||||||||||||
Auction rate securities |
$ | 1,400 | $ | | $ | (131 | ) | $ | 1,269 | |||||||
Short-term: |
||||||||||||||||
Mutual fund deposits |
8,882 | | (21 | ) | 8,861 | |||||||||||
Total |
$ | 10,282 | $ | | $ | (152 | ) | $ | 10,130 | |||||||
The Companys available-for-sale securities comprise ARS and mutual funds. As of
March 31, 2011 all of the Companys available-for-sale ARS have been in an unrealized loss position
for more than twelve months.
Using a discounted cash flow analysis, the Company has assessed that the fair value of its ARS
classified as available-for-sale securities is $110,000 less than their amortized cost at March 31,
2011, compared to $131,000 less than amortized cost at December 31, 2010. The Company has recorded
the change in valuation, a gain of $21,000, 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 $1.0 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 months ended March 31, 2011 and 2010 (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Total other-than-temporary losses |
$ | (2 | ) | $ | (4 | ) | ||
Less: portion of loss recognized in other
comprehensive loss |
(2 | ) | (4 | ) | ||||
Net impairment losses recognized in
earnings |
$ | | $ | | ||||
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 months ended March 31, 2011 and
2010.
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 March 31, 2011 and December 31, 2010 (in thousands):
8
Table of Contents
Fair Value Measurements at March 31, 2011 Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial assets: |
||||||||||||||||
Auction rate securities |
$ | | $ | | $ | 1,290 | $ | 1,290 | ||||||||
Bank time deposits |
| 69,003 | | 69,003 | ||||||||||||
Foreign exchange option contracts, net |
| 39 | | 39 | ||||||||||||
Money market fund deposits |
22,100 | | | 22,100 | ||||||||||||
Mutual funds |
8,962 | | | 8,962 | ||||||||||||
Indemnification assets acquired |
| | 1,078 | 1,078 | ||||||||||||
Total |
$ | 31,062 | $ | 69,042 | $ | 2,368 | $ | 102,472 | ||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial liabilities: |
||||||||||||||||
Foreign exchange option contracts, net |
$ | | $ | 179 | $ | | $ | 179 | ||||||||
Deferred consideration acquired |
| | 231 | 231 | ||||||||||||
Other long-term liabilities acquired |
| | 1,443 | 1,443 | ||||||||||||
Total |
$ | | $ | 179 | $ | 1,674 | $ | 1,853 | ||||||||
Fair Value Measurements at December 31, 2010 Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial assets: |
||||||||||||||||
Auction rate securities |
$ | | $ | | $ | 1,269 | $ | 1,269 | ||||||||
Bank time deposits |
| 65,646 | | 65,646 | ||||||||||||
Foreign exchange option contracts, net |
| 133 | | 133 | ||||||||||||
Money market fund deposits |
27,703 | | | 27,703 | ||||||||||||
Mutual funds |
8,861 | | | 8,861 | ||||||||||||
Indemnification assets acquired |
| | 1,078 | 1,078 | ||||||||||||
Total |
$ | 36,564 | $ | 65,779 | $ | 2,347 | $ | 104,690 | ||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Financial liabilities: |
||||||||||||||||
Foreign exchange option contracts, net |
$ | | $ | | $ | | $ | | ||||||||
Deferred consideration acquired |
| | 231 | 231 | ||||||||||||
Other long-term liabilities acquired |
| | 1,419 | 1,419 | ||||||||||||
Total |
$ | | $ | | $ | 1,650 | $ | 1,650 | ||||||||
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 three
months ended March 31, 2011.
Level 1 assets consist of money market fund deposits and mutual funds that are traded in
active markets with sufficient volume and frequency of transactions. The fair values of these
assets were 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 values of these assets were
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 include 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 and liabilities 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 liabilities.
The following table provides a summary of changes in fair value of the Companys Level 3
financial assets and liabilities measured on a recurring basis for the three months ended March 31,
2011 (in thousands):
Level 3 Inputs | ||||||||
Assets | Liabilities | |||||||
Balance at December 31, 2010 |
$ | 2,347 | $ | 1,650 | ||||
Loss on increase in fair value of other long-term liability acquired, included
in general and administrative expenses |
| 24 | ||||||
Unrealized gain included in accumulated other comprehensive loss |
21 | | ||||||
Balance at March 31, 2011 |
$ | 2,368 | $ | 1,674 | ||||
Included in the Companys cash and cash equivalents balance of $196.4 million as of
March 31, 2011 were $69.0 million of time deposits with maturities of less than or equal to 90 days
and money market fund deposits of $22.1 million. Included in the Companys cash and cash
equivalents balance of $219.4 million as of December 31, 2010 were $65.6 million of time deposits
with maturities of less than or equal to 90 days and money market fund deposits of $27.7 million.
4. Stock-Based Compensation
The Company recorded $3.9 million and $4.2 million of stock-based compensation expense for the
three months ended March 31, 2011 and 2010, 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):
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Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Project personnel expenses |
$ | 2,488 | $ | 2,112 | ||||
Selling and marketing expenses |
267 | 435 | ||||||
General and administrative expenses |
1,121 | 1,684 | ||||||
Total stock-based compensation |
$ | 3,876 | $ | 4,231 | ||||
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 an estimated 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 or performance condition, vesting is based on the derived service
period. The Company estimates its forfeiture rate based on its historical experience.
During the three months ended March 31, 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. Under the terms of our RSU awards, RSUs were not entitled to dividends. As
a result, the dividend declared on outstanding RSUs was a modification of the original awards, and
the cost of the dividend equivalent is being recognized as stock-based compensation in the same
manner which 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 is being recognized
through March 1, 2014, with the amounts recorded in each period to be commensurate with the vesting
of the underlying awards.
During the second quarter of 2010, the Company granted RSUs with service and performance
conditions to its Chief Executive Officer (CEO). Up to 100,000 units will vest on March 1, 2013
if the performance conditions are met for the three year period ending December 31, 2012. The CEO
was also granted an additional 50,000 RSUs that will vest based on strategic objectives that will be
determined by the Companys Board of Directors.
During
the second quarter of 2011, the Company granted an aggregate of
294,000 RSUs with service and performance conditions to six
members of its leadership team.
The following table summarizes activity relating to stock options under all stock option plans
for the three months ended March 31, 2011 (in thousands, except prices):
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding as of December 31, 2010 |
3,246 | $ | 5.89 | |||||
Options exercised |
(451 | ) | $ | 9.46 | ||||
Options forfeited/cancelled |
(49 | ) | $ | 10.95 | ||||
Outstanding as of March 31, 2011 |
2,746 | $ | 5.22 | |||||
Vested and expected to vest as of March 31, 2011 |
2,746 | $ | 5.22 | |||||
Options exercisable as of March 31, 2011 |
2,744 | $ | 5.22 | |||||
Aggregate intrinsic value of outstanding |
$ | 17,119 | ||||||
Aggregate intrinsic value of vested and expected to vest |
$ | 17,117 | ||||||
Aggregate intrinsic value of exercisable |
$ | 17,111 |
The aggregate intrinsic value of stock options exercised in the three months ended
March 31, 2011 and 2010 was $0.8 million and $2.4 million, respectively, determined at the date of
exercise. As of March 31, 2011 the weighted average remaining contractual term for stock options
outstanding, vested and expected to vest, and exercisable was less than one year. As of March 31,
2011 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 following table summarizes activity relating to RSUs for the three months ended March 31,
2011 (in thousands, except prices):
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Number of Shares | Weighted | |||||||
Underlying | Average Grant | |||||||
Restricted Units | Date Fair Value | |||||||
Unvested as of December 31, 2010 |
6,188 | $ | 6.23 | |||||
Restricted units granted |
135 | $ | 12.00 | |||||
Restricted units vested |
(272 | ) | $ | 11.98 | ||||
Restricted units forfeited/cancelled |
(55 | ) | $ | 9.74 | ||||
Unvested as of March 31, 2011 |
5,996 | $ | 6.07 | |||||
Expected to vest as of March 31, 2011 |
5,602 | $ | 6.07 | |||||
The weighted average grant date fair value of RSUs granted for the three months
ended March 31, 2011 and 2010 was $12.00 and $8.36, respectively. The aggregate intrinsic value of
RSUs vested in the three months ended March 31, 2011 and 2010 was $3.3 million and $3.2 million,
respectively. The intrinsic value of non-vested RSUs, net of forfeitures, as of March 31, 2011, was
$68.6 million. As of March 31, 2011 there remained $29.5 million of compensation expense related to
non-vested RSUs to be recognized as expense over a weighted average period of approximately 2.3
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):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Net income |
$ | 12,158 | $ | 6,239 | ||||
Basic net income per share: |
||||||||
Weighted average common shares outstanding |
136,293 | 130,054 | ||||||
Basic net income per share |
$ | 0.09 | $ | 0.05 | ||||
Diluted net income per share: |
||||||||
Weighted average common shares outstanding |
136,293 | 130,054 | ||||||
Weighted average dilutive common share equivalents |
4,272 | 6,743 | ||||||
Weighted average common shares and dilutive common share equivalents |
140,565 | 136,797 | ||||||
Diluted net income per share |
$ | 0.09 | $ | 0.05 | ||||
Anti-dilutive options and share-based awards not included in the calculation |
9 | 9 | ||||||
Included in weighted average dilutive common share equivalents are
restricted shares associated with the Nitro acquisition. These shares were reflected in weighted
average dilutive common share equivalents as they were contingent shares during the period
presented.
6. Commitments and Contingencies
The Company is subject to certain legal proceedings and claims, as discussed below. The
Company is also subject to certain other legal proceedings and claims that have arisen in the
course of business and that have not been fully adjudicated. However, the results of legal
proceedings cannot be predicted with certainty. 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.
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 totaling approximately $10.3 million, for which the likelihood of a loss is considered more
than remote, and various administrative audits, each of which have arisen in the ordinary course of
business. The Company has recorded an accrual at March 31, 2011 of approximately $1.3 million
related to certain of these items. Although the Company intends to defend these matters vigorously,
the ultimate outcome of these matters is uncertain and the potential loss, if any, may be
significantly higher or lower than the amounts that the Company has previously accrued.
11
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7. Restructuring and Other Related Charges
2011 Restructuring Events
For the three months ended March 31, 2011 the Company recorded a restructuring charge of $5.7
million related to cash and other
termination benefits for two former Nitro executives whose positions
were made redundant, as well as the re-positioning of a portion of its SapientNitro business in Australia from
traditional advertising capabilities to digitally-led capabilities. The
restructuring charge consisted of $1.1 million of cash severance and other associated termination
benefits, and a $4.6 million non-cash charge related to the acceleration of unrecognized compensation expense
for stock-based
awards.
The following table shows activity during the three months ended March 31, 2011 related to the
2011 restructuring events (in thousands):
Workforce | ||||
Balance, December 31, 2010 |
$ | | ||
2011 provision |
5,687 | |||
Non-cash portion of 2011 provision |
(4,612 | ) | ||
Cash utilized |
(918 | ) | ||
Balance, March 31, 2011 |
$ | 157 | ||
The remaining $157,000 accrued restructuring balance as of March 31, 2011 is expected to be
paid in full by June 30, 2011.
2010 Restructuring Event
During the three months ended March 31, 2010, the Company consolidated its UK operations into
one office space. As such, the Company restructured one lease which ended in March 2011. Estimated
costs for the consolidation of facilities included contractual rental commitments and related
costs. The Company recorded $0.9 million in restructuring expense during the three months ended
March 31, 2010 and a benefit of less than $0.1 million during the three months ended March 31,
2011. The following table shows activity during the three months ended March 31, 2011, related to
the 2010 restructuring event (in thousands):
Facilities | ||||
Balance, December 31, 2010 |
$ | 242 | ||
Benefits, net |
(23 | ) | ||
Cash utilized |
(155 | ) | ||
Balance, March 31, 2011 |
$ | 64 | ||
The remaining $64,000 accrued restructuring balance as of March 31, 2011 is expected to be
paid in full by June 30, 2011.
2001, 2002, 2003 Restructuring Events
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. The
restructuring events 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 three months ended March 31, 2011 the Company recorded a net restructuring benefit
associated with the 2001, 2002 and 2003 events of less than $0.1 million, principally related to
changes in the Companys estimated operating expenses to be incurred in connection with a
previously restructured lease, which ends in November 2011.
For the three months ended March 31, 2010, the Company recorded a net restructuring benefit of
approximately $0.6 million, principally related to changes in the Companys estimated operating
expenses to be incurred and sub-lease income in connection with a previously restructured lease,
which ends in the fourth quarter of 2011.
The following table shows activity during the three months ended March 31, 2011 related to the
2001, 2002 and 2003 restructuring events (in thousands):
Facilities | ||||
Balance, December 31, 2010 |
$ | 2,887 | ||
Benefits, net |
(22 | ) | ||
Cash utilized |
(781 | ) | ||
Balance, March 31, 2011 |
$ | 2,084 | ||
The total remaining accrued restructuring balance for the 2001, 2002 and 2003 events
of $2.1 million as of March 31, 2011 is expected to be paid in full by November 2011.
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8. Income Taxes
For the three months ended March 31, 2011 the Company recorded an income tax provision of $7.8
million compared to $3.6 million for the three months ended March 31, 2010. Income tax is related
to federal, state, and foreign tax obligations. The increase in tax expense was primarily related
to an increase in profits.
The Companys 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.
The
Company enjoys the benefits of income tax holidays in certain
jurisdictions in which it operates. Tax holidays for the
Companys business located in Bangalore and Noida, India, expired on March 31, 2011.
In addition, in 2009 the Company established a new India unit in a Special Economic Zone (SEZ)
which is entitled to a five year, 100% tax holiday. Immediately
following the expiration of the 100% tax holiday, the SEZ unit is
entitled to a five year, 50% tax holiday.
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 March 31, 2011, 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 remain with a valuation allowance recorded against
them. Additionally, the Company maintains a valuation allowance against its deferred tax assets in
Switzerland but believes 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 had gross unrecognized tax benefits, including interest and penalties, of
approximately $13.2 million as of March 31, 2011 and $12.0 million as of December 31, 2010. 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 accrued interest and
penalties related to unrecognized tax benefits in the provision for income taxes. As of
March 31, 2011 and December 31, 2010, accrued interest and penalties totaled approximately $1.2
million and $1.1 million, respectively.
The Company conducts business globally and, as a result, its subsidiaries file 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, including such major jurisdictions as Canada, Germany, India, the United Kingdom and the
United States. The Companys U.S. federal tax filings are open for examination for tax years 2007
through the present. The statutes of limitations in the Companys other tax jurisdictions remain
open for 2004 through the present. However, carry forward attributes from prior years may still be
adjusted upon examination by tax authorities if they are used in a future period.
Although the Company believes its tax estimates are appropriate, the final
determination of tax audits could result in favorable or unfavorable changes in its estimates. The
Company anticipates the settlement of tax audits in the next twelve months and the expiration of
relevant statutes of limitations could result in a decrease in its unrecognized tax benefits of an
amount between $1.0 million and $2.0 million.
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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 12,158 | $ | 6,239 | ||||
Foreign currency translation gain (loss) |
4,402 | (1,501 | ) | |||||
Unrealized
loss on available-for-sale securities |
(2 | ) | (4 | ) | ||||
Comprehensive income |
$ | 16,558 | $ | 4,734 | ||||
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.
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.
Management does not allocate restructuring and other related charges, amortization
13
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of purchased intangible assets, stock-based compensation expense, interest and other income,
net or acquisition expenses and other related charges to the segments for the review
of results by 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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Service Revenues: |
||||||||
SapientNitro |
$ | 154,320 | $ | 115,692 | ||||
Sapient Global Markets |
73,565 | 57,111 | ||||||
Sapient Government Services |
13,455 | 10,420 | ||||||
Consolidated Service Revenues |
$ | 241,340 | $ | 183,223 | ||||
Income Before Income Taxes: |
||||||||
SapientNitro |
$ | 46,298 | $ | 29,442 | ||||
Sapient Global Markets |
21,740 | 20,706 | ||||||
Sapient Government Services |
3,742 | 2,772 | ||||||
Total reportable segments operating income (1) |
71,780 | 52,920 | ||||||
Less reconciling items (2) |
(51,833 | ) | (43,118 | ) | ||||
Consolidated Income Before Income Taxes |
$ | 19,947 | $ | 9,802 | ||||
(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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Centrally managed functions |
$ | 46,001 | $ | 38,124 | ||||
Restructuring and other related charges |
5,642 | 286 | ||||||
Amortization of purchased intangible assets |
1,273 | 1,467 | ||||||
Stock-based compensation expense |
3,876 | 4,231 | ||||||
Interest and other income, net |
(1,459 | ) | (800 | ) | ||||
Acquisition expense and other related charges |
| 111 | ||||||
Unallocated expenses (a) |
(3,500 | ) | (301 | ) | ||||
Total |
$ | 51,833 | $ | 43,118 | ||||
(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):
14
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Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Service revenues: |
||||||||
United States |
$ | 144,560 | $ | 105,434 | ||||
International |
96,780 | 77,789 | ||||||
Total service revenues |
$ | 241,340 | $ | 183,223 | ||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Long-lived assets: |
||||||||
United States |
$ | 14,911 | $ | 14,792 | ||||
United Kingdom |
4,815 | 3,936 | ||||||
India |
18,230 | 13,771 | ||||||
Rest of International |
3,905 | 3,072 | ||||||
Total long-lived assets (1) |
$ | 41,861 | $ | 35,571 | ||||
(1) | Reflects net book value of the Companys property and equipment. |
12. Goodwill and Purchased Intangible Assets
The following is a summary of goodwill allocated to the Companys business segments as of
March 31, 2011 and December 31, 2010 (in thousands):
Sapient Global | ||||||||||||||||
SapientNitro | Markets | Total | ||||||||||||||
Goodwill as of December 31, 2010 |
$ | 52,902 | $ | 24,963 | $ | 77,865 | ||||||||||
Contingent consideration recorded during the period |
| 4,613 | 4,613 | |||||||||||||
Exchange rate effect |
248 | 581 | 829 | |||||||||||||
Goodwill as of March 31, 2011 |
$ | 53,150 | $ | 30,157 | $ | 83,307 | ||||||||||
The following is a summary of intangible assets as of March 31, 2011 and December
31, 2010 (in thousands; the gross carrying amounts of local currency denominated purchased
intangible assets are reflected at the respective balance sheet date exchange rate):
15
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March 31, 2011 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Book | ||||||||||
Amount | Amortization | Value | ||||||||||
Customer lists and customer relationships |
$ | 23,158 | $ | (13,255 | ) | $ | 9,903 | |||||
SAP license agreement |
1,100 | (1,100 | ) | | ||||||||
Non-compete agreements |
8,674 | (3,480 | ) | 5,194 | ||||||||
Tradename |
3,194 | (1,731 | ) | 1,463 | ||||||||
Total purchased intangible assets |
$ | 36,126 | $ | (19,566 | ) | $ | 16,560 | |||||
December 31, 2010 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Book | ||||||||||
Amount | Amortization | Value | ||||||||||
Customer lists and customer relationships |
$ | 22,954 | $ | (12,351 | ) | $ | 10,603 | |||||
SAP license agreement |
1,100 | (1,100 | ) | | ||||||||
Non-compete agreements |
8,538 | (3,074 | ) | 5,464 | ||||||||
Tradename |
3,149 | (1,587 | ) | 1,562 | ||||||||
Total purchased intangible assets |
$ | 35,741 | $ | (18,112 | ) | $ | 17,629 | |||||
Amortization expense related to the purchased intangible assets was $1.3 million and
$1.5 million for the three months ended March 31, 2011 and 2010, respectively.
13. Foreign Currency Translation and Derivative Instruments
Foreign exchange gains of $0.4 million and losses of $0.9 million were recorded for the three
months ended March 31, 2011 and 2010, 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 17% of the Companys operating expenses for the three months ended March 31,
2011 were denominated in Indian rupees. Approximately 15%, 3% and 8% of service revenues for the
three months ended March 31, 2011 were denominated in British pounds sterling, Euros and Canadian
dollars, respectively. As the Company has minimal associated revenues in Indian rupees, any
significant 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, the U.S. dollar and the Euro and the
U.S. dollar and the Canadian dollar 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, the Euro and the Canadian dollar, and
that includes the use of derivative financial instruments which are not 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, (iii) Euro denominated revenues
against the appreciation of the U.S. dollar relative to the Euro, and
(iv) Canadian dollar
denominated revenues against the appreciation of the U.S. dollar relative to the Canadian dollar.
Currently, the Company enters into 30 day average rate instruments covering a rolling 90 day period
with notional amounts of 350 million rupees (approximately $7.7 million), 2.0 million pounds
sterling (approximately $3.2 million), 0.1 million Euros (approximately $0.1 million), and 2.5
million Canadian dollars (approximately $2.5 million). 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 March 31, 2011.
The following table reflects the fair value of the Companys derivative assets and liabilities
on its consolidated and condensed balance sheets as of March 31, 2011 and December 31, 2010 (in
thousands):
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Derivative Assets Reported in Other | Derivative Liabilities Reported in | |||||||||||||||
Current Assets | Accrued Expenses | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Foreign exchange option
contracts not designated |
$ | 39 | $ | 133 | $ | (179 | ) | $ | | |||||||
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
months ended March 31, 2011 and 2010 (in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Loss) gain on foreign
exchange option contracts not
designated |
$ | (268 | ) | $ | 610 | |||
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
(an Indian subsidiary of the Company) 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, dependent on the payback period selected at the
time of borrowing. There are no covenants based on financial measures governing this facility. At
March 31, 2011, the Company had one short-term loan outstanding. The 60 million rupee loan
(approximately $1.3 million) is at an interest rate of 12.0% and has a maturity date of April 16,
2011. This borrowing is reflected in accrued expenses on the consolidated and condensed balance
sheets.
Credit Facilities | ||||
Balance, December 31, 2010 |
$ | 4,420 | ||
Proceeds from credit facilities |
1,768 | |||
Repayments of credit facilities |
(4,862 | ) | ||
Balance, March 31, 2011 |
$ | 1,326 | ||
16. Recent Accounting Pronouncements
There were no recently issued accounting pronouncements or changes in accounting
pronouncements during the three months ended March 31, 2011, that are expected to
have a material effect on the Companys financial condition, results of operations or cash flows.
17
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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 are currently, and are 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 and a
globally integrated service in derivatives processing. 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 March 31, 2011 were $241.3 million, a 32%
increase compared to service revenues for same period in 2010. The increase in service revenues was
primarily due to an increase in demand for our services compared to 2010.
For the three months ended March 31, 2011 we reported income from operations of $18.5 million,
a 105% increase compared to $9.0 million for the same period in 2010. The increase in operating
income was due to the increase in demand for our services and our management of project personnel,
sales and marketing, and general and administrative expenses, all of which decreased as a
percentage of revenue in the first quarter of 2011 as compared to the first quarter of 2010.
For the three months ended March 31, 2011 we reported net income of $12.2 million, a 95%
increase compared to $6.2 million for the same period in 2010. The increase in service revenues and
the fact that project personnel, sales and marketing and general and administrative expenses have
decreased as a percentage of revenue were the primary contributors to this increase.
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 months
ended March 31, 2011 and 2010 (in thousands, except percentages):
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Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Service revenues |
$ | 241,340 | $ | 183,223 | ||||
GAAP income from operations |
$ | 18,488 | $ | 9,002 | ||||
Stock-based compensation expense |
3,876 | 4,231 | ||||||
Restructuring and other related charges |
5,642 | 286 | ||||||
Amortization of purchased intangible assets |
1,273 | 1,467 | ||||||
Acquisition costs and other related charges |
| 111 | ||||||
Stock-based compensation review and restatement benefit |
(3,500 | ) | (301 | ) | ||||
Non-GAAP income from operations |
$ | 25,779 | $ | 14,796 | ||||
GAAP operating margin |
7.7 | % | 4.9 | % | ||||
Effect of adjustments detailed above |
3.0 | % | 3.2 | % | ||||
Non-GAAP operating margin |
10.7 | % | 8.1 | % | ||||
Non-GAAP income from operations increased in the three months ended March 31, 2011
compared to 2010 due primarily 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. During the quarter ended March 31, 2011, we received insurance recovery proceeds of $3.5
million as reimbursement for expenses incurred during the stock option review and restatement in
2006 and 2007. When the expenses were originally incurred, they were excluded from our non-GAAP
operating income. Similarly, the $3.5 million benefit has been excluded from non-GAAP operating
income in the current quarter.
When important to managements analysis, operating results are compared in constant currency
terms, which exclude 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 3. 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. Management believes that there have been no significant changes
during 2011 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, 2010.
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:
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Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
Revenues: |
|||||||||
Service revenues |
100 | % | 100 | % | |||||
Reimbursable expenses |
4 | % | 5 | % | |||||
Total gross revenues |
104 | % | 105 | % | |||||
Operating expenses: |
|||||||||
Project personnel expenses |
69 | % | 70 | % | |||||
Reimbursable expenses |
4 | % | 5 | % | |||||
Total project personnel expenses and reimbursable expenses |
73 | % | 74 | % | |||||
Selling and marketing expenses |
4 | % | 5 | % | |||||
General and administrative expenses |
16 | % | 20 | % | |||||
Restructuring and other related charges |
2 | % | 0 | % | |||||
Amortization of purchased intangible assets |
1 | % | 1 | % | |||||
Acquisition costs and other related charges |
0 | % | 0 | % | |||||
Total operating expenses |
96 | % | 100 | % | |||||
Income from operations |
8 | % | 5 | % | |||||
Interest and other income, net |
1 | % | 1 | % | |||||
Income before income taxes |
8 | % | 6 | % | |||||
Provision for income taxes |
3 | % | 2 | % | |||||
Net income |
5 | % | 3 | % | |||||
Three months ended March 31, 2011 compared to the three months ended March 31, 2010
Service Revenues
Our service revenues for the three months ended March 31, 2011 and 2010 were as follows (in
thousands, except percentages):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | Percentage | ||||||||||||||
2011 | 2010 | Increase | Increase | |||||||||||||
Service revenues |
$ | 241,340 | $ | 183,223 | $ | 58,117 | 32 | % |
The increase in service revenues for the three months ended March 31, 2011 was primarily due
to an increase in demand for our services compared to 2010. The following table compares our first
quarter 2011 service revenues by industry sector to 2010 (in millions, except percentages):
Percentage | ||||||||||||||||
Three Months Ended March 31, | Increase / | Increase / | ||||||||||||||
Industry Sector | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Financial Services |
$ | 80.0 | $ | 53.0 | $ | 27.1 | 51 | % | ||||||||
Consumer, Travel & Automotive |
81.7 | 53.3 | 28.3 | 53 | % | |||||||||||
Technology & Communications |
32.2 | 27.3 | 4.9 | 18 | % | |||||||||||
Government, Health & Education |
26.0 | 27.5 | (1.5 | ) | (6 | %) | ||||||||||
Energy Services |
21.4 | 22.1 | (0.7 | ) | (3 | %) | ||||||||||
Total |
$ | 241.3 | $ | 183.2 | $ | 58.1 | 32 | % | ||||||||
The increases in the sectors noted above were due to an increase in demand for our services in
these industries. The decreases in the Government, Health & Education and Energy Services sector
were due to decreases in demand. In constant currency terms, service revenues increased 30%
compared to the same period in 2010, 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 2010.
The increases in demand across the majority of industry sectors caused our average project
personnel peoplecount to increase 31% for the three months ended March 31, 2011 compared to the
same period in 2010. Utilization represents the percentage of our project personnels time spent on
billable client work. Our utilization of 71% was lower than the 75% rate we had for the same period
in 2010. We also increased our use of external contractors and consultants by 28% compared to 2010,
as demand for our services concentrated in specialized areas increased.
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Our five largest customers, in the aggregate, accounted for approximately 21% of our service
revenues for the three months ended March 31, 2011 and 2010. No
customer accounted for more than 10% of our service revenues. Long-Term and Retainer Revenues are
revenues from contracts with durations of at least twelve months, as well as revenues from
applications management and long-term support projects, which are cancelable. Our
Long-Term and Retainer Revenues were 47% of our service revenues for the three months ended March
31, 2011, compared to 45% for the same period in 2010.
Project Personnel Expenses
Project personnel expenses consist principally of salaries and employee benefits for personnel
dedicated to client projects, independent 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 months ended March
31, 2011 and 2010 were as follows (in thousands, except percentages):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | Increase/ | Percentage | |||||||||||||
2011 | 2010 | (Decrease) | Increase | |||||||||||||
Project personnel expenses |
$ | 166,676 | $ | 127,767 | $ | 38,909 | 30 | % | ||||||||
Project personnel expenses as a percentage
of service revenues |
69 | % | 70 | % | (1 point) |
The increase for the three months ended March 31, 2011 was primarily due to the
increase in project personnel peoplecount. Compensation expense increased $29.5 million due to the
increase in peoplecount. Use of external contractors and consultants increased $4.6 million due to
an increase in demand for our services in specialized areas. Travel costs increased $2.3 million as
the Company incurred greater transportation costs due to the increase in peoplecount. 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 months ended March 31, 2011 and 2010 were as follows (in thousands, except
percentages):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | Increase/ | Percentage | |||||||||||||
2011 | 2010 | (Decrease) | Increase | |||||||||||||
Selling and marketing expenses |
$ | 10,156 | $ | 8,647 | $ | 1,509 | 17 | % | ||||||||
Selling and marketing expenses as a percentage
of service revenues |
4 | % | 5 | % | (1 point) |
The increase for the three months ended March 31, 2011 was primarily due to costs
incurred to drive the 32% increase in service revenues, and to a lesser extent, an increase in
sales and marketing peoplecount. Compensation expense increased $0.6 million due to the increase in
peoplecount. Travel costs increased $0.6 million as the Company incurred greater transportation
costs due to the increase in peoplecount. External consultant expense increased $0.2 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. The remaining
increase was due to increases in various other selling and marketing expenses.
General and Administrative Expenses
General and administrative expenses consist principally of 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 months ended March 31, 2011 and 2010 were as follows (in thousands, except
percentages):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | Increase/ | Percentage | |||||||||||||
2011 | 2010 | (Decrease) | Increase | |||||||||||||
General and administrative expenses |
$ | 39,105 | $ | 35,943 | $ | 3,162 | 9 | % | ||||||||
General and administrative
expenses as a percentage
of service revenues |
16 | % | 20 | % | (4 points) |
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The increase for the three months ended March 31, 2011 was primarily due to the following
factors: (i) facilities expenses increased $2.3 million due to the opening of a new office in India
in the first quarter of 2010, (ii) compensation expense increased $1.2 million due to an increase
in general and administrative peoplecount, (iii) a currency gain of $0.4 million was recognized in
2011 and a currency loss of $0.9 million was recognized in 2010 as currency rates fluctuated on our
short-term transactions, these amounts were offset by hedging losses of $0.3 million in 2011 and
hedging gains of $0.6 million in 2010, (iv) travel costs increased $0.5 million due to the increase
in peoplecount, (v) insurance costs increased $1.5 million due to the increase in peoplecount and
rate increases, (vi) a $0.9 million legal accrual is
included in 2011 and (vii) use of
external contractors and consultants increased $0.7 million. These increases were partially
offset by insurance recovery proceeds of $3.5 million received during the first quarter of 2011 as
reimbursement for expenses incurred during the stock option review and restatement in 2006 and
2007. The remaining net decrease was due to changes in various other general and administrative
expenses.
Restructuring and Other Related Charges
Restructuring and other related charges were $5.6 million for the three months ended March 31,
2011, compared to $0.3 million during the same period in 2010. The restructuring charge in the first
quarter of 2011 related primarily to
cash and other termination benefits for two former Nitro executives whose positions were made
redundant, as well as the re-positioning of a portion of our SapientNitro business
in Australia from traditional advertising capabilities to digitally-led capabilities. The restructuring charge consisted of $1.1 million of cash severance and other
associated termination benefits, and a $4.6 million non-cash charge related to the acceleration of
unrecognized compensation expense. The restructuring charge in the first quarter of 2010 consisted of
$0.9 million for the consolidation of our UK operations into one office space, offset by a $0.6
million benefit related to changes in the Companys estimated operating expenses to be incurred and
sub-lease income in connection with a previously restructured lease, which ends in the fourth
quarter of 2011.
We expect to incur additional restructuring charges of approximately $1.5 million in the third
quarter of 2011 related to the consolidation of our two office locations in New York City into one
office. The $1.5 million is expected to comprise a charge for future committed rental
payments and operating expenses after the cease-use date, offset by estimated sublease income over
the remaining lease term.
Amortization of Purchased Intangible Assets
Amortization of intangible assets consists of non-compete and non-solicitation agreements,
customer lists and tradenames acquired in business combinations. Amortization of purchased
intangible assets was $1.3 million for the three months ended March 31, 2011, compared to $1.5
million for the same period in 2010. The decrease in expense was due to the fact that certain
intangible assets from previous acquisitions have been fully amortized.
Acquisition Costs and Other Related Charges
Acquisition costs and other related charges are costs associated with third-party
professional services we incur related to our evaluation process of potential acquisition
opportunities. Although we may incur acquisition costs and other related charges, this is not
indicative that any transaction will be consummated. We did not incur any acquisition costs in the
first quarter of 2011, compared to a $0.1 million charge for the first quarter of 2010.
Interest and Other Income, Net
Interest and other income is derived primarily from investments in U.S. government securities,
bank time deposits and money market funds. Our interest and other income, net for the three months
ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | Percentage | ||||||||||||||
2011 | 2010 | Increase | Increase | |||||||||||||
Interest and other
income, net |
$ | 1,459 | $ | 800 | $ | 659 | 82 | % |
The increase for the three months ended March 31, 2011 was primarily due to higher
interest income. This increase in interest income was due to increases in local interest rates on
our foreign currency cash and equivalents and higher average cash balances for the three months
ended March 31, 2011 compared to the same period in 2010.
Provision for Income Taxes
For the three months ended March 31, 2011, we recorded an income tax provision of $7.8 million,
compared to $3.6 million in 2010. Income tax is related to federal, state and foreign tax
obligations. The increase in tax expense was primarily related to an increase in profits.
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.
We enjoy the benefits of income tax holidays in certain jurisdictions in which we operate.
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The tax holidays for our
business located in Bangalore and Noida, India, expired on March 31, 2011. In addition, in 2009 we
established a new India unit in a Special Economic Zone (SEZ) which is entitled to a five year,
100% tax holiday. Immediately following the expiration of the 100%
tax holiday, the SEZ unit is entitled to a five year, 50% tax holiday.
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 March 31, 2011, 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, remain with a valuation allowance recorded against
them. Additionally, we maintain a valuation allowance against our deferred tax assets in
Switzerland but 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 had gross unrecognized tax benefits, including interest and penalties, of approximately
$13.2 million as of March 31, 2011 and $12.0 million as of December 31, 2010. These amounts
represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction
of our effective tax rate. We recognize accrued interest and penalties related to
unrecognized tax benefits in the provision for income taxes. As of March 31, 2011 and December 31,
2010, accrued interest and penalties totaled approximately $1.2 million and $1.1 million,
respectively.
We conduct business globally and, as a result, our subsidiaries file 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, including such
major jurisdictions as Canada, Germany, India, the United Kingdom and the United States. Our U.S.
federal tax filings are open for examination for tax years 2007 through the present. The statutes
of limitations in our other tax jurisdictions remain open for 2004 through the present. However,
carry forward attributes from prior years may still be adjusted upon examination by tax authorities
if they are used in a future period.
Although we believe our tax estimates are appropriate, the final determination of
tax audits could result in favorable or unfavorable changes in our estimates. We anticipate the
settlement of tax audits in the next twelve months and the expiration of relevant statutes of
limitations could result in a decrease in our unrecognized tax benefits of an amount between $1.0
million and $2.0 million.
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.
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. Management
does not allocate restructuring and other related charges, amortization of purchased intangible
assets, stock-based compensation expense, interest and other income, net or acquisition expenses and other related
charges to the segments for the review of results by the Chief
Operating Decision Maker (CODM). Asset information by operating segment is not reported to or
reviewed by the CODM, and therefore, we have 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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Service Revenues: |
||||||||
SapientNitro |
$ | 154,320 | $ | 115,692 | ||||
Sapient Global Markets |
73,565 | 57,111 | ||||||
Sapient Government Services |
13,455 | 10,420 | ||||||
Consolidated Service Revenues |
$ | 241,340 | $ | 183,223 | ||||
Income Before Income Taxes: |
||||||||
SapientNitro |
$ | 46,298 | $ | 29,442 | ||||
Sapient Global Markets |
21,740 | 20,706 | ||||||
Sapient Government Services |
3,742 | 2,772 | ||||||
Total reportable segments operating income (1) |
71,780 | 52,920 | ||||||
Less reconciling items (2) |
(51,833 | ) | (43,118 | ) | ||||
Consolidated Income Before Income Taxes |
$ | 19,947 | $ | 9,802 | ||||
(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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Centrally managed functions |
$ | 46,001 | $ | 38,124 | ||||
Restructuring and other related charges |
5,642 | 286 | ||||||
Amortization of purchased intangible assets |
1,273 | 1,467 | ||||||
Stock-based compensation expense |
3,876 | 4,231 | ||||||
Interest and other income, net |
(1,459 | ) | (800 | ) | ||||
Acquisition expense and other related charges |
| 111 | ||||||
Unallocated expenses (a) |
(3,500 | ) | (301 | ) | ||||
Total |
$ | 51,833 | $ | 43,118 | ||||
(a) | Reflects stock option restatement-related benefits. |
The increase in SapientNitro service revenues for the three months ended March 31,
2011 was primarily due to increases in demand for our services in the majority of the industry
sectors we operate in. The following table compares SapientNitro service revenues by industry
sector for the three months ended March 31, 2011 compared to the same period in 2010 (in millions,
except percentages):
Percentage | ||||||||||||||||
Three Months Ended March 31, | Increase / | Increase / | ||||||||||||||
Industry Sector | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Consumer, Travel & Automotive |
$ | 81.7 | $ | 53.4 | $ | 28.3 | 53 | % | ||||||||
Technology & Communications |
32.1 | 27.2 | 4.9 | 18 | % | |||||||||||
Financial Services |
28.7 | 17.1 | 11.6 | 68 | % | |||||||||||
Government, Health & Education |
9.8 | 15.6 | (5.8 | ) | (37 | %) | ||||||||||
Energy Services |
2.0 | 2.4 | (0.4 | ) | (18 | %) | ||||||||||
Total |
$ | 154.3 | $ | 115.7 | $ | 38.6 | 33 | % | ||||||||
For the three months ended March 31, 2011, the increases in sector service revenues were
primarily due to increases in demand in these
24
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sectors, while the decreases were due to decreased
demand. In constant currency terms, SapientNitro service revenues increased 31% for the three
months ended March 31, 2011 compared to the same period in 2010. The overall increase in demand for
our services contributed to SapientNitros average project personnel peoplecount increasing
compared to 2010.
The increase in Sapient Global Markets revenue for the three months ended March 31, 2011 was
due to increases in demand for our
services compared to 2010. The following table compares Sapient Global Markets service revenues by
industry sector for the three months ended March 31, 2011 compared to the same period in 2010 (in
millions, except percentages):
Percentage | ||||||||||||||||
Three Months Ended March 31, | Increase / | Increase / | ||||||||||||||
Industry Sector | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Financial Services |
$ | 54.1 | $ | 37.4 | $ | 16.7 | 45 | % | ||||||||
Energy Services |
19.5 | 19.7 | (0.2 | ) | (1 | %) | ||||||||||
Total |
$ | 73.6 | $ | 57.1 | $ | 16.5 | 29 | % | ||||||||
The increase in Financial Services was due to increases in demand for our services in this
sector. In constant currency terms, Sapient Global Markets service revenues increased 27% for the
three months ended March 31, 2011 compared to 2010. The overall increase in demand for our services
contributed to Sapient Global Markets average project personnel peoplecount increasing compared to
the same period in 2010.
Service revenues for our Sapient Government Services operating segment increased by 29% during
the three months ended March 31, 2011 compared to the same period in 2010 due to increases 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 2010.
Operating Income by Operating Segments
SapientNitros operating income increased as a percentage of related service revenues to 30%
for the three months ended March 31, 2011 compared to 25% for 2010. The increase was primarily due
to a decrease in consultant expense as a percentage of revenue compared to 2010.
Sapient Global Markets operating income decreased as a percentage of related service revenues
to 30% for the three months ended March 31, 2011 compared to 36% for 2010. The decrease was
primarily due to an increase in consultant expense as a percentage of revenue compared to 2010 as
demand for our services in specialized areas increased.
Sapient Government Services operating income as a percentage of related service revenues was
28% for the three months ended March 31, 2011 compared to 27% for the three months ended March 31,
2010.
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 March 31, 2011 we had approximately
$210.3 million in cash, cash equivalents, restricted cash and marketable securities, compared to
$234.1 million at December 31, 2010.
We had approximately $3.7 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 March 31, 2011.
Cash used in operating activities was $19.0 million for the three months ended March 31, 2011.
This resulted from net income of $12.2 million and the addition of non-cash charges of $16.1
million being more than offset by increases in unbilled revenues and accounts receivable of $31.3
million and a decrease in accrued compensation of $18.1 million as a result of bonus payments
relating to 2010 performance being paid in the first quarter of 2011. Cash used in operating
activities increased compared to the same period in 2010 due to lower bonus payment of prior year
bonuses as bonuses based on 2010 results were higher than those paid in the first quarter of
2010 which were based on 2009 results and an increase in Days sales outstanding (DSO)
described below which created increases in accounts receivable and unbilled revenue balances.
Days sales outstanding (DSO) is calculated based on the actual three months of total revenue
and period end receivables, unbilled and deferred revenue balances. Our DSO increased 12% to 73
days as of March 31, 2011 as compared to our DSO of 65 days as of December 31, 2010. DSO increased
primarily due to the increase in unbilled revenues, specifically the timing of achieving certain
project milestones and proportionately more revenue being recognized in
the third month of the first quarter of 2011, resulting in a higher
amount of invoices being sent in the first month of the following
quarter. Time and materials arrangements have longer billing cycles than fixed-price
contracts, which increase DSO. Approximately 55% of our services revenue for the first three months
of 2011 was derived from time and materials arrangements as compared to 54% for the fourth quarter
of 2010. We expect our unbilled revenues to be short-term in nature, with a majority being billed
within 90 days.
Cash used in investing activities was $7.3 million for the three months ended March 31, 2011.
This was primarily due to $8.1 million in capital expenditures,
primarily for the buildout of facilities in our India locations and the costs of internally
developed software being offset by a $0.9 million decrease in restricted cash balances. Cash
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used
by investing activities increased compared to the same period in 2010. The current period reflected
more capital expenditures, primarily related to build-out costs for new offices.
Cash provided by financing activities was $1.1 million for the three months ended March 31,
2011, primarily derived from $4.2 million of
proceeds from stock option exercises being partially offset by net repayments of $3.1 million under
our revolving credit facility in India. Cash used in financing
activities was $44.3 million for the three months ended
March 31, 2010 primarily as a result of the $46.8 million
dividend payment being partially offset by $2.5 million in
proceeds from stock option exercises.
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 $10.3 million, for which the likelihood of a loss is considered more than remote, and
various administrative audits, each of which have arisen in the ordinary course of our business. We
have recorded an accrual at March 31, 2011 of approximately $1.3 million related to certain of
these items. Although we intend to defend these matters vigorously, the ultimate outcome of these matters is
uncertain and the potential loss, if any, may be significantly higher or lower than the amounts
that we have previously accrued and may have a material effect on our operating results.
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 outlays for our previously recorded restructuring activities for at least the
next 12 months.
New Accounting Pronouncements
There were no recently issued accounting pronouncements or changes in accounting
pronouncements during the three months ended March 31, 2011, that are expected to have
a material effect on our financial condition, results of operations or cash flows.
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, and we may suffer losses in
principal if we are forced to sell securities that decline in 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 March 31, 2011 and our interest income would not have
changed by a material amount for the three months ended March 31, 2011.
As of
March 31, 2011, 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 liquidity
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 March 31, 2011, approximately 34% of our revenues and approximately
54% of our operating expenses were denominated in foreign currencies, as compared to 42% and 53%,
respectively, during the same period in 2010. In addition, 53% of our assets and 53% of our
liabilities were subject to foreign currency exchange fluctuations at March 31, 2011 as compared to
52% and 52% of our assets and liabilities, respectively, at December 31, 2010. We also have assets
and liabilities in certain entities that are denominated in currencies other than the entitys
functional currency.
Approximately 17% of our operating expenses for the three months ended March 31, 2011 were
denominated in Indian rupees. Because we have minimal associated revenues in Indian rupees, any
significant 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 15% of our service
revenues for the three months ended March 31, 2011 were denominated in the British pound sterling.
Any significant 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 3% of our service revenues
for the three months ended March 31, 2011 were denominated in the Euro. Any significant movement in
the exchange rate between the U.S. dollar and the Euro has a significant impact on our revenues and
operating income. Approximately 8% of our service revenues for the three months ended March 31,
2011 were denominated in Canadian dollars. Any significant movement in the exchange rate between
the U.S. dollar and the Canadian dollar has a significant impact on our revenues and operating
income. We manage these exposures through a risk management program that partially mitigates our
exposure to operating expenses denominated in the Indian rupee and operating margins
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denominated in
the British pound sterling, the Euro and the Canadian dollar, and that includes the use of
derivative financial instruments which are not designated as accounting hedges. As of March 31,
2011, we had option contracts outstanding in the notional amount of approximately $27.3 million
($15.5 million for our Indian rupee contracts, $6.4 million for our British pound sterling
contracts, $0.3 million for our Euro contracts and $5.1 million for our Canadian dollar 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 March 31, 2011. The following table details our net realized and unrealized
gains/losses on these option contracts for the three months ended March 31, 2011 and 2010 (in
thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Loss) gain on foreign
exchange option contracts not
designated |
$ | (268 | ) | $ | 610 | |||
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 March 31, 2011 would
result in maximum losses on these positions of $.6 million, $1.2 million and $1.8 million,
respectively. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled
British pound sterling positions as of March 31, 2011 would result in maximum losses on these
positions of $0.6 million, $0.9 million and $1.2 million, respectively. Changes of 10%, 15% and 20%
of the underlying average exchange rate of our unsettled Euro positions as of March 31, 2011 would
result in maximum losses on these positions of less than
$0.1 million, less than $0.1 million and $0.1 million,
respectively. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled
Canadian dollar positions as of March 31, 2011 would result in maximum losses on these positions of
$0.4 million, $0.8 million and $1.1 million, respectively. These positions expire in April and May
of 2011 and therefore, any losses in respect to these positions after March 31, 2011 would be
recognized in the three months ending June 30, 2011.
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, 2010.
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 March 31, 2011, 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 three months
ended March 31, 2011 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 are subject to certain legal proceedings and claims, as discussed below. We are also
subject to certain other legal proceedings and claims that have arisen in the course of business
that have not been fully adjudicated. However, the results of legal proceedings cannot be
predicted with certainty. 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.
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
$10.3 million, for which the likelihood of a loss is considered more than remote, and various
administrative audits each of which have arisen in the ordinary course of our business. We have
recorded an accrual at March 31, 2011 of approximately $1.3 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 previously accrued.
Item 1A. Risk Factors
Risk Factors
The following important factors, among others, could cause our actual business, financial
condition and future 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 generate 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 expired. 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 in the Middle East and other countries 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 $96.8 million for
the first three months of 2011. Doing business in these foreign currencies exposes us to foreign
currency risks in numerous areas, including revenues and receivables, purchases, payroll and
investments. As of March 31, 2011, 53% of our assets and our liabilities were subject to foreign
currency fluctuations. 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, Euro and Canadian dollar currencies,
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 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.
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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 purchased 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 45% 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.
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
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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 Long-Term and Retainer Revenue in Part I, Item 2, 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.
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
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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.
Certain of our directors 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 20% of our outstanding common stock as
of May 1, 2011. 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.
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
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Table of Contents
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.
SAPIENT CORPORATION
PART II. OTHER INFORMATION
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*
|
Separation Agreement between Sapient Corporation and Jane E. Owens dated March 4, 2011 | |
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 | |
101.1*
|
The following materials from Sapient Corporation on Form 10-Q for the quarterly period ended March 31, 2011, 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 and Condensed 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). |
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
|
President and Chief Executive Officer | May 5, 2011 | ||
Alan J. Herrick
|
(Principal Executive Officer) | |||
/s/ Joseph S. Tibbetts, Jr.
|
Chief Financial Officer | May 5, 2011 | ||
Joseph S. Tibbetts, Jr.
|
(Principal Financial Officer) |
33