Annual Report
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
| OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
OR
| ¨ | 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 131 Dartmouth Street, Boston, MA | 02116 | |
| (Address of principal executive offices) | (Zip Code) | |
617-621-0200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Name of Each Exchange on Which Registered |
|
|
Common Stock, $0.01 par value per share |
The NASDAQ Global Select Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (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 ¨ No þ
As of June 30, 2011 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1.7 billion based on the closing sale price as reported on the NASDAQ Global Select Stock Market. Solely for purposes of the foregoing calculation, “affiliates” are deemed to consist of each officer and director of the registrant, and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
|
Class |
Outstanding at February 22, 2012 |
|
|
Common Stock, $0.01 par value per share |
140,246,799 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2012 Annual Meeting of Stockholders, which document will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Form 10-K relates, are incorporated by reference into Items 10 through 14 of Part III of this Form 10-K.
Table of Contents
SAPIENT CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2011
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
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of 1934 (the “Exchange Act”). All statements included in this Annual Report on Form 10-K, including those related to our cash and liquidity resources, our cash expenditures relating to dividend payments and restructuring, our tax estimates, the outcome of tax audits, the effects of restructuring certain subsidiaries, our accrual of contingent liabilities, the effects of changes in interest rates, the impact of new accounting pronouncements, anticipated revenue from our services, including traditional IT consulting services, our ability to meet working capital and capital expenditure requirements, the outcome of litigation, client restrictions on solutions we develop, our expectations regarding fixed-price contracts, our ability to sell auction rate securities, as well as any statement other than statements of historical fact regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives are forward-looking statements. When used in this Annual Report on Form 10-K, 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 in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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, except as required by law.
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PART I
General
Sapient Corporation (“Sapient” or the “Company”) 1 is a global services company that helps clients leverage marketing and technology to transform their businesses. We provide services, as described below, that enable our clients to gain a competitive advantage and succeed in an increasingly digital, customer-centric world. We do this through three main business units: SapientNitro, Sapient Global Markets, and Sapient Government Services.
SapientNitro provides integrated marketing and creative services, web and interactive development, traditional advertising, media planning and buying, strategic planning and marketing analytics, multi-channel commerce strategy and solutions including a significant focus on mobile, and content and asset management strategies and solutions. Through this business unit, we combine multi-channel marketing and commerce, and the technology that binds them, to influence customer behavior across the spectrum of our clients’ communication channels, resulting in deeper, more meaningful relationships between customers and brands.
Sapient Global Markets provides integrated advisory, program management, analytics, technology and operations services to leaders in today’s dynamic capital and commodity markets. We provide a full range of capabilities to help clients in investment banking, investment management and commodities, as well as intermediaries, regulators, and governments, grow and enhance their organizations, create robust and transparent infrastructure, manage operating costs, and foster innovation. Through global expertise and disciplined delivery, we develop solutions that address some of the biggest challenges facing our clients today, including a complex and changing regulatory environment, increased internal and market-facing reporting requirements, the drive for improved operational efficiencies, and the need for greater visibility into risk management.
Sapient Government Services provides consulting, technology, and marketing services to U.S. government agencies and non-governmental organizations (“NGOs”). Focused on driving long-term change and transforming the citizen experience, we use technology and communications to help our clients become more accessible, transparent, and effective. With a track record of delivering mission-critical solutions and the ability to leverage commercial best practices, we serve as trusted advisors to U.S. government agencies such as National Institutes of Health, Department of Homeland Security, Department of Commerce, Library of Congress, and Department of Defense.
Founded in 1990 and incorporated in Delaware in 1991, we maintain a strong global presence with offices and approximately 10,000 employees in North America, Europe and the Asia-Pacific region, including India. Our headquarters and executive offices are located at 131 Dartmouth Street, Boston, Massachusetts 02116, and our telephone number is (617) 621-0200. Our stock trades on the NASDAQ Global Select Market under the symbol “SAPE.” Our Internet address is http://www.sapient.com. Material contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Our clients consist of leading Global 2000 and other companies within the following industries in which we have extensive expertise (our “industry sectors”): financial services, technology & communications, consumer, travel & automotive, energy services, and government, health & education. We also provide services to federal government clients within the U.S. and to provincial and other governmental entities in Canada and Europe.
Integral to our service capabilities is our Global Distributed Delivery (“GDD”) model, which enables us to perform services on a continuous basis, through client teams located in North America, Europe and the Asia-Pacific region, including India. Our GDD model involves a single, coordinated effort between development
1 Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Sapient,” the “company,” “we,” “us” or “our” refer to Sapient Corporation and its wholly-owned subsidiaries.
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teams in a remote location (typically highly skilled business, technology, and creative specialists in our India offices in the cities of Gurgaon, Bangalore, and Noida) and development and client teams in North America, Europe, the Asia-Pacific region and India. To work effectively in this globally distributed environment, we have developed extensive expertise and processes in coordinating assignment management and implementation efforts among the various development teams that we deploy to enable continuous assignment services. Through our GDD model, we believe that we deliver greater value to our clients at a competitive cost and in an accelerated timeframe. In addition to solution design and implementation, many of our long-term engagements and outsourcing relationships leverage our longstanding GDD execution model. Across all of our business units, we use our proprietary Fusion workshops to help our clients validate their proposed approach, gather requirements, and design effective solution roadmaps.
We derive Long-Term and Retainer Revenues from many of our client relationships. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, or contracts in which our clients have chosen us as an exclusive provider, for marketing retainer-based services, capacity, applications management and other services. In 2011, Long-Term and Retainer Revenues represented 48% of our global services revenues, compared to 46% in 2010 and 44% in 2009. Further, in 2011 our five largest individual clients accounted for approximately 19% of our revenues in the aggregate, compared to 19% in 2010 and 21% in 2009. No individual client accounted for more than 10% of our revenues in 2011, 2010 or 2009.
We provide our services under time-and-materials, fixed-price, and retainer contracts. We price our work based on established rates that vary according to our professionals’ experience levels, roles and geographic locations.
Under our time-and-materials arrangements, we charge for our actual time and expenses incurred on an engagement. These arrangements may include an estimated fee range or a cap on our total fees. Under the latter circumstances, we assume the risk that we have correctly estimated the timeframe and level of effort required to complete any deliverables within the allotted fee cap.
In fixed-price contracts, we charge a fixed amount based on our anticipated total level of effort required for an assignment. For these arrangements, we similarly assume the risk of estimating correctly the scope of work and required resources for the applicable assignment. While we undertake rigorous assignment management throughout an engagement to ensure we deliver the assignment on time and on budget, we may recognize losses or lower profitability on fixed-price contracts if we do not successfully manage these risks. These risks are magnified for large assignments and multi-staged assignments in which we perform our scope and labor estimates, and fix the total assignment price from inception through implementation, at an early stage of an engagement.
Under our retainer contracts, we charge our clients a fixed fee in exchange for providing a defined team of consultants for a defined number of hours, to perform marketing, creative and other services at our clients’ direction. These arrangements are designed to afford our clients flexibility to engage us for myriad services as and when needed and, therefore, do not typically include defined scope or deliverables. Additionally, as our fees and level of effort are fixed in advance, should our clients choose not to use all level of effort allotted to them under the contract, we nonetheless charge and are entitled to receive our full fixed fee. Conversely, while we are contractually obligated to provide a specified number of hours of retainer service under each retainer contract, our clients may demand hours in excess of the contractually allotted amount. Under those circumstances, our retainer contracts typically include provisions that enable our clients to purchase additional hours of service on a time-and-materials basis.
Segment Information
Beginning in 2010, we realigned our North America and Europe business units and internal reporting systems into three operating segments to better align our services with our business and operating strategy. The realigned operating segments are: SapientNitro, Sapient Global Markets and Sapient Government Services. Further information about these operating segments, including a presentation of financial information, is located in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
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Note 18 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The principal risks and uncertainties facing our business, operations and financial condition are discussed in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Our SapientNitro and Sapient Global Markets operating segments include globally-based professionals, and our Sapient Government Services segment includes professionals based in the United States. Within each operating segment, we focus our sales and delivery efforts on clients within our industry sectors. Through this global, industry sector-specific focus, we have developed an extensive understanding of our clients’ markets that enables us to skillfully address the market dynamics and business opportunities that our clients face. This understanding also enables us to identify and focus on critical areas to help our clients grow, perform, and innovate.
Information regarding financial data by geographic area is set forth in Note 18, Segment Reporting , in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Acquisitions
In the past few years, we have acquired several businesses to enhance and/or complement our service offerings.
On September 6, 2011, we acquired 100% of the outstanding shares of D&D Holdings Ltd. (“DAD”), a London-based advertising agency operating in the United Kingdom and continental Europe. The acquisition added approximately 200 people and was allocated to our SapientNitro operating segment. We acquired DAD to strengthen our capabilities in marketing campaign production and direct response measurement.
On July 13, 2011, we acquired 100% of the outstanding shares of CLANMO GmbH (“Clanmo”), a full-service mobile interactive agency based in Cologne, Germany, which focuses on mobile strategy, communications, design, and technological implementation. The acquisition added approximately 50 people and was allocated to our SapientNitro operating segment. We acquired Clanmo to strengthen our mobile interactive capabilities in the European market.
On July 1, 2009, we acquired 100% of the outstanding shares of Nitro Group Ltd. (“Nitro”), a global advertising network operating across North America, Europe, Australia and Asia. The acquisition added approximately 300 people and was allocated to our SapientNitro operating segment. We acquired Nitro to combine its traditional advertising services with our interactive marketing and technology services to form a complete, multi-channel marketing and commerce capability.
On August 6, 2008, we acquired 100% of the outstanding shares of Derivatives Consulting Group Limited (“DCG”), a London-based international financial advisory firm that provides derivatives consulting and outsourcing services. The DCG acquisition added approximately 200 people and was allocated to our Sapient Global Markets operating segment.
Our Services
SapientNitro
SapientNitro services include integrated marketing and creative services, web and interactive development, traditional advertising, media planning and buying, strategic planning and marketing analytics, multi-channel commerce strategy and solutions including a significant focus on mobile, and content and asset management strategies and solutions. These capabilities are applied to solve our clients’ most challenging business problems. We integrate creative marketing concepts with technology tools and platforms to build brand experiences designed to acquire new customers and increase demand, create profitable customer relationships and build brand awareness and loyalty.
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Integrated Marketing and Creative Services
We conceive, design, develop and deliver seamlessly integrated, highly measurable multi-channel marketing and commerce experiences to engage our clients’ consumers and drive sales. Our marketing and creative services consist of:
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visual concept, design and implementation via multiple media; |
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brand building and direct response programs, audience segmentation and profiling strategies; |
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customer loyalty strategies; |
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customer relationship strategy and implementation; |
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customer lead generation and management; and |
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integrated advertising campaigns. |
Additionally, we offer our clients technology platforms that accelerate and advance key components of the marketing landscape, including the following:
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BridgeTrack ® is a proprietary advertising campaign tracking and measurement software application that enables clients to measure the effectiveness of an online campaign in real-time and, in turn, optimize results at the earliest possible phase of their campaigns by re-allocating marketing dollars across those marketing channels that are generating the best return on investment. BridgeTrack ® generates real-time reporting and optimization of advertising campaigns across multiple media channels, including advertising via email, website displays/banner ads and internet natural search advertising. Through BridgeTrack ® , our clients see how consumers react to their online marketing campaigns — whether, for example, consumers ultimately decide to buy the client’s offerings, even if the consumers make a purchase at a later date. |
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Ionos ™ is a platform that provides content and advertising monetization capabilities for digital publishers and site owners. It works alongside content and commerce platforms across all digital channels – web, mobile, digital in-store – to help publishers and ad buyers identify and deliver monetized content and traditional advertising inventory with a unique patent-pending mechanism for allocating inventory using facet-based ad buying and prioritization. Ionos ™ is deployed in the airport traveler space today. We expect that Ionos ™ will be an important element of our services to various clients in 2012. Ionos ™ integrates directly with BridgeTrack ® as well as several third-party advertising networks to ensure that publishers get the most from their digital properties. |
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Relay provides a unified development and operational toolset that helps our clients deliver consistent, superior experiences to mobile web and mobile application users across device operating systems. Our clients use Relay to reduce development, testing, and operations costs across a broad range of mobile platforms which are used by millions of users every day. |
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Seamless is a mobile phone and tablet platform used across device operating systems to deliver in-store shopping and assisted sales experiences. Seamless integrates with in-store point of sale or e-commerce infrastructures to extend the in-store aisle or to allow customers to directly transact without having to wait in line at the point of sale. |
Web and Interactive Development
We conceive, develop and implement world class, award-winning websites and applications for our clients. Our services include user interface design and development, site design and development, custom application development, user research and testing, content management and technology development and implementation, and quality assurance testing. As digital channels expand beyond the Web, we have applied our strategy, design, and development services to new digital platforms, such as mobile phones, tablet devices, interactive kiosks, touch-screen displays, and digital signage.
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Traditional Advertising
We integrate our interactive marketing services with award-winning off-line media capabilities. Our services include brand strategy, copywriting, advertising creative and production for print, radio, and television campaigns. By combining the best of traditional advertising with an expansive mix of interactive and emerging technology expertise, our traditional advertising not only creates and engineers highly relevant experiences, it helps accelerate business growth and fuels brand advocacy by eliminating the operational silos that often block business success.
Media Planning and Buying
We help our clients design and implement media and customer channel planning and buying strategies and purchase and arrange for placement of our clients’ advertisements in the media. Our media planning and buying services include media strategy development, website search engine marketing, email marketing, online advertising, viral and social media marketing, emerging channels marketing (e.g., online video, mobile technologies, and social networking), gaming (placing advertisements in online games and creating “advergames”), real-time reporting and optimizing of the success of campaigns, and integration of our clients’ media spending strategy with their other marketing initiatives.
Strategic Planning and Marketing Analytics
We provide our clients a broad array of strategic planning services that are intended to maximize returns on their marketing initiatives investments. We combine our deep business and technology expertise to analyze how products, brands and consumers interact and the role that current and emerging technologies play in this relationship. Additionally, we apply expertise in marketing analytics to collect, analyze and report on online consumer behavior and insights, and assist our clients to develop successful online marketing strategies and campaigns. Our array of strategic planning and marketing analytics services includes brand strategy development, consumer and market research (primary and secondary), advertising message content and medium strategy development, internet and blogosphere analytics (researching and analyzing what social networking websites and blogs say about our clients), and coordination and management of mixed media (e.g., online and print media).
Commerce and Content Technologies
We apply our substantial knowledge and expertise in connecting companies and customers to help our clients achieve their business goals. In today’s digitally disrupted marketplace, clients are looking for new approaches to managing in the resulting multi-channel world. This impacts our work in marketing and commerce, which are both becoming increasingly multi-channel. Specifically, our multi-channel commerce work includes marketing asset management platforms, selection and implementation of advertising campaign management systems, application integration and research, and implementation of emerging technologies.
We also devise content, collaboration, commerce and technology strategies that improve our clients’ competitive position and performance, as well as the value they realize from their technology portfolio. We apply our substantial expertise in diverse technologies and our understanding of each client’s business issues to design solutions that align, and create a roadmap for the achievement of, the client’s business objectives. Our areas of content, collaboration, commerce and technology strategy expertise are geared toward helping clients succeed in today’s digitally disrupted market. The issues which clients need to address in order to create success include:
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business process consulting - as digital disrupts core business processes; |
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overall digital strategy; |
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technology governance and enterprise architecture; and |
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program management. |
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Sapient Global Markets
Sapient Global Markets operates in key centers relevant to the global capital and commodity markets, including New York, London, Zurich, Chicago, Houston, Amsterdam, Singapore, Boston, Toronto and Calgary. We leverage our industry insights, deep capabilities, global reach, and disciplined execution to enable our clients to succeed in these dynamic markets.
Within Sapient Global Markets we have created a number of practices, designed to enable us to align our services directly with the manner in which our clients do business, and to focus on key areas of need within their operations. Our practice areas include:
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derivative platforms; |
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energy and commodity trading platforms; |
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market initiatives and infrastructure; |
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investment management; |
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portfolio accounting; |
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risk assurance; |
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data management; |
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valuation and risk analytics; and |
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visualization. |
Additionally, we offer a full set of services that enables us to provide capabilities across the full assignment lifecycle — from concept to delivery. These service lines are:
Advisory
Our Advisory service line studies and develops best practices in business processes, technology architecture, and program management to develop industry-leading solutions throughout the trade and client management lifecycle in our clients’ businesses. Our business analysts, system architects, designers, and program managers are, in many cases, former practitioners and, thus, apply real-world experience when customizing solutions for our clients. We focus on the following core capabilities within Advisory:
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strategy alignment and roadmap; |
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gap analysis; |
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subject matter expertise; |
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organizational design and change management; |
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assurance; |
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process model definition; |
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process and architecture definition; and |
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user experience and interface design. |
Program Management
Within our Program Management service line we ensure that our clients’ programs are successfully managed from inception to completion. Our service lines operate independently or together, to provide full lifecycle capabilities across all stages of an assignment. We perform strategic planning, enterprise architecture
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development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure on-time, on-budget delivery of solutions that provide results for our clients.
Some of the capabilities of our Program Management service line include:
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program management office; |
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technology project management; |
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agile methodology consulting; |
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governance model definition; |
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project benchmarking and reporting; and |
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project and program diagnosis and turnaround. |
Analytics
Our Analytics service line comprises industry leaders in areas such as portfolio valuation as well as assessing market, credit and operational risk management techniques. Key engagements of this group have included helping clients value and manage their portfolios to meet increased regulatory requirements, and benchmarking the trade lifecycle processes of the largest investment banks in the world in support of their commitments to operational excellence made to government regulators. Our current offerings include:
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quantitative methodologies; |
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audits and process reviews; |
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benchmark-driven roadmaps; and |
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trade and portfolio evaluation. |
Technology
Our Technology service line, in conjunction with our Advisory service line, designs, develops, integrates, supports and tests software solutions for the most critical functions of today’s capital and commodity market participants, regulators, and intermediaries. Our capabilities range from GDD-enabled custom software development to third-party system integration for our clients. We also maintain core expertise in all of today’s most relevant technology platforms and uniquely instill our people with industry-leading business knowledge to ensure that we create technology solutions with the full context of the business environment. Our specific capabilities include:
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architecture and technical design; |
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system selection and implementation; |
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custom software development; |
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systems integration; |
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data architecture and management; |
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quality assurance (QA) and testing services; and |
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application maintenance and support. |
Operations
Our Operations service line designs, implements, executes and enables onshore and offshore delivery of some of the most difficult trading and risk management processes within the global markets arena. We have a
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unique understanding of the financial markets through our combination of deep industry expertise, customized outsourcing methodology and ability to innovate solutions to some of the day’s most pressing trade management issues. Representative work includes master agreement negotiation, confirmation reconciliation, settlement calculation, collateral management, and clearing. Further, we have worked at the center of several of the largest bank mergers in recent history, developing and implementing plans for integrating two entities into one.
Additionally, in 2009, we launched a major initiative to take our industry-leading onshore process capabilities and offer the same solutions to clients leveraging our offshore capabilities in India. We developed a unique methodology for transitioning these processes, and several of our clients have begun applying this methodology to shift substantial portions of their operations offshore to our offices in Gurgaon and Bangalore. Our expertise in complex areas such as derivatives has enabled our clients to consider higher-order processes for outsourcing than previously possible. Further, by co-locating our technology and process activities in India, we have developed important new solutions and capabilities for our clients, including the automation of complex processes in a single, unified environment.
Capabilities within our Operations service line include:
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process analysis and optimization; |
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testing services; |
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outsourced operations; |
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operations staff support; |
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merger and divesture support; |
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trade documentation support; |
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middle-office; and |
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outsourcing. |
We pride ourselves on our record of attracting, training and retaining the highest quality professionals available in the market. We have developed our unique “Institute of Trading and Risk Management,” a four-month course for incoming staff designed to provide grounding in the processes and technologies supporting the clients and industries we serve.
Sapient Government Services
Sapient Government Services offers a robust suite of high-value capabilities to U.S. government clients and NGOs including digital marketing strategy and execution, program management, solution delivery, strategy, and communications and outreach. We help our clients to optimize and align technology, programs, and systems, while solving their most challenging problems, and increasing their digital interactions with constituents across multiple channels.
Program Management
We ensure that our clients’ programs are successfully managed from inception to completion. We perform strategic planning, enterprise architecture development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure on-time, on-budget delivery of solutions that provide the right results for our clients.
Solution Delivery
We design, develop, and deliver innovative IT and marketing solutions for our government clients. We rapidly prototype new solutions and integrate critical business processes and information for our clients. Through
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agile systems engineering, we rationalize IT infrastructures to reduce cost and complexity while retiring legacy infrastructures, streamlining existing systems, and incorporating the best commercial products.
Strategy
We help our clients to identify, establish, and execute changes to their strategic missions. We provide knowledge management, mission needs analysis, requirements and design services to enable users to streamline their business processes, tools, and metrics; enhance productivity and effectiveness; and enable continuous improvement. We employ our expertise to transform strategic intent into actionable plans for implementing client strategies.
Communications and Outreach
We help our public sector clients to communicate and collaborate with key stakeholders and constituents. We develop communications strategies that align our clients’ stakeholders and business users’ buy-in to ensure their needs are considered in program and system design. Additionally, we provide marketing services that help the government better communicate and connect to citizens across all channels and to improve the overall citizen experience.
Alliances
We focus on building the right results for our clients’ businesses. To support this focus, we work closely with alliance partners to develop industry-leading solutions that we can deliver to meet our clients’ needs. We have established global partnerships with industry leaders, including Adobe, IBM, Microsoft, Google, Oracle, Hybris, Endeca, Autonomy Interwoven, SDL Tridion and Jive Software. We have a skilled knowledge base in these companies’ products to help our clients solve their business challenges through technology. Further, we have formed, and continue to form, “Centers of Excellence,” comprising dedicated, globally distributed teams with deep application knowledge and a proven track record in implementing solutions based on Sapient’s strategic partner technologies. Through our expert knowledge and commitment to collaboration, we help our clients identify and implement faster the right solutions at lower overall costs.
Our alliances with leading technology and services companies help us rapidly deliver high-performance business and technology solutions. We frequently recommend the use of pre-engineered components from our alliance partners to deliver the rapid business value our clients need. Our alliance relationships, and the solutions that we derive from these relationships, are structured in a manner to help ensure that we deliver to our clients solutions that will be sustainable and provide long-term value.
We also collaborate with our partners to selectively target specific markets and opportunities to offer quality repeatable solutions, frameworks and components that speed deployment and time-to-value for our clients. Additionally, our alliance partners provide us advance information and access to their product road maps to ensure that our technology solutions are more cost-effective to build and maintain over the long-term.
We continue to actively build relationships and strategic alliances with technology and other services companies, including packaged technology vendors. These relationships focus on a wide range of joint activities, including working on client engagements, evaluating and recommending the other party’s technology and other solutions to clients, and training and transferring knowledge regarding the other party’s solutions. We believe that these relationships and strategic alliances enable us to provide better delivery and value to our existing clients and attract new clients through referrals.
Additionally, we have a dedicated global industry analyst relations team that maintains ongoing relationships with leading industry analysts such as Gartner, Forrester, Aite and TABB Group. These relationships are integral to our business and help ensure that a core set of focused analysts maintains a good
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understanding of our offerings and positioning to help us drive innovative and creative solutions to the marketplace. These research analysts also manage related market research and advisory sessions that help identify market and technology trends for our clients and our internal business teams.
The Sapient Approach
Our unique consultative methodology, Sapient Approach, helps ensure predictable business results that are delivered on-time and on-budget while meaningfully meeting the needs of our clients’ end customers. We employ a collaborative, agile/lean-based delivery approach, in which we develop and release in an iterative manner usable components of a deliverable, thus enabling our clients to review, validate and commence use of work product throughout the life cycle of a project, rather than await the end of the project to realize its full benefits. Our overall approach has been time tested over a number of years and has successfully produced meaningful results for our clients. For our SapientNitro business unit, we slightly modify Sapient Approach with the “Idea Engineering” approach, which uniquely leverages our multi-disciplinary teams and blends our skills at idea creation and strategy with the technology needed to bring them to life for today’s digitally powered consumer.
While Sapient Approach provides clients significant value and return on investment in the shortest possible time period, it also minimizes assignment risk because discrete pieces of work are tested and accepted throughout the assignment, while at the same time it gives our clients speed to market advantages which are increasingly important given the rate and speed of change in the market today.
In contrast to traditional consulting services methods that require heavy up-front investment in time and effort to define all possible requirements, our agile/lean-based methodology uses actual development to evaluate and improve the design as the assignment progresses. This means that unnecessary steps or features are identified and eliminated early in the design and implementation process, materially reducing overall assignment cost.
Sapient Approach also enables us to commit to delivering our marketing services and other work within the price and schedule that we have promised to our clients, and to create solutions that bring together marketing, business, user, creative and technology requirements to solve our clients’ problems. We design these solutions to deliver tangible business value to clients, including increased revenues, reduced costs and more effective use of assets.
Additionally, the “Idea Engineering” approach integrates a creative methodology to design and create user experiences that are useful, usable and compelling. Our creative approach is highly iterative, and integrates input from a wide range of perspectives and disciplines. This approach is highly scalable, and evolves based upon whether the creative output is intended to be a marketing campaign, a social media initiative, a website customer experience, a mobile application, or a retail experience. Through our creative approach we develop a deep understanding of the target user’s needs, and synchronize the design of the user experience with agile delivery of the supporting technology to minimize risk and rework.
Sapient Approach also enables flexibility in selecting the process standardization and continuous improvement models that work best for each client. Our teams regularly incorporate Six Sigma, Capability Maturity Model Integration ® (CMMI), International Standards Organization (ISO) and Information Technology Infrastructure Library (ITIL) processes to ensure that appropriate rigor, discipline and accountability are built into each project. By employing these industry-leading techniques, our teams establish an enduring environment of process improvement that enables organizational capabilities essential to sustaining competitive business advantage.
Strategic Context, People and Culture
We have established and continuously promote a strong corporate culture based on our “strategic context” — purpose, core company values, vision, goals and client value proposition — which is critical to our success.
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Our unwavering attention to our strategic context has enabled us to adapt and thrive in the fast-changing markets we serve, as we strive to build a great company that has a long-lasting impact on the world. Our passion for client success — evidenced by our ability to foster collaboration, drive innovation and solve challenging problems — is the subject of case studies on leadership and organizational behavior used by MBA students at both Harvard and Yale business schools.
To foster and encourage the realization of our strategic context, we reward teamwork and evaluate our peoples’ performance, and promote people, based on their adoption of and adherence to our strategic context. In addition, we conduct an intensive orientation program to introduce new hires to our culture and values, and conduct internal communications and training initiatives that define and promote our culture and values.
As of December 31, 2011 we had 9,950 full-time employees, consisting of 8,836 delivery personnel, 1,027 general and administrative personnel and 87 sales and marketing personnel. None of our employees is subject to a collective bargaining agreement. We believe that we have good relationships with our employees.
Selling and Marketing
Our corporate marketing team strives to build greater brand awareness and drive client acquisition, retention and loyalty in all global markets in which we operate. We conduct marketing activities at the company, industry and service levels across SapientNitro, Sapient Global Markets and Sapient Government Services.
Our dedicated team drives globally-integrated initiatives including, but not limited to, developing and implementing an overall global marketing and brand strategy for Sapient and its three business units; executing thought leadership campaigns; sponsoring focused multi-client events; cultivating media and industry analyst relations; conducting market research and analysis; sponsoring and participating in targeted industry conferences, award shows, and events; creating marketing assets and materials to assist client-development teams with lead generation; and publishing our website, http://www.sapient.com , our blogs, and content on many corporate social media channels.
We organize our sales professionals primarily along our operating segments. We believe that the industry and geographic focus of our sales professionals enhances their knowledge and expertise within their applicable segments and generates additional client engagements.
Competition
The markets for the services we provide are highly competitive. In our SapientNitro and Sapient Global Markets business units, we believe that we compete principally with large systems consulting and implementation firms, traditional and digital advertising and marketing agencies, offshore consulting and outsourcing companies, and clients’ internal IT departments. To a lesser extent, we compete with boutique consulting firms that maintain specialized skills and/or are geographically focused. With respect to Sapient Government Services, we both compete and partner with large systems integrators, major consulting firms with dedicated government business units, and government contractors.
We believe that the principal competitive factors in our markets include: ability to solve business problems; ability to provide creative concepts and solutions; expertise and talent with advanced technologies; global scale; expertise in delivering complex assignments through teams located in globally distributed geographies; availability of resources; quality and speed of delivery; price of solutions; industry knowledge; technology-enabled marketing expertise; understanding of user experience; and sophisticated assignment and program management capability.
We also believe that we compete favorably when considering these factors and that our ability to deliver business innovation and outstanding value to our clients on time and on budget, our GDD model, our integrated marketing services capabilities and our successful track record in working with our clients distinguish us from our competitors.
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Intellectual Property Rights
We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws to protect our proprietary consulting methodology, custom-developed software and other rights. We enter into confidentiality agreements with our employees, subcontractors, vendors, professionals, and clients, and limit access to and distribution of our proprietary information.
Our services involve the development of business, technology and marketing solutions for specific client engagements. Ownership of these solutions is the subject of negotiation and is frequently assigned to the client, although we often retain ownership of certain development tools and may be granted a license to use the solutions for certain purposes. Certain of our clients have prohibited us from marketing for specified periods of time or to specified third parties the solutions we develop for them, and we anticipate that certain of our clients will demand similar or other restrictions in the future.
Where to Find More Information
We make our public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at our website, http://www.sapient.com, as soon as reasonably practicable after we file such materials with the SEC. We also make available on our website reports filed by our executive officers, directors and holders of more than 10% of our common stock, on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the “Investors” portion of our website, under the link “SEC Filings,” and on the SEC’s website, http://www.sec.gov. You may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC
You should carefully consider the following important factors which could cause our actual business, financial condition or future results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere by management from time to time. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
Our business, financial condition and results of operations may be materially impacted by economic conditions and related fluctuations in client 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 and could also result in us having inadequate people resources as economic conditions improve. A downturn could result in reduced demand for our services, assignment 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.
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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, traditional and digital advertising and marketing agencies, offshore consulting and outsourcing companies, and clients’ internal information systems departments. To a lesser extent, other competitors include boutique consulting firms that maintain specialized skills and/or are geographically focused. Regarding our Government Services practice, we both compete and partner with large systems integrators, major consulting firms with dedicated government business units, and government 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. 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 account for 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; |
| • |
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 assignment. 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 March 31, 2009, the income tax incentive of one of our Software Technology Parks (“STPs”) units in India expired. On March 31, 2011, the income tax incentives applicable to our other two STPs units in India expired. In 2009 we established a new India unit in a Special Economic Zone (“SEZ”), which is eligible for 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. In 2011, we established three new India business units in
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SEZs, which are eligible for similar tax benefits. The expiration of incentives may adversely affect our cost of operations and increase the risk of delivering our services on budget for client assignments. 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. In addition, it has become increasingly difficult to obtain necessary visas for certain international personnel, particularly technical personnel, working in our domestic offices, and to receive necessary immigration approvals for our domestic employees working abroad on international assignments. If these challenges continue or increase, it may limit our ability to engage the most desirable personnel for particular assignments, increase the time necessary to receive approvals to do so or prevent us from obtaining such approvals, and increase our costs, all of which could materially adversely affect 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 assignments 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 $395.8 million for 2011. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues and receivables, purchases, payroll and investments on both a transactional level and a financial statement translation basis. As of December 31, 2011, 53% of our assets and 51% of our liabilities were subject to foreign currency exchange 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 a foreign country, because revenues and costs are denominated in the same foreign currency, and certain cash balances are held in
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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 portion of our assignment costs in Indian rupees and earn revenue from our clients in other currencies. 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 any hedging activity we may undertake will be effective or that our financial condition will not be negatively impacted by the currency exchange rate fluctuations of the Indian rupee or other currencies versus the U.S. dollar. Costs for our delivery of services, including labor, could increase as a result of the decrease in value of the U.S. dollar against the Indian rupee or other currencies, 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. 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 assignments 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 assignment, a client’s decision not to proceed with a assignment we anticipated or the completion during a quarter of several major client assignments 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 assignments, including achievement of certain business results; |
| • |
any delays incurred in connection with assignments; |
| • |
the adequacy of provisions for losses and bad debts; |
| • |
the accuracy of our estimates of resources required to complete ongoing assignments; |
| • |
loss of key highly-skilled personnel necessary to complete assignments; 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; |
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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; |
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| • |
the outcome of future tax audits and examinations; and |
| • |
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. 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.
A portion of our service revenues in 2011 was derived from fixed-price contracts, rather than contracts in which payment to us is determined on a time-and-materials basis. Our failure to estimate accurately the resources and schedule required for an assignment, or our failure to complete our contractual obligations in a manner consistent with the assignment 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 assignments that magnify this risk. We have been required to commit unanticipated additional resources to complete assignments 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 assignments at an early stage of the assignment 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 by three primary factors: (i) the prices for our services; (ii) our professionals’ utilization or billable time; and (iii) our costs. To achieve our desired level of profitability, our utilization must remain at an appropriate rate, and we must contain our costs. Should we reduce our prices in the future as a result of pricing pressures, or should we be unable to achieve our target utilization rates and costs, our profitability could be adversely impacted.
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 assignments 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 assignments 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 assignment. 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 client’s 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 client’s assignment. 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 assignments, or client termination of one or more recurring revenue contracts could have a material adverse effect on our business, financial condition and results of operations.
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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 client 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, including an attack by computer programmers or hackers who may develop or deploy viruses, worms, or other malicious software programs, system failures or otherwise, we may have substantial liabilities to our clients or their customers. Further, any such compromise to our computer systems could disrupt our operations, as well as our clients’ operations.
Further, many of our assignments 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. Any such failures by us could result in claims by our clients for substantial damages against us.
We may be liable for 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, we cannot be assured that any 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, 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, and the resolution of these claims, irrespective of whether a court determines that our services infringed another party’s 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 information or that we will be able to detect unauthorized use and take appropriate steps to enforce our IP rights.
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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 at various times in the past. Our trading price could continue to be subject to wide fluctuations in response to:
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quarterly variations in operating results and achievement of key business metrics by us or our competitors; |
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changes in operating results estimates by securities analysts; |
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any differences between our reported results and securities analysts’ published or unpublished expectations; |
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announcements of new contracts or service offerings made by us or our competitors; |
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announcements of acquisitions or joint ventures made by us or our competitors; and |
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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 management’s 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 16% of the outstanding shares of our common stock as of February 22, 2012. As a result, they have the ability to substantially influence and, in some cases, 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 or employees to any such competitor could have a material adverse effect on our business, financial condition and results of operations. We cannot be certain that any agreements we require our employees to enter into will be effective in preventing them 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 require substantial attention from management. The diversion of management’s 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.
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The failure to successfully and timely implement certain financial system changes to improve operating efficiency and enhance our reporting controls could harm our business.
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.
Item 1B. Unresolved Staff Comments
None.
Our headquarters and principal administrative, finance, and marketing operations are located in approximately 45,000 square feet of leased office space in Boston, Massachusetts. We also lease offices in other parts of the United States and in Canada, Europe, India, Asia and Australia. We believe our properties are suitable for the conduct of our business, adequate for our present needs and adequate for our foreseeable future needs. We do not own any material real property. Substantially all of our office space is leased under long-term leases with varying expiration dates. For further information regarding our lease obligations, see Note 12 in the Notes to Consolidated Financial Statements included in Item
We are subject to certain legal proceedings and claims incidental to the operations of our business. 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. We currently do not anticipate that these matters, if resolved against us, will have a material adverse impact on our financial results.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Price of Common Stock
Our common stock is quoted on the NASDAQ Global Select Stock Market under the symbol “SAPE.” The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock.
| High | Low | |||||||
|
2010: |
||||||||
|
First Quarter |
$ | 10.01 | $ | 7.60 | ||||
|
Second Quarter |
$ | 11.00 | $ | 9.03 | ||||
|
Third Quarter |
$ | 12.17 | $ | 9.71 | ||||
|
Fourth Quarter |
$ | 13.44 | $ | 11.66 | ||||
|
2011: |
||||||||
|
First Quarter |
$ | 13.44 | $ | 10.48 | ||||
|
Second Quarter |
$ | 15.48 | $ | 11.45 | ||||
|
Third Quarter |
$ | 16.25 | $ | 9.66 | ||||
|
Fourth Quarter |
$ | 13.23 | $ | 9.00 | ||||
On February 22, 2012, the last reported sale price of our common stock was $12.71 per share. As of February 22, 2012 there were approximately 321 holders of record of our common stock.
Stock Performance
The following graph compares the cumulative five-year total stockholder return on our common stock from December 31, 2006 through December 31, 2011, with the cumulative five-year total return, during the equivalent period, on (i) the NASDAQ Composite Index and (ii) the Dow Jones US Technology Index. The comparison assumes the investment of $100 on December 31, 2006 in our common stock and in each of the comparison indices and, in each case, assumes reinvestment of all dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Sapient Corporation, the NASDAQ Composite Index,
and the Dow Jones US Technology Index
| 12/06 | 12/07 | 12/08 | 12/09 | 12/10 | 12/11 | |||||||||||||||||||
|
Sapient Corporation |
100.00 | 160.47 | 80.87 | 150.64 | 229.27 | 246.39 | ||||||||||||||||||
|
NASDAQ Composite |
100.00 | 110.26 | 65.65 | 95.19 | 112.10 | 110.81 | ||||||||||||||||||
|
Dow Jones US Technology |
100.00 | 115.70 | 66.10 | 108.72 | 122.40 | 122.59 | ||||||||||||||||||
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Dividends
On August 4, 2011, we declared a special dividend of $0.35 per share for all stockholders as of the record date of August 15, 2011, which was paid on August 29, 2011. In addition, we declared a special dividend equivalent payment of $0.35 per Restricted Stock Unit (“RSU”) for all outstanding RSU awards as of August 15, 2011, to be paid in shares when the awards vest. If an RSU does not vest, the dividend is forfeited.
On February 18, 2010, we declared a special dividend of $0.35 per share for all stockholders as of the record date of March 1, 2010, which was paid on March 15, 2010. In addition, we declared a special dividend equivalent payment of $0.35 per RSU for all outstanding RSU awards as of March 1, 2010, to be paid in shares when the awards vest. If an RSU does not vest, the dividend is forfeited.
We may declare or pay special cash dividends on our common stock in the near future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, cash requirements and business projections.
Issuer Purchases of Equity Securities
We did not make any purchases of our securities during the three months ended December 31, 2011.
For information required by Regulation S-K Item 201(d), see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” under Part III of this Annual Report on Form 10-K.
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Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and management’s discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K. The balance sheet data at December 31, 2011 and 2010 and the statement of operations data for each of the three years ended December 31, 2011, 2010 and 2009 are derived from the audited consolidated financial statements for such years, included elsewhere in this Annual Report on Form 10-K. The statement of operations data set forth below for the years ended December 31, 2008 and 2007 and the balance sheet data set forth below at December 31, 2009, 2008 and 2007 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.
| Year Ended December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
|
Statement of Operations Data: |
||||||||||||||||||||
|
Revenues: |
||||||||||||||||||||
|
Service revenues |
$ | 1,020,840 | $ | 823,511 | $ | 638,884 | $ | 662,412 | $ | 546,438 | ||||||||||
|
Reimbursable expenses |
41,364 | 40,008 | 27,794 | 25,076 | 19,551 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total gross revenues |
1,062,204 | 863,519 | 666,678 | 687,488 | 565,989 | |||||||||||||||
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|
|
|
|
|
|
|||||||||||
|
Operating expenses: |
||||||||||||||||||||
|
Project personnel expenses |
690,821 | 563,930 | 435,859 | 435,508 | 372,363 | |||||||||||||||
|
Reimbursable expenses |
41,364 | 40,008 | 27,794 | 25,076 | 19,551 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total project personnel expenses and reimbursable expenses |
732,185 | 603,938 | 463,653 | 460,584 | 391,914 | |||||||||||||||
|
Selling and marketing expenses |
39,025 | 38,833 | 31,931 | 36,233 | 33,113 | |||||||||||||||
|
General and administrative expenses |
171,641 | 150,877 | 118,018 | 123,188 | 120,617 | |||||||||||||||
|
Restructuring and other related charges |
6,507 | 414 | 4,548 | 194 | 32 | |||||||||||||||
|
Amortization of purchased intangible assets |
6,813 | 5,448 | 5,146 | 2,660 | 2,038 | |||||||||||||||
|
Acquisition costs and other related charges |
1,861 | 111 | 2,962 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total operating expenses |
958,032 | 799,621 | 626,258 | 622,859 | 547,714 | |||||||||||||||
|
|
|
|
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|
|
|
|
|
|
|||||||||||
|
Income from operations |
104,172 | 63,898 | 40,420 | 64,629 | 18,275 | |||||||||||||||
|
Other income, net |
594 | 196 | 267 | 1,280 | 422 | |||||||||||||||
|
Interest income, net |
5,748 | 3,509 | 2,889 | 5,806 | 5,478 | |||||||||||||||
|
|
|
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|
|
|
|
|
|
|
|||||||||||
|
Income before income taxes |
110,514 | 67,603 | 43,576 | 71,715 | 24,175 | |||||||||||||||
|
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|
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|
|
|
|
|
|
|
|||||||||||
|
Provision for (benefit from) income taxes: |
||||||||||||||||||||
|
Provision for income taxes |
36,896 | 23,798 | 13,735 | 9,239 | 8,959 | |||||||||||||||
|
Benefit from release of valuation allowance |
— | — | (58,285 | ) | — | — | ||||||||||||||
|
|
|
|
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|
|
|
|
|
|||||||||||
|
Provision for (benefit from) income taxes |
36,896 | 23,798 | (44,550 | ) | 9,239 | 8,959 | ||||||||||||||
|
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|
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|
|||||||||||
|
Net income |
$ | 73,618 | $ | 43,805 | $ | 88,126 | $ | 62,476 | $ | 15,216 | ||||||||||
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|
|||||||||||
|
Basic net income per share |
$ | 0.53 | $ | 0.33 | $ | 0.69 | $ | 0.50 | $ | 0.12 | ||||||||||
|
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|
|
|||||||||||
|
Diluted net income per share |
$ | 0.52 | $ | 0.32 | $ | 0.66 | $ | 0.48 | $ | 0.12 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Weighted average common shares |
137,788 | 132,060 | 127,969 | 125,988 | 124,180 | |||||||||||||||
|
Weighted average dilutive common share equivalents |
4,208 | 6,669 | 4,912 | 3,176 | 3,711 | |||||||||||||||
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|
|
|
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|
|
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|
|||||||||||
|
Weighted average common shares and dilutive common share equivalents |
141,996 | 138,729 | 132,881 | 129,164 | 127,891 | |||||||||||||||
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|
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|
|
|
|
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|
|||||||||||
|
Cash dividends declared per common share |
$ | 0.35 | $ | 0.35 | $ | — | $ | — | $ | — | ||||||||||
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|
|
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| December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
|
Balance Sheet Data: |
||||||||||||||||||||
|
Working capital |
$ | 290,388 | $ | 301,963 | $ | 276,564 | $ | 198,062 | $ | 189,201 | ||||||||||
|
Total assets |
713,038 | 623,722 | 594,919 | 452,270 | 407,604 | |||||||||||||||
|
Total long-term liabilities |
42,921 | 22,396 | 21,207 | 22,393 | 20,598 | |||||||||||||||
|
Redeemable common stock |
— | — | — | — | 290 | |||||||||||||||
|
Total stockholders' equity(1) |
479,404 | 442,305 | 426,201 | 301,947 | 260,559 | |||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company
We help 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 world’s largest independent digitally-led, integrated marketing services firms, provides multi-channel marketing and commerce services that span brand and marketing strategy, digital/broadcast/print advertising creative, web design and development, e-commerce, media planning and buying, and emerging platforms, such as social media and mobile. Through SapientNitro we offer a complete, multi-channel marketing and commerce solution that strengthens relationships between our clients’ customers and their brands. For simplicity of operations, SapientNitro also includes our traditional IT consulting services, which is currently, and is expected to remain, less than 10% of our total revenues. Our Sapient Global Markets business unit 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 U.S. governmental agencies and non-governmental organizations (“NGOs”). Focused on driving long-term change and transforming the citizen experience, we use technology to help our clients become more accessible, transparent, and effective.
Founded in 1990 and incorporated in Delaware in 1991, we maintain 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 assignment schedules. By engaging India’s 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.
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Summary of Results of Operations
The following table presents a summary of our results of operations for the years ended December 31, 2011 and 2010 (in thousands, except percentages):
| Year Ended December 31, | Increase | |||||||||||||||
| 2011 | 2010 | Dollars | Percentage | |||||||||||||
|
Service revenues |
$ | 1,020,840 | $ | 823,511 | $ | 197,329 | 24 | % | ||||||||
|
Income from operations |
$ | 104,172 | $ | 63,898 | $ | 40,274 | 63 | % | ||||||||
|
Net income |
$ | 73,618 | $ | 43,805 | $ | 29,813 | 68 | % | ||||||||
The increase in service revenues for the year ended December 31, 2011 was primarily due to increases in demand for our services in all three of our primary business units, and to a lesser extent, the impact of the two acquisitions we completed during 2011. The increases in income from operations and net income were primarily due to the increase in service revenues, coupled with our management of project personnel, sales and marketing, and general and administrative expenses, all of which decreased or remained unchanged as a percentage of service revenues in 2011 as compared to 2010.
The following table presents a summary of our results of operations for the years ended December 31, 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||
| 2010 | 2009 | Dollars | Percentage | |||||||||||||
|
Service revenues |
$ | 823,511 | $ | 638,884 | $ | 184,627 | 29 | % | ||||||||
|
Income from operations |
$ | 63,898 | $ | 40,420 | $ | 23,478 | 58 | % | ||||||||
|
Net income |
$ | 43,805 | $ | 88,126 | $ | (44,321 | ) | (50 | )% | |||||||
The increase in service revenues for the year ended December 31, 2010 was primarily due to increases in demand for our services in all three of our primary business units, and to a lesser extent, the impact of our acquisition of Nitro in July 2009. The increase in income from operations was primarily due to the increase in service revenues, coupled with our management of project personnel, sales and marketing, and general and administrative expenses, all of which remained unchanged as a percentage of service revenues in 2010 as compared to 2009. In addition, restructuring and other related charges and acquisition costs and other related charges decreased in 2010 as compared to 2009. The decrease in net income was primarily due to the fact that 2009 included a $58.3 million income tax benefit from the release of the valuation allowance on our U.S. deferred tax assets, while 2010 included no similar income tax benefits.
Please see our “Results of Operations” section for additional discussion and analysis of these items.
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 statements of operations, excluding certain expenses and benefits, which we refer to as “non-GAAP income from operations”. The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we refer to as “non-GAAP operating margin”. Management believes that these non-GAAP measures help illustrate underlying trends in our business. We use these measures to establish budgets and operational goals (communicated internally and externally), manage our business and evaluate our performance. We exclude certain expenses and benefits from non-GAAP income from operations that we believe are not reflective of these underlying business trends and are not useful measures in determining our operational performance and overall business strategy. Because our reported non-GAAP financial measures are not calculated according to GAAP, these measures may not necessarily be comparable to GAAP or similarly described non-GAAP measures reported by other companies
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within our industry. Consequently, our non-GAAP financial measures should not be evaluated in isolation or supplant comparable GAAP measures, but, rather, should be considered together with our consolidated financial statements, which are prepared according to GAAP. The following table reconciles income from operations as reported on our consolidated statements of operations to non-GAAP income from operations and non-GAAP operating margin for 2011, 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Service revenues |
$ | 1,020,840 | $ | 823,511 | $ | 638,884 | ||||||
|
|
|
|
|
|
|
|||||||
|
GAAP income from operations |
$ | 104,172 | $ | 63,898 | $ | 40,420 | ||||||
|
Stock-based compensation expense |
19,256 | 18,156 | 14,921 | |||||||||
|
Restructuring and other related charges |
6,507 | 414 | 4,548 | |||||||||
|
Amortization of purchased intangible assets |
6,813 | 5,448 | 5,146 | |||||||||
|
Acquisition costs and other related charges |
1,861 | 111 | 2,962 | |||||||||
|
Stock-based compensation review and restatement benefits |
(3,500 | ) | (301 | ) | (992 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Non-GAAP income from operations |
$ | 135,109 | $ | 87,726 | $ | 67,005 | ||||||
|
|
|
|
|
|
|
|||||||
|
GAAP operating margin |
10.2 | % | 7.8 | % | 6.3 | % | ||||||
|
Effect of adjustments detailed above |
3.0 | % | 2.9 | % | 4.2 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Non-GAAP operating margin |
13.2 | % | 10.7 | % | 10.5 | % | ||||||
|
|
|
|
|
|
|
|||||||
Non-GAAP income from operations increased in 2011 compared to 2010, and in 2010 compared to 2009, primarily due to the increases in reported GAAP income from operations. During 2011, 2010, and 2009, we received insurance recovery proceeds of $3.5 million, $0.3 million, and $1.0 million, respectively, as reimbursement for expenses incurred in 2006 and 2007 relating to the stock option review and restatement. When the expenses were originally incurred, they were excluded from our non-GAAP income from operations. Similarly, these benefits have been excluded from non-GAAP income from operations in 2011, 2010, and 2009.
Please see the “Results of Operations” section for a more detailed discussion and analysis of restructuring and other related charges, amortization of purchased intangible assets, and acquisition costs and other related charges.
When important to management’s analysis, operating results are compared in “constant currency terms”, a non-GAAP financial measure that excludes the effect of foreign currency exchange rate fluctuations. The effect of rate fluctuations is excluded by translating the current period’s local currency service revenues and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For a discussion of our exposure to exchange rates, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”.
Summary of Critical Accounting Policies; Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates relied upon in preparing these financial statements include, but are not limited to, estimated costs to complete long-term contracts, estimated fair value of investments, including whether any decline in such fair value is other-than-temporary, estimated fair values of reporting units used to evaluate goodwill for impairment, stock-based compensation expenses, restructuring and other related charges, contingent liabilities and recoverability of our net deferred tax assets and related valuation allowances. Although management regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.
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A summary of those accounting policies, significant judgments and estimates that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
We recognize revenues from the provision of professional services, digital marketing services and offline printing and production services arrangements with our clients when persuasive evidence of an arrangement exists, services have been provided to the client, the fee is fixed or determinable and collectability is reasonably assured. In instances where the client, at its sole discretion, has the right to reject the services prior to final acceptance, revenue is deferred until such acceptance occurs.
We evaluate our contracts for multiple elements, and when appropriate, separate the contracts into separate units of accounting for revenue recognition. We allocate revenue to the elements in a multiple-element arrangement based upon their relative selling prices. We determine relative selling prices for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence (“VSOE”), if available. If VSOE is not available, third party evidence (“TPE”) is used, and if neither VSOE nor TPE is available, the selling price for a deliverable is based on our best estimate of selling price. In some instances, multiple contracts with a single client are combined for purposes of assessing revenue recognition.
We recognize revenues from our fixed-price contracts and certain time-and-materials technology implementation consulting contracts using the percentage-of-completion method. We use the percentage-of-completion method because the services provided in these contracts are similar to services in contracts that are required to use the percentage-of-completion method under GAAP, such as services provided by engineers and architects, for example. Revenues generated from fixed-price and time-and-materials non-technology implementation contracts, except for support and maintenance contracts, are recognized based upon a proportional performance model. Our percentage-of-completion method and our proportional performance method of accounting calculate revenue based on the percentage of labor incurred to estimated total labor. This method is used because reasonably dependable estimates of the revenues and labor applicable to various stages of an arrangement can be made, based on historical experience and milestones set in the contract. Revenue from time-and-materials contracts is recognized as services are provided. In situations where time-and-materials contracts require deliverables and provide for a ceiling on fees that can be charged, the arrangement is recognized as time-and-materials are incurred unless calculated fees are estimated to exceed the ceiling, in which case revenue recognition is based on the proportional performance method. Revenues generated from staff augmentation, support and maintenance contracts are recognized ratably over the arrangement’s term.
Our assignment delivery and business unit finance personnel continually review labor incurred and estimated total labor, which may result in revisions to the amount of recognized revenue under an arrangement. Certain arrangements provide for revenue to be generated based upon the achievement of certain performance standards. Revenue related to achieving such performance standards is recognized when such standards are achieved. Revenue related to the achievement of performance standards was immaterial for all of the periods presented in our consolidated financial statements.
Revenues related to our digital marketing media sales are recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. We are required to assess whether the agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we broadly operate as an advertising agency based on our primary lines of business and given the industry practice to generally record revenue on a
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net basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we record revenue net of pass-through charges when we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue.
Our marketing services, including access to our BridgeTrack ® software application, help our clients optimize their cross-platform marketing effectively to track behavior and improve conversion rates through data-driven analysis. These services are provided in exchange for monthly retainer fees and license fees, and revenues are recognized as the monthly services are provided.
Revenues from offline printing and production services are recognized at the time title of the related items transfers to our clients, provided that all other revenue recognition criteria have been met.
If we do not accurately estimate the resources required or the scope of work to be performed for an arrangement or we do not manage the assignment properly within the planned time period, then we may recognize a loss on the arrangement. Provisions for estimated losses on uncompleted arrangements are made on an arrangement-by-arrangement basis and are recognized in the period in which such losses are identified. We have committed unanticipated additional resources to complete assignments in the past, which has resulted in lower than anticipated profitability or losses on those arrangements. We expect that we will experience similar situations in the future. In addition, we may fix the price for some assignments at an early stage of the process, which could result in a fixed price that is too low and, therefore, a corrected estimation could adversely affect our business, financial condition and results of operations.
We recognize revenue for services when collection from the client is reasonably assured, and our fees are fixed or determinable, provided that all other revenue recognition criteria have been met. We establish billing terms at the time assignment deliverables and milestones are agreed. Our normal payment terms are thirty days from invoice date. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues. Amounts invoiced to clients in excess of revenue recognized are classified as deferred revenues. Our assignment delivery and business unit finance personnel continually monitor the timeliness of payments from our clients and assess any collection issues.
Valuation and Impairment of Investments and/or Marketable Securities and Other Financial Assets
Assessing whether a decline in value in available-for-sale securities is other-than-temporary requires us to assess whether we intend to sell the security and if it would be more likely than not that we would be required to sell the available-for-sale security before its cost can be recovered, for reasons such as contractual obligations or working capital needs. Also, we have to assess whether the cost of the available-for-sale security will be recovered regardless of intent and/or requirement to sell. This assessment requires us to evaluate, among other factors: the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health and business outlook of the issuer, including industry and sector performance, operational and financing cash flow factors and overall market conditions and trends. Assessing the above factors involves inherent uncertainty. Accordingly, declines in fair value, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio, if, among other things, relevant information related to our marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. Those levels are:
| • |
Level 1 — Quoted prices in active markets for identical assets or liabilities. |
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| • |
Level 2 — Inputs other than Level 1 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 for substantially the full term of the assets or liabilities. |
| • |
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. |
Accounting for Income Taxes
We record income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences, operating losses, or tax credit carryforwards are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We are required to establish a valuation allowance based on whether realization of deferred tax assets is considered to be more likely than not. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We reinvest certain earnings of foreign operations indefinitely and, accordingly, we do not provide for income taxes that could result from the remittance of such earnings. When we can no longer assert indefinite reinvestment of foreign earnings, we must provide for income taxes on these amounts.
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.
We record accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.
Valuation of Long-Lived Assets and Goodwill
Long-lived assets are reviewed for impairment on a regular basis for the existence of facts and circumstances that may suggest that the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated undiscounted future cash flows. If the estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. We assess the useful lives and possible impairment of long-lived assets when an event occurs that may trigger such a review. Determining whether a triggering event has occurred includes significant judgment by management. Factors we consider important which could trigger an impairment review include, but are not limited to:
| • |
significant underperformance relative to historical or projected future operating results; |
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| • |
significant changes in the manner of use of the acquired assets or the strategy for our overall business; |
| • |
identification of other impaired assets within a reporting unit; |
| • |
disposition of a significant portion of an operating segment; |
| • |
significant negative industry or economic trends; |
| • |
significant decline in our stock price for a sustained period; and |
| • |
a decline in our market capitalization relative to net book value. |
During 2011, we performed two impairment reviews of the customer list intangible asset which we obtained in our acquisition of Nitro in 2009. These impairment reviews were performed during the second and fourth quarters of 2011 and were triggered by certain legacy Nitro customers notifying us of their intentions to cease or significantly reduce their purchases of our services. This caused the actual customer attrition rates experienced since we acquired Nitro to exceed the estimated attrition rates utilized in the original valuation of the Nitro customer list intangible asset. This intangible asset has a gross carrying amount of $10.1 million. The net book value of this intangible asset was $5.2 million and $7.0 million as of December 31, 2011 and 2010, respectively. In estimating the undiscounted future net cash flows expected to be generated by this intangible asset, we considered the following factors: actual customer attrition rates since the acquisition date; expected future attrition rates; estimated undiscounted net cash flows generated by the intangible asset since the acquisition date; estimated undiscounted net cash flows expected to be generated by the intangible asset over its remaining expected useful life; and the expected remaining useful life of the intangible asset. Our impairment reviews considered multiple future scenarios and the expected likelihood of those scenarios occurring, based on the information which was known to management at the time the reviews were performed. In both of these impairment reviews, the undiscounted net cash flows expected to be generated by the intangible asset were greater than the net book value of the asset at the time of the reviews. As a result, no impairments of this intangible asset were recorded during 2011. These impairment reviews involved the use of significant judgment by management, and different judgments could yield different results. In addition, if losses of additional legacy Nitro customers in the future exceed our current expectations of future attrition, such losses would be considered triggering events requiring us to perform additional impairment reviews of the customer list intangible asset. Such impairment reviews could result in the recognition of impairment losses, which could have a material adverse impact on our results of operations in the period in which such losses are recognized.
We assess goodwill annually (during the fourth quarter), or more frequently when events and circumstances, such as the ones mentioned above, occur indicating that the recorded goodwill may be impaired. In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the two-step impairment test. In assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, events which are specific to Sapient, and trends in the market price of our common stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact.
The two-step goodwill impairment test requires us to identify our reporting units and to determine estimates of the fair values of those reporting units as of the date we test for impairment. Assets and liabilities, including goodwill, are allocated to reporting units based on factors such as specific identification and percentage of
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revenue. To conduct a quantitative two-step goodwill impairment test, the fair value of the reporting unit is first compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we perform the second step and record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. We estimate the fair values of our reporting units using the income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free” rate of return on an investment, the weighted average cost of capital of a market participant, and future revenue, operating margin, working capital and capital expenditure trends. Determining the fair values of reporting units and goodwill includes significant judgment by management, and different judgments could yield different results.
We performed the annual assessment of our goodwill during the fourth quarter of 2011, using the qualitative approach described above. Based on our qualitative assessment, we concluded that it was not more likely than not that the fair values of any of our reporting units were less than their carrying amounts, and therefore it was not necessary to perform the quantitative two-step impairment test. The key qualitative factors that led to our conclusion included the following: our impairment test performed during the fourth quarter of 2010 showed significant headroom between the fair values and carrying values for each reporting unit; our reporting units continued to show positive performance during 2011; based on our current forecasts for 2012 and beyond, we expect continued positive performance for all reporting units; and our market capitalization has not experienced any significant decline in the past year. In performing our assessment, we determined that one of our reporting units had a negative carrying value. Our conclusion that it was not necessary to perform the two-step impairment test for this reporting unit was based on the key factors noted above, in addition to assessing the reasons for the negative carrying value, and performing a sensitivity analysis on the two-step impairment test performed for this unit in the prior year. Also, the carrying value of one of our reporting units increased significantly from the prior year due to the two acquisitions which we completed during 2011. The performance of the acquired companies since the respective acquisition dates did not provide any contrary indications to our conclusion that it was not more likely than not that the fair value of this reporting unit was less than its carrying amount.
Restructuring and Other Related Charges
From time to time we establish exit plans for restructuring activities which require that we make estimates as to the nature, timing and amount of the exit costs that we specifically identify. The consolidation of facilities requires us to make estimates, which include contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. We review our sub-lease assumptions and lease buy-out assumptions on a regular basis. These estimates include lease buy-out costs, anticipated sub-lease rates, other terms and conditions in sub-lease contracts, and the timing of these sub-lease arrangements. If the rental markets continue to change, our lease buy-out, sub-lease and space requirement assumptions may not be accurate, and it is possible that changes in these estimates could materially affect our financial condition and results of operations.
Contingent Liabilities
We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $0.3 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 December 31, 2011 of approximately $0.3 million related to certain of these items for which the likelihood of a loss is considered probable. Although we intend to defend these matters vigorously, the ultimate outcome of these items is uncertain. However, we do not expect the potential losses, if any, to have a material adverse effect on our operating results.
Accounting for Acquisitions
We account for acquisitions completed after December 31, 2008 using the acquisition method. The acquisition method requires us to recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. Accounting for acquisitions involves significant judgments and estimates, primarily, but not limited to: the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues and cash flows, the fair value of other acquired
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assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. Our financial position and results of operations may be materially impacted by the initial selection of, or changes in, assumptions and estimates used in accounting for prior or future acquisitions.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements.
Results of Operations
The following table presents the items included in our consolidated statements of operations as percentages of service revenues:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Revenues: |
||||||||||||
|
Service revenues |
100 | % | 100 | % | 100 | % | ||||||
|
Reimbursable expenses |
4 | % | 5 | % | 4 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Total gross revenues |
104 | % | 105 | % | 104 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Operating expenses: |
||||||||||||
|
Project personnel expenses |
68 | % | 68 | % | 68 | % | ||||||
|
Reimbursable expenses |
4 | % | 5 | % | 5 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Total project personnel expenses and reimbursable expenses |
72 | % | 73 | % | 73 | % | ||||||
|
Selling and marketing expenses |
4 | % | 5 | % | 5 | % | ||||||
|
General and administrative expenses |
17 | % | 18 | % | 18 | % | ||||||
|
Restructuring and other related charges |
0 | % | 0 | % | 1 | % | ||||||
|
Amortization of purchased intangible assets |
1 | % | 1 | % | 1 | % | ||||||
|
Acquisition costs and other related charges |
0 | % | 0 | % | 0 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Total operating expenses |
94 | % | 97 | % | 98 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Income from operations |
10 | % | 8 | % | 6 | % | ||||||
|
Other income, net |
0 | % | 0 | % | 0 | % | ||||||
|
Interest income, net |
1 | % | 0 | % | 1 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
11 | % | 8 | % | 7 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
4 | % | 3 | % | 2 | % | ||||||
|
Benefit from release of valuation allowance |
0 | % | 0 | % | (9 | )% | ||||||
|
|
|
|
|
|
|
|||||||
|
Provision for (benefit from) income taxes |
4 | % | 3 | % | (7 | )% | ||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
7 | % | 5 | % | 14 | % | ||||||
|
|
|
|
|
|
|
|||||||
Years Ended December 31, 2011 and 2010
Service Revenues
Our service revenues for 2011 and 2010 were as follows (in thousands, except percentages):
| Year Ended December 31, |
Percentage
Increase |
|||||||||||||||
| 2011 | 2010 | Increase | ||||||||||||||
|
Service revenues |
$ | 1,020,840 | $ | 823,511 | $ | 197,329 | 24 | % | ||||||||
Service revenues increased due to increases in demand for our services in all three of our primary business units. Compared geographically to 2010, 2011 service revenues in the United States increased 29%, compared to an increase of 17% from our international subsidiaries. Service revenues also increased, to a lesser extent, due to incremental service revenues from our 2011 acquisitions.
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The following table presents our service revenues by industry sector for 2011 and 2010 (in millions, except percentages):
| Year Ended December 31, |
Increase/
(Decrease) |
Percentage
Increase/ (Decrease) |
||||||||||||||
|
Industry Sector |
2011 | 2010 | ||||||||||||||
|
Consumer, Travel & Automotive |
$ | 390.0 | $ | 256.1 | $ | 133.9 | 52 | % | ||||||||
|
Financial Services |
318.8 | 264.8 | 54.0 | 20 | % | |||||||||||
|
Technology & Communications |
118.3 | 116.7 | 1.6 | 1 | % | |||||||||||
|
Government, Health & Education |
112.2 | 104.2 | 8.0 | 8 | % | |||||||||||
|
Energy Services |
81.5 | 81.7 | (0.2 | ) | (0 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Total service revenues |
$ | 1,020.8 | $ | 823.5 | $ | 197.3 | 24 | % | ||||||||
|
|
|
|
|
|
|
|||||||||||
The increases in industry sector service revenues were due to increases in demand for our services in these sectors. The decrease in the Energy Services sector was due to a decrease in demand compared to 2010.
Utilization represents the percentage of our delivery personnel’s time spent on billable client work. Our 2011 utilization was 71%, a four-point decrease from our 2010 utilization of 75%. Our 2011 average delivery personnel peoplecount increased 21% compared to 2010, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased 7% compared to 2010 as our need for contractors and consultants in specialized areas for certain client contracts increased.
Our five largest clients, in the aggregate, accounted for 19% of our service revenues in 2011 compared to 19% in 2010. No individual client accounted for more than 10% of our service revenues for 2011 and 2010. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, and from applications management and long-term support assignments, which are cancelable. Long-Term and Retainer Revenues represented 48% and 46% of our total service revenues for 2011 and 2010, respectively.
Project Personnel Expenses
Project personnel expenses consist primarily of salaries and employee benefits for personnel dedicated to client assignments, contractors and consultants and other direct expenses incurred to complete assignments that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services. The following table presents project personnel expenses for 2011 and 2010 (in thousands, except percentages):
| Year Ended December 31, |
Percentage
Increase |
|||||||||||||||
| 2011 | 2010 | Increase | ||||||||||||||
|
Project personnel expenses |
$ | 690,821 | $ | 563,930 | $ | 126,891 | 23 | % | ||||||||
|
Project personnel expenses as a percentage of service revenues |
68 | % | 68 | % | 0 points | |||||||||||
The increase in project personnel expense in 2011 was a direct result of our service revenue growth as we had to increase delivery personnel peoplecount, use of contractors and consultants and other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $108.0 million, primarily due to a 21% increase in delivery personnel peoplecount. Contractor and consultant expense increased $5.6 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses increased $11.0 million to support revenue growth. Finally, other project personnel expenses increased in the aggregate by $2.3 million.
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Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses. The following table presents selling and marketing expenses for 2011 and 2010 (in thousands, except percentages):
| Year Ended December 31, |
Increase/
(Decrease) |
Percentage
Increase |
||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Selling and marketing expenses |
$ | 39,025 | $ | 38,833 | $ | 192 | 0 | % | ||||||||
|
Selling and marketing expenses as a percentage of service revenues |
4 | % | 5 | % | (1 point | ) | ||||||||||
Selling and marketing expenses were essentially unchanged in 2011 compared to 2010. Compensation expenses
increased $1.4 million, primarily due to an increase in selling and marketing peoplecount. This increase was offset by a decrease of $1.4 million in external consultant costs. Other selling and marketing expenses increased, in the aggregate, $0.2
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses. The following table presents general and administrative expenses for 2011 and 2010 (in thousands, except percentages):
| Year Ended December 31, |
Increase/
(Decrease) |
Percentage
Increase |
||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
General and administrative expenses |
$ | 171,641 | $ | 150,877 | $ | 20,764 | 14 | % | ||||||||
|
General and administrative expenses as a percentage of service revenues |
17 | % | 18 | % | (1 point | ) | ||||||||||
The increase in general and administrative expenses was primarily due to the following factors:
| • |
facilities expenses increased $10.3 million, primarily due to office space expansions in several locations during 2011; |
| • |
compensation expenses increased $6.8 million due to a 14% increase in average general and administrative peoplecount and the impact of annual raises and promotions; |
| • |
insurance costs increased $5.9 million due to the increase in peoplecount and rate increases; |
| • |
external consultant costs increased $2.3 million; and |
| • |
expenses relating to hedging gains and losses increased $1.7 million, as net losses of $1.2 million were recorded in 2011, compared to net gains of $0.5 million in 2010. |
These increases were partially offset by the following factors:
| • |
expenses relating to currency gains and losses decreased by $2.3 million, as net gains of $1.6 million were recorded in 2011, compared to net losses of $0.7 million in 2010; and |
| • |
insurance recovery proceeds of $3.5 million were received during the first quarter of 2011 as reimbursement for expenses incurred during the stock option review and restatement in 2006 and 2007. |
Other general and administrative expenses decreased, in the aggregate, $0.4 million.
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Restructuring and Other Related Charges
Restructuring and other related charges increased $6.1 million in 2011 to $6.5 million, compared to $0.4 million in 2010. Restructuring and other related charges for 2011 consisted primarily of the following:
| • |
$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 our SapientNitro business in Australia from traditional advertising capabilities to digitally-led capabilities; this 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; |
| • |
$0.9 million related to the consolidation of our New York City operations into one office space; |
| • |
$0.3 million related to future payments owed to us under a sub-lease of a previously restructured office space which are no longer expected to be collected; and |
| • |
net benefits of $0.4 million related to changes in the estimated operating expenses to be incurred and sub-lease income to be received in connection with previously restructured leases. |
Net restructuring charges of $0.4 million recorded in 2010 consisted of a $0.8 million charge relating to the consolidation of our UK operations into one office space, partially offset by benefits of $0.4 million related to changes in the estimated operating expenses to be incurred and sub-lease income to be received in connection with two previously restructured leases, which ended in 2011.
Amortization of Purchased Intangible Assets
During 2011 and 2010, purchased intangible assets consisted of non-compete and non-solicitation agreements, customer lists, intellectual property, and tradenames acquired in business combinations. Amortization expense related to intangible assets increased from $5.4 million in 2010 to $6.8 million in 2011 due to the amortization of intangible assets acquired in our 2011 acquisitions, partially offset by a decrease in expense as the useful economic lives of certain other intangible assets ended.
Acquisition Costs and Other Related Charges
Acquisition costs and other related charges are expenses associated with third-party professional services we utilize related to the evaluation of potential targets and the execution of successful acquisitions. Although we may incur costs to evaluate targets, the related potential transaction(s) may never be consummated. Acquisition costs and other related charges also include changes in the fair value of contingent consideration liabilities recorded as the result of acquisitions. Until these liabilities are settled, they must be remeasured to fair value each reporting period, with the changes included in earnings. Acquisition costs and other related charges were $1.9 million and $0.1 million for 2011 and 2010, respectively. The increase was due to the fact that two acquisitions occurred during 2011, for which we incurred expenses relating to third-party services and remeasurements of the fair value of contingent consideration liabilities, while no acquisitions were completed during 2010. We recorded contingent consideration liabilities as the result of our acquisition of D&D Holdings Limited during 2011, and we expect to record quarterly remeasurements of the fair value of these liabilities until they are settled at various points in time through 2014.
Interest and Other Income
The most significant component of interest and other income is interest income. Interest income is derived primarily from investments in U.S. government securities, bank time deposits, and money market funds. The following table presents interest and other income for 2011 and 2010 (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Interest and other income, net |
$ | 6,342 | $ | 3,705 | $ | 2,637 | 71 | % | ||||||||
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Interest and other income increased in 2011 primarily due to an increase in interest income, as we had higher average balances of cash and cash equivalents compared to 2010, and, to a lesser extent, an increase in interest rates on our foreign currency cash and cash equivalents.
Provision for Income Taxes
The provision for income taxes was $36.9 million and $23.8 million for 2011 and 2010, respectively. Income tax is related to foreign, federal and state tax obligations. The increase in our provision for income taxes was primarily due to increased profits.
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. As of December 31, 2011, a valuation allowance is maintained against deferred tax assets associated with certain state net operating loss carryforwards. We also 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 $15.2 million as of December 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 December 31, 2011 and 2010, accrued interest and penalties were approximately $1.4 million and $1.1 million, respectively.
We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as Canada, Germany, India, Switzerland, the United Kingdom and the United States. Our U.S. federal tax filings are open for examination for tax years 2008 through the present. The statutes of limitations in our other tax jurisdictions remain open for various periods between 2004 and the present. However, carryforward 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 and the expiration of relevant statutes of limitations in the next twelve months could result in a decrease in our unrecognized tax benefits of an amount between $1.5 million and $2.5 million.
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. For 2011, our effective tax rate varied from the statutory tax rate primarily due to state income taxes, the tax rate differential attributable to income earned by our foreign subsidiaries and the related mix of jurisdictional profits, changes in uncertain tax positions, and changes in deferred taxes on unremitted earnings.
Results by Operating Segment
We have discrete financial data by operating segments available based on our method of internal reporting, which disaggregates our operations. Operating segments are defined as components of the Company for which separate financial information is available to manage resources and evaluate performance.
Beginning in 2010, we realigned our North America and Europe operating segments and internal reporting systems into three operating segments to better align our services with our business and operational strategy. The
35
Table of Contents
realigned operating segments were: SapientNitro, Sapient Global Markets and Sapient Government Services. As such, results by operating segment for the year ended December 31, 2009 have been recast to reflect the operating segment unit structure.
We typically do not allocate certain marketing and general and administrative expenses including costs associated with our restructuring events (as described in Note 10 in the Notes to Consolidated Financial Statements), to our operating segments because these activities and costs generally impact areas that support the operating segments and, therefore, are managed separately. However, in 2009, we allocated $1.2 million and $0.6 million of $2.0 million related to our first quarter reduction in workforce to our SapientNitro and Sapient Global Markets segments, respectively, because all of the people involved provided labor exclusively for one of these two segments. Management does not allocate amortization of purchased intangible assets, stock-based compensation expense, acquisition costs and other related charges, or interest and other income 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 the operating segments.
The following tables present the service revenues and income before income taxes attributable to these operating segments for the periods presented (in thousands):
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Service Revenues: |
||||||||
|
SapientNitro |
$ | 685,659 | $ | 514,727 | ||||
|
Sapient Global Markets |
282,798 | 260,359 | ||||||
|
Sapient Government Services |
52,383 | 48,425 | ||||||
|
|
|
|
|
|||||
|
Total service revenues |
$ | 1,020,840 | $ | 823,511 | ||||
|
|
|
|
|
|||||
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Income Before Income Taxes: |
||||||||
|
SapientNitro |
$ | 226,227 | $ | 150,429 | ||||
|
Sapient Global Markets |
86,948 | 84,974 | ||||||
|
Sapient Government Services |
13,745 | 13,749 | ||||||
|
|
|
|
|
|||||
|
Total reportable segments operating income(1) |
326,920 | 249,152 | ||||||
|
Less: reconciling items(2) |
(216,406 | ) | (181,549 | ) | ||||
|
|
|
|
|
|||||
|
Total income before income taxes |
$ | 110,514 | $ | 67,603 | ||||
|
|
|
|
|
|||||
| (1) | Segment operating income 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. |
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| (2) | Adjustments that are made to reconcile total reportable segments operating income to consolidated income before income taxes include the following (in thousands): |
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Centrally managed functions |
$ | 191,811 | $ | 161,426 | ||||
|
Restructuring and other related charges |
6,507 | 414 | ||||||
|
Amortization of purchased intangible assets |
6,813 | 5,448 | ||||||
|
Stock-based compensation expense |
19,256 | 18,156 | ||||||
|
Interest and other income, net |
(6,342 | ) | (3,705 | ) | ||||
|
Acquisition costs and other related charges |
1,861 | 111 | ||||||
|
Unallocated benefits(a) |
(3,500 | ) | (301 | ) | ||||
|
|
|
|
|
|||||
|
Total reconciling items |
$ | 216,406 | $ | 181,549 | ||||
|
|
|
|
|
|||||
| (a) | Reflects stock option restatement-related benefits. |
Service Revenues by Operating Segment
SapientNitro service revenues increased 33% due to an increase in demand for our services, and to a lesser extent, incremental revenue from our 2011 acquisitions. In constant currency terms, SapientNitro service revenues increased 31%.
The following table presents SapientNitro service revenues by industry sector for 2011 and 2010 (in millions except percentages):
| Year Ended December 31, |
Increase
/
(Decrease) |
Percentage
Increase / (Decrease) |
||||||||||||||
|
Industry Sector |
2011 | 2010 | ||||||||||||||
|
Consumer, Travel & Automotive |
$ | 390.0 | $ | 256.1 | $ | 133.9 | 52 | % | ||||||||
|
Technology & Communications |
117.4 | 116.7 | 0.7 | 1 | % | |||||||||||
|
Financial Services |
116.2 | 79.5 | 36.7 | 46 | % | |||||||||||
|
Government, Health & Education |
52.6 | 53.2 | (0.6 | ) | (1 | )% | ||||||||||
|
Energy Services |
9.5 | 9.2 | 0.3 | 3 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Total SapientNitro service revenues |
$ | 685.7 | $ | 514.7 | $ | 171.0 | 33 | % | ||||||||
|
|
|
|
|
|
|
|||||||||||
The increases in sector service revenues were due to increases in demand for our services and, to a lesser extent, specifically in the case of the Consumer, Travel and Automotive sector, incremental revenue from our 2011 acquisitions. In the Consumer, Travel and Automotive and Financial Services industry sectors in particular, we have experienced increasing acceptance of our value proposition, as companies in these sectors shift more of their marketing efforts to digital platforms. The decrease in the Government, Health and Education sector was due to a decrease in demand for our services in this sector.
Sapient Global Markets service revenues increased 9% due to an increase in demand for our services. In constant currency terms, Sapient Global Markets service revenues increased 7%.
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The following table presents Sapient Global Markets service revenues by industry sector for 2011 and 2010 (in millions except percentages):
| Year Ended December 31, |
Increase/
(Decrease) |
Percentage
Increase/ (Decrease) |
||||||||||||||
|
Industry Sector |
2011 | 2010 | ||||||||||||||
|
Financial Services |
$ | 202.5 | $ | 185.1 | $ | 17.4 | 9 | % | ||||||||
|
Government, Health & Education |
8.3 | 2.8 | 5.5 | 196 | % | |||||||||||
|
Energy Services |
72.0 | 72.5 | (0.5 | ) | (1 | )% | ||||||||||
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Total Sapient Global Markets service revenues |
$ | 282.8 | $ | 260.4 | $ | 22.4 | 9 | % | ||||||||
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The increases in service revenues in the Financial Services and Government, Health & Education sectors were due to increases in demand for our services. The decrease in the Energy Services sector was due to a decrease in demand for our services in this sector.
Service revenues for our Sapient Government Services segment increased by 8% in 2011 compared to 2010, due to an increase in demand for our services in this segment.
Operating Income by Operating Segment
SapientNitro’s operating income increased $75.8 million in 2011. As a percentage of revenue, SapientNitro’s operating income increased to 33% in 2011 compared to 29% in 2010. These increases were primarily due to increases in pricing for our services and a decrease in compensation expenses as a percentage of related service revenues.
Sapient Global Markets’ operating income increased $2.0 million due to the increase in service revenues. As a percentage of revenue, Sapient Global Markets’ operating income decreased to 31% in 2011 compared to 33% in 2010. This decrease was primarily due to increases in compensation expenses and travel expenses, partially offset by a decrease in external consultant costs, as percentages of related service revenues.
Sapient Government Services’ operating income was essentially unchanged in 2011 compared to 2010. As a percentage of revenue, Sapient Government Services’ operating income decreased to 26% compared to 28% in 2010. The primary reason for this decrease was an increase in compensation expenses as a percentage of related service revenues.
Years Ended December 31, 2010 and 2009
Service Revenues
Our service revenues for 2010 and 2009 were as follows (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Service revenues |
$ | 823,511 | $ | 638,884 | $ | 184,627 | 29 | % | ||||||||
Service revenues increased due to increases in demand for our services in all three of our primary business units. Compared geographically to 2009, 2010 service revenues from clients in the United States increased 37%, compared to an increase of 19% from our international clients (see Results by Operating Segment ). Service revenues also increased, to a lesser extent, due to incremental service revenues from our Nitro acquisition.
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The following table presents our service revenues by industry sector for 2010 and 2009 (in millions, except percentages):
| Year Ended December 31, |
Increase/
(Decrease) |
Percentage
Increase/ (Decrease) |
||||||||||||||
|
Industry Sector |
2010 | 2009 | ||||||||||||||
|
Financial Services |
$ | 264.8 | $ | 209.0 | $ | 55.8 | 27 | % | ||||||||
|
Consumer, Travel & Automotive |
256.1 | 152.8 | 103.3 | 68 | % | |||||||||||
|
Technology & Communications |
116.7 | 99.5 | 17.2 | 17 | % | |||||||||||
|
Government, Health & Education |
104.2 | 92.9 | 11.3 | 12 | % | |||||||||||
|
Energy Services |
81.7 | 84.7 | (3.0 | ) | (4 | )% | ||||||||||
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Total service revenues |
$ | 823.5 | $ | 638.9 | $ | 184.6 | 29 | % | ||||||||
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The increases in industry sector service revenues were due to an increase in demand for our services in these sectors, and to a lesser extent in the Consumer, Travel and Automotive sector, incremental revenue from our Nitro acquisition. The decrease in the Energy Services sector was due to a slight decrease in demand compared to 2009.
Utilization represents the percentage of our delivery personnel’s time spent on billable client work. Our 2010 utilization was 75%, a two-point decrease from our 2009 utilization of 77%. Our 2010 average delivery personnel peoplecount increased 30% compared to 2009, which was in line with service revenue growth. Contractors and consultant usage, measured by expense, increased 20% compared to 2009 as our need for contractors and consultants in specialized areas for certain client contracts increased.
Our five largest clients, in the aggregate, accounted for 19% of our service revenues in 2010 compared to 21% in 2009. No individual client accounted for more than 10% of our service revenues for 2010 and 2009. Long-Term and Retainer Revenues represented 46% and 44% of our total service revenues for 2010 and 2009, respectively.
Project Personnel Expenses
Project personnel expenses consist primarily of salaries and employee benefits for personnel dedicated to client assignments, contractors and consultants and other direct expenses incurred to complete assignments that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services. The following table presents project personnel expenses for 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Project personnel expenses |
$ | 563,930 | $ | 435,859 | $ | 128,071 | 29 | % | ||||||||
|
Project personnel expenses as a percentage of service revenues |
68 | % | 68 | % | 0 points | |||||||||||
The increase in project personnel expense in 2010 was a direct result of our service revenue growth as we had to increase delivery personnel peoplecount, use of contractors and consultants and other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $105.7 million, primarily due to a 30% increase in delivery personnel peoplecount. Contractor and consultant expense increased $12.9 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses increased $4.2 million to support revenue growth in addition to the fact that we made a concerted effort to reduce non-essential travel in 2009 during the general economic downturn. Stock-based compensation expense also increased $2.2 million, primarily due to the increase in average stock price compared to 2009. Finally, other project personnel expenses increased, in the aggregate, $3.1 million.
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Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses. The following table presents selling and marketing expenses for 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Selling and marketing expenses |
$ | 38,833 | $ | 31,931 | $ | 6,902 | 22 | % | ||||||||
|
Selling and marketing expenses as a percentage of service revenues |
5 | % | 5 | % | 0 points | |||||||||||
The increase in selling and marketing expenses was due to multiple factors: (i) compensation expense
increased $3.2 million, primarily due to an increase in peoplecount, (ii) use of consultants increased $2.6 million due to increased need for sales support in light of revenue growth, and (iii) other selling and marketing expenses
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses. The following table presents general and administrative expenses for 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
General and administrative expenses |
$ | 150,877 | $ | 118,018 | $ | 32,859 | 28 | % | ||||||||
|
General and administrative expenses as a percentage of service revenues |
18 | % | 18 | % | 0 points | |||||||||||
The increase in general and administrative expenses was due to the following factors: (i) facilities expenses increased $9.2 million primarily due to our new Special Economic Zone (“SEZ”) unit in India and moving into new office space in the United Kingdom midway through 2009, (ii) compensation expense increased $7.4 million, (iii) consultant expense increased $3.7 million, (iv) professional service fees such as agency fees and legal fees increased, in the aggregate, $3.8 million due to an overall increase in peoplecount and corporate maintenance expenses, respectively, (v) travel expenses increased $2.0 million due to internal projects and the fact that we made a concerted effort to reduce non-essential travel in 2009 during the general economic downturn, (vi) stock-based compensation expense increased $1.5 million due to incremental expense from the Nitro acquisition and the increase of the average price of our common stock compared to 2009 and (vii) health insurance costs increased $1.2 million due to the overall increase in peoplecount. Finally, other general and administrative expenses increased, in the aggregate, $4.2 million.
Restructuring and Other Related Charges
Restructuring and other related charges decreased $4.1 million compared to 2009 due to two reasons. First, we had a workforce restructuring where we recorded a $2.0 million restructuring charge in the first quarter of 2009. Second, we recorded a $2.6 million charge in the third quarter of 2009 principally as a result of a change in estimated sub-lease income associated with two previously restructured leases. In 2010 we had one facility restructuring which resulted in a charge of only $0.8 million which was offset by a benefit of $0.4 million principally as a result of a change in estimated sub-lease income associated with two previously restructured leases.
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Amortization of Purchased Intangible Assets
During 2010 and 2009, purchased intangible assets consisted of non-compete and non-solicitation agreements, customer lists, and tradenames acquired in business combinations. Amortization expense related to intangible assets increased $0.3 million due to the amortization of intangible assets acquired in the Nitro acquisition, offset by a decrease in expense as the useful economic lives of other intangibles ended.
Acquisition Costs and Other Related Charges
On January 1, 2009, we began accounting for business combinations using the acquisition method which requires acquisition related costs to be expensed as incurred. These costs include expenses associated with third-party professional services we incur related to our evaluation process of potential acquisition opportunities and other related charges. Though we may incur acquisition costs and other related charges it is not indicative that any transaction will be consummated. The reason why expenses decreased in 2010 is that 2009 reflected the bulk of expenses related to the Nitro acquisition while we had no acquisitions in 2010.
Interest and Other Income
The most significant component of interest and other income is interest income. Interest income is derived primarily from investments in U.S. government securities, bank time deposits, and money market funds. The following table presents interest and other income for 2010 and 2009 (in thousands, except percentages):
| Year Ended December 31, | Increase |
Percentage
Increase |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Interest and other income, net |
$ | 3,705 | $ | 3,156 | $ | 549 | 17 | % | ||||||||
Interest and other income increased due to an increase in interest income as we had higher average cash balances compared to 2009, and, to a lesser extent, an increase in interest rates.
Provision for Income Taxes
The provision for income taxes is related to foreign, federal and state tax obligations. The increase in our provision for income taxes was due to higher income before taxes and a higher tax expense rate on our U.S. income due to the release of our valuation allowance on a substantial portion of our U.S. deferred taxes in the fourth quarter of 2009. Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2008 all of our U.S. deferred tax assets had a full valuation allowance of $112.1 million. Based upon our operating results for the years immediately preceding and through December 31, 2009, as well as an assessment of our expected future results of operations in the U.S., at December 31, 2009 we determined that it had become more likely than not that we would realize a substantial portion of our deferred tax assets in the U.S. As a result, we released our valuation allowances on a substantial portion of our U.S. deferred tax assets in the fourth quarter of 2009. Certain state tax net operating loss carryforwards, as well as a portion of the net operating loss carryforwards relating to certain stock-based compensation deductions will remain with a valuation allowance recorded against them at December 31, 2010 and 2009. At December 31, 2010 we determined that it had become more likely than not that we would realize a portion of our deferred tax assets related to state net operating loss carryforwards. As a result, we released $2.3 million of valuation allowances on our state deferred tax assets, which was recorded as an income tax benefit. In addition, at December 31, 2010 we established a valuation allowance of $1.5 million against deferred tax assets in Switzerland, but continue to believe that the deferred tax assets in other foreign subsidiaries 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 $12.0 million as of December 31, 2010 and $8.9 million as of December 31, 2009. These amounts represent the amount of
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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 December 31, 2010, accrued interest and penalties were approximately $1.1 million.
Results by Operating Segment
The following tables present the service revenues and income before income taxes attributable to our operating segments for the periods presented (in thousands):
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Service Revenues: |
||||||||
|
SapientNitro |
$ | 514,727 | $ | 405,020 | ||||
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Sapient Global Markets |
260,359 | 198,043 | ||||||
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Sapient Government Services |
48,425 | 35,821 | ||||||
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Total service revenues |
$ | 823,511 | $ | 638,884 | ||||
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| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
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Income Before Income Taxes: |
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SapientNitro |
$ | 150,429 | $ | 115,461 | ||||
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Sapient Global Markets |
84,974 | 65,316 | ||||||
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Sapient Government Services |
13,749 | 10,303 | ||||||
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Total reportable segments operating income(1) |
249,152 | 191,080 | ||||||
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Less reconciling items(2) |
(181,549 | ) | (147,504 | ) | ||||
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Total income before income taxes |
$ | 67,603 | $ | 43,576 | ||||
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| (1) | Segment operating income 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 reconcile total reportable segments operating income to consolidated income before income taxes include the following (in thousands): |
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Centrally managed functions |
$ | 161,426 | $ | 125,864 | ||||
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Restructuring and other related charges |
414 | 2,759 | ||||||
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Amortization of purchased intangible assets |
5,448 | 5,146 | ||||||
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Stock-based compensation expense |
18,156 | 14,921 | ||||||
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Interest and other income, net |
(3,705 | ) | (3,156 | ) | ||||
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Acquisition costs and other related charges |
111 | 2,962 | ||||||
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Unallocated benefits(a) |
(301 | ) | (992 | ) | ||||
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Total reconciling items |
$ | 181,549 | $ | 147,504 | ||||
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| (a) | Reflects stock option restatement-related benefits. |
Service Revenues by Operating Segment
Our SapientNitro service revenues increased 27% due to an increase in demand for our services, and to a lesser extent, incremental revenue from our Nitro acquisition. In constant currency terms, SapientNitro service revenues increased 26%.
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The following table compares our 2010 SapientNitro service revenues by industry sector to 2009:
| Year Ended December 31, |
Increase
/
(Decrease) |
Percentage
Increase / (Decrease) |
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|
Industry Sector |
2010 | 2009 | ||||||||||||||
|
Consumer, Travel & Automotive |
$ | 256.1 | $ | 152.8 | $ | 103.3 | 68 | % | ||||||||
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Technology & Communications |
116.7 | 99.5 | 17.2 | 17 | % | |||||||||||
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Financial Services |
79.5 | 76.7 | 2.8 | 4 | % | |||||||||||
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Government, Health & Education |
53.2 | 57.0 | (3.8 | ) | (7 | )% | ||||||||||
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Energy Services |
9.2 | 19.1 | (9.9 | ) | (52 | )% | ||||||||||
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Total SapientNitro service revenues |
$ | 514.7 | $ | 405.1 | $ | 109.6 | 27 | % | ||||||||
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The increases in sector service revenues were due to an increase in demand for our services and, to a lesser extent in the case of the Consumer, Travel and Automotive sector, incremental revenue from our Nitro acquisition. The decreases in the Government, Health and Education and Energy Services sectors were due to a decrease in demand for our services in these sectors.
The following table compares our 2010 Sapient Global Markets service revenues by industry sector to 2009:
| Year Ended December 31, |
Percentage
Increase |
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|
Industry Sector |
2010 | 2009 | Increase | |||||||||||||
|
Financial Services |
$ | 185.1 | $ | 132.3 | $ | 52.8 | 40 | % | ||||||||
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Government, Health & Education |
2.8 | — | 2.8 | N/A | ||||||||||||
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Energy Services |
72.5 | 65.7 | 6.8 | 10 | % | |||||||||||
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Total Sapient Global Markets service revenues |
$ | 260.4 | $ | 198.0 | $ | 62.4 | 32 | % | ||||||||
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The increase in service revenues in these sectors was due to an increase in demand for our services.
Service revenues for our Sapient Government Services segment increased by 35% in 2010 compared to 2009 due to an increase in demand for our services in this sector.
Operating Income by Operating Segment
SapientNitro’s operating income increased $35.0 million due to the increase in service revenues. As a percentage of revenue, SapientNitro’s operating income remained constant at 29% compared to 2009.
Sapient Global Markets operating income increased $19.7 million due to the increase in service revenues. As a percentage of revenue, Sapient Global Markets operating income remained constant at 33% compared to 2009.
Sapient Government Services operating income increased $3.5 million due to the increase in service revenues. As a percentage of revenue, Sapient Government Services operating income decreased to 28% compared to 29% in 2009. The reason for the decrease was an increase in contractor and consultant usage as our need for contractors and consultants in specialized areas for certain client contracts increased.
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, mutual funds and other cash equivalents. At December 31, 2011 we had approximately
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$225.6 million in cash, cash equivalents, restricted cash and marketable investments, compared to $234.1 million at December 31, 2010. The decrease was primarily due to the use of $44.6 million in cash for our two 2011 acquisitions, $35.5 million for capital purchases, $48.9 million for a special cash dividend, and a decrease of $15.4 million as a result of foreign currency exchange rate fluctuations, partially offset by $132.6 million of cash which was provided by operating activities.
We had approximately $4.2 million held with various banks as collateral for letters of credit and performance bonds, and those amounts are classified as restricted cash on our consolidated balance sheet at December 31, 2011.
At December 31, 2011 we had the following contractual obligations:
| Payments Due By Period | ||||||||||||||||||||
|
Less Than
One Year |
1 - 3
Years |
3 - 5
Years |
More Than
5 Years |
Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating leases |
$ | 22,865 | $ | 41,831 | $ | 30,971 | $ | 50,737 | $ | 146,404 | ||||||||||
|
Cash outlays for restructuring and other related activities(1) |
130 | 5 | 4 | — | 139 | |||||||||||||||
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Purchase obligations(2) |
1,344 | 103 | — | — | 1,447 | |||||||||||||||
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Uncertain tax positions |
— | 13,840 | — | — | 13,840 | |||||||||||||||
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Total |
$ | 24,339 | $ | 55,779 | $ | 30,975 | $ | 50,737 | $ | 161,830 | ||||||||||
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| (1) | Cash outlays for restructuring and other related activities include $3.3 million of minimum future lease and related payments for excess facilities, net of estimated sublease income of $3.2 million under existing arrangements. Estimated future payments for operating expenses relating to excess facilities are not included. |
| (2) | Purchase obligations represent minimum commitments due to third parties, including subcontractor agreements, telecommunications contracts, IT maintenance contracts in support of internal use of software and hardware and other marketing and consulting contracts. Contracts for which our commitment is variable based on volumes, with no fixed minimum quantities, and contracts that can be cancelled without payment penalties, have been excluded. Amounts presented also exclude accounts payable and accrued expenses at December 31, 2011. |
Operating Activities
Cash provided by operating activities during 2011 totaled $132.6 million, primarily due to $73.6 million in net income and the addition of $68.2 million in non-cash charges, partially offset by a decrease of $9.2 million in cash relating to changes in working capital. Within working capital, changes in accounts receivable, unbilled revenues and deferred revenues resulted in a net decrease of $17.2 million, primarily due to higher service revenues in 2011 compared to 2010. Accrued compensation increased by $15.0 million, primarily due to the fact that bonuses accrued for 2011 were higher than bonuses paid out in 2011 for 2010 performance, due to the improvement in our operating results. Cash provided by operating activities increased by $61.7 million from $70.9 million in 2010, primarily due to the $29.8 million increase in net income, and a $19.9 million improvement from changes in working capital.
Days sales outstanding (“DSO”) is calculated based on actual three months of total revenue and period end accounts receivable, unbilled revenue and deferred revenue balances. Our DSO decreased 3% to 63 days as of December 31, 2011 compared to DSO of 65 days as of December 31, 2010. DSO decreased primarily due to improvements in our collection of cash from clients.
Investing Activities
Cash used in investing activities during 2011 totaled $81.0 million. This was primarily due to the use of $44.6 million (net of cash acquired) for the acquisitions of DAD and Clanmo, and the use of $35.5 million for
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capital expenditures and internally developed software. Cash used in investing activities increased by $64.0 million from $17.0 million in 2010, primarily due to the fact that we used only $3.2 million for acquisitions in 2010, and capital expenditures increased by $14.3 million, primarily due to more activity relating to build-outs of new or expanded office spaces. In addition, during 2010 we received $16.4 million from sales and maturities of trading securities, while we had no activity in trading securities during 2011.
Financing Activities
Cash used in financing activities during 2011 was $43.3 million, primarily relating to a $48.9 million special dividend payment to holders of common stock, net repayments of $4.4 million under our revolving credit facility in India, and the repayment of $3.8 million of debt assumed in the acquisition of DAD. These cash outflows were partially offset by the receipt of $10.2 million in cash proceeds from stock option exercises, and $3.7 million of tax benefits from stock plans. Cash used in financing activities increased by $9.4 million from $33.9 million in 2010, primarily due to an increase of $8.8 million in net repayments under the India credit facility, and an increase of $2.0 million in cash dividend payments. We entered into our India credit facility in 2010 in order to finance the build-out of a new office in India. Management concluded that this credit facility was the most efficient financing method available. This credit facility expired December 31, 2011.
Non-cash investing transactions of $4.9 million and $2.4 million in 2011 and 2010, respectively, reflect the value of shares of common stock issued as contingent consideration in connection with our acquisition of DCG.
We use foreign currency option contracts to partially mitigate the effects of exchange rate fluctuations on revenues and operating expenses denominated in certain foreign currencies. Please see Item 7A, “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 $0.3 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 December 31, 2011 of $0.3 million related to certain of these items for which the likelihood of a loss is considered probable. During the three months ended September 30, 2011, we made a payment of $0.9 million to settle a claim which had initially been accrued as a contingent liability during the three months ended March 31, 2011. Although we intend to defend these matters vigorously, the ultimate outcome of these matters is uncertain. However, we do not expect the potential losses, if any, to have a material adverse effect on our operating results.
As of December 31, 2011, our total cash, cash equivalents, restricted cash and marketable securities were $225.6 million. This balance included $76.1 million held by our U.S. entities and $149.5 million held by our foreign subsidiaries. If we need to access these overseas funds for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to reinvest the unremitted earnings of our foreign subsidiaries indefinitely, except for $38.1 million of unremitted earnings which as of December 31, 2011 were not reinvested indefinitely. Our current plans do not demonstrate a need to repatriate any overseas funds to fund our U.S. operations.
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
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs , which amends Accounting Standards Codification (“ASC”) Topic 820,
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Fair Value Measurement . ASU 2011-04 provides a consistent definition of fair value and ensures that fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances disclosure requirements. ASU 2011-04 is effective for annual and interim periods beginning after December 15, 2011 and must be applied prospectively. Early adoption by public entities is not permitted. We do not expect the adoption of ASU 2011-04 to have a material impact on our financial condition, results of operations or cash flows.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income , which amends ASC Topic 220, Comprehensive Income . ASU 2011-05 eliminates the option to present the components of other comprehensive income as a part of the statement of stockholders’ equity and requires other comprehensive income to be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of operations. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and must be retrospectively applied to all reporting periods presented. Early adoption is permitted, but we did not adopt ASU 2011-05 early. ASU 2011-05 will not have an impact on the Company’s financial condition, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We account for our marketable securities as “available-for-sale” or “trading” securities. Available-for-sale securities are carried on the balance sheet at fair value. Unrealized gains and losses on available-for-sale securities that are considered temporary are reflected in the “accumulated other comprehensive loss” caption of our consolidated balance sheets. Unrealized losses on available-for-sale securities are reflected in earnings when the decline in fair value below cost basis is determined to be other-than-temporary. Credit losses on debt securities classified as available-for-sale are an example of other-than-temporary declines in value and are reflected in the “other income, net” caption of our consolidated statements of operations. Trading securities are carried on the balance sheet at fair value with unrealized gains and losses reflected in the “other income, net” caption of our consolidated statements of operations.
The estimated fair value of our marketable securities portfolio was $9.0 million as of December 31, 2011, which included $7.7 million of mutual funds and $1.3 million of auction rate securities (“ARS”). 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 estimated fair value of our marketable securities portfolio was $10.1 million as of December 31, 2010, which included $8.8 million of mutual funds and $1.3 million of ARS.
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. The market values of fixed rate securities may be adversely impacted due to a rise in market interest rates, while floating rate securities may produce less income than expected if market 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. If the interest rate had fluctuated by 10%, the increase or decrease in value of our marketable securities would not have been material as of December 31, 2011 and our interest income would not have changed by a material amount for the three months ended December 31, 2011.
46
Table of Contents
Exchange Rate Sensitivity
We face exposure to adverse movements in foreign currency exchange rates because significant portions 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.
Foreign Currency Transaction Exposure:
Foreign currency transaction exposure is derived primarily from intercompany transactions of a short-term nature and transactions with clients or vendors in currencies other than the functional currency of the legal entity in which the transaction is recorded. Assets and liabilities arising from such transactions are translated into the legal entity’s functional currency at each reporting period using period-end exchange rates and any resulting gain or loss as a result of currency fluctuations is recorded in general and administrative expenses in our consolidated statements of operations. Foreign currency transaction gains of $1.6 million and losses of $0.7 million were recorded for the years ended December 31, 2011 and 2010, respectively.
We mitigate foreign currency transaction exposure by settling these types of transactions in a timely manner where practical, thereby limiting the amount of time that the resulting non-functional currency asset or liability remains outstanding and subject to exchange rate fluctuations.
Foreign Currency Translation Exposure:
Foreign currency translation exposure is derived from the translation of the financial statements of our subsidiaries for which the functional currency is not the U.S. dollar into U.S. dollars for consolidated reporting purposes. These subsidiaries’ balance sheets are translated into U.S. dollars using period-end exchange rates and their income statements are translated into U.S. dollars using individual transactional exchange rates or average monthly exchange rates. Any difference between the period-end exchange rates and the transactional or average monthly rates is recorded in accumulated other comprehensive loss in our consolidated balance sheets.
For 2011, approximately 31% of our revenues and approximately 48% of our operating expenses were generated by subsidiaries for which the functional currency is not the U.S. dollar and thus subject to foreign currency translation exposure, as compared to 41% and 46%, respectively, for 2010. In addition, 53% of our assets and 51% of our liabilities were subject to foreign currency translation exposure as of December 31, 2011, as compared to 52% of our assets and 52% of our liabilities as of December 31, 2010. We also have assets and liabilities in certain entities that are denominated in currencies other than the entity’s functional currency and are subject to foreign currency exposure, as described above.
Approximately 17% of our operating expenses for 2011 was incurred by foreign subsidiaries whose functional currency is the Indian rupee. Because we have 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 our operating expenses and operating profit. Approximately 14%, 3% and 7% of our service revenues for 2011 were generated by foreign subsidiaries whose functional currencies are the British pound sterling, euro and Canadian dollar, respectively. Any significant movements in the exchange rates 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 have a significant impact on our service revenues and operating income. We manage these exposures through a risk management program which is designed to mitigate our exposure to operating expenses incurred by foreign subsidiaries whose functional currency is the Indian rupee and operating margins in foreign subsidiaries whose functional currencies are the British pound sterling, the euro and the Canadian dollar. This program includes the use of derivative financial instruments which are not designated as accounting hedges. As of December 31, 2011, we had option contracts outstanding in the notional amount of approximately $24.3 million ($12.9 million for our Indian rupee contracts, $6.2 million for our British pound sterling contracts, $0.3 million for our euro contracts and $4.9 million for our Canadian dollar contracts). Because these instruments are option collars that are settled on a
47
Table of Contents
net basis with the counterparty banks, we have not recorded the gross underlying notional amounts in our consolidated balance sheets as of December 31, 2011. The following table presents a summary of our net realized and unrealized gains/losses on our option contracts for 2011, 2010 and 2009 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
(Loss) gain on foreign exchange option contracts not designated |
$ | (1,211 | ) | $ | 530 | $ | 19 | |||||
|
|
|
|
|
|
|
|||||||
We also performed a sensitivity analysis of the possible losses that could be incurred on these contracts as a result of movements in the respective foreign currency exchange rates. The following table presents the maximum losses on these unsettled positions that would result from changes of 10%, 15% and 20% in the underlying average exchange rates of the respective foreign currencies (in millions):
|
Maximum Losses Resulting from Changes in
Underlying Average Exchange Rates of: |
||||||||||||
|
Currency |
10% | 15% | 20% | |||||||||
|
Indian rupee |
$ | 0.4 | $ | 0.9 | $ | 1.4 | ||||||
|
British pound sterling |
$ | 0.5 | $ | 0.9 | $ | 1.2 | ||||||
|
Euro |
$ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||
|
Canadian dollar |
$ | 0.3 | $ | 0.4 | $ | 0.5 | ||||||
These positions expire in January and February of 2012 and therefore, any realized losses in respect to these positions after December 31, 2011 would be recognized in the three months ending March 31, 2012.
For additional discussion of the risks we face as a result of foreign currency fluctuations, see “Risk Factors” in Part I, Item 1A and ”Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.
48
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Item 8. Financial Statements and Supplementary Data
SAPIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
|
Financial Statement Schedule: |
||||
|
Schedule II — Valuation and Qualifying Accounts and Reserves |
99 | |||
49
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Sapient Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sapient Corporation and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 28, 2012
50
Table of Contents
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
(In thousands, except share and per share amounts) |
||||||||
| ASSETS | ||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 212,406 | $ | 219,448 | ||||
|
Marketable securities, current portion |
7,748 | 8,861 | ||||||
|
Restricted cash, current portion |
426 | 1,416 | ||||||
|
Accounts receivable, less allowance for doubtful accounts of $86 and $91 at December 31, 2011 and December 31, 2010, respectively |
156,109 | 136,300 | ||||||
|
Unbilled revenues |
61,712 | 49,765 | ||||||
|
Deferred tax assets, current portion |
19,966 | 23,938 | ||||||
|
Prepaid expenses and other current assets |
22,734 | 21,256 | ||||||
|
|
|
|
|
|||||
|
Total current assets |
481,101 | 460,984 | ||||||
|
Marketable securities, net of current portion |
1,290 | 1,269 | ||||||
|
Restricted cash, net of current portion |
3,779 | 3,093 | ||||||
|
Property and equipment, net |
64,257 | 35,571 | ||||||
|
Purchased intangible assets, net |
36,822 | 17,629 | ||||||
|
Goodwill |
107,971 | 77,865 | ||||||
|
Deferred tax assets, net of current portion |
9,227 | 19,692 | ||||||
|
Other assets |
8,591 | 7,619 | ||||||
|
|
|
|
|
|||||
|
Total assets |
$ | 713,038 | $ | 623,722 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Current liabilities: |
||||||||
|
Accounts payable |
$ | 25,389 | $ | 18,714 | ||||
|
Accrued expenses |
58,767 | 51,444 | ||||||
|
Accrued compensation |
77,721 | 66,609 | ||||||
|
Accrued restructuring costs, current portion |
324 | 3,129 | ||||||
|
Income taxes payable |
2,590 | 567 | ||||||
|
Deferred tax liabilities, current portion |
323 | — | ||||||
|
Deferred revenues |
25,599 | 18,558 | ||||||
|
|
|
|
|
|||||
|
Total current liabilities |
190,713 | 159,021 | ||||||
|
Accrued restructuring costs, net of current portion |
407 | — | ||||||
|
Deferred tax liabilities, net of current portion |
7,787 | 831 | ||||||
|
Other long-term liabilities |
34,727 | 21,565 | ||||||
|
|
|
|
|
|||||
|
Total liabilities |
233,634 | 181,417 | ||||||
|
|
|
|
|
|||||
|
Commitments and contingencies (Note 12) |
||||||||
|
Stockholders’ equity: |
||||||||
|
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized and none issued or outstanding at December 31, 2011 and 2010, respectively |
— | — | ||||||
|
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 140,238,302 and 137,307,612 shares issued, and 140,122,986 and 136,848,948 shares outstanding at December 31, 2011 and 2010, respectively |
1,402 | 1,373 | ||||||
|
Additional paid-in capital |
536,836 | 555,562 | ||||||
|
Treasury stock, at cost, 115,316 and 458,664 shares at December 31, 2011 and 2010, respectively |
(762 | ) | (2,466 | ) | ||||
|
Accumulated other comprehensive loss |
(32,014 | ) | (12,488 | ) | ||||
|
Accumulated deficit |
(26,058 | ) | (99,676 | ) | ||||
|
|
|
|
|
|||||
|
Total stockholders’ equity |
479,404 | 442,305 | ||||||
|
|
|
|
|
|||||
|
Total liabilities and stockholders’ equity |
$ | 713,038 | $ | 623,722 | ||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
51
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Revenues: |
||||||||||||
|
Service revenues |
$ | 1,020,840 | $ | 823,511 | $ | 638,884 | ||||||
|
Reimbursable expenses |
41,364 | 40,008 | 27,794 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total gross revenues |
1,062,204 | 863,519 | 666,678 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Operating expenses: |
||||||||||||
|
Project personnel expenses |
690,821 | 563,930 | 435,859 | |||||||||
|
Reimbursable expenses |
41,364 | 40,008 | 27,794 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total project personnel expenses and reimbursable expenses |
732,185 | 603,938 | 463,653 | |||||||||
|
Selling and marketing expenses |
39,025 | 38,833 | 31,931 | |||||||||
|
General and administrative expenses |
171,641 | 150,877 | 118,018 | |||||||||
|
Restructuring and other related charges |
6,507 | 414 | 4,548 | |||||||||
|
Amortization of purchased intangible assets |
6,813 | 5,448 | 5,146 | |||||||||
|
Acquisition costs and other related charges |
1,861 | 111 | 2,962 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total operating expenses |
958,032 | 799,621 | 626,258 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income from operations |
104,172 | 63,898 | 40,420 | |||||||||
|
Other income, net |
594 | 196 | 267 | |||||||||
|
Interest income, net |
5,748 | 3,509 | 2,889 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income before income taxes |
110,514 | 67,603 | 43,576 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
36,896 | 23,798 | 13,735 | |||||||||
|
Benefit from release of valuation allowance |
— | — | (58,285 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Provision for (benefit from) income taxes |
36,896 | 23,798 | (44,550 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income |
$ | 73,618 | $ | 43,805 | $ | 88,126 | ||||||
|
|
|
|
|
|
|
|||||||
|
Basic net income per share |
$ | 0.53 | $ | 0.33 | $ | 0.69 | ||||||
|
|
|
|
|
|
|
|||||||
|
Diluted net income per share |
$ | 0.52 | $ | 0.32 | $ | 0.66 | ||||||
|
|
|
|
|
|
|
|||||||
|
Weighted average common shares |
137,788 | 132,060 | 127,969 | |||||||||
|
Weighted average dilutive common share equivalents |
4,208 | 6,669 | 4,912 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Weighted average common shares and dilutive common share equivalents |
141,996 | 138,729 | 132,881 | |||||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock |
Additional
Paid-In Capital |
Treasury Stock |
Comprehensive
Income |
Accumulated
Other Comprehensive Loss |
Accumulated
Deficit |
Total
Stockholders’ Equity |
||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2008 |
131,785 | $ | 1,318 | $ | 580,936 | (5,239 | ) | $ | (24,165 | ) | $ | (24,535 | ) | $ | (231,607 | ) | $ | 301,947 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Shares issued under stock option and purchase plans |
338 | 3 | 1,074 | 64 | 296 | — | — | 1,373 | ||||||||||||||||||||||||||||
|
Vesting of restricted stock, net |
838 | 9 | (8,502 | ) | 754 | 3,479 | (5,014 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | 14,721 | — | — | — | — | 14,721 | ||||||||||||||||||||||||||||
|
Issuance of common stock in connection with Derivatives Consulting Group Ltd. acquisition |
312 | 3 | 2,360 | — | — | — | — | 2,363 | ||||||||||||||||||||||||||||
|
Issuance of common stock in connection with Nitro Group Limited acquisition |
— | — | (7,242 | ) | 3,114 | 14,096 | — | — | 6,854 | |||||||||||||||||||||||||||
|
Issuance of employment-based restricted shares in connection with Nitro Group Limited acquisition |
— | — | — | 863 | 3,978 | — | — | 3,978 | ||||||||||||||||||||||||||||
|
Tax shortfall from stock plans |
— | — | (56 | ) | — | — | — | — | (56 | ) | ||||||||||||||||||||||||||
|
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Net income |
— | — | — | — | — | $ | 88,126 | — | 88,126 | 88,126 | ||||||||||||||||||||||||||
|
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Currency translation adjustments |
— | — | — | — | — | 11,871 | 11,871 | — | 11,871 | |||||||||||||||||||||||||||
|
Net unrealized gain on investments |
— | — | — | — | — | 38 | 38 | — | 38 | |||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
|
Total comprehensive income |
— | — | — | — | — | $ | 100,035 | — | — | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance at December 31, 2009 |
133,273 | $ | 1,333 | $ | 583,291 | (444 | ) | $ | (2,316 | ) | $ | (12,626 | ) | $ | (143,481 | ) | $ | 426,201 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Shares issued under stock option and purchase plans |
1,543 | 15 | 8,675 | — | — | — | — | 8,690 | ||||||||||||||||||||||||||||
|
Vesting of restricted stock, net |
1,842 | 18 | (10,084 | ) | — | — | (10,066 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | 18,156 | — | — | — | — | 18,156 | ||||||||||||||||||||||||||||
|
Issuance of common stock in connection with Derivatives Consulting Group Ltd. acquisition |
650 | 7 | 2,367 | — | — | — | — | 2,374 | ||||||||||||||||||||||||||||
|
Dividends paid on common stock |
— | — | (46,843 | ) | — | — | — | — | (46,843 | ) | ||||||||||||||||||||||||||
|
Return of shares related to acquisitions |
— | — | — | (15 | ) | (150 | ) | — | — | (150 | ) | |||||||||||||||||||||||||
|
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Net income |
— | — | — | — | — | $ | 43,805 | — | 43,805 | 43,805 | ||||||||||||||||||||||||||
|
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Currency translation adjustments |
— | — | — | — | — | 128 | 128 | — | 128 | |||||||||||||||||||||||||||
|
Net unrealized gain on investments |
— | — | — | — | — | 10 | 10 | — | 10 | |||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
|
Total comprehensive income |
— | — | — | — | — | $ | 43,943 | — | — | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Balance at December 31, 2010 |
137,308 | $ | 1,373 | $ | 555,562 | (459 | ) | $ | (2,466 | ) | $ | (12,488 | ) | $ | (99,676 | ) | $ | 442,305 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Shares issued under stock option and purchase plans |
1,456 | 14 | 10,147 | — | — | — | — | 10,161 | ||||||||||||||||||||||||||||
|
Vesting of restricted stock, net |
1,474 | 15 | (10,407 | ) | — | — | (10,392 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | 19,238 | — | — | — | — | 19,238 | ||||||||||||||||||||||||||||
|
Issuance of common stock in connection with Derivatives Consulting Group Ltd. acquisition |
— | — | 2,906 | 359 | 1,929 | — | — | 4,835 | ||||||||||||||||||||||||||||
|
Dividends paid on common stock |
— | — | (48,873 | ) | — | — | — | — | (48,873 | ) | ||||||||||||||||||||||||||
|
Return of shares related to acquisitions |
— | — | — | (15 | ) | (225 | ) | — | — | (225 | ) | |||||||||||||||||||||||||
|
Acceleration of vesting of restricted stock awards |
— | — | 4,612 | — | — | — | — | 4,612 | ||||||||||||||||||||||||||||
|
Tax benefit from stock plans |
— | — | 3,651 | — | — | — | — | 3,651 | ||||||||||||||||||||||||||||
|
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Net income |
— | — | — | — | — | $ | 73,618 | — | 73,618 | 73,618 | ||||||||||||||||||||||||||
|
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
|
Currency translation adjustments |
— | — | — | — | — | (19,548 | ) | (19,548 | ) | — | (19,548 | ) | ||||||||||||||||||||||||
|
Net unrealized gain on investments |
— | — | — | — | — | 22 | 22 | — | 22 | |||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
|
Total comprehensive income |
— | — | — | — | — | $ | 54,092 | — | — | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance at December 31, 2011 |
140,238 | $ | 1,402 | $ | 536,836 | (115 | ) | $ | (762 | ) | $ | (32,014 | ) | $ | (26,058 | ) | $ | 479,404 | ||||||||||||||||||
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The accompanying notes are an integral part of these Consolidated Financial Statements.
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