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| IGTE > SEC Filings for IGTE > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Some of the statements in this Form 10-Q contain statements that are not historical facts and that constitute "forward-looking statements" within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our financial growth and liquidity projections as well as statements concerning our plans, strategies, intentions and beliefs concerning our business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify certain forward-looking statements. These forward-looking statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements. While we cannot predict all of the risks and uncertainties, they include, but are not limited to, our ability to predict our financial performance, the level of market demand for our services, the highly-competitive market for the types of services that we offer, the impact of competitive factors on profit margins, market conditions that could cause our customers to reduce their spending for our services, our ability to create, acquire and build new businesses and grow our existing businesses, our ability to attract and retain qualified personnel, our ability to reduce costs and conserve cash, currency fluctuations and market conditions in India and elsewhere around the world, political and military tensions in India and Southern Asia, changes in generally accepted accounting principles and/or their interpretation and other risks that are described in more detail in our filings with the Securities and Exchange Commission, including our Form 10-K ("Form 10-K") for the year ended December 31, 2008.
Unless otherwise indicated or the context otherwise requires, all references in this report to "iGATE", the "Company", "us", "our", or "we" are to iGATE Corporation, a Pennsylvania corporation, and its consolidated subsidiaries. iGATE Corporation, formerly named iGATE Capital Corporation, through its operating subsidiaries, is a worldwide provider of Information Technology ("IT") and IT enabled operations offshore outsourcing services to large and medium-sized organizations. These services include client/server design and development, conversion/migration services, offshore outsourcing, enterprise resource planning ("ERP") package implementation and integration services, software development and applications maintenance outsourcing.
Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations simply as "revenues" and "earnings" throughout this Management's Discussion & Analysis. Similarly, discussion of other matters in our Condensed Consolidated Financial Statements refers to continuing operations unless otherwise indicated.
Website Access to SEC Reports
The Company's website is http://www.igate.com. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available free of charge on the Investors page of the Company's website as soon as reasonably practicable after the reports are filed electronically with the Securities and Exchange Commission.
Business Overview
iGATE's service offerings include Information Technology ("IT") and IT enabled operations offshore outsourcing solutions and services to large and medium-sized organizations using an offshore/onsite model.
The use of offshore outsourcing for IT and IT enabled operations offshore outsourcing solutions and services has emerged as a global trend in numerous countries and industries. Our clients recognize that offshore outsourcing is an effective way to provide high quality and cost-effective services.
Our principal strategy is to offer offshore-based Integrated Technology and Operations ("iTOPS") solutions that integrate IT outsourcing and IT enabled operations offshore outsourcing solutions and services in a seamless
offering as well as conventional IT and business process outsourcing services to our clients in various industries. Some of our current service offerings are non-IT related and include services as diverse as call centers and mortgage and claims processing. We may continue to expand our IT enabled operations offshore outsourcing service offerings through acquisitions and strategic relationships and internal initiatives.
Our iTOPs offerings include outsourcing solutions focused primarily on insurance, banking, financial services and capital markets industries as well as finance and accounting process outsourcing delivered out of our offshore facilities in India that targets diverse industries
IT services that we deliver using our offshore centers include software application development and maintenance, system integration, implementation and support of enterprise applications, package evaluation and implementation, re-engineering, data warehousing, business intelligence, analytics, data management and integration, software testing and IT infrastructure management services. We believe that we deliver high quality solutions to our clients at a substantial savings by using our global pool of highly talented people.
IT enabled operations offshore outsourcing solutions and services offered include business process outsourcing, transaction processing services and call center services. The call center services are offered to clients in several industries and are not industry specific. The transaction processing services offered are focused on the mortgage banking, financial services, insurance and capital market industries, except for the delivery of finance and accounting functions such as accounts payable which can be performed for clients across all industries.
iGATE has offshore development centers ("ODCs") located in Bangalore, Hyderabad, Chennai and Noida in India. iGATE has global development centers ("GDCs") located in Canada, Malaysia and the U.S. The centers can deliver both near shore ("work performed primarily at the client site") and offshore services, dependent upon customer location and expectations. iGATE operates in India, Canada, the U.S., Europe, Mexico, Singapore, Malaysia, Japan and Australia.
A majority of our clients have headquarters in North America and operate internationally. iGATE has 6,492 employees as of March 31, 2009.
iGATE markets its service offerings to large and medium-sized organizations. Certain contracts are based upon a fixed price with payment based upon deliverables and/or project milestones reached. Certain contracts are time-and-materials based where contract payments are based on the number of consultant hours worked on the project. Certain contracts with no stated deliverables have a designated workforce and are based on fixed periodic payments. Some process outsourcing contracts provide pricing per transaction. Customers typically have the right to cancel contracts with minimal notice. Contracts with deliverables or project milestones can provide for certain penalties if the deliverables or project milestones are not met within contract timelines.
iGATE services customers in a wide range of industries. Our largest customer is General Electric Company ("GE") which accounted for approximately 24% and 24% of revenues for the three months ended March 31, 2009 and 2008, respectively. iGATE is a Global Preferred Partner of GE. Our Global Preferred Partnership status extends through the end of 2009. Our second largest customer, Royal Bank of Canada, accounted for approximately 23% and 17% of revenues for the three months ended March 31, 2009 and 2008, respectively.
Reportable Financial Segments
The Company's reportable segments through June 30, 2008 were iGATE Solutions ("iGS"), iGATE Professional Services ("iPS") and iGATE Shared Services ("iSS"). The iGS segment's service offerings include IT and IT enabled operations offshore outsourcing solutions and services to large and medium-sized organizations. The iPS segment's offerings included a variety of client-managed and supervised IT staffing service offerings. This segment services are offered principally in the United States of America. The iSS
segment's offerings included the operations of the clinical research business (i.e. iGATE Clinical Research International Inc. and iGATE Clinical Research International Private Limited collectively "iCRI") and the corporate shared service division of the Company.
On July 31, 2008, the Company sold its clinical research business. Additionally, pursuant to an enterprise reorganization, the Company assigned the resources, including employees, relating to the corporate shared service division in the iSS segment to the iGS segment of its business. Also, as more fully explained in Note 2 of the Condensed Consolidated Financial Statements, effective September 30, 2008, the Company spun off the iPS segment of its business into a newly formed company known as Mastech Holdings, Inc ("Mastech").
As a consequence of the above mentioned events, currently the business of the Company is comprised solely of what was formerly known as the iGS segment, which is conducted through our wholly owned subsidiary, iGATE Global Solutions Limited.
Critical Accounting Policies
Our critical accounting polices are described in the summary of significant accounting policies as discussed in Note 1 of our Form 10-K.
Recently Issued Accounting Pronouncements
The following paragraphs discuss recently issued accounting pronouncements.
In May 2008, the FASB issued SFAS No.162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. SFAS No. 162 becomes effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The Company does not expect that the adoption of this statement will have a material impact on its consolidated financial statements.
In April 2009, the FASB issued Staff Position No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 amends FASB Statement No.157, Fair Value Measurements to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability significantly decreased in relation to market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. SFAS No. 157-4 becomes effective for interim and annual periods ending after June 15, 2009 with early application permitted for period ending after March 15, 2009. The Company expects to adopt the standard effective with the June 30, 2009 quarter and it is currently evaluating the potential impact, if any, on its consolidated results of operations and financial condition.
In April 2009, the FASB issued Staff Position No. FAS 107-1, "Interim Disclosures About Fair Value of Financial Instruments" ("FSP 107-1"). FSP 107-1 amends FASB Statement No.107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim period of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financials information at interim reporting periods. SFAS No. 107-1 becomes effective for interim and annual periods ending after June 15, 2009 with early application permitted for period ending after March 15, 2009. The Company expects to adopt the standard effective with the June 30, 2009 quarter and it is currently evaluating the potential impact, if any, on its consolidated results of operations and financial condition.
In April 2009, the FASB issued Staff Position No. FAS 115-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP 115-2"). FSP 115-2 provides new guidance on the recognition of an
Other-Than-Temporary-Impairments (OTTI) and provides some new disclosure requirements. SFAS No. 115-2 becomes effective for interim and annual periods ending after June 15, 2009 with early application permitted for period ending after March 15, 2009. The Company expects to adopt the standard effective with the June 30, 2009 quarter and it is currently evaluating the potential impact, if any, on its consolidated results of operations and financial condition.
Results of Operations from Operations for the Three Months Ended March 31, 2009 as Compared to the Three Months Ended March 31, 2008:
Revenues for the three months ended March 31, 2009 were $44.8 million, a decrease of $10.8 million, or 19.5%, as compared to $55.6 million for the three months ended March 31, 2008. Our revenue decrease for the periods presented is directly attributable to a combination of reduced customer demand, pricing pressure, volatility in currency markets, and customer insolvencies. The top 10 customers accounted for 79% and 75% of the revenue for the three months ended March 31, 2009 and March 31, 2008, respectively.
The gross margin as a percentage of sales ("gross margin percentage") was 35.9% for the three months ended March 31, 2009, as compared to 36.6% for the three months ended March 31, 2008. The decrease in gross margin percentage was primarily on account of reduction in revenue, decreased utilization and reductions in average bill rates, which could not offset the favorable movement of exchange movement.
Selling, general and administrative expenses ("S,G&A") include all costs that are not directly associated with revenue-generating activities. S,G&A expenses include employee costs, corporate costs and facilities costs. Employee costs include selling, marketing and administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include costs such as legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
S,G&A costs for the three months ended March 31, 2009 were $8.6 million or 19.2% of revenues, as compared to $11.9 million or 21.5% of revenues for the three months ended March 31, 2008. Our net employee cost decreased by approximately $2.5 million for the three months ended March 31, 2009, as compared to three months ended March 31, 2008, mainly due to decrease in variable pay, reduction of support headcount from 510 to 487, recruitment, travel and related costs. Our net corporate cost was lower by approximately $0.6 million for the three months ended March 31, 2009 due to decrease in provision for doubtful debts, marketing, legal, accounting and administrative charges. Our net facilities costs decreased by $0.3 million for the three months ended March 31, 2009, mainly due to reduction in rental and communication related expenses.
Depreciation and amortization costs for the three months ended March 31, 2009 were $1.9 million or 4.3% of revenues, as compared to $2.9 million or 5.2% of revenues for the three months ended March 31, 2008.
Operating income was 12.5% of revenue for the three months ended March 31, 2009 and 9.9% of revenue for the three months ended March 31, 2008. This increase was due primarily to the decrease in S,G&A costs.
Other (Expense) Income Components
Other (expenses) income, net for the three months ended March 31, 2009, totaled $(0.8) million, compared to $1.3 million for the three months ended March 31, 2008.
During the three months ended March 31, 2009, our net investment income totaled $0.9 million as compared to $0.6 million for the three months ended March 31, 2008. The increase was due to an increase in cash and cash equivalents from $51.5 million in March 31, 2008 to $62.6 million in March 31, 2009 and a consequential increase in investable funds. The increase in cash was mainly due to the cash flow from operating activity which offsets the payment of dividend and investment in new properties. For the three months ended March 31, 2009, we recognized a $1.8 million of foreign currency loss in our income statement as compared to a gain of $0.6
million for the three months ended March 31, 2008. These are primarily due to movements of foreign currency rates. As of March 31, 2009 all the outstanding forward contracts met the qualifying criteria to apply hedge accounting.
Income Taxes
Federal income taxes, calculated at the U.S. statutory rate, totaled $1.6 million for the three months ended March 31, 2009. State income taxes, which totaled $0.01 million for the three months ended March 31, 2009, were calculated using a blended statutory rate, and are net of federal income tax benefit. Our income tax provision was a benefit of $0.15 million at an effective rate of 3.2% for the three months ended March 31, 2009.
Several items caused variations from our statutory tax provision. iGS is eligible to claim a tax holiday on the majority of its operating income through March 31, 2010. Taxable income for determining the income tax provision of iGS includes non operating income, such as interest income and capital gains income and operating income of one of its units for which tax holiday has expired. The tax holiday and foreign taxes have resulted in a benefit of $2.1 million for the three months ended March 31, 2009.
Other variations typically arise because certain expenses or benefits recorded in our financial statements are either limited or disallowed when calculating our income tax provision. Certain expenses such as meals and entertainment and executive compensation are limited for income tax purposes. Losses in the current year will result in a set off of future taxable income. The impact of the limited or disallowed items and benefit of losses discussed above was $0.24 million.
Federal income taxes, calculated at the U.S. statutory rate, totaled $2.3 million for the three months ended March 31, 2008. State income taxes which totaled $0.01 million for the three months ended March 31, 2008, were calculated using a blended statutory rate, and are net of federal income tax benefit. Our income tax provision was $0.1 million at an effective rate of 1.5% for the three months ended March 31, 2008.
Several items caused variations from our statutory income tax provision. iGS is eligible to claim a tax holiday on the majority of its operating income through March 31, 2010. Taxable income for determining the income tax provision of iGS includes non operating income, such as interest income and capital gains income and operating income of one of its units for which tax holiday has expired. The tax holiday and foreign taxes have resulted in a benefit of $2.4 million for the three months ended March 31, 2008.
Other variations typically arise because certain expenses or benefits recorded to our financial statements are either limited or disallowed when calculating our income tax provision. Also, certain expenses such as meals and entertainment and executive compensation are limited for income tax purposes. Other expenses such as minority interest expense are not deductible at all. Losses in the current year will result in a set off of future taxable income. The impact of the limited or disallowed items and benefit of losses discussed above was $0.23 million.
Liquidity and Capital Resources
Cash from Operations
Cash provided by operations was $8.6 million for the three months ended March 31, 2009. Factors contributing to our cash provided by operations were income from operations of $5.0 million for the period and a decrease in accounts receivable and unbilled receivables of $3.5 million offset by a decrease of accrued and other liabilities of $2.4 million. During the period, significant non cash items totaled $2.6 million and included depreciation and amortization costs of $1.9 million and stock based compensation expense of $1.3 million, provision for doubtful debts of $0.2 million, and is offset by deferred income taxes of $ 0.8 million.
Cash provided by continuing operations was $8.4 million for the three months ended March 31, 2008. Factors contributing to our cash provided by operations were income from operations of $6.4 million; a decrease
of prepaid and other current assets of $3.5 million and a decrease of deferred revenue of $1.1 million offset by an increase in accounts receivable of $6.6 million. Significant non-cash items during the three months ended March 31, 2008 totaled $3.8 million and included depreciation and amortization costs of $2.9 million and stock based compensation expense of $1.2 million, provision for doubtful debts of $0.4 million, minority interest of $0.3 million, deferred rent of $0.4 million and is offset by deferred income taxes of $1.4 million.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2009 was $16.3 million, as compared to cash used in investing activities of $35.5 million for the three months ended March 31, 2008.
Our capital expenditures were $2.4 million and $2.2 million for the three months ended March 31, 2009 and 2008, respectively.
We have increased our investment portfolios and other investments by $13.6 million and $9.8 million for the three month periods ended March 31, 2009 and 2008, respectively.
Financing Activities
Cash used by financing activities for the three months ended March 31, 2009 was $5.9 million, as compared to $0.4 million of cash provided for the three months ended March 31, 2008. Sources of cash related to stock option exercises including excess tax benefits were $0.1 million. Dividends paid amounted to $6.0 million.
Payments on secured financing for automobiles in India were $0.1 million and $0.1 million for the three months ending March 31, 2009 and 2008, respectively.
During the first quarter of the fiscal year, our Board of Directors approved the initiation of an annual cash dividend. Our Board of Directors authorized an annual cash dividend of $0.11 per share, which was paid on March 16, 2009 to stockholders of record at the close of business on February 28, 2009. The total amount of dividends paid was $6.0 million.
On May 21, 2008, our operating subsidiary, iGATE Global Solutions, entered into a loan agreement with Citibank N.A. that provided for a $6.5 million working capital line of credit. The loan is secured by way of a charge on all present and future receivables, investments, rights to or on moveable properties and moveable current assets. iGS does not have any amount outstanding under the line of credit and the agreement was not renewed.
The Company's cash and short-term investments balance as of March 31, 2009 was $62.6 million. The Company believes that cash generated from operations and its current cash reserves are adequate to meet the Company's reasonably foreseeable operating liquidity requirements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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