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| IGTE > SEC Filings for IGTE > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-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 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, Mexico 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 6,380 employees as of September 30, 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 Royal Bank of Canada which accounted for approximately 29% and 26% of revenues for the three and nine months ended September 30, 2009, respectively. For the three and nine months ended September 30, 2008, the corresponding figures are 19% and 18%, respectively. Our second largest customer, General Electric Company ("GE"), accounted for approximately 23% and 24% of revenues for the three and nine months ended September 30, 2009, respectively. For the three and nine months ended September 30, 2008, the corresponding figures are 26% and 25%, respectively. iGATE is a Global Preferred Partner of GE. During the quarter our Global Preferred Partnership was extended through the end of 2012.
Recent Developments
On October 21, 2009, the Company filed a Registration Statement on Form S-3 on behalf of Sunil Wadhwani and Ashok Trivedi (the "Selling Shareholders") to permit the Selling Shareholders to sell up to 4,000,000 shares of the Company's common stock from time to time, in the open market or otherwise, in order to diversify their holdings for estate planning purposes.
Reportable Financial Segments
The Company's reportable segments through September 30, 2008 were iGATE Solutions ("iGS"), iGATE Professional Services ("iPS") and iGATE Shared Services ("iSS"). The iGS segment's service offerings included 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's 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 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
In August 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2009-05, "Measuring Liabilities at Fair Value" ("ASU 2009-05"). The amendments in this ASU apply to all entities that measure liabilities at fair value and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using one or more techniques laid out in this ASU. The guidance provided in this ASU is effective for the first reporting period (including reporting periods) beginning after issuance. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In September 2009, the FASB issued ASU No. 2009-13 "Revenue recognition - Multiple deliverable revenue arrangements". The ASU provides amendments to the criteria in "Revenue recognition - multiple element arrangements" for separating consideration in multiple element arrangements. The amendments in this ASU establish a selling price hierarchy for determining the selling price of a deliverable. Further, the term fair value in the revenue guidance will be replaced with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a market place participant. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is evaluating this ASU.
Results of Operations from Operations for the Three Months Ended September 30, 2009 as Compared to the Three Months Ended September 30, 2008:
Revenues for the three months ended September 30, 2009 were $49.1 million, a decrease of $6.4 million, or 11.5%, as compared to $55.4 million for the three months ended September 30, 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 in late 2008. Our top 10 customers accounted for 80% and 73% of the revenue for the three months ended September 30, 2009 and September 30, 2008, respectively.
Gross margin as a percentage of sales ("gross margin percentage") was 41.1% for the three months ended September 30, 2009, as compared to 38.4% for the three months ended September 30, 2008. The increase in gross margin percentage was primarily on account of increase in utilization rate and strengthening of the US Dollar against other currencies.
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 September 30, 2009 were $9.2 million or 18.8% of revenues, as compared to $11.7 million or 21% of revenues for the three months ended September 30, 2008. Our net employee cost decreased by $1.6 million for the three months ended September 30, 2009, as compared to three months ended September 30, 2008, mainly due to a decrease in variable pay, reduction of support headcount from 537 to 491, and reductions in recruitment, travel and related costs. Our net corporate cost decreased by $1 million for the three months ended September 30, 2009 due to a decrease in provision for doubtful debts, marketing and legal costs. Our net facilities costs increased by $0.2 million for the three months ended September 30, 2009, mainly due to increase in rent and other expenses, offset by the decrease in non capital equipment expenses. The decrease in S, G&A cost includes favorable impact of the strengthening of the US Dollar against the Indian Rupee amounting to $0.6 million.
Depreciation and amortization costs for the three months ended September 30, 2009 were $1.8 million or 3.7% of revenues, as compared to $2.2 million or 3.9% of revenues for the three months ended September 30, 2008.
Operating income was 18.6% of revenue for the three months ended September 30, 2009 and 13.4% of revenue for the three months ended September 30, 2008. This increase was due primarily to a decrease in S, G&A costs and increased gross margin.
Other Income Components
Other income, net for the three months ended September 30, 2009, totaled $ 0.04 million, compared to $1.0 million for the three months ended September 30, 2008.
During the three months ended September 30, 2009, our net investment income totaled $0.8 million as compared to $0.6 million for the three months ended September 30, 2008. The increase was due to an increase in cash and short term investments from $61.4 million in September 30, 2008 to $84.5 million in September 30, 2009. The increase in cash and short term investments was mainly due to the cash flow from operating activity which offset the payment of our first dividend and investment in new properties. For the three months ended September 30, 2009, we recognized $1.2 million of foreign currency loss in our income statement as compared to a gain of $0.01 million for the three months ended September 30, 2008. These are primarily due to loss on settlement of foreign currency derivative contracts amounting to $1.7 million, offset by $0.5 million gain on account of remeasurement of foreign currency monetary items. As of September 30, 2009, all the outstanding forward contracts met the qualifying criteria to apply hedge accounting. In 2008 there was a gain of $0.4 million on the termination of a land contract.
In September 2009, we received $0.4 million of cash from an escrow account related to the prior sale of a business. The cash received was recognized as a gain on venture investments and affiliated companies.
Income Taxes
Federal income taxes, calculated at the U.S. statutory rate, totaled $3.1 million and $2.9 million for the three months ended September 30, 2009 and 2008, respectively. State income taxes, which totaled $0.001 million and $0.13 million for the three months ended September 30, 2009 and 2008, respectively, were calculated using a blended statutory rate, and are net of federal income tax benefit. Our income tax provision was $0.28 million at an effective rate of 3.0% for the three months ended September 30, 2009. Our income tax provision was a benefit of $0.04 million at an effective rate of 0.5% for the three months ended September 30, 2008.
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, 2011. 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 the tax holiday has expired. The tax holiday and foreign taxes have resulted in a benefit of $2.6 million and $3.1 million for the three months ended September 30, 2009 and 2008, respectively.
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 offset future taxable income. The impact of the limited or disallowed items and benefit of losses discussed above was $(0.28) million and $(0.001) million for the three months ended September 30, 2009 and 2008, respectively.
Results of Operations from Operations for the Nine Months Ended September 30, 2009 as Compared to the Nine Months Ended September 30, 2008:
Revenues for the nine months ended September 30, 2009 were $140.7 million, a decrease of $26.6 million, or 15.9%, as compared to $167.3 million for the nine months ended September 30, 2008. Our revenue decrease for the period presented is directly attributable to a combination of reduced customer demand, pricing pressure, volatility in currency markets, and customer insolvencies in late 2008. Our top 10 customers accounted for 80% and 70% of the revenue for the nine months ended September 30, 2009 and September 30, 2008, respectively.
Gross margin as a percentage of sales ("gross margin percentage") was 38.5% for the nine months ended September 30, 2009, as compared to 36.7% for the nine months ended September 30, 2008. The increase in gross margin percentage was primarily on account of increase in utilization rate and strengthening of the US Dollar against other currencies.
S,G&A costs for the nine months ended September 30, 2009 were $26.6 million or 18.9% of revenues, as compared to $33.9 million or 20.3% of revenues for the nine months ended September 30, 2008. Our net employee cost decreased by $6.1 million for the nine months ended September 30, 2009, as compared to nine months ended September 30, 2008, mainly due to decrease in variable pay, reduction of support headcount from 528 to 491, and a decrease in recruitment, travel and related costs. Our net corporate cost was lower by $1.5 million for the nine months ended September 30, 2009 due to decrease in marketing, legal, professional and administrative charges. Our net facilities costs increased by $0.3 million for the nine months ended September 30, 2009. The decrease in S,G&A cost includes favorable impact of strengthening of US Dollar against other currencies amounting to $3.3 million.
Depreciation and amortization costs for the nine months ended September 30, 2009 were $5.6 million or 4.0% of revenues, as compared to $7.5 million or 4.5% of revenues for the nine months ended September 30, 2008. The decrease in depreciation and amortization cost includes favorable impact of strengthening of US Dollar against other currencies amounting to $0.9 million.
Operating income was 15.6% of revenue for the nine months ended September 30, 2009 and 12.0% of revenue for the nine months ended September 30, 2008. This increase was due primarily to the decrease in S,G&A costs and increased gross margin.
Other (Expense) Income Components
Other (expense) income, net for the nine months ended September 30, 2009, totaled $(1.7) million, compared to $3.2 million for the nine months ended September 30, 2008.
During the nine months ended September 30, 2009, our net investment income totaled $2.6 million as compared to $1.7 million for the nine months ended September 30, 2008. The increase was due to an increase in cash and short term investments from $61.4 million in September 30, 2008 to $84.5 million in September 30, 2009. The increase in cash and short term investments was mainly due to the cash flow from operating activity which offsets the payment of dividend and investment in new properties. For the nine months ended September 30, 2009, we recognized a $5.0 million of foreign currency loss in our income statement as compared to a gain of $0.9 million for the nine months ended September 30, 2008. These are primarily due to loss on settlement of foreign currency derivative contracts amounting to $6.5 million, offset by $1.5 million gain on account of remeasurement of foreign currency monetary items. As of September 30, 2009 all the outstanding forward contracts met the qualifying criteria to apply hedge accounting. In 2008 there was a gain of $0.4 million on the termination of a land contract.
In September 2009, we received $0.4 million of cash from an escrow account related to the prior sale of a business. The cash received was recognized as a gain on venture investments and affiliated companies.
Income Taxes
Federal income taxes, calculated at the U.S. statutory rate, totaled $6.9 million and $8.0 million for the nine months ended September 30, 2009 and 2008, respectively. State income taxes, which totaled $0.04 million and $0.12 million for the nine months ended September 30, 2009 and 2008, respectively, were calculated using a blended statutory rate, and are net of federal income tax benefits. We had an income tax provision of $0.25 million at an effective rate of 1.2% for the nine months ended September 30, 2009. Our income tax provision was $0.54 million at an effective rate of 2.4% for the nine months ended September 30, 2008.
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, 2011. 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 the tax holiday has expired. The tax holiday and foreign taxes have resulted in a benefit of $6.8 million and $7.7 million for the nine months ended September 30, 2009 and 2008, respectively.
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 offset future taxable income. The impact of the limited or disallowed items and benefit of losses discussed above was $0.15 million and $0.15 million for the nine months ended September 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
Cash from Operations
Cash provided by operations was $31.8 million for the nine months ended September 30, 2009. Factors contributing to our cash provided by operations were net income of $19.9 million for the period and a decrease in accounts receivable and unbilled receivables of $6.6 million, increase in deferred revenue of $0.6 million and a decrease of prepaid and other assets of $0.6 million, offset by a decrease of accounts payable by $0.2 million and a decrease of accrued and other liabilities of $0.5 million. During the period, significant non-cash items totaled $6.8 million and included depreciation and amortization costs of $5.6 million, stock based compensation expense of $4.0 million, provision for doubtful debts of $0.3 million, offset by deferred income taxes of $3.1 million.
Cash provided by continuing operations was $32.2 million for the nine months ended September 30, 2008. Factors contributing to our cash provided by operations were net income of $24.1 million; a decrease of prepaid and other assets of $3.9 million and an increase of accrued and other current liabilities of $15.4 million offset by an increase in accounts receivable and unbilled receivables of $14.7 million, decrease of accounts payable of $0.8 million and restructuring reserve of $0.6 million. Significant non-cash items during the nine months ended September 30, 2008 totaled $9.6 million and included depreciation and amortization costs of $7.5 million, stock based compensation expense of $3.4 million, unrealized loss on derivative instrument of $0.7 million, deferred rent of $0.5 million, offset by deferred income taxes of $2.9 million.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2009 was $27.8 million, as compared to cash used in investing activities of $44.8 million for the nine months ended September 30, 2008.
Our capital expenditures were $9.0 million and $10.1 million for the nine months ended September 30, 2009 and 2008, respectively and the payment towards purchase of iGS stock was $28.1 million for the nine months ended September 30, 2008.
We have increased our investment portfolios and other investments by $18.6 million and $10.4 million for the nine months ended September 30, 2009 and 2008, respectively.
Financing Activities
Cash used by financing activities for the nine months ended September 30, 2009 was $4.5 million, as compared to $2.6 million of cash provided for the nine months ended September 30, 2008. Sources of cash related to stock option exercises including excess tax benefits were $1.5 million. Dividends paid amounted to $6.0 million.
Payments on secured financing for automobiles in India were $0.1 million and $0.2 million for the nine months ending September 30, 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.
The Company's cash and cash equivalents as of September 30, 2009 was $29.6 million. The Company believes that cash generated from operations and its . . .
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