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IGTE > SEC Filings for IGTE > Form 10-Q on 28-Jul-2014All Recent SEC Filings

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Form 10-Q for IGATE CORP


28-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 "believe," "anticipate," "plan," "expect" 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, changes in generally accepted accounting principles and/or their interpretation, our ability to satisfy or refinance our substantial indebtedness, our ability to comply with our debt covenants, increases to our borrowing costs and other risks that are described in more detail in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including our Form 10-K ("Form 10-K") for the year ended December 31, 2013 and in this Form 10-Q under Item 1 (A).

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, through its operating subsidiaries, is a worldwide provider of Information Technology ("IT") and IT-enabled operations, and provides integrated technology and operations-based solutions to large and medium-sized organizations. These services include application development, application maintenance, business intelligence and analytics, cloud services, engineering design services, enterprise application solutions, enterprise mobility, infrastructure management services, product and engineering solutions, embedded systems, product verification and validation, verification and validation and business process outsourcing ("BPO").

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 SEC. The inclusion of our website address above and elsewhere in this quarterly report is, in each case, intended to be an inactive textual reference only and not an active hyperlink to our website. The information contained in, or that can be accessed through, our website is not part of this quarterly report.

Business Overview

We are a global leader in providing integrated technology and operations-based information technology solutions. We provide solutions to clients' business challenges by leveraging our technology and process capabilities and offering productized applications and platforms that provide the necessary competitive and innovation edge to clients across industries, through a combination of speed, agility and imagination. We believe that these three attributes will be the key guiding principles for us to navigate our way to creating greater value for all our stakeholders.

We deliver a comprehensive range of solutions and services across multiple domains and industries including healthcare, life sciences, insurance, manufacturing, banking, financial services, business administrative services, data management services, product and engineering solutions, retail, consumer packaged goods, communications, energy, utility, media and entertainment. Our services include application development, application maintenance, business intelligence and analytics, cloud services, engineering design services, enterprise application solutions, enterprise mobility, infrastructure management services, product and engineering solutions embedded systems, product verification and validation, verification and validation and BPO.

We are the first "integrated technology and operations" ("ITOPS") company. ITOPS is a business outcomes based model that adds certainty to our clients' business. Through ITOPS, we enable our clients to optimize their business through a combination of process investment strategies, technology leverage, and business process outsourcing and provisioning. Our core proposition of integrating technology and customer processes in a proprietary way has conformed to the changing customer needs and the ITOPS framework has helped us align better with the new-age business challenges of corporations. Our ITOPS framework has helped us build solutions that address explicit client issues taking into account the market and industry context. We have also developed strong expertise in industry processes that enable us to drive more innovation and technology capabilities to solve business challenges.

We have adopted a global delivery model for providing varied and complex IT-enabled services to our global customers spread across multiple locations. With a global presence and world class delivery centers spanning across the Americas, EMEA and Asia-Pacific


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with 32,742 employees (consisting of 30,729 IT and IT-enabled service professionals and 2,013 individuals working in sales, recruiting, general and administrative roles, of which 26,933 employees were located at offshore premises and 5,809 employees were located at onsite premises) and 24 offices worldwide, we combine a single business management system with best industry practices, models and standards. We have tailored delivery models encompassing pure offshore, pure onsite, pure near-shore and blended models (onsite, near-shore, offshore) to meet the specific requirements of our clients.

In our pursuit to be a differentiated value provider to clients and better address their business imperatives, we rebranded our identity which is represented by a new logo, and renewed vision, mission and values. Our mission is to be an organization that strives for superior and predictable financial performance through focused and innovative execution excellence delivered by a team that believes in high performance and all through its journey, remains socially conscious.

We were founded in 1986. We are incorporated in Pennsylvania and our principal executive office is located at Bridgewater, New Jersey. We have operations in India, Canada, the United States, Belgium, Denmark, France, Finland, Germany, Ireland, Netherlands, Sweden, Switzerland, Luxemburg, Mexico, Hungary, Singapore, Malaysia, Japan, Australia, the United Arab Emirates, South Africa, China, Mauritius and the United Kingdom.

A majority of our clients have headquarters in North America and operate internationally.

We market our 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 and are billed at an agreed upon hourly or daily rate. 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.

We service customers in a wide range of industries. Our largest customer is General Electric Company ("GE"), which accounted for approximately 16% of revenues for the three and six months ended June 30, 2014 and 13% of revenues for the three and six months ended June 30, 2013. Our second largest customer, Royal Bank of Canada ("RBC"), accounted for approximately 10% of revenues for the three and six months ended June 30, 2014 and 11% for the three and six months ended June 30, 2013. IGATE is a Global Preferred Partner of RBC.

Recent Developments

Redemption of the 9% Senior Notes due 2016

On April 22, 2014, the Company redeemed 9% Senior Notes due 2016, pursuant to a conditional notice of redemption which was delivered on March 20, 2014, to the holders thereof, calling for redemption of the entire outstanding $770 million aggregate principal amount of the Notes. The redemption was pursuant to the terms of the indenture (the "Indenture), dated as of April 29, 2011, by and among the Company, the Guarantors named therein and Wilmington Trust, National Association (as successor by merger to Wilmington Trust, FSB), as trustee, governing the Existing Notes. The redemption price was equal to 100% of the principal amount of the Notes plus the applicable premium, which was $806.3 million.

Issuance of New Senior Notes

On April 2, 2014, the Company completed the private placement of $325 million aggregate principal amount of 4.75% Senior Notes due 2019 (the "Notes") to several initial purchasers. The Notes will mature on April 15, 2019, and bear interest at a rate of 4.75% per annum, payable semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on October 15, 2014. The Notes are senior unsecured obligations of the Company and will be guaranteed by the Guarantors. The Notes will be redeemable, in whole or in part, at any time on or after April 15, 2016, at the redemption prices specified in an indenture (the "Indenture"), dated as of April 2, 2014, by and among the Company, IGATE Technologies Inc. ("ITI"), IGATE, Inc., IGATE Holding Corporation and the trustee, together with accrued and unpaid interest, if any, to the redemption date. At any time prior to April 15, 2016, the Company may redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 104.75% of the principal amount thereof, together with accrued and unpaid interest, if any, to the redemption date. In addition, at any time prior to April 15, 2016, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes so redeemed, plus a "make whole" premium, together with accrued and unpaid interest, if any, to the redemption date. Upon the occurrence of a change of control triggering event specified in the Indenture, the Company must offer to purchase the Notes at a redemption price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.


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Reportable Financial Segments

The Company's Chief Executive Officer, who is also the Chief Operating Decision Maker, has recently regrouped the organization into vertical-based business units to bring in more industry knowledge and solutions and increase the depth and accountability to the business. However, the Company does not prepare discrete financial information as per the requirements of ASC 280 and as a result segment information is not presented.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") as set forth in the Financial Accounting Standards Board's Accounting Standards Codification (the "Codification") and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition.

Income Taxes.

Derivative Instruments and Hedging Activities.

Stock-based compensation.

Intangible assets.

During the six months ended June 30, 2014, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013 provides a more complete discussion of our critical accounting policies and estimates.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity is required to follow five steps which comprises of a) identifying the contract(s) with a customer; b) identifying the performance obligations in the contract; c) determining the transaction price; d) allocating the transaction price to the performance obligations in the contract and e) recognizing revenue when (or as) the entity satisfies a performance obligation. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, under either retrospective or retrospective with cumulative effect adoption. Early application is not permitted. The Company is currently assessing the potential effects of these changes to the consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12- "Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The ASU clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The ASU is effective for annual and interim periods for fiscal years beginning on or after December 15, 2015. Entities can apply the amendment either a) prospectively to all awards granted or modified after the effective date or b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The ASU does not have an impact on the consolidated financial statements.


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Results of Operations for the Three Months Ended June 30, 2014 as Compared to the Three Months Ended June 30, 2013 (dollars in thousands):

                                                              Three Months Ended June 30,
                                                                                                      % change of
                                                                                                      amount from
                                                                                                      comparable
                                                2014                            2013                    period
                                                        % of                            % of
                                       Amount         Revenues         Amount         Revenues
Revenues                              $ 311,745           100.0 %     $ 283,268           100.0 %             10.1 %
Cost of revenues (a)                    197,733            63.4         175,771            62.1               12.5

Gross margin                            114,012            36.6         107,497            37.9                6.1
Selling, general and administrative
expense                                  47,508            15.2          49,350            17.4               (3.7 )
Depreciation and amortization             8,718             2.8           8,595             3.0                1.4

Income from operations                   57,786            18.6          49,552            17.5               16.6
Interest expense                        (12,196 )          (3.9 )       (24,112 )          (8.5 )            (49.4 )
Foreign exchange gain, net                2,717             0.8           1,983             0.7               37.0
Loss on extinguishment of debt (b)      (51,760 )         (16.6 )            -               -                  -
Other income                              3,640             1.1          17,417             6.1              (79.1 )

Income before income taxes                  187             0.0          44,840            15.8              (99.6 )
Income tax (benefit) expense (c)         (3,027 )          (1.0 )        14,867             5.2                 -

Net income                                3,214             1.0          29,973            10.6              (89.3 )
Non-controlling interest (b)                 98             0.0              -               -                  -

Net income attributable to IGATE          3,116             1.0          29,973            10.6              (89.6 )
Accretion to preferred stock                145             0.0             120             0.0               20.8
Preferred dividend                        8,390             2.7           7,752             2.7                8.2

Net income (loss) attributable to
IGATE common shareholders             $  (5,419 )          (1.7 )%    $  22,101             7.9 %           (124.5 )%

(a) Cost of revenues is exclusive of depreciation and amortization.

(b) As there is no amount in the previous period, the percent change from previous period is not computed.

(c) As the effective tax rate is a better comparable measure, the percent change from comparable period is not computed.

Revenues

Revenues increased by 10.1% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase is directly attributable to the combination of increased business with our recurring customers by 7.6% and business with new customers by 3.5%, which was partly offset by the cessation of business with certain existing customers by 1.2%. In addition, the movement of the U.S. dollar ("USD") as against various other currencies during the three months ended June 30, 2014 as compared to the corresponding period in the previous year had a favorable impact on our revenues by 0.2%.

Our top five customers accounted for 39.1% and 40.0% of the revenues for the three months ended June 30, 2014 and 2013, respectively. We continue to derive a significant portion of our revenues from our customers in the United States and Canada, which constitutes about 78.5% and 82.0% of revenue for the three months ended June 30, 2014 and 2013, respectively.


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Revenues by Geography

The following table presents our consolidated domestic and international
revenues as a percentage of consolidated revenues based on customer geography
(in thousands):



                                          Three Months Ended June 30,
                                        2014                      2013
                                 Amount          %         Amount          %
               Revenues:
               United States    $ 215,057        69.0     $ 202,190        71.4
               Canada              29,702         9.5        30,064        10.6
               EMEA (1)            48,857        15.7        33,885        12.0
               Asia Pacific        18,129         5.8        17,129         6.0

               Total revenues   $ 311,745       100.0     $ 283,268       100.0

(1) Comprises of Europe, Middle East and African countries.

Revenue by verticals

The following table presents our consolidated revenues as a percentage of consolidated revenues based on customer business verticals (in thousands):

                                                  Three Months Ended June 30,
                                                2014                      2013
                                         Amount          %         Amount          %
       Revenues:
       Banking and financial services   $  72,558        23.3     $  59,375        21.0
       Insurance                           62,410        20.0        65,060        23.0
       Healthcare and life sciences        28,120         9.0        27,176         9.6
       Manufacturing                       82,187        26.4        74,247        26.2
       Retail and CPG                      27,535         8.8        26,724         9.4
       Services                            38,935        12.5        30,686        10.8

       Total revenues                   $ 311,745       100.0     $ 283,268       100.0

The revenue mix by vertical for the three months ended June 30, 2014 as compared to 2013 changed marginally by increase in Banking and financial services by 2.3%, Services sector by 1.7% and a decrease in Insurance sector by 3.0%. The change in the mix in Banking and financial services sector is primarily due to the increased business from the existing customers. The change in the mix in Insurance sector is primarily on account of reduced business from the existing customers. The change in the mix in Services sector is primarily on account of new customers.

Revenue by project type

The following table presents our consolidated revenues as a percentage of consolidated revenues based on project type (in thousands):

                                           Three Months Ended June 30,
                                         2014                      2013
                                  Amount          %         Amount          %
             Revenues:
             Fixed price         $ 209,214        67.1     $ 176,626        62.4
             Time and material     102,531        32.9       106,642        37.6

             Total revenues      $ 311,745       100.0     $ 283,268       100.0

The revenue mix by project type for the three months ended June 30, 2014 as compared to June 30, 2013 changed by an increase in fixed price projects by 4.7% which was predominantly on account of increased business from the existing customers and the new customers based on fixed price.


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Gross margin

Our Gross margin percentage was 36.6% for the three months ended June 30, 2014, as compared to 37.9% for the three months ended June 30, 2013. The details of gross margin are as follows (in thousands):

Gross Margin Metrics:



                                            Three Months Ended
                                                 June 30,
                                            2014          2013
                    Revenue               $ 311,745     $ 283,268
                    Cost of revenues:
                    Direct salary costs     170,869       148,229
                    Direct travel costs       6,340         8,488
                    Direct other costs       20,524        19,054


                    Gross Margin          $ 114,012     $ 107,497

As we conduct business through our globally integrated onsite and offshore delivery locations, primarily in India, the strengthening or weakening of the USD against other currencies, has a direct effect on our costs by reducing or increasing the cost of our services in offshore delivery centers which impacts our profitability.

During the three months ended June 30, 2014, the decrease in gross margin percentage was directly attributable to an increase in salaries and other costs directly associated with billable professionals, including payroll taxes by 3.2%, which was offset by a decrease in immigration costs including visa fees by 0.5%, insurance, travel and other related expenses by 0.1% and favorable movement of the USD against other currencies by 1.3%.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") include all costs that are not directly associated with revenue-generating activities. These include employee costs, corporate costs and facilities costs. Employee costs include selling, marketing and administrative salaries and related employee benefits and training costs. Corporate costs include costs such as marketing and advertisement expense, reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs. The SG&A expense details are as follows (in thousands):

                                                         Three Months Ended
                                                              June 30,
                                                         2014           2013
        Employee costs                                 $  22,543      $ 22,009
        Travel costs                                       2,925         2,822
        Corporate costs:
        - Marketing costs                                  2,464         1,080
        - Legal costs                                       (236 )       2,432
        - Other corporate costs                            6,935         9,506

        Total Corporate costs                              9,163        13,018
        Facility costs                                    12,877        11,501

        Selling, general and administrative expenses   $  47,508      $ 49,350

. . .

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