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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, 2013

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)

Registrant’s telephone number, including area code: (617) 621-0200

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.    þ

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 the last business day of the registrant’s most recently completed second quarter (June 30, 2013), the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1.2 billion based on the closing sale price as reported on the NASDAQ Global Select 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 March 14, 2014

Common Stock, $0.01 par value per share

  140,392,890 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2014 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.

 

 

 


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SAPIENT CORPORATION

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2013

TABLE OF CONTENTS

 

          Page  
   PART I   

Item 1.

   Business      1   

Item 1A.

   Risk Factors      12   

Item 1B.

   Unresolved Staff Comments      21   

Item 2.

   Properties      21   

Item 3.

   Legal Proceedings      21   

Item 4.

   Mine Safety Disclosures      21   
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      22   

Item 6.

   Selected Financial Data      25   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      58   

Item 8.

   Financial Statements and Supplementary Data      61   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      133   

Item 9A.

   Controls and Procedures      133   

Item 9B.

   Other Information      135   
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      136   

Item 11.

   Executive Compensation      136   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      136   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      137   

Item 14.

   Principal Accounting Fees and Services      137   
   PART IV   

Item 15.

   Exhibits, Financial Statement Schedules      138   

Signatures

     139   

 

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EXPLANATORY NOTE

This Form 10-K includes the restatement of certain of the Company’s previously issued consolidated financial statements and selected financial data. It also amends previously filed management’s discussion and analysis of financial condition and results of operations and other disclosures for the periods presented in this Form 10-K. As indicated in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, the Company corrected certain errors in prior periods primarily related to the Company’s unrecorded corporate income and employment-related tax liabilities resulting from the movement of employees globally. In this Form 10-K, we therefore have restated the following financial information as of and for the periods (collectively, the “Restated Periods”) noted in the table below.

 

Type of Financial Information:    Date or Period:

Consolidated balance sheet

   As of December 31, 2012
Consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows    Years ended December 31, 2012 and 2011

Selected financial data

   Years ended December 31, 2012, 2011, 2010 and 2009

Unaudited quarterly financial information

   Quarters ended September 30, 2013, June 30, 2013 and March 31, 2013 and each quarter in the year ended December 31, 2012
Management’s discussion and analysis of financial condition and results of operations    As of and for the years ended December 31, 2012 and 2011

We believe that presenting all of the amended and restated information regarding the Restated Periods in this Form 10-K allows investors to review all pertinent data in a single report. In addition, the Company’s Quarterly Reports on Form 10-Q to be filed during 2014 will include the restated 2013 comparable prior quarter and year to date periods. We have not filed and do not intend to file amendments to (i) our Quarterly Reports on Form 10-Q for the first three quarterly periods in the year ended December 31, 2013 or (ii) our Annual Report on Form 10-K for the year ended December 31, 2012 (collectively, the “Affected Periods”). Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated Periods in this Form 10-K or in future filings with the SEC (as applicable), and not on any previously issued or filed reports, earnings releases or similar communications relating to those periods.

The combined impact of the adjustments and specified line items in the Affected Periods resulting from the restatement is set forth in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following items of this Form 10-K are impacted as a result of the restatement.

 

   

Part I, Item 1A, Risk Factors

 

   

Part II, Item 6, Selected Financial Data

 

   

Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

   

Part II, Item 8, Financial Statements and Supplementary Data

 

   

Part II, Item 9A, Controls and Procedures

 

   

Part IV, Item 15, Exhibits, Financial Statement Schedules

 

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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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (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 outlays, our capital expenditures relating to restructuring, future dividend payments, investing activities, and repurchases of our common stock, the nature of our unbilled revenues, our tax estimates and deferred tax amounts, the outcome of tax audits, the effects of restructuring certain subsidiaries, our accrual of contingent liabilities, the impact of acquisitions and acquisition costs, our compensation expense, the ability of our insurance to cover our indemnification arrangements and our fair value estimates of such arrangements, the effects of changes in interest rates and currency exchange rate fluctuations, the impact of new accounting pronouncements, our cash outlays, the temporary nature of certain impairments, our assumptions underlying certain impairment reviews, our revenue recognition, anticipated revenue from our services, including traditional IT consulting services, anticipated client contractual demands, our ability to meet working capital and capital expenditure requirements, investing activities, stock repurchases and expected cash outlays, the outcome of litigation, our Global Distributed Delivery model results, benefits of our relationships and strategic alliances, the alignment of our sales professionals, our employee relationships, our competition and our principal competitive factors, our ability to estimate required resources for client arrangements, our technology platforms, our reinvestment of unremitted earnings and our plans regarding whether or not to repatriate overseas funds, our expectations regarding fixed-price contracts and lease extensions, the anticipated impact of cross-border mobility and the movement of employees globally, the impact and timing of our internal controls remediation, as well as any statement other than statements of historical facts 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

Item 1.    Business

General

Sapient Corporation (“Sapient” or the “Company”) is a global services company that helps clients identify and act upon opportunities to improve their business performance by capitalizing on changes, disruptions, or opportunities that exist in their business or industry.

We provide a combination of strategy, marketing, and technology services that we uniquely connect to enable our clients to gain a competitive advantage and succeed in a rapidly changing, hyper-connected, and increasingly global business environment. We achieve this success for our clients by delivering a unique combination of integrated marketing and business services that leverage a deep understanding of technology and a rich history of understanding the role technology plays in creating competitive advantage for companies in the digital age of business.

We provide services, as described below, which enable our clients to succeed in an increasingly connected, customer-centric environment. Capitalizing on market disruptions and technology-driven changes requires more than an understanding of and facility with technology. It demands the agility to act - to strategically create, integrate, and mobilize capability in service of what is ahead. To make an impact in this state of frenetic change, business will need deep insights into, and the ability to act on, changing consumer attitudes and shifting regulatory environments. We do this through three main business units: SapientNitro, Sapient Global Markets, and Sapient Government Services. 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.

SapientNitro is a new breed of agency redefining storytelling for an “always-on” world. In a market dramatically altered by the changing behavior of the connected consumer, we help clients tell their stories through seamless experiences across brand communications, digital and experimental engagement, and omni-channel commerce. We call this approach “StoryscapingSM”, where storytelling meets the power and scale of systems thinking, to create immersive worlds that enable clients to more meaningfully engage their always-on consumers wherever they are in the brand experience — whether attraction, engagement, or transaction. By using the storyscaping approach, brands can move beyond making ads and into creating worlds where their story becomes part of the consumer’s story. Our connected teams of strategists, creatives, and technologists, collaborating across disciplines, perspectives and continents, take a holistic approach to conceiving and driving a brand’s organizing idea across the full spectrum of physical and digital touch points, resulting in deeper, more meaningful relationships between brands and their customers.

Sapient Global Markets provides business and technology services and solutions to capital and commodity market participants, intermediaries and regulators. We leverage our deep industry insight and broad integrated capabilities to enable transformation for our clients and industry. Delivered on a global scale, our offerings help our clients to grow and enhance their organizations, create robust and transparent infrastructures, manage operating costs, and foster innovation.

Sapient Government Services provides consulting, technology, and marketing services to U.S. federal government agencies, nonprofit organizations and non-governmental organizations (“NGOs”). Focused on driving long-term change and transforming the citizen experience despite growing pressures on open data and shrinking budgets, we use a proven methodology to help our clients become more accessible, transparent, and effective. With a track record of delivering tailored mission-critical solutions, we serve as a trusted advisor to U.S. government agencies and globally recognized nonprofit organizations and NGOs.

 

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Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global presence with offices in 37 cities and approximately 11,900 employees in the Americas, 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, retail, technology & communications, consumer packaged goods, travel & leisure, 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 the Americas, Europe and the Asia-Pacific region, including India. Our GDD model involves a single, coordinated effort between development 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 the Americas, 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 time frame. 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 road maps.

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 2013, Long-Term and Retainer Revenues represented 51% of our global services revenues, compared to 52% in 2012 and 48% in 2011. Further, in 2013 our five largest individual clients accounted for approximately 18% of our revenues in the aggregate, compared to 21% in 2012 and 19% in 2011. No individual client accounted for more than 10% of our revenues in 2013, 2012 or 2011.

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 may assume the risk that we have correctly estimated the time frame 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.

 

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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

We have three reportable segments: SapientNitro, Sapient Global Markets and Sapient Government Services. Further information about these reportable segments, including a presentation of financial information, is located in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 18, Segment Reporting, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, 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 reportable segments include globally-based professionals, and our Sapient Government Services segment includes professionals based in the United States. Within each reportable segment, we focus our sales and delivery efforts on clients within our industry sectors. 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, Financial Statements and Supplementary Data, 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 February 5, 2014, we acquired 100% of the outstanding securities of OnPoint Consulting, Inc. (“OnPoint”), a technology consulting firm providing enterprise systems and infrastructure services to federal government customers based in Arlington, Virginia. We acquired OnPoint to expand our portfolio of government clients and contracts for application development, cyber-security services and IT infrastructure services. The acquisition added approximately 150 people and was allocated to our Sapient Government Services reportable segment.

On December 30, 2013, we acquired 100% of the outstanding equity of “la comunidad” CORPORATION and La Comunidad S.A., (together, “La Comunidad”). La Comunidad is an independent multicultural creative agency based in Miami, Florida and Buenos Aires, Argentina. We acquired La Comunidad to leverage the growing importance of multicultural marketing in expanding our combination of brand and creative service offerings to our clients. The acquisition added approximately 90 people and was allocated to our SapientNitro reportable segment.

On January 16, 2013, we acquired 81% of the outstanding securities of iThink Comunicação e Publicidade Ltda (“iThink”), an independent digital agency based in Sao Paulo, Brazil. We acquired iThink to expand our

 

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combination of brand, digital and commerce service offerings to our global clients in Latin America. We subsequently increased our ownership to 84%. The acquisition added approximately 65 people and was allocated to our SapientNitro reportable segment.

On December 27, 2012, we acquired 100% of the membership interests of (m)Phasize, LLC (“(m)Phasize”), a marketing analytics company located in Westport, Connecticut. We acquired (m)Phasize to strengthen our analytics services and marketing mix modeling capabilities. The acquisition added approximately 16 people and was allocated to our SapientNitro reportable segment.

On November 1, 2012, we acquired 100% of the outstanding shares of Second Story Inc. (“Second Story”), an interactive studio located in Portland, Oregon. We acquired Second Story to strengthen our ability to craft immersive experiences that seamlessly blend physical and digital environments, from web and mobile to in-store and in-venue. The acquisition added approximately 35 people and was allocated to our SapientNitro reportable segment.

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. We acquired DAD to strengthen our capabilities in marketing campaign production and direct response measurement. The acquisition added approximately 200 people and was allocated to our SapientNitro reportable segment.

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. We acquired Clanmo to strengthen our mobile interactive capabilities in the European market. The acquisition added approximately 50 people and was allocated to our SapientNitro reportable 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 connected capabilities are applied to solve our clients’ most challenging business problems. We integrate creative marketing concepts with technology tools and platforms to build rich experiences across brand, digital and commerce, designed to acquire new customers and increase demand, create profitable customer relationships and build brand awareness and loyalty.

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:

 

   

visual concept, design and implementation via multiple media;

 

   

brand building and direct response programs, audience segmentation and profiling strategies;

 

   

customer loyalty strategies;

 

   

customer relationship strategy and implementation;

 

   

customer lead generation and management; and

 

   

integrated advertising campaigns.

 

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Additionally, we offer our clients technology platforms that accelerate and advance key components of the marketing landscape, including the following:

 

   

Sapient EngagedNowSM is a robust cloud-based platform offering that gives marketers the ability to better engage their consumers across a range of digitally enhanced channels, allowing brands to create immersive, multi-channel customer experiences without having to design, develop and support the infrastructure needed to enable these experiences. EngagedNow is a platform suite that can be used broadly across a range of industries. The suite also includes unique offerings and modular capabilities to support the specific needs of industry verticals, including sports & entertainment (Sapient EngagedFanSM) and travel (Sapient EngagedTravelerSM). EngagedNow is an end-to-end platform that connects brands with digitally enabled consumers across an integrated set of channels — from web and mobile to tablets and digital signage.

 

   

Sapient EngagedNowSM Express is a highly productized version of EngagedNow. EngagedNow Express is built to support the rapid creation and operation of marketing microsites and campaign sites in the cloud. EngagedNow Express is tightly integrated to the Adobe Cloud Marketing Suite and is deployed on Amazon Web Services. It has a range of pre-built site responsive design templates and component libraries. This allows our clients to use true enterprise-class tools in highly cost-effective ways at scale and with high repeatability. EngagedNow Express is part of an overall managed service offering that currently hosts several live sites and will be a core part of our service offerings to our marketing services clients in 2014.

 

   

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.

 

   

IonosTM 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 has been in production since 2010 and today is part of both our EngagedFan and EngagedTraveler multi-channel digital platforms. In 2013, Ionos was used in a range of mobile and in-venue retail applications for our clients. Ionos integrates directly with BridgeTrack® as well as several third-party advertising networks to ensure that publishers get the most from their digital properties.

 

   

Ionos™ In-Venue Digital Platform provides a multi-tier, cloud-based architecture for managing complex digital signage and digital wayfinding networks. The In-Venue components are an extension of the core Ionos platform and feature sophisticated faceted and geo-located content delivery integrated to a range of content management systems. Ionos In-Venue was architected to deliver sophisticated user experiences at scale with integrated monitoring and alerting as well as real-time connection to broader client enterprise systems. Ionos In-Venue Digital is currently in use in U.S. travel and hospitality clients today and we expect it to see broad deployment in 2014 in travel, retail, and hospitality venues.

 

   

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.

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 with a broad array of strategic planning services that are intended to maximize return on marketing initiative 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 in developing successful online marketing strategies and campaigns. Our array of strategic planning and marketing analytics services includes brand strategy development, marketing mix modeling, 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 an always-on world. This impacts our work across marketing and commerce, which are becoming deeply integrated and increasingly omni-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.

 

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We 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 with, 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 environment. The issues we help our clients address include:

 

   

business process consulting — as digital disrupts core business processes;

 

   

overall digital strategy;

 

   

technology governance and enterprise architecture services; and

 

   

program management.

Sapient Global Markets

Through highly specialized expertise, Sapient Global Markets delivers services and solutions that address the key drivers important to leaders in today’s capital and commodity markets, including: responding to a complex and changing regulatory environment; achieving operational efficiencies; creating a dynamic user experience; and managing enterprise risk. We leverage deep industry insight and expertise to deliver a wide range of integrated capabilities, which include business consulting, technology services and solutions.

Industry Insight and Expertise

We work with the key participants within the Global Markets ecosystem, including banks, investment management firms, custodians and brokers, intermediaries, energy and commodity companies and government and regulators, to identify their key challenges and develop solutions to address them. We also partner with the industry itself to shape market initiatives that address global issues, such as the need for increased market transparency and standards. To focus on key client requirements, we have created and continue to invest in practice areas that allow us to infuse deep knowledge and real-world experience into all of our engagements. These include:

 

   

buy-side investment process;

 

   

commodities trading and risk management;

 

   

derivatives platforms;

 

   

clearing and collateral;

 

   

data management;

 

   

operational risk;

 

   

pipeline and shipping;

 

   

portfolio accounting;

 

   

trade documentation;

 

   

regulatory reporting; and

 

   

valuation and risk analytics.

Highly Integrated Breadth of Capabilities

We continuously invest in attracting, training and retaining the highest quality professionals. Our exceptionally knowledgeable teams offer fully integrated services and solutions that provide capabilities across the full engagement lifecycle from concept and delivery to ongoing management. Our offerings include:

 

   

Business Consulting: With a focus on addressing business issues, we offer consulting services through which we develop and deliver executable strategies for enabling change.

 

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Technical Services: Our services help create efficiencies across the trading and risk management lifecycle in a wide range of projects from model definition and design to implementation and ongoing operations. Our cross-domain capabilities ensure comprehensive support and coverage from start to finish.

 

   

Solutions: We deliver innovative software solutions and managed service offerings to help our clients leverage technology and new sourcing models to optimize their businesses.

Sapient Global Markets operates in key centers relevant to the global capital and commodity markets, including Boston, Chicago, Houston, New York, Calgary, Toronto, Amsterdam, Dusseldorf, Geneva, London, Munich, Zurich and Singapore, as well as in large technology development and operations outsourcing centers in Bangalore, Delhi, and Noida, India. Our services and solutions are delivered and executed around the world through our GDD model. Through the GDD model, we are able to leverage the right resources and expertise for any project regardless of physical location and scale to meet changing requirements.

Sapient Government Services

Leveraging over 20 years’ experience and a global understanding across industry perspectives, Sapient Government Services delivers transformational solutions for public sector organizations with complex challenges. We leverage our commercial best practices in digital strategies, mobile solutions and constituent outreach. Our robust suite of high-value capabilities includes: program management; solution delivery; strategy; and communications and outreach. We help our public sector clients to optimize through aligning technology, programs, and service platforms.

Program Management

We ensure that our clients’ programs are successfully managed from concept to completion. We perform strategic planning, enterprise architecture development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure that solutions are delivered on-time and on-budget.

Solution Delivery

We design, develop, and deliver innovative digital and mobile solutions for our public sector clients. With a focus on the user experience, we rapidly prototype new solutions and integrate critical business processes and information for our clients. Through agile systems engineering, we rationalize IT infrastructures to reduce cost and complexity while retiring or streamlining existing systems, and incorporating the best commercial products.

Strategy

We provide knowledge management, mission-needs analysis and requirements services to enable streamlined business processes for enhanced productivity and effectiveness. We employ our expertise to transform strategic intent into actionable plans and help our clients unlock the power of big government data.

Communications and Outreach

Our solutions position our public sector clients to better connect with key stakeholders and constituents to accomplish their missions faster and more effectively. Through thorough analytics, we develop digital communications strategies that enable the government and public sector to be accessible by providing information to citizens anywhere and anytime; ultimately improving the citizen’s experience and streamlining it with their public-sector expectations.

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

 

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have established global partnerships with industry leaders, including Adobe, IBM, Microsoft, Google, Oracle, Hybris, Demandware, HP, Sitecore, 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 of implementing solutions based on our 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 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, the “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. Our SapientNitro business unit utilizes a slightly modified Sapient Approach, 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 always-on consumer.

The Sapient Approach provides clients significant value and return on investment in the shortest possible time period, and also minimizes assignment risk because discrete pieces of work are tested and accepted throughout the assignment. 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.

 

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The 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.

The 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.

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 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, 2013, we had approximately 11,900 full-time employees, consisting of 10,600 delivery personnel, 1,100 general and administrative personnel and 200 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; hosting focused multi-client events; cultivating media and industry analyst relations; conducting market research and analysis; sponsoring and participating in targeted industry conferences,

 

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award shows, and events; creating marketing assets and materials to assist client-development teams with lead generation; and publishing our website, 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. 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.

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 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 “Financial Information — 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 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

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Item 1A.    Risk Factors

You should carefully consider the following risk factors, which could materially impact our business and 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.

Changes to earnings resulting from past acquisitions may adversely affect our operating results.

Under ASC Topic 805, “Business Combinations”, we allocate the total purchase price to an acquired company’s net tangible assets, intangible assets and in-process research and development based on their values as of the date of the acquisition (including certain assets and liabilities that are recorded at fair value) and record the excess of the purchase price over those values as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain. After we complete an acquisition, the following factors, among others, could result in material charges that would adversely affect our operating results and may adversely affect our cash flows:

 

   

Impairment of goodwill or intangible assets;

 

   

A reduction in the useful lives of intangible assets acquired;

 

   

Identification of assumed contingent liabilities after we finalize the purchase price allocation period;

 

   

Charges to our operating results to eliminate certain pre-merger activities that duplicate those of the acquired company or to reduce our cost structure; or

 

   

Charges to our operating results resulting from revised estimates to restructure an acquired company’s operations after we finalize the purchase price allocation period.

Routine charges to our operating results associated with acquisitions include amortization of intangible assets, in-process research and development as well as other acquisition related charges, and restructuring. Charges to our operating results in any given period could differ substantially from other periods based on the timing and size of our future acquisitions and the extent of integration activities.

We may incur additional costs associated with combining the operations of our acquired companies, which may be substantial. Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, and severance payments, reorganization or closure of facilities, taxes, and termination of contracts that provide redundant or conflicting services. These costs would be accounted for as expenses and would decrease our net income and earnings per share for the periods in which those adjustments are made.

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 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 Sapient Government Services business unit, 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;

 

   

tightened credit markets in particular geographies;

 

   

limitations on our ability to repatriate cash from our foreign subsidiaries;

 

   

reduced protection for intellectual property in some countries;

 

   

changes and complexities in tax laws; and

 

   

complexities and costs associated with adapting our GDD model to ensure compliance with current and evolving regulations, client demands, and employee considerations.

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 our GDD model 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.

In addition, in many parts of the world, including countries in which we operate and/or seek to expand, practices in the local business community might not conform to international business standards and could

 

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violate anticorruption laws, or regulations, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act 2010, to which we are subject. Our employees, subcontractors, agents, alliance or joint venture partners and other third parties with which we may associate, could take actions that violate policies or procedures designed to promote legal and regulatory compliance or applicable anticorruption laws or regulations. Violations of these laws or regulations by us, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether or not we participated in or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and suspension or disqualification from work, including U.S. federal contracting, any of which could materially adversely affect our business, including our results of operations and our reputation.

Also, 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, changes in tax laws have been introduced in recent years and may be introduced in the future that may partially offset those benefits. Specifically, in recent years, the income tax incentives applicable to three of our Software Technology Parks 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 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 tax 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, our client’s ability, capacity and need to invest 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 continued civil unrest, terrorism and conflicts with bordering countries in India were to increase significantly. Additionally, hurricanes or other unanticipated catastrophes, both in the U.S. and globally, could disrupt our operations and negatively impact our business as well as disrupt our clients’ businesses, which may result in a further adverse impact on our business. 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

 

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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.

The success of our business depends in large part on our ability to develop solutions and service offerings that keep pace with the changes in the markets in which we provide our services.

The professional services markets in which we operate are characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our future success will depend on our ability to develop solutions and service offerings that keep pace with changes in the markets in which we provide services. We cannot be sure that we will be successful in developing new services addressing evolving technologies in a timely or cost-effective manner or, if these services are developed, that we will be successful in offering and deploying them in the marketplace. In addition, we cannot be sure that products, services or technologies developed by others will not render our services non-competitive or obsolete. Our failure to address the demands of the rapidly evolving technological environment could have a material adverse effect on our business, results of operations and financial condition. Our ability to remain competitive will also depend on our ability to design and implement, in a timely and cost-effective manner, solutions for clients that both leverage their legacy systems and appropriately utilize newer technologies. Our ability to implement solutions for our clients incorporating new developments and improvements in technology which translate into productivity improvements for our clients and to develop service offerings that meet current and prospective clients’ needs are critical to our success.

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 $461.1 million for 2013. 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, 2013, 50% of our assets and 40% 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 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 currency hedging activity we may undertake will be effective or that our financial condition will not be negatively impacted because our hedging activities are themselves subject to risk. These include risks related to counterparty performance under hedging contracts, risks related to currency exchange rate fluctuations of the Indian rupee or other currencies versus the U.S. dollar, and risks related to the regulatory environment under which we conduct our hedging activities. 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.

 

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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 an 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;

 

   

our ability to accurately value certain assets, including intellectual property;

 

   

changes in tax laws and the interpretation of those tax laws;

 

   

changes to our assessments about the realizability of our deferred tax assets which are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies and our internal structure, and the economic environment in which we do business;

 

   

the cross-border mobility of our employees;

 

   

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 for which 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.

 

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Taxing authorities could challenge our historical and future tax positions related to the allocation of income among our subsidiaries.

We enter into intercompany transactions with affiliated companies located in various tax jurisdictions around the world. Transfer prices for these transactions could be challenged by the various tax authorities resulting in additional tax liabilities, interest, and/or penalties, and the possibility of double taxation. If any of these tax authorities are successful in challenging our tax positions, our income tax expense may be adversely affected.

We may not be able to recognize revenue in the period in which our services are performed, which may contribute to fluctuations in our revenue and margins.

We provide our services under time-and-materials, fixed-price, and retainer contracts. All revenue is recognized pursuant to generally accepted accounting principles. These principles require us to recognize revenue once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. If we perform our services prior to the period in which we are able to recognize the associated revenue, our revenue and margins may fluctuate from quarter to quarter.

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 is 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 are dependent on, and may be adversely impacted by, the performance of third parties on certain complex engagements.

Certain complex engagements may require that we partner with specialized software or systems vendors or other partners to perform 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 engagements 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 engagement. Furthermore, our relationships with our clients and our reputation generally may suffer harm as a result of these third parties’ unsatisfactory performance.

 

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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.

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 or have access to confidential information from our clients, including confidential client data that we use to develop or support 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 for substantial damages by our clients 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 coverage 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 coverage 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 could materially and adversely 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.

 

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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.

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:

 

   

quarterly variations in operating results and achievement of key business metrics by us or our competitors;

 

   

changes in operating results estimates by securities analysts;

 

   

any differences between our reported results and securities analysts’ published or unpublished expectations;

 

   

announcements of new contracts or service offerings made by us or our competitors;

 

   

announcements of acquisitions or joint ventures made by us or our competitors; and

 

   

general economic or stock market conditions.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us could result in substantial costs and a diversion of 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, current Co-Chairman of the Board of Directors and former Chief Executive Officer of the Company, and J. Stuart Moore, former Co-Chairman of the Board of Directors and Co-Chief Executive Officer and current member of our Board of Directors, hold, in the aggregate, approximately 12% of the outstanding shares of our common stock as of March 14, 2014. 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. Affiliates of Messrs. Greenberg and Moore own substantial holdings not represented by this percentage over which Messrs. Greenberg and Moore disclaim beneficial ownership.

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.

 

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We may be unable to achieve anticipated benefits from acquisitions.

The anticipated benefits from any acquisitions that we have undertaken in the past or 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 the acquisition.

The failure to successfully and timely implement certain financial system changes to improve operating efficiency and enhance our reporting controls could harm our business.

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 efficiencies 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 obligations under the Sarbanes-Oxley Act of 2002, significant deficiencies or a material weakness, and/or the inability to report our financial results in a timely and accurate manner.

The restatement of our consolidated financial statements and possible related events, should they occur, may negatively impact our stock price, and may consume time and resources.

As discussed in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, we have restated in this Form 10-K our consolidated financial statements for certain prior periods to correct certain errors in those financial statements. The previously disclosed errors related to our unrecorded corporate income and employment tax liabilities in connection with the movement of employees globally.

As with all corporate controls, we cannot be certain that the measures we have taken, and are taking, to remedy the errors since they were discovered will ensure that no errors occur in the future. Further, the restatement may negatively impact our stock price.

Although we have now completed the restatement, we cannot guarantee that we will not receive regulatory inquiries or be subject to litigation regarding our restated financial statements or matters relating thereto. Were any such future regulatory inquiries or litigation to occur, regardless of the outcome, such actions would likely consume internal resources and result in additional legal and consulting costs.

We cannot assure investors that we will be able to fully or timely address the material weakness in our internal controls that led to the restatement, or that remediation efforts will prevent future material weakness.

As a result of our review of issues related to the restatement described herein, management has identified deficiencies in our control environment that constitute a material weakness and, consequently, has concluded that our internal control over financial reporting was not effective at December 31, 2013. In addition, management has concluded, based primarily on the identification of the material weakness that our disclosure controls and procedures and our internal control over financial reporting were not effective as of December 31, 2013 as a result of the material weakness in internal controls related to accounting for certain tax liabilities resulting from the movement of our employees globally. See Item 9A, Controls and Procedures, in Part II of this Annual Report

 

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on Form 10-K. If we are unable to successfully remediate this material weakness and to do so in a timely manner, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our headquarters and principal administrative, finance, and marketing operations are located in approximately 80,000 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, Australia and South America. 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, Commitments and Contingencies: Lease Commitments, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Item 3.    Legal Proceedings

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 or financial condition.

For further information regarding our legal proceedings and claims, see Note 12, Commitments and Contingencies: Legal Claims, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

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 and Holders

Our common stock is traded on the NASDAQ Global Select Market under the ticker symbol “SAPE.” The following table sets forth, for the periods indicated, the high and low intraday sales prices of our common stock as reported on NASDAQ.

 

     Sales Prices  
     High      Low  

2013

     

First Quarter

   $ 12.60       $ 10.58   

Second Quarter

   $ 13.59       $ 10.91   

Third Quarter

   $ 16.15       $ 12.93   

Fourth Quarter

   $ 17.95       $ 14.80   

2012

     

First Quarter

   $ 13.88       $ 11.93   

Second Quarter

   $ 12.80       $ 9.01   

Third Quarter

   $ 10.99       $ 9.13   

Fourth Quarter

   $ 11.75       $ 9.90   

On March 14, 2014, the last reported sale price of our common stock was $16.58 per share. As of the close of business on March 14, 2014, there were approximately 281 holders of record of our common stock. Because many of the common shares are registered in “nominee” or “street” names, we believe that the total number of beneficial owners is considerably higher.

 

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Stock Performance

The following graph compares the cumulative five-year total stockholder return on our common stock from December 31, 2008 through December 31, 2013, 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, 2008 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

 

LOGO

*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

Copyright© 2014 Dow Jones & Co. All rights reserved.

 

      12/08      12/09      12/10      12/11      12/12      12/13  

Sapient Corporation

     100.00         186.26         283.49         304.66         255.34         419.76   

NASDAQ Composite

     100.00         143.89         168.22         165.19         191.47         264.84   

Dow Jones US Technology

     100.00         164.48         185.17         185.47         207.88         263.93   

Dividends

We have not paid dividends in the prior two fiscal years. We may declare or pay special cash dividends on our common stock in the 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

From time to time, we repurchase shares of our common stock in the open market pursuant to programs approved by our Board of Directors. We may repurchase our common stock for a variety of reasons, such as acquiring shares to offset dilution related to equity-based incentives granted to employees, including stock options and RSUs, and optimizing our capital structure.

 

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On May 9, 2012, our Board of Directors authorized a stock repurchase program of up to $100 million of the Company’s common stock for a period of two years. The following table includes information with respect to repurchases we made of our common stock pursuant to our stock repurchase program during the three month period ended December 31, 2013:

 

Period

  Total number
of shares
purchased
    Average price
paid per share
    Total number of
shares purchased
as part of a
publicly
announced
program
    Maximum
approximate
dollar value of
shares that may
yet be  purchased
under the program
 
                      (In thousands)  

October 1 to October 31, 2013

    650      $ 14.99        650      $ 55,388   

November 1 to November 30, 2013

    807      $ 14.97        807      $ 55,375   

December 1 to December 31, 2013

    36,800      $ 14.94        36,800      $ 54,825   
 

 

 

     

 

 

   

Total

    38,257      $ 14.94        38,257     
 

 

 

     

 

 

   

Sales of Unregistered Securities

On December 30, 2013, 84,166 shares of unregistered common stock were issued in connection with the acquisition of La Comunidad. The issuance of such shares was made pursuant to Section 4(2) of the Securities Act. On October 1, 2013, 33,816 shares of unregistered common stock were issued in connection with the acquisition of Second Story. The issuance of such shares was made pursuant to Section 4(2) of the Securities Act. On November 1, 2012, 235,490 shares of unregistered common stock were issued in connection with the acquisition of Second Story. The issuance of such shares were made pursuant to Rule 506 of Regulation D under the Securities Act.

Securities Authorized for Issuance under Equity Compensation Plans

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

We have restated the selected financial data presented in this report as of and for each of the years ended December 31, 2012, 2011, 2010, and 2009. This Part II, Item 6, Selected Financial Data of this Annual Report on Form 10-K includes the following:

 

   

The restated selected financial data for the annual periods described above;

 

   

The selected financial data for the year ended December 31, 2013;

 

   

Schedules presenting the details of the nature and impact of the restatement adjustments. For information regarding our restatement, see Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The adjustments related to the years prior to 2009 are reflected in the beginning retained earnings for 2009. The cumulative impact of these adjusting entries decreased retained earnings by $7.2 million, net of tax, at the beginning of 2009.

The following selected consolidated financial data should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The balance sheet data at December 31, 2013 and 2012 and the statement of operations data for each of the three years ended December 31, 2013, 2012 and 2011 are derived from the audited consolidated financial statements for such years, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

The account balances labeled “As Reported” in the years ended December 31, 2012, 2011, 2010, and 2009 represent the previously reported audited balances in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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Table of Contents
    Year Ended December 31,  
    2013     2012 (1)     2011 (1)     2010 (1)     2009 (1)  
    (In thousands, except per share amounts)  
          As
Restated
    As
Restated
    As
Restated
    As
Restated
 

Statement of Operations Data:

         

Revenues:

         

Service revenues

  $ 1,259,418      $ 1,121,010      $ 1,021,083      $ 823,511      $ 638,884   

Reimbursable expenses

    45,814        40,538        41,364        40,008        27,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross revenues

    1,305,232        1,161,548        1,062,447        863,519        666,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Project personnel expenses

    855,753        771,998        697,015        569,150        437,221   

Reimbursable expenses

    45,814        40,538        41,364        40,008        27,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

    901,567        812,536        738,379        609,158        465,015   

Selling and marketing expenses

    50,567        44,661        39,025        38,833        31,931   

General and administrative expenses

    216,066        192,530        172,627        151,652        118,930   

Restructuring and other related charges

    1,970        394        6,507        414        4,548   

Amortization of purchased intangible assets

    12,810        11,052        6,813        5,448        5,146   

Acquisition costs and other related (benefits) charges

    (172     4,354        1,861        111        2,962   

Impairment of intangible asset

    2,090                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,184,898        1,065,527        965,212        805,616        628,532   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    120,334        96,021        97,235        57,903        38,146   

Interest income, net

    4,002        3,735        5,748        3,509        2,889   

Other income, net

    888        849        594        196        267   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    125,224        100,605        103,577        61,608        41,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes:

         

Provision for income taxes

    47,680        41,786        36,820        23,599        10,925   

Benefit from release of valuation allowance

                                (48,511
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes

    47,680        41,786        36,820        23,599        (37,586
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    77,544        58,819        66,757        38,009        78,888   

Less: Net loss attributable to noncontrolling interest

    (183                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

  $ 77,727      $ 58,819      $ 66,757      $ 38,009      $ 78,888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to stockholders of Sapient Corporation

  $ 0.56      $ 0.43      $ 0.48      $ 0.29      $ 0.62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to stockholders of Sapient Corporation

  $ 0.54      $ 0.41      $ 0.47      $ 0.27      $ 0.59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares

    139,120        138,188        137,788        132,060        127,969   

Weighted average dilutive common share equivalents

    3,516        3,921        4,208        6,669        4,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and dilutive common share equivalents

    142,636        142,109        141,996        138,729        132,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

  $      $      $ 0.35      $ 0.35      $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     December 31,  
     2013      2012 (1)      2011 (1)      2010 (1)      2009 (1)  
            As
Restated
     As
Restated
     As
Restated
     As
Restated
 

Balance Sheet Data:

              

Working capital

   $ 424,628       $ 349,419       $ 304,994       $ 301,501       $ 276,879   

Total assets

     950,648         811,243         716,555         617,954         588,757   

Total long-term liabilities

     117,568         121,959         89,009         39,914         31,828   

Total Sapient Corporation stockholders’ equity(2)

     589,229         496,405         448,643         418,557         409,036   

 

(1) Certain financial statement amounts included in the years ended December 31, 2012, 2011, 2010 and 2009 have been restated to correct certain prior period errors, primarily relating to unrecorded corporate income and employment tax liabilities resulting from the movement of employees globally. The restatement adjustments are described in detail in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(2) On August 4, 2011, we declared a special dividend equivalent payment of $0.35 per 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 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.

Cumulative Restatement Adjustments to Previously Reported Beginning Retained Earnings and Net Income Attributable to Sapient Corporation

The following tables present the impact of the restatement adjustments on previously reported retained earnings for the years ended 2012, 2011, 2010, and 2009. These restatements are described in detail in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

 

    December 31,  
    2013     2012     2011     2010     2009  
    (In thousands)  

Retained earnings as restated

         

Beginning retained earnings as reported

  $ 27,832      $ (37,409   $ (110,085   $ (152,763   $ (231,607

Cumulative adjustments to beginning retained earnings

    (24,141     (17,719     (11,800     (7,131     (7,175
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning retained earnings as restated

    3,691        (55,128     (121,885     (159,894     (238,782
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Sapient Corporation as reported

    77,727        65,241        72,676        42,678        78,844   

Net income attributable to Sapient Corporation restatement adjustments

           (6,422     (5,919     (4,669     44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Sapient Corporation as restated

    77,727        58,819        66,757        38,009        78,888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retained earnings as restated

  $ 81,418      $ 3,691      $ (55,128   $ (121,885   $ (159,894
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Impact of Restatement Adjustments on the Year Ended December 31, 2012 Consolidated Statement of Operations

The following table presents the impact of the restatement adjustments on our Consolidated Statement of Operations for the year ended December 31, 2012:

 

     Year Ended December 31, 2012  
Consolidated Statement of Operations:    As Reported      Adjustments     As Restated  
     (In thousands, except per share amounts)  

Revenues:

       

Service revenues

   $ 1,121,010       $      $ 1,121,010   

Reimbursable expenses

     40,538                40,538   
  

 

 

    

 

 

   

 

 

 

Total gross revenues

     1,161,548                1,161,548   
  

 

 

    

 

 

   

 

 

 

Operating expenses:

       

Project personnel expenses

     764,843         7,155        771,998   

Reimbursable expenses

     40,538                40,538   
  

 

 

    

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

     805,381         7,155        812,536   

Selling and marketing expenses

     44,661                44,661   

General and administrative expenses

     191,599         931        192,530   

Restructuring and other related charges

     394                394   

Amortization of purchased intangible assets

     11,052                11,052   

Acquisition costs and other related charges

     4,354                4,354   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     1,057,441         8,086        1,065,527   
  

 

 

    

 

 

   

 

 

 

Income from operations

     104,107         (8,086     96,021   

Interest income, net

     3,735                3,735   

Other income, net

     849                849   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     108,691         (8,086     100,605   

Provision for income taxes

     43,450         (1,664     41,786   
  

 

 

    

 

 

   

 

 

 

Net income

     65,241         (6,422     58,819   

Less: Net loss attributable to noncontrolling interest

                      
  

 

 

    

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

   $ 65,241       $ (6,422   $ 58,819   
  

 

 

    

 

 

   

 

 

 

Basic net income per share attributable to stockholders of Sapient Corporation

   $ 0.47       $ (0.04   $ 0.43   
  

 

 

    

 

 

   

 

 

 

Diluted net income per share attributable to stockholders of Sapient Corporation

   $ 0.46       $ (0.05   $ 0.41   
  

 

 

    

 

 

   

 

 

 

Weighted average common shares

     138,188                138,188   

Weighted average dilutive common share equivalents

     3,921                3,921   
  

 

 

    

 

 

   

 

 

 

Weighted average common shares and dilutive common share equivalents

     142,109                142,109   
  

 

 

    

 

 

   

 

 

 

 

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Impact of Restatement Adjustments on the Year Ended December 31, 2011 Consolidated Statement of Operations

The following table presents the impact of the restatement adjustments on our Consolidated Statement of Operations for the year ended December 31, 2011:

 

    Year Ended December 31, 2011  
Consolidated Statement of Operations:   As Reported     Adjustments     As Restated  
    (In thousands, except per share amounts)  

Revenues:

     

Service revenues

  $ 1,021,083      $      $ 1,021,083   

Reimbursable expenses

    41,364               41,364   
 

 

 

   

 

 

   

 

 

 

Total gross revenues

    1,062,447               1,062,447   
 

 

 

   

 

 

   

 

 

 

Operating expenses:

     

Project personnel expenses

    691,041        5,974        697,015   

Reimbursable expenses

    41,364               41,364   
 

 

 

   

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

    732,405        5,974        738,379   

Selling and marketing expenses

    39,025               39,025   

General and administrative expenses

    171,759        868        172,627   

Restructuring and other related charges

    6,507               6,507   

Amortization of purchased intangible assets

    6,813               6,813   

Acquisition costs and other related charges

    1,861               1,861   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    958,370        6,842        965,212   
 

 

 

   

 

 

   

 

 

 

Income from operations

    104,077        (6,842     97,235   

Interest income, net

    5,748               5,748   

Other income, net

    594               594   
 

 

 

   

 

 

   

 

 

 

Income before income taxes

    110,419        (6,842     103,577   

Provision for income taxes

    37,743        (923     36,820   
 

 

 

   

 

 

   

 

 

 

Net income

    72,676        (5,919     66,757   

Less: Net loss attributable to noncontrolling interest

                    
 

 

 

   

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

  $ 72,676      $ (5,919   $ 66,757   
 

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to stockholders of Sapient Corporation

  $ 0.53      $ (0.05   $ 0.48   
 

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to stockholders of Sapient Corporation

  $ 0.51      $ (0.04   $ 0.47   
 

 

 

   

 

 

   

 

 

 

Weighted average common shares

    137,788               137,788   

Weighted average dilutive common share equivalents

    4,208               4,208   
 

 

 

   

 

 

   

 

 

 

Weighted average common shares and dilutive common share equivalents

    141,996               141,996   
 

 

 

   

 

 

   

 

 

 

 

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Impact of Restatement Adjustments on the Year Ended December 31, 2010 Consolidated Statement of Operations

The following table presents the impact of the restatement adjustments on our Consolidated Statement of Operations for the year ended December 31, 2010:

 

     Year Ended December 31, 2010  
Consolidated Statement of Operations:    As Reported      Adjustments     As Restated  
     (In thousands, except per share amounts)  

Revenues:

       

Service revenues

   $ 823,511       $      $ 823,511   

Reimbursable expenses

     40,008                40,008   
  

 

 

    

 

 

   

 

 

 

Total gross revenues

     863,519                863,519   
  

 

 

    

 

 

   

 

 

 

Operating expenses:

       

Project personnel expenses

     564,407         4,743        569,150   

Reimbursable expenses

     40,008                40,008   
  

 

 

    

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

     604,415         4,743        609,158   

Selling and marketing expenses

     38,833                38,833   

General and administrative expenses

     150,800         852        151,652   

Restructuring and other related charges

     414                414   

Amortization of purchased intangible assets

     5,448                5,448   

Acquisition costs and other related charges

     111                111   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     800,021         5,595        805,616   
  

 

 

    

 

 

   

 

 

 

Income from operations

     63,498         (5,595     57,903   

Interest income, net

     3,509                3,509   

Other income, net

     196                196   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     67,203         (5,595     61,608   

Provision for income taxes

     24,525         (926     23,599   
  

 

 

    

 

 

   

 

 

 

Net income

     42,678         (4,669     38,009   

Less: Net loss attributable to noncontrolling interest

                      
  

 

 

    

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

   $ 42,678       $ (4,669   $ 38,009   
  

 

 

    

 

 

   

 

 

 

Basic net income per share attributable to stockholders of Sapient Corporation

   $ 0.32       $ (0.03   $ 0.29   
  

 

 

    

 

 

   

 

 

 

Diluted net income per share attributable to stockholders of Sapient Corporation

   $ 0.31       $ (0.04   $ 0.27   
  

 

 

    

 

 

   

 

 

 

Weighted average common shares

     132,060                132,060   

Weighted average dilutive common share equivalents

     6,669                6,669   
  

 

 

    

 

 

   

 

 

 

Weighted average common shares and dilutive common share equivalents

     138,729                138,729   
  

 

 

    

 

 

   

 

 

 

 

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Impact of Restatement Adjustments on the Year Ended December 31, 2009 Consolidated Statement of Operations

The following table presents the impact of the restatement adjustments on our Consolidated Statement of Operations for the year ended December 31, 2009:

 

     Year Ended December 31, 2009  
Consolidated Statement of Operations:    As Reported     Adjustments     As Restated  
     (In thousands, except per share amounts)  

Revenues:

      

Service revenues

   $ 638,884      $      $ 638,884   

Reimbursable expenses

     27,794               27,794   
  

 

 

   

 

 

   

 

 

 

Total gross revenues

     666,678               666,678   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Project personnel expenses

     435,162        2,059        437,221   

Reimbursable expenses

     27,794               27,794   
  

 

 

   

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

     462,956        2,059        465,015   

Selling and marketing expenses

     31,931               31,931   

General and administrative expenses

     118,223        707        118,930   

Restructuring and other related charges

     4,548               4,548   

Amortization of purchased intangible assets

     5,146               5,146   

Acquisition costs and other related charges

     2,962               2,962   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     625,766        2,766        628,532   
  

 

 

   

 

 

   

 

 

 

Income from operations

     40,912        (2,766     38,146   

Interest income, net

     2,889               2,889   

Other income, net

     267               267   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     44,068        (2,766     41,302   

Provision for income taxes

     13,735        (2,810     10,925   

Benefit from release of valuation allowance

     (48,511            (48,511
  

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes

     (34,776     (2,810     (37,586
  

 

 

   

 

 

   

 

 

 

Net income

     78,844        44        78,888   

Less: Net loss attributable to noncontrolling interest

                     
  

 

 

   

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

   $ 78,844      $ 44      $ 78,888   
  

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to stockholders of Sapient Corporation

   $ 0.62      $      $ 0.62   
  

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to stockholders of Sapient Corporation

   $ 0.59      $      $ 0.59   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares

     127,969               127,969   

Weighted average dilutive common share equivalents

     4,912               4,912   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares and dilutive common share equivalents

     132,881               132,881   
  

 

 

   

 

 

   

 

 

 

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Restatement of Previously Issued Financial Statements

As discussed further in Note 21, Restatement, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, we have restated our consolidated financial statements for the years ended December 31, 2012 and 2011 and our unaudited quarterly financial information for each of the quarters in the year ended December 31, 2012 and for the first three quarters in the year ended December 31, 2013 (collectively, the “Restated Periods”).

For information regarding our controls and procedures, see Part II, Item 9A, Controls and Procedures, of this Annual Report on Form 10-K.

Overview

The Company

We help clients identify and act upon opportunities to improve their business performance by capitalizing on changes, disruptions, or opportunities that exist in their business or industry. 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 is a new breed of agency which helps clients tell their stories through seamless experiences across brand communications, digital engagement, and omni-channel commerce. SapientNitro offers services including 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. Sapient Global Markets provides business and technology services including integrated advisory, program management, analytics, technology and operations services to leaders in banking, investment management, energy and commodity industries, as well as to governments. 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, nonprofit organizations (“NPOs”), and non-governmental organizations (“NGOs”). Focused on driving long-term change and transforming the citizen experience, we use technology, marketing services and communications 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 perform services on a continuous basis through global client teams and 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 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. Our value proposition includes helping clients tell their stories through seamless experiences across brand communications, digital engagement, and omni-channel commerce. Our value proposition also includes offering 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. In addition, our value proposition refers to our organizational strategy of helping clients identify and act upon opportunities to improve their business performance by capitalizing on changes, disruptions, or opportunities that exist in their business or industry.

 

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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, 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,      Increase  
     2013      2012      Dollars      Percentage  
            As Restated                

Service revenues

   $ 1,259,418       $ 1,121,010       $ 138,408         12%   

Income from operations

   $ 120,334       $ 96,021       $ 24,313         25%   

Net income attributable to Sapient Corporation

   $ 77,727       $ 58,819       $ 18,908         32%   

The increase in service revenues for the year ended December 31, 2013 was due primarily to higher demand for our services from new and existing customers and, to a lesser extent, revenues generated from acquisitions completed during the quarters ended December 31, 2012 and March 31, 2013. The increase in income from operations was due to the increase in service revenues and decreases in project personnel expenses as a percentage of service revenue. Net income attributable to Sapient Corporation increased due to the foregoing as well as a lower tax effective rate.

The following table presents a summary of our results of operations for the years ended December 31, 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,      Increase / (Decrease)  
     2012      2011      Dollars     Percentage  
     As Restated      As Restated               

Service revenues

   $ 1,121,010       $ 1,021,083       $ 99,927        10%    

Income from operations

   $ 96,021       $ 97,235       $ (1,214     (1)%   

Net income attributable to Sapient Corporation

   $ 58,819       $ 66,757       $ (7,938     (12)%   

The increase in service revenues for the year ended December 31, 2012 was primarily due to higher demand for our services from new and existing customers and, to a lesser extent, the revenues generated from acquisitions completed during the third quarter of 2011. Income from operations was essentially unchanged, as increased service revenues were largely offset by similar increases in operating expenses. Net income decreased due to lower interest and other income (net), and a higher provision for income taxes in 2012 as compared to 2011.

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 the 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

 

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necessarily be comparable to GAAP or similarly described non-GAAP measures reported by other companies 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 in accordance with GAAP and included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following table reconciles income from operations as reported on our consolidated statements of operations to non-GAAP income from operations, and GAAP operating margin to non-GAAP operating margin, for 2013, 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,  
     2013     2012     2011  
           As Restated     As Restated  

Service revenues

   $ 1,259,418      $ 1,121,010      $ 1,021,083   
  

 

 

   

 

 

   

 

 

 

GAAP income from operations

   $ 120,334      $ 96,021      $ 97,235   

Stock-based compensation expense

     30,699        23,795        19,256   

Amortization of purchased intangible assets

     12,810        11,052        6,813   

Restructuring and other related charges

     1,970        394        6,507   

Acquisition costs and other related (benefits) charges

     (172     4,354        1,861   

Impairment of intangible asset

     2,090                 

Stock-based compensation review and restatement benefits

                   (3,500
  

 

 

   

 

 

   

 

 

 

Non-GAAP income from operations

   $ 167,731      $ 135,616      $ 128,172   
  

 

 

   

 

 

   

 

 

 

GAAP operating margin

     9.6     8.6     9.5

Effect of adjustments detailed above

     3.7        3.5        3.1   
  

 

 

   

 

 

   

 

 

 

Non-GAAP operating margin

     13.3     12.1     12.6
  

 

 

   

 

 

   

 

 

 

Non-GAAP income from operations increased in 2013 compared to 2012, and in 2012 compared to 2011 primarily due to the increases in reported GAAP income from operations and increases in non-GAAP items, specifically stock-based compensation expense. During 2011, we received insurance recovery proceeds of $3.5 million as reimbursement for expenses incurred in 2006 and 2007 relating to a review of stock option grant practices and the related 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.

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 exchange 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 Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Annual Report on Form 10-K.

 

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Table of Contents

Results of Operations

The following table presents the components of net income attributable to stockholders of Sapient Corporation included in our consolidated statements of operations as percentages of service revenues:

 

     Years Ended December 31,  
     2013     2012     2011  
           As Restated     As Restated  

Revenues:

      

Service revenues

     100.0     100.0     100.0

Reimbursable expenses

     3.6     3.6     4.1
  

 

 

   

 

 

   

 

 

 

Total gross revenues

     103.6     103.6     104.1
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Project personnel expenses

     67.9     68.9     68.3

Reimbursable expenses

     3.6     3.6     4.1
  

 

 

   

 

 

   

 

 

 

Total project personnel expenses and reimbursable expenses

     71.6     72.5     72.4

Selling and marketing expenses

     4.0     4.0     3.8

General and administrative expenses

     17.0     17.1     16.9

Restructuring and other related charges

     0.2     0.0     0.6

Amortization of purchased intangible assets

     1.0     1.0     0.7

Acquisition costs and other related (benefits) charges

     —      0.4     0.2

Impairment of intangible asset

     0.2        
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     94.0     95.0     94.6
  

 

 

   

 

 

   

 

 

 

Income from operations

     9.6     8.6     9.5

Interest income, net

     0.3     0.2     0.6

Other income, net

     0.1     0.1     0.1
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     10.0     8.9     10.2

Provision for income taxes

     3.8     3.7     3.6
  

 

 

   

 

 

   

 

 

 

Net income

     6.2     5.2     6.6

Less: Net loss attributable to noncontrolling interest

            
  

 

 

   

 

 

   

 

 

 

Net income attributable to stockholders of Sapient Corporation

     6.2     5.2     6.6
  

 

 

   

 

 

   

 

 

 

Years Ended December 31, 2013 and 2012

Service Revenues

Our service revenues for 2013 and 2012 were as follows (in thousands, except percentages):

 

     Years Ended December 31,      Increase      Percentage
Increase
 
     2013      2012        
            As Restated                

Service revenues

   $ 1,259,418       $ 1,121,010       $ 138,408         12

The increase in service revenues for the year ended December 31, 2013 was due primarily to higher demand for our services from new and existing customers and, to a lesser extent, revenues generated from acquisitions completed during the quarters ended December 31, 2012 and March 31, 2013. Compared geographically to 2012, 2013 service revenues in the United States increased 16%, while international service revenues increased 7%. In constant currency terms, service revenues increased 13% in 2013 as compared to 2012.

 

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Table of Contents

The following table presents our service revenues by industry sector for 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,      Increase  

Industry Sector

   2013      2012      Dollars      Percentage  
          As Restated                

Consumer, Travel & Automotive

   $ 522,377       $ 485,688       $ 36,689         8

Financial Services

     394,616         345,124         49,492         14

Government, Health & Education

     134,010         115,973         18,037         16

Energy Services

     112,057         88,612         23,445         26

Technology & Communications

     96,358         85,613         10,745         12
  

 

 

    

 

 

    

 

 

    

Total service revenues

   $ 1,259,418       $ 1,121,010       $ 138,408         12
  

 

 

    

 

 

    

 

 

    

See Service Revenues by Reportable Segment below for discussion of service revenues by reportable segment and industry sector.

Utilization, which represents the percentage of our delivery personnel’s time spent on billable client work, was 72% for 2013, a one-point decrease from our 2012 utilization of 73%. Our 2013 average delivery personnel peoplecount increased 12% compared to 2012, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased 11% compared to 2012 as our need for contractors and consultants in specialized areas for certain client contracts increased.

Our five largest clients, in the aggregate, accounted for 18% of our service revenues in 2013, compared to 21% in 2012. No individual client accounted for more than 10% of our service revenues for 2013 and 2012. Long-Term and Retainer Revenues represented 51% and 52% of our total service revenues for 2013 and 2012, respectively. 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.

Project Personnel Expenses

Project personnel expenses consist primarily of compensation 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 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,     Increase / (Decrease)     Percentage
Increase
 
           2013                 2012            
           As Restated              

Project personnel expenses

   $ 855,753      $ 771,998      $ 83,755        11

Project personnel expenses as a percentage of service revenues

     68     69     (1 point  

The increase in project personnel expenses in 2013 was a direct result of our service revenue growth as we increased delivery personnel peoplecount, use of contractors and consultants and certain other direct expenses in order to fulfill the increase in demand for our services. Compensation expenses increased $60.5 million, primarily due to the 12% increase in delivery personnel peoplecount. Contractor and consultant expense increased $9.5 million, as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses, which can fluctuate based on specific client project needs, increased $6.3 million. Other project personnel expenses increased, in the aggregate, by $7.5 million.

 

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Selling and Marketing Expenses

Selling and marketing expenses consist primarily of compensation, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses. The following table presents selling and marketing expenses for 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,     Increase      Percentage
Increase
 
           2013                 2012             
           As Restated               

Selling and marketing expenses

   $ 50,567      $ 44,661      $ 5,906         13

Selling and marketing expenses as a percentage of service revenues

     4     4     0 points      

The increase in selling and marketing expenses was due to increases of $2.6 million in compensation expenses relating to an increase in selling and marketing peoplecount, $1.3 million in travel expenses, and $1.2 million in trade show expenses. Other selling and marketing expenses increased, in the aggregate, by $0.8 million.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation 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 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,     Increase      Percentage
Increase
 
             2013                     2012               
           As Restated               

General and administrative expenses

   $ 216,066      $ 192,530      $ 23,536         12

General and administrative expenses as a percentage of service revenues

     17     17     0 points      

The increase in general and administrative expenses was primarily due to the following factors:

 

   

compensation expenses increased $7.6 million primarily due to an increase in stock-based compensation, increases in salary expense, and bonus expense;

 

   

depreciation expense increased $3.3 million, primarily due to the impact of leasehold improvement assets purchased in recent years in connection with our expansions of office space in several locations;

 

   

facilities expenses increased $2.1 million, primarily due to office space expansions in several locations during 2012 and 2013;

 

   

accounting and tax fees increased $1.9 million due to increased tax and accounting services by outside consultants;

 

   

the net impact of our hedging gains and losses resulted in an increase of general and administrative expenses of $1.7 million, as net losses of $1.7 million were recorded in 2013, compared to net losses of less than $0.1 million in 2012;

 

   

the net impact of foreign currency gains and losses resulted in an increase in general and administrative expenses of $1.4 million, as net losses of $1.0 million were recorded in 2013, compared to net gains of $0.4 million in 2012;

 

   

contracting and consultant expense increased $1.5 million, as our need for contractors and consultants in specialized areas for certain internal projects increased; and

 

   

Other general and administrative expenses increased, in the aggregate, $4.0 million.

 

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Restructuring and Other Related Charges

Restructuring and other related charges were $2.0 million and $0.4 million in 2013 and 2012, respectively. The net charges recorded in 2013 included $2.1 million of cash and other termination benefits for 82 employees whose positions were made redundant. These actions were taken in order to improve efficiency based on our revenue mix, skills mix, and leverage mode. Also included were benefits of $0.1 million related to changes in the estimated costs to be incurred in connection with a previously restructured office lease. The net charges recorded in 2012 included a restructuring charge of $0.5 million which included cash and other termination benefits for 15 Australian employees whose positions were made redundant, net of $0.1 million of benefits relating to changes in estimated future costs to be incurred in connection with two previously restructured office leases. This action was taken in response to customer attrition as well as a continuing re-positioning of the Company’s SapientNitro business in Australia from traditional advertising capabilities to digitally-led capabilities.

Amortization of Purchased Intangible Assets

During 2013 and 2012, 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 $11.1 million in 2012 to $12.8 million in 2013, primarily due to the additional amortization expense related to the new intangible assets acquired in connection with the three acquisitions which occurred during the fourth quarter of 2012 and the first quarter of 2013.

Acquisition Costs and Other Related (Benefits) Charges

Acquisition costs and other related (benefits) charges include 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 (benefits) charges also include changes in the fair value of contingent consideration liabilities recorded as the result of acquisitions. These liabilities must be measured at fair value on the acquisition date, and 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 (benefits) charges was a benefit of $0.2 million and a charge of $4.4 million for 2013 and 2012, respectively. The decrease of $4.6 million was due to a $0.3 million decrease in third-party costs related to the evaluation of potential targets and the completion of acquisition and a $4.3 million decrease in remeasurements of the fair value of contingent consideration liabilities.

We recorded contingent consideration liabilities as the result of our acquisitions of La Comunidad and iThink during 2013, (m)Phasize, LLC during 2012, and D&D Holdings Limited (“DAD”) 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 2017. Acquisition costs and other related (benefits) charges recorded in 2013 and 2012 included benefits and expenses of $1.9 million and $2.4 million, respectively, relating to the remeasurement of the fair value of these contingent consideration liabilities. We may also continue to incur additional acquisition costs and other related (benefits) charges in future periods resulting from the evaluation of potential acquisition targets.

Impairment of Intangible Asset

During the quarters ended September 30, June 30, and March 31, 2013, we performed impairment reviews of the customer list intangible asset obtained in the acquisition of Nitro Group Limited (“Nitro”), acquired in 2009. The impairment reviews were triggered by certain legacy Nitro customers having notified us of their intentions to cease or reduce purchases of our services. In the first step of the June 30, 2013 impairment review, the undiscounted net cash flows expected to be generated by the asset were compared to the carrying value of the asset. The undiscounted net cash flows expected to be generated by the asset were greater than the carrying value of the asset, and as a result no impairment was recorded during the three months ended June 30, 2013. In the first step of the September 30 and March 31, 2013 impairment reviews, the carrying value of the asset exceeded the undiscounted net cash flows expected to be generated by the asset, indicating that the carrying value was not

 

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recoverable. In the second step, the impairment amount of $0.6 million and $1.5 million recorded in the three months ended September 30 and March 31, 2013, respectively, was determined as the amount by which the asset’s carrying amount exceeded its fair value, which was estimated using a discounted cash flow approach. During the three months ended December 31, 2013, there were no triggering events that compelled the Company to perform an impairment review.

In estimating the undiscounted future net cash flows expected to be generated by this intangible asset, management 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. In the course of these impairment reviews, we considered multiple future scenarios and the expected likelihood of those scenarios occurring, based on the information which was known to management at the times the reviews were performed. These impairment reviews involved the use of significant judgment by management, and different judgments could yield different results. The net book value of the Nitro customer list intangible asset was $0.4 million and $3.5 million as of December 31, 2013 and December 31, 2012, respectively.

Interest Income, Net

Interest income is derived from investments in U.S. government securities, bank time deposits, and money market funds. Interest expense consists primarily of imputed interest on rent payments for leased properties of which we are considered the owner for accounting purposes. The following table presents interest income, net for 2013 and 2012 (in thousands, except percentages):

 

     Years Ended December 31,      Increase      Percentage
Increase
 
           2013                  2012              
            As Restated                

Interest income, net

   $ 4,002       $ 3,735       $ 267         7

Interest income, net increased in 2013 as compared to 2012 due to higher interest income relating to higher average balances of our interest-bearing foreign currency holdings of cash, cash equivalents and marketable securities partially offset by an increase in interest expense due to two “build-to-suit” office properties in India that we occupy, and the weakening of the Indian rupee against the U.S. dollar.

Provision for Income Taxes

The provision for income taxes was $47.7 million and $41.8 million for 2013 and 2012, respectively. Income tax is related to foreign, federal and state tax obligations. The increase in our provision for income taxes was primarily due to the increase in profit before tax, and changes in the mix of jurisdictional 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, 2013, a valuation allowance is maintained against deferred tax assets associated primarily with certain state net operating loss carryforwards.

We had gross unrecognized tax benefits, including interest and penalties, of $30.8 million and $28.1 million as of December 31, 2013 and 2012, respectively. The amounts of unrecognized tax benefits that, if recognized, would result in a reduction of our effective tax rate were $29.7 million and $25.6 million as of December 31, 2013 and 2012, respectively. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2013 and 2012, accrued interest and penalties were $4.2 million and $5.3 million, respectively.

 

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We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal and state jurisdictions and various 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 2010 through the present. The statutes of limitations in our other tax jurisdictions remain open for various periods between 2006 and the present. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in an open 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 $2.0 million and $3.5 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 2013, 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, and changes in uncertain tax positions.

Results by Reportable Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer.

We identify such segments based upon target client markets because each operating segment helps clients identify and act upon opportunities to improve their business performance, but strategically serves different markets. We considered qualitative factors, including the economic characteristics of each operating segment to determine if any qualified for aggregation. More specifically, we evaluated the economic characteristics, the nature of products and services, the methods used to provide services, the types of customers, and the nature of the corresponding regulatory environment of our operating segments. As a result, we have identified the following reportable segments: SapientNitro, Sapient Global Markets, and Sapient Government Services.

The CODM evaluates performance based upon each segment’s operating income, which is defined as income before allocations of certain marketing and general and administrative expenses, including costs associated with its restructuring events (as described in Note 10, Restructuring and Other Related Charges, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K). These charges are excluded from evaluation of performance because these activities and costs generally impact areas that support the segments and, therefore, are managed separately. Management does not allocate amortization of purchased intangible assets, acquisition costs, stock-based compensation expense, or interest and other income to the segments for the review of results by the CODM. Asset information by segment is not reported to or reviewed by the CODM, and therefore, we have not disclosed asset information for the segments. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

 

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The following tables present the service revenues and operating income attributable to our reportable segments for the periods presented (in thousands):

 

     Years Ended December 31,  
     2013      2012  
            As Restated  

Service Revenues:

     

SapientNitro

   $ 851,048       $ 771,883   

Sapient Global Markets

     350,749         298,108   

Sapient Government Services

     57,621         51,019   
  

 

 

    

 

 

 

Total service revenues

   $ 1,259,418       $ 1,121,010   
  

 

 

    

 

 

 

 

     Years Ended December 31,  
     2013     2012  
           As Restated  

Income Before Income Taxes:

    

SapientNitro

   $ 276,001      $ 241,498   

Sapient Global Markets

     110,425        88,678   

Sapient Government Services

     16,810        14,091   
  

 

 

   

 

 

 

Total reportable segments operating income(1)

     403,236        344,267   

Less: reconciling items(2)

     (278,012     (243,662
  

 

 

   

 

 

 

Total income before income taxes

   $ 125,224      $ 100,605   
  

 

 

   

 

 

 

 

(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. Segment operating income reflects restructuring charges allocated to the SapientNitro and Sapient Global Markets reportable segments consisting of $1.3 million and $0.5 million for the year ended December 31, 2013.
(2) Adjustments that are made to reconcile total reportable segments operating income to consolidated income before income taxes include the following (in thousands):

 

     Years Ended December 31,  
           2013                 2012        
           As Restated  

Centrally managed functions

   $ 237,289      $ 208,651   

Restructuring and other related charges

     186        394   

Amortization of purchased intangible assets

     12,810        11,052   

Acquisition costs and other related charges

     (172     4,354   

Stock-based compensation expense

     30,699        23,795   

Impairment of long lived assets

     2,090          

Interest and other income, net

     (4,890     (4,584
  

 

 

   

 

 

 

Total reconciling items

   $ 278,012      $ 243,662   
  

 

 

   

 

 

 

Service Revenues by Reportable Segment

The Company does not internally measure or report revenues by individual service offering as providing such information is impracticable and, therefore, the Company has not disclosed the revenues from external customers for each service offering described in Note 2(m), Summary of Significant Accounting Policies, Revenue Recognition, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

 

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The following table presents SapientNitro service revenues by industry sector for 2013 and 2012 (in thousands except percentages):

 

     Years Ended December 31,      Increase / (Decrease)  
           2013                  2012            Dollars     Percentage  

Industry Sector

          As Restated               

Consumer, Travel & Automotive

   $ 519,697       $ 485,793       $ 33,904        7

Financial Services

     154,860         125,209         29,651        24

Technology & Communications

     92,648         85,632         7,016        8

Government, Health & Education

     73,859         59,895         13,964        23

Energy Services

     9,984         15,354         (5,370     (35 )% 
  

 

 

    

 

 

    

 

 

   

Total SapientNitro service revenues

   $ 851,048       $ 771,883       $ 79,165        10
  

 

 

    

 

 

    

 

 

   

SapientNitro service revenues increased 10% driven by an increase in new clients partially offset by a decrease in revenues from existing clients. The increase was primarily driven by both an increase in the Consumer, Travel and Automotive industry sector and strong demand for our services in the Financial Services sector. In particular, the Consumer, Travel and Automotive industry sector has experienced increasing acceptance of our value proposition, as companies in this sector shift more of their marketing efforts to digital platforms. In 2013, the Consumer, Travel and Automotive sector increased 7% based on an increase in new client demand, partially offset by a decrease in revenue from existing clients in 2012. The Financial Services sector service revenue experienced equally strong demand from both new and existing clients, which drove the 24% increase in this sector in 2013. The Government, Health & Education sector experienced strong growth as service revenues increased from new clients, which was partially offset by a decrease in revenues from existing clients in 2013. Technology & Communications increased as new client revenues increased in 2013, which was partially offset by a decrease in revenues from existing clients. SapientNitro experienced a slowdown in existing Energy Services clients’ demand that drove the 35% decrease. Overall, in constant currency terms, SapientNitro service revenues increased 11% from 2012 to 2013.

The following table presents Sapient Global Markets service revenues by industry sector for 2013 and 2012 (in thousands except percentages):

 

     Years Ended December 31,      Increase  
             2013                      2012              Dollars      Percentage  

Industry Sector

          As Restated                

Financial Services

   $ 242,201       $ 220,212       $ 21,989         10

Energy Services

     102,128         72,278         29,850         41

Government, Health & Education

     6,420         5,618         802         14
  

 

 

    

 

 

    

 

 

    

Total Sapient Global Markets service revenues

   $ 350,749       $ 298,108       $ 52,641         18
  

 

 

    

 

 

    

 

 

    

Sapient Global Markets grew strongly 18% from 2012 to 2013. This increase was driven primarily within the Energy and Financial Services sectors with existing clients increasing their demand for Sapient Global Market services. The Energy Sector grew 41% driven by an increase in new and existing customers. The Financial Services sector grew 10% due to an increase in revenues from both new and existing clients. The Government, Health and Education sector growth was driven entirely by the expansion of work from our existing clients. In constant currency terms, Sapient Global Markets service revenues increased 18% from 2012 to 2013.

Service revenues for the Sapient Government Services segment (which are derived entirely from the Government, Health & Education industry sector) increased by $6.6 million, or 13%, in 2013 compared to 2012, due to increased demand for our services from new governmental and non governmental clients in this segment, and partially due to an expansion within the existing client base.

 

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Operating Income by Reportable Segment

SapientNitro’s operating income increased $34.5 million in 2013. As a percentage of related service revenues, SapientNitro’s operating income increased to 32% in 2013 as compared to 31% in 2012. The increase is primarily due to our management of direct expenses as direct expenses increased 8% compared to an increase of 10% in service revenues.

Sapient Global Markets’ operating income increased $21.7 million in 2013. As a percentage of related service revenues, Sapient Global Markets’ operating income increased to 31% in 2013 as compared to 30% in 2012. The increase is primarily due to our management of direct expenses as direct expenses increased 15% compared to an increase of 18% in service revenues.

Sapient Government Services’ operating income increased $2.7 million in 2013. As a percentage of related service revenues, Sapient Government Services’ operating income increased to 29% in 2013 as compared to 28% in 2012. The increase is primarily due to our management of direct expenses as direct expenses increased 11% compared to an increase of 13% in service revenues.

Years Ended December 31, 2012 and 2011

Service Revenues

Our service revenues for 2012 and 2011 were as follows (in thousands, except percentages):

 

     Years Ended December 31,      Increase      Percentage
Increase
 
     2012      2011        
     As Restated      As Restated                

Service revenues

   $ 1,121,010       $ 1,021,083       $ 99,927         10

The increase in service revenues for the year ended December 31, 2012 was primarily due to higher demand for our services from new and existing customers and, to a lesser extent, the revenues generated from acquisitions completed during the third quarter of 2011.

The following table presents our service revenues by industry sector for 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,      Increase / (Decrease)  
     2012      2011      Dollars     Percentage  

Industry Sector

   As Restated      As Restated               

Consumer, Travel & Automotive

   $ 485,688       $ 390,027       $ 95,661        25

Financial Services

     345,124         323,014         22,110        7

Technology & Communications

     115,973         112,633         3,340        3

Government, Health & Education

     88,612         77,155         11,457        15

Energy Services

     85,613         118,254         (32,641     (28 )% 
  

 

 

    

 

 

    

 

 

   

Total service revenues

   $ 1,121,010       $ 1,021,083       $ 99,927        10
  

 

 

    

 

 

    

 

 

   

See Service Revenues by Reportable Segment below for discussion of service revenues by reportable segment and industry sector.

Utilization was 73% for 2012, a two-point increase from our 2011 utilization of 71%. Our 2012 average delivery personnel peoplecount increased 8% compared to 2011, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased 1% compared to 2011 as our need for contractors and consultants in specialized areas for certain client contracts increased.

 

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Our five largest clients, in the aggregate, accounted for 21% of our service revenues in 2012, compared to 19% in 2011. No individual client accounted for more than 10% of our service revenues for 2012 and 2011. Long-Term and Retainer Revenues represented 52% and 48% of our total service revenues for 2012 and 2011, respectively.

Project Personnel Expenses

The following table presents project personnel expenses for 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,     Increase      Percentage
Increase
 
           2012                 2011             
     As Restated     As Restated               

Project personnel expenses

   $ 771,998      $ 697,015      $ 74,983         11

Project personnel expenses as a percentage of service revenues

     69     68     1 point      

The increase in project personnel expenses in 2012 was a direct result of our service revenue growth as we increased delivery personnel peoplecount, use of contractors and consultants and certain other direct expenses in order to fulfill the increase in demand for our services. Compensation expenses increased $67.6 million, primarily due to the 7% increase in delivery personnel peoplecount and the impact of annual compensation rate increases and promotions. Contractor and consultant expense increased $0.4 million, as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses, which can fluctuate based on specific client project needs, decreased $1.8 million. Other project personnel expenses increased, in the aggregate, by $8.8 million.

Selling and Marketing Expenses

The following table presents selling and marketing expenses for 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,     Increase      Percentage
Increase
 
           2012                 2011             
     As Restated     As Restated               

Selling and marketing expenses

   $ 44,661      $ 39,025      $ 5,636         14

Selling and marketing expenses as a percentage of service revenues

     4     4     0 points      

The increase in selling and marketing expenses was due to increases of $2.3 million in travel expenses, $1.7 million in compensation expenses relating to an increase in selling and marketing peoplecount, $0.7 million in trade show expenses, and $0.6 million in consultant costs relating to selling and marketing initiatives. Other selling and marketing expenses increased, in the aggregate, by $0.3 million.

General and Administrative Expenses

The following table presents general and administrative expenses for 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,     Increase      Percentage
Increase
 
     2012     2011       
     As Restated     As Restated               

General and administrative expenses

   $ 192,530      $ 172,627      $ 19,903         12

General and administrative expenses as a percentage of service revenues

     17     17     0 points      

 

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The increase in general and administrative expenses was primarily due to the following factors:

 

   

compensation expenses increased $6.8 million due to a 10% increase in average general and administrative peoplecount and the impact of annual compensation rate increases and promotions;

 

   

facilities expenses increased $4.5 million, primarily due to office space expansions in several locations;

 

   

depreciation expense increased $2.6 million, primarily due to the impact of leasehold improvement assets purchased in recent years in connection with our expansions of office space in several locations;

 

   

health insurance costs increased $1.7 million due to increases in company-wide peoplecount and insurance rate increases;

 

   

the net impact of foreign currency gains and losses resulted in an increase in general and administrative expenses of $1.2 million, as net gains of $0.4 million were recorded in 2012, compared to net gains of $1.6 million in 2011;

 

   

2011 included a benefit of $3.5 million relating to insurance recovery proceeds received as reimbursement for expenses incurred during a review of stock option grant practices and the related restatement in 2006 and 2007, while 2012 included no similar benefits;

 

   

These increases were partially offset by the net impact of hedging gains and losses, which resulted in a decrease in general and administrative expenses of $1.2 million, as net losses totaling less than $0.1 million were recorded in 2012 compared to net losses of $1.2 million in 2011; and

 

   

Other general and administrative expenses increased, in the aggregate, $0.8 million.

Restructuring and Other Related Charges

Restructuring and other related charges were $0.4 million and $6.5 million in 2012 and 2011, respectively. The net charges recorded in 2012 included $0.5 million of cash and other termination benefits for 15 employees in Australia whose positions were made redundant, net of $0.1 million of benefits relating to changes in estimated future costs to be incurred in connection with two previously restructured office leases. The net charges recorded in 2011 consisted 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.

Amortization of Purchased Intangible Assets

During 2012 and 2011, 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 $6.8 million in 2011 to $11.1 million in 2012, primarily due to the full-year impact of the two acquisitions we completed during the third quarter of 2011, and, to a lesser extent, the impact of the two acquisitions we completed during the fourth quarter of 2012.

 

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Acquisition Costs and Other Related Charges

Acquisition costs and other related charges include 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. These liabilities must be measured at fair value on the acquisition date, and 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 $4.4 million and $1.9 million for 2012 and 2011, respectively. The increase of $2.5 million was due to a $1.8 million increase in remeasurements of the fair value of contingent consideration liabilities, and a $0.7 million increase in third-party costs related to the evaluation of potential targets and the completion of acquisitions.

We recorded contingent consideration liabilities as the result of our acquisitions of (m)Phasize, LLC during 2012 and D&D Holdings Limited (“DAD”) 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. Acquisition costs and other related charges recorded in 2012 and 2011 included expenses of $2.4 million and $0.6 million, respectively, relating to the remeasurement of the fair value of these contingent consideration liabilities.

Interest Income, net

The following table presents interest income, net for 2012 and 2011 (in thousands, except percentages):

 

     Years Ended December 31,      Decrease     Percentage
Decrease
 
           2012                  2011             
     As Restated      As Restated               

Interest income, net

   $ 3,735       $ 5,748       $ (2,013     (35 )% 

Interest income, net decreased in 2012 as compared to 2011 primarily due to lower interest income relating to lower average balances of our interest-bearing foreign currency holdings of cash, cash equivalents and marketable securities, and due to interest expense relating to the two “build-to-suit” properties in India which we occupied during 2012.

Provision for Income Taxes

The provision for income taxes was $41.8 million and $36.8 million for 2012 and 2011, respectively. Income tax is related to foreign, federal and state tax obligations. The increase in our provision for income taxes was primarily due to changes in the mix of jurisdictional profits, provisions for uncertain tax positions, and the decrease in the deferred tax liability from unremitted foreign earnings in 2011.

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, 2012, a valuation allowance was maintained against deferred tax assets associated with certain state net operating loss carryforwards. We also maintained a valuation allowance against our deferred tax assets in Switzerland, but believed 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 $28.1 million and $21.0 million as of December 31, 2012 and 2011, respectively. The amounts of unrecognized tax benefits that, if recognized, would result in a reduction of our effective tax rate were $25.6 million and $19.0 million as of December 31, 2012 and 2011, respectively. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2012 and 2011, accrued interest and penalties were $5.3 million and $4.4 million, respectively.

 

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We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal and state jurisdictions and various 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. As of December 31, 2012, our U.S. federal tax filings were open for examination for tax years 2009 through the present. The statutes of limitations in our other tax jurisdictions remain open for various periods between 2005 and the present. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in an open 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. As of December 31, 2012, we anticipated 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 2012, 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, and changes in uncertain tax positions.

Results by Reportable Segment

The following tables present the service revenues and operating income attributable to our reportable segments for the periods presented (in thousands):

 

     Years Ended December 31,  
     2012      2011  
     As Restated      As Restated  

Service Revenues:

     

SapientNitro

   $ 771,883       $ 685,719   

Sapient Global Markets

     298,108         282,981   

Sapient Government Services

     51,019         52,383   
  

 

 

    

 

 

 

Total service revenues

   $ 1,121,010       $ 1,021,083   
  

 

 

    

 

 

 

 

     Years Ended December 31,  
     2012     2011  
     As Restated     As Restated  

Income Before Income Taxes:

    

SapientNitro

   $ 241,498      $ 222,564   

Sapient Global Markets

     88,678        84,660   

Sapient Government Services

     14,091        13,745   
  

 

 

   

 

 

 

Total reportable segments operating income(1)

     344,267        320,969   

Less: reconciling items(2)

     (243,662     (217,392
  

 

 

   

 

 

 

Total income before income taxes

   $ 100,605      $ 103,577   
  

 

 

   

 

 

 

 

(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):

 

     Years Ended December 31,  
     2012     2011  
     As Restated     As Restated  

Centrally managed functions

   $ 208,651      $ 192,797   

Restructuring and other related charges

     394        6,507   

Amortization of purchased intangible assets

     11,052        6,813   

Acquisition costs and other related charges

     4,354        1,861   

Stock-based compensation expense

     23,795        19,256   

Interest and other income, net

     (4,584     (6,342

Unallocated benefits(a)

            (3,500
  

 

 

   

 

 

 

Total reconciling items

   $ 243,662      $ 217,392   
  

 

 

   

 

 

 

 

(a) Reflects stock option restatement-related benefits.

Service Revenues by Reportable Segment

The following table presents SapientNitro service revenues by industry sector for 2012 and 2011 (in thousands except percentages):

 

     Years Ended December 31,      Increase / (Decrease)  
             2012                      2011              Dollars     Percentage  

Industry Sector

   As Restated      As Restated               

Consumer, Travel & Automotive

   $ 485,793       $ 390,027       $ 95,766        25

Technology & Communications

     125,209         116,257         8,952        8

Financial Services

     85,632         117,340         (31,708     (27 )% 

Government, Health & Education

     59,895         52,604         7,291        14

Energy Services

     15,354         9,491         5,863        62
  

 

 

    

 

 

    

 

 

   

Total SapientNitro service revenues

   $ 771,883       $ 685,719       $ 86,164        13
  

 

 

    

 

 

    

 

 

   

SapientNitro service revenues grew 13% primarily due to increase in demand from both new and existing client base. The increase was particularly driven by the Consumer, Travel and Automotive industry sector as we have experienced increasing acceptance of our value proposition, with companies in this sector shifting more of their marketing efforts to digital platforms. Within the Consumer, Travel and Automotive industry sector, service revenue increased from both new and existing clients. The 8% increase in Technology & Communications sector revenues was primarily due to an increase in new clients partially offset by a decrease in revenues from existing clients. The decrease within the Financial Services sector resulted from contract price compressions from some of our largest clients in this sector and a decrease in the volume of services provided to existing clients. This decrease was partially offset by an increase in new clients. The increase in Government, Health & Education industry sector was due to an increase in new and existing clients. The Energy Services sector increased 62%, primarily due to an increased demand from new and existing clients. In constant currency terms, SapientNitro service revenues increased 13% from 2011 to 2012.

 

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The following table presents Sapient Global Markets service revenues by industry sector for 2012 and 2011 (in thousands except percentages):

 

     Years Ended December 31,      Increase / (Decrease)  
             2012                      2011              Dollars     Percentage  

Industry Sector

   As Restated      As Restated               

Financial Services

   $ 220,212       $ 206,581       $ 13,631        7

Energy Services

     72,278         67,664         4,614        7

Government, Health & Education

     5,618         8,736         (3,118     (36 )% 
  

 

 

    

 

 

    

 

 

   

Total Sapient Global Markets service revenues

   $ 298,108       $ 282,981       $ 15,127        5
  

 

 

    

 

 

    

 

 

   

The 5% increase in service revenues was primarily driven by higher demand from clients in the Financial Services sector while the increase within Energy Services was partially offset by the decrease in Government, Health, and Education sector. The Financial Services sector experienced an increase in revenue from new clients, partially offset by a decrease in revenue from existing clients. Within the Energy Services sector service revenues from both new clients and existing clients increased. In constant currency terms, Sapient Global Markets service revenues increased 6% from 2011 to 2012.

Service revenues for the Sapient Government Services segment (which are derived entirely from the Government, Health & Education industry sector) decreased by $1.4 million, or 3%, in 2012 compared to 2011, due to a decrease in demand for our services from existing clients in this segment, in large part due to budgetary pressures experienced by U.S. government agencies. This decrease was partially offset by an increase in new, primarily non-governmental, clients.

Operating Income by Reportable Segment

SapientNitro’s operating income increased $18.9 million in 2012. As a percentage of related service revenues, SapientNitro’s operating income decreased to 31% in 2012 as compared to 32% in 2011. The decrease in operating income as a percentage of service revenues was primarily due to higher compensation expenses as a percentage of related service revenues.

Sapient Global Markets’ operating income increased $4.0 million in 2012. As a percentage of related service revenues, Sapient Global Markets’ operating income was 30% in both 2012 and 2011. An increase in compensation expenses as a percentage of related service revenues was offset by a decrease in contractor and consultant expenses as a percentage of related service revenues.

Sapient Government Services’ operating income increased $0.3 million in 2012. As a percentage of related service revenues, Sapient Government Services’ operating income increased to 28% in 2012 as compared to 26% in 2011. This increase was primarily due to lower contractor and consultant expenses as a percentage of related service revenues.

Liquidity and Capital Resources

Years Ended December 31, 2013 and 2012

 

     December 31,  
     2013      2012  
            As Restated  
     (in thousands)  

Cash, cash equivalents, restricted cash and marketable securities

   $ 345,588       $ 253,501   

 

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     Years Ended December 31,  
             2013                     2012          
           As Restated  
     (in thousands)  

Summary of cash flow activities:

    

Net cash provided by operating activities

   $ 155,282      $ 110,803   

Net cash used in investing activities

   $ (49,007   $ (58,663

Net cash provided by (used in) financing activities

   $ 5,577      $ (33,230

We invest our excess cash predominantly in money market funds, time deposits with maturities of 91 days or less, mutual funds and other cash equivalents.

As of December 31, 2013 and 2012, we had $2.1 million and $6.1 million, respectively, held with various banks as collateral for letters of credit and performance bonds, and as escrow funds related to acquisitions, and those amounts are classified as “Restricted cash” on our consolidated balance sheets. We also had $5.8 million recorded as restricted cash as of December 31, 2012 relating to our acquisitions of DAD and (m)Phasize.

As of December 31, 2013, our total cash, cash equivalents, restricted cash, and marketable securities balance included $141.0 million held by our U.S. entities and $204.6 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 $33.5 million of unremitted earnings which as of December 31, 2013 were not reinvested indefinitely, and for which a deferred income tax liability has been recorded. Determination of the potential deferred tax liability on other unremitted earnings is not practicable because such liability, if any, would depend on circumstances existing if and when such remittance occurs. Our current plans do not demonstrate a need to repatriate any overseas funds to fund our U.S. operations.

In July 2012, we entered into a revolving credit facility under which we may request advances for general working capital purposes, in U.S. dollars, British pounds sterling and euros, not to exceed an equivalent of $20.0 million U.S. dollars in the aggregate. As of March 18, 2014, we had not drawn any advances under this facility. 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, repurchases of common stock, and the expected cash outlays for our previously recorded restructuring activities, for at least the next 12 months.

At December 31, 2013 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

   $ 24,145       $ 45,603       $ 40,028       $ 52,450       $ 162,226   

Purchase obligations(1)

     1,962         1,259                         3,221   

Uncertain tax positions(2)

                                     30,841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,107       $ 46,862       $ 40,028       $ 52,450       $ 196,288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 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 canceled without payment penalties, have been excluded. Amounts presented also exclude accounts payable and accrued expenses at December 31, 2013.

 

(2) We are not able to determine a reasonably reliable estimate of the timing of potential future payments relating to uncertain tax positions.

 

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Operating Activities

Cash provided by operating activities during 2013 totaled $155.3 million, primarily due to $77.5 million in net income and the addition of $55.8 million in non-cash items, and an increase of $22.0 million in cash related to changes in operating assets and liabilities. Cash provided by operating activities during 2012 totaled $110.8 million, primarily due to $58.8 million in net income and the addition of $59.3 million in non-cash items, partially offset by a decrease of $7.3 million in cash relating to changes in operating assets and liabilities.

Days sales outstanding (“DSO”) is calculated based on the most recent three months of total gross revenues and period end balances of accounts receivable, unbilled revenues and deferred revenues. Our DSO was 63 days as of December 31, 2013 and 2012. DSO is affected by changes in accounts receivable and unbilled revenues, which are related to the trend in service revenues, the timing of achieving certain project milestones and the timing of project billings. We expect our unbilled revenues to be short-term in nature, with a majority being billed within 90 days.

Investing Activities

Cash used in investing activities during 2013 totaled $49.0 million. This was primarily due to the use of $36.6 million for capital expenditures and internally developed software, and the use of $14.4 million (net of cash acquired) for the acquisitions of iThink Comunicação e Publicidade Ltda (“iThink”) and “la comunidad” CORPORATION and La Comunidad S.A. (together, “La Comunidad”). Cash used in investing activities during 2012 totaled $58.7 million, primarily due to the use of $37.8 million for capital expenditures and internally developed software, and the use of $18.3 million (net of cash acquired) for the acquisitions of Second Story, Inc. and (m)Phasize, LLC. Our use of cash for acquisitions can fluctuate from year to year based on acquisition opportunities available to us at any given time, as well as the proportions of acquisition consideration which are in the forms of cash or equity. The magnitude of capital expenditures in a given year is often impacted by our activities in leasing new office spaces or expanding existing spaces, which typically require expenditures for leasehold improvements, as well as replacement cycles for computer software and hardware.

Financing Activities

Cash provided by financing activities during 2013 totaled $5.6 million, primarily due to proceeds from stock option plan of $3.6 million and tax benefit from stock plans of $2.5 million, partially offset by the use of $0.6 million for repurchases of our common stock. Cash used in financing activities during 2012 totaled $33.2 million, primarily due the use of $44.6 million for repurchases of our common stock, partially offset by $10.1 million of tax benefits from stock plans.

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 Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Annual Report on Form 10-K for a discussion of our use of such derivative financial instruments.

Years Ended December 31, 2012 and 2011

 

     December 31,  
     2012      2011  
     As Restated      As Restated  
     (in thousands)  

Cash, cash equivalents, restricted cash and marketable securities

   $ 253,501       $ 225,649   

 

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     Years Ended December 31,  
     2012     2011  
     As Restated     As Restated  
     (in thousands)  

Summary of cash flow activities:

    

Net cash provided by operating activities

   $ 110,803      $ 131,868   

Net cash used in investing activities

   $ (58,663   $ (80,966

Net cash used in financing activities

   $ (33,230   $ (42,581

We invest our excess cash predominantly in money market funds, time deposits with maturities of 91 days or less, mutual funds and other cash equivalents.

As of December 31, 2012 and 2011, we had $11.9 million and $4.2 million, respectively, held with various banks as collateral for letters of credit and performance bonds, and as escrow funds related to acquisitions, and those amounts are classified as “Restricted cash” on our consolidated balance sheets.

As of December 31, 2012, our total cash, cash equivalents, restricted cash, and marketable securities balance included $80.1 million held by our U.S. entities and $173.4 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 $37.9 million of unremitted earnings which as of December 31, 2012 were not reinvested indefinitely, and for which a deferred income tax liability has been recorded. Determination of the potential deferred tax liability on other unremitted earnings is not practicable because such liability, if any, would depend on circumstances existing if and when such remittance occurs. Our current plans do not demonstrate a need to repatriate any overseas funds to fund our U.S. operations.

In July 2012, we entered into a revolving credit facility under which we may request advances for general working capital purposes, in U.S. dollars, British pounds sterling and euros, not to exceed an equivalent of $20 million U.S. dollars in the aggregate. As of December 31, 2012, we had not drawn any advances under this facility.

At December 31, 2012 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

   $ 23,342       $ 39,412       $ 36,258       $ 60,175       $ 159,187   

Purchase obligations(1)

     2,117         1,026                         3,143   

Uncertain tax positions(2)

                                     28,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,459       $ 40,438       $ 36,258       $ 60,175       $ 190,452   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 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 canceled without payment penalties, have been excluded. Amounts presented also exclude accounts payable and accrued expenses at December 31, 2012.

 

(2) We are not able to determine a reasonably reliable estimate of the timing of potential future payments relating to uncertain tax positions.

 

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Operating Activities

Cash provided by operating activities during 2012 totaled $110.8 million, primarily due to $58.8 million in net income and the addition of $59.3 million in non-cash items, partially offset by a decrease of $7.3 million in cash relating to changes in operating assets and liabilities. Cash provided by operating activities during 2011 totaled $131.9 million, primarily due to $66.8 million in net income and the addition of $61.0 million in non-cash items, partially offset by a decrease of $1.6 million in cash relating to changes in operating assets and liabilities.

Days sales outstanding (“DSO”) is calculated based on the most recent three months of total gross revenues and period end balances of accounts receivable, unbilled revenues and deferred revenues. Our DSO was 63 days as of December 31, 2012 compared to 64 days as of December 31, 2011. DSO is affected by changes in accounts receivable and unbilled revenues, which are related to the trend in service revenues, the timing of achieving certain project milestones and the timing of project billings.

Investing Activities

Cash used in investing activities during 2012 totaled $58.7 million. This was primarily due to the use of $37.8 million for capital expenditures and internally developed software, and the use of $18.3 million (net of cash acquired) for the acquisitions of Second Story, Inc. and (m)Phasize, LLC. Cash used in investing activities during 2011 totaled $81.0 million, primarily due to the use of $44.6 million (net of cash acquired) for the acquisitions of DAD and Clanmo GmbH, and the use of $35.5 million for capital expenditures and internally developed software. Our use of cash for acquisitions can fluctuate from year to year based on the acquisition opportunities available to us at any given time, as well as the proportions of acquisition consideration which are in the forms of cash or equity. The magnitude of capital expenditures in a given year is often impacted by our activities in leasing new office spaces or expanding existing spaces, which typically require expenditures for leasehold improvements, as well as replacement cycles for computer software and hardware.

Financing Activities

Cash used in financing activities during 2012 totaled $33.2 million, primarily due to the use of $44.6 million for repurchases of our common stock, partially offset by $10.1 million of tax benefits from stock plans. Cash used in financing activities during 2011 totaled $42.6 million, primarily due to a $48.9 million special dividend payment to holders of common stock, net repayments of $10.4 million under a revolving credit facility in India (which expired December 31, 2011), and the repayment of $3.8 million of debt assumed in the acquisition of DAD. These outflows were partially offset by the receipt of $10.2 million in cash proceeds from stock option exercises, and $4.4 million of tax benefits from stock plans.

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 Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Annual Report on Form 10-K for a discussion of our use of such derivative financial instruments.

Contingencies

We are subject to certain legal proceedings and claims incidental to the operation of our business. We are also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and 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 or financial condition.

We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. As of December 31, 2013, we have recorded an accrual of $1.2 million for loss contingencies, which represents the minimum amount of probable range between $1.2 million and $7.8 million, related to all probable losses where a reasonable range could be made. This range includes a potential liability associated with non-income tax matters in certain of our foreign jurisdictions.

 

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We do not accrue for contingent losses that, in our judgment, are considered to be reasonably possible, but not probable. 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 impact on our operating results or financial condition.

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 GAAP. In connection with the preparation of our consolidated financial statements, we are required to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures at the date of the financial statements. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

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, delivery has occurred or 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 deliverables, and when appropriate, separate the contracts into separate units of accounting for revenue recognition. Typically, the elements bundled together in our multiple element arrangements are: development and implementation of web, interactive, and commerce and content technologies, as well as follow-up support services, including operations, maintenance, and hosting of those technologies. We allocate revenue to the deliverables 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 technology implementation 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 technology implementation 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

 

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estimated total labor. This method is used because reasonably dependable estimates of labor applicable to various stages of an arrangement can be made, based on historical experience and milestones set in the contract. 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. 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 and additional funding is not probable, in which case revenue recognition is based on the proportional performance method. Revenues generated from support and maintenance contracts are recognized ratably over the arrangement’s term. 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.

Revenues related to our digital marketing media sales are recorded as the net amount of our 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 consolidated 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 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.

Our marketing services, including access to our technology platforms, 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 the resources required or the scope of work to be performed for an arrangement cannot be accurately estimated, or if the assignment is not managed properly within the planned time period, then a loss, or lower profitability on the arrangement may be recorded. 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.

The Company does not recognize revenue until collectability is reasonable assured, in addition to 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.

 

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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 other than goodwill, which is separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate 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;

 

   

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.

 

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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 quantitative 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 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. The Company utilizes a combined weighted average of a market based approach (utilizing fair value multiples of comparable publicly traded companies) and an income based approach (utilizing discounted projected after tax cash flows) to determine the fair value of its reporting units.

These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations.

Contingent Liabilities

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. We do not accrue for contingent losses that, in our judgment, are considered to be reasonably possible, but not probable; however, we disclose the range of such reasonably possible losses.

Accounting for Acquisitions

We account for acquisitions using the acquisition method. The acquisition method requires us to recognize and measure the fair value of 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 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.

Accounting for Stock-Based Compensation

We issue various types of stock-based awards to employees, directors and certain key persons (including consultants and advisors) under stockholder-approved plans. For such awards, we measure compensation cost at

 

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fair value on the grant date and recognize this cost as stock-based compensation expense over the requisite service period. We make estimates and assumptions which impact the amounts of expense recognized in our consolidated statement of operations, including estimated forfeiture rates. Also, for awards which include performance conditions, we make estimates as to the probability that the underlying performance conditions will be met. Changes to these estimates and assumptions may have a significant impact on the value and timing of stock-based compensation expense recognized, which could have a material impact on our consolidated financial statements.

New Accounting Pronouncements

For information regarding our new accounting pronouncements, see Note 2(s), Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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 yield 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, 2013 and our interest income would not have changed by a material amount for the year ended December 31, 2013.

The estimated fair value of our marketable securities portfolio was $5.9 million as of December 31, 2013, which consisted entirely of mutual funds.

The estimated fair value of our marketable securities portfolio was $7.5 million as of December 31, 2012, which included $6.3 million of mutual funds and $1.2 million of Auction Rate Securities (“ARS”).

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 net losses of $1.0 million and gains of $0.4 million were recorded for the years ended December 31, 2013 and 2012, 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.

 

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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 2013, approximately 26% of our revenues and approximately 44% 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 21% and 47%, respectively, for 2012. In addition, 50% of our assets and 40% of our liabilities were subject to foreign currency translation exposure as of December 31, 2013, as compared to 49% of our assets and 41% of our liabilities as of December 31, 2012. 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 transaction exposure, as described above.

Approximately 15% of our operating expenses for 2013 were 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 Indian rupee has a significant impact on our operating expenses and operating profit. Approximately 10% and 2% of our service revenues for 2013 were generated by foreign subsidiaries whose functional currencies are the British pound sterling, and the euro, respectively. Any significant movements in the exchange rates between the U.S. dollar and the British pound sterling and the U.S. dollar and the euro, 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 and the euro. This program includes the use of derivative financial instruments which are not designated as accounting hedges. As of December 31, 2013, we had option contracts outstanding in the notional amount of approximately $34.2 million ($24.3 million for our Indian rupee contracts, $8.2 million for our British pound sterling contracts, and $1.7 million for our euro contracts). Because these instruments are average rate option collars that are settled on a net basis with the counterparty banks, we have not recorded the gross underlying notional amounts in our consolidated balance sheets as of December 31, 2013. The following table presents net realized and unrealized gains or losses on our option contracts for 2013, 2012 and 2011 (in thousands):

 

     Years Ended December 31,  
     2013     2012     2011  
           As Restated     As Restated  

Net realized (loss) gain on foreign exchange option contracts not designated as accounting hedges

   $ (1,769   $ 103      $ (1,113

Net unrealized gain (loss) on foreign exchange option contracts not designated as accounting hedges

     69        (143     (98
  

 

 

   

 

 

   

 

 

 

Total

   $ (1,700   $ (40   $ (1,211
  

 

 

   

 

 

   

 

 

 

 

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We also performed a sensitivity analysis of the possible losses that could be incurred on these contracts as a result of unfavorable 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 thousands):

 

     Maximum Losses Resulting from Changes in
Underlying Average Exchange Rates of:
 

Currency

         10%                  15%                    20%        

Indian rupee

   $ 300       $ 1,200         $ 2,100   

British pound sterling

   $ 670       $ 1,080         $ 1,480   

Euro

   $ 140       $ 223         $ 307   

Open option positions as of December 31, 2013 expire in January, February and March of 2014 and, therefore, any realized losses in respect to these positions after December 31, 2013 would be recognized in the three months ending March 31, 2014.

For additional discussion of the risks we face and the recorded gains and losses as a result of foreign currency fluctuations, see Part I, Item 1A, Risk Factors, and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.

 

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Item 8.    Financial Statements and Supplementary Data

SAPIENT CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 

Report of Independent Registered Public Accounting Firm

     62   

Consolidated Balance Sheets as of December 31, 2013 and 2012 (As Restated)

     64   

Consolidated Statements of Operations for the years ended December  31, 2013, 2012 (As Restated) and 2011 (As Restated)

     65   

Consolidated Statements of Comprehensive Income for the years ended December  31, 2013, 2012 (As Restated) and 2011 (As Restated)

     66   

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December  31, 2013, 2012 (As Restated) and 2011 (As Restated)

     67   

Consolidated Statements of Cash Flows for the years ended December  31, 2013, 2012 (As Restated) and 2011 (As Restated)

     68   

Notes to Consolidated Financial Statements

     69   

Financial Statement Schedule:

  

Schedule II  — Valuation and Qualifying Accounts and Reserves (As Restated)

     141   

 

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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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 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 index appearing under Item 15(a)(2) 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 did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the accounting for certain tax liabilities resulting from the global movement of employees existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. 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 referred to above. 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.

As discussed in Note 21 to the consolidated financial statements, the Company has restated its 2012 and 2011 financial statements to correct an error.

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.

 

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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

March 18, 2014

 

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SAPIENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     December 31,  
     2013     2012  
           As Restated  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 337,630      $ 234,038   

Marketable securities, current portion

     5,870        6,321   

Restricted cash, current portion

     69        9,026   

Accounts receivable, net of allowance for doubtful accounts of $0 at December 31, 2013 and 2012

     184,174        168,951   

Unbilled revenues

     85,436        71,842   

Deferred tax assets, current portion

     20,552        15,809   

Prepaid expenses and other current assets

     33,964        36,311   
  

 

 

   

 

 

 

Total current assets

     667,695        542,298   

Marketable securities, net of current portion

            1,202   

Restricted cash, net of current portion

     2,019        2,914   

Property and equipment, net

     85,898        80,760   

Purchased intangible assets, net

     27,508        35,050   

Goodwill

     149,142        128,628   

Deferred tax assets, net of current portion

     8,693        11,819   

Other assets

     9,693        8,572   
  

 

 

   

 

 

 

Total assets

   $ 950,648      $ 811,243   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 30,410      $ 26,937   

Accrued expenses

     64,480        53,278   

Deferred tax liabilities, current portion

     868