Innodata Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request specifies 2013 Q4, this is an annual filing; unaudited fourth-quarter results are included below where available. Innodata provides digital content, business-process, IT, and professional services through Content Services (CS) and Innodata Advanced Data Solutions (IADS).
Key financial results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $64.2 million | $86.6 million |
| Operating income (loss) | $(7.7) million | $6.5 million |
| Net income (loss) attributable to Innodata | $(10.6) million; $(0.43) per diluted share | $7.5 million; $0.28 per diluted share |
| Operating cash flow | $0.6 million | $17.8 million |
| Capital expenditures | $3.8 million | $6.8 million |
| Cash and cash equivalents | $24.8 million | $25.4 million |
| Working capital | $28.8 million | $32.8 million |
| Total long-term obligations, including current portion | $4.1 million | $4.2 million |
Direct operating costs were 76.5% of revenue, versus 66.3% in 2012. Gross profit, calculated as revenue less direct operating costs, was approximately $15.1 million (23.5% of revenue), down from approximately $29.2 million (33.7%). Operating margin was approximately negative 12.0%, versus positive 7.5%.
Fourth-quarter 2013 revenue was $15.4 million, gross profit was $4.5 million, and net income attributable to Innodata was $0.9 million. In Q4 2012, the corresponding figures were $19.0 million, $5.9 million, and $0.7 million.
Business performance and changes
- Revenue fell 26% year over year. CS revenue declined to $63.1 million from $85.4 million, principally because e-book-related services for a significant client decreased by $18.9 million. Non-e-book CS revenue rose by $3.4 million.
- IADS revenue was approximately $1.1 million, versus $1.2 million. Its net loss increased to $11.8 million from $6.3 million. CS segment net income fell to $1.2 million from $13.8 million.
- Increased fixed-cost burden as revenue contracted pressured CS margins. Management also cited restructuring-related savings in the second half of 2013.
- Four clients generated approximately 51% of 2013 revenue. Apple contributed about 11%, Bloomberg-affiliated clients 15%, Reed Elsevier-affiliated clients 15%, and Wolters Kluwer-affiliated clients 11%. Foreign clients accounted for 35% of revenue.
Liquidity, debt, and cash flow
- Operating cash flow dropped to $0.6 million from $17.8 million, despite a $2.4 million cash source from lower accounts receivable; lower accrued salaries and tax balances used cash. Cash flow less capital expenditures was approximately negative $3.2 million.
- Cash was $24.8 million, of which $22.6 million was held by foreign subsidiaries. Management intends to permanently reinvest foreign earnings; repatriation could trigger U.S. taxes. Working capital declined by $3.9 million.
- The $15 million bank line was uncommitted and had not been drawn. In February 2014, the bank said it did not intend to advance funds unless it first received satisfactory financial and business information. In March 2014, the company completed a $0.9 million, three-year sale-leaseback transaction at an effective 3% rate.
- Management expected cash and internally generated funds to meet needs for the next 12 months, while noting that IADS investment could be curtailed if funding proved insufficient or outside financing unavailable on acceptable terms.
Outlook, risks, and unusual items
- Management expected revenue from one non-e-book client to decline by approximately $5 million in 2014. It planned to continue investing $1.5 million to $2.0 million per quarter in IADS and forecast 2014 capital expenditures of $3 million to $4 million.
- 2013 included a $5.5 million impairment of Synodex fixed assets; all IADS fixed assets had been written off by year-end. The filing also reports an $8.1 million valuation allowance against deferred tax assets and a $5.5 million income-tax provision despite a pretax loss. The valuation allowance contributed materially to the reported loss.
- Key risks include client and project concentration, short-notice or at-will contract termination, inability to replace completed work, pricing pressure, wage inflation, foreign-exchange exposure, and IADS’s limited revenue and continuing losses. The company used foreign-currency forward contracts with $15.2 million aggregate notional amount at year-end.
- A Philippine labor matter seeks approximately $8 million in reinstatement, back wages, and benefits. Management believes recovery against Innodata is unlikely; the filing also says other reasonably possible legal losses could total approximately $250,000 beyond recorded amounts.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unmodified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm the durability and replacement of the lost e-book work and the expected $5 million client revenue decline in 2014.
- Track CS margins, utilization, and restructuring savings as lower revenue interacts with fixed operating costs.
- Assess IADS’s commercial traction and cash requirements against its planned quarterly investment and prior losses.
- Verify the bank’s credit-line status, liquidity needs, and the availability and restrictions on cash held overseas.
- Reconcile the filing’s IADS investment and tax-allowance disclosures: it cites different investment totals in different sections and describes the deferred-tax valuation allowance as both $7.1 million and $8.1 million.
- Monitor the Philippine labor case, tax audits, client receivable concentration, and foreign-currency exposures.