Innodata Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 15, 2013. Innodata provides digital-content, IT and business-process services through Content Services (CS) and Innodata Advanced Data Solutions (IADS).
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $86.6 million | $73.9 million |
| Operating income | $6.5 million; 7.5% margin | $4.7 million; 6.4% margin |
| Net income | $5.7 million | $3.9 million |
| Net income attributable to Innodata and subsidiaries | $7.5 million; $0.30 basic and $0.28 diluted EPS | $4.5 million; $0.18 basic and diluted EPS |
| Operating cash flow | $17.8 million | $(3.0) million |
| Cash and cash equivalents | $25.4 million | $11.4 million |
| Short-term investments | $3.1 million | $5.8 million |
| Working capital | $32.8 million | $28.1 million |
| Total assets | $66.2 million | $59.4 million |
Revenue increased 17%. CS generated $85.4 million, up from $73.9 million; IADS generated $1.2 million versus none in 2011. Higher e-book-related work for a major client drove most CS growth. Direct operating costs were 66.3% of revenue versus 67.8%; selling and administrative expenses were 25.6% versus 25.8%. Net income attributable to the company exceeds consolidated net income because the filing reports losses attributable to non-controlling interests.
Cash generation rebounded substantially, aided by $7.4 million from a decrease in receivables. Capital expenditures were $6.8 million. The company reported no third-party debt; long-term obligations were $3.4 million, including accrued pension liabilities. The $15 million receivables-backed credit line had no borrowings at year-end and was due to expire in June 2013. DSO rose to 76 days from 74.
Quarterly trend and material changes
FY 2012 quarterly revenue declined from $25.1 million in Q1 to $19.0 million in Q4; attributable net income fell from $3.4 million to $0.7 million. Q4 2012 revenue was $19.0 million and attributable net income was $0.7 million, compared with $23.7 million and $2.3 million in Q4 2011. The filing attributes the annual growth mainly to e-book work for a significant client, but reports sequential revenue declines from that client in the last three quarters of 2012.
CS generated $13.1 million of 2012 pretax income after intersegment eliminations. IADS recorded a $6.3 million net loss after eliminations, versus a $2.2 million loss in 2011. IADS incurred approximately $7.5 million of development and operating expenses and $2.0 million of capital expenses; docGenix assets were impaired by $0.5 million. A $0.2 million restructuring charge was recorded, with expected annual savings of approximately $3.0 million.
Outlook, risks and unusual items
- Management planned to continue combined Synodex and docGenix investment at $1.5–$2.0 million per quarter in the immediate future. It forecast 2013 capital expenditures of $5–$6 million and said existing liquidity and the credit facility should cover the next 12 months. No revenue or earnings guidance was provided.
- Customer concentration increased: Apple contributed approximately $25.7 million, or 30% of revenue, and Reed Elsevier-affiliated clients approximately $9.6 million, or 11%; together, the top two represented 41% of revenue. Many contracts are project-based or terminable on short notice.
- Management disclosed an approximately $3.8 million informal Philippine tax assessment received in January 2013 and recorded no provision, stating it believed a successful challenge was reasonably likely. Indian tax matters included assessments and recorded provisions; unrecognized tax benefits were $2.4 million.
- A Philippine labor ruling sought reinstatement and approximately $8.5 million in back wages and benefits. The company said recovery against Innodata was unlikely; it also disclosed approximately $0.3 million of reasonably possible additional exposure beyond recorded amounts for other legal matters.
- Cash and short-term investments held outside the U.S. totaled approximately $18.2 million; foreign earnings of $31.7 million were considered indefinitely reinvested. Repatriation could trigger additional U.S. tax. Currency movements, Asian wage inflation, client credit exposure and political or operational disruption in delivery countries are key risks.
- Management identified a material weakness in financial-reporting controls over accounting for certain non-routine transactions. Disclosure controls and internal control over financial reporting were assessed as ineffective at year-end. The error was corrected and did not affect consolidated net income, but affected the presentation of non-controlling interests and attributable income. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements.
- The board adopted a shareholder-rights plan in December 2012, subject to stockholder approval at the 2013 annual meeting. No cash dividends were anticipated.
Important facts to verify
- Whether revenue and workload at the major e-book client continued to decline after 2012, and the status of contract renewals and diversification.
- Progress in monetizing Synodex and revising docGenix offerings, including subsequent losses, customer uptake and investment needs.
- Remediation of the material weakness, the effectiveness of revised controls, and any subsequent financial-statement adjustments.
- Outcomes and provisioning for the Philippine and Indian tax matters and the Philippine labor litigation.
- Renewal or replacement of the credit facility due in June 2013, and the accessibility and tax implications of overseas cash.
- Whether the restructuring delivered the expected savings and whether 2013 capital spending remained within the stated $5–$6 million estimate.