Innodata Isogen, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This annual filing includes fourth-quarter results. The company provides digital content services and consulting through Content Services, and launched its early-stage Innodata Advanced Data Solutions (IADS) segment in 2011.
Financial performance
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Revenue | $73.9 million | $61.5 million | Up 20%, principally from eBook work for a major client and analytics services for a major accounting firm. |
| Gross profit and margin | $23.8 million; 32.1% | $14.2 million; 23.1% | Improved as revenue grew and productivity increased. |
| Operating income (loss) | $4.7 million; 6.3% margin | $(1.4) million; (2.3)% margin | Returned to operating profit. |
| Net income (loss) | $3.9 million consolidated; $4.5 million attributable to Innodata | $(0.7) million | 2011 included a $0.6 million loss attributable to non-controlling interests. |
| Basic and diluted EPS | $0.18 | $(0.03) | Per share amounts attributable to Innodata. |
| Operating cash flow | $(3.0) million | $4.9 million | Cash use primarily reflected a $12.9 million increase in accounts receivable. |
| Capital expenditures | $5.9 million | $1.9 million | Included IADS software development and two new Asian delivery centers. |
Fourth quarter: Revenue was $23.7 million, gross profit $8.4 million, and net income attributable to Innodata $2.3 million (diluted EPS $0.09). Revenue and profit rose through each quarter of 2011.
Liquidity, debt and financial position
- At year-end, cash and cash equivalents were $11.4 million, short-term investments $5.8 million, and working capital $28.1 million.
- The company reported no third-party debt and no outstanding borrowings under its $7.0 million accounts-receivable-backed credit line, which was due to expire in June 2012. Total current and long-term obligations on the balance sheet were approximately $3.6 million, including pension, lease and vendor obligations.
- Accounts receivable rose to $21.7 million from $8.4 million; days sales outstanding increased to 66 from 61. Two clients represented 62% ($13.4 million) of receivables. Management attributed the increase primarily to payment-processing delays at one large client.
- Management said available cash, investments, operating cash generation and the credit facility should meet needs for the next 12 months. It expected 2012 capital expenditures of approximately $6–$7 million.
Material changes and management commentary
- Revenue recovered from the 2010 decline, but remained below 2009’s $76.7 million. The 2010 decline was principally linked to a $20.5 million revenue reduction from one significant client.
- Three clients generated approximately 44% of 2011 revenue: Apple contributed about $13.3 million (18%), Wolters Kluwer affiliates about $10.0 million (14%), and Reed Elsevier affiliates about $9.3 million (13%). Foreign clients, principally in Europe, generated 30% of revenue.
- IADS, launched in the second quarter, reported no 2011 revenue and incurred approximately $2.7 million in start-up costs. Innodata owned 77% of Synodex and 78% of docGenix; it acquired certain docGenix assets for $0.4 million.
- Direct costs benefited from productivity and process improvements, but foreign-exchange movements and Asian wage inflation pressured costs. Realized gains on currency forwards were $1.2 million, down from $2.2 million in 2010. Selling and administrative expense rose 20% to $19.1 million, including IADS investment and higher sales staffing, incentives and severance.
Outlook, risks and unusual items
- No revenue or earnings guidance was provided. Management planned further facility expansion in 2012 and forecast capital expenditures of $6–$7 million.
- Key business risks include dependence on project-based work, short termination notice periods, and customer concentration. A loss or reduction in work from major clients could materially affect revenue and profitability.
- Collection and credit risk increased with the receivables buildup and concentration in two customers. Management described the client experiencing payment delays as financially strong, but the timing of collection remains important to cash flow.
- Foreign-currency exposure, wage inflation, competitive pricing pressure, employee retention, data security, and political or operating disruptions in delivery countries could affect margins and service delivery. Forward contracts had a $28 million aggregate notional amount and a $1.8 million liability fair value at year-end.
- Tax exposures include Indian tax assessments and audits; unrecognized tax benefits were $2.3 million at year-end. A January 2012 Indian assessment of approximately $1.1 million related to an earlier tax year; the company appealed and recorded a $0.3 million provision for that assessment.
- A Philippine labor decision orders reinstatement and approximately $7.5 million in back wages and benefits. Management, based on legal advice, considered recovery against the parent unlikely, but acknowledged that an adverse outcome could be material.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the large year-end receivables balance was collected and whether days sales outstanding returned toward prior levels.
- Whether revenue growth and the improved gross margin persisted without relying disproportionately on a few large customers.
- Whether IADS generated revenue and justified its continuing start-up spending and planned investment.
- How 2012 capital spending, new facilities and operating cash flow affected liquidity and the company’s cash and investment balances.
- Developments in Indian tax disputes and the Philippine labor litigation, including any changes to accrued liabilities or management’s assessments.