TMCnet News
IGATE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Some of the statements in this Form 10-Q contain statements that are not historical facts and that constitute "forward-looking statements" within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our financial growth and liquidity projections as well as statements concerning our plans, strategies, intentions and beliefs concerning our business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words "believe," "anticipate," "plan," "expect" and similar expressions are intended to identify certain forward-looking statements. These forward-looking statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements. While we cannot predict all of the risks and uncertainties, they include, but are not limited to, our ability to predict our financial performance, the level of market demand for our services, the highly-competitive market for the types of services that we offer, the impact of competitive factors on profit margins, market conditions that could cause our customers to reduce their spending for our services, our ability to create, acquire and build new businesses and grow our existing businesses, our ability to attract and retain qualified personnel, our ability to reduce costs and conserve cash, currency fluctuations and market conditions in India and elsewhere around the world, changes in generally accepted accounting principles and/or their interpretation, our ability to satisfy or refinance our substantial indebtedness, our ability to comply with our debt covenants, increases to our borrowing costs and other risks that are described in more detail in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including our Form 10-K ("Form 10-K") for the year ended December 31, 2013 and in this Form 10-Q under Item 1 (A). Unless otherwise indicated or the context otherwise requires, all references in this report to "IGATE", the "Company", "us", "our", or "we" are to IGATE Corporation, a Pennsylvania corporation, and its consolidated subsidiaries. IGATE Corporation, through its operating subsidiaries, is a worldwide provider of Information Technology ("IT") and IT-enabled operations, and provides integrated technology and operations-based solutions to large and medium-sized organizations. These services include application development, application maintenance, business intelligence and analytics, cloud services, engineering design services, enterprise application solutions, enterprise mobility, infrastructure management services, product and engineering solutions embedded systems, product verification and validation, verification and validation and business process outsourcing ("BPO"). Website Access to SEC Reports The Company's website is http://www.igate.com. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available free of charge on the Investors page of the Company's website as soon as reasonably practicable after the reports are filed electronically with the SEC. The inclusion of our website address above is intended to be an inactive textual reference only and not an active hyperlink to our website. The information contained in, or that can be accessed through, our website is not part of this quarterly report. Business Overview We are a global leader in providing integrated technology and operations-based information technology solutions. We provide solutions to clients' business challenges by leveraging our technology and process capabilities and offering productized applications and platforms that provide the necessary competitive and innovation edge to clients across industries, through a combination of speed, agility and imagination. We believe that these three attributes will be the key guiding principles for us to navigate our way to creating greater value for all our stakeholders. We deliver a comprehensive range of solutions and services across multiple domains and industries including healthcare, life sciences, insurance, manufacturing, banking, financial services, business administrative services, data management services, product and engineering solutions, retail, consumer packaged goods, communications, energy, utility, media and entertainment. Our services include application development, application maintenance, business intelligence and analytics, cloud services, engineering design services, enterprise application solutions, enterprise mobility, infrastructure management services, product and engineering solutions embedded systems, product verification and validation, verification and validation and BPO. We are the first "integrated technology and operations" ("ITOPS") company. ITOPS is a business outcomes based model that adds certainty to our clients' business. Through ITOPS, we enable our clients to optimize their business through a combination of process investment strategies, technology leverage, and business process outsourcing and provisioning. Our core proposition of integrating technology and customer processes in a proprietary way has conformed to the changing customer needs and the ITOPS framework has helped us align better with the new-age business challenges of corporations. Our ITOPS framework has helped us build solutions that address explicit client issues taking into account the market and industry context. We have also developed strong expertise in industry processes that enable us to drive more innovation and technology capabilities to solve business challenges. 41 -------------------------------------------------------------------------------- Table of Contents We have adopted a global delivery model for providing varied and complex IT-enabled services to our global customers spread across multiple locations. With a global presence and world class delivery centers spanning across the Americas, EMEA and Asia-Pacific, as of September 30, 2014, our global operations had 34,455 employees (consisting of 32,414 IT and IT-enabled service professionals and 2,041 individuals working in sales, recruiting, general and administrative roles, of which 28,262 employees were located at offshore and 6,193 employees were located at onsite premises). We have 24 offices worldwide. We combine a single business management system with best industry practices, models and standards. We have tailored delivery models encompassing pure offshore, pure onsite, pure near-shore and blended models (onsite, near-shore, offshore) to meet the specific requirements of our clients. The increase in headcount over the last few quarters demonstrates our ability to attract talent and the anticipation of ramp up of our key deals and clients. We are currently operating under a hire-for-growth model as opposed to our old just-in-time model and we have hired 4,722 employees during the nine months ended September 30, 2014. We expect our hiring numbers to be moderate in the future due to the increase in the adoption of our business model, technology automation and stable retention rates. In our pursuit to be a differentiated value provider to clients and better address their business imperatives, we rebranded our identity which is represented by a new logo, and renewed vision, mission and values. Our mission is to be an organization that strives for superior and predictable financial performance through focused and innovative execution excellence delivered by a team that believes in high performance and all through its journey, remains socially conscious. We were founded in 1986. We are incorporated in Pennsylvania and our principal executive office is located at Bridgewater, New Jersey. We have operations in India, Canada, the United States, Belgium, Denmark, France, Finland, Germany, Ireland, Netherlands, Sweden, Switzerland, Luxemburg, Mexico, Hungary, Singapore, Malaysia, Japan, Australia, the United Arab Emirates, South Africa, China, Mauritius and the United Kingdom. A majority of our clients have headquarters in North America and operate internationally. We market our service offerings to large and medium-sized organizations. Certain contracts are based upon a fixed price with payment based upon deliverables and/or project milestones reached. Certain contracts are time-and-materials based and are billed at an agreed upon hourly or daily rate. Certain contracts with no stated deliverables have a designated workforce and are based on fixed periodic payments. Some process outsourcing contracts provide pricing per transaction. Customers typically have the right to cancel contracts with minimal notice. Contracts with deliverables or project milestones can provide for certain penalties if the deliverables or project milestones are not met within contract timelines. We service customers in a wide range of industries. Our largest customer is General Electric Company ("GE"), which accounted for approximately 17% and 16% of revenues for the three and nine months ended September 30, 2014 and 13% of revenues for each of the three and nine months ended September 30, 2013. Our second largest customer, Royal Bank of Canada ("RBC"), accounted for approximately 10% of revenues for the three and nine months ended September 30, 2014 and 11% for the three and nine months ended September 30, 2013. IGATE is a Global Preferred Partner of RBC. Recent Developments Commencement of Exchange Offer of Notes On September 19, 2014, the Company offered to exchange all of its outstanding 4.75% Senior Notes due 2019 in the aggregate principal amount of $325,000,000 (which we refer to as the "Old Notes") for an equal aggregate principal amount of 4.75% Senior Notes due 2019 which have been registered under the Securities Act (which we refer to as the "Exchange Notes"). The exchange offer is designed to provide holders of Old Notes with an opportunity to acquire Exchange Notes which, unlike the Old Notes, will be freely transferable, subject to certain restrictions. The terms of the Exchange Notes will be substantially identical to those of the outstanding Old Notes, except the transfer restrictions, registration rights and additional interest provisions relating to the Old Notes will not apply to the Exchange Notes. The exchange offer expired on October 17, 2014 and all the Notes were tendered by the Note holders. 42-------------------------------------------------------------------------------- Table of Contents Reportable Financial Segments The Company's Chief Executive Officer, who is also the Chief Operating Decision Maker, has regrouped the organization into vertical-based business units to bring in more industry knowledge and solutions and increase the depth and accountability to the business. However, the Company does not prepare discrete financial information as per the requirements of ASC 280 and as a result segment information is not presented. Critical Accounting Policies Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") as set forth in the Financial Accounting Standards Board's Accounting Standards Codification (the "Codification") and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: • Revenue recognition. • Income taxes. • Derivative instruments and hedging activities. • Stock-based compensation. • Intangible assets. During the nine months ended September 30, 2014, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013 provides a more complete discussion of our critical accounting policies and estimates. Recently Issued Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity is required to follow five steps which comprises of a) identifying the contract(s) with a customer; b) identifying the performance obligations in the contract; c) determining the transaction price; d) allocating the transaction price to the performance obligations in the contract and e) recognizing revenue when (or as) the entity satisfies a performance obligation. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, under either retrospective or retrospective with cumulative effect adoption. Early application is not permitted. The Company is currently assessing the potential effects of these changes to the consolidated financial statements. In June 2014, the FASB issued ASU No. 2014-12- "Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The ASU clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The ASU is effective for annual and interim periods for fiscal years beginning on or after December 15, 2015. Entities can apply the amendment either a) prospectively to all awards granted or modified after the effective date or b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The ASU does not have an impact on the consolidated financial statements. 43-------------------------------------------------------------------------------- Table of Contents In August 2014, the FASB issued ASU No. 2014-15- "Presentation of Financial Statements - Going Concern" which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. The ASU defines and clarifies that substantial doubt exists when conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date financial statements are issued or available to be issued. The ASU requires management to perform the assessment every interim and annual period. The ASU applies to all entities and is effective for the annual period ending after December 15, 2016. Early application is permitted. The ASU does not have an impact on the consolidated financial statements. Results of Operations for the Three Months Ended September 30, 2014 as Compared to the Three Months Ended September 30, 2013 (dollars in thousands): Three Months Ended September 30, % change of amount from 2014 2013 comparable period Amount % of Revenues Amount % of Revenues Revenues $ 322,774 100.0 % $ 293,406 100.0 % 10.0 % Cost of revenues (a) 208,801 64.7 172,063 58.6 21.4 Gross margin 113,973 35.3 121,343 41.4 (6.1 ) Selling, general and administrative expense 49,934 15.5 46,862 16.0 6.6 Depreciation and amortization 9,384 2.9 8,439 2.9 11.2 Income from operations 54,655 16.9 66,042 22.5 (17.2 ) Interest expense (7,492 ) (2.3 ) (20,256 ) (6.9 ) (63.0 ) Foreign exchange gain (loss), net 3,169 1.0 (4,372 ) (1.5 ) 172.5 Other income 4,153 1.3 5,213 1.8 (20.3 ) Income before income taxes 54,485 16.9 46,627 15.9 16.9 Income tax expense (b) 17,088 5.3 14,634 5.0 - Net income 37,397 11.6 31,993 10.9 16.9 Non-controlling interest 89 0.0 97 0.0 (8.2 ) Net income attributable to IGATE Corporation 37,308 11.6 31,896 10.9 17.0 Accretion to preferred stock 152 0.1 126 0.1 20.6 Preferred dividend 8,653 2.7 7,994 2.7 8.2 Net income (loss) attributable to IGATE common shareholders $ 28,503 8.8 % $ 23,776 8.1 % 19.9 % (a) Cost of revenues is exclusive of depreciation and amortization. (b) As the effective tax rate is a better comparable measure, the percent change from comparable period is not computed. Revenues Revenues increased by 10.0% for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increase is directly attributable to the combination of increased business with our recurring customers by 8.8% and business with new customers by 2.1%, which was partly offset by the cessation of business with certain existing customers by 0.9%. We have strategized our priority of expanding our relationships with our existing clients. There was an immaterial currency impact during the three months ended September 30, 2014 as compared to the corresponding period as the cross currency movements offset each other. Our top five customers accounted for 39.0% and 40.0% of the revenues for the three months ended September 30, 2014 and 2013, respectively. 44-------------------------------------------------------------------------------- Table of Contents Revenues by Geography The following table presents our consolidated domestic and international revenues as a percentage of consolidated revenues based on customer geography (in thousands): Three Months Ended September 30, 2014 2013 Amount % Amount % Revenues: United States $ 225,565 69.9 $ 202,591 69.0 Canada 31,331 9.7 32,158 11.0 EMEA (1) 47,789 14.8 41,293 14.1 Asia Pacific 18,089 5.6 17,364 5.9 Total revenues $ 322,774 100.0 $ 293,406 100.0 (1) Comprises of Europe, Middle East and African countries. United States revenues increased to $225.6 million for the three months ended September 30, 2014, or 69.9% of total revenues, from $202.6 million, or 69.0% of total revenues, for the three months ended September 30, 2013. The $23.0 million increase was primarily attributable to increased business with our recurring customers contributing $19.3 million, which is offset by $1.3 million in lost revenues as a result of projects completed and a $5.0 million increase in revenues from new customers. Canada revenues decreased to $31.3 million for the three months ended September 30, 2014, or 9.7% of total revenues, from $32.1 million, or 11.0% of total revenues, for the three months ended September 30, 2013. The $0.8 million decrease was primarily attributable to decreased business with our recurring customers contributing $0.8 million. EMEA revenues increased to $47.8 million for the three months ended September 30, 2014, or 14.8% of total revenues, from $41.3 million, or 14.1% of total revenues, for the three months ended September 30, 2013. The $6.5 million increase was primarily attributable to increased business with our recurring customers contributing $6.6 million, which is offset by $0.6 million in lost revenues as a result of projects completed and a $0.5 million increase in revenues from new customers. The revenue growth in Europe was driven by our increased focus and strong traction in existing markets. Asia Pacific revenues increased to $18.1 million for the three months ended September 30, 2014, or 5.6% of total revenues, from $17.4 million, or 5.9% of total revenues, for the three months ended September 30, 2013. The $0.7 million increase was primarily attributable to increased business with our recurring customers contributing $0.8 million, which is offset by $0.7 million in lost revenues as a result of projects completed and $0.6 million increase in revenues from new customers. Revenue by verticals The following table presents our consolidated revenues as a percentage of consolidated revenues based on customer business verticals (in thousands): Three Months Ended September 30, 2014 2013 Amount % Amount % Revenues: Banking and financial services $ 74,412 23.0 $ 64,520 22.0 Insurance 62,186 19.3 66,019 22.5 Healthcare and life sciences 30,406 9.4 26,217 8.9 Manufacturing 90,940 28.2 78,091 26.6 Retail and consumer packaged goods 27,083 8.4 26,186 9.0 Services 37,747 11.7 32,373 11.0 Total revenues $ 322,774 100.0 $ 293,406 100.0 Banking and financial services revenues increased to $74.4 million for the three months ended September 30, 2014, or 23.0% of total revenues, from $64.5 million, or 22.0% of total revenues, for the three months ended September 30, 2013. The $9.9 million increase was primarily attributable to increased business with our recurring customers contributing $10.2 million, which is offset by $0.4 million in lost revenues as a result of projects completed and $0.1 million increase in revenues from new customers. We continue to see strength in banking and financial services and our Reference Data Management Solution designed for clients continue to gain traction. Insurance revenues decreased to $62.2 million for the three months ended September 30, 2014, or 19.3% of total revenues, from $66.0 million, or 22.5% of total revenues, for the three months ended September 30, 2013. The $3.8 million decrease was primarily attributable to a $3.5 million decrease in business with our recurring customers, and $0.4 million in lost revenues as a result of projects completed partly offset by $0.1 million increase in revenues from new customers. 45 -------------------------------------------------------------------------------- Table of Contents Healthcare and life sciences revenues increased to $30.4 million for the three months ended September 30, 2014, or 9.4% of total revenues, from $26.2 million, or 8.9% of total revenues, for the three months ended September 30, 2013. The $4.2 million increase was primarily attributable to increased business with our recurring customers contributing $1.3 million, which is offset by $0.2 million in lost revenues as a result of projects completed and $3.1 million increase in revenues from new customers. Manufacturing revenues increased to $90.9 million for the three months ended September 30, 2014, or 28.2% of total revenues, from $78.1 million, or 26.6% of total revenues, for the three months ended September 30, 2013. The $12.8 million increase was primarily attributable to increased business with our recurring customers contributing $12.4 million, which is offset by $1.0 million in lost revenues as a result of projects completed and $1.4 million increase in revenues from new customers. Retail and consumer packaged goods revenues increased to $27.1 million for the three months ended September 30, 2014, or 8.4% of total revenues, from $26.2 million, or 9.0% of total revenues, for the three months ended September 30, 2013. The $0.9 million increase was primarily attributable to increased business with our recurring customers contributing $1.1 million, which is offset by $0.2 million in lost revenues as a result of projects completed. Services revenues increased to $37.7 million for the three months ended September 30, 2014, or 11.7% of total revenues, from $32.4 million, or 11.0% of total revenues, for the three months ended September 30, 2013. The $5.4 million increase was primarily attributable to increased business with our recurring customers contributing $5.7 million, which is offset by $0.7 million in lost revenues as a result of projects completed and a $0.4 million increase in revenues from new customers. Revenue by project type The following table presents our consolidated revenues as a percentage of consolidated revenues based on project type (in thousands): Three Months Ended September 30, 2014 2013 Amount % Amount % Revenues: Fixed price $ 213,149 66.0 $ 187,535 63.9 Time and material 109,625 34.0 105,871 36.1 Total revenues $ 322,774 100.0 $ 293,406 100.0 Fixed price revenues primarily represents annual maintenance contract/fixed time frame contracts, which include application maintenance and support services, on which revenue is recognized ratably over the term of maintenance. Revenues increased to $213.1 million for the three months ended September 30, 2014, or 66.0% of total revenues, from $187.5 million, or 63.9% of total revenues, for the three months ended September 30, 2013. The $25.6 million increase was primarily attributable to increased business with our recurring customers contributing $22.2 million, which is offset by $1.1 million in lost revenues as a result of projects completed and a $4.5 million increase in revenues from new customers. Time and material projects are projects wherein contract payments are based on the number of consultant hours worked on the project. Revenues increased to $109.6 million for the three months ended September 30, 2014, or 34.0% of total revenues, from $105.9 million, or 36.1% of total revenues, for the three months ended September 30, 2013. The $3.8 million increase was primarily attributable to increased business with our recurring customers contributing $3.7 million, which is offset by $1.5 million in lost revenues as a result of projects completed and a $1.6 million increase in revenues from new customers. 46-------------------------------------------------------------------------------- Table of Contents Revenue Mix and Utilization The following table presents percentages of our revenue mix and utilization: Three Months Ended September 30, 2014 2013 % % Efforts: Onsite 22.8 21.5 Offshore 77.2 78.5 Revenue Mix: Onsite 50.3 48.9 Offshore 49.7 51.1 Realized Rate (IT and Consulting Services): Onsite 64.8 67.9 Offshore 19.5 20.2 Utilization: Utilization (IT and Consulting Services) 71.0 79.4 Utilization (BPO) 91.2 95.8 Utilization 74.2 82.3 During the three months ended September 30, 2014, there was an increase in revenue from onsite directly attributable to an increase in the use of onsite resources. During the quarter ended September 30, 2014, we increased our investments in building talent capital, leadership, and learning and solution development with a view to build long term value and thereby strengthen our competitive position. The increased investments were also directly responsible for a decrease in realized and utilization rates during the three months ended September 30, 2014. We believe our increased on-site presence, stable future hiring, increased automation and other scale benefits will improve utilization rates. Gross margin Our Gross margin percentage was 35.3% for the three months ended September 30, 2014, as compared to 41.4% for the three months ended September 30, 2013. In addition to our increased hiring, investments in business tools, methodology and capabilities and the initial set up and conversion costs associated with ramping up for our large deals have resulted in lower margins during the quarter. However, our continuous investments in people, capabilities and infrastructure will enable us to strengthen our position as a transformational ITOPS solutions provider and drive our revenue growth. The details of our gross margin are as follows (in thousands): Gross Margin Metrics: Three Months Ended September 30, 2014 2013 Revenue $ 322,774 $ 293,406 Cost of revenues: Direct salary costs 179,094 144,921 Direct travel costs 9,385 7,438 Direct other costs 20,322 19,704 Gross Margin $ 113,973 $ 121,343 47 -------------------------------------------------------------------------------- Table of Contents As we conduct business through our globally integrated onsite and offshore delivery locations, primarily in India, the strengthening or weakening of the USD against other currencies, has a direct effect on our costs by reducing or increasing the cost of our services in offshore delivery centers which impacts our profitability. During the three months ended September 30, 2014, the decrease in gross margin percentage was directly attributable to an decrease in utilization by 2.2%, increase in salaries and other costs directly associated with billable professionals, including payroll taxes by 2.8%, increase in travel and immigration costs including visa fees by 0.4%. The decrease was also impacted by adverse movement of the USD against other currencies by 0.7%. Selling, general and administrative expenses Selling, general and administrative expenses ("SG&A") include all costs that are not directly associated with revenue-generating activities. These include employee costs, corporate costs and facilities costs. Employee costs include selling, marketing and administrative salaries and related employee benefits and training costs. Corporate costs include costs such as marketing and advertisement expense, reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs. Our SG&A percentage was 15.5% for the three months ended September 30, 2014, as compared to 16.0% for the three months ended September 30, 2013. The SG&A expense details are as follows (in thousands): Three Months Ended September 30, 2014 2013 Employee costs $ 25,666 $ 23,341 Travel costs 3,200 3,084 Corporate costs: - Marketing costs 1,066 1,164 - Legal costs 1,094 1,680 - Other corporate costs 5,784 5,404 Total Corporate costs 7,944 8,248 Facility costs 13,124 12,189 Selling, general and administrative expenses $ 49,934 $ 46,862 Total SG&A expenses for the three months ended September 30, 2014 increased by $3.1 million as compared to the three months ended September 30, 2013. Employee costs increased by $2.3 million for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to increase in stock-based compensation expenses by $0.9 million, higher staff welfare expenses by $0.8 million and higher salary, overhead expenses and benefits by $0.6 million. Our corporate costs decreased by $0.3 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was primarily attributable to the decrease in legal fees by $0.6 million related to ongoing general litigation matters which was partly offset by an increase in subscription fees by $0.3 million. Facilities costs increased by $1.0 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increase was primarily on account of increase in rent and related expenses by $0.8 million. Depreciation and amortization costs Depreciation and amortization costs were 2.9% of revenue for each of the three months ended September 30, 2014 and 2013, respectively. 48-------------------------------------------------------------------------------- Table of Contents Operating income Our operating margin (operating income as a percentage of revenue) was 16.9% and 22.5% for the three months ended September 30, 2014 and 2013, respectively. The decrease was mainly due to decrease in margins and an increase in selling, general and administrative expenses. Interest expense Interest expenses were 2.3% and 6.9% of revenues for the three months ended September 30, 2014 and 2013, respectively. The details of interest expense are as follows (in thousands): Three Months Ended September 30, 2014 2013 Interest on Senior Notes (including amortization of debt issuance costs) $ 4,110 $ 18,950 Interest expense on line of credit and term loans (including amortization of debt issuance costs) 3,142 1,187 Interest on uncertain tax position 75 99 Other interest charges 165 20 $ 7,492 $ 20,256 The decrease in interest expense of $12.8 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 was primarily on account of lower interest of 4.75% on the new Senior Notes as compared to 9.00% on the extinguished Senior Notes. Foreign exchange gain (loss), net Foreign exchange gain was $3.2 million for the three months ended September 30, 2014 as compared to a loss of $4.4 million for the three months ended September 30, 2013, respectively. We recognized foreign currency gain of $4.4 million and loss of $9.4 million on foreign exchange derivative contracts related to inter-company and customer receivables and forecasted revenues for the three months ended September 30, 2014 and 2013, respectively. During the three months ended September 30, 2013, we recognized net unrealized gain of $0.3 million on a foreign exchange forward contract that was entered to hedge the exchange risk on our foreign currency denominated investments classified as available-for-sale securities. We also recognized a foreign currency loss of $0.1 million on the re-measurement of other monetary assets and liabilities and loss of $1.3 million on the re-measurement of the unsecured revolving working credit facility for the three months ended September 30, 2014, as compared to a gain of $7.2 million on the re-measurement of other monetary assets and liabilities and a loss of $2.5 million on the re-measurement of unsecured revolving working credit facility for the three months ended September 30, 2013. Other income, net Other income was 1.3% and 1.8% of revenues for the three months ended September 30, 2014 and 2013, respectively. The details of other income are as follows (in thousands): Three Months Ended September 30, 2014 2013 Investment income $ 3,455 $ 4,088 Interest income 63 705 Gain on sale of fixed assets 64 8 Other 571 412 Other income, net $ 4,153 $ 5,213 The decrease in other income is primarily due to the reduction in the investment income. Our investment base as of July 01, 2014 and 2013 was $150.9 million and $275.2 million, respectively. 49-------------------------------------------------------------------------------- Table of Contents Income taxes Our reported effective tax rate ("ETR"), including discrete items, was 31.4% during each of the three months ended September 30, 2014 and 2013. There are no major variances in the components of reported ETR during the three months ended September 2014 as compared to the three month ended September 2013. Non-controlling interest Post the approval of the merger scheme of IGATE Global Solutions Limited ("IGATE Global") on May 10, 2013 by the High Court of Judicature at Mumbai approving the merger of IGATE Computer Systems Limited ("IGATE Computer") with IGATE Global, shareholders of IGATE Computer who did not tender their shares during the exit period (until May 27, 2013) were issued IGATE Global shares in the ratio of five equity shares of IGATE Global for twenty two equity shares of IGATE Computer. The Company has no obligation to redeem the shares and accordingly the remaining redeemable non-controlling interest was reclassified to permanent equity. The shares held by general public as of September 30, 2014 and 2013 represents approximately 0.5% of the outstanding share capital of IGATE Global. For the three months ended September 30, 2014, we recorded $0.1 million share of profits and $0.2 million of accumulated other comprehensive loss attributable to non-controlling interest as compared to $0.1 million share of profits and $2.0 million of accumulated other comprehensive income attributable to non-controlling interest for the three months ended September 30, 2013. Preferred dividend On February 1, 2011, pursuant to the securities purchase agreement with Viscaria Limited dated January 10, 2011, we issued 210,000 shares of Series B Preferred Stock for a consideration of $210 million and an additional 120,000 shares were issued on May 9, 2011 for a consideration of $120 million. We have accrued cumulative dividends of $8.7 million and $8.0 million at a rate of 8.00% per annum, compounded quarterly, for the three months ended September 30, 2014 and 2013, respectively. Results of Operations for the Nine Months Ended September 30, 2014 as Compared to the Nine Months Ended September 30, 2013 (dollars in thousands): Nine Months Ended September 30, % change of Amount from comparable 2014 2013 period % of % of Amount Revenues Amount Revenues Revenues $ 936,725 100.0 % $ 851,592 100.0 % 10.0 % Cost of revenues (a) 595,314 63.6 518,073 60.8 14.9 Gross margin 341,411 36.4 333,519 39.2 2.4 Selling, general and administrative expense 140,103 15.0 139,004 16.3 0.8 Depreciation and amortization 27,660 2.9 26,305 3.1 5.2 Income from operations 173,648 18.5 168,210 19.8 3.2 Interest expense (43,317 ) (4.6 ) (67,025 ) (7.9 ) (35.4 ) Foreign exchange gain, net 6,090 0.7 92 0.0 6519.6 Loss on extinguishment of debt (b) (51,760 ) (5.5 ) - - - Other income 15,147 1.6 39,910 4.7 (62.0 ) Income before income taxes 99,808 10.7 141,187 16.6 (29.3 ) Income tax expense (c) 27,486 2.9 44,461 5.2 - Net income 72,322 7.8 96,726 11.4 (25.2 ) Non-controlling interest 282 0.1 97 0.0 190.7 Net income attributable to IGATE 72,040 7.7 96,629 11.4 (25.4 ) Accretion to preferred stock 436 0.0 361 0.1 20.8 Preferred dividend 25,182 2.7 23,246 2.7 8.3 Net income attributable to IGATE common shareholders $ 46,422 5.0 % $ 73,022 8.6 % (36.4 )% (a) Cost of revenues is exclusive of depreciation and amortization. (b) As there is no amount in the previous period, the percent change from previous period is not computed. (c) As the effective tax rate is a better comparable measure, the percent change from comparable period is not computed. 50 -------------------------------------------------------------------------------- Table of Contents Revenues Revenues increased by 10.0% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase is directly attributable to the combination of increased business with our recurring customers by 9.4% and business with new customers by 1.5%, which was partly offset by the cessation of business with certain existing customers by 0.7%. We have strategized our priority of expanding our relationships with our existing clients. The movement of the USD against various other currencies had a net adverse impact on our revenues of 0.2% during the nine months ended September 30, 2014 as compared to the corresponding period in the previous year. Our top five customers accounted for 38.9% and 40.0% of the revenues for the nine months ended September 30, 2014 and 2013, respectively. Revenues by Geography The following table presents our consolidated domestic and international revenues as a percentage of consolidated revenues based customer geography (in thousands): Nine Months Ended September 30, 2014 2013 Amount % Amount % Revenues: United States $ 645,881 69.0 $ 596,583 70.1 Canada 90,247 9.6 91,243 10.7 EMEA (1) 146,470 15.6 110,016 12.9 Asia Pacific 54,127 5.8 53,750 6.3 Total revenues $ 936,725 100.0 $ 851,592 100.0 (1) Comprises of Europe, Middle East and African countries. United States revenues increased to $645.9 million for the nine months ended September 30, 2014, or 69.0% of total revenues, from $596.6 million, or 70.1% of total revenues, for the nine months ended September 30, 2013. The $49.3 million increase was primarily attributable to increased business with our recurring customers contributing $42.8 million, which is offset by $3.5 million in lost revenues as a result of projects completed and $10.0 million increase in revenues from new customers. Canada revenues decreased to $90.2 million for the nine months ended September 30, 2014, or 9.6% of total revenues, from $91.2 million, or 10.7% of total revenues, for the nine months ended September 30, 2013. The $1.0 million decrease was primarily attributable to decreased business with our recurring customers contributing $0.9 million, which is offset by $0.1 million in lost revenues as a result of projects completed. EMEA revenues increased to $146.5 million for the nine months ended September 30, 2014, or 15.6% of total revenues, from $110.0 million, or 12.9% of total revenues, for the nine months ended September 30, 2013. The $36.5 million increase was primarily attributable to increased business with our recurring customers contributing $36.3 million, which is offset by $1.2 million in lost revenues as a result of projects completed and a $1.4 million increase in revenues from new customers. The revenue growth in Europe was driven by our increased focus and strong traction in existing markets. Asia Pacific revenues increased to $54.1 million for the nine months ended September 30, 2014, or 5.8% of total revenues, from $53.7 million, or 6.3% of total revenues, for the nine months ended September 30, 2013. The $0.4 million increase was primarily attributable to decreased business with our recurring customers contributing $0.2 million, which is offset by $0.7 million in lost revenues as a result of projects completed and $1.3 million increase in revenues from new customers. Revenue by verticals The following table presents our consolidated revenues as a percentage of consolidated revenues based on customer business verticals (in thousands): Nine Months Ended September 30, 2014 2013 Amount % Amount % Revenues: Banking and financial services $ 216,573 23.1 $ 184,947 21.7 Insurance 185,886 19.9 191,390 22.5 Healthcare and life sciences 85,872 9.2 81,174 9.5 Manufacturing 253,165 27.0 225,985 26.5 Retail and consumer packaged goods 81,004 8.6 74,699 8.8 Services 114,225 12.2 93,397 11.0 Total revenues $ 936,725 100.0 $ 851,592 100.0 51 -------------------------------------------------------------------------------- Table of Contents Banking and financial services revenues increased to $216.6 million for the nine months ended September 30, 2014, or 23.1% of total revenues, from $184.9 million, or 21.7% of total revenues, for the nine months ended September 30, 2013. The $31.6 million increase was primarily attributable to increased business with our recurring customers contributing $31.5 million, offset by $0.3 million in lost revenues as a result of projects completed and $0.4 million increase in revenue from new customers. We continue to see strength in banking and financial services and our Reference Data Management Solution designed for clients continue to gain traction. Insurance revenues decreased to $185.9 million for the nine months ended September 30, 2014, or 19.9% of total revenues, from $191.4 million, or 22.5% of total revenues, for the nine months ended September 30, 2013. The $5.5 million decrease was primarily attributable to a $5.5 million decrease in business with our recurring customers, and $0.2 million in lost revenues as a result of projects completed partly offset by $0.2 million increase in revenues from new customers. Healthcare and life sciences revenues increased to $85.9 million for the nine months ended September 30, 2014, or 9.2% of total revenues, from $81.2 million, or 9.5% of total revenues, for the nine months ended September 30, 2013. The $4.7 million increase was primarily attributable to revenues from new customers contributing $6.7 million, offset by $0.9 million in lost revenues as a result of projects completed and $1.1 million decrease in business with our recurring customers. Manufacturing revenues increased to $253.2 million for the nine months ended September 30, 2014, or 27.0% of total revenues, from $226.0 million, or 26.5% of total revenues, for the nine months ended September 30, 2013. The $27.2 million increase was primarily attributable to increased business with our recurring customers contributing $27.1 million, offset by $2.8 million in lost revenues as a result of projects completed and $2.9 million increase in revenue from new customers. Retail and consumer packaged goods revenues increased to $81.0 million for the nine months ended September 30, 2014, or 8.6% of total revenues, from $74.7 million, or 8.8% of total revenues, for the nine months ended September 30, 2013. The $6.3 million increase was primarily attributable to increased business with our recurring customers contributing $4.5 million, offset by $0.1 million in lost revenues as a result of projects completed and $1.9 million increase in revenue from new customers. Services revenues increased to $114.2 million for the nine months ended September 30, 2014, or 12.2% of total revenues, from $93.4 million, or 11.0% of total revenues, for the nine months ended September 30, 2013. The $20.8 million increase was primarily attributable to revenues from new customers contributing $21.4 million, offset by $1.3 million in lost revenues as a result of projects completed and a $0.7 million increased business with our recurring customers. Revenue by project type The following table presents our consolidated revenues as a percentage of consolidated revenues based on project type (in thousands): Nine Months Ended September 30, 2014 2013 Amount % Amount % Revenues: Fixed price $ 624,837 66.7 $ 535,353 62.9 Time and material 311,888 33.3 316,239 37.1 Total revenues $ 936,725 100.0 $ 851,592 100.0 Fixed price revenues primarily represents annual maintenance contract/fixed time frame contracts, which include application maintenance and support services, on which revenue is recognized ratably over the term of maintenance. Revenues increased to $624.8 million for the nine months ended September 30, 2014, or 66.7% of total revenues, from $535.4 million, or 62.9% of total revenues, for the nine months ended September 30, 2013. The $89.4 million increase was primarily attributable to increased business with our recurring customers contributing $83.4 million, which is offset by $2.4 million in lost revenues as a result of projects completed and a $8.4 million increase in revenues from new customers. 52 -------------------------------------------------------------------------------- Table of Contents Time and material projects are projects wherein contract payments are based on the number of consultant hours worked on the project. Revenues decreased to $311.9 million for the nine months ended September 30, 2014, or 33.3% of total revenues, from $316.2 million, or 37.1% of total revenues, for the nine months ended September 30, 2013. The $4.3 million decrease was primarily attributable to decrease in business with our recurring customers contributing $5.5 million, which is offset by $3.1 million in lost revenues as a result of project completion and a $4.3 million increase in revenues from new customers. Revenue Mix and Utilization - IT and Consulting Services The following table presents our revenue mix and utilization percentages for IT and Consulting Services: Nine Months Ended September 30, 2014 2013 % % Efforts: Onsite 22.3 21.8 Offshore 77.7 78.2 Revenue: Onsite 49.7 48.8 Offshore 50.3 51.2 Realized Rate (IT and Consulting Services): Onsite 65.7 68.0 Offshore 19.5 20.0 Utilization: Utilization (IT and Consulting Services) 72.9 77.1 Utilization (BPO) 94.1 94.8 Utilization 76.3 80.2 During the nine months ended September 30, 2014, there was an increase in revenue from onsite directly attributable to an increase in the use of onsite resources. During the recent quarters, we increased our investments in building talent capital, leadership, and learning and solution development with a view to build long term value and thereby strengthen our competitive position. The increased investments were also directly responsible for our decrease in realized and utilization rates during the nine months ended September 30, 2014. We believe our increased higher on-site presence, stable future hiring, increased automation and other scale benefits will improve utilization rates. Gross margin Our Gross margin percentage was 36.4% for the nine months ended September 30, 2014, as compared to 39.2% for the nine months ended September 30, 2013. In addition to our increased hiring, investments in business tools, methodology and capabilities and the initial set up and conversion costs associated with ramping up for our large deals have resulted in lower margin during the nine months ended September 30, 2014. However, our continuous investments in people, capabilities and infrastructure will enable us to strengthen our position as a transformational ITOPS solutions provider and drive our revenue growth. The details of our gross margin are as follows (in thousands): 53-------------------------------------------------------------------------------- Table of Contents Gross Margin Metrics: Nine Months Ended September 30, 2014 2013 Revenue $ 936,725 $ 851,592 Cost of revenues: Direct salary costs 501,724 433,546 Direct travel costs 30,403 28,537 Direct other costs 63,187 55,990 Gross Margin $ 341,411 $ 333,519 As we conduct business through our globally integrated onsite and offshore delivery locations, primarily in India, the strengthening or weakening of the USD against other currencies, has a direct effect on our costs by reducing or increasing the cost of our services in offshore delivery centers which impacts our profitability. During the nine months ended September 30, 2014, the decrease in gross margin percentage was directly attributable to an increase in salaries, performance incentives and other costs directly associated with billable professionals, including payroll taxes by 2.6%, decrease in utilization by 1.2%, which was offset by favorable movement of the USD against the other currencies by 1.0%. Selling, general and administrative expenses SG&A include all costs that are not directly associated with revenue-generating activities. These include employee costs, corporate costs and facilities costs. Employee costs include selling, marketing and administrative salaries and related employee benefits and training costs. Corporate costs include costs such as marketing and advertisement expense, reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs. Our SG&A percentage was 15.0% for the nine months ended September 30, 2014, as compared to 16.3% for the nine months ended September 30, 2013. The SG&A expense details are as follows (in thousands): Nine Months Ended September 30, 2014 2013 Employee costs $ 70,783 $ 65,840 Travel costs 8,979 9,147 Corporate costs: - Marketing costs 4,912 4,952 - Legal costs 1,835 4,604 - Other corporate costs 16,385 19,473 Total Corporate costs 23,132 29,029 Facility costs 37,209 34,988 Selling, general and administrative expenses $ 140,103 $ 139,004 Total SG&A expenses for the nine months ended September 30, 2014 increased by $1.1 million as compared to the nine months ended September 30, 2013. Employee costs increased by $4.9 million for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, resulting from an increase due to employee stock-based compensation expenses of $2.1 million, staff welfare expenses of $1.5 million and salary costs of $1.3 million. 54-------------------------------------------------------------------------------- Table of Contents Our corporate costs decreased by $5.9 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Legal costs decreased by $2.8 million primarily due to decreased professional fees of $1.4 million related to ongoing general litigation matters and the Company also received from an insurance company a reimbursement of $1.4 million against the payment towards a claim brought against us by a former employee. Other corporate costs decreased by $3.1 million mainly due to decrease in merger and reorganization expenses of $5.0 million incurred in connection with implementation of structural changes, reversal of provision for doubtful debts by $0.7 million, professional and accounting fees by $0.5 million, which was partly offset by $2.3 million increase in service, state and withholding taxes and an increase in recruitment expenses by $0.9 million. Facilities costs increased by $2.2 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase was primarily on account of increase in rent and related expenses by $2.2 million. Depreciation and amortization costs Depreciation and amortization costs were consistent at 2.9% and 3.1% of revenue for the nine months ended September 30, 2014 and 2013, respectively. Operating income Our operating margin (operating income as a percentage of revenue) was 18.5% and 19.8% for the nine months ended September 30, 2014 and 2013, respectively. Although, the operating margin decreased marginally as a percentage of revenue due to the higher revenue base in 2014 as compared to 2013, it increased in absolute terms. Interest expense Interest expenses were 4.6% and 7.9% of revenues for the nine months ended September 30, 2014 and 2013, respectively. The details of interest expense are as follows (in thousands): Nine Months Ended September 30, 2014 2013 Interest on Senior Notes (including amortization of debt issuance costs) $ 31,592 $ 56,705 Interest expense on line of credit and term loans (including amortization of debt issuance costs) 10,334 9,930 Interest on uncertain tax position 1,142 316 Other interest charges 249 74 $ 43,317 $ 67,025 The decrease in interest expense of $23.7 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 was primarily on account of lower interest of 4.75% on the new Senior Notes as compared to 9.00% on the extinguished Senior Notes. Foreign exchange gain, net Foreign exchange gain was $6.1 million and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. We recognized foreign currency gain of $8.4 million and loss of $9.3 million on foreign exchange derivative contracts related to inter-company and customer receivables and forecasted revenues for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2013, we recognized net unrealized gain of $0.2 million on a foreign exchange forward contract that was entered to hedge the exchange risk on our foreign currency denominated investments classified as available-for-sale securities. We also recognized a foreign currency loss of $2.4 million on the re-measurement of other monetary assets and liabilities and gain of $0.1 million on the re-measurement of the unsecured revolving working credit facility for the nine months ended September 30, 2014, as compared to a gain of $16.1 million on the re-measurement of other monetary assets and liabilities, a loss of $6.4 million on the re-measurement of unsecured revolving working credit facility, a loss of $0.9 million on the re-measurement of escrow account balance and a gain of $0.4 million on re-measurement of redeemable non-controlling interest for the nine months ended September 30, 2013. 55-------------------------------------------------------------------------------- Table of Contents Loss on extinguishment of debt On April 22, 2014, pursuant to the "Optional Redemption" clause, as per the terms of the Indenture of Senior Notes due May 1, 2016, the Company redeemed 9.00% Senior Notes of $770 million together with a make whole premium of $36.3 million and charged the loss on extinguishment of $51.8 million (inclusive of unamortized debt issuance cost of $15.5 million) to earnings during the second quarter of 2014. The Company redeemed the Senior Notes due by partly raising funds through the private placement of $325 million principal amount of 4.75% Senior Notes due April 15, 2019 (the "Notes") to several initial purchasers. See Note 6 for more details on the new Notes. Other income, net Other income was 1.6% and 4.7% of revenues for the nine months ended September 30, 2014 and 2013, respectively. The details of other income are as follows (in thousands): Nine Months Ended September 30, 2014 2013 Investment income $ 10,995 $ 30,057 Interest income 1,877 2,986 Gain (loss) on sale of fixed assets 82 2,248 Forfeiture of vested stock options - 3,005 Other 2,193 1,614 Other income, net $ 15,147 $ 39,910 The decrease in other income is primarily due to the reduction in the investment income. Our investment base as of January 01, 2014 and 2013 was $181.4 million and $510.8 million, respectively. The Company sold some of the lands located in India and realized a gain of $2.2 million for the nine months ended September 30, 2013. Interest income received on tax refunds from tax authorities amounted to $0.7 million for the nine months ended September 30, 2014 as compared to $2.3 million for the nine months ended September 30, 2013. Interest received from customer as part of the receivables settlement is $0.7 million for the nine months ended September 30, 2014 and interest received on term and other bank deposits amounted to $0.4 million for the nine months ended September 30, 2014 as compared to $0.7 million for the nine months ended September 30, 2013. Additionally, other income for the nine months ended September 30, 2013, includes approximately $3.0 million attributable to the forfeiture of vested stock options in connection with the termination of our former Chief Executive Officer. Income taxes Our reported ETR, including discrete items recorded during the period, was 27.5% and 31.5% during the nine months ended September 30, 2014 and 2013, respectively. The Company recognized a tax benefit in the U.S. jurisdiction of $19.7 million during the nine months ended September 30, 2014 related to the loss on extinguishment of debt of $51.8 million (inclusive of unamortized debt issuance cost of $15.5 million). During the nine months ended September 30, 2014, the Company released valuation allowance of $2.3 million pertaining to its subsidiary in U.K. and Singapore jurisdiction. The Company weighed all evidences and determined that the positive evidences relating to the reliability of its deferred tax asset particularly the evidences that were objectively verifiable outweighed the negative evidences. The positive evidences that outweighed the negative evidences includes (i) three years cumulative income position; (ii) the strong positive trend in the subsidiary's financial performance over four consecutive quarters; (iii) the forecasted income for 2014 and future taxable income; (iv) indefinite carry forward period of the net operating losses; and (v) improved trend in earnings and increased customer revenues from contracts entered in 2013. Accordingly, the Company concluded that it is more likely than not that the deferred tax assets will be realized and released the valuation allowance. 56-------------------------------------------------------------------------------- Table of Contents The impact of the above resulted in lower ETR during the nine months ended September 30, 2014. The Company recorded a tax expense of $3.0 million as a result of increase in Indian statutory tax rate on the deferred tax liability as per the new legislation. The Company also recorded a discrete tax benefit of $4.1 million on account of merger of entities in India jurisdiction. This led to a net tax benefit of 1.1 million for nine months ended September 30, 2013 in the India jurisdiction. Non-controlling interest Post the approval of the merger scheme of IGATE Global on May 10, 2013 by the High Court of Judicature at Mumbai approving the merger of IGATE Computer with IGATE Global, shareholders of IGATE Computer who did not tender their shares during the exit period (until May 27, 2013) were issued IGATE Global shares in the ratio of five equity shares of IGATE Global for twenty two equity shares of IGATE Computer. The Company had no obligation to redeem the shares and accordingly the remaining redeemable non-controlling interest was reclassified to permanent equity. The shares held by general public as of September 30, 2014 and 2013 represents approximately 0.5% of the outstanding share capital of IGATE Global. For the nine months ended September 30, 2014, we recorded $0.3 million share of profits and $0.1 million of accumulated other comprehensive loss attributable to non-controlling interest as compared to $0.1 million share of profits and $2.0 million of accumulated other comprehensive income attributable to non-controlling interest for the nine months ended September 30, 2013. Preferred dividend On February 1, 2011, pursuant to the securities purchase agreement with Viscaria Limited dated January 10, 2011, we issued 210,000 shares of Series B Preferred Stock for a consideration of $210 million and an additional 120,000 shares were issued on May 9, 2011 for a consideration of $120 million. We have accrued cumulative dividends of $25.2 million and $23.2 million at a rate of 8.00% per annum, compounded quarterly, for the nine months ended September 30, 2014 and 2013, respectively. Use of non-GAAP Financial Measures: We believe that providing adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") and non-GAAP net income and non-GAAP basic and diluted earnings per share in addition to the related GAAP measures provides investors with greater transparency to the information used by our management in our financial and operational decision-making. These non-GAAP measures are also used by management in connection with our performance compensation programs. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Reconciliations of these non-GAAP measures to their comparable GAAP measures are included in the financial tables below. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. These non GAAP measures should be considered supplemental in nature and should not be considered in isolation or be construed as being more important than comparable GAAP measures. The non-GAAP financial measures contained herein exclude the following items: • Amortization of intangible assets: Intangible assets primarily comprise of customer relationships. We incur charges relating to the amortization of these intangibles. These charges are included in our GAAP presentation of earnings from operations, operating margin, net income and diluted earnings per share. We exclude these charges for purposes of calculating these non-GAAP measures. 57 -------------------------------------------------------------------------------- Table of Contents • Stock-based compensation: Although stock-based compensation is an important component of the compensation of our employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may not reflect the actual value realized upon the future exercise or termination of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business. • Foreign exchange (gain)/loss: From time to time, we recognize foreign currency losses on re-measurement of escrow account balance and foreign exchange gains on re-measurement of redeemable non-controlling interest liability. We believe that eliminating the non-capitalized items for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of our current performance and comparisons to its past performance. • Delisting expenses: We voluntarily delisted the equity shares of our majority owned subsidiary, IGATE Computer from the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited and the American Depository Shares from the New York Stock Exchange. Delisting is an infrequent activity and expenses incurred in connection therein are inconsistent in amount and are significantly impacted by the timing and nature of the delisting. We believe that eliminating these expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of our current operating performance and comparisons to its past operating performance. • Merger and reorganization expenses: We are merging and reorganizing our overseas subsidiaries and branches with a view to simplifying the corporate structure and have incurred legal and professional expenses in this connection. Merger and reorganization is an infrequent activity and expenses incurred in connection therein are inconsistent in amount and significantly impacted by the timing and nature of the reorganization. We believe that eliminating these expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. • Preferred dividend and accretion to preferred stock: We have issued 8.00% Series B Preferred Stock. We also incurred issuance costs that have been netted against the proceeds received from the issuance of the Series B Preferred Stock. The Series B Preferred Stock is being accreted over a period of six years. Although, the effect of inclusion of equivalent units of common stock towards convertible participating preferred stock is anti-dilutive for GAAP purposes, the non-GAAP diluted earnings per share has been calculated assuming the conversion of all outstanding shares of preferred stock into equivalent units of common stock. We believe that eliminating these expenses as well as inclusion of equivalent units of common stock towards the preference shares to compute diluted earnings per share for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. • Loss on extinguishment of debt: We extinguished debt prior to its scheduled maturity which has resulted in non-operating expenses which otherwise would not have been incurred. Debt extinguishment related charges that are excluded from GAAP earnings to determine non-GAAP earnings consist of the extinguishment premium paid as well as the write-off of unamortized debt issuance costs. These expenses are one-off and of a non-recurring nature and we believe that eliminating them for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance. From time to time in the future, there may be other items that we may exclude in presenting our financial results. 58-------------------------------------------------------------------------------- Table of Contents The table below presents a reconciliation of our non-GAAP financial measures to the most comparable GAAP measures for the three and nine months ended September 30, 2014 and 2013, respectively (in thousands, except for per share data): Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 GAAP Net Income attributable to IGATE common shareholders $ 28,503 $ 23,776 $ 46,422 $ 73,022 Adjustments: Preferred dividend and accretion to preferred stock 8,805 8,120 25,618 23,607 Amortization of Intangible assets 2,715 2,540 7,996 7,980 Stock-based compensation 4,607 3,878 12,423 10,243 Delisting expenses - - - 93 Merger and reorganization expenses 156 - 286 5,264 Foreign exchange loss on acquisition hedging and re-measurement - - - 489 Loss on extinguishment of debt - - 51,760 - Forfeiture of vested stock options - - - (3,005 ) Income tax adjustments (2,253 ) (2,020 ) (26,070 ) (7,028 ) Non-GAAP Net income attributable to IGATE common shareholders $ 42,533 $ 36,294 $ 118,435 $ 110,665 Basic EPS (GAAP) to Basic EPS (Non-GAAP): BASIC EPS (GAAP) $ 0.35 $ 0.30 $ 0.58 $ 0.94 Preferred dividend and accretion to preferred stock 0.11 0.11 0.32 0.31 Amortization of Intangible assets 0.04 0.03 0.10 0.10 Stock-based compensation 0.06 0.05 0.15 0.13 Delisting expenses - - - 0.00 Merger and reorganization expenses 0.00 - 0.00 0.07 Foreign exchange loss on acquisition hedging and re-measurement - - - 0.01 Loss on extinguishment of debt - - 0.64 - Forfeiture of vested stock options - - - (0.04 ) Income tax adjustments (0.03 ) (0.03 ) (0.32 ) (0.09 ) BASIC EPS (Non-GAAP) $ 0.53 $ 0.46 $ 1.47 $ 1.43 Diluted EPS (GAAP) to Diluted EPS (Non-GAAP): Diluted EPS (GAAP) $ 0.34 $ 0.30 $ 0.56 $ 0.91 Preferred dividend and accretion to preferred stock 0.11 0.11 0.31 0.30 Amortization of Intangible assets 0.04 0.03 0.10 0.10 Stock-based compensation 0.06 0.05 0.16 0.13 Delisting expenses - - - 0.00 Merger and reorganization expenses 0.00 - 0.00 0.07 Foreign exchange loss on acquisition hedging and re-measurement - - - 0.01 Loss on extinguishment of debt - - 0.63 - Forfeiture of vested stock options - - - (0.04 ) Income tax adjustments (0.03 ) (0.03 ) (0.32 ) (0.09 ) Diluted EPS (Non-GAAP) $ 0.52 $ 0.46 $ 1.44 $ 1.39 Weighted average shares outstanding, Basic 58,962 58,171 58,829 57,918 Add: Assumed preferred stock conversion 21,565 19,923 21,565 19,923 Non-GAAP weighted average shares outstanding, Basic 80,527 78,094 80,394 77,841 Weighted average dilutive common shares outstanding 60,867 59,836 60,709 59,564 Add: Assumed preferred stock conversion 21,565 19,923 21,565 19,923 Weighted average dilutive common equivalent shares outstanding 82,432 79,759 82,274 79,487 59 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Disclosure of Adjusted EBITDA We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income plus (i) depreciation and amortization, (ii) interest expense, (iii) income tax expense, minus (iv) other income, net plus (v) foreign exchange (gain)/loss, (vi) stock-based compensation (vii) delisting expenses (viii) loss on extinguishment of debt and (ix) merger and reorganization expenses. We eliminated the impact of the above as we do not consider them as indicative of our ongoing operating performance. These adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in evaluating management's performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because our credit agreement and our Indenture use measures similar to Adjusted EBITDA to measure our compliance with certain covenants. Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: • Adjusted EBITDA does not reflect our cash expenditures or future requirements, for capital expenditures or contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and • Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. The table below presents Adjusted EBITDA for each of the three and nine months ended September 30, 2014 and 2013, respectively (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Net income $ 37,397 $ 31,993 $ 72,322 $ 96,726 Adjustments: Depreciation and amortization 9,384 8,439 27,660 26,305 Interest expenses 7,492 20,256 43,317 67,025 Income tax expense 17,088 14,634 27,486 44,461 Other income, net (4,153 ) (5,213 ) (15,147 ) (39,910 ) Foreign exchange (gain) loss (3,169 ) 4,372 (6,090 ) (92 ) Stock-based compensation 4,607 3,878 12,423 10,243 Loss on extinguishment of debt - - 51,760 - Delisting expenses - - - 93 Merger and reorganization expenses 156 - 286 5,264 Adjusted EBITDA (a non-GAAP measure) $ 68,802 $ 78,359 $ 214,017 $ 210,115 60 -------------------------------------------------------------------------------- Table of Contents The Company presents the non-GAAP financial measure Adjusted EBITDA because, management uses this measure to monitor and evaluate the performance of the business and believes that the presentation of this measure will enhance the investors' ability to analyze trends in the business and evaluate our underlying performance relative to other companies in the industry. Liquidity and Capital Resources Our cash balances are held in numerous locations throughout the world, of which we hold approximately $115 million of cash, cash equivalents and short-term investments in our foreign locations as of September 30, 2014. Amounts held outside of the United States are utilized to support non-U.S. liquidity needs. Our ongoing cash flows and external borrowings in the United States are expected to be sufficient to meet our primary operating liquidity needs, in the United States, for at least twelve (12) months following this report. We have provided for the United States federal tax liability on the post-acquisition and pre-merger earnings and profits of the former IGATE Computer (currently merged with IGATE Global), India. The Company intends to use the remaining accumulated and future earnings of merged entities as well as other foreign subsidiaries to expand operations outside the United States and accordingly, undistributed earnings and profits are deemed permanently reinvested. However, if our intent is to change and we elected to repatriate such undistributed foreign earnings back to United States, it could result in additional income tax payments in future years. We estimate the potential tax liability relating to the repatriation of such undistributed foreign earnings to be approximately $171.2 million as of September 30, 2014. The following table summarizes the sources and uses of cash from our condensed consolidated statements of cash flow (in thousands): Nine Months Ended September 30, 2014 2013 Net cash provided by operating activities $ 84,544 $ 128,293 Net cash provided by investing activities 88,878 141,920 Net cash used in financing activities (245,337 ) (244,756 ) Effect of exchange rate changes (2,717 ) 21,367 Net change in cash and cash equivalents $ (74,632 ) $ 46,824 Cash from Operations Our largest source of operating cash flows is cash collections from our customers for different information technology services we render under various Statements of Work. Our primary uses of cash from operating activities are for personnel related expenditures, leased facilities and taxes. Net cash provided by operating activities decreased by $43.7 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to lower net income which was adjusted for higher non-cash charges such as depreciation, amortization of intangible assets and stock-based compensation which was partially offset by increases in accounts receivable and unbilled revenues resulting from an increased business. Investing Activities Cash provided by investing activities for the nine months ended September 30, 2014 was $88.9 million as compared to $141.9 million for the nine months ended September 30, 2013. Our investment portfolio and other investments decreased by $159.9 million for the nine months ended September 30, 2014 as compared to $184.2 million for the nine months ended September 30, 2013. Our investment portfolio decreased during the current and previous reporting period as we redeemed investments to repay term loan facility. During the nine months ended September 30, 2013, $23.7 million was used to purchase 2.5 million shares of IGATE Computer and released the restricted cash of $3.07 million on utilization of the same. 61-------------------------------------------------------------------------------- Table of Contents Capital expenditures were $70.9 million and $24.2 million for the nine months ended September 30, 2014 and 2013, respectively. Significant portions of the capital expenditures were due to the expansion of our campus facilities located in our Indian centers. Financing Activities Cash used in financing activities was $245.3 million for the nine months ended September 30, 2014 as compared to $244.8 million for the nine months ended September 30, 2013. The net proceeds from the exercise of employee stock options were $4.5 million and $3.6 million for the nine months ended September 30, 2014 and 2013, respectively. The cash used in financing activities during the nine months ended September 30, 2014, was primarily due to the repayment of 9% Senior Notes of $770 million together with a make whole premium of $36.3 million on April 22, 2014. We used our restricted cash of $360 million towards the repayment of the Senior Notes. On April 2, 2014, we completed the private placement of $325 million aggregate principal amount of the 4.75% Senior Notes due April 15, 2019, on which we paid debt issuance cost of $5.1 million. The cash used in financing activities during the nine months ended September 30, 2013, was primarily due to the net repayment of an outstanding term loan amounting to $228.5 million, which was undertaken to finance delisting related expenses and partial repayment of another term loan amounting to $17.5 million, which was undertaken to finance the purchase of a subsidiary. We also incurred a payment of debt related cost of $2.4 million. Our primary future cash requirements will be to fund working capital, debt service, capital expenditures, and benefit obligations. In addition to our working capital requirements, we expect our primary cash requirements for 2014 to be as follows: • Debt service- We expect to make payments of approximately $9.8 million during the remainder of 2014 for interest associated with Senior Notes and bank borrowings. • Capital expenditures- We expect to spend approximately $45.7 million for new and existing facility expansion and new hardware and software during the remainder of 2014. Of this, we have open purchase obligations of $38.1 million towards construction of new facilities and purchase of property and equipment. We will fund all capital expenditures through a combination of available cash reserves and short term investments and expect to fund the costs of future expansion through our net cash flows provided by operations. We and our subsidiaries may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Future Sources of Liquidity We expect our primary source of cash to be positive net cash flows provided by operating activities. Further, we continue to focus on cost reductions and have initiated steps to reduce overhead and provide cash savings. The Company currently has two revolving credit facilities providing for borrowings of up to an aggregate of $120 million subject to certain contractual limitations. As of September 30, 2014, we had borrowed $52.0 million under the revolving credit facilities. Both revolving credit facilities include other conditions that, if not complied with, could restrict our availability to borrow. The Indenture governing our Senior Notes and our credit agreements contain various covenants which are subject to a number of limitations and exceptions. The Indenture governing the Notes requires us to comply with a Consolidated Total Leverage Ratio, Consolidated Total Secured Leverage Ratio and a Fixed Charge Coverage Ratio when certain events occur. These ratios are based on what we refer to as "Adjusted EBITDA", which is defined under "Use of non-GAAP Financial Measures" in this Form 10 Q. Non-compliance with such covenants could affect our liquidity. We are currently in compliance with all covenants associated with our borrowings. The specific covenants and related definitions can be found in the Indenture and credit agreements, each of which are filed with the SEC. 62 -------------------------------------------------------------------------------- Table of Contents For more information on the revolving credit facilities and the restrictions on borrowing there under, including information on the covenants, please refer to Note 4 Line of Credit, Note 5 Term Loans and Note 6 Senior Notes, to our unaudited condensed consolidated financial statements included in this Form 10-Q. In order to meet our cash needs we may, from time to time borrow under our credit facilities or issue long term or short-term debt or equity, if the market and our credit facilities and the Indenture governing our Notes permit us to do so. For more information on the income tax consequences of the repatriation of the earnings of our foreign subsidiaries, please refer to the disclosure provided in Liquidity and Capital Resources included in this Form 10 Q. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. Based on past performance and current expectations, we expect our existing cash, cash equivalents and short-term investments of $163.0 million as of September 30, 2014, and our ongoing cash flows and external borrowings to be sufficient to meet our operating liquidity requirements described above for at least the twelve (12) months following this report. Debt Service Obligations As of September, 30, 2014, principal payments due under our indebtedness were $611 million, excluding capital lease obligations of $1.3 million. Our interest expense (excluding amortization) for the three and nine months ended September 30, 2014 was $6.4 million and $37.6 million, respectively. Our leverage requires that a substantial portion of our cash flows from operations be dedicated to the payment of principal and interest on our indebtedness. We continually monitor our exposure to the risk of increased interest rates as portions of our borrowings under our credit facilities are at variable rates of interest. The Company has made all scheduled payments timely under the indentures governing its extinguished Senior Notes, the new Senior Notes, and the revolving credit facilities. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. 63-------------------------------------------------------------------------------- Table of Contents |