Annual Reports

  • 10-K (Mar 18, 2014)
  • 10-K (Feb 28, 2013)
  • 10-K (Feb 25, 2011)
  • 10-K (Feb 23, 2010)
  • 10-K (Feb 23, 2009)
  • 10-K (Feb 29, 2008)

 
Quarterly Reports

 
8-K

 
Other

Sapient 10-K 2011
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from            to          
 
Commission file number: 0-28074
 
     
Delaware   04-3130648
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
131 Dartmouth Street, Boston, MA
(Address of principal executive offices)
  02116
(Zip Code)
 
617-621-0200
 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
 
Common Stock, $0.01 par value per share
  The Nasdaq Global Select Stock Market
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o      No þ
 
As of June 30, 2010 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1.2 billion based on the closing sale price as reported on the Nasdaq Global Select Stock Market. Solely for purposes of the foregoing calculation, “affiliates” are deemed to consist of each officer and director of the registrant, and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
     
Class   Outstanding at February 18, 2011
 
Common Stock, $0.01 par value per share   137,014,605 shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive proxy statement for the 2011 Annual Meeting of Stockholders, which document will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Form 10-K relates, are incorporated by reference into Items 10 through 14 of Part III of this Form 10-K.
 


 

 
SAPIENT CORPORATION
 
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2010
 
 
             
        Page
 
Item 1.   Business     1  
Item 1A.   Risk Factors     10  
Item 1B.   Unresolved Staff Comments     17  
Item 2.   Properties     17  
Item 3.   Legal Proceedings     17  
Item 4.   Removed and Reserved     17  
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
Item 6.   Selected Financial Data     20  
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk     42  
Item 8.   Financial Statements and Supplementary Data     44  
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     91  
Item 9A.   Controls and Procedures     91  
Item 9B.   Other Information        
Item 10.   Directors, Executive Officers and Corporate Governance     92  
Item 11.   Executive Compensation     93  
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     93  
Item 13.   Certain Relationships and Related Transactions, and Director Independence     94  
Item 14.   Principal Accounting Fees and Services     94  
Item 15.   Exhibits and Financial Statement Schedules     95  
Signatures     96  
 EX-10.29
 EX-10.30
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
 
 
Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Annual Report, including those related to our cash and liquidity resources and our cash expenditures related to dividend payments and restructuring, as well as any statements other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives are forward-looking statements. When used in this Annual Report, the words “will,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and


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you should not place undue reliance on our forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition, any forward-looking statements represent our expectation only as of the day this Annual Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.


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PART I
 
Item 1.   Business
 
 
Sapient Corporation (“Sapient” or the “Company”) 1 is a global services company that helps clients leverage marketing and technology to transform their businesses. We provide the following services that enable our clients to gain a competitive advantage and succeed in an increasingly-digital, customer-centric world. We do this through three main divisions: SapientNitro, Sapient Global Markets, and Sapient Government Services.
 
SapientNitro (formerly Sapient Interactive and Nitro Ltd.) is a leading integrated marketing and technology services group. We provide brand and marketing strategy and analytics, creative services, Web design and technology development, media buying and planning, search engine marketing, commerce solutions, emerging media expertise (including social media, mobile applications, and digital signage), and traditional advertising services. Through this group, we combine multi-channel marketing and commerce, and the technology that binds them, to influence customer behavior across the spectrum of our clients’ communication channels, resulting in deeper, more meaningful relationships between customers and brands.
 
Sapient Global Markets provides integrated advisory, program management, analytics, technology and operations services to leaders in today’s capital and commodity markets. We provide a full range of capabilities to help clients in investment banking, investment management and commodities, as well as intermediaries and government, grow and enhance their businesses, create robust and transparent infrastructure, manage operating costs, and foster innovation throughout their organizations. We also leverage our unique perspective, full capabilities, global reach and disciplined execution to enable our clients to succeed in these dynamic markets.
 
Sapient Government Services is a leading provider of consulting, technology, and marketing services to a wide array of U.S. governmental agencies. Focused on driving long-term change and transforming the citizen experience, we use technology and communications to help agencies become more accessible and transparent. With a track record of delivering mission-critical solutions and the ability to leverage commercial best practices, we serve as trusted advisors to government agencies such as the Federal Bureau of Investigation, Library of Congress, National Institutes of Health and United States Department of Homeland Security.
 
Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global presence with offices and over 9,000 employees in North America, Europe and the Asia-Pacific region, including India. Our headquarters and executive offices are located at 131 Dartmouth Street, Boston, Massachusetts 02116, and our telephone number is (617) 621-0200. Our stock trades on the Nasdaq Global Select Market under the symbol “SAPE.” Our Internet address is http://www.sapient.com. Material contained on our website is not incorporated by reference into this Annual Report.
 
Our clients consist of leading Global 2000 and other companies within the following industries in which we have extensive expertise (our “industry sectors”): financial services, technology and communications, consumer, travel and automotive, energy services and government, health and education. We also provide services to federal government clients within the U.S. and to provincial and other governmental entities in Canada and Europe.
 
Integral to our service capabilities is our Global Distributed Delivery (“GDD”) model, which enables us to perform services on a continuous basis, through client teams located in North America, Europe and the Asia-Pacific region, including India. Our GDD model involves a single, coordinated effort between development teams in a remote location (typically highly-skilled business, technology, and creative specialists in our Gurgaon, Bangalore, and Noida India offices) and development and client teams in North America, Europe, the Asia-Pacific region and India. To work effectively in this globally-distributed environment, we have developed extensive expertise and processes in coordinating project management and implementation efforts among the various development teams that we deploy to enable continuous project work. Through our GDD model, we believe that we deliver greater value to our clients at a competitive cost and in an accelerated timeframe. In addition to solution design and
 
 
1 Unless the context otherwise requires, references in this Annual Report to “Sapient,” the “company,” “we,” “us” or “our” refer to Sapient Corporation and its wholly-owned subsidiaries.


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implementation, many of our long-term engagement and outsourcing relationships leverage our longstanding GDD execution model.
 
We derive Long Term and Retainer Revenues from many client relationships. Long Term and Retainer Revenues are revenues from contracts with durations equal to or greater than twelve months, or contracts in which our clients have chosen us as an exclusive provider, for retainer-based, capacity, applications management and other services. In 2010, Long Term and Retainers Revenues represented 46% of our global services revenues, compared to 44% in 2009 and 43% in 2008. Further, in 2010 our five largest clients accounted for approximately 19% of our revenues in the aggregate, compared to 21% and 24% in 2009 and 2008. No client accounted for more than 10% of our revenues in 2010, 2009 or 2008.
 
We provide our services under fixed-price, time and materials and retainer contracts. We price our work based on established rates that vary according to our professionals’ experience levels, roles and geographic locations. Under our time and materials arrangements, we charge for our actual time and expenses incurred on an engagement. These arrangements may include an estimated fee range or a cap on our total fees. Under the latter circumstances, we assume the risk that we have correctly estimated the timeframe and level of effort required to complete any deliverables within the allotted fee cap.
 
In fixed-price contracts, we charge a fixed amount based on our anticipated total level of effort required for a project. For these arrangements, we similarly assume the risk of estimating correctly the scope of work and required resources for the applicable project. While we undertake rigorous project management throughout an engagement to ensure we deliver the project on time and on budget, we may recognize losses or lower profitability on capped arrangements or fixed-price contracts if we do not successfully manage these risks. These risks are magnified for large projects — which are increasingly part of our business — and multi-staged projects in which we perform our scope and labor estimates, and fix the total project price from inception through implementation, at an early stage of an engagement.
 
Under our retainer contracts, we charge our clients a fixed fee in exchange for providing a defined team of consultants, for a defined number of hours, to perform marketing, creative and other services at our clients’ direction. These arrangements are designed to afford our clients flexibility to engage us for myriad services as and when needed and, therefore, do not typically include defined scope or deliverables. Additionally, as our fees and level of effort are fixed in advance, should our clients choose not to use all level of effort allotted to them under the contract, we nonetheless charge and are entitled to receive our full fixed fee. Conversely, while we are contractually obligated to provide a specified number of hours of retainer service under each retainer contract, our clients may demand hours in excess of the contractually allotted amount. Under those circumstances, our retainer contracts typically include provisions that enable our clients to purchase additional hours of service on a time and materials basis fee basis.
 
Segment Information
 
Beginning in 2010, we realigned our North America and Europe business into three operating segments: SapientNitro, Sapient Global Markets and Sapient Government Services. Further information about these operating segments, including a presentation of financial information, is located in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18 in the Notes to Consolidated Financial Statements included in this Annual Report. The principal risks and uncertainties facing our business, operations and financial condition are discussed in Part I, Item 1A in this Annual Report.
 
Each of our Sapient Nitro and Sapient Global Markets operating segments includes globally-based professionals and, with respect to Sapient Government Services, professionals based in the United States. Within each operating segment, we focus our sales and delivery efforts on clients within our industry sectors. Through this global, industry sector-specific focus, we have developed an extensive understanding of our clients’ markets that enables us to skillfully address the market dynamics and business opportunities that our clients face. This understanding also enables us to identify and focus on critical areas to help our clients grow, perform, and innovate.


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In the past few years we have acquired certain businesses to enhance and/or complement our service offerings.
 
On July 1, 2009, we acquired 100% of the outstanding shares of NITRO Group Ltd. (“Nitro”), a global advertising network operating across North America, Europe, Australia and Asia. The acquisition added approximately 300 employees and was integrated into our SapientNitro operating segment. We acquired Nitro to leverage its traditional advertising services with our digital commerce and marketing technology services.
 
On August 6, 2008, we acquired 100% of the outstanding shares of Derivatives Consulting Group Limited (“DCG”), a London-based international financial advisory firm that is a provider of derivatives consulting and outsourcing services. The DCG acquisition added approximately 200 employees and was integrated into our Sapient Global Markets operating segment.
 
 
SapientNitro
 
SapientNitro services include integrated marketing and creative services, Web and interactive development, traditional advertising, media planning and buying, strategic planning and marketing analytics, commerce and content technologies, and business applications. These capabilities are applied to solve our clients’ most challenging business problems. We integrate creative marketing concepts with technology tools and platforms to build brand experiences designed to acquire new customers and increase demand, create profitable customer relationships and build brand awareness and loyalty.
 
Integrated Marketing and Creative Services
 
We conceive, design, develop and deliver seamlessly integrated, highly measurable, multi-channel marketing and commerce experiences that are as efficient as they are engaging. Our marketing and creative services consist of:
 
  •  Visual concept, design and implementation via multiple media;
 
  •  Brand building and direct response programs, audience segmentation and profiling strategies;
 
  •  Customer loyalty strategies;
 
  •  Customer relationship strategy and implementation;
 
  •  Customer lead generation and management; and
 
  •  Integrated advertising campaigns.
 
Our strategic and creative capabilities span the entire spectrum of interactive and traditional media and include brand and marketing strategy and analytics, paid and natural search advertising, targeted email advertising campaigns, third party banner advertisement campaigns, print and television advertising, and viral marketing initiatives.
 
Additionally, we offer our clients BridgeTrack®, a proprietary advertising campaign tracking and measurement software application that enables customers to measure the effectiveness of an online campaign in real-time and, in turn, improve results at the earliest possible phase of their campaigns by re-allocating marketing dollars across those marketing channels that are generating the best return on investment. BridgeTrack® generates real-time reporting and optimization of advertising campaigns across multiple media channels, including advertising via email, website displays/banner ads and internet natural search advertising. Through BridgeTrack®, our clients see how consumers react to their online marketing campaigns — whether, for example, consumers ultimately decide to buy the client’s offerings, even if the consumers make a purchase at a later date.
 
 
We conceive, develop and implement world class, award-winning websites and applications for our clients. Our services include user interface design and development, site design and development, custom application


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development, user research and testing, content management and technology development and implementation, and quality assurance testing. As digital channels expand beyond the Web, we have applied our strategy, design, and development services to new digital platforms, such as mobile phones, tablet devices, kiosks, touch-screen displays, and digital signage.
 
Traditional Advertising
 
We integrate our interactive marketing services with award-winning off-line media capabilities. Our services include brand strategy, copywriting, advertising work, and production for print, radio, and television campaigns. By combining the best of traditional advertising with an expansive mix of interactive and emerging technology expertise, our traditional advertising not only creates and engineers highly relevant experiences, it helps accelerate business growth and fuels brand advocacy by eliminating the operational silos that often block business success.
 
 
We help our clients design and implement media and customer channel planning and buying strategies and purchase and arrange for placement of our clients’ advertisements in the media. Our media planning and buying services include media strategy development, website search engine marketing, email marketing, online advertising, viral and social media marketing, emerging channels marketing (e.g., online video, mobile technologies, social networking), gaming (placing advertisements in online games and creating “advergames”), real-time reporting and optimizing of the success of campaigns, and integration of our customers’ media spending strategy with their other marketing initiatives.
 
 
We provide our clients a broad array of strategic planning services that are intended to maximize returns on their marketing initiatives investments. We combine our deep business and technology expertise to analyze how products, brands and consumers interact and the role that current and emerging technologies play in this relationship. Additionally, we apply expertise in marketing analytics to collect, analyze and report on online consumer behavior and insights, and assist our clients to develop successful online marketing strategies and campaigns. Our array of strategic planning and marketing analytics services includes brand strategy development, consumer and market research (primary and secondary), advertising message content and medium strategy development, internet and blogosphere analytics (researching and analyzing what social networking websites and blogs say about our clients) and coordination, and management of mixed media (e.g., online and print media).
 
Commerce & Content Technologies
 
We apply our substantial knowledge and expertise in marketing technologies to help our clients achieve their business goals. Our marketing technologies services include e-commerce platform selection and implementation, content management customization and implementation, the building of marketing asset management platforms, selection and implementation of advertising campaign management systems, application integration and research, and implementation of emerging technologies.
 
We also devise content, collaboration, commerce and IT strategies that improve our clients’ competitive position and performance, as well as the value they realize from their IT portfolio. We apply our substantial expertise in diverse technologies and our understanding of each client’s business issues to design solutions that align, and create a roadmap for the achievement of, the client’s business objectives. Our areas of content, collaboration, commerce and IT strategy expertise include:
 
  •  Business process consulting;
 
  •  E-business & digital strategy;
 
  •  IT governance & advisory services; and
 
  •  Program management office.


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Our substantial industry expertise and understanding of our clients’ customers, partners, competitors and processes enable us to rapidly define user requirements and gain alignment among client executives, chief marketing officers, chief information officers, chief technology officers and other client stakeholders concerning the design of mission-critical business applications. Additionally, we apply our expertise in business processes, enabling technologies and applications, and user-centered design to create and implement business and technology solutions that achieve substantial returns on our clients’ IT investments. Our primary areas of software development expertise are:
 
  •  Business applications;
 
  •  Customer relationship solutions;
 
  •  Custom & package applications; and
 
  •  Web solutions.
 
Sapient Global Markets
 
Sapient Global Markets operates in key centers relevant to the global capital and commodity markets, including New York, London, Zurich, Chicago, Houston, Amsterdam, Singapore, Boston, Toronto and Calgary.
 
Within Sapient Global Markets we have created a number of practices, designed to enable us to align our services directly with the manner in which our clients do business, and to focus on key areas of need within their operations. Our practice areas include:
 
  •  Derivative Platforms;
 
  •  Energy & Commodity;
 
  •  Market Initiatives and Infrastructure;
 
  •  Order Management Systems (OMS) / Execution Management Systems (EMS) Platforms;
 
  •  Portfolio Accounting;
 
  •  Trade and Transaction Reporting;
 
  •  Trade Documentation;
 
  •  Valuation and Risk Analytics; and
 
  •  Visualization.
 
Additionally, we offer a full set of services that enable us to provide capabilities across the full project lifecycle — from concept to delivery. These service lines are:
 
Advisory
 
Our Advisory service line studies and develops best practices in business processes and technology architecture to develop industry-leading solutions throughout the trade and client management lifecycle within our clients’ businesses. Our business analysts, system architects and designers are, in many cases, former practitioners and, thus, apply real-world experience when customizing solutions for our clients. We focus on the following core capabilities within Advisory:
 
  •  Strategy alignment & roadmap;
 
  •  Subject matter expertise;
 
  •  Organizational design and change management;
 
  •  Process model definition;
 
  •  Process & architecture definition; and


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  •  User experience & interface design.
 
Program Management
 
Within our Program Management service line we ensure that our clients’ programs are successfully managed from inception to completion. Our service lines operate independently or together, to provide full lifecycle capabilities across all stages of a project. We perform strategic planning, enterprise architecture development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure on-time, on-budget delivery of solutions that provide the right results for our clients.
 
Some of the capabilities of our Program Management service line include:
 
  •  Program management (PMO);
 
  •  Technology project management;
 
  •  Agile methodology consulting;
 
  •  Governance model definition;
 
  •  Project benchmarking and reporting; and
 
  •  Project & program diagnosis and turnaround.
 
Analytics
 
Our Analytics service line comprises industry leaders in areas such as portfolio valuation as well as assessing market, credit and operational risk management techniques. Key engagements of this group have included helping clients value and manage their portfolios to meet increased regulatory requirements, and benchmarking the trade lifecycle processes of the largest investment banks in the world in support of their commitments to operational excellence made to government regulators. Our current offerings include:
 
  •  Quantitative methodologies;
 
  •  Audits & process reviews;
 
  •  Benchmark-driven roadmaps; and
 
  •  Trade & portfolio evaluation.
 
Technology
 
Our Technology service line, in conjunction with our Advisory service line, designs, develops, integrates, supports and tests software solutions for the most critical functions of today’s capital and commodity market participants. Our capabilities range from GDD-enabled custom software development and third-party system integration for our clients. We also maintain core expertise in all of today’s most relevant technology platforms and uniquely instill our people with industry-leading business knowledge to ensure that we create technology solutions with the full context of the business environment embedded into our solutions. Our specific capabilities include:
 
  •  Architecture & technical design;
 
  •  System selection & implementation;
 
  •  Custom software development;
 
  •  Systems integration;
 
  •  Data architecture & management;
 
  •  Quality assurance (QA) & testing services; and
 
  •  Application maintenance & support.
 
Operations
 
Our Operations service line designs, implements, executes and enables offshore delivery of some of the most difficult trading and risk management processes within the global markets arena. Bolstered by our 2008 acquisition of London-based DCG, we have a unique understanding of the global markets industry through our combination of


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deep industry expertise, customized outsourcing methodology and ability to innovate solutions to some of the day’s most pressing trade management issues. Representative work includes master agreement negotiation, confirmation reconciliation, settlement calculation, collateral management, and clearing. Further, we have worked at the center of several of the largest bank mergers in recent history, developing and implementing plans for integrating two entities into one.
 
Additionally, in 2009, we launched a major initiative to take our industry-leading onshore process capabilities and offer the same solutions to clients leveraging our offshore capabilities in India. We developed a unique methodology for transitioning these processes, and several of our clients have begun applying this methodology to shift substantial portions of their operations offshore to our offices in Gurgaon and Bangalore. Our expertise in complex areas such as derivatives has enabled our clients to consider higher-order processes for outsourcing than previously possible. Further, by co-locating our technology and process activities in India, we have developed important new solutions and capabilities for our clients, including the automation of complex processes in a single, unified environment.
 
Capabilities within our Operations service line include:
 
  •  Process analysis & optimization;
 
  •  Testing services;
 
  •  Outsourced operations;
 
  •  Operations staff support;
 
  •  Merger & divesture support;
 
  •  Trade documentation support;
 
  •  Middle-office; and
 
  •  Outsourcing.
 
We pride ourselves on our record of attracting, training and retaining the highest quality professionals available in the market. In 2006 we developed the unique “Institute of Trading and Risk Management,” a four-month course for incoming staff designed to provide grounding in the processes and technologies supporting the clients and industries we serve.
 
Sapient Government Services
 
Sapient Government Services offers a robust suite of high-value capabilities to U.S. government clients including program management; solution delivery; strategy; and communications outreach. We help U.S. Government agencies to optimize and align technology, programs, and systems, while solving our clients’ most challenging problems.
 
Program Management
 
We ensure that our clients’ programs are successfully managed from inception to completion. We perform strategic planning, enterprise architecture development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure on-time, on-budget delivery of solutions that provide the right results for our clients.
 
Solution Delivery
 
We design, develop, and deliver innovative IT and marketing solutions for our government clients. We rapidly prototype new solutions and integrate critical business processes and information for our clients. Through systems engineering, we rationalize IT infrastructures to reduce cost and complexity while retiring legacy infrastructures, streamlining existing systems, and incorporating the best commercial products.
 
Strategy
 
We help our clients to identify, establish, and execute changes to their strategic missions. We provide knowledge management, mission needs analysis, requirements and design services to enable users to streamline their business processes, tools, and metrics; enhance productivity and effectiveness; and enable continuous improvement. We employ our expertise to transform strategic intent into actionable plans for implementing client strategies.


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Communications and Outreach
 
We help our public sector clients to communicate and collaborate with key stakeholders and constituents. We develop communications strategies that align our clients’ stakeholders and business users’ buy-in to ensure their needs are considered in program and system design. Our propriety Fusion workshops help our clients validate their proposed approach, gather requirements, and design effective project roadmaps. Additionally, we provide marketing services that help the government better communicate and connect to citizens across all channels and to improve the overall citizen experience.
 
Process Engineering
 
We provide knowledge management, mission needs analysis, and requirements and design services to enable business users to streamline their business processes, tools, and metrics; enhance productivity and effectiveness; and enable continuous improvement. We also employ our expertise in process management to streamline our clients’ critical business processes, thereby reducing waste and optimizing efficiency.
 
 
We focus on building the right results for our clients’ businesses. To support this focus, we work closely with alliance partners to develop industry-leading solutions that we can deliver to meet our clients’ needs. We have established global partnerships are with industry leaders and include Adobe, IBM, Microsoft, Google, Oracle, Hybris, Endeca, Autonomy Interwoven, SDL Tridion and Jive Software. We have a skilled knowledge base in their products to help our clients solve their business challenges through technology. Further, we have formed “Centers of Excellence,” comprising dedicated, globally-distributed teams with deep application knowledge and a proven track record in implementing solutions based on Sapient’s strategic partner technologies. Through our expert knowledge and commitment to collaboration, we help our clients identify and implement faster the right solutions at lower overall costs.
 
Our alliances with leading technology and services companies help us rapidly deliver high-performance business and technology solutions. We frequently recommend the use of pre-engineered components from our alliance partners to deliver the rapid business value our clients need. Our alliance relationships, and the solutions that we derive from these relationships, are structured in a manner to ensure that we deliver to our clients solutions that will be sustainable and provide long-term value.
 
We also collaborate with our partners to selectively target specific markets and opportunities to offer quality repeatable solutions, frameworks and components that speed deployment and time-to-value for our customers. Additionally, our alliance partners provide us advance information and access to their product road maps to ensure that our technology solutions are more cost-effective to build and maintain over the long-term.
 
We continue to actively build relationships and strategic alliances with technology and other consulting companies, including packaged technology vendors. These relationships focus on a wide range of joint activities, including working on client engagements, evaluating and recommending the other party’s technology and other solutions to customers, and training and transferring knowledge regarding the other party’s solutions. We believe that these relationships and strategic alliances enable us to provide better delivery and value to our existing clients and attract new clients through referrals.
 
Additionally, we have a dedicated global industry analyst relations team that maintains ongoing relationships with leading industry analysts such as Gartner, Forrester, Aite and Celent. These relationships are integral to our business and help ensure that a core set of focused analysts maintain a good understanding of our offerings and positioning to help us drive innovative and creative solutions to the marketplace. These research analysts also manage related market research and advisory sessions that help identify market and technology trends for our clients and our internal business teams.
 
 
Our unique consulting methodology, Sapient Approach, is designed to address the biggest problems that most companies face when pursuing business-enabling marketing, technology and other initiatives: the majority of projects never finish, are completed late or over budget, lack promised capabilities, or contain unused functionality. We employ a collaborative, agile/lean-based delivery approach, in which we develop and release in an iterative manner usable components of a deliverable, thus enabling our clients to review, validate and commence use of work product throughout the life cycle of a project, rather than await the end of the project to realize the project’s full benefits.


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While this delivery approach provides clients the most value and return on investment in the shortest possible time period, it also minimizes project risk because discrete pieces of work are tested and accepted throughout the project. By contrast to traditional consulting services methods that require heavy up-front investment in time and effort to define all possible requirements, our agile/lean-based methodology uses actual development to evaluate and improve the design as the project progresses. This means that unnecessary steps or features are identified and eliminated early in the design and implementation process, dramatically reducing overall project cost.
 
Sapient Approach also enables us to commit to delivering our marketing services and other solutions within the price and schedule that we have promised to our clients, and to create solutions that bring together business, user, creative and technology requirements to solve our clients’ business problems. We design these solutions to deliver tangible business value to clients, including increased revenues, reduced costs and more effective use of assets.
 
Additionally, Sapient Approach integrates a creative methodology to design and create user experiences that are useful, usable and compelling. Our creative approach is highly iterative, and integrates input from a wide range of perspectives and disciplines. This approach is highly scalable, and evolves based upon whether the creative output is intended to be a marketing campaign, a social media initiative, a website customer experience, a mobile application, or a retail experience. Through our creative approach we develop a deep understanding of the target user’s needs, and synchronize the design of the user experience with agile delivery of the supporting technology to minimize risk and rework.
 
Sapient Approach also enables flexibility in selecting the process standardization and continuous improvement models that work best for each client. Our teams regularly incorporate Six Sigma, Capability Maturity Model Integration® (CMMI), International Standards Organization (ISO) and Information Technology Infrastructure Library (ITIL) processes to ensure that appropriate rigor, discipline and accountability are built into each project. By employing these industry-leading techniques, our teams establish an enduring environment of process improvement that enables organizational capabilities essential to sustaining competitive business advantage.
 
 
We have established and continuously promote a strong corporate culture based on our “strategic context” — purpose, core company values, vision, goals and client value proposition — which is critical to our success.
 
Our unwavering attention to our strategic context has enabled us to adapt and thrive in the fast-changing markets we serve, as we strive to build a great company that has a long-lasting impact on the world. Our passion for client success — evidenced by our ability to foster collaboration, drive innovation and solve challenging problems — is the subject of case studies on leadership and organizational behavior used by MBA students at both Harvard and Yale business schools.
 
To foster and encourage the realization of our strategic context, we reward teamwork and evaluate our people’s performance, and promote people, based on their adoption of and adherence to our strategic context. In addition, we conduct an intensive orientation program to introduce new hires to our culture and values, and conduct internal communications and training initiatives that define and promote our culture and values.
 
As of December 31, 2010 we had 9,015 full-time employees, consisting of 8,053 project personnel, 882 general and administrative personnel and 80 sales and marketing personnel. None of our employees is subject to a collective bargaining agreement. We believe that we have good relationships with our employees.
 
 
Our corporate marketing team strives to build greater brand awareness and drive client acquisition, retention and loyalty in all global markets in which we operate. We conduct marketing activities at the company, industry and service levels across SapientNitro, Sapient Global Markets and Sapient Government Services.
 
Our dedicated team drives globally-integrated initiatives including, but not limited to, developing and implementing an overall global marketing and brand strategy for Sapient and its three business units; executing thought leadership campaigns; sponsoring focused multi-client events; cultivating media and industry analyst relations; conducting market research and analysis; sponsoring and participating in targeted industry conferences, award shows, and events; creating marketing assets and materials to assist client-development teams with lead generation; and publishing our website, http://www.sapient.com, our blog, and content on all corporate social media channels.


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We organize our sales professionals primarily along our operating segments. We believe that the industry and geographic focus of our sales professionals enhances their knowledge and expertise within their applicable segments and generates additional client engagements.
 
 
The markets for the services we provide are highly competitive. We believe that we compete principally with large systems consulting and implementation firms, traditional and interactive advertising and marketing agencies, offshore consulting and outsourcing companies, and clients’ internal IT departments. To a lesser extent, we compete with boutique consulting firms that maintain specialized skills and/or are geographically focused. Additionally, with respect to Sapient Government Services, we both compete and partner with large systems integrators, major consulting firms with dedicated government business units, and government contractors.
 
We believe that the principal competitive factors in our markets include: ability to solve business problems; ability to provide creative concepts and solutions; expertise and talent with advanced technologies; global scale; expertise in delivering complex projects through teams located in globally distributed geographies; availability of resources; quality and speed of delivery; price of solutions; industry knowledge; technology-enabled marketing expertise; understanding of user experience; and sophisticated project and program management capability.
 
We also believe that we compete favorably when considering these factors and that our ability to deliver business innovation and outstanding value to our clients on time and on budget, our GDD model, our integrated marketing services capabilities and our successful track record in working with our clients distinguish us from our competitors.
 
 
We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements; and patent, copyright and trademark laws to protect our proprietary consulting methodology, custom-developed software and other rights. We enter into confidentiality agreements with our employees, subcontractors, vendors, professionals, and clients, and limit access to and distribution of our proprietary information.
 
Our services involve the development of business, technology and marketing solutions for specific client engagements. Ownership of these solutions is the subject of negotiation and is frequently assigned to the client, although we often retain ownership of certain development tools and may be granted a license to use the solutions for certain purposes. Certain of our clients have prohibited us from marketing for specified periods of time or to specified third parties the solutions we develop for them, and we anticipate that certain of our clients will demand similar or other restrictions in the future.
 
 
We make our public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at our website, http://www.sapient.com, as soon as reasonably practicable after we file such materials with the SEC. We also make available on our website reports filed by our executive officers, directors and holders of more than 10% of our common stock, on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the “Investors” portion of our website, under the link “SEC Filings,” and on the SEC’s website, http://www.sec.gov. You may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
Item 1A.   Risk Factors
 
Risk Factors
 
The following important factors, among others, could cause our actual business, financial condition and future results to differ materially from those contained in forward-looking statements made in this Annual Report or presented elsewhere by management from time to time.


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The market for our consulting services and the technologies used in our solutions historically has tended to fluctuate with economic cycles — particularly those cycles in the United States and Europe, where we earn the majority of our revenues. During economic cycles in which many companies are experiencing financial difficulties or uncertainty, clients and potential clients may cancel or delay spending on marketing, technology and other business initiatives. Our efforts to down-size, when necessary, in a manner intended to mirror downturned economic conditions could be delayed and costly. A downturn could result in reduced demand for our services, project cancellations or delays, lower revenues and operating margins resulting from price reduction pressures for our services, and payment and collection issues with our clients. Any of these events could materially and adversely impact our business, financial condition and results of operations.
 
 
The markets for the services we provide are highly competitive. We believe that we compete principally with large systems consulting and implementation firms, offshore outsourcing companies, interactive and traditional advertising agencies, and clients’ internal information systems departments. To a lesser extent, other competitors include boutique consulting firms that maintain specialized skills and/or are geography based. Regarding our Government Services practice, we both compete and partner with large defense contractors. Some of our competitors have significantly greater financial, technical and marketing resources, and generate greater revenues and have greater name recognition, than we do. Often, these competitors offer a larger and more diversified suite of products and services than we offer. These competitors may win client engagements by significantly discounting their services in exchange for a client’s promise to purchase other goods and services from the competitor, either concurrently or in the future. If we cannot keep pace with the intense competition in our marketplace, our business, financial condition and results of operations will suffer.
 
 
We have offices throughout the world. Our international operations are a significant percentage of our total revenues, and our GDD model is a key component of our ability to deliver our services successfully. Our international operations are subject to inherent risks, including:
 
  •  economic recessions in foreign countries;
 
  •  fluctuations in currency exchange rates or impositions of restrictive currency controls;
 
  •  political instability, war or military conflict;
 
  •  changes in regulatory requirements;
 
  •  complexities and costs in effectively managing multi-national operations and associated internal controls and procedures;
 
  •  significant changes in immigration policies or difficulties in obtaining required immigration approvals for international assignments;
 
  •  restrictions imposed on the import and export of technologies in countries where we operate;
 
  •  reduced protection for intellectual property in some countries; and
 
  •  changes in tax laws.
 
In particular, our GDD model depends heavily on our offices in Gurgaon, Bangalore and Noida, India. Any escalation in the political or military instability in India or Pakistan or the surrounding countries, or a business interruption resulting from a natural disaster, such as an earthquake, could hinder our ability to use GDD successfully and could result in material adverse effects to our business, financial condition and results of


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operations. Furthermore, the delivery of our services from remote locations causes us to rely on data, phone, power and other networks which are not as reliable in India as those in other countries where we operate. Any failures of these systems, or any failure of our systems generally, could affect the success of our GDD model. Remote delivery of our services also increases the complexity and risk of delivering our services, which could affect our ability to satisfy our clients’ expectations or perform our services within the estimated time frame and budget for each project. Changes to government structure or policies in countries in which we operate could negatively impact our operations if such changes were to limit or cease any benefits that may currently be available to us. For example, although the Indian government has historically offered generous tax incentives to induce foreign companies to base operations in India, new taxes have been introduced in recent years that partially offset those benefits. On April 1, 2009 the income-tax incentive of one of our Software Technology Parks (“STPs”) Units in India expired. Beginning April 1, 2011, the income-tax incentives applicable to our other two STPs Units in India are scheduled to expire. In addition, in 2009 we established a new India unit in a Special Economic Zone (“SEZ”) which is eligible for a five year, 100% tax holiday. This expiration of incentives may adversely affect our cost of operations and increase the risk of delivering our services on budget for client projects. Expiration of benefits provided to us by having operations based in India could have a material adverse effect on our business, financial condition and results of operations.
 
 
Military actions in Iraq, Afghanistan and elsewhere, global terrorism, natural disasters and political unrest in the Middle East and other countries are among the factors that may adversely impact regional and global economic conditions and, concomitantly, client investments in our services. In addition to the potential impact of any of these events on the business of our clients, these events could pose a threat to our global operations and people. Specifically, our people and operations in India could be impacted if the recent rise in civil unrest, terrorism and conflicts with bordering countries in India were to increase significantly. As a result, significant disruptions caused by such events could materially and adversely affect our business, financial condition and results of operations.
 
 
Our business is labor intensive, and our success depends upon our ability to attract, retain, train and motivate highly skilled employees. The improvement in demand for marketing and business and technology consulting services has further increased the need for employees with specialized skills or significant experience in marketing, business and technology consulting, particularly at senior levels. We have been expanding our operations, and these expansion efforts will be highly dependent on attracting a sufficient number of highly skilled people. We may not be successful in attracting enough employees to achieve our expansion or staffing plans. Furthermore, the industry turnover rates for these types of employees are high, and we may not be successful in retaining, training and motivating the employees we attract. Any inability to attract, retain, train and motivate employees could impair our ability to manage adequately and complete existing projects and to bid for or accept new client engagements. Such inability may also force us to increase our hiring of expensive independent contractors, which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and financial resources to monitoring and managing our workforce and other resources. Our future success will depend on our ability to manage the levels and related costs of our workforce and other resources effectively.
 
 
We have significant international operations, and we frequently earn our revenues and incur our costs in various foreign currencies. Our international service revenues were $339.6 million for 2010. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues and receivables, purchases, payroll and investments. As of December 31, 2010 52% of our assets and liabilities were subject to foreign currency exchange fluctuations. We also have a significant amount of foreign currency operating income and net asset exposures. Certain foreign currency exposures, to some extent, are naturally offset within an


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international business unit, because revenues and costs are denominated in the same foreign currency, and certain cash balances are held in U.S. dollar denominated accounts. However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our financial results. Our GDD model also subjects us to increased currency risk because we incur a significant portion of our project costs in Indian rupees and earn revenue from our clients in other currencies. While we have entered into foreign currency offsetting option positions that allow the Company partially to hedge certain short-term translation exposures in Indian rupee, British pound sterling and the euro currencies, and may in the future enter into foreign currency exchanges swaps and purchases as well as sales of foreign currency options, we will continue to experience foreign currency gains and losses in certain instances where it is not possible or cost effective to hedge foreign currencies. There is no guarantee that such hedging activity will be effective or that our financial condition will not be negatively impacted by the currency exchange rate fluctuations of the Indian rupee versus the U.S. dollar. Costs for our delivery of services, including labor, could increase as a result of the decrease in value of the U.S. dollar against the Indian rupee, affecting our reported results.
 
Our cash positions include amounts denominated in foreign currencies. We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of our subsidiaries outside the United States could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available without legal restrictions to fund ordinary business operations. Any fluctuations in foreign currency exchange rates, or changes in local tax laws, could materially impact the availability and size of these funds for repatriation or transfer.
 
 
A high percentage of our operating expenses, particularly salary expense, rent, depreciation expense and amortization of intangible assets, are fixed in advance of any particular quarter. As a result, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter.
 
An unanticipated termination or decrease in size or scope of a major project, a client’s decision not to proceed with a project we anticipated or the completion during a quarter of several major client projects could require us to maintain underutilized employees and could have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings may also fluctuate from quarter to quarter because of such factors as:
 
  •  the contractual terms and timing of completion of projects, including achievement of certain business results;
 
  •  any delays incurred in connection with projects;
 
  •  the adequacy of provisions for losses and bad debts;
 
  •  the accuracy of our estimates of resources required to complete ongoing projects;
 
  •  loss of key highly-skilled personnel necessary to complete projects; and
 
  •  general economic conditions.
 
Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.
 
Our effective tax rate could be adversely impacted by several factors, some of which are outside our control, including:
 
  •  Changes in relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
 
  •  Changes in tax laws and the interpretation of those tax laws;


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  •  Changes to our assessments about the realizability of our deferred tax assets which are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies and the economic environment in which we do business;
 
  •  The outcome of future tax audits and examinations; and
 
  •  Changes in generally accepted accounting principles that affect the accounting for taxes.
 
In the ordinary course of our business, many transactions occur where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe our tax estimates are reasonable, the final determination could be materially different from our historical tax provisions and accruals.
 
Our profits may decrease and/or we may incur significant unanticipated costs if we do not accurately estimate the costs of fixed-price engagements.
 
Approximately 46% of our projects are based on fixed-price contracts, rather than contracts in which payment to us is determined on a time and materials or other basis. Our failure to estimate accurately the resources and schedule required for a project, or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price contract was based, could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We are consistently entering into contracts for large projects that magnify this risk. We have been required to commit unanticipated additional resources to complete projects in the past, which has occasionally resulted in losses on those contracts. We will likely experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the project engagement, which could result in a fixed price that is too low. Therefore, any changes from our original estimates could adversely affect our business, financial condition and results of operations.
 
 
Our profitability derives from and is impacted primarily by three factors, primarily: (i) the prices for our services; (ii) our professionals’ utilization or billable time, and (iii) our costs. To achieve our desired level of profitability, our utilization must remain at an appropriate rate, and we must contain our costs. Should we reduce our prices in the future as a result of pricing pressures, or should we be unable to achieve our target utilization rates and costs, our profitability could be adversely impacted and our stock price could decline materially.
 
 
Certain complex projects may require that we partner with specialized software or systems vendors or other partners to perform our services. Often in these circumstances, we are liable to our clients for the performance of these third parties. Should the third parties fail to perform timely or satisfactorily, our clients may elect to terminate the projects or withhold payment until the services have been completed successfully. Additionally, the timing of our revenue recognition may be affected or we may realize lower profits if we incur additional costs due to delays or because we must assign additional personnel to complete the project. Furthermore, our relationships with our clients and our reputation generally may suffer harm as a result of our partners’ unsatisfactory performance.
 
 
Most of our contracts can be canceled by the client with limited advance notice and without significant penalty. A client’s termination of a contract for our services could result in a loss of expected revenues and additional expenses for staff that were allocated to that client’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract. The unexpected cancellation or significant reduction in the scope of any of our large projects, or client termination of one or more recurring revenue contracts (see


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explanation of “Long Term and Retainer Revenues” in Part I, Item 1, above), could have a material adverse effect on our business, financial condition and results of operations.
 
We may be liable to our clients for substantial damages caused by our unauthorized disclosures of confidential information, breaches of data security, failure to remedy system failures or other material contract breaches.
 
We frequently receive confidential information from our clients, including confidential customer data that we use to develop solutions. If any person, including one of our employees, misappropriates client confidential information, or if client confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, we may have substantial liabilities to our clients or client customers.
 
Further, many of our projects involve technology applications or systems that are critical to the operations of our clients’ businesses and handle very large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. While we have taken precautionary actions to create redundancy and back-up systems, any such failures by us could result in claims by our clients for substantial damages against us.
 
Although we attempt to limit the amount and type of our contractual liability for our breaches of confidentiality or data security, defects in the applications or systems we deliver or other material contract breaches that we may commit during the performance of our services (collectively, “Contract Breaches”), in certain circumstances we agree to unlimited liability for Contract Breaches. Additionally, while we carry insurance that is intended to mitigate our liabilities for such Contract Breaches, we cannot be assured that our insurance coverages will be applicable and enforceable in all cases, or sufficient to cover substantial liabilities that we may incur. Further, we cannot be assured that contractual limitations on liability will be applicable and enforceable in all cases. Accordingly, even if our insurance coverages or contractual limitations on liability are found to be applicable and enforceable, our liability to our clients for Contract Breaches could be material in amount and affect our business, financial condition and results of operations. Moreover, such claims may harm our reputation and cause us to lose clients.
 
 
The services that we offer to clients may infringe the intellectual property (“IP”) rights of third parties and result in legal claims against our clients and Sapient. These claims may damage our reputation, adversely impact our client relationships and create liability for us. Moreover, although we generally agree in our client contracts to indemnify the clients for expenses or liabilities they incur as a result of third party IP infringement claims associated with our services, the resolution of these claims, irrespective of whether a court determines that our services infringed another party’s IP rights, may be time-consuming, disruptive to our business and extraordinarily costly. Finally, in connection with an IP infringement dispute, we may be required to cease using or developing certain IP that we offer to our clients. These circumstances could adversely impact our ability to generate revenue as well as require us to incur significant expense to develop alternative or modified services for our clients.
 
 
Our success depends, in part, upon our proprietary methodology and other IP rights. We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our proprietary rights. We enter into confidentiality agreements with our employees, contractors, vendors and clients, and limit access to and distribution of our proprietary information. We cannot be certain that the steps we take in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our IP rights.


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The trading price of our common stock has been subject to wide fluctuations, particularly in the second half of 2008 and the first half of 2009. Our trading price could continue to be subject to wide fluctuations in response to:
 
  •  quarterly variations in operating results and achievement of key business metrics by us or our competitors;
 
  •  changes in operating results estimates by securities analysts;
 
  •  any differences between our reported results and securities analysts’ published or unpublished expectations;
 
  •  announcements of new contracts or service offerings made by us or our competitors;
 
  •  announcements of acquisitions or joint ventures made by us or our competitors; and
 
  •  general economic or stock market conditions.
 
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us could result in substantial costs and a diversion of management’s attention and resources.
 
Certain of our directors have significant voting power and may effectively control the outcome of any stockholder vote.
 
Jerry A. Greenberg, our former Co-Chairman of the Board of Directors and Chief Executive Officer of the Company and current member of our Board of Directors, and J. Stuart Moore, our former Co-Chairman of the Board of Directors and Co-Chief Executive Officer and current member of our Board of Directors, own, in the aggregate, approximately 20% of our outstanding common stock as of February 21, 2011. As a result, they have the ability to substantially influence and may effectively control the outcome of corporate actions requiring stockholder approval, including the election of directors. This concentration of ownership may also have the effect of delaying or preventing a change in control of Sapient, even if such a change in control would benefit other investors.
 
 
Our success depends in large part upon the continued services of a number of key employees. Our employment arrangements with key personnel provide that employment is terminable at will by either party. The loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, if our key employees resign from Sapient to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on our business, financial condition and results of operations. Although, to the extent permitted by law, we require our employees to sign agreements prohibiting them from joining a competitor, forming a competing company or soliciting our clients or employees for certain periods of time, we cannot be certain that these agreements will be effective in preventing our key employees from engaging in these actions or that courts or other adjudicative entities will substantially enforce these agreements.
 
We may be unable to achieve anticipated benefits from acquisitions.
 
The anticipated benefits from any acquisitions that we may undertake might not be achieved. For example, if we acquire a company, we cannot be certain that clients of the acquired business will continue to conduct business with us, or that employees of the acquired business will continue their employment or integrate successfully into our operations and culture. The identification, consummation and integration of acquisitions and joint ventures require substantial attention from management. The diversion of management’s attention, as well as any difficulties encountered in the integration process, could have an adverse impact on our business, financial condition and results of operations. Further, we may incur significant expenses in completing any such acquisitions, and we may assume significant liabilities, some of which may be unknown at the time of such acquisition.


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In parallel with the foregoing operational process redesign and role transition activities, we have implemented and continue to install several upgrades and enhancements to our financial systems. We expect these initiatives to enable us to achieve greater operating and financial reporting efficiency and also enhance our existing control environment through increased levels of automation of certain processes. Failure to successfully execute these initiatives in a timely, effective and efficient manner could result in the disruption of our operations, the inability to comply with our Sarbanes-Oxley obligations and the inability to report our financial results in a timely and accurate manner.
 
 
We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. We may in the future identify material weaknesses in our internal control over financial reporting. Further, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, regardless of the adequacy of such controls. Should we fail either to maintain adequate internal controls or implement required new or improved controls, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations, and investors could lose faith in the reliability of our financial statements. Consequently, the price of our securities may be adversely and materially impacted.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Our headquarters and principal administrative, finance, selling and marketing operations are located in approximately 32,000 square feet of leased office space in Boston, Massachusetts. We also lease offices in other parts of the United States and in Canada, Europe, India, Asia and Australia. We do not own any material real property. Substantially all of our office space is leased under long-term leases with varying expiration dates.
 
Item 3.   Legal Proceedings
 
We are subject to certain legal proceedings and claims, as discussed below. We are also subject to certain other legal proceedings and claims that have arisen in the course of business and that have not been fully adjudicated. However, the results of legal proceedings cannot be predicted with certainty. Should the we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.
 
We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $10.7 million, for which the likelihood of a loss is considered more than remote, and various administrative audits each of which have arisen in the ordinary course of our business. We have an accrual at December 31, 2010 of approximately $0.7 million related to certain of these items. We intend to defend these matters vigorously, although the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that we have previously accrued.
 
Item 4.   Removed and Reserved


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Our common stock is quoted on the Nasdaq Global Select Stock Market under the symbol “SAPE.” The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock.
 
                 
    High   Low
 
2009:
               
First Quarter
  $ 5.01     $ 3.25  
Second Quarter
  $ 6.46     $ 4.26  
Third Quarter
  $ 8.44     $ 5.66  
Fourth Quarter
  $ 9.02     $ 6.99  
2010:
               
First Quarter
  $ 10.01     $ 7.60  
Second Quarter
  $ 11.00     $ 9.03  
Third Quarter
  $ 12.17     $ 9.71  
Fourth Quarter
  $ 13.44     $ 11.66  
 
On February 18, 2011 the last reported sale price of our common stock was $12.21 per share. As of February 18, 2011 there were approximately 366 holders of record of our common stock.
 
Stock Performance
 
The following graph compares the cumulative five-year total stockholder return on our common stock from December 31, 2005 through December 31, 2010, with the cumulative five-year total return, during the equivalent period, on the (i) NASDAQ Composite Index and (ii) Dow Jones US Technology Index. The comparison assumes the investment of $100 on December 31, 2004 in our common stock and in each of the comparison indices and, in each case, assumes reinvestment of all dividends.
 
 
(PERFORMANCE GRAPH)


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      12/05     12/06     12/07     12/08     12/09     12/10
Sapient Corporation
      100.00         96.49         154.83         78.03         145.34         221.21  
NASDAQ Composite
      100.00         111.74         124.67         73.77         107.12         125.93  
Dow Jones US Technology
      100.00         110.10         127.38         72.78         119.70         134.76  
                                                             
 
Dividends
 
On February 18, 2010 we declared a special dividend of $0.35 per share for all shareholders as of the record date of March 1, 2010, payable on March 15, 2010. In addition, we declared a special dividend equivalent payment of $0.35 per Restricted Stock Unit (“RSU”) for all outstanding RSU awards as of March 1, 2010, to be paid in shares when the awards vest. If an RSU does not vest, the dividend is forfeited. We may declare or pay special cash dividends on our common stock in the near future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon various factors including our results of operations, financial condition, cash requirements and business projections.
 
 
We did not make any purchases during the three months ended December 31, 2010.


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Item 6.   Selected Financial Data
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and management’s discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report. The balance sheet data at December 31, 2010 and 2009 and the statement of operations data for each of the three years ended December 31, 2010, 2009 and 2008 are derived from the audited consolidated financial statements for such years, included elsewhere in this Annual Report. The statement of operations data set forth below for the years ended December 31, 2007 and 2006 and the balance sheet data set forth below at December 31, 2008, 2007 and 2006 are derived from our consolidated financial statements not included in the annual report and are presented herein on an unaudited basis.
 
                                         
    Twelve Months Ended December 31,  
    2010     2009     2008     2007     2006  
    (In thousands, except per share amounts)  
 
Statement of Operations Data(1):
                                       
Revenues:
                                       
Service revenues
  $ 823,511     $ 638,884     $ 662,412     $ 546,438     $ 405,582  
Reimbursable expenses
    40,008       27,794       25,076       19,551       16,061  
                                         
Total gross revenues
    863,519       666,678       687,488       565,989       421,643  
                                         
Operating expenses:
                                       
Project personnel expenses
    563,930       435,859       435,508       372,363       270,213  
Reimbursable expenses
    40,008       27,794       25,076       19,551       16,061  
                                         
Total project personnel expenses and reimbursable expenses
    603,938       463,653       460,584       391,914       286,274  
Selling and marketing expenses
    38,833       31,931       36,233       33,113       24,025  
General and administrative expenses
    150,877       118,018       123,188       120,617       109,022  
Restructuring and other related charges
    414       4,548       194       32       1,912  
Amortization of intangible assets
    5,448       5,146       2,660       2,038       3,564  
Acquisition costs and other related charges
    111       2,962                    
                                         
Total operating expenses
    799,621       626,258       622,859       547,714       424,797  
                                         
Income (loss) from operations
    63,898       40,420       64,629       18,275       (3,154 )
Other income, net
    196       267       1,280       422       1,929  
Interest income, net
    3,509       2,889       5,806       5,478       4,238  
Income from continuing operations before income taxes, discontinued operations and cumulative effect of accounting change
    67,603       43,576       71,715       24,175       3,013  
(Benefit from) provision for income taxes:
                                       
Provision for income taxes
    23,798       13,735       9,239       8,959       4,432  
Benefit from release of valuation allowance
          (58,285 )                  
                                         
(Benefit from) provision for income taxes
    23,798       (44,550 )     9,239       8,959       4,432  
                                         
Income (loss) from continuing operations before discontinued, operations and cumulative effect of accounting change
    43,805       88,126       62,476       15,216       (1,419 )
(Loss) income from discontinued operations
                            (433 )
Gain on disposal of discontinued operations (net of tax provision of $342)
                            4,834  
                                         
Income before cumulative effect of accounting change
    43,805       88,126       62,476       15,216       2,982  
Cumulative effect of accounting change
                            154  
                                         
Net income
  $ 43,805     $ 88,126     $ 62,476     $ 15,216     $ 3,136  
                                         
Basic income (loss) per share from continuing operations
  $ 0.33     $ 0.69     $ 0.50     $ 0.12     $ (0.01 )
                                         
Diluted income (loss) per share from continuing operations
  $ 0.32     $ 0.66     $ 0.48     $ 0.12     $ (0.01 )
                                         
Basic net income per share
  $ 0.33     $ 0.69     $ 0.50     $ 0.12     $ 0.03  
                                         
Diluted net income per share
  $ 0.32     $ 0.66     $ 0.48     $ 0.12     $ 0.03  
                                         
Weighted average common shares
    132,060       127,969       125,988       124,180       123,692  
Weighted average dilutive common share equivalents
    6,669       4,912       3,176       3,711        
                                         
Weighted average common shares and dilutive common share equivalents
    138,729       132,881       129,164       127,891       123,692  
                                         
 


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    Twelve Months Ended December 31,
    2010   2009   2008   2007   2006
 
Balance Sheet Data:
                                       
Working capital
  $ 301,963     $ 276,564     $ 198,062     $ 189,201     $ 148,899  
Total assets
    623,722       594,919       452,270       407,604       342,064  
Total long-term liabilities
    22,396       21,207       22,393       20,598       18,386  
Redeemable common stock
                      290       480  
Total stockholders’ equity(2)
    442,305       426,201       301,947       260,559       214,497  
Cash dividends declared
  $ 46,843     $     $     $     $  
 
 
(1) We sold our HWT, Inc. (“HWT”) unit in May 2006. As a result, operating results of this subsidiary for all prior periods presented have been reclassified into the caption “(Loss) income from discontinued operations.”
 
(2) On February 18, 2010 we declared a one-time special dividend equivalent payment of $0.35 per Restricted Stock Unit (“RSU”) for all outstanding RSU awards as of March 1, 2010, to be paid in shares when the awards vest. If an RSU does not vest, the dividend is forfeited.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
The Company
 
Sapient Corporation (“Sapient” or the “Company”), a global services firm, helps clients transform in the areas of business, marketing, and technology and succeed in an increasingly complex marketplace. We market our services through three primary business units — SapientNitro, Sapient Global Markets, and Sapient Government Services — positioned at the intersection of marketing, business and technology. SapientNitro, one of the world’s largest independent digitally-led, integrated marketing services firms, provides multi-channel marketing and commerce services that span brand and marketing strategy, digital/broadcast/print advertising creative, web design and development, e-commerce, media planning and buying, and emerging platforms, such as social media and mobile. Through SapientNitro we offer a complete, multi-channel marketing and commerce solution that strengthens relationships between our clients’ customers and their brands. For simplicity of operations, SapientNitro also includes our traditional IT consulting services, which is currently, and is expected to remain, below 10% of our total revenues. Our Sapient Global Markets segment provides business and IT strategy, process and system design, program management, custom development and package implementation, systems integration and outsourced services to financial services and energy services market leaders. A core focus area within Sapient Global Markets is trading and risk management, to which we bring more than 15 years of experience and a globally integrated service in derivatives processing. Sapient Government Services provides consulting, technology, and marketing services to a wide array of U.S. governmental agencies. Focused on driving long-term change and transforming the citizen experience, we use technology to help government agencies become more accessible, efficient, and transparent.
 
Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global presence with offices around the world. We utilize our proprietary Global Distributed Delivery (“GDD”) model in support of our SapientNitro and Sapient Global Markets segments. Our GDD model enables us to provide high-quality, cost-effective solutions under accelerated project schedules. By engaging India’s highly skilled technology specialists, we can provide services at lower total costs as well as offer a continuous delivery capability resulting from time differences between India and the countries we serve. We also employ our GDD model to provide application management services.
 
Summary of Results of Operations
 
Our service revenues increased $184.6 million, or 29%, compared to 2009. This was due to an increase in demand for our services in all three of our primary business units. Compared geographically to 2009, 2010 service revenue growth from clients in the United States increased 37% compared to 19% growth from our international

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clients. Service revenues also increased, to lesser extent, due to incremental service revenues from our Nitro acquisition. Nitro’s results of operations are reflected in ours as of the acquisition date, July 1, 2009. Our income from operations increased $23.5 million, or 58%, compared to 2009. This increase is primarily due to higher margin (service revenues less project personnel expenses) compared to 2009 as we were able to maintain these expenses at 68% of service revenues while service revenues grew 29%. In addition we also maintained selling and marketing expenses and general and administrative expenses as a percentage of revenue. Finally, 2010 operating income increased compared to the prior year as 2009 reflected more restructuring and acquisition related expenses as we had more activity of this nature in 2009. Our net income decreased $44.3 million, or 50%, compared to 2009. This was due to a benefit of $58.3 million from the release of our valuation allowance on our U.S. deferred tax assets at the end of 2009. Through the end of 2009 we had achieved sustained profitability in the U.S. and this was the primary reason we released the valuation allowance on our U.S. deferred tax assets. Please see our Results of Operations section for our discussion and analysis of these items.
 
In 2009 our service revenues decreased $23.5 million, or 4%, compared to 2008. The decrease in our service revenues was due to pricing pressures, and in the first half of 2009, a decrease in demand for our services compared to 2008. These negative factors were a result of the overall economic downturn that began in the latter half of 2008. Revenue also decreased due to currency fluctuations. These decreases were partially offset by incremental service revenues from our Nitro and DCG acquisitions. DCG’s results of operations are reflected in ours as of the acquisition date, August 6, 2008. Our income from operations decreased $24.2 million, or 37%, compared to 2008. The decrease in operating income is primarily due to lower margin as a result of pricing pressures on our service revenues, causing 2009 margin to drop to 32% of service revenues compared to 34% in 2008. The increases in restructuring expenses, amortization expense and acquisition costs were offset by decreases in selling and marketing expenses and general and administrative expenses. Our net income increased $25.7 million, or 41%, compared to 2008. The main reason for the increase in net income was the benefit of $58.3 million from the release of our valuation allowance on our U.S. deferred tax assets. Please see our Results of Operations section for our discussion and analysis of these items.


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Non-GAAP Financial Measures
 
In our quarterly earnings press releases and conference calls we discuss two key measures that are not calculated according to generally accepted accounting principles (“GAAP”). The first non-GAAP measure is operating income, as reported on our consolidated and condensed statements of operations, excluding certain expenses and benefits, which we call “non-GAAP income from operations”. The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we call “non-GAAP operating margin”. We believe that non-GAAP measures help illustrate underlying trends in our business, and use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We exclude certain expenses from our non-GAAP operating income that we believe are not reflective of these underlying business trends or useful measures for determining our operational performance and overall business strategy. These non-GAAP financial measures should be used in addition to and in conjunction with GAAP results. The following table reconciles income from operations as reported on our consolidated and condensed statements of operations to non-GAAP income from operations and non-GAAP operating margin for 2010, 2009 and 2008 (in thousands, except percentages):
 
                         
    Twelve Months Ended December 31,  
    2010     2009     2008  
 
Service revenues
  $ 823,511     $ 638,884     $ 662,412  
                         
GAAP income from operations
  $ 63,898     $ 40,420     $ 64,629  
Stock-based compensation expense
    18,156       14,921       15,213  
Restructuring and other related charges
    414       4,548       194  
Amortization of purchased intangible assets
    5,448       5,146       2,660  
Acquisition costs and other related charges
    111       2,962        
Stock-based compensation review and restatement benefit
    (301 )     (992 )     (36 )
                         
Non-GAAP income from operations
  $ 87,726     $ 67,005     $ 82,660  
                         
GAAP operating margin
    7.8 %     6.3 %     9.8 %
Effect of adjustments detailed above
    2.9 %     4.2 %     2.7 %
                         
Non-GAAP operating margin
    10.7 %     10.5 %     12.5 %
                         
 
The increase in non-GAAP operating margin in 2010 compared to 2009, as an amount and as a percentage of service revenues, is due to the increase in income from operations. The decrease in 2009 compared to 2008 in both amount and percentage is due to the decrease in income from operations.
 
When important to management’s analysis operating results are compared in “constant currency terms”, which excludes the effect of foreign exchange rate fluctuations, a non-GAAP measure. The effect is excluded by translating the current period’s local currency service revenues and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For a discussion of our exposure to exchange rates see “Item 7a. Quantitative and Qualitative Disclosures About Market Risk”.
 
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates relied upon in preparing these financial statements include estimated costs to complete long-term contracts, estimated fair value of investments, including whether any decline in such fair value is other-than-temporary, estimated fair values of reporting units used to evaluate goodwill for impairment stock-based compensation expenses, restructuring and other related charges, contingent liabilities and recoverability of our net deferred tax assets and related valuation allowances. Although management regularly assesses these estimates, actual results


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could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances
 
A summary of those accounting policies, significant judgments and estimates that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report.
 
 
We recognize revenue from the provision of professional services, digital marketing services and offline printing and production services arrangements with our clients when persuasive evidence of an arrangement exists, services or product have been provided to the customer, the fee is fixed or determinable and collectability is reasonably assured. In instances where the customer, at its discretion, has the right to reject the services or product prior to final acceptance, revenue is deferred until such acceptance occurs.
 
We recognize revenues from our fixed-price and time-and-materials technology implementation consulting contracts using the percentage-of-completion method. We use the percentage-of-completion method because the nature of the services provided in these contracts are similar to contracts that are required to use the percentage-of-completion per generally accepted accounting principles, like services provided by engineers and architects, for example. Revenues generated from fixed-price and time-and-materials non-technology implementation contracts, except for support and maintenance contracts, are recognized based upon a proportional performance model. Our percentage-of-completion method and our proportional performance method of accounting calculate revenue based on the percentage-of-labor incurred to estimated total labor. This method is used because reasonably dependable estimates of the revenues and labor applicable to various stages of an arrangement can be made, based on historical experience and milestones set in the contract. Revenue from time-and-materials contracts is recognized as services are provided. In situations where time-and-materials contracts require deliverables and provide for a ceiling on fees that can be charged, the arrangement is recognized as time-and-materials are incurred unless calculated fees are estimated to exceed the ceiling, in which case revenue recognition is based on the proportional performance method. Revenues generated from staff augmentation, support and maintenance contracts are recognized ratably over the arrangement’s term.
 
Our project delivery and business unit finance personnel continually review labor incurred and estimated total labor, which may result in revisions to the amount of recognized revenue under an arrangement. Certain arrangements provide for revenue to be generated based upon the achievement of certain performance standards. Revenue related to achieving such performance standards is recognized when such standards are achieved. Revenue related to the achievement of performance standards was immaterial for any of the periods presented in our consolidated financial statements.
 
Revenues related to our digital marketing media sales are recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. We are required to assess whether the agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we broadly operate as an advertising agency based on our primary lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we record revenue net of pass-through charges when we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue.
 
Our marketing services, including access to our BridgeTrack software application, help our clients optimize their cross platform marketing effectively to track behavior and improve conversion rates through data-driven


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analysis. These services are provided in exchange for monthly retainer fees and license fees and are recognized as the monthly services are provided.
 
Revenue from offline printing and production services are recognized at the time title of the related items transfers to our customers, provided that all other revenue recognition criteria have been met.
 
If we do not accurately estimate the resources required or the scope of work to be performed for an arrangement or we do not manage the project properly within the planned time period, then we may recognize a loss on the arrangement. Provisions for estimated losses on uncompleted arrangements are made on an arrangement-by-arrangement basis and are recognized in the period in which such losses are identified. We have committed unanticipated additional resources to complete projects in the past, which has resulted in lower than anticipated profitability or losses on those arrangements. We expect that we will experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed-price that is too low and, therefore, a corrected estimation could adversely affect our business, financial condition and results of operations.
 
We recognize revenue for services when collection from the client is reasonably assured, and our fees are fixed or determinable, provided that all other revenue recognition criteria have been met. We establish billing terms at the time project deliverables and milestones are agreed. Our normal payment terms are thirty days from invoice date. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues. Amounts invoiced to clients in excess of revenue recognized are classified as deferred revenues. Our project delivery and business unit finance personnel continually monitor timely payments from our clients and assess any collection issues.
 
Valuation and Impairment of Investments and/or Marketable Securities and Other Financial Assets
 
Assessing whether a decline in value in available-for-sale securities is other-than-temporary requires us to assess whether we intend to sell the security and if it would be more likely than not that we would be required to sell the available-for-sale security before its cost can be recovered, for reasons such as contractual obligations or working capital needs. Also, we have to assess whether cost of the available-for-sale security will be recovered regardless of intent and/or requirement to sell. This assessment requires us to evaluate, among other factors: the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of the business outlook for the issuer, including industry and sector performance, operational and financing cash flow factors and overall market conditions and trends. Assessing the above factors involves inherent uncertainty. Accordingly, declines in fair value, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio, if, among other things, relevant information related to our marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.
 
Effective January 1, 2008 we adopted new accounting standard stating that valuation techniques used to measure fair value under the current fair value standard must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
 
  •  Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
  •  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
  •  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.


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We record income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences, operating losses, or tax credit carry forwards are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We are required to establish a valuation allowance based on whether realization of deferred tax assets are considered to be more likely than not. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We reinvest certain earnings of foreign operations indefinitely and, accordingly, we do not provide for income taxes that could result from the remittance of such earnings. When we can no longer assert indefinite reinvestment of foreign earnings we must provide for income taxes on these amounts.
 
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.
 
We record interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2010 and 2009, interest and penalties accrued were approximately $1.1 million and $1.6 million, respectively.
 
Valuation of Long-Lived Assets and Goodwill
 
Long-lived assets are reviewed for impairment on a regular basis for the existence of facts and circumstances that may suggest that the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated undiscounted future cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. We assess the useful lives and possible impairment of long — lived assets when an event occurs that may trigger such a review. Factors we consider important which could trigger an impairment review include, but are not limited to:
 
  •  significant underperformance relative to historical or projected future operating results;
 
  •  significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
 
  •  identification of other impaired assets within a reporting unit;
 
  •  disposition of a significant portion of an operating segment;
 
  •  significant negative industry or economic trends;
 
  •  significant decline in our stock price for a sustained period; and
 
  •  a decline in our market capitalization relative to net book value.
 
Determining whether a triggering event has occurred includes significant judgment from management.


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The goodwill impairment test requires us to identify reporting units and to determine estimates of the fair value of our reporting units as of the date we test for impairment. Assets and liabilities, including goodwill, were allocated to reporting units based on factors such as specific identification and percentage of revenue. To conduct a goodwill impairment test, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. Management estimates the fair value of the Company’s reporting units using the income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free” rate of return on an investment, the weighted average cost of capital of a market participant, and future revenue, operating margin, working capital and capital expenditure trends. We performed the annual assessment of our goodwill during the fourth quarter of 2010 and determined that the estimated fair values of our reporting units significantly exceed their carrying value and, therefore, goodwill was not impaired. We complete goodwill impairment analyses at least annually, or more frequently when events and circumstances, like the ones mentioned above, occur indicating that the recorded goodwill may be impaired. Determining fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.
 
 
From time to time we establish exit plans for restructuring activities which require that we make estimates as to the nature, timing and amount of the exit costs that we specifically identified. The consolidation of facilities requires us to make estimates, which included contractual rental commitments or lease buy-outs for office space vacated and related costs, offset by estimated sub-lease income. We review on a regular basis our sub-lease assumptions and lease buy-out assumptions. These estimates include lease buy-out costs, anticipated sublease rates, other terms and conditions in sub-lease contracts, and the timing of these sub-lease arrangements. If the rental markets continue to change, our lease buy-out, sub-lease and space requirement assumptions may not be accurate and it is possible that changes in these estimates could materially affect our financial condition and results of operations. Our sub-lease income estimates are sensitive to the level of sub-lease rent anticipated and the timing of sub-lease commencement. If the estimated sub-lease dates were to be delayed by six months, based on our current estimates, we would potentially have to recognize an additional $0.3 million in our consolidated statement of operations for restructuring and other related charges. A 10% reduction in our sublease rate would have resulted in additional charges of approximately $0.1 million as of the end of 2010.
 
 
We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $10.7 million, for which the likelihood of loss is considered more than remote, and various administrative audits, each of which have arisen in the ordinary course of our business. We have an accrual at December 31, 2010 of approximately $0.7 million related to certain of these items. We intend to defend these matters vigorously, although the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts we have accrued.
 
 
We account for acquisitions completed after December 31, 2008 using the acquisition method. The acquisition method requires us to recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. Our accounting for acquisitions involves significant judgments and estimates primarily, but not limited to: the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.
 
Acquisitions completed prior to January 1, 2009 are accounted for using the purchase method. The purchase method and acquisition method are similar in many aspects, though the two most significant changes, as it pertains to our financial statements, are how the purchase method accounts for contingent consideration and transaction


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costs. Under the purchase method, contingent consideration is only recorded in the period in which the consideration is earned as goodwill in that period. Under the acquisition method we are required to estimate the fair value of contingent consideration as an assumed liability on the acquisition date by estimating the amount of the consideration and probability of the contingencies being met. This estimate is recorded as goodwill on the acquisition date and its value is assessed at each reporting date. Any subsequent change to the estimated fair value is reflected in earnings and not in goodwill. Under the purchase method we were able to record transaction costs related to the completion of the acquisition as goodwill. Under the acquisition method we are required to expense these costs as they are incurred. These costs are reflected in “acquisition costs and other related charges” on our consolidated statement of operations.
 
 
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements.
 
Results of Operations
 
The following table sets forth items included in our consolidated statements of operations as a percentage of service revenues of:
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Revenues:
                       
Service revenues
    100 %     100 %     100 %
Reimbursable expenses
    5 %     4 %     4 %
                         
Total gross revenues
    105 %     104 %     104 %
Operating expenses:
                       
Project personnel expenses
    68 %     68 %     66 %
Reimbursable expenses
    5 %     4 %     4 %
                         
Total project personnel expenses and reimbursable expenses
    73 %     73 %     70 %
Selling and marketing expenses
    5 %     5 %     5 %
General and administrative expenses
    18 %     18 %     19 %
Restructuring and other related charges
    0 %     1 %     0 %
Amortization of purchased intangible assets
    1 %     1 %     0 %
Acquisition costs and other related charges
    0 %     0 %     0 %
                         
Total operating expenses (net of reimbursable expenses)
    92 %     93 %     90 %
                         
Income from operations
    8 %     6 %     10 %
Other income, net
    0 %     0 %     0 %
Interest income, net
    1 %     1 %     1 %
                         
Income before income taxes
    8 %     7 %     11 %
                         
Provision for income taxes
    3 %     2 %     2 %
Benefit from release of valuation allowance
    0 %     −9 %     0 %
                         
Provision for (benefit from) income taxes
    3 %     −7 %     2 %
                         
Net income
    5 %     14 %     9 %
                         


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Years Ended December 31, 2010 and 2009
 
 
Our service revenues for 2010 and 2009 were as follows (in thousands, except percentages):
 
                                 
    Twelve Months Ended
             
    December 31,           Percentage
 
    2010     2009     Increase     Increase  
 
Service revenues
  $ 823,511     $ 638,884     $ 184,627       29 %
 
Service revenues increased due to an increase in demand for our services in all three of our primary business units. Compared geographically to 2009, 2010 service revenue growth from clients in the United States increased 37% compared to 19% growth from our international clients (see Results by Operating Segment). Service revenues also increased, to lesser extent, due to incremental service revenues from our Nitro acquisition.
 
The following table compares our 2010 service revenues by industry sector to 2009 (in millions, except percentages):
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2010     2009     (Decrease)     (Decrease)  
 
Financial Services
  $ 264.8     $ 209.0     $ 55.8       27 %
Consumer, Travel & Automotive
    256.1       152.8       103.3       68 %
Technology & Communications
    116.7       99.5       17.2       17 %
Government, Health & Education
    104.2       92.9       11.3       12 %
Energy Services
    81.7       84.7       (3.0 )     −4 %
                                 
Total
  $ 823.5     $ 638.9     $ 184.6       29 %
                                 
 
The increases in industry sector service revenues were due to an increase in demand for our services in these sectors, and to a lesser extent in the Consumer, Travel and Automotive sector, incremental revenue from our Nitro acquisition. The decrease in the Energy Services sector was due to a slight decrease in demand compared to 2009.
 
Utilization represents the percentage of our project personnel’s time spent on billable client work. Our 2010 utilization was 75%, a two point decrease from our 2009 utilization of 77%. Our 2010 average project personnel peoplecount increased 30% compared to 2009, which is in line with service revenue growth. Contractors and consultant usage, measured by expense, increased 20% compared to 2009 as our need for contractors and consultants in specialized areas for certain client contracts increased.
 
Our five largest customers, in the aggregate, accounted for 19% of our service revenues in 2010 compared to 21% in 2009. No customer accounted for more than 10% of our service revenues for 2010 and 2009. Long Term and Retainer Revenues are revenue from contracts with durations equal to or greater than twelve months, applications management and long term support projects, which are cancelable. Our Long Term and Retainer Revenues were 46% and 44% of our global service revenues for 2010 and 2009, respectively.
 
 
Project personnel expenses consist principally of salaries and employee benefits for personnel dedicated to client projects, independent contractors and direct expenses incurred to complete projects that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services.
 
                                 
    Twelve Months Ended
       
    December 31,       Percentage
    2010   2009   Increase   Increase
 
Project personnel expenses
  $ 563,930     $ 435,859     $ 128,071       29 %
Project personnel expenses as a percentage of service revenues
    68 %     68 %              


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The increase in project personnel expense in 2010 was a direct result of our service revenue growth as we had to increase project personnel peoplecount, use of contractors and consultants and other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $105.7 million, primarily due to a 30% increase in project personnel peoplecount. Contractor and consultant expense increased $12.9 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses increased $4.2 million to support revenue growth in addition to the fact that we made a concerted effort to manage these expenses in 2009 during the general economic downturn. Stock-based compensation expense also increased $2.2 million, primarily due to the increase in average stock price compared to 2009. Finally, other project personnel expenses increased, in the aggregate, $3.1 million.
 
 
Selling and marketing expenses consist principally of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses.
 
                                 
    Twelve Months Ended
       
    December 31,       Percentage
    2010   2009   Increase   Increase
 
Selling and marketing expenses
  $ 38,833     $ 31,931     $ 6,902       22 %
Selling and marketing expenses as a percentage of service revenues
    5 %     5 %              
 
The increase in selling and marketing expenses was due to multiple factors: (i) compensation expense increased $3.2 million, primarily due to an increase in peoplecount, (ii) use of consultants increased $2.6 million due to increased need for sales support in light of revenue growth, and (iii) other selling and marketing expenses increased, in the aggregate, $1.1 million.
 
 
General and administrative expenses relate principally to salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses.
 
                                 
    Twelve Months Ended December 31,       Percentage
    2010   2009   Increase   Increase
 
General and administrative expenses
  $ 150,877     $ 118,018     $ 32,859       28 %
General and administrative expenses as a percentage of service revenues
    18 %     18 %              
 
The increase in general and administrative expenses was due to multiple factors: (i) facilities expenses increased $9.2 million primarily due to our new Special Economic Zone (“SEZ”) unit in India and moving into new office space in the United Kingdom midway through 2009, (ii) compensation expense increased $7.4 million, (iii) consultant expense increased $3.7 million, (iv) professional service fees such as agency fees and legal fees increased, in the aggregate, $3.8 million due to an overall increase in peoplecount and corporate maintenance expenses, respectively, (v) travel expenses increased $2.0 million due to internal projects and the fact that we made a concerted effort to manage these costs in 2009 during the general economic downturn, (vi) stock based compensation expense increased $1.5 million due to incremental expense from the Nitro acquisition and the increase of the company’s average stock price compared to 2009 and (vii) health insurance costs increased $1.2 million due to the overall increase in peoplecount. Finally, other general and administrative expenses increased, in the aggregate, $4.2 million.
 
 
Restructuring and other related charges decreased $4.1 million compared to 2009 due to two reasons. First, we had a workforce restructuring where we recorded a $2.0 million restructuring charge in the first quarter of 2009. Second, we recorded a $2.6 million charge in the third quarter o 2009 principally as a result of a change in estimated


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sub-lease income associated with two previously restructured leases. In 2010 we had one facility restructuring which resulted in a charge of only $0.8 million which was offset by a benefit of $0.4 million principally as a result of a change in estimated sub-lease income associated with two previously restructured leases.
 
Amortization of Purchased Intangible Assets
 
During 2010 and 2009, purchased intangible assets consisted of non-compete and non-solicitation agreements, customer lists, and tradenames acquired in business combinations. Amortization expense related to intangible assets increased $0.3 million due to the amortization of intangible assets acquired in the Nitro acquisition, offset by a decrease in expense as the useful economic lives of other intangibles ended.
 
 
On January 1, 2009, we began accounting for business combinations using the acquisition method which requires acquisition related costs to be expensed as incurred. These costs include expenses associated with third-party professional services we incur related to our evaluation process of potential acquisition opportunities and other related charges. Though we may incur acquisition costs and other related charges it is not indicative that any transaction will be consummated. The reason why expenses decreased in 2010 is that the previous year reflected the bulk of expenses related to the Nitro acquisition while we had no acquisitions in 2010.
 
 
Interest and other income is derived primarily from investments in U.S. government securities, bank time deposits, and money market funds.
 
                                         
    Twelve Months Ended December 31,       Percentage
   
    2010   2009   Increase   Increase    
 
Interest and other income, net
  $ 3,705     $ 3,156     $ 549       17 %        
 
Interest and other income increased due to an increase in interest income as we had higher average cash balances compared to 2009, and, to a lesser extent, an increase in interest rates.
 
Provision for Income Taxes and Benefit From Release of Valuation Allowance
 
Our income tax is related to federal, state and foreign tax obligations. The increase in our provision for income taxes is due to higher income before taxes and a higher tax rate on our U.S. income due to the release of our valuation allowance on a substantial portion of our U.S. deferred taxes in the fourth quarter of 2009. Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2008 all of our U.S. deferred tax assets had a full valuation allowance of $112.1 million. Based upon our operating results for the years immediately preceding and through December 31, 2009, as well as an assessment of our expected future results of operations in the U.S., at December 31, 2009 we determined that it had become more likely than not that we would realize a substantial portion of our deferred tax assets in the U.S. As a result, we released our valuation allowances on a substantial portion of our U.S. deferred tax assets in the fourth quarter of 2009. Certain state tax net operating loss carry forwards, as well as a portion of the net operating loss carry forwards relating to certain stock-based compensation deductions will remain with a valuation allowance recorded against them at December 31, 2010 and 2009. At December 31, 2010 we determined that it had become more likely than not that we would realize a portion of our deferred tax assets related to state net operating loss carry forwards. As a result, we released $2.3 million of valuation allowances on our state deferred tax assets which was recorded as an income tax benefit. In addition, at December 31, 2010 we established a valuation allowance of $1.5 million against deferred tax assets in Switzerland, but continue to believe that the deferred tax assets in other foreign subsidiaries are more likely than not to be realized and, therefore, no valuation allowance has been recorded against these assets.
 
We have gross unrecognized tax benefits, including interest and penalties, of approximately $12.0 million as of December 31, 2010 and $8.9 million as of December 31, 2009. These amounts represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of our effective tax rate. We recognize


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interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2010 interest accrued was approximately $1.1 million.
 
We conduct business globally and, as a result, one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world.
 
Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions.
 
Results by Operating Segment
 
We have discrete financial data by operating segments available based on our method of internal reporting, which disaggregates our operations. Operating segments are defined as components of the Company for which separate financial information is available to manage resources and evaluate performance.
 
Beginning in 2010, we realigned our North America and Europe operating segments and internal reporting systems to better align our services with our business and operational strategy. The new operating segments are: SapientNitro (new), Sapient Global Markets (new) and Sapient Government Services. As such, results by operating segment for the twelve months ended December 31, 2009 and 2008 have been recast to reflect the operating segment unit structure.
 
We do not allocate certain marketing and general and administrative expenses to our business unit segments because these activities are managed separately from the business units. We allocated $1.2 million and $0.6 million of $2.0 million related to our first quarter 2009 reduction in workforce to our SapientNitro and Sapient Global Markets segments, respectively. We did not allocate the remaining $0.2 million in costs associated with our 2009 restructuring activity or any costs associated with our 2001, 2002, 2003 and 2010 restructuring events across our operating segments for internal measurement purposes because the substantial majority of these restructuring costs impacted areas of the business that supported the business units and, specifically in the case of our 2001, 2002, 2003 and 2010 events, were related to the initiative to reengineer general and administrative activities and the consolidation of facilities. Management does not allocate stock-based compensation to the segments for the review of results by the Chief Operating Decision Maker (“CODM”). Asset information by operating segment is not reported to or reviewed by the CODM, and therefore, the Company has not disclosed asset information for each operating segment.
 
The tables below present the service revenues and income before income taxes attributable to these operating segments for the periods presented (in thousands).
 
                 
    2010     2009  
 
Service Revenues:
               
SapientNitro
  $ 514,727     $ 405,020  
Sapient Global Markets
    260,359       198,043  
Sapient Government Services
    48,425       35,821  
                 
Total Service Revenues
  $ 823,511     $ 638,884  
                 
 


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    2010     2009  
 
Income Before Income Taxes:
               
SapientNitro
  $ 150,429     $ 115,461  
Sapient Global Markets
    84,974       65,316  
Sapient Government Services
    13,749       10,303  
                 
Total Reportable Segments(1)
    249,152       191,080  
Less Reconciling Items(2)
    (181,549 )     (147,504 )
                 
Consolidated Income Before Income Taxes
  $ 67,603     $ 43,576  
                 
 
 
(1) Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments.
 
(2) Adjustments that are made to the total of the segments’ operating income to arrive at consolidated income before income taxes include the following:
 
                 
    2010     2009  
 
Centrally managed functions
  $ 161,426     $ 125,864  
Restructuring and other related charges
    414       2,759  
Amortization of intangible assets
    5,448       5,146  
Stock-based compensation expense
    18,156       14,921  
Interest and other income, net
    (3,705 )     (3,156 )
Acquisition costs and other related charges
    111       2,962  
Unallocated benefits(a)
    (301 )     (992 )
                 
    $ 181,549     $ 147,504  
                 
 
 
(a) Reflects stock-option restatement related benefits.
 
 
Our SapientNitro service revenues increased 27% due to an increase in demand for our services, and to a lesser extent, incremental revenue from our Nitro acquisition. In constant currency terms, SapientNitro service revenues increased 26%.
 
The following table compares our 2010 SapientNitro service revenues by industry sector to 2009:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2010     2009     (Decrease)     (Decrease)  
 
Consumer, Travel & Automotive
  $ 256.1     $ 152.8     $ 103.3       68 %
Technology & Communications
    116.7       99.5       17.2       17 %
Financial Services
    79.5       76.7       2.8       4 %
Government, Health & Education
    53.2       57.0       (3.8 )     −7 %
Energy Services
    9.2       19.1       (9.9 )     −52 %
                                 
Total
  $ 514.7     $ 405.1     $ 109.6       27 %
                                 
 
The increases in sector service revenues are due to an increase in demand for our services and, to a lesser extent in the case of the Consumer, Travel and Automotive sector, incremental revenue from our Nitro acquisition. The decreases in the Government, Health and Education and Energy Services sectors are due to a decrease in demand for our services in these sectors.

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The following table compares our 2010 Sapient Global Markets service revenues by industry sector to 2009:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2010     2009     (Decrease)     (Decrease)  
 
Financial Services
  $ 185.1     $ 132.3     $ 52.8       40 %
Government, Health & Education
    2.8             2.8       NA  
Energy Services
    72.5       65.7       6.8       10 %
                                 
Total
  $ 260.4     $ 198.0     $ 62.4       32 %
                                 
 
The increase in service revenues in these sectors is due to an increase in demand for our services.
 
Service revenues for our Sapient Government Services segment increased by 35% in 2010 compared to 2009 due to an increase in demand for our services in this sector.
 
 
SapientNitro’s operating income increased $35.0 million due to the increase in service revenues. As a percentage of revenue, SapientNitro’s operating income remained constant at 29% compared to 2009.
 
Sapient Global Markets operating income increased $19.7 million due to the increase in service revenues. As a percentage of revenue, Sapient Global Markets operating income remain constant at 33% compared to 2009.
 
Sapient Government Services operating income increased $3.5 million due to the increase in service revenues. As a percentage of revenue, Sapient Government Services operating income decreased to 28% compared to 29% in 2009. The reason for the decrease is an increase in contractor and consultant usage as our need for contractors and consultants in specialized areas for certain client contracts increased.
 
Years Ended December 31, 2009 and 2008
 
 
Our service revenues for 2009 and 2008 were as follows:
 
                                 
    Twelve Months Ended December 31,       Percentage
    2009   2008   Decrease   Decrease
 
Service revenues
  $ 638,884     $ 662,412     $ (23,528 )     −4 %
 
Our service revenues decreased $23.5 million, or 4%, in U.S. dollars in 2009 compared to 2008. Service revenues were $670.1 million in constant currency terms, a 1% increase compared to 2008. The increase in constant currency terms was due to incremental revenues from our Nitro and DCG acquisitions, offset by pricing pressures and, to a lesser extent, a decrease in demand for our services in our SapientNitro segment (see Results by Operating Segment).
 
The following table compares our 2009 service revenues by industry sector to 2008:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2009     2008     (Decrease)     (Decrease)  
 
Financial Services
  $ 209.0     $ 203.7     $ 5.3       3 %
Consumer, Travel & Automotive
    152.8       144.5       8.3       6 %
Technology & Communications
    99.5       123.5       (24.0 )     −19 %
Government, Health & Education
    92.9       98.3       (5.4 )     −5 %
Energy Services
    84.7       92.4       (7.7 )     −8 %
                                 
Total
  $ 638.9     $ 662.4     $ (23.5 )     −4 %
                                 


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The following table compares our 2009 service revenues by industry sector to 2008 in constant currency terms:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2009     2008     (Decrease)     (Decrease)  
 
Financial Services
  $ 217.4     $ 203.7     $ 13.7       7 %
Consumer, Travel & Automotive
    156.7       144.5       12.2       8 %
Technology & Communications
    106.7       123.5       (16.8 )     −14 %
Government, Health & Education
    100.4       98.3       2.1       2 %
Energy Services
    88.9       92.4       (3.5 )     −4 %
                                 
Total
  $ 670.1     $ 662.4     $ 7.7       1 %
                                 
 
The increases in the Financial Services and Consumer, Travel and Automotive sectors were primarily due to incremental revenues from our DCG and Nitro acquisitions, respectively. The increase in the Government, Health and Education sector was due to an increase in demand in the U.S. in our Government Services segment, offset by pricing pressures. The decreases in other sector revenues were due to pricing pressures, and to a lesser extent, a decrease in demand for our services, primarily in our SapientNitro segment.
 
Our 2009 utilization was 77%, a one point decrease from our 2008 utilization of 78%. Our 2009 average project personnel peoplecount remained relatively flat compared to 2008. Contractors and consultant usage, measured by expense, increased 4% compared to 2008. In constant currency terms, we increased our use of contractors and consultants by 8% in 2009 compared to 2008 as our need for contractors and consultants in specialized areas for certain client contracts increased.
 
Our five largest customers, in the aggregate, accounted for 21% of our service revenues in 2009 compared to 24% in 2008. No customer accounted for more than 10% of our service revenues for 2009 or 2008. Long Term and Retainer Revenues were 44% and 43% of our global service revenues for 2009 and 2008, respectively.
 
 
Project personnel expenses consist principally of salaries and employee benefits for personnel dedicated to client projects, independent contractors and direct expenses incurred to complete projects that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services.
 
                                 
    Twelve Months Ended December 31,       Percentage
    2009   2008   Increase   Increase
 
Project personnel expenses
  $ 435,859     $ 435,508     $ 351       0 %
Project personnel expenses as a percentage of service revenues
    68 %     66 %     2 points          
 
Project personnel expenses remained flat in 2009 compared to 2008. Excluding a decrease of $24.6 million in expenses due to currency fluctuations, project personnel expenses, in constant currency terms, increased $24.9 million, or 6%. This increase was due to multiple factors. Compensation expense increased $11.7 million, though average personnel peoplecount remained constant in 2009 compared to 2008. The reason for the increase is due to an increase in non-India project personnel, whose compensation costs are higher than our India project personnel. Average peoplecount in total remained constant due to a decrease in India project personnel as part of our 2009 restructure event (see Restructuring and Other Related Charges). Other increases were: (i) contractor and consultant expense increased $5.1 million as our need for contractors and consultants in specialized areas for certain client contracts increased, (ii) stock-based compensation expense increased $1.5 million due to an increased number of grants made to project personnel compared to 2008, (iii) other project personnel expenses increased $0.9 million and (iv) project personnel expense increased $13.0 million as a result of the Nitro acquisition. These increases were offset by a decrease of $5.3 million in travel expenses and a $1.9 million decrease in equipment expenses. Travel expenses decreased due to a concerted effort to manage these costs and equipment expenses decreased due to non-recurring, project specific expenses incurred in 2008. Project personnel expenses increased as a percentage of revenue due to pricing pressures on our service revenues.


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Selling and marketing expenses consist principally of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses.
 
                                 
    Twelve Months Ended
       
    December 31,       Percentage
    2009   2008   Decrease   Decrease
 
Selling and marketing expenses
  $ 31,931     $ 36,233     $ (4,302 )     −12 %
Selling and marketing expenses as a percentage of service revenues
    5 %     5 %              
 
Selling and marketing expenses decreased $4.3 million in 2009 compared to 2008. Selling and marketing compensation expenses decreased $5.7 million and stock-based compensation expenses decreased $1.9 million, primarily due to a decrease in selling and marketing peoplecount. Other selling and marketing expenses also decreased $0.5 million. These decreases were offset by an increase in consultant usage and related travel expenses of $3.0 million and incremental expenses of $0.8 million due to the Nitro acquisition.
 
 
                                 
    Twelve Months Ended December 31,       Percentage
    2009   2008   Decrease   Decrease
 
General and administrative expenses
  $ 118,018     $ 123,188     $ (5,170 )     −4 %
General and administrative expenses as a percentage of service revenues
    18 %     19 %     (1 point )        
 
General and administrative expenses decreased $5.2 million in 2009 compared to 2008. Excluding a decrease of $5.7 million of expenses due to currency fluctuations, general and administrative expense, in constant currency terms, increased $0.5 million. The increase was due to: (i) incremental expense of $8.3 million due to the Nitro acquisition and (ii) $2.8 million less in currency transaction gains as we recorded a $0.3 million currency loss in 2009 compared to a $2.5 million gain in 2008. These increase were offset by: (i) a $5.0 million decrease in compensation expenses, (ii) a $3.1 million decrease, in the aggregate, of professional fees, employment agency fees and travel expenses as we made a concerted effort to manage these costs, (iii) a decrease of $1.6 million in other general and administrative expenses primarily due to a $0.9 million reimbursement of expenses related to our stock-option restatement in 2007 and a $0.8 million decrease in realized and unrealized losses on hedge positions in 2009 compared to 2008, and (iv) a decrease of $0.8 million in stock-based compensation expense. General and administrative expenses decreased as a percentage of revenue as a result of the foregoing.
 
 
Restructuring and other related charges increased $4.4 million compared to 2008 due to the 2009 workforce restructuring where we recorded a $2.0 million restructuring charge and a $2.6 million charge recorded in 2009 principally as a result of a change in estimated sub-lease income associated with two previously restructured leases. In 2008 we had a charge of $0.2 million principally related to a change in estimated sub-lease income associated with two previously restructured leases.
 
Amortization of Purchased Intangible Assets
 
During 2009 and 2008, amortization of intangible assets consisted primarily of non-compete and non-solicitation agreements, customer lists, an SAP license agreement and tradenames acquired in business combinations. Amortization expense related to intangible assets was $5.1 million in 2009 compared to $2.7 million in 2008. The increase in expense was due to the amortization of intangible assets acquired in the Nitro and DCG acquisitions.


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On January 1, 2009, we began accounting for business combinations using the acquisition method which requires acquisition related costs to be expensed as incurred. These costs include expenses associated with third-party professional services we incur related to our evaluation process of potential acquisition opportunities and other related charges. Though we may incur acquisition costs and other related charges it is not indicative that any transaction will be consummated. Acquisition costs and other related expenses were $3.0 million for 2009. The majority of these expenses were incurred as a result of the Nitro acquisition.
 
 
Interest and other income is derived primarily from investments in U.S. government securities, corporate debt securities, auction rate securities, commercial paper, time deposits, and money market funds.
 
                                 
    Twelve Months Ended December 31,       Percentage
    2009   2008   Decrease   Decrease
 
Interest and other income, net
  $ 3,156     $ 7,086     $ (3,930 )     −55 %
 
Interest and other income decreased $3.9 million in 2009 compared to 2008. The decrease was primarily due to a decrease of $2.9 million in interest income due to lower interest rates and a more conservative investment strategy in 2009 compared to 2008. Other income decreased $1.0 million due to a number of non-recurring items that were recorded as income during the three months ended March 31, 2008.
 
Provision for Income Taxes and Benefit From Release of Valuation Allowance
 
Our income tax provision is primarily related to foreign, federal alternative minimum tax and state tax obligations and, in 2009, the release of our valuation allowance on our U.S. deferred tax assets (discussed below). Our effective income tax rate for 2009 was (102%) as a result of releasing our valuation allowance on our U.S. deferred tax assets. The releases of the valuation allowance resulted in a benefit of $58.3 million. Excluding this benefit our income tax provision for 2009 was $13.7 million compared to $9.2 million for 2008. The increase, in both dollars and as a percentage of profit before income taxes, was due to the income tax effect of a royalty fee arrangement completed in the fourth quarter of 2009 between the Company and one of its foreign subsidiaries.
 
Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2008 all of our U.S. deferred tax assets had a full valuation allowance of $112.1 million. Based upon our operating results for the years immediately preceding and through December 31, 2009, as well as an assessment of our expected future results of operations in the U.S., at December 31, 2009, we determined that it had become more likely than not that we would realize a substantial portion of our deferred tax assets in the U.S. As a result, we released $58.3 million of valuation allowances on our U.S. deferred tax assets.
 
Certain state tax net operating loss carry forwards, as well as a portion of the net operating loss carry forwards relating to certain stock based compensation deductions remain with a valuation allowance recorded against them at December 31, 2009. We continue to believe that deferred tax assets in Germany, Canada, United Kingdom, Australia and India are more likely than not to be realized and, therefore, no valuation allowance has been recorded against these assets.
 
Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions.


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Results by Operating Segment
 
The tables below present the service revenues and income before income taxes attributable to these operating segments for the periods presented (in thousands):
 
                 
    2009     2008  
 
Service Revenues:
               
SapientNitro
  $ 405,020     $ 461,682  
Sapient Global Markets
    198,043       172,457  
Sapient Government Services
    35,821       28,273  
                 
Total Service Revenues
  $ 638,884     $ 662,412  
                 
 
                 
    2009     2008  
 
Income Before Income Taxes:
               
SapientNitro
  $ 115,461     $ 144,301  
Sapient Global Markets
    65,316       62,338  
Sapient Government Services
    10,303       8,812  
                 
Total Reportable Segments(1)
    191,080       215,451  
Less Reconciling Items(2)
    (147,504 )     (143,736 )
                 
Consolidated Income Before Income Taxes
  $ 43,576     $ 71,715  
                 
 
 
(1) Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments.
 
(2) Adjustments that are made to the total of the segments’ operating income to arrive at consolidated income before income taxes include the following:
 
                 
    2009     2008  
 
Centrally managed functions
  $ 125,864     $ 132,882  
Restructuring and other related charges
    2,759       194  
Amortization of intangible assets
    5,146       2,660  
Stock-based compensation expense
    14,921       15,122  
Interest and other income, net
    (3,156 )     (7,086 )
Acquisition costs and other related charges
    2,962        
Unallocated expenses(a)
    (992 )     (36 )
                 
    $ 147,504     $ 143,736  
                 
 
 
(a) Reflects stock-option restatement related benefits.
 
 
Our SapientNitro service revenues decreased compared to 2008 due to pricing pressures and, to a lesser extent, a decrease in demand for our services. The decrease was offset by incremental revenues from out Nitro acquisition.


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The following table compares 2009 SapientNitro service revenues by industry sector to 2008:
 
                                         
                      Percentage
       
    Twelve Months Ended December 31,     Increase /
    Increase /
       
Industry Sector   2009     2008     (Decrease)     (Decrease)        
 
Consumer, Travel & Automotive
  $ 152.8     $ 144.5     $ 8.3       6 %        
Technology & Communications
    99.5       123.5       (24.0 )     −19 %        
Financial Services
    76.7       74.7       2.0       3 %        
Government, Health & Education
    57.0       70.0       (13.0 )     −19 %        
Energy Services
    19.1       49.0       (29.9 )     −61 %        
                                         
Total
  $ 405.1     $ 461.7     $ (56.6 )     −12 %        
                                         
 
The following table compares 2009 SapientNitro service revenues by industry sector to 2008 in constant currency terms:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2009     2008     (Decrease)     (Decrease)  
 
Consumer, Travel & Automotive
  $ 156.7     $ 144.5     $ 12.2       8 %
Technology & Communications
    106.7       123.5       (16.8 )     −14 %
Financial Services
    79.8       74.7       5.1       7 %
Government, Health & Education
    64.5       70.0       (5.5 )     −8 %
Energy Services
    20.0       49.0       (29.0 )     −59 %
                                 
Total
  $ 427.7     $ 461.7     $ (34.0 )     −7 %
                                 
 
On a constant currency basis, the increase in service revenues in the Consumer, Travel and Automotive sector is primarily due to incremental revenue from the Nitro acquisition. The increase in the Financial Services sector is due to an increase in demand for SapientNitro’s services in this sector, offset by pricing pressures. The decrease in service revenues in the other industry sectors is due to pricing pressures and, to a lesser extent, a decrease in demand for our services compared to 2008.
 
Our Sapient Global Markets service revenues increased compared to 2008. The increase was due to an increase in demand for our services and incremental revenue from our DCG acquisition, offset by pricing pressures.
 
The following table compares 2009 Sapient Global Markets service revenues by industry sector to 2008:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2009     2008     (Decrease)     (Decrease)  
 
Financial Services
  $ 132.3     $ 129.0     $ 3.3       3 %
Energy Services
    65.7       43.4       22.3       51 %
                                 
Total
  $ 198.0     $ 172.4     $ 25.6       15 %
                                 
 
The following table compares 2009 Sapient Global Markets service revenues by industry sector to 2008 in constant currency terms:
 
                                 
                      Percentage
 
    Twelve Months Ended December 31,     Increase /
    Increase /
 
Industry Sector   2009     2008     (Decrease)     (Decrease)  
 
Financial Services
  $ 137.6     $ 129.0     $ 8.6       7 %
Energy Services
    69.0       43.4       25.6       59 %
                                 
Total
  $ 206.6     $ 172.4     $ 34.2       20 %
                                 


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In constant currency terms, the increases in the Financial Services and Energy Services sectors were due to an increase in demand and incremental revenue from our DCG acquisition, offset by pricing pressures.
 
Service revenues for our Government Services operating segment increased compared to the 2008 as we saw a strong market demand for our services in this segment.
 
 
SapientNitro’s operating income decreased $28.8 million due to the decrease in service revenues. As a percentage of revenue, SapientNitro’s operating income decreased to 29% compared to 31% in 2008. This decrease was also a result of the revenue decrease as direct expenses actually decreased by $27.8 million.
 
Sapient Global Markets operating income increased $3 million due to the increase in service revenues. As a percentage of revenue, Sapient Global Markets operating income decreased to 33% compared to 36% in 2008. The decrease in operating income as a percentage of revenue was due to an increased in contractor and consultant usage as our need for contractors and consultants in specialized areas for certain client contracts increased.
 
Sapient Government Services operating income increased $1.5 million. This was due to our management of direct expenses as direct expenses only increased $6.1 million compared to an increase of $7.5 million in revenues.
 
 
During 2010 and 2009 we funded our operations with cash flows generated from operations. We invest our excess cash predominantly in money market funds, time deposits with maturities of less than or equal to 90 days, mutual funds and other cash equivalents. At December 31, 2010 we had approximately $234.1 million in cash, cash equivalents, restricted cash and marketable investments, compared to $215.8 million at December 31, 2009. This increase was due to cash flow from operations of $87.3 million, net of cash used in financing activities for our special dividend payment in the first quarter of 2010 of $46.8 million and the purchase of property, plant and equipment.
 
We have approximately $4.5 million with various banks as collateral for letters of credit and performance bonds and have classified this cash as restricted on our consolidated balance sheet at December 31, 2010.
 
At December 31, 2010 we had the following contractual obligations:
 
                                         
    Payments Due By Period  
    Less Than
    1 - 3
    3 - 5
    More Than
       
    One Year      Years     Years     5 Years     Total  
    (In thousands)  
 
Operating leases
  $ 14,582     $ 27,720     $ 23,220     $ 45,167     $ 110,689  
Cash outlays for restructuring and other related activities(1)
    2,460                         2,460  
Purchase obligations(2)
    1,161       1,009                   2,170  
Uncertain tax positions
          10,864                   10,864  
                                         
Total
  $ 18,203     $ 39,593     $ 23,220     $ 45,167     $ 126,183  
                                         
 
 
(1) Cash outlay for restructuring and other related activities include minimum future lease and related payments for excess facilities, net of estimated sublease income of $2.7 million under existing arrangements.
 
(2) Purchase obligations represent minimum commitments due to third parties, including subcontractor agreements, telecommunications contracts, IT maintenance contracts in support of internal use of software and hardware and other marketing and consulting contracts. Contracts for which our commitment is variable based on volumes, with no fixed minimum quantities, and contracts that can be cancelled without payment penalties, have been excluded. Amounts presented also exclude accounts payable and accrued expenses at December 31, 2010.
 
Cash provided by operating activities resulted from net income, the addition of non-cash charges, the sale of $16.4 million in trading marketable securities and an increase in accrued compensation. These increases in


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operating cash flow were primarily offset by an increase in accounts receivable. The increase in accounts receivable is due to the increase in service revenues. Cash provided by operating activities increased compared to the same period in 2009 due to lower bonus payment of prior year bonuses — as bonuses based on 2009 results were lower than those paid in the first quarter of 2009 which were based on 2008 results — net income and, to a lesser extent, sales of trading marketable securities.
 
Days sales outstanding (“DSO”) is calculated based on actual three months of total revenue and period end receivables, unbilled and deferred revenue balances. Our DSO decreased 2% to 65 days as of December 31, 2010 compared to our DSO of 66 days as of December 31, 2009. DSO decreased due to a concerted effort to improve collections.
 
Cash used by investing activities was $33.4 million. This was due to $3.2 million in payments of deferred consideration related to the Nitro acquisition, $21.3 million in capital expenditures and the costs of internally developed software and $8.8 million in purchases of marketable securities. These uses of cash were offset by $0.8 million in redemptions of available-for-sale marketable securities and the receipt of $0.7 million on our hedge positions. Cash used by investing activities increased compared to the same period in 2009 due to the purchases of marketable securities. Though the current period reflected more capital expenditures, primarily related to build-out costs for a new India unit (discussed below), 2009 reflected more cash paid for acquisitions which related to Nitro.
 
Cash used by financing activities was $33.9 million as a result of a $46.8 million special dividend payment on all outstanding common stock as of March 1, 2010 as a return of capital to shareholders. This was offset by $8.7 million in proceeds associated with the issuance of common stock for stock option exercises and $4.4 million in proceeds from our credit facility. The difference between the financing activities in the current period compared to the same period in 2009 is the dividend payment. In addition, in 2010 we entered into a $10.0 million revolving credit facility in India, which matures in May 2011, to finance the build-out of a new India unit in a Special Economic Zone (“SEZ”) which is eligible for a five year, 100% tax holiday. Management concluded that this short-term credit facility was the most efficient financing method available.
 
Non-cash investing activity of $2.4 million reflects the value of common shares issued as part of contingent consideration in connection with our DCG acquisition.
 
We use foreign currency option contracts to partially mitigate the effects of exchange rate fluctuations on certain revenues and operating expenses denominated in foreign currencies. Please see “Item 7a. Quantitative and Qualitative Disclosures About Market Risk” for a discussion of our use of such derivative financial instruments.
 
We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $10.7 million, for which the likelihood of loss is considered more than remote, and various administrative audits, each of which have arisen in the ordinary course of our business. We have an accrual at December 31, 2010 of approximately $0.7 million related to certain of these items. We intend to defend these matters vigorously, although the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that we have previously accrued and may have a material effect on our operating results.
 
We believe that our existing cash, credit facility and other short-term investments will be sufficient to meet our working capital and capital expenditure requirements, investing activities and the expected cash outlay for our previously recorded restructuring activities for at least the next 12 months.
 
 
In January 2010, we adopted ASU No. 2010-06 — Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This standard amends the disclosure guidance with respect to fair value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. We have included these new disclosures, as applicable, in Note 3 in the Notes to Consolidated and Condensed Financial Statements.


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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We account for our marketable securities as “available-for-sale” or “trading” securities. Available-for-sale securities are carried on the balance sheet at fair value. Unrealized gains and losses on available-for-sale securities that are considered temporary are reflected in the “accumulated other comprehensive loss” section of our consolidated balance sheet. Unrealized losses on available-for-sale securities are reflected in earnings when the decline in fair value below cost basis is determined to be other-than-temporary. Credit losses on debt securities classified as available-for-sale are an example of other-than-temporary declines in value and are reflected in the “other income, net” section of our consolidated statements of operations. Trading securities are carried on the balance sheet at fair value with unrealized gains and losses reflected in the “other income, net” section of our consolidated statements of operations.
 
The estimated fair value of our marketable securities portfolio was $10.1 million as of December 31, 2010 which includes $8.8 million of mutual finds and $1.3 million of auction rate securities (“ARS”).
 
The estimated fair value of our marketable securities portfolio was $17.4 million as of December 31, 2009 which includes $16.7 million of ARS and $0.8 million of a money market fund (the “Primary Fund”) classified as marketable securities. Our investment in the Primary Fund is classified as available-for-sale securities. In January 2010 we received the remaining Primary Fund balance of $0.8 million. As of December 31, 2009 the estimated fair value of our ARS classified as available-for-sale was $1.4 million and our ARS classified as trading securities was $15.3 million. In 2010 we sold all our trading securities at amortized cost.
 
Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in the market value due to changes in interest rates. Should the interest rate fluctuate by 10%, the change in value of our marketable securities would not have been material as of December 31, 2010 and our interest income would not have changed by a material amount for the three months ended December 31, 2010.
 
 
We face exposure to adverse movements in foreign currency exchange rates because a significant portion of our revenues, expenses, assets, and liabilities are denominated in currencies other than the U.S. dollar, primarily the British pound sterling, the euro, the Indian rupee and the Canadian dollar. These exposures may change over time as business practices evolve.
 
For 2010, approximately 41% of our revenues and approximately 54% of our operating expenses were denominated in foreign currencies, as compared to 45% and 56%, respectively, during the same period in 2009. In addition, 52% of our assets and liabilities were subject to foreign currency exchange fluctuations at December 31, 2010 as compared to 49% and 47% for our assets and liabilities, respectively, at December 31, 2009. We also have assets and liabilities in certain entities that are denominated in currencies other than the entity’s functional currency.
 
Approximately 16% of our operating expenses for 2010 were denominated in Indian rupees. Because we have minimal associated revenues in Indian rupees, any movement in the exchange rate between the U.S. dollar and the Indian rupee has a significant impact on our operating expenses and operating profit. Approximately 19% of our service revenues for 2010 are denominated in the British pound sterling. Any movement in the exchange rate between the U.S. dollar and the British pound has a significant impact on our revenues and operating income. Approximately 5% of our service revenues for 2010 are denominated in the euro. Any movement in the exchange rate between the U.S. dollar and the euro has a significant impact on our revenues and operating income. We manage this exposure through a risk management program that partially mitigates our exposure to operating expenses denominated in the Indian rupee and operating margins denominated in the British pound sterling and the euro, and that includes the use of derivative financial instruments which are not designated as accounting hedges. As of December 31, 2010 we had option contracts outstanding in the notional amount of approximately $24.2 million ($15.4 million for our Indian rupee contracts, $6.2 million for our British pound sterling contracts and $2.6 million


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for our euro contracts). Because these instruments are option collars that are settled on a net basis with the bank, we have not recorded the gross underlying notional amounts in our assets and liabilities as of December 31, 2010. The following table details our net realized and unrealized gains/losses on these option contracts for 2010, 2009 and 2008.
 
                         
    Twelve Months Ended December 31,
    2010   2009   2008
 
Gain (loss) on foreign exchange option contracts not designated
  $ 530     $ 19     $ (802 )
 
We also performed a sensitivity analysis of the possible loss that could be incurred on these contracts as a result of movements in the Indian rupee. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled Indian rupee positions as of December 31, 2010 would result in maximum losses on these positions of $0.7 million, $1.3 million, and $1.9 million, respectively. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled British pound sterling positions as of December 31, 2010 would result in maximum losses on these positions of $0.2 million, $0.3 million, and $0.4 million, respectively. Changes of 10%, 15% and 20% of the underlying average exchange rate of our unsettled euro positions as of December 31, 2010 would result in maximum losses on these positions of $0.1 million, $0.2 million, and $0.2 million, respectively. Positions expire in January and February of 2011 and therefore, any losses in respect to these positions after December 31, 2010 would be recognized in the three months ending March 31, 2011.
 
For a discussion of the risks we face as a result of foreign currency fluctuations, please see “Risk Factors” in Part I, Item 1A and — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.


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Table of Contents

 
 
To the Board of Directors and Stockholders
of Sapient Corporation
 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sapient Corporation and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations as of January 1, 2009.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/  PricewaterhouseCoopers LLP
 
Boston, Massachusetts
February 25, 2011


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SAPIENT CORPORATION
 
                 
    December 31,
    December 31,
 
    2010     2009  
    (In thousands, except share and per share amounts)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 219,448     $ 195,678  
Marketable securities, current portion
    8,861       16,082  
Restricted cash, current portion
    1,416       393  
Accounts receivable, less allowance for doubtful accounts of $91 and $610 at December 31, 2010 and December 31, 2009, respectively
    136,300       111,987  
Unbilled revenues
    49,765       47,426  
Deferred tax assets, current portion
    23,938       27,616  
Prepaid expenses and other current assets
    21,256       24,893  
                 
Total current assets
    460,984       424,075  
Marketable securities, net of current portion
    1,269       1,362  
Restricted cash, net of current portion
    3,093       2,308  
Property and equipment, net
    35,571       29,229  
Purchased intangible assets, net
    17,629       23,061  
Goodwill
    77,865       76,004  
Deferred tax assets, net of current portion
    19,692       33,521  
Other assets
    7,619       5,359  
                 
Total assets
  $ 623,722     $ 594,919  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 18,714     $ 19,238  
Accrued expenses
    51,444       47,185  
Accrued compensation
    66,609       49,147  
Accrued restructuring costs, current portion
    3,129       3,727  
Income taxes payable
    567       8,534  
Deferred tax liabilities, current portion
          136  
Deferred revenues, current portion
    18,558       19,544  
                 
Total current liabilities
    159,021       147,511  
Accrued restructuring costs, net of current portion
          2,994  
Deferred tax liabilities, net of current portion
    831       1,579  
Other long-term liabilities
    21,565       16,634  
                 
Total liabilities
    181,417       168,718  
Commitments and contingencies (Note 12)
               
Stockholders’ equity:
               
Preferred stock, par value $0.01 per share, 5,000,000 authorized and none issued at December 31, 2010 and 2009
           
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 137,307,612 and 133,272,997 shares issued at December 31, 2010 and 2009, respectively
    1,373       1,333  
Additional paid-in capital
    555,562       583,291  
Treasury stock, at cost, 458,664 and 444,418 shares at December 31, 2010 and 2009, respectively
    (2,466 )     (2,316 )
Accumulated other comprehensive loss
    (12,488 )     (12,626 )
Accumulated deficit
    (99,676 )     (143,481 )
                 
Total stockholders’ equity
    442,305       426,201  
                 
Total liabilities and stockholders’ equity
  $ 623,722     $ 594,919  
                 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


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SAPIENT CORPORATION
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands, except per share amounts)  
 
Revenues:
                       
Service revenues
  $ 823,511     $ 638,884     $ 662,412  
Reimbursable expenses
    40,008       27,794       25,076  
Total gross revenues
    863,519       666,678       687,488  
                         
Operating expenses:
                       
Project personnel expenses
    563,930       435,859       435,508  
Reimbursable expenses
    40,008       27,794       25,076  
                         
Total project personnel expenses and reimbursable expenses
    603,938       463,653       460,584  
Selling and marketing expenses
    38,833       31,931       36,233  
General and administrative expenses
    150,877       118,018       123,188  
Restructuring and other related charges
    414       4,548       194  
Amortization of purchased intangible assets
    5,448       5,146       2,660  
Acquisition costs and other related charges
    111       2,962        
                         
Total operating expenses
    799,621       626,258       622,859  
Income from operations
    63,898       40,420       64,629  
Other income, net
    196       267       1,280  
Interest income, net
    3,509       2,889       5,806  
                         
Income before income taxes
    67,603       43,576       71,715  
Provision for income taxes
    23,798       13,735       9,239  
Benefit from release of valuation allowance
          (58,285 )      
                         
Provision for (benefit from) income taxes
    23,798       (44,550 )     9,239  
                         
Net income
  $ 43,805     $ 88,126     $ 62,476  
                         
Basic net income per share
  $ 0.33     $ 0.69     $ 0.50  
                         
Diluted net income per share
  $ 0.32     $ 0.66     $ 0.48  
                         
Weighted average common shares
    132,060       127,969       125,988  
Weighted average dilutive common share equivalents
    6,669       4,912       3,176  
                         
Weighted average common shares and dilutive common share equivalents
    138,729       132,881       129,164  
                         
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


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SAPIENT CORPORATION
 
 
                                                                         
                                        Accumulated
             
                Additional
                      Other
          Total
 
    Common Shares     Paid-
    Treasury Shares     Comprehensive
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     In Capital     Shares     Amount     Income     Income (Loss)     Deficit     Equity  
    (In thousands)  
 
Balance at December 31, 2007
    131,785     $ 1,318     $ 564,878       (6,072 )   $ (24,240 )           $ 12,686     $ (294,083 )   $ 260,559  
                                                                         
Shares issued under stock option and purchase plans
                425       1,304       5,759                           6,184  
Vesting of restricted stock, net
                    (5,252 )     662       2,799                               (2,453 )
Stock-based compensation expense
                15,122                                       15,122  
Repurchase of common stock
                      (1,441 )     (9,902 )                         (9,902 )
Reclassification of redeemable common stock
                290                                       290  
Issuance of common stock in connection with acquisition
                5,388       308       1,419                           6,807  
Tax benefits from stock plans
                85                                       85  
Comprehensive income:
                                                                       
Net income
                                  62,476             62,476       62,476  
Other comprehensive income:
                                                                       
Currency translation adjustments
                                  (37,064 )     (37,064 )           (37,064 )
Net unrealized loss on investments
                                  (157 )     (157 )           (157 )
                                                                         
Total comprehensive income
                                $ 25,255                    
                                                                         
Balance at December 31, 2008
    131,785     $ 1,318     $ 580,936       (5,239 )   $ (24,165 )           $ (24,535 )   $ (231,607 )   $ 301,947  
                                                                         
Shares issued under stock option and purchase plans
    338       3       1,074       64       296                           1,373  
Vesting of restricted stock, net
    838       9       (8,502 )     754       3,479                               (5,014 )
Stock-based compensation expense
                14,721                                       14,721  
Issuance of common stock in connection with Derivatives
                                                                       
Consulting Group Ltd. acquisition
    312       3       2,360                                       2,363  
Issuance of common stock in connection with Nitro Limited acquisition
                (7,242 )     3,114       14,096                           6,854  
Issuance of employment-based restricted shares in connection with Nitro Limited acquisition
                      863       3,978                           3,978  
Tax shortfall from stock plans
                (56 )                                     (56 )
Comprehensive income:
                                                                       
Net income
                                  88,126             88,126       88,126  
Other comprehensive income:
                                                                       
Currency translation adjustments
                                  11,871       11,871             11,871  
Net unrealized gain on investments
                                  38       38             38  
                                                                         
Total comprehensive income
                                $ 100,035                    
                                                                         
Balance at December 31, 2009
    133,273       1,333       583,291       (444 )     (2,316 )             (12,626 )     (143,481 )     426,201  
                                                                         
Shares issued under stock option and purchase plans
    1,543       15       8,675                                       8,690  
Vesting of restricted stock, net
    1,842       18       (10,084 )                                         (10,066 )
Stock-based compensation expense
                18,156                                       18,156  
Issuance of common stock in connection with Derivatives
                                                                       
Consulting Group Ltd. acquisition
    650       7       2,367                                       2,374  
Dividends paid on Common Stock
                (46,843 )                                     (46,843 )
Return of Shares Related to Acquisitions
                      (15 )     (150 )                         (150 )
Comprehensive income:
                                                                       
Net income
                                  43,805             43,805       43,805  
Other comprehensive income:
                                                                       
Currency translation adjustments
                                  128       128             128  
Net unrealized gain on investments
                                  10       10             10  
                                                                       
                                                                         
Total comprehensive income
                                $ 43,943                    
                                                                         
Balance at December 31, 2010
    137,308       1,373       555,562       (459 )     (2,466 )           $ (12,488 )   $ (99,676 )   $ 442,305  
                                                                         
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


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Table of Contents

 
SAPIENT CORPORATION
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net income
  $ 43,805     $ 88,126     $ 62,476  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
(Gain) loss recognized on disposition of fixed assets
    (35 )     85       660  
Unrealized loss (gain) on financial instruments
    139       44       (264 )
Realized (gain) loss on investments
    (132 )     (103 )     310  
Depreciation expense
    16,214       15,984       17,218  
Amortization of purchased intangible assets
    5,448       5,146       2,660  
Deferred income taxes
    16,681       869       45  
Income tax benefit from release of valuation allowance
          (58,285 )      
(Recovery of) provision for doubtful accounts, net
    (227 )     215       (54 )
Stock-based compensation expense
    18,156       14,921       15,122  
Changes in operating assets and liabilities, net of acquisitions and disposition:
                       
Accounts receivable
    (24,474 )     (8,805 )     (7,132 )
Unbilled revenues
    (2,447 )     (1,286 )     (15,914 )
Prepaid expenses and other current assets
    1,738       (3,255 )     753  
Sales of trading marketable securities
    16,425              
Other assets
    (2,205 )     (141 )     (189 )
Accounts payable
    (1,299 )     3,484       (685 )
Accrued compensation
    17,202       (12,030 )     4,462  
Payments of withholding taxes in connection with vesting of stock-based awards
    (10,031 )     (5,018 )     (2,453 )
Accrued restructuring costs
    (3,548 )     (1,207 )     (3,323 )
Deferred revenues
    (900 )     3,325       3,002  
Accrued expenses
    130       (7,471 )     1,984  
Income taxes payable
    (8,075 )     2,098       6,409  
Other long-term liabilities
    4,745