Since Wipro (WIT) announced its acquisition of Infocrossing, analyzing Infocrossing's 10-k report was one the items in my to-do list. The following are some important points I found out about this infrastructure-cum-health care BPO company. Infocrossing's (IFOX) biggest asset is its data centers that it uses to manage its customers IT infrastructure, which mostly consists of mainframes, Unix and linux servers. The company has grown organically as well as through acquisitions.
One of its recent acquisitions has been that of Structure acquired on Nov 2005 for $82.26million. $67.04 million was funded by a debt proceed of $70mn, $11,512,000 by net proceeds from the sale/leaseback of a certain parcel of land containing a data center with approximately 88,000 rentable square feet in Omaha, Nebraska, and the remainder with available cash. ”Structure" has been renamed to Infocrossing LLC. Other acquisitions include healthcare services and a systems management business.
Infocrossing’s Health Care Services
On October 1, 2004, the company acquired the common stock of the Medicaid, Medicare and Managed Care claims processing business (the "Claims Processing Business") of Verizon Information Technologies Inc. ("VITI") from VerizonCommunications Inc. for $43,500,000 in cash and approximately $1,886,000 in related acquisition costs (the "IHS Acquisition").
Infocrossing West Inc.
On April 2, 2004, the company acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists [SMS] from ITO Holdings, LLC ("Holdings") for$34,909,000 in cash, $1,224,000 in related acquisition costs and 135,892 shares of common stock of the company valued at approximately $1,439,000 (the SMS Acquisition). Prior to the acquisition, SMS changed its name to Infocrossing West, Inc. (IFOX West).
Infocrossing's products and services are mainly classified into:
Mainframe outsourcing. Mid-Range systems management. Open systems management. BPO E-mail security services. Business continuity.
Business with State of Missouri
For the years ended December 31, 2006 and 2005, the Missouri Department of Social Services, accounted for in excess of 10% of Infocrossing’s consolidated revenue.
Targeting mid size businesses by leveraging selective outsourcing Infocrossing's services are particularly attractive to mid-tier companies that need substantial infrastructure to support their business environment, but are considered "small" compared to the multi-billion dollar engagements executed by companies like IBM or EDS. Many mid-market companies perceive large companies like IBM and EDS as "inflexible" and "unresponsive" to their smaller-scale requirements.
Five data centers: Following are the five data centers of infocrossing.
Leonia, NJ: 67,000 square feet Norcross, GA: 30,600 sq ft (expiring in Jul-2015)Atlanta, GA: 10,700 sq ft (expiring Dec-2007) Brea, CA: 68,800 sq ft (expiring Dec-2014).
The equipment in the data centers are usually leased and are structured as capital leases and contain bargain purchase options.
Income Tax Scenario
For 2006, they recorded tax expense of $6.81million compared with tax expense of $2.15millionn for 2005. The effective tax rate in 2006 was 45%, compared with an effective tax rate of 46% in 2005. Although income taxes accrued at a rate of 45% in the current period, they are payable at the rate of 10% after the application of net operating loss carry-forwards. They had a deferred tax valuation allowance of $2.46mn in December 31, 2006 and 2005. Their net operating loss carry-forwards of approximately $34mn for Federal income tax purposes begins to expire in 2019. The use of these net operating loss carry-forwards is limited in future years according to Section 382 of the Internal Revenue Code of 1986.
Depreciation and Amortization Depreciation and amortization of fixed assets and other intangible assets increased $5.79mn (52%) to $16.94mn for 2006 from $11.14mn for 2005. This increase was related to increases in assets from the Structure acquisition, including $1.87million in amortization of client contracts.
In 2005, depreciation and amortization increased $2.46mn (28.4%) to $11.14mn from $8.67mn for 2004. Of this increase, $387,000 or 15.7% of the increase related to the acquisition of IST. Approximately $1.39mn or 56.3% of the increase related to depreciation and amortization related to entities acquired in 2004. The remainder of the increase of $690,000, or 28.0% of the increase, resulted from new fixed asset additions during 2005 and 2004. Depreciation and amortization decreased as a percentage of revenues to 7.5% in 2005 compared with 8.3% in 2004.
For 2006, EBITDA was $41.99mn compared with $22.08mn for 2005, 18% and15% as a percentage of revenue, respectively. It should be kept in mind that EBITDA does not take into account the following:
(a) changes in, or cash requirements for working capital needs. (b) significant interest expense, or the cash requirements necessary to service interest or principal payments, on debts. (c) cash requirements for capital expenditures.
The Credit Agreements
On November 30, 2005 Infocrossing entered into a $70mn senior secured credit facility. The Credit Agreement provides for a $55 million term loan, subject to combination of scheduled quarterly repayment amounts which began September 30, 2006. Annual payments are due no more than 95 days after each year-end of 50% of their Excess Cash Flow, as that term is defined in the Credit Agreement. The first of such payments is due no later than April 3, 2007, and is estimated to be $177,000, and there will be other payments as described below. The Credit Agreement also provides for a $15 million revolving credit facility (including letter of credit subfacilities). During 2006, they repaid $5mn on the revolving credi tfacility and currently have no balance due. The maturity date for both the term loan and the revolving credit facility is April 14, 2009. On December 31, 2006, the interest rate on the term loan was 8.5%.
Scheduled quarterly amortization payment made in 2006 totaled $4,779,000. The current scheduled quarterly amounts due on the term loan are: $11.89mn for 2007 and $16.65 million for 2008. The balance of the term loan and any amount outstanding under the revolving credit facility are due April 14, 2009. They have $72mn of outstanding 4.0% Convertible Senior Notes due July 15, 2024.
The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of common stock at a specified conversion price, subject to certain adjustments. The conversion price must be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock, and other events. Upon conversion, the company will have the right to deliver to the holders, at company's option, cash, shares of common stock, or a combination.. At the initial conversion price of $15.36, the Notes were convertible into 4,687,500 common shares. The Notes and the shares of common stock into which they may be converted may be resold pursuant to a registration statement on Form S-3 that became effective in August 2004.
Number of Shares offered for Conversion is Affected by the Stock Price of the Company On August 5, 2005, because the market price of Infocrossing's stock was less than $10.48 (68.23% of the initial conversion price) for at least 20 trading days during the 30 consecutive trading day period ending on August 5, 2005, a reset adjustment was triggered, whereby the conversion price was immediately reduced by 17.38% to $12.69. As a result of the reset adjustment, the number of common shares into which the Notes are convertible is 5,673,759, an increase of 986,259 shares. No further reset adjustments will be made, but the adjusted conversion price of $12.69 remains subject to adjustment as noted above for stock dividends, splits, issuances of rights to purchase shares of common stock, and other events .
The reset adjustment was valued in accordance with EITF 00-27; "Application of Issue No. 98-5 - Certain Convertible Instruments" at $4.59million, and this amount was recorded as an increase in Additional Paid in Capital and as a discount tithe carrying value of the Notes. This additional discount is being accredited to the carrying value of the Notes through an interest charge for the life of the Notes.
My Next Task
It will be interesting to see Wipro's strategy in handling the credit arrangements of Infocrossing. I will try to contact Mr. Suresh Senapathy (CFO of Wipro) and see if I can give you all some more information. Please stay tuned for more on this topic.