CI&T Inc(CINT) - 2021 Q4 - Annual Report

PART I Presentation of Financial and Other Information This section outlines the basis for the financial statements and other information presented, prepared under IFRS with Brazilian Reais (R$) as presentation currency - CI&T Inc is a Cayman Islands exempted company incorporated on June 7, 2021, which became the ultimate holding company of the group following a corporate reorganization in November 2021[13] - The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB, with the Brazilian real (R$) as the functional and presentation currency[12][13] - The report presents several non-IFRS financial measures, including Adjusted Gross Profit, Adjusted EBITDA, Adjusted Net Profit, and Net Revenue at Constant Currency, which management believes provide supplemental measures of core operational performance[16] Key Information This section details significant investment risks, including client concentration, competition, talent retention, and the dual-class share structure D. Risk factors The company faces substantial risks from client concentration, intense competition, talent retention, geopolitical events, and material weaknesses in internal controls - Significant client concentration risk exists, with the top client accounting for 20% of net revenue and the top ten clients accounting for 63% of net revenue in 2021[53] - The company faces intense competition from digital transformation providers like Globant and EPAM, as well as traditional IT services companies like Accenture and Cognizant[65] - Material weaknesses in internal control over financial reporting have been identified, specifically related to general information technology controls (GITCs) and the review of manual journal entries[42][104] - The dual-class share structure concentrates voting control with Class B shareholders, who hold ten votes per share compared to one vote per Class A share, limiting the influence of public shareholders on corporate matters[50][136] - The business is subject to geopolitical risks, including potential adverse effects from the military conflict between Russia and Ukraine and the resulting economic sanctions[33][57] Information on the Company This section provides a comprehensive overview of CI&T's business, history, structure, and strategic acquisitions, including its service model and market position A. History and Development of the Company Founded in 1995 in Brazil, CI&T has grown into a global digital transformation specialist through strategic investments and acquisitions, including its 2021 NYSE IPO - In 2019, funds managed by Advent International made a strategic minority investment, enabling the company to accelerate its global growth strategy[151] - The company completed its initial public offering (IPO) on November 10, 2021, with its Class A common shares trading on the NYSE under the symbol 'CINT'[151] - CI&T has pursued strategic acquisitions to fuel growth, including Dextra Investimentos S.A. in Brazil (closed August 2021) and Somo Global Ltd in the EMEA region (closed January 2022)[151][153] B. Business Overview CI&T provides end-to-end digital transformation services to large enterprises, operating with a 'Growth Unit' and 'Squads' model, demonstrating strong client retention - CI&T operates in the global digital transformation services market, which IDC forecasts will reach US$958 billion in annual spending by 2024[153] - The company's delivery model is structured around autonomous 'Growth Units' of approximately 400 people, which are further broken down into 'Squads' of about 10 people dedicated to specific clients or projects[153] - The company has demonstrated strong client relationships and expansion, with a five-year average Net Revenue Retention Rate of 120%[155][178] Net Revenue by Industry Vertical (2021 vs 2020) | By Industry Vertical | 2021 (in thousands of R$) | 2021 (%) | 2020 (in thousands of R$) | 2020 (%) | | :--- | :--- | :--- | :--- | :--- | | Financial Services | 487,177 | 34% | 324,118 | 34% | | Food and Beverages | 340,709 | 24% | 244,590 | 26% | | Pharmaceuticals and Cosmetics | 206,375 | 14% | 134,763 | 14% | | Technology, Media and Telecom | 169,311 | 12% | 81,961 | 9% | | Retail and Manufacturing | 93,871 | 7% | 83,046 | 9% | | Education and Services | 64,336 | 5% | 41,323 | 4% | | Others | 82,600 | 6% | 46,718 | 5% | | Total Net revenue | 1,444,380 | 100% | 956,519 | 100% | Client Concentration (2021 vs 2020) | Client Concentration | 2021 (in thousands of R$) | 2021 (%) | 2020 (in thousands of R$) | 2020 (%) | | :--- | :--- | :--- | :--- | :--- | | Top Client | 283,311 | 20% | 190,599 | 20% | | Top Ten Clients | 913,890 | 63% | 644,722 | 67% | | Total Net revenue | 1,444,380 | | 956,519 | | C. Organizational Structure CI&T Inc., a Cayman Islands holding company, became the indirect parent of CI&T Brazil through a U.S. subsidiary following a corporate reorganization prior to its 2021 IPO - The current corporate structure was established through a series of contributions prior to the IPO, resulting in CI&T Inc. (Cayman Islands) holding CI&T Delaware LLC (USA), which in turn holds CI&T Brazil[199] Operating and Financial Review and Prospects This section analyzes CI&T's financial performance, highlighting 2021 revenue growth driven by client expansion and acquisitions, alongside a slight net profit decrease due to increased expenses A. Operating Results. In 2021, net revenue grew 51% to R$1.44 billion, but net profit decreased 1% to R$126.0 million due to higher operating expenses and acquisition-related costs Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 (in thousands of R$) | 2020 (in thousands of R$) | Change (%) | | :--- | :--- | :--- | :--- | | Net revenue | 1,444,380 | 956,519 | 51% | | Gross Profit | 508,648 | 355,653 | 43% | | Operating profit | 244,606 | 208,244 | 17% | | Net profit for the year | 125,957 | 127,654 | (1)% | - Net revenue growth in 2021 was driven by a 128% Net Revenue Retention rate, the addition of 36 new clients with over R$1.0 million in revenue, and a R$107 million contribution from the Dextra acquisition[215] - Operating expenses increased by 79% in 2021, mainly due to higher employee expenses from new hires, M&A consulting fees, and a R$21.9 million impairment charge on intangible assets related to the Dextra acquisition[223][224][227] Non-IFRS Financial Measures (2021 vs. 2020) | Metric | 2021 (in thousands of R$) | 2020 (in thousands of R$) | | :--- | :--- | :--- | | Adjusted Gross Profit | 542,463 | 379,877 | | Adjusted Gross Profit Margin | 37.6% | 39.7% | | Adjusted EBITDA | 324,081 | 237,917 | | Adjusted EBITDA Margin | 22.4% | 24.9% | | Adjusted Net Profit | 157,029 | 128,082 | | Adjusted Net Profit Margin | 10.9% | 13.4% | B. Liquidity and Capital Resources As of December 31, 2021, the company maintained strong liquidity with R$934.5 million in cash and investments, despite significant cash usage for acquisitions and debt financing Cash and Financial Investments (as of Dec 31, 2021) | Item | Amount (in thousands of R$) | | :--- | :--- | | Cash and cash equivalents | 135,727 | | Financial investments | 798,786 | | Total | 934,513 | Consolidated Cash Flow Summary (FY 2021) | Cash Flow Activity | Amount (in thousands of R$) | | :--- | :--- | | Net cash from operating activities | 132,379 | | Net cash used in investing activities | (1,507,544) | | Net cash from financing activities | 1,376,766 | - Total outstanding consolidated indebtedness was R$788.7 million as of December 31, 2021, an increase of R$699.5 million from 2020, mainly to finance the Dextra acquisition[273] - Capital expenditures in 2021 were R$29.9 million, primarily for IT equipment and software investments to support company growth[276] E. Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in lease term determination, revenue recognition, and fair value measurement in business combinations - Significant judgments are made in determining lease terms, specifically whether the company is reasonably certain to exercise extension options[280] - A key area of estimation uncertainty is the measurement of fair value for assets acquired and liabilities assumed in business combinations, as demonstrated in the Dextra acquisition[281] Directors, Senior Management and Employees This section details the company's seven-member board, executive compensation, and significant employee growth to 5,564 in 2021, with a 15.6% voluntary attrition rate - The Board of Directors is composed of seven members, including three independent directors: Silvio Romero de Lemos Meira, Maria Helena dos Santos Fernandes de Santana, and Eduardo Campozana Gouveia[286] - Aggregate compensation for the board of directors and executive officers for the year ended December 31, 2021, was R$11.1 million[294] Employee Headcount by Geography | Region | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | North America & Europe | 210 | 145 | 110 | | Latin America (Brazil) | 5,139 | 2,910 | 2,090 | | Asia Pacific and Japan | 215 | 164 | 150 | | Total | 5,564 | 3,219 | 2,350 | - The company's voluntary employee attrition rate for the period 2020 through 2021 was 15.6% (excluding employees with less than six months of tenure)[303] Major Shareholders and Related Party Transactions This section outlines CI&T's dual-class share structure, concentrating 92.9% of voting power with founders and Advent, and details the Shareholders' Agreement Major Shareholders and Voting Power | Shareholder | Class B Shares | % of Class B | % of Total Voting Power | | :--- | :--- | :--- | :--- | | Cesar Nivaldo Gon (Founder) | 23,303,273 | 19.9% | 19.6% | | Fernando Matt Borges Martins (Founder) | 22,722,913 | 19.4% | 19.1% | | Bruno Guiçardi Neto (Founder) | 15,298,381 | 13.0% | 12.9% | | Advent Managed Fund LLCs | 49,081,192 | 41.9% | 41.3% | - Due to the dual-class structure (10 votes per Class B share), the holders of Class B common shares (Founders and Advent) collectively control approximately 92.9% of the total voting power[305][314] - A Shareholders' Agreement is in place, granting the Founders the right to appoint a majority of the board of directors and giving Advent the right to appoint directors based on its voting power percentage[316] Financial Information This section confirms the inclusion of consolidated financial statements, notes no material legal proceedings, and states the company's policy of retaining earnings for growth instead of paying dividends - The company is not presently a party to any legal proceedings that would have a material adverse effect on its business[322] - CI&T has not adopted a dividend policy and does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for business development and expansion[323] - The company's Brazilian subsidiary is required by local law to distribute a mandatory minimum dividend of at least 25% of its adjusted net income for the prior year[325] Additional Information This section details CI&T's corporate governance, dual-class share structure with Class B shares having ten votes and preemptive rights, and anti-takeover provisions - The company has a dual-class share structure: Class A common shares with one vote per share and Class B common shares with ten votes per share[334][340] - Each Class B common share is convertible into one Class A common share at the holder's option or automatically upon most transfers, and all Class B shares will automatically convert if their total number falls below 10% of total outstanding shares[344] - Holders of Class B shares have preemptive rights to purchase additional Class B shares in new issuances to maintain their proportional ownership, subject to the consent of a majority of Class B shareholders[343] - The Articles of Association include anti-takeover provisions, such as the dual-class voting structure and the board's authority to issue preferred shares with special rights without shareholder approval[371][374] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to credit, interest rate, and significant foreign currency exchange rate risks, which are partially hedged using derivative financial instruments - The company's primary market risk is foreign currency exchange rate risk, as most revenue is in foreign currency (mainly USD) while most expenses are in Brazilian Reais (BRL)[416] - As of December 31, 2021, the company's net exposure to USD was R$725.4 million[416][770] Sensitivity Analysis for Interest Rate Risk (Effect on Earnings) | Scenario | Probable | Adverse | Remote | | :--- | :--- | :--- | :--- | | Effect on earnings (reduction in R$ thousands) | (8,367) | (12,763) | (17,160) | Sensitivity Analysis for Exchange Rate Risk (Effect on Earnings) | Scenario | Probable (USD/BRL 5.30) | Adverse (USD/BRL 5.50) | Remote (USD/BRL 5.70) | | :--- | :--- | :--- | :--- | | Effect on earnings (increase/(decrease) in R$ thousands) | 303 | 88 | (357) | PART II Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2021, due to material weaknesses in IT and manual journal entry controls, with a remediation plan underway - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to material weaknesses in internal control over financial reporting[439] - Two material weaknesses were identified: 1) Ineffective design and implementation of general information technology controls (GITCs) related to user access, and 2) Ineffective design and implementation of formal controls for the review of manual journal entries[441] - A remediation plan is underway, involving the implementation of new access management processes, a privileged access management (PAM) tool, and automated preventive controls for journal entries within the ERP system, which were implemented in February 2022 and will be monitored for effectiveness[441] PART III Financial Statements This section presents CI&T's audited consolidated financial statements for the three years ended December 31, 2021, prepared under IFRS, including notes on corporate restructuring and acquisitions Consolidated Statement of Financial Position (Abridged) | (in thousands of R$) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | 2,362,344 | 585,082 | | Total Current Assets | 1,450,905 | 434,552 | | Total Non-Current Assets | 911,439 | 150,530 | | Total Liabilities and Equity | 2,362,344 | 585,082 | | Total Current Liabilities | 548,973 | 310,992 | | Total Non-Current Liabilities | 724,076 | 75,630 | | Total Equity | 1,089,295 | 198,460 | Consolidated Statement of Profit or Loss (Abridged) | (in thousands of R$) | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Net revenue | 1,444,380 | 956,519 | 677,133 | | Gross profit | 508,648 | 355,653 | 228,154 | | Operating profit | 244,606 | 208,244 | 91,699 | | Net profit for the year | 125,957 | 127,654 | 56,569 | - The acquisition of Dextra Group on August 10, 2021, involved a total consideration of R$783.6 million and resulted in the recognition of R$595.7 million in goodwill[635][650] - Subsequent to year-end, on January 27, 2022, the company completed the acquisition of Somo Global Ltd for R$341 million in cash and 225,649 Class A common shares, plus a potential earn-out[815]