Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms “Ebix,” “the Company,” “we,” “our” and “us” refer to Ebix, Inc., a Delaware corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Ebix, Inc.
Safe Harbor for Forward-Looking Statements—
This Form 10-Q and certain information incorporated herein by reference contains forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Company’s products by the market, and management’s plans and objectives. In addition, certain statements included in this and our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by the Company to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. These statements are based on our current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in these forward-looking statements. Factors that may cause such a difference, include, but are not limited to those discussed and identified in Part II, Item 1A "Risk Factors" in this quarterly report for the three and nine months ending September 30, 2013 on this Form 10-Q, and in Part I, Item 1A, “Risk Factors” in our 2012 Form 10-K which is incorporated by reference herein, as well as: the risk of an unfavorable outcome of the pending governmental investigations or shareholder class action lawsuits, and the reputational harm caused by such investigations and lawsuits; the willingness of independent insurance agencies to outsource their computer and other processing needs to third parties; pricing and other competitive pressures and the Company’s ability to gain or maintain share of sales as a result of actions by competitors and others; changes in estimates in critical accounting judgments; changes in or failure to comply with laws and regulations, including accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax interpretations) in domestic or foreign jurisdictions; exchange rate fluctuations and other risks associated with investments and operations in foreign countries (particularly in Australia, Brazil, and Europe wherein we have significant or growing operations); equity markets, including market disruptions and significant interest rate fluctuations, which may impede our access to, or increase the cost of, external financing; and international conflict, including terrorist acts. The Company undertakes no obligation to update any such factors, or to publicly announce the results of, or changes to any of the forward-looking statements contained herein to reflect future events, developments, changed circumstances, or for any other reason.
The important risk factors that could cause actual results to differ materially from those in our specific forward-looking statements included in this Form 10-Q include, but are not limited to, the following:
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•
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Regarding Note 4 of the Notes to the Condensed Consolidated Financial Statements, and our future liquidity needs discussed under “Liquidity and Financial Condition” as pertaining to our ability to generate cash from operating activities and any declines in our credit ratings or financial condition which could restrict our access to the capital markets or materially increase our financing costs;
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•
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With respect to Note 5 of the Notes to the Condensed Consolidated Financial Statements, “Commitments and Contingencies”, and “Contractual Obligations and Commercial Commitments” in MD&A, as regarding to changes in the market value of our assets or the ultimate actual cost of our commitments and contingencies;
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•
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With respect to Note 3 of the Condensed Notes to the Condensed Consolidated Financial Statements as pertaining to the business acquisitions we have made and our ability to efficiently and effectively integrate acquired business operations, and our ability to accurately estimate the fair value of tangible and intangible assets;
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•
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With respect this Management Discussion & Analysis of Financial Condition and Results of Operation and the analysis of the
three and nine
month revenue trends including the actual realized level of demand for our products during the immediately foreseeable future.
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Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including future reports on Forms 10-Q and 8-K, and any amendments thereto. You may obtain our SEC filings at our website,
www.ebix.com
under the “Investor Information” section, or over the Internet at the SEC’s website,
www.sec.gov
.
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part 1, Item 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2012
.
Company Overview
Ebix, Inc. is a leading international supplier of software and e-commerce solutions to the insurance industry. Ebix provides a variety of application software products for the insurance industry ranging from carrier systems, agency systems and data exchanges to custom software development for all entities involved in insurance and financial services. Our goal is to be the leading provider of back-end insurance transactions in the world. The Company’s vision is to focus on the convergence of technology platforms for all insurance channels, processes and entities in a manner such that data seamlessly flows once a data entry has been made. Our customers include many of the top insurance and financial sector companies in the world.
The insurance industry continues to undergo significant consolidation driven by the need for, and benefits from, economies of scale and scope in providing insurance services in a competitive environment. Furthermore the insurance industry has particularly experienced a steady increase in the desire to reduce paper-based processes and to improve efficiency both at the back-end and consumer end sides. Such consolidation has involved both insurance carriers and insurance brokers and is directly impacting the manner in which insurance products are distributed. Management believes the insurance industry will continue to experience significant change and increased efficiencies through online exchanges, as the transition from paper-based processes are increasingly becoming the norm across world insurance markets. Changes in the insurance industry are likely to create new opportunities for the Company.
Ebix strives to work collaboratively with clients to develop innovative technology strategies and solutions that address specific business challenges. Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and business process outsourcing, applications software, and Web and application hosting to meet the individual needs of insurance providers and related entities. We intend to continue to expand both organically and through strategic business acquisitions.
Offices and Geographic Information
The Company has its worldwide headquarters in Atlanta, Georgia with its international operations being managed from its Singapore offices. The Company has operations across the United States with offices in Walnut Creek, San Diego, Pasadena, Fresno, Santa Barbara and Hemet, California; Miami, Florida; Pittsburgh, Pennsylvania; Park City, Utah; Herndon and Lynchburg, Virginia; Dallas and Houston, Texas; Norwalk, Connecticut; and Columbus, Ohio, as well as an additional operating facility in Atlanta, Georgia. The Company also has offices in Australia, Brazil, China, Japan, New Zealand, United Kingdom, Canada and India. In these offices, Ebix employs insurance and technology professionals who provide products, services, support and consultancy to thousands of customers across six continents. The Company’s product development unit in India has been awarded Level 5 status of the Carnegie Mellon Software Engineering Institute’s Capability Maturity Model Integrated (CMMI), ISO 9001:2000 certification, and ISO 2700 security certification.
Results of Operations
— Three Months Ended
September 30, 2013
and
2012
Operating Revenue
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our ASP platforms, fees for business process outsourcing services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems.
Ebix’s revenue streams come from four product channels. Presented in the table below is the breakout of our revenues for each of those product channels for the
three and nine
months ended
September 30, 2013
and
2012
, respectively.
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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(dollar amounts in thousands)
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2013
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2012
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2013
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2012
|
Exchanges
|
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$
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40,554
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|
$
|
43,592
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|
$
|
122,741
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|
$
|
116,420
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Broker Systems
|
|
4,390
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|
|
4,537
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|
13,878
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|
|
13,713
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Business Process Outsourcing (“BPO”)
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|
3,604
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|
|
4,252
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|
|
11,781
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|
11,713
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Carrier Systems
|
|
1,745
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|
|
1,423
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|
|
5,463
|
|
|
3,501
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Totals
|
|
$
|
50,293
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|
|
$
|
53,804
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|
|
$
|
153,863
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|
$
|
145,347
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During the three months ended
September 30, 2013
our total operating revenues decreased
$3.5 million
or
7%
, to
$50.3 million
as compared to
$53.8 million
during the
third
quarter of
2012
. The relative comparative decrease in revenues is due partially to a temporary reduction in professional services revenue generated from the PlanetSoft business acquired in 2012 and also due to the effect of exchange rate decreases from Q3 2012 to Q3 2013. During the three months ended September 30, 2013 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(1.6) million. Accordingly on a constant currency basis the Company’s revenue increased sequentially from $51.5 million in Q2 of 2013 to $51.9 million in Q3 of 2013.
With respect to business acquisitions completed during the years 2012 and 2013 on a pro forma basis, as disclosed in the table in Note 3 “Pro Forma Financial Information” to the enclosed Condensed Consolidated Financial Statements, combined revenues decreased 8.2% for the third quarter of 2013 versus the third quarter of 2012 whereas there was a 6.5% decrease in reported revenues for the same comparative period. The cause for the difference between the 6.5% decrease in reported Q3 2013 revenue versus Q3 2012 revenue, as compared to the 8.2% decrease in Q3 2013 pro forma versus Q3 2012 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2012 and 2013, specifically BSI, Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst with the Company's pre-existing operations. The 2013 and 2012 pro forma financial information assumes that
all
such business acquisitions were made on January 1, 2012, whereas the Company's reported financial statements for Q3 2012 only includes the revenues from the businesses since the effective date that they were acquired by Ebix. The 2012 pro forma financial information includes a full three months of results for TriSystems, Fintechnix, and Qatarlyst as if they had been acquired on January 1, 2012.
The above referenced pro forma table and the relative comparative change in pro forma and actual revenues are based on the following premises:
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•
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2012 and 2013 pro forma revenue contains actual revenue of the acquired entities before acquisition date, as reported by the sellers, as well as actual revenue of the acquired entities after acquisition. Reported growth in revenues of the acquired entities after acquisition date are only reflected for the period after their acquisition.
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•
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Revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business.
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•
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Any existing products sold to new customers acquired through the acquisition customer base, have also been assigned to the acquired section of our business.
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•
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2012 pro forma revenues include revenues from some product lines whose sale was discontinued after the acquisition date and revenues from some customers whose contracts were discontinued. This is typically done for efficiency and/or competitive reasons.
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Cost of Services Provided
Costs of services provided, which include costs associated with maintenance, support, call center, consulting, implementation and training services, increased
$0.6 million
or
7%
, from
$9.5 million
in the
third
quarter of
2012
to
$10.1 million
in the
third
quarter of
2013
. This increase is due to additional personnel costs and professional service expenses in support of efforts to grow the revenue streams associated with our health services division, and some of the business acquisitions made during 2012 and 2013.
Product Development Expenses
The Company’s product development efforts are focused on the development of new operating technologies and services for use by insurance carriers, brokers and agents, and the development of new data exchanges for use in the domestic and international insurance markets. Product development expenses decreased
$0.5 million
or
7%
from
$7.1 million
during the
third
quarter of
2012
to
$6.6 million
during the
third
quarter of
2013
. This relative comparative decrease in product development
expenses is caused by the combination of realignment and increased cross-utilization of human resources, and the impact on reported expenses from fluctuations in the exchange rates for the foreign currencies in India and Singapore wherein we have substantial product development operations.
Sales and Marketing Expenses
Sales and marketing expenses decreased
$322 thousand
or
7%
, from
$4.3 million
in the
third
quarter of
2012
to
$4.0 million
in the
third
quarter of
2013
. This decrease is due to lower personnel costs and less trade show costs resulting from the Company combining many of its product-based user conferences into broad solution based conferences.
General and Administrative Expenses
General and administrative expenses decreased by
$1.2 million
or
13%
from
$9.7 million
in the
third
quarter of
2012
to
$8.4 million
in the
third
quarter of
2013
. General and administrative expenses for third quarter of 2013 include a benefit of $4.1 million resulting from the net reduction of earnout contingent liabilities with respect to certain prior business acquisitions made in 2012. The Q3 2013 general and administrative expenses include a non-recurring costs of approximately $2.9 million pertaining to certain legal and associated costs, and $0.8 million of accounts receivable bad debt provisioning.
Amortization and Depreciation Expenses
Amortization and depreciation expenses were essentially flat at
$2.5 million
in the
third
quarter of
2013
consistent with the same amount for the third quarter of 2012.
Interest Income
Interest income increased
$71 thousand
or
81%
from
$88 thousand
in the
third
quarter of
2012
to
$159 thousand
in the
third
quarter of
2013
. Interest income increased as a result of increased average cash balances.
Interest Expense
Interest expense decreased
$122 thousand
or
28%
, from
$440 thousand
in the
third
quarter of
2012
to
$318 thousand
in the
third
quarter of
2013
. Interest expense decreased due to the fact that the aggregate outstanding balance on the Company's credit facility decreased from $80.7 million at
September 30, 2012
to $57.1 million at
September 30, 2013
.
Non-operating income (loss) - put option
Non-operating income for the three months ended
September 30, 2013
in the amount of
$93 thousand
pertains to the gain recognized in regards to the decrease in the fair value of the put option that was issued to the former stockholders of PlanetSoft, acquired by Ebix in June 2012, who received shares of Ebix common stock as part of the acquisition consideration paid by the Company.
Non-operating expense - securities litigation
As discussed in more detail in Note 5 “Commitments and Contingencies” to the enclosed Condensed Consolidated Financial Statements, management after recent consultation with the Company’s outside advisors concluded that it was appropriate to record a contingent liability and recognize a charge against earnings in the amount of
$4.23 million
(
$2.63 million
net of the associated tax benefit), which represents our current estimate of the potential liability in regards to the pending federal class action matter. This contingent liability is reported in the current section of the enclosed Condensed Consolidated Balance Sheet, and the charge against earnings is reported below operating income in the enclosed Condensed Consolidated Statement of Income as of and for the three and nine months ended September 30, 2013.
Foreign Currency Exchange Loss
Net foreign currency exchange losses for the three months ended
September 30, 2013
in the amount of $33 thousand primarily pertain to losses recognized upon settlement of certain transactions denominated in currencies other than the functional currency of the respective operating division.
Income Taxes
The Company recognized total income tax expense of
$1.1 million
for the three months ended
September 30, 2013
, as compared to
$2.2 million
for the three months ended
September 30, 2012
. The Company's interim period tax provision, exclusive of discrete items, for this three month period during 2013 was an expense of $1.7 million. The Company's effective tax rate used in the determination of its interim period tax provision for the quarter was 8.98%, as compared to the 10.35% for the same period during 2012. The effective rate decreased primarily due to increased taxable income from jurisdictions with lower tax rates. The discrete items recognized during the nine months ending September 30, 2013 included a $1.6 million tax benefit to be realized in connection with the $4.2 million non-operating charge against earnings that was recorded in regards to the contingent loss recognized for certain securities litigation matters, and $1.0 million of additional tax expense recorded to increase the reserve for uncertain tax positions. The Company's interim period income tax provisions are based on an estimate of the effective income tax rate expected to be applicable to the corresponding annual period, after eliminating discrete items unique to the respective interim period being reported.
Results of Operations
—
Nine Months Ended
September 30, 2013
and
2012
Operating Revenue
During the
nine
months ended
September 30, 2013
our total operating revenues increased
$8.5 million
or
6%
, to
$153.9 million
as compared to
$145.3 million
during the same period in
2012
. The increase in revenues is due to the addition of revenue generated from business acquisitions completed during 2012 and 2013. Ebix Carrier revenues increased by 56% on a year over year basis. The increase in Carrier revenues is the result of a targeted emphasis on larger scale professional service projects to clients in this product channel. With regards to business acquisitions, the Company continues to immediately and efficiently leverage product cross-selling opportunities across all channels, as facilitated by our operating philosophy and business acquisition strategy. With respect to business acquisitions completed during the years 2012 and 2013 on a pro forma basis, as disclosed in the table in Note 3 “Pro Forma Financial Information” to the enclosed Condensed Consolidated Financial Statements, combined revenues decreased 3.4% for the nine months ending September 30, 2013 versus the same comparative nine-month period in 2012 whereas there was a 5.9% increase in reported revenues for the same comparative periods. The cause for the difference between the 5.9% increase in reported year-to-date revenues as of September 30, 2013 versus year-to-date revenues as of September 30, 2012, as compared to the 3.4% decrease in pro forma year-to-date revenues as of September 30, 2013 versus year-to-date revenues as of September 30, 2012 is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2012 and 2013, specifically BSI, Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst with the Company's pre-existing operations. The 2013 and 2012 pro forma financial information assumes that
all
such business acquisitions were made on January 1, 2012, whereas the Company's reported financial statements for nine months ending September 30, 2013 only includes the revenues from the businesses since the effective date that they were acquired by Ebix. The 2012 pro forma financial information includes a full nine months of results for PlanetSoft, TriSystems, BSI, Taimma, Fintechnix, and Qatarlyst as if they had been acquired on January 1, 2012. Also partially effecting reported revenues was the impact from fluctuations in the exchange rates of the foreign currencies in the countries in which we conduct operations. During the nine months ended September 30, 2013 and 2012 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(2.5) million and $(1.3) million, respectfully.
The above referenced pro forma table and the relative change in pro forma and actual revenues are based on the following premises:
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•
|
2012 and 2013 pro forma revenue contains actual revenue of the acquired entities before acquisition date, as reported by the sellers, as well as actual revenue of the acquired entities after acquisition. Reported growth in revenues of the acquired entities after acquisition date are only reflected for the period after their acquisition.
|
|
|
•
|
Revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business.
|
|
|
•
|
Any existing products sold to new customers acquired through the acquisition customer base, have also been assigned to the acquired section of our business.
|
|
|
•
|
2012 pro forma revenues include revenues from some product lines whose sale was discontinued after the acquisition date and revenues from some customers whose contracts were discontinued. This is typically done for efficiency and/or competitive reasons.
|
Cost of Services Provided
Costs of services provided increased
$2.7 million
or
10%
, during the
nine
months ended
September 30, 2013
to
$30.4 million
as compared to
$27.7 million
incurred during the same period in
2012
. This increase is primarily due to additional professional service expenses in support of expanded revenue streams associated with business acquisitions made during 2012 and 2013.
Product Development Expenses
Product development expenses increased
$3.2 million
or
19%
, during the
nine
months ended
September 30, 2013
to
$20.4 million
as compared to
$17.2 million
incurred during the same period in
2012
. This increase is attributable to additional personnel costs and professional service expenses associated with increased software and system development activities within our Exchange channel and at our India operating centers in support of further revenue growth for the Company.
Sales and Marketing Expenses
Sales and marketing expenses decreased
$691 thousand
or
6%
, during the
nine
months ended
September 30, 2013
to
$11.8 million
as compared to
$12.5 million
incurred during the same period in
2012
. This decrease is due to lower personnel costs and less trade show expenditures.
General and Administrative Expenses
General and administrative expenses increased by
$2.0 million
or
8%
, during the
nine
months ended
September 30, 2013
to
$26.7 million
as compared to
$24.7 million
incurred during the same period in
2012
. General and administrative expenses for the nine months ended September 30, 2013 include a benefit of $10.3 million resulting from the net reduction of earnout contingent liabilities with respect to certain prior business acquisitions made during 2012. Offsetting this decrease to general and administrative expenses were approximately $7.3 million of non-recurring legal and associated costs, $2.8 million of additional personnel related costs associated with staff added from certain business acquisitions made in 2012 and 2013, $1.4 million of accounts receivable bad debt provisioning, and the fact that in 2012 the Company realized a net benefit in the approximate amount of $1.0 million related to a termination fee received in connection with a failed business acquisition (net of directly related internal operating costs incurred by the Company and a portion of the fee that had to be paid to our investment banker).
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased
$888 thousand
or
14%
, during the
nine
months ended
September 30, 2013
to
$7.5 million
as compared to
$6.6 million
incurred during the same period in
2012
. This increase is primarily due to $1.1 million of additional amortization costs associated with the customer relationship and developed technology intangible assets that were acquired in connection with the business acquisitions of Taimma, PlanetSoft, Fintechnix, TriSystems, and Qatarlyst completed during 2012 and 2013.
Interest Income
Interest income decreased
$22 thousand
or
6%
, during the
nine
months ended
September 30, 2013
to
$343 thousand
as compared to
$365 thousand
incurred during the same period in
2012
. Interest income was comparatively less due to a reduction in short-term investments, particularly funds invested in bank certificates of deposits.
Interest Expense
Interest expense decreased
$44 thousand
or
4%
, during the
nine
months ended
September 30, 2013
to
$961 thousand
as compared to
$1.0 million
incurred during the same period in
2012
. Interest expense decreased due to the fact that the aggregate outstanding balance on the Company's credit facility decreased from $80.7 million at
September 30, 2012
to $57.1 million at
September 30, 2013
.
Non-operating income (loss) - put options
Other non-operating loss for the
nine months
ended
September 30, 2013
in the amount of
$1.3 million
pertains to the loss recognized in regards to the increase in the fair value of the put option that was issued to the former stockholders of PlanetSoft, acquired by Ebix in June 2012, who received shares of Ebix common stock as part of the acquisition consideration paid by the Company.
Non-operating expense - securities litigation
As discussed in more detail in Note 5 “Commitments and Contingencies” to the enclosed Condensed Consolidated Financial Statements, management after recent consultation with the Company’s outside advisors concluded that it was appropriate to record a contingent liability and recognize a charge against earnings in the amount of
$4.23 million
(
$2.63 million
net of the associated tax benefit), which represents our current estimate of the potential liability in regards to the pending federal class action matter. This contingent liability is reported in the current section of the enclosed Condensed Consolidated Balance Sheet, and the charge against earnings is reported below operating income in the enclosed Condensed Consolidated Statement of Income as of and for the three and nine months ended September 30, 2013.
Foreign Currency Exchange Loss
Net foreign currency exchange losses for the nine months ended
September 30, 2013
in the amount of $326 thousand primarily pertained to losses realized upon the settlement of certain transactions denominated in currencies other than the functional currency of the respective operating division.
Income Taxes
The Company recognized total income tax expense of
$6.75 million
for the
nine months
ended
September 30, 2013
, as compared to
$6.7 million
for the
nine months
ended
September 30, 2012
. The Company's interim period tax provision, exclusive of discrete items, for this nine month period during 2013 was an expense of $4.94 million which is reflective of an 8.98% effective tax rate, as compared to the 10.35% for the same period during 2012. The effective rate decreased primarily due to increased taxable income from jurisdictions with lower tax rates. The discrete items recognized during the nine months ending September 30, 2013 included a $1.6 million tax benefit to be realized in connection with the $4.2 million non-operating charge against earnings that was recorded in regards to the contingent loss recognized for certain securities litigation matters, and $3.4 million of additional tax expense recorded to increase the reserve for uncertain tax positions. The Company's interim period income tax provisions are based on an estimate of the effective income tax rate expected to be applicable to the corresponding annual period, after eliminating discrete items unique to the respective interim period being reported.
Liquidity and Capital Resources
The Company's ability to generate significant cash flows from its ongoing operating activities is one of our fundamental financial strengths. Our principal sources of liquidity are the cash flows provided by the Company's operating activities, our commercial banking credit facility, and cash and cash equivalents on hand. Due to the effect of temporary or timing differences resulting from the differing treatment of items for tax and accounting purposes (including the treatment of net operating loss carryforwards and minimum alternative tax obligations in the U.S. and India), future cash outlays for income taxes are expected to exceed income tax expense. We intend to utilize cash flows generated by our operations, in combination with our bank credit facility, and the possible issuance of additional equity or debt securities, to fund capital expenditures and organic growth initiatives, and to make strategic business acquisitions in the insurance services sector.
We believe that anticipated cash flows provided by our operating activities, together with current cash and cash equivalent balances, access to our credit facilities, and access to the capital markets, if required and available, will be sufficient to meet our projected cash requirements for the next twelve months, and the foreseeable future thereafter, although any projections of future cash needs, cash flows, and the condition of the capital markets in general, as to the availability of debt and equity financing, are subject to substantial uncertainty.
Our cash and cash equivalents were
$36.89 million
and
$36.45 million
at
September 30, 2013
and
December 31, 2012
, respectively. Our cash and cash equivalents balance has increased by
$0.44 million
since year end
2012
, as a result of cash generated by our ongoing operating activities. The Company holds material cash balances overseas in foreign jurisdictions. The free flow of cash from certain countries where we hold such balances may be subject to repatriation tax effects and other restrictions. Specifically the repatriation of earnings from some of our foreign subsidiaries would result in the application of withholding taxes at source as well as a tax at the U.S. parent level upon receipt of the repatriated amounts. The approximate cash, cash equivalents, and short-term investments balances held in our domestic U.S. operations and each of our foreign subsidiaries as of November 6, 2013 are presented in the table below (figures denominated in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Latin America
|
|
Australia
|
|
Singapore
|
|
New Zealand
|
|
India
|
|
Europe
|
|
Sweden
|
|
Total
|
Cash and ST investments
|
$
|
10,571
|
|
|
$
|
3,840
|
|
|
$
|
1,392
|
|
|
$
|
3,092
|
|
|
$
|
8,442
|
|
|
$
|
658
|
|
|
$
|
9,089
|
|
|
$
|
3,092
|
|
|
$
|
16
|
|
|
$
|
40,192
|
|
Our current ratio slightly decreased to
1.41
at
September 30, 2013
from
1.44
at
December 31, 2012
and our corresponding working capital position also slightly decreased to
$24.7 million
at
September 30, 2013
from
$25.0 million
at the end of the
2012
. Our short-term liquidity position has decreased due to increased current obligations associated with contingent business acquisition related earnout liabilities and derivative instruments. The Company's accounts receivable DSO stood at 73 days at
September 30, 2013
and reflects an increase of 5 days from June 30, 2013 and a 12 day increase from the
third
quarter of 2012, due a relative increase in the aging of certain trade receivables in our foreign operations, some particularly associated with recent business acquisitions. We believe that the Company's ability to generate sustainable and robust cash flows from operations will enable the Company to continue to fund its current liabilities from current assets including available cash balances for the foreseeable future.
Business Combinations
The Company executes accretive business acquisitions in combination with organic growth initiatives as part of its comprehensive business growth and expansion strategy. The Company looks to acquire businesses that are complementary to Ebix's existing products and services. During the nine months ended September 30, 2013 the Company completed one business acquisition which was not considered material to the Company's consolidated operations or financial position.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential future cash earnout based on reaching certain specified future revenue targets. The Company recognizes these potential obligations as contingent liabilities. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. As of
September 30, 2013
, the total of these contingent liabilities was
$14.2 million
, of which
$10.1 million
is reported in long-term liabilities, and
$4.2 million
is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. As of
December 31, 2012
the total of these contingent liabilities was $17.5 million, of which $14.2 million is reported in long-term liabilities, and $3.3 million is included in current liabilities in the Company's Condensed Consolidated Balance Sheet.
Operating Activities
Net cash provided by our operating activities was
$37.8 million
for the
nine months
ended
September 30, 2013
. The primary components of the cash provided by operations during the
nine months
period consisted of net income of
$44.0 million
, net of
$1.2 million
of net non-cash losses recognized on derivative instruments and foreign currency exchange,
$7.5 million
of depreciation and amortization, $(10.3) million of non-cash gains associated with the reduction to acquisition related earnout contingent liabilities, and
$(6.1) million
of working capital requirements primarily associated with increased outstanding trade accounts receivable and reduced trade payables, accrued liabilities, and deferred revenues, and
$1.5 million
of non-cash share-based compensation. During the
nine months
ending
September 30, 2013
the Company made $13.0 million of tax payments including $8.0 million of minimum alternative tax payments in India, which is a component of deferred tax assets on the Company's Condensed Consolidated Balance Sheets.
Net cash provided by operating activities was $54.0 million for the nine months ended September 30, 2012. The primary components of the cash provided by operations during that nine month period consisted of net income of $51.8 million, net of $(280) thousand of net non-cash gains recognized on derivative instruments and foreign currency exchange, $6.6 million of depreciation and amortization, $(5.7) million of working capital requirements primarily associated with increased outstanding trade accounts receivable and reductions to trade payables and accrued liabilities, and $1.6 million of non-cash share-based compensation.
Investing Activities
Net cash used for investing activities during the
nine months
ended
September 30, 2013
was
$8.5 million
, of which $4.7 million was used for the acquisition of Qatarlyst (net of cash acquired), $2.3 million was used for the payment of an earnout obligation in connection with our 2012 acquisition of Taimma in Canada, $727 thousand was used for the payment of an earnout obligation in connection with our 2010 acquisition of USIX in Brazil, and
$887 thousand
was used for capital expenditures pertaining to the enhancement of our technology platforms and the purchases of operating equipment to support our expanding
operations. Partially offsetting these investment cash outflows was
$104 thousand
of net cash in-flow from maturities of marketable securities (specifically bank certificates of deposit), net of purchases.
Net cash used for investing activities during the nine months ended September 30, 2012 was $58.9 million, of which $54.1 million in the aggregate was used to complete business acquisitions closed during the year, $2.0 million was used for the investment in CurePet, $1.5 million was used in payment of an earnout obligation in connection with our 2010 acquisition of MCN in Brazil, and $1.5 million was used for capital expenditures. Partially offsetting these investment cash outflows was $146 thousand of net cash in-flow from maturities of marketable securities (specifically bank certificates of deposit), net of purchases.
Financing Activities
During the
nine months
ended
September 30, 2013
net cash used by financing activities was
$27.2 million
which primarily consisted of
$6.5 million
of principal repayments against our term loan facility with Citibank,
$15.0 million
of principal repayments against our revolving credit facility with Citibank,
$2.8 million
used to pay a quarterly dividend to our common stockholders,
$2.5 million
used to repurchase shares of our common stock, and
$857 thousand
used to make principal payments on long-term debt and capital lease obligations. Partially offsetting these financing cash outflows was $1.4 million of proceeds from the exercise of stock options.
During the nine months ended September 30, 2012 net cash provided by financing activities was $13.7 million which consisted of $27.9 million provided from the Company's term loan with Citibank, $6.1 million provided from our commercial bank revolving credit facility with Citibank (net of repayments), and $739 thousand of proceeds from the exercise of common stock options. Partially offsetting these aggregate cash proceeds was $15.2 million used to repurchase shares of our common stock, $5.2 million used to pay quarterly dividends to our common stockholders, and $829 thousand used to make principal payments on long-term debt and capital lease obligations.
Commercial Bank Financing Facility
On April 26, 2012 Ebix entered into a credit agreement providing for a $100 million secured syndicated credit facility (the “Secured Syndicated Credit Facility”) with Citibank as administrative agent and Citibank, N.A., Wells Fargo Capital Finance, LLC, and RBS Citizens, N.A. as joint lenders. The financing is comprised of a four-year, $45 million secured revolving credit facility, a $45 million secured term loan which amortizes over a four year period with quarterly principal and interest payments that commenced on June 30, 2012 and a final payment of all remaining outstanding principal and accrued interest due on April 26, 2016, and an accordion feature that provides for the expansion of the credit facility by an additional $10 million. The interest rate applicable to the Secured Syndicated Credit Facility is LIBOR plus 1.50% or currently 1.68%. Under the Secured Syndicated Credit Facility the maximum interest rate that could be charged depending upon the Company's leverage ratio is LIBOR plus 2.00%. The credit facility is used by the Company to fund working capital requirements primarily in support of current operations, organic growth, and accretive business acquisitions. The underlying financing agreement contains financial covenants regarding the Company's annualized EBITDA, fixed charge coverage ratio, and leverage ratio, as well as certain restrictive covenants pertaining to such matters as the incurrence of new debt, the aggregate amount of repurchases of the Company's equity shares, the payment of cash dividends, and the consummation of new business acquisitions. The Company currently is in compliance with all such financial and restrictive covenants.
At
September 30, 2013
, the outstanding balance on the Company's revolving line of credit with Citibank was
$22.8 million
and the facility carried an interest rate of
1.68%
. This balance is included in the long-term liabilities section of the Condensed Consolidated Balance Sheet. During the
nine months
ended
September 30, 2013
, the average outstanding balance on the revolving line of credit was
$33.3 million
and the maximum outstanding balance was
$37.8 million
.
At
September 30, 2013
, the outstanding balance on the Company's term loan with Citibank was
$34.3 million
of which
$12.7 million
is due within the next twelve months. This term loan also carried an interest rate of
1.68%
. During the
nine months
ended
September 30, 2013
,
$6.5 million
of scheduled payments were against the existing term loan with Citibank. The current and long-term portions of the term loan are included in the respective current and long-term sections of the Condensed Consolidated Balance Sheet, the amounts of which were
$12.7 million
and
$21.6 million
, respectively, at
September 30, 2013
.
Off-Balance Sheet Arrangements
We do not engage in off -balance sheet financing arrangements.
Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual purchase obligations and other long-term commercial commitments as of
September 30, 2013
. The table excludes obligations or commitments that are contingent based on events or factors uncertain at this time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 years
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Revolving line of credit
|
$
|
22,840
|
|
|
$
|
—
|
|
|
$
|
22,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt
|
36,266
|
|
|
13,366
|
|
|
22,900
|
|
|
—
|
|
|
—
|
|
Operating leases
|
15,549
|
|
|
5,363
|
|
|
5,734
|
|
|
3,562
|
|
|
890
|
|
Capital leases
|
297
|
|
|
210
|
|
|
87
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
74,952
|
|
|
$
|
18,939
|
|
|
$
|
51,561
|
|
|
$
|
3,562
|
|
|
$
|
890
|
|
Recent Accounting Pronouncements
For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 1 of the condensed notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Note 1 of the notes to consolidated financial statements in our 2012 Form 10-K.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”), as promulgated in the United States, requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures in our Condensed Consolidated Financial Statements and accompanying notes. We believe the most complex and sensitive judgments, because of their significance to the Condensed Consolidated Financial Statements, result primarily from the need to make estimates and assumptions about the effects of matters that are inherently uncertain. The following accounting policies involve the use of “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by management about matters that are uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have possibly been used in the current period, and changes in the accounting estimates that we used are reasonably likely to occur from period to period both of which may have a material impact on our financial condition and results of operations. For additional information about these policies, see Note 1 of the Condensed Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. Although we believe that our estimates, assumptions and judgments are reasonable, they are limited based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Revenue Recognition
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our ASP platforms, fees for business process outsourcing services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems.
In accordance with the Financial Accounting Standards Board ("FASB") and Securities and Exchange Commission Staff Accounting (the “SEC”) accounting guidance on revenue recognition the Company considers revenue earned and realizable when: (a) persuasive evidence of the sales arrangement exists, provided that the arrangement fee is fixed or determinable, (b) delivery or performance has occurred, (c) customer acceptance has been received, if contractually required, and (d) collectability of the arrangement fee is probable. The Company uses signed contractual agreements as persuasive evidence of a sales arrangement. We apply the provisions of the relevant generally accepted accounting principles related to all transactions involving the license of software where the software deliverables are considered more than inconsequential to the other elements in the arrangement.
For contracts that contain multiple deliverables, we analyze the revenue arrangements in accordance with the relevant technical accounting guidance, which provides criteria governing how to determine whether goods or services that are delivered separately in a bundled sales arrangement should be considered as separate units of accounting for the purpose of revenue recognition. Generally these types of arrangements include deliverables pertaining to software licenses, system set-up, and professional services associated with product customization or modification. Delivery of the various contractual elements typically occurs over periods of less than eighteen months. These arrangements generally do not have refund provisions or have very limited refund terms.
Software development arrangements involving significant customization, modification or production are accounted for in accordance with the appropriate technical accounting guidance issued by FASB using the percentage-of-completion method. The Company recognizes revenue using periodic reported actual hours worked as a percentage of total expected hours required to complete the project arrangement and applies the percentage to the total arrangement fee.
Allowance for Doubtful Accounts Receivable
Management specifically analyzes accounts receivable and historical bad debts, write-offs, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
Valuation of Goodwill
Goodwill represents the cost in excess of the fair value of the net assets of acquired businesses. Indefinite-lived intangible assets represent the fair value of acquired contractual customer relationships for which future cash flows are expected to continue indefinitely. In accordance with the relevant FASB accounting guidance, goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment at the reporting unit level on an annual basis or on an interim basis if an event occurs or circumstances change that would likely have reduced the fair value of a reporting unit below its carrying value. Potential impairment indicators include a significant change in the business climate, legal factors, operating performance indicators, competition, and the sale or disposition of a significant portion of the business. The impairment evaluation process involves an assessment of certain qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of any of our reporting units was less than its carrying amount. If after assessing the totality of events or circumstances, we were to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would not perform the two-step quantitative impairment testing described further below.
The aforementioned two-step quantitative testing process involves comparing the reporting unit carrying values to their respective fair values. We determine the fair value of our reporting units by applying the discounted cash flow method using the present value of future estimated net cash flows. If the fair value of a reporting unit exceeds its carrying value, then no further testing is required. However, if a reporting unit's fair value were to be less than its carrying value, we would then determine the amount of the impairment charge, if any, which would be the amount that the carrying value of the reporting unit's goodwill exceeded its implied value. Projections of cash flows are based on our views of growth rates, operating costs, anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. The use of different estimates or assumptions for our projected discounted cash flows (e.g., growth rates, future economic conditions, discount rates and estimates of terminal values) when determining the fair value of our reporting units could result in different values and may result in a goodwill impairment charge. We perform our annual goodwill impairment evaluation and testing as of September 30th of each year. This evaluation is done during the fourth quarter each year. During the year ended December 31, 2012 we had no impairment of our reporting unit goodwill balances.
Income Taxes
Deferred income taxes are recorded to reflect the estimated future tax effects of differences between financial statement and tax basis of assets, liabilities, operating losses, and tax credit carry forwards using the tax rates expected to be in effect when the temporary differences reverse. Valuation allowances, if any, are recorded to reduce deferred tax assets to the amount management considers more likely than not to be realized. Such valuation allowances are recorded for the portion of the deferred tax assets that are not expected to be realized based on the levels of historical taxable income and projections for future taxable income over the periods in which the temporary differences will be deductible.
The Company also applies FASB accounting guidance on accounting for uncertainty in income taxes positions. This guidance clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Foreign Currency Matters
Historically the functional currency for the Company's foreign subsidiaries in India and Singapore had been the Indian rupee and Singapore dollar, respectively. As a result of the Company's rapid growth, the expansion of its intellectual property research and development activities in its Singapore subsidiary, and its product development activities and information technology enabled services for the insurance industry provided by its India subsidiary in support of Ebix's operating divisions across the world (both of which are transacted in U.S. dollars), management undertook a reconsideration of functional currency designations for these two foreign subsidiaries in India and Singapore, and concluded that effective July 1, 2012 the functional currency for these entities should be changed to the U.S. dollar. The Company believes that the acquisition of PlanetSoft along with other business acquisitions completed in 2012, combined with the cumulative effect of business acquisitions made over the last few years which in turn necessitated the rapid growth of the Company's operations in India and Singapore, were the primary economic facts and circumstances that justified the reconsideration and ultimate change in the functional currency.
The functional currency of the Company's other foreign subsidiaries is the local currency of the country in which the subsidiary operates. The assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at the rates of exchange at the balance sheet dates. Income and expense accounts are translated at the average exchange rates in effect during the period. Gains and losses resulting from translation adjustments are included as a component of other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. Foreign exchange transaction gains and losses that are derived from transactions denominated in a currency other than the subsidiary's functional currency are included in the determination of net income.