Notes to Condensed Consolidated Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies
Description of Business—
Ebix, Inc. and subsidiaries (“Ebix” or the “Company”) is an international supplier of on-demand software and e-commerce solutions to the insurance, healthcare and financial industries, as well as e-governance solutions to governmental agencies in the health and education sectors. Ebix provides various application software products for the insurance industry including data exchanges, carrier systems, broker systems, and agency systems, and custom software development for business entities across the insurance industry. The Company's products feature fully customizable and scalable on-demand software applications designed to streamline the way insurance professionals manage distribution, marketing, sales, customer service, and accounting activities. The Company has its headquarters in Johns Creek, Georgia and also conducts operating activities in Australia, Canada, India, Dubai, New Zealand, Singapore, United Kingdom and Brazil. International revenue accounted for
27.8%
and
22.7%
of the Company’s total revenue for the
nine months
ended
September 30, 2016
and
2015
, respectively.
The Company’s revenues are derived from
four
product/service channels. Presented in the table below is the breakout of our revenue streams for each of those product/service channels for the
three
and
nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(dollar amounts in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Exchanges
|
|
$
|
52,016
|
|
|
$
|
46,209
|
|
|
$
|
151,424
|
|
|
$
|
139,712
|
|
Broker Systems
|
|
3,557
|
|
|
3,812
|
|
|
10,654
|
|
|
11,067
|
|
Risk Compliance Solutions (“RCS”)
|
|
18,076
|
|
|
15,754
|
|
|
53,489
|
|
|
41,218
|
|
Carrier Systems
|
|
959
|
|
|
1,038
|
|
|
2,681
|
|
|
3,281
|
|
Totals
|
|
$
|
74,608
|
|
|
$
|
66,813
|
|
|
$
|
218,248
|
|
|
$
|
195,278
|
|
Summary of Significant Accounting Policies
Basis of Presentation—
The accompanying unaudited condensed consolidated financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") with the effect of inter-company balances and transactions eliminated. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP and SEC rules have been condensed or omitted as permitted by and pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements contain adjustments (consisting only of normal recurring items) necessary to fairly present the consolidated financial position of the Company and its consolidated results of operations and cash flows. Operating results for the
nine months
ended
September 30, 2016
and
2015
are not necessarily indicative of the results that may be expected for future quarters or the full year of 2016. The condensed consolidated
December 31, 2015
balance sheet included in this interim period filing has been derived from the audited financial statements at that date but does not necessarily include all of the information and related notes required by GAAP for complete financial statements. These condensed interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Advertising
—With the exception of certain direct-response costs, advertising costs are expensed as incurred. Advertising costs amounted to
$4.7 million
and
$2.1 million
in the first
nine months
of
2016
and
2015
, respectively, and are included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income. Sales and marketing expenses in the first
nine months
of
2016
include the deferment of
$151 thousand
(net of amortization) of certain direct-response advertising costs associated with our acquisition of Oakstone, which have been capitalized in accordance with Accounting Standards Codification ("ASC") Topic 340. These costs are being amortized to expense over periods ranging from
twelve
to
twenty-four
months based on the type of product the customer purchases.
Fair Value of Financial Instrument—
The Company follows the relevant GAAP guidance concerning fair value measurements which provides a consistent framework to define, measure, and disclose the fair value of assets and liabilities in financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction. This guidance establishes a three-level hierarchy priority for disclosure of assets and liabilities recorded at fair value. The ordering of priority reflects the degree to which objective data from external active markets are available to measure fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable.
|
|
•
|
Level 1 Inputs
- Unadjusted quoted prices available in active markets for identical investments to the reporting entity at the measurement date.
|
|
|
•
|
Level 2 Inputs
- Other than quoted prices included in Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 Inputs
- Unobservable inputs, which are used to the extent that observable inputs are not available, and used in situations where there is little or no market activity for the asset or liability and wherein the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.
|
A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
As of
September 30, 2016
the Company had the following financial instruments to which it had to consider fair values and had to make fair value assessments:
|
|
•
|
Short-term investments for which the fair values are measured as a Level 1 instrument.
|
|
|
•
|
Contingent accrued earn-out business acquisition consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
|
Other financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheet at
September 30, 2016
but which require disclosure of their fair values include: cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued payroll and related benefits, capital lease obligations, and the revolving line of credit and term loan debt under the syndicated credit agreement facility with Regions Financial Corporation. The Company believes that the estimated fair value of such instruments at
September 30, 2016
and
December 31, 2015
approximates their carrying value as reported on the unaudited Condensed Consolidated Balance Sheet.
Additional information regarding the Company's assets and liabilities that are measured at fair value on a recurring basis is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values at Reporting Date Using*
|
Descriptions
|
|
Balance, September 30, 2016
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Commercial bank certificates of deposits
|
|
$
|
2,975
|
|
$
|
2,975
|
|
$
|
—
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
2,975
|
|
$
|
2,975
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Contingent accrued earn-out acquisition consideration (a)
|
|
$
|
1,621
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,621
|
|
Total liabilities measured at fair value
|
|
$
|
1,621
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,621
|
|
|
|
|
|
|
|
(a) The income valuation approach is applied and the valuation inputs include the contingent payment arrangement terms, projected cash flows, rate of return, and probability assessments.
|
* During the nine months ended September 30, 2016 there were no transfers between fair value Levels 1, 2 or 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values at Reporting Date Using*
|
Descriptions
|
|
Balance, December 31, 2015
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Commercial bank certificates of deposits
|
|
$
|
1,538
|
|
1,538
|
|
$
|
—
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
1,538
|
|
$
|
1,538
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Contingent accrued earn-out acquisition consideration (a)
|
|
$
|
4,277
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,277
|
|
Total liabilities measured at fair value
|
|
$
|
4,277
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,277
|
|
|
|
|
|
|
|
(a) The income valuation approach is applied and the valuation inputs include the contingent payment arrangement terms, projected cash flows, rate of return, and probability assessments.
|
* During the twelve months ended December 31, 2015 there were no transfers between fair value Levels 1, 2 or 3.
|
For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the
nine months
ended
September 30, 2016
and during the year ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Contingent Liability for Accrued Earn-out Acquisition Consideration
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,277
|
|
|
$
|
5,367
|
|
|
|
|
|
|
Total remeasurement adjustments:
|
|
|
|
|
Gains included in earnings **
|
|
(1,726
|
)
|
|
(1,533
|
)
|
Reductions recorded against goodwill
|
|
(664
|
)
|
|
(2,000
|
)
|
Foreign currency translation adjustments ***
|
|
(266
|
)
|
|
(73
|
)
|
|
|
|
|
|
Acquisitions and settlements
|
|
|
|
|
Business acquisitions
|
|
—
|
|
|
2,516
|
|
Settlement payments
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,621
|
|
|
$
|
4,277
|
|
|
|
|
|
|
The amount of total (gains) losses for the period included in earnings or changes to net assets, attributable to changes in unrealized gains relating to assets or liabilities still held at period-end. Vertex earnout period expired in the third quarter of 2016 and gain was realized.
|
|
$
|
(1,006
|
)
|
|
$
|
(1,533
|
)
|
|
|
|
|
|
** recorded as an reduction to reported general and administrative expenses
|
|
|
*** recorded as a component of other comprehensive income within stockholders' equity
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at September 30, 2016
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(Qatarlyst acquisition)
|
|
$1,621
|
|
Discounted cash flow
|
|
Projected revenue and probability of achievement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at December 31, 2015
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(Qatarlyst, Vertex, PB Systems, and Via Media acquisitions)
|
|
$4,277
|
|
Discounted cash flow
|
|
Projected revenue and probability of achievement
|
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to business acquisitions are projected revenue forecasts as developed by the relevant members of Company's management team and the probability of achievement of those revenue forecasts. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly higher (lower) fair value measurement. The Company applies these terms in its calculation and determination of the fair value of contingent earn out liabilities for purchased businesses as part of the related valuation and purchase price allocation exercise for the corresponding acquired assets and liabilities. During the 1st and 2nd quarter of 2016, certain of the Company's contingent earn out liabilities were adjusted because of changes to anticipated future revenues from these acquired businesses, or as a result of finalizing purchase price allocations that were previously provisional.
Revenue Recognition—
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our application service provider ("ASP") platforms, fees for risk compliance solution services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems and applications. Sales and value-added taxes are not included in revenues, but rather are recorded as a liability until the taxes assessed are remitted to the respective taxing authorities.
In accordance with Financial Accounting Standard Board (“FASB”) and 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 or is assured, 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. 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.
Accounts Receivable and the Allowance for Doubtful Accounts Receivable—
Reported accounts receivable include
$49.9 million
of trade receivables stated at invoice billed amounts and
$12.8 million
of unbilled receivables, net of the estimated allowance for doubtful accounts receivable in the amount of
$1.9 million
. The unbilled receivables pertain to certain projects for which the timing of billing is tied to contractual milestones. The Company adheres to such contractually stated performance milestones and accordingly issues invoices to customers as per contract billing schedules. Approximately
$5.1 million
of deferred revenue is included in billed accounts receivable at
September 30, 2016
. The Company recognized and recorded bad debt expense in the amount of
$243 thousand
and
$700 thousand
for the
three
and
nine
-month periods ended
September 30, 2016
and
$1.7 million
and
$2.0 million
for the
three
and
nine
-month periods ended
September 30, 2015
, respectively. Accounts receivable are written off against the allowance account when the Company has exhausted all reasonable collection efforts. During the
nine
months ended
September 30, 2016
,
$2.2 million
of accounts receivable, which had been specifically reserved for in prior periods, were written off.
Goodwill and Other Indefinite-Lived Intangible Assets—
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 certain 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 the Company 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 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. In 2015 the goodwill residing in the Broker Systems reporting unit and the Carrier Systems reporting unit, were evaluated for impairment based on an assessment of certain qualitative factors, and were determined not to have been impaired. In 2015 the goodwill residing in the Exchange reporting unit and the Risk Compliance Solutions ("RCS") reporting unit were evaluated for impairment using step-one of the quantitative testing process described above. The fair value of both of these reporting units were found to be greater than their carrying value, and thusly there was no need to proceed to step-two, as there was no impairment indicated. In specific regards to the Risk Compliance Solutions reporting unit, its assessed fair value was
$102.0 million
which was
$13.5 million
or
15%
in excess of its
$88.5 million
carrying value. Key assumptions used in the fair value determination were annual revenue growth of
2%
to
3%
and discount rate of
16%
. As of December 31, 2015 there was
$64.0 million
of goodwill assigned to the RCS reporting unit. A significant reduction in future revenues for the RCS reporting unit would negatively effect the fair value determination for this unit and may result in an impairment to goodwill and a corresponding charge against earnings. 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, 2015
we had no impairment of our reporting unit goodwill balances.
Changes in the carrying amount of goodwill for the
nine months
ended
September 30, 2016
and the year ended
December 31, 2015
are reflected in the following table.
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Beginning Balance
|
$
|
402,259
|
|
|
$
|
402,220
|
|
Additions (see Note 3)
|
21,789
|
|
|
8,868
|
|
Purchase accounting adjustments for acquisitions provisionally recorded (see Note 3 "Business Combinations")
|
4,298
|
|
|
(2,099
|
)
|
Contributed portions of CurePet investment to Joint Ventures,(see Note 8,
"Investment in Joint Ventures")
|
—
|
|
|
(1,783
|
)
|
Foreign currency translation adjustments
|
(283
|
)
|
|
(4,947
|
)
|
Ending Balance
|
$
|
428,063
|
|
|
$
|
402,259
|
|
Capitalized Software Development Costs
—In accordance with the relevant FASB accounting guidance regarding the development of software to be sold, leased, or marketed, the Company expenses such costs as they are incurred until technological feasibility has been established, at and after which time those costs are capitalized until the product is available for general release to customers. Costs incurred to enhance our software products, after general market release of the services using the products, are expensed in the period they are incurred.
Finite-lived Intangible Assets—
Purchased intangible assets represent the estimated acquisition date fair value of customer relationships, developed technology, trademarks and non-compete agreements obtained in connection with the businesses we acquire. We amortize these intangible assets on a straight-line basis over their estimated useful lives, as follows:
|
|
|
|
Category
|
|
Life (yrs)
|
Customer relationships
|
|
7–20
|
Developed technology
|
|
3–12
|
Trademarks
|
|
3–15
|
Non-compete agreements
|
|
5
|
Backlog
|
|
1.2
|
Database
|
|
10
|
The carrying value of finite-lived and indefinite-lived intangible assets at
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
(In thousands)
|
Finite-lived intangible assets:
|
|
|
|
Customer relationships
|
$
|
67,679
|
|
|
$
|
76,275
|
|
Developed technology
|
15,012
|
|
|
15,121
|
|
Trademarks
|
2,683
|
|
|
2,729
|
|
Non-compete agreements
|
764
|
|
|
743
|
|
Backlog
|
140
|
|
|
140
|
|
Database
|
212
|
|
|
212
|
|
Total intangibles
|
86,490
|
|
|
95,220
|
|
Accumulated amortization
|
(48,339
|
)
|
|
(43,372
|
)
|
Finite-lived intangibles, net
|
$
|
38,151
|
|
|
$
|
51,848
|
|
|
|
|
|
Indefinite-lived intangibles:
|
|
|
|
Customer/territorial relationships
|
$
|
30,887
|
|
|
$
|
30,887
|
|
Amortization expense recognized in connection with acquired intangible assets was
$1.7 million
and
$5.1 million
for the
three
and
nine
months ended
September 30, 2016
, respectively, and
$1.8 million
and
$5.4 million
for the
three
and
nine
months ended
September 30, 2015
, respectively.
Foreign Currency Translation—
The functional currency for the Company's foreign subsidiaries in India, Dubai, and Singapore is the U.S. dollar because the intellectual property research and development activities provided by its Dubai and Singapore subsidiaries, and the product development and information technology enabled services activities for the insurance industry provided by its India subsidiary, both in support of Ebix's operating divisions across the world, are transacted in U.S. dollars.
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 accumulated other comprehensive income in the accompanying consolidated balance sheets, and are included in the condensed consolidated statements of comprehensive income. 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.
Income Taxes—
Deferred income taxes are recorded to reflect the estimated future tax effects of differences between the 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 the relevant 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. In this regard we recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The Company has applied the provisions under FASB update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry Forward, A Similar Tax Loss, or a Tax Credit Carry Forward Exists. Under these provisions, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward in most cases. This provision has been applied resulting in
$341 thousand
of unrecognized tax benefits have been applied against both the NOL carry forward amounts as of
September 30, 2016
and December 31, 2015.
Recent Relevant Accounting Pronouncements—
The following is a brief discussion of recently released accounting pronouncements that are pertinent to the Company's business:
In August 2016 the FASB issued Accounting Standards Update ("ASU") No. 2016-15 “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
”. This ASU addresses the following eight specific cash flow issues: Contingent consideration payments made after a business combination; distributions received from equity method investees; debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies; and beneficial interests in securitization transactions; and also addresses separately identifiable cash flows and application of the predominance principle. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the ASU for those issuers would be applied prospectively as of the earliest date practicable. The Company will adopt this ASU in January 2017 and has not yet determined the impact of its adoption.
In March 2016 the FASB issued Accounting Standards Update ("ASU") No. 2016-08, "
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net
)". The amendments relate to when another party, along with the Company, is involved in providing a good or service to a customer. Topic 606 Revenue from Contracts with Customers requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying the following:
> An entity determines whether it is a principal or an agent for each specified good or service promised to a customer.
> An entity determines the nature of each specified good or service (e.g., whether it is a good, service, or a right to a good or service).
> When another entity is involved in providing goods or services to a customer, an entity that is a principal obtains control of: (a) a good or another asset from the other party that it then transfers to the customer; (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf; or (c) a good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.
> The purpose of the indicators in paragraph 606-10-55-39 is to support or assist in the assessment of control. The amendments in paragraph 606-10-55-39A clarify that the indicators may be more or less relevant to the control assessment and that one or more indicators may be more or less persuasive to the control assessment, depending on the facts and circumstances.
The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). The Company will adopt this new technical accounting guidance at that time and does not expect its adoption to have a material effect on its result of operations or financial position.
In March 2016 the FASB issued ASU 2016-07 "
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
". The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company will adopt this new technical guidance in 2017, and has not yet determined the impact of its adoption.
In March 2016 the FASB issued ASU 2016-09
,
“
Compensation - Stock Compensation (Topic 71
8)”. This amendment simplifies the requirements for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 31, 2016, and interim periods within those annual periods. The Company will adopt ASU in January 2017, but has not fully assessed the impact its adoption will have on the Company's results of operations or financial position.
In February 2016 the FASB issued ASU 2016-02, "
Leases (Topic 842
)". This new accounting guidance is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet the new ASU will require both types of leases (i.e., operating and capital) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. For operating leases there will have to be the recognition of a lease liability and a lease asset for all such leases greater than one year in term. The leasing standard will be effective for calendar year-end public companies beginning after December 15, 2018. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. For calendar year-end public companies, this means an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements for 2018 and 2017. Lessees with a large portfolio of leases are likely to see a significant increase in balance sheet assets and liabilities. See Note 5 for the Company’s current lease commitments. The Company is evaluating the impact that this new leasing ASU will have on its financial statements.
In September 2015 the FASB issued ASU No. 2015-16, "
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments"
. This pronouncement simplifies the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the requirement to retrospectively account for those adjustments.
GAAP currently requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities.
The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts.
The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record and disclose, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, the amendments became effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The only disclosures required at transition should be the nature of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first annual period in which the changes are effective. The Company adopted this ASU during the third quarter of 2015 and its adoption did not have a material impact on its financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "
Balance Sheet Classification of Deferred Taxes
". This ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. Prior to the issuance of ASU 2015-17, deferred taxes were required to be presented as a net current asset or liability and a net noncurrent asset or liability. We adopted the provisions of ASU 2015-17 upon issuance and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2014, the previously reported balance of our net current deferred tax assets of
$2.11 million
was reclassified in the consolidated balance sheet and netted against the net long-term deferred tax liabilities. The adoption of ASU 2015-17 did not impact our consolidated financial position, results of operations or cash flows.
In May 2014 the FASB issued ASU No. 2014-09, "
Revenue from Contracts with Customer
s"
.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
An entity should apply the amendments in this ASU using one of the following two methods:
1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
|
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•
|
For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
|
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|
•
|
For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
|
|
|
•
|
For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
|
2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
|
|
•
|
The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.
|
|
|
•
|
An explanation of the reasons for significant changes.
|
Subsequently, in August 2015 the FASB issued ASU No. 2015-14
"Revenue from Contracts with Customers: Deferral of Effective Date
", to defer the effective date of ASU No. 2014-09 for all entities by one year. Accordingly public business entities should apply the guidance of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that annual reporting period.
Although early adoption is allowed, the Company plans to adopt this new accounting standard on its newly revised effective date of January 1, 2018, but it has not presently determined the impact that the adoption of ASU No. 2014-09 will have on its income statement, balance sheet, or statement of cash flows. Furthermore, the Company has not yet determined the method of retrospective adoption it will use as described in first and second paragraphs immediately above.
In a related technical accounting pronouncement in April 2016 the FASB issued ASU 2016-10
, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”
, which is an amendment to ASU 2014-09. This amendment provides clarification on two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The effective date for nonpublic entities is deferred by one year. A summary of this ASU is as follows:
Identifying Performance Obligations
Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments add the following guidance:
1. An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
2. An entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.
To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. The amendments improve the guidance on assessing the promises are separately identifiable criterion by:
1. Better articulating the principle for determining whether promises to transfer goods or services to a customer are separately identifiable by emphasizing that an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.
2. Revising the related factors and examples to align with the improved articulation of the separately identifiable principle.
Licensing Implementation Guidance
Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments are intended to improve the operability and understandability of the licensing implementation guidance by clarifying the following:
1. An entity’s promise to grant a customer a license to intellectual property that has significant standalone functionality (e.g., the ability to process a transaction, perform a function or task, or be played or aired) does not include supporting or maintaining that intellectual property during the license period.
2. An entity’s promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality) includes supporting or maintaining that intellectual property during the license period.
3. An entity considers the nature of its promise in granting a license, regardless of whether the license is distinct, in order to apply the other guidance in Topic 606 to a single performance obligation that includes a license and other goods or services (in particular, the guidance on determining whether a performance obligation is satisfied over time or at a point in time and the guidance on how best to measure progress toward the complete satisfaction of a performance obligation satisfied over time).
Note 2: Earnings per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
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Three Months Ended
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|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands, except per share data)
|
Net income attributable to Ebix, Inc.
|
$
|
24,067
|
|
|
$
|
20,232
|
|
|
$
|
69,218
|
|
|
$
|
57,604
|
|
Basic Weighted Average Shares Outstanding
|
32,421
|
|
|
34,304
|
|
|
32,716
|
|
|
35,014
|
|
Dilutive effect of stock options and restricted stock awards
|
284
|
|
|
211
|
|
|
278
|
|
|
227
|
|
Diluted weighted average shares outstanding
|
32,705
|
|
|
34,515
|
|
|
32,994
|
|
|
35,241
|
|
Basic earnings per common share
|
$
|
0.74
|
|
|
$
|
0.59
|
|
|
$
|
2.12
|
|
|
$
|
1.65
|
|
Diluted earnings per common share
|
$
|
0.74
|
|
|
$
|
0.59
|
|
|
$
|
2.10
|
|
|
$
|
1.63
|
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Note 3: Business Combinations
The Company seeks to execute accretive business acquisitions (which primarily targets businesses that are complementary to Ebix's existing products and services), in combination with organic growth initiatives, as part of its comprehensive business growth and expansion strategy.
During the
nine
months ended
September 30, 2016
, the Company completed one business acquisition as follows:
Effective July 1, 2016 Ebix and IHC jointly executed a Call Notice agreement, whereby Ebix purchased additional common units in the EbixHealth JV from IHC constituting eleven percent (
11%
) of the EbixHealth JV for
$2.0 million
cash which resulted in Ebix holding an aggregate fifty-one percent (
51%
) controlling equity interest in the EbixHealth JV. Commensurate with additional equity stake in the joint venture a contemporaneous valuation of the business was completed. In accordance with the technical accounting guidance pertaining to step acquisitions the Company recorded goodwill in the amount of
$21.8 million
, a non-controlling interest in the amount of
$11.3 million
, and recognized a
$1.2 million
gain on its previously carried
40%
equity interest in the EbixHealth JV. This recognized gain is reflected as a component of other non-operating income in the accompanying Condensed Consolidated Statement of Income. The valuation of the EbixHealth JV is considered preliminary as the allocation to the identified tangible and intangible assets (e.g. customer lists, trade name, developed technology), and the determination of the residual goodwill has yet to performed, but will be completed in line with the filing of the Company's 2016 annual report on Form 10-K. Previously, effective September 1, 2015 Ebix and Independence Holdings Corporation ("IHC") formed a joint venture named Ebix Health Exchange Holdings, LLC ("EbixHealth JV"). Ebix paid
$6.0 million
and contributed a license to use certain CurePet software and systems valued by the EbixHealth JV at
$2.0 million
, for its initial
40%
membership interest in the EbixHealth JV.
During the year ended December 31, 2015, the Company completed
two
business acquisitions, as follows:
The Company acquired PB Systems, Inc. (a U.S. company) and PB Systems Private Limited (an Indian company) (together, being "PB Systems"), effective June 1, 2015. PB Systems develops and implements software solutions for insurance clients. Ebix acquired PB Systems for upfront cash consideration in the amount of
$12.4 million
, plus possible future contingent earn out payments of up to
$8.0 million
based on earned revenues over the subsequent
twenty-four
month period following the effective date of the acquisition. The Company has determined that the fair value of the contingent earn out consideration is
zero
as of September 30, 2016. In the Company's Form 10-Q for the six months ended June 30, 2015, Form 10-Q for the nine months ended September 30, 2015, Form 10-K for the year ended December 31, 2015, and Form 10-Q for the three months ended March 31, 2016 the Company had disclosed that the valuation and purchase price allocation for the PB Systems acquisition was preliminary because all of the information necessary to determine the fair value of the acquired customer relationship intangible asset and fair value of the revenue-based earn out contingent liability was still in the process of being evaluated by management and the Company's external valuation firms. This evaluation was completed during the second quarter ended June 30, 2016 and resulted in a
$1.8 million
reduction to the developed technology intangible asset, a
$1.6 million
reduction to the customer relationship intangible
asset, a
$657 thousand
reduction to the deferred tax liability, a
$4.4 million
reduction to the revenue-based earn out contingent liability, and a corresponding and offsetting
$1.6 million
reduction to goodwill to what was originally recorded in the second quarter of 2015. Additionally, since December 31, 2015 this resulted in a
$8.2 million
reduction to the customer relationship intangible asset, a
$3.2 million
reduction to the deferred tax liability, a
$664 thousand
reduction to the revenue-based earn out contingent liability, and a corresponding and offsetting
$4.3 million
increase to goodwill.
The Company acquired Via Media Health Communications Private Limited ("Via Media Health"), effective March 1, 2015. Via Media Health is one of India’s leading health content and communication companies. Ebix acquired Via Media Health for upfront cash consideration in the amount of
$1.0 million
, plus a possible future one time contingent earn out payment of up to
$372 thousand
based on earned revenues over the subsequent
twelve
- month period following the effective date of the acquisition, and an additional possible one time future performance bonus of up to
$1.0 million
depending upon revenue growth realized in the business over the subsequent
twenty-four
month period following the effective date of the acquisition. The Company has determined that the fair value of the contingent earn out consideration is
zero
as of September 30, 2016.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential subsequent cash earnout payment based on reaching certain specified future revenue targets. The terms for the contingent earn out payments in most of the Company's business acquisitions typically address the GAAP recognizable revenues achieved by the acquired entity over a one, two, and/or three year period subsequent to the effective date of their acquisition by Ebix. These terms typically establish a minimum threshold revenue target with achievement of revenues recognized over that target being awarded in the form of a specified cash earn out payment. The Company applies these terms in its calculation and determination of the fair value of contingent earn out liabilities for purchased businesses as part of the related valuation and purchase price allocation exercise for the corresponding acquired assets and liabilities. The Company recognizes these potential obligations as contingent liabilities and are reported as such on its Condensed Consolidated Balance Sheets. As discussed in more detail in Note 1, these contingent consideration liabilities are recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. During the
nine
months ended
September 30, 2016
and
2015
, these aggregate contingent accrued earn-out business acquisition consideration liabilities were reduced by
$2.4 million
and
$1.5 million
, respectively, due to remeasurements based on the then assessed fair value and changes in anticipated future revenue levels. These reductions to the contingent accrued earn-out liabilities resulted in a corresponding reduction of
$1.7 million
to general and administrative expenses as reported on the Condensed Consolidated Statements of Income and a reduction of
$664 thousand
to goodwill as reported in the enclosed Condensed Consolidated Balance Sheets. As of
September 30, 2016
, the total of these contingent liabilities was
$1.62 million
, of which
none
is reported in long-term liabilities, and
$1.62 million
is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. As of
December 31, 2015
the total of these contingent liabilities was
$4.28 million
, of which
$2.57 million
was reported in long-term liabilities, and
$1.71 million
was included in current liabilities in the Company's Condensed Consolidated Balance Sheet.
Consideration paid by the Company for the businesses it purchases is allocated to the assets and liabilities acquired based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. Recognized goodwill pertains to the value of the expected synergies to be derived from combining the operations of the businesses we acquire including the value of the acquired workforce.
The aggregated unaudited pro forma financial information pertaining to all of the Company's acquisitions made during the
nine months
ended
September 30, 2015
and
September 30, 2016
, which includes the acquisitions of Via Media Health (acquired in March 2015), PB Systems (acquired June 2015), and the EbixHealth JV (being fully consolidated effective July 1, 2016) as presented in the table below is provided for informational purposes only and is not a projection of the Company's expected results of operations for any future period. No effect has been given in this pro forma information for future synergistic benefits that may still be realized as a result of combining these companies or costs that may yet be incurred in integrating their operations. The 2016 and 2015 pro forma financial information below assumes that all such business acquisitions were made on January 1, 2015, whereas the Company's reported financial statements for the
three
months ended
September 30, 2016
only include the operating results from these businesses since the effective date that they were acquired by Ebix.
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|
|
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|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
As Reported
|
Pro Forma
|
|
As Reported
|
Pro Forma
|
|
As Reported
|
Pro Forma
|
|
As Reported
|
Pro Forma
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(In thousands, except per share data)
|
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|
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|
|
Revenue
|
$
|
74,608
|
|
$
|
74,608
|
|
|
$
|
66,813
|
|
$
|
69,854
|
|
|
$
|
218,248
|
|
$
|
224,534
|
|
|
$
|
195,278
|
|
$
|
211,013
|
|
Net Income attributable to Ebix, Inc.
|
$
|
24,067
|
|
$
|
24,067
|
|
|
$
|
20,232
|
|
$
|
19,574
|
|
|
$
|
69,218
|
|
$
|
68,249
|
|
|
$
|
57,604
|
|
$
|
56,206
|
|
Basic EPS
|
$
|
0.74
|
|
$
|
0.74
|
|
|
$
|
0.59
|
|
$
|
0.57
|
|
|
$
|
2.12
|
|
$
|
2.09
|
|
|
$
|
1.65
|
|
$
|
1.61
|
|
Diluted EPS
|
$
|
0.74
|
|
$
|
0.74
|
|
|
$
|
0.59
|
|
$
|
0.57
|
|
|
$
|
2.10
|
|
$
|
2.07
|
|
|
$
|
1.63
|
|
$
|
1.59
|
|
During the three months ended
September 30, 2016
the Company's reported total operating revenues increased by
$7.8 million
or
12%
to
$74.6 million
as compared to
$66.8 million
during the same period in 2015. Reported revenues were effected by the continuing weakening in the foreign currencies in which we conduct operations (particularly in Australia, Brazil, Great Britain, and India) as compared to the strengthening of the U.S. dollar. Specifically, the adverse impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations, in the aggregate reduced reported revenues by
$348 thousand
and
$3.3 million
for the three and
nine
months ended September 30, 2016, respectively.
With respect to business acquisitions completed during the years 2016 and 2015 on a pro forma basis, as disclosed in the above pro forma financial information table, combined revenues increased
7%
and
6%
for the three and nine months ending September 30, 2016, respectively, versus the same periods in 2015. The 2016 and 2015 pro forma financial information assumes that all business acquisitions made during this period were made on January 1, 2015, whereas the Company's reported financial statements for Q3 2016 and Q3 2015 only includes the revenues from these businesses since the effective date that they were acquired or consolidated by Ebix, being March 2015 for Via Media Health, June 2015 for PB Systems, and July 2016 for the EbixHealth JV.
The above referenced pro forma information and the relative comparative change in pro forma and reported revenues are based on the following premises:
•
2016 and 2015 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, whereas the 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 obtained through a newly acquired customer base are assigned to the acquired section of our business.
•
Pro formas do not include post acquisition revenue reductions as a result of discontinuation of any product lines and/or customer projects by Ebix in line with the Company's initiatives to maximize profitability.
Note 4: Debt with Commercial Bank
On June 17, 2016, the Company and certain of its subsidiaries entered into the Second Amendment (the “Second Amendment”) to the Regions Secured Credit Facility (as defined below), dated August 5, 2014, among the Company, Regions Bank as Administrative and Collateral Agent ("Regions"), Regions Capital Markets, PNC Capital Markets, LLC, and TD Securities (USA) as joint Lead Arrangers for the syndicate of lenders. The Second Amendment increases the total credit facility to
$400 million
from the prior amount of
$240 million
, and expands the syndicated bank group to
eleven
participants by adding
seven
new participants which include PNC Bank, National Association BMO Harris Bank N.A., Key Bank National Association, HSBC Bank National, Cadence Bank, the Toronto-Dominion Bank (New York Branch), and Trustmark National Bank. The Credit Agreement (as defined below) now consists of a
5
-year revolving credit component in the amount of
$275 million
, and a
5
-year term loan component in the amount of
$125 million
, with repayments due in the amount
$3.13 million
due each quarter, starting
September 30, 2016 . The Credit Agreement also contains an accordion feature, which if exercised and approved by all credit parties, would expand the total borrowing capacity under the syndicated credit facility to
$500 million
. The credit facility carries a leverage-based LIBOR related interest rate, which currently stands at approximately
2.81%
.
On October 8, 2015 Ebix exercised the
$50 million
accordion feature under the Regions Secured Credit Facility. TD Bank, NA was added to the syndication group along with
four
other bank participants which include Regions. The exercise of the accordion feature increased the Aggregate Revolving Commitment under the Credit Agreement to
$240 million
from the prior amount of
$190 million
.
As of
September 30, 2016
the Company's consolidated balance sheet includes
$3.38 million
of remaining deferred financing costs in connection with this credit facility, which are being amortized as a component of interest expense over the
five
-year term of the financing agreement. In regards to these deferred financing costs,
$2.7 million
pertains to the revolving line of credit component of the Credit Agreement, and
$676 thousand
pertains to the term loan component of the Credit Agreement of which
$136 thousand
is netted against the current portion and
$540 thousand
is netted against the long-term portions of the term loan as reported on the Condensed Consolidated Balance.
At
September 30, 2016
, the outstanding balance on the revolving line of credit under the Credit Agreement was
$134.0 million
and the facility carried an interest rate of
2.81%
. During the
nine months
ended
September 30, 2016
,
$50.0 million
of draws were made off of the revolving credit facility. In June the revolving line of credit was refinanced in conjunction with the Second Amendment to the Credit Agreement with
$125 million
being converted to a term loan, with the resulting balance on the revolving line of credit being
$104.0 million
(including certain deferred financing costs and before a
$15 million
draw). The revolving line of credit balance is included in the long-term liabilities section of the Condensed Consolidated Balance Sheets. Prior to the Second Amendment, during the
nine months
period ended
September 30, 2016
, the average and maximum outstanding balances of the revolving line of credit component of the credit facility were
$179.4 million
and
$226.5 million
, respectively.
At
September 30, 2016
, the outstanding balance on the term loan was
$121.9 million
of which
$12.5 million
is due within the next
twelve
months, with the first repayment of
$3.13 million
having been made on September 30, 2016, as scheduled. This term loan also carried an interest rate of
2.81%
. 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 Sheets, the amounts of which were
$12.5 million
and
$109.4 million
respectively at
September 30, 2016
.
Note 5: Commitments and Contingencies
Contingencies
-On December 3, 2012, the Company received a subpoena and letter from the SEC dated November 30, 2012, stating that the SEC is conducting a formal, non-public investigation styled In the Matter of Ebix, Inc. (A-3318) and seeking documents primarily related to the issues raised in the In re: Ebix, Inc. Securities Litigation. On April 16, 2013, the Company received a second subpoena from the SEC seeking additional documents. The Company has cooperated with the SEC to provide the requested documents. The Company has had no substantive communication with the SEC since February 2014.
On June 6, 2013, the Company was notified that the U.S. Attorney for the Northern District of Georgia had opened an investigation into allegations of intentional misconduct that had been brought to its attention from the then-pending shareholder class action lawsuit against the Company's directors and officers, the media and other sources. The Company has cooperated with the U.S. Attorney's office.
Following the announcement on May 1, 2013 of the Company's execution of a merger agreement with affiliates of Goldman Sachs & Co., twelve putative class action complaints challenging the proposed merger were filed in the Delaware Court of Chancery. These complaints name as Defendants some combination of the Company, its directors, Goldman Sachs & Co. and affiliated entities. On June 10, 2013, the twelve complaints were consolidated by the Delaware Court of Chancery, now captioned In re Ebix, Inc. Stockholder Litigation, CA No. 8526-VCS. On June 19, 2013, the Company announced that the merger agreement had been terminated pursuant to a Termination and Settlement Agreement dated June 19, 2013. After Defendants moved to dismiss the consolidated proceeding, Lead Plaintiffs amended their operative complaint to drop their claims against Goldman Sachs & Co. and focus their allegations on an Acquisition Bonus Agreement (“ABA”) between the Company and Robin Raina. On September 26, 2013, Defendants moved to dismiss the Amended Consolidated Complaint. On July 24, 2014, the Court issued its Memorandum Opinion that granted in large part the Company’s Motion to Dismiss and narrowed the remaining claims. On September 15, 2014, the Court entered an Order implementing its Memorandum Opinion. On January 16, 2015, the Court entered an Order permitting Plaintiffs to file a Second Amended and Supplemented Complaint. On February 10, 2015, Defendants filed a Motion to Dismiss the Second Amended and Supplemented Complaint, which was granted in part and denied in part in a January 15, 2016 Memorandum Opinion and Order. The remaining claims are as follows: (i) a purported class and derivative claim for breach of fiduciary duty
by the individual Defendants for improperly maintaining the ABA as an unreasonable anti-takeover device; (ii) a purported class claim against the individual Defendants for breach of the fiduciary duty of disclosure to the stockholders with respect to the Company’s 2010 Proxy Statement and 2010 Stock Incentive Plan; (iii) a purported derivative claim against the individual Defendants for breach of fiduciary duty to the Company in causing incentive compensation to be awarded to themselves and others under the 2010 Stock Incentive Plan; (iv) a purported class and derivative claim for breach of fiduciary duty by the individual Defendants in adopting certain bylaw amendments on December 19, 2014; and, (v) a purported class and derivative claim seeking invalidation of the December 19, 2014 bylaw amendments under Delaware law. Lead Plaintiffs seek declaratory relief with respect to the 2010 Stock Incentive Plan, the 2010 Proxy Statement, and the bylaw amendments. Lead Plaintiffs also seek compensatory damages, interest, and attorneys’ fees and costs. The parties have filed answers to the remaining claims in the Second Amended and Supplemented Complaint and discovery has commenced. On October 25, 2016, the Court entered an Order permitting Plaintiffs to file a Verified Third Amended and Supplemented Class Action and Derivative Complaint, which was then filed on October 26, 2016. The Company denies any liability and intends to defend the action vigorously.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate likely disposition of these matters will not have a material impact on its financial operating results or financial position.
Lease Commitments—
The Company leases office space under non-cancelable operating leases with expiration dates ranging through 2021, with various renewal options. Capital leases range from
three
to
five
years and are primarily for computer equipment. There were multiple assets under various individual capital leases at
September 30, 2016
and
2015
. Rental expense for office facilities and certain equipment subject to operating leases for the
nine months
ended
September 30, 2016
and
2015
was
$4.7 million
and
$4.9 million
, respectively.
Self Insurance—
For some of the Company’s U.S. employees the Company is self-insured for its health insurance program and has a stop loss policy that limits the individual liability to
$120 thousand
per person and the aggregate liability to
125%
of the expected claims based upon the number of participants and historical claims. As of
September 30, 2016
, the amount accrued on the Company’s Condensed Consolidated Balance Sheet for the self-insured component of the Company’s employee health insurance was
$273 thousand
. The maximum potential estimated cumulative liability for the annual contract period, which ended in September 2016, was
$2.9 million
.
Note 6: Income Taxes
The Company recorded an income tax expense of
$789 thousand
(
3.2%
) and
$1.1 million
(
1.6%
) during the three and nine months ended September 30, 2016, respectively, which included discrete items for additions to the reserve for uncertain tax positions and prior year true-ups ups that resulted in a net tax expense charge that was more than offset by a tax benefit from transferring certain intellectual property intangible assets in Q2. The income tax expense exclusive of discrete items for the three and nine months ended September 30, 2016, respectively, is
$139 thousand
(
0.0%
) and
$2.8 million
(
4.0%
). Our tax expense and effective tax rate decreased year over year, exclusive of discrete charges, due to favorable changes in the proportion of our taxable income in certain foreign jurisdictions relative to total pre-tax income. The Company expects its full year tax rate before discrete items to be approximately
6%
.
The Company’s effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the US statutory rate of
35%
and where the Company enjoys a tax holiday in India. During 2015, the Company secured an additional tax holiday in India until the year 2020 to support certain portions of its expanding operations there. The Company, also, had income during the quarter ended September 30, 2016 in Singapore, the United Kingdom, Dubai, and Sweden, where the statutory tax rates are lower than the US rate of
35%
.
As of
September 30, 2016
a liability of
$3.8 million
for uncertain tax positions is included in other long-term liabilities of the Company's Condensed Consolidated Balance Sheet. During the three and
nine months
ended
September 30, 2016
there was
$650
and
$700 thousand
, respectively, in additions to this liability reserve. During the same periods in 2015, there were
$486 thousand
and
$594 thousand
in additions to this liability reserve. The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense.
Note 7: Geographic Information
The Company operates with
one
reportable segment whose results are regularly reviewed by the Company's chief operating decision maker as to performance and allocation of resources. External customer revenues in the tables below are attributed to a
particular country based on whether the customer had a direct contract with the Company which was executed in that particular country for the sale of the Company's products/services with an Ebix subsidiary located in that country.
The impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations partially affected reported revenues, and were the primary cause for the drop in 2016 revenues in Australia and Latin America. Specifically, during the first
nine
months of 2016 the change in foreign currency exchange rates decreased reported Australian operating revenues by
($733) thousand
, and Latin America operating revenues by
$(491) thousand
. India's revenue for the nine months ending September 30, 2016 revenues increased
$7.5 million
due primarily to the various new e-governance contracts with a number of large clients. Europe's revenues increased
$8.2 million
due primarily to the execution and commencement of certain significant contracts.
The following enterprise wide information relates to the Company's geographic locations (all amounts in thousands):
As of and for the
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Latin America
|
|
Australia
|
|
Singapore
|
|
New Zealand
|
|
India
|
|
Europe
|
|
Dubai
|
|
Total
|
External Revenues
|
$
|
157,480
|
|
|
$
|
4,653
|
|
|
$
|
3,933
|
|
|
$
|
22,869
|
|
|
$
|
4,384
|
|
|
$
|
1,384
|
|
|
$
|
10,076
|
|
|
$
|
13,469
|
|
|
$
|
—
|
|
|
$
|
218,248
|
|
Long-lived assets
|
$
|
384,511
|
|
|
$
|
6,736
|
|
|
$
|
7,328
|
|
|
$
|
1,256
|
|
|
$
|
17,505
|
|
|
$
|
228
|
|
|
$
|
80,636
|
|
|
$
|
23,199
|
|
|
$
|
54,333
|
|
|
$
|
575,732
|
|
As of and for the
Nine Months Ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Latin America
|
|
Australia
|
|
Singapore
|
|
New Zealand
|
|
India
|
|
Europe
|
|
Dubai
|
|
Total
|
External Revenues
|
$
|
150,873
|
|
|
$
|
3,386
|
|
|
$
|
4,399
|
|
|
$
|
23,301
|
|
|
$
|
3,855
|
|
|
$
|
1,662
|
|
|
$
|
2,548
|
|
|
$
|
5,254
|
|
|
$
|
—
|
|
|
$
|
195,278
|
|
Long-lived assets
|
$
|
374,639
|
|
|
$
|
6,899
|
|
|
$
|
5,843
|
|
|
$
|
465
|
|
|
$
|
68,805
|
|
|
$
|
204
|
|
|
$
|
73,921
|
|
|
$
|
24,463
|
|
|
$
|
—
|
|
|
$
|
555,239
|
|
In the geographical information table above the significant changes to long-lived assets from September 30, 2015 to September 30, 2016 were comprised of a net
$9.9 million
decrease in the U.S. associated with transferring
$28.8 million
of goodwill connected with the December 2014 acquisition of Oakstone to India, partially offset by an increase in goodwill of
$21.8 million
associated with fully consolidating the operations of the EbixHealth JV into the Company's financial statements, a
$51.3 million
decrease in Singapore (net of deferred taxes) with a corresponding
$54.3 million
increase in Dubai due to transferring certain intangible assets.
Note 8: Investment in Joint Ventures
Effective February 7, 2016 Ebix and Vayam Technologies Ltd ("Vayam") formed a joint venture named Ebix Vayam Limited JV. This joint venture was established to carry out IT projects in the government sector of the country of India and particularly in regards to the implementation of e-governance projects in the areas of education and healthcare. Ebix has a
51%
equity interest in the joint venture, and Vayam has a
49%
equity interest in the joint venture. Ebix is fully consolidating the operations of the Ebix Vayam Limited JV into the Company's financial statements and separately reporting the Vayam minority, non-controlling, interest in the joint venture's net income and equity.
Effective September 1, 2015 Ebix and Independence Holdings Corporation ("IHC") formed a joint venture named Ebix Health Exchange Holdings, LLC ("EbixHealth JV"). This joint venture was established to promote and market an administrative data exchange for health and pet insurance lines of business nationally. Ebix paid
$6.0 million
and contributed a license to use certain CurePet software and systems valued by the EbixHealth JV at
$2.0 million
, for its initial
40%
membership interest in the EbixHealth JV. IHC contributed all if its shares in its existing third party administrator operations (IHC Health Solutions, Inc.), valued by the EbixHealth JV at
$18.0 million
for its
60%
membership interest in the EbixHealth JV, and received a special distribution of
$6.0 million
. Effective July 1, 2016 Ebix and IHC jointly executed a Call Notice agreement, whereby Ebix purchased additional common units in the EbixHealth JV from IHC constituting eleven percent (
11%
) of the EbixHealth JV for
$2.0 million
cash which resulted in Ebix holding an aggregate fifty-one percent (
51%
) of the EbixHealth JV. Commensurate with additional equity stake in the joint venture and a new contemporaneous valuation of the business the Company realized a
$1.2 million
gain on its previously carried
40%
equity interest in the EbixHealth JV. This recognized gain is reflected as a component of other non-
operating income in the accompanying Condensed Consolidated Statement of Income. The valuation of the EbixHealth JV is considered preliminary as the allocation to the identified tangible and intangible assets (e.g. customer lists, trade name, developed technology), and the determination of the residual goodwill has yet to performed, but will be completed in line with the filing of the Company's 2016 annual report on Form 10-K. Beginning July 1, 2016 Ebix is fully consolidating the operations of the EbixHealth JV into the Company's financial statements and separately reporting the IHC minority, non-controlling,
49%
interest in the joint venture's net income and equity, and thereby reflecting Ebix's net resulting
51%
interest in the EbixHealth JV profits or losses. Furthermore, as a related party, IHC also has been and continues to be a customer of Ebix, and during the nine months ending September 30, 2016 the Company recognized
$1.4 million
of revenue from IHC, and as of September 30, 2016 IHC had
$752 thousand
of accounts receivable with Ebix.
Note 9: Capitalized Software Development Costs
In accordance with the relevant FASB accounting literature, the Company had previously capitalized certain software and product related development costs associated with both its continuing medical education service offerings, and the development of a property and casualty underwriting insurance data exchange platform. During the
nine months
ended
September 30, 2016
, the Company capitalized
$1.0 million
of such development costs. As of
September 30, 2016
, a total of
$3.2 million
of remaining unamortized development costs are reported on the Company’s consolidated balance sheet. During the
nine months
ended
September 30, 2016
, the Company recognized
$1.0 million
of amortization expense with regards to these capitalized software development costs, which is included in costs of services provided in the Company’s consolidated income statement. The useful life over which these capitalized software development costs are being amortized is
eighteen
months for the continuing medical education products, and
six
years for the property and casualty underwriting insurance data exchange platform.
Note 10: Other Current Assets
Other current assets at
September 30, 2016
and
December 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Prepaid expenses
|
$
|
10,718
|
|
|
$
|
8,290
|
|
Sales taxes receivable from customers
|
30
|
|
|
120
|
|
Due from prior owners of acquired businesses for working capital settlements
|
945
|
|
|
1,021
|
|
Research and development tax credits receivable
|
383
|
|
|
898
|
|
Tax refunds receivable
|
347
|
|
|
—
|
|
Other
|
409
|
|
|
613
|
|
Total
|
$
|
12,832
|
|
|
$
|
10,942
|
|
Note 11: Subsequent Events
None.