Management of Manhattan Associates, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of the end of the Company’s 2017 fiscal year, management conducted an assessment of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2017 was effective.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements for the year ended December 31, 2017, has audited the Company’s internal control over financial reporting as of December 31, 2017 and has issued a report regarding the Company’s internal control over financial reporting appearing on page 42, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.
The accompanying notes are an integral part of these Consolidated Statements of Income.
The accompanying notes are an integral part of these Consolidated Statements of Comprehensive Income.
The accompanying notes are an integral part of these Consolidated Balance Sheets.
The accompanying notes are an integral part of these Consolidated Statements of Cash Flows.
The accompanying notes are an integral part of these Consolidated Statements of Shareholders’ Equity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
1. Organization, Consolidation and Summary of Significant Accounting Policies
Organization and Business
Manhattan Associates, Inc. (“Manhattan” or the “Company”) is a developer and provider of supply chain commerce solutions that help organizations optimize the effectiveness, efficiency, and strategic advantages of their supply chains. The Company’s solutions consist of software, services, and hardware, which coordinate people, workflows, assets, events, and tasks holistically across the functions linked in a supply chain from planning through execution. These solutions also help coordinate the actions, data exchange, and communication of participants in supply chain ecosystems, such as manufacturers, suppliers, distributors, trading partners, transportation providers, channels (such as catalogers, store retailers, and Web outlets), and consumers.
The Company’s operations are in North and South America (Americas), Europe (EMEA), and the Asia/Pacific (APAC) region. The Americas operation are conducted through the Parent Company, Manhattan Associates, Inc., and its wholly-owned subsidiary, Manhattan Associates Chile Spa. The European operations are conducted through the Company’s wholly-owned subsidiaries, Manhattan Associates Limited, Manhattan Associates Europe B.V., Manhattan France SARL, and Manhattan Associates GmbH, in the United Kingdom, the Netherlands, France, and Germany, respectively. The Company’s Asia/Pacific operations are conducted through its wholly-owned subsidiaries, Manhattan Associates Pty Ltd., Manhattan Associates KK, Manhattan Associates Software (Shanghai), Co. Ltd., Manhattan Associates Software Pte Ltd., and Manhattan Associates (India) Development Centre Private Limited in Australia, Japan, China, Singapore, and India, respectively. The Company occasionally sells its products and services in other countries, such as countries in Latin America, Eastern Europe, Middle East, and Asia, through its direct sales channel as well as various reseller channels.
Risks Associated with Single Business Line, Technological Advances, and Foreign Operations
The Company currently derives a substantial portion of its revenues from sales of its software and related services and hardware. The markets for supply chain commerce solutions are highly competitive, subject to rapid technological change, changing customer needs, frequent new product introductions, and evolving industry standards that may render existing products and services obsolete. As a result, the Company’s position in these markets could be eroded rapidly by unforeseen changes in customer requirements for application features, functions, and technologies. The Company’s growth and future operating results will depend, in part, upon its ability to enhance existing applications and develop and introduce new applications that meet changing customer requirements that respond to competitive products and that achieve market acceptance. Any factor adversely affecting the markets for supply chain commerce solutions could have an adverse effect on the Company’s business, financial condition, results of operations and operating cash flows.
The Company’s international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. The Company recognized foreign exchange losses of $1.8 million and $0.1 million in 2017 and 2015, respectively, and a foreign exchange gain of $0.6 million in 2016. Foreign exchange rate transaction gains and losses are classified in “Other (loss) income, net” on the Consolidated Statements of Income.
In addition, we have a large development center in Bangalore, India, that does not have a natural in-market revenue hedge to mitigate currency risk to our operating expense in India. Fluctuations in the value of other currencies, particularly the Indian rupee, could significantly affect our revenues, expenses, operating profit and net income.
Principles of Consolidation and Foreign Currency Translation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The financial statements of foreign subsidiaries have been translated into United States dollars in accordance with the foreign currency matters topic in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (the “Codification”). Revenues and expenses from international operations were denominated in the respective local currencies and translated using the average monthly exchange rates for the year. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date and the effect of changes in exchange rates from year to year are disclosed as a separate component of shareholders’ equity and comprehensive income.
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Reclassifications
Certain line items in prior period financial statements have been reclassified to conform to the current period presentation in the consolidated statements of income due to our business transition to cloud subscriptions. We believe separate disclosures of our software license, cloud subscriptions, maintenance and service revenue is meaningful to investors and provide an important measure of our business performance. Certain line items in prior period financial statements have been reclassified to conform to the current period presentation in the consolidated statements of income, including: all revenue line items; cost of license; cost of cloud subscriptions, maintenance and services; and cost of hardware. Such reclassifications did not affect total revenues, operating income or net income
.
New Accounting Pronouncements Adopted in Fiscal Year 2017
Stock Compensation
During the three months ended March 31, 2017, we adopted Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to improve the accounting for employee share-based payments. Under the new guidance, all excess tax benefits and certain tax deficiencies are recorded as income tax expense or benefit in the income statement rather than recorded in additional paid-in capital. The additional paid-in capital pools are eliminated. This new guidance must be applied on a prospective basis. As a result, the excess tax benefits of $1.9 million for the year ended December 31, 2017 are recorded in our provision for income taxes rather than additional paid-in capital. As required by the ASU, excess tax benefits recognized on share-based compensation expense are classified as an operating activity on the statement of cash flows rather than as a financing activity, and we have applied this provision on a prospective basis.
The ASU also allows the Company to repurchase more of an employee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the course of a vesting period. As a result, the net cumulative-effect of this election was recognized as a $1.8 million increase to additional paid-in capital, a $0.5 million increase to deferred tax assets and a $1.3 million decrease to retained earnings as of January 1, 2017.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities should apply the modification accounting guidance if the fair value, vesting conditions or classification of the award changes. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 on a prospective basis to an award modified on or after the adoption date. Early adoption is permitted. We early adopted this guidance during the three months ended June 2017, and the adoption did not impact our financial statements.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) that simplifies the test for goodwill impairment by eliminating step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount based on the excess of a reporting unit’s carrying amount over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. For public companies, the guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 on a prospective basis, and earlier adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this guidance during the three months ended March 2017, and the adoption did not impact our financial statements.
Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230) that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. Prior to the issuance, there were certain issues where diversity in practice in how certain cash receipts and cash payments were presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We early adopted this guidance during the three months ended June 30, 2017, and the adoption did not impact our financial statements.
New Accounting Pronouncements Not Yet Adopted as of Fiscal Year 2017
Revenue Recognition
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In May 2014, the FASB issued ASU 2014-09, Revenue Recognition – Revenue from Contracts with Customers (Topic 606), which will replace substantially all current revenue recognition guidance once it
becomes effective. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope
of other standards. The new standard is less prescriptive and may require software entities to use more judgment and estimates in the revenue recognition process than are required under existing revenue guidance.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, which clarifies the following aspects in ASU 2014-09: collectability, presentation of sales taxes and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts at transition, and technical correction. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides thirteen technical corrections and improvements to the new revenue standard. We must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20 with ASU 2014-09, which is effective for annual and interim periods beginning after December 15, 2017.
The new revenue standard may be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures).
We adopted the standard as of January 1, 2018 and elected to use the modified retrospective method. Historical hardware sales prior to the adoption of ASC606 were recorded on a gross basis, as we were the principal in the transaction in accordance with ASC 605-45. Under the new standard, we are an agent in the transaction as we do not physically control the hardware which we sell, accordingly, we recognize our hardware revenue net of related cost which reduces both hardware revenue and cost of sales as compared to our accounting prior to 2018. Based on expected renewals of maintenance and multi-year cloud subscriptions, a portion of our commissions expense is deferred and amortized over time as the corresponding services are transferred to the customer under the new standard. As a result, the net cumulative-effect of the adoption is estimated to increase retained earnings by approximately $1.5 million to $2.4 million as of January 1, 2018, net of the effect of income taxes. We have not identified other significant differences related to the pattern of revenue recognition or presentation of revenue compared to our historical accounting. We continue to finalize our analysis of the adoption during the first quarter of 2018.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 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 to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Our leasing activity is primarily related to office space. For public companies, this guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, but may be adopted earlier. We are expecting to adopt the standard in the first quarter of 2019 on a modified prospective basis and currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements. The adoption will increase our total assets and liabilities.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash or cash equivalents.
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Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with various financial institutions. Amounts held are above the federally insured limit.
The Company’s sales are primarily to companies located in the United States, Europe and Asia. The Company performs periodic credit evaluations of its customers’ financial condition and does not require collateral. Accounts receivable are due principally from large U.S., European and Asia Pacific companies under stated contract terms. Accounts receivable, net as of December 31, 2017 for the Americas, EMEA, and APAC companies were $71.8 million, $16.1 million, and $4.3 million, respectively. Accounts receivable, net as of December 31, 2016 for the Americas, EMEA, and APAC companies were $81.5 million, $15.0 million, and $3.8 million, respectively. The Company’s top five customers in aggregate accounted for 9%, 12%, and 8% of total revenue recognized for each of the years ended December 31, 2017, 2016 and 2015, respectively. No single customer accounted for more than 10% of revenue for the years ended December 31, 2017, 2016 and 2015 or for more than 10% of accounts receivable as of December 31, 2017 and 2016.
Fair Value Measurement
The Company measures its investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:
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•
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Level 1–Quoted prices in active markets for identical instruments.
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•
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Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
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|
•
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Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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At December 31, 2017, the Company’s cash and cash equivalents balances were $90.4 million and $35.1 million, respectively. Cash equivalents consist of highly liquid money market funds and certificates of deposit. At December 31, 2017, the Company has $24.6 million in certificates of deposit in India, which are included in cash equivalents. At December 31, 2017, the Company has $10.5 million in money market funds, which are classified as Level 1 and are included in cash and cash equivalents on the Consolidated Balance Sheet. The Company had no investments at December 31, 2017 and 2016.
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable included in the accompanying Consolidated Balance Sheets approximate their fair values principally due to the short-term maturities of these instruments.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the allowance for doubtful accounts, which is based upon an evaluation of historical amounts written-off, the customers’ ability to pay, and general economic conditions; self-insurance accruals; impairment testing of goodwill; and the Company’s effective income tax rate (including the impact of unrecognized tax benefits) and deferred tax assets, which are based upon the Company’s expectations of future taxable income, allowable deductions, and projected tax credits. Actual results will differ from these estimates.
Revenue Recognition
The Company’s revenue consists of fees from software licensing; cloud subscriptions; customer support services and software enhancements (collectively, “maintenance”); fees from implementation and training services, and reimbursements of out-pocket expenses in connection with our services (collectively, “services”) and sales of hardware (“hardware”).
The Company recognizes license revenue when the following criteria are met: (1) a signed contract is obtained covering all elements of the arrangement, (2) delivery of the product has occurred, (3) the license fee is fixed or determinable, and (4) collection is probable. Revenue recognition for software with multiple-element arrangements requires recognition of revenue using the “residual method” when (a) there is vendor-specific objective evidence (VSOE) of the fair values of all undelivered elements in a multiple-
52
element arrangement that is not accounted for using long-term contract accounting, (b) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (c) all other applicable revenue-re
cognition criteria for software revenue recognition are satisfied. For those contracts that contain significant customization or modifications, license revenue is recognized using contract accounting.
Cloud subscriptions includes software as a service (“SaaS”) and arrangements which provide customers with the right to use our software within a cloud-based environment that we provide and manage, where the customer does not have the right to take possession of the software without significant penalties. SaaS and hosting revenues are recognized over the term of the related arrangements. For hosting arrangements, where perpetual licenses are also sold, the initial non-cancellable hosting period generally results in the arrangements being accounted for as service agreements, accordingly, amounts billed for the licenses are recognized over the customer relationship period.
Payment terms for the Company’s software licenses vary. Each contract is evaluated individually to determine whether the fees in the contract are fixed or determinable and whether collectability is probable. Judgment is required in assessing the probability of collection, which is generally based on evaluation of customer-specific information, historical collection experience, and economic market conditions. If market conditions decline, or if the financial conditions of customers deteriorate, the Company may be unable to determine that collectability is probable, and the Company could be required to defer the recognition of revenue until the Company receives customer payments. The Company has an established history of collecting under the terms of its software license contracts without providing refunds or concessions to its customers. Therefore, the Company has determined that the presence of payment terms that extend beyond contract execution in a particular contract do not preclude the conclusion that the fees in the contract are fixed or determinable. Although infrequent, when payment terms in a contract extend beyond our standard terms or twelve months, the Company has determined that such fees are not fixed or determinable and recognizes revenue as payments become due provided that all other conditions for revenue recognition have been met.
The Company’s Maintenance revenue consists of fees for a comprehensive 24 hours per day, 365 days per year program that provides customers with software upgrades, when and if available, which include additional or improved functionality and technological advances incorporating emerging supply chain and industry initiatives. Revenue related to maintenance is generally paid in advance and recognized ratably over the term of the agreement, typically twelve months.
The Company allocates revenue to maintenance and any other undelivered elements of the arrangement based on VSOE of fair value of each element, and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. If the Company cannot objectively determine the fair value of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. The Company must apply judgment in determining all elements of the arrangement and in determining the VSOE of fair value for each element, considering the price charged for each product on a stand-alone basis or applicable renewal rates. For arrangements that include future software functionality deliverables, the Company accounts for these deliverables as a separate element of the arrangement. Because the Company does not sell these deliverables on a standalone basis, the Company is not able to establish VSOE of fair value of these deliverables. As a result, the Company defers all revenue under the arrangement until the future functionality has been delivered to the customer.
The Company’s services revenue consists of fees generated from implementation and training services (collectively “professional services”), and reimbursements of out-pocket expenses in connection with our services. Professional services include system planning, design, configuration, testing, and other software implementation support, and are not typically essential to the functionality of the software. Fees from professional services performed by the Company are separately priced and are generally billed on an hourly basis, and revenue is recognized as the services are performed. In certain situations, professional services are rendered under agreements in which billings are limited to contractual maximums or based upon a fixed fee for portions of or all of the engagement. Revenue related to fixed-fee-based contracts is recognized on a proportional performance basis based on the hours incurred on discrete projects within an overall services arrangement. The Company has determined that output measures, or services delivered, approximate the input measures associated with fixed-fee services arrangements. Project losses are provided for in their entirety in the period in which they become known. The total amount of expense reimbursement recorded to revenue was $17.9 million, $18.3 million, and $20.2 million for 2017, 2016 and 2015, respectively.
Hardware revenue is generated from the resale of a variety of hardware products, developed and manufactured by third parties, that are integrated with and complementary to the Company’s software solutions. As part of a complete solution, the Company’s customers periodically purchase hardware from the Company for use with the software licenses purchased from the Company. These products include computer hardware, radio frequency terminal networks, radio frequency identification (RFID) chip readers, bar code printers and scanners, and other peripherals. Hardware revenue is recognized upon shipment to the customer when title passes. The Company generally purchases hardware from the Company’s vendors only after receiving an order from a customer. As a result, the Company generally does not maintain hardware inventory.
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Deferred Revenue
Deferred revenue represents amounts collected prior to having completed performance of professional services, maintenance, and significant remaining obligations under license agreements. Deferred revenue also represents amounts billed or collected for cloud subscriptions that are generally billed annually in advance.
Returns and Allowances
The Company has not experienced significant returns or warranty claims to date and, as a result, has not recorded a provision for the cost of returns and product warranty claims at December 31, 2017 or 2016.
The Company records an allowance for doubtful accounts based on the historical experience of write-offs and a detailed assessment of accounts receivable. Additions to the allowance for doubtful accounts generally represent a sales allowance on services revenue, which are recorded to operations as a reduction to services revenue. The total amounts charged to operations were $1.6 million, $4.9 million, and $7.1 million for 2017, 2016 and 2015, respectively. In estimating the allowance for doubtful accounts, management considers the age of the accounts receivable, the Company’s historical write-offs, and the creditworthiness of the customer, among other factors. Should any of these factors change, the estimates made by management will also change accordingly, which could affect the level of the Company’s future allowances. Uncollectible accounts are written off when it is determined that the specific balance is not collectible.
Property and Equipment
Property and equipment is recorded at cost and consists of furniture, computers, other office equipment, and leasehold improvements. The Company depreciates the cost of furniture, computers, and other office equipment on a straight-line basis over their estimated useful lives (five years for office equipment, seven years for furniture and fixtures). Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Depreciation expense for property and equipment for the years ended December 31, 2017, 2016 and 2015 was approximately $7.7 million, $7.5 million, and $6.4 million, respectively, and was included in “Depreciation and amortization” in the Consolidated Statements of Income.
Property and equipment, at cost, consist of the following (in thousands):
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December 31,
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|
|
|
2017
|
|
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2016
|
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Office equipment
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|
$
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39,644
|
|
|
$
|
36,217
|
|
Furniture and fixtures
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|
|
4,662
|
|
|
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4,698
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|
Leasehold improvement
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|
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18,494
|
|
|
|
18,453
|
|
Property and equipment, gross
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|
|
62,800
|
|
|
|
59,368
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Less accumulated depreciation
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|
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(47,307
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)
|
|
|
(41,944
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)
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Property and equipment, net
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|
$
|
15,493
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|
|
$
|
17,424
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Software Development Costs
Research and development expenses are charged to expense as incurred. For the years ended December 31, 2017, 2016 and 2015, the Company did not capitalize any internal research and development costs because the costs incurred between the attainment of technological feasibility for the related software product through the date when the product was available for general release to customers have been insignificant.
The Company determines the amount of development costs capitalizable under the provisions of FASB Codification accounting for costs of computer software to be sold, leased, or marketed. Under this guidance, computer software development costs are charged to R&D expense until technological feasibility is established, after which remaining software production costs are capitalized. The Company has defined technological feasibility as the point in time at which the Company has a detailed program design or a working model of the related product, depending on the type of development efforts, and high-risk development issues have been resolved through end-to-end system testing.
Impairment of Long-Lived Assets
The Company reviews the values assigned to long-lived assets, including property and certain intangible assets, to determine whether events and circumstances have occurred which indicate that the remaining estimated useful lives may warrant revision or that the remaining balances may not be recoverable. In such reviews, undiscounted cash flows associated with these assets are compared
54
with their carrying value to determine if a write-down to fair value is required. During 2017, 2016 and 2015, the Company di
d not recognize any impairment charges associated with its long-lived or intangible assets.
The evaluation of asset impairment requires management to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment, and actual results may differ from assumed and estimated amounts.
Goodwill and Impairment of Goodwill
Goodwill
Goodwill represents the excess of purchase price over fair value of net identified tangible and intangible assets and liabilities acquired. The Company does not amortize goodwill, but instead tests goodwill for impairment on at least an annual basis. Goodwill was $62.2 million at the end of each of the years ended December 31, 2017 and 2016.
Impairment of Goodwill
The Company evaluates the carrying value of goodwill annually as of December 31 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
The Company applied the simplified goodwill impairment test for the fiscal year ended December 31, 2017, that permits companies to perform a qualitative assessment based on economic, industry and company-specific factors as the initial step in the annual goodwill impairment test for all or selected reporting units. Based on the results of the qualitative assessment, companies are only required to perform Step 1 of the annual impairment test for a reporting unit if the company concludes that it is not more likely than not that the unit’s fair value is less than its carrying amount. To the extent the Company concludes it is more likely than not that a reporting unit’s estimated fair value is less than its carrying amount, the two-step approach is applied. The first step would require a comparison of each reporting unit’s fair value to the respective carrying value. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss, if any. The Company did not identify any macroeconomic or industry conditions as of December 31, 2017, that would indicate the fair value of the reporting units were more likely than not to be less than their respective carrying values. If circumstances change or events occur to indicate it is more likely than not that the fair value of any reporting units have fallen below their carrying value, the Company would record an impairment charge based on that difference. The Company performed its periodic review of its goodwill for impairment as of December 31, 2017 and 2016, and did not identify any impairment as a result of the review.
Guarantees and Indemnities
The Company accounts for guarantees in accordance with the guarantee accounting topic in the FASB Codification
.
Our customer contracts generally contain infringement indemnity provisions. Under those provisions, we generally agree, subject to certain exceptions, to indemnify, defend, and hold harmless the customer in connection with third party claims against the customer alleging that the customer’s use of our software products in compliance with their license infringe the third party’s patent, copyright, or other intellectual property rights. Conditions to our obligations generally include that we are provided the right to control the defense of the claims and, in general, to control settlement negotiations. Those provisions generally provide also that, if the customer is prevented from using our software because of a third party infringement claim, our sole obligation (in addition to the indemnification, defense, and hold harmless obligation referred to above) is to, at our expense, (i) procure for the customer the right to continue to use the software, (ii) to replace or modify the product so that its use by the customer does not infringe, or, if either of the foregoing are not reasonably feasible, to terminate the customer contract and provide a refund of the unamortized portion of the customer’s license fee (based on a five year amortization period). Our customer contracts sometimes also require us to indemnify, defend, and hold harmless the customer in connection with death, personal injury, or property damage claims made by third parties with respect to actions of our personnel or contractors. The indemnity obligations contained in our customer contracts generally have no specified expiration date and no specified monetary limitation on liability. We have not previously incurred costs to settle claims or pay awards under these indemnification obligations. We account for these indemnity obligations in accordance with FASB guidance on accounting for contingencies, and record a liability for these obligations when a loss is probable and reasonably estimable. We have not recorded any liabilities for these contracts as of December 31, 2017, or 2016.
In general, in our customer contracts, the Company warrants to its customers that its software products will perform in all material respects in accordance with the standard published specifications in effect at the time of delivery of the licensed products to the customer for six months after first use of the licensed products, but no more than 24 months after execution of the license agreement. Additionally, the Company warrants to its customers that services will be performed consistent with generally accepted industry standards or specific service levels through completion of the agreed upon services. If necessary, the Company will provide for the
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estimated cost of product and service warranties based on specific warranty claims and claim history. However, the Company has not incurred significant recurring expense under product or service warranties. As a result, the Comp
any believes the estimated fair value of these agreements is nominal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2017 and 2016.
Segment Information
The Company has three reportable segments: Americas, EMEA, and APAC as defined by FASB Codification topic for segment reporting. See Note 7 for discussion of the Company’s reportable segments.
Basic and Diluted Net Income Per Share
Basic net income per share is computed using net income divided by the weighted average number of shares of common stock outstanding (“Weighted Shares”) for the period presented.
Diluted net income per share is computed using net income divided by Weighted Shares and the treasury stock method effect of common equivalent shares (“CESs”) outstanding for each period presented. The following is a reconciliation of the shares used in the computation of net income per share for the years ended December 31, 2017, 2016 and 2015 (in thousands, except per share data):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except per share data)
|
|
Net income
|
|
$
|
116,481
|
|
|
$
|
124,234
|
|
|
$
|
103,475
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.68
|
|
|
$
|
1.73
|
|
|
$
|
1.41
|
|
Effect of CESs
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Diluted
|
|
$
|
1.68
|
|
|
$
|
1.72
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,175
|
|
|
|
71,674
|
|
|
|
73,443
|
|
Effect of CESs
|
|
|
249
|
|
|
|
386
|
|
|
|
595
|
|
Diluted
|
|
|
69,424
|
|
|
|
72,060
|
|
|
|
74,038
|
|
The number of anti-dilutive CESs in 2017, 2016 and 2015 was immaterial. See Note 2 for further information on those securities.
Accumulated Other Comprehensive Income
Comprehensive income includes net income and foreign currency translation adjustments that are excluded from net income and reflected in shareholders’ equity. The entire accumulated other comprehensive income balance as of December 31, 2017 and 2016 represents foreign currency translation adjustments.
Accounting for Income Taxes
We provide for the effect of income taxes on our financial position and results of operations in accordance with the Income Taxes Topic of the ASC. Under this accounting pronouncement, income tax expense is recognized for the amount of income taxes payable or refundable for the current year and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. Management must make significant assumptions, judgments, and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset.
Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, projected tax credits, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We do not recognize a tax benefit unless we conclude that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than 50 percent likely to be realized. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments, and estimates relative to the value of our net deferred tax asset take into account predictions of the
56
amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable
net deferred taxes inaccurate, thus materially impacting our financial position and results of operations.
Equity-Based Compensation
The Company accounts for equity-based compensation in accordance with ASC 718,
Compensation – Stock Compensation.
See Note 2 for further information.
2. Equity-Based Compensation
Equity Based Compensation Plans
In May 2007, the Manhattan Associates, Inc. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by the shareholders of the Company and subsequently amended in May 2009 and May 2011. The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights. Vesting conditions can be service-based or performance-based, or a combination of both.
As amended, a maximum of 30,000,000 shares are available for grant under the 2007 Plan. Each stock option or stock appreciation right granted is counted against the maximum share limitation as one share, and each share of restricted stock or restricted stock unit granted (including those that are service based or performance based) counts against the maximum share limitation as two shares. Options and stock appreciation rights cannot have a term exceeding seven years. As of December 31, 2017, there were 10,525,434 shares available for issuance under the amended 2007 Plan. The 2007 Plan is administered by the Compensation Committee of the Board of Directors. The committee has the authority to interpret the provisions thereof.
The restricted stock awards contain vesting provisions that are 50% service based and 50% performance based for employee awards and 100% service based for non-employee members of the Board of Directors (“Outside Directors”). The employee awards have a four year vesting period, with the performance portion tied to annual revenue and earnings per share targets. The awards to Outside Directors have a one year vesting period. The Company recognizes compensation cost for service-based restricted awards with graded vesting on a straight-line basis over the entire vesting period, with the amount of compensation cost recognized at any date at least equal to the portion of the grant-date value of the award that is vested at that date. For its performance-based restricted stock awards with graded vesting, the Company recognizes compensation cost on an accelerated basis applying straight-line expensing for each separately vesting portion of each award.
In January 2012, in order to simplify equity grant administration, the Company changed its practice of granting restricted stock in favor of granting restricted stock
units
, or RSUs, which convert to the Company’s common stock upon vesting. There is no material difference between the grant of restricted stock and the grant of RSUs to either the Company or the recipients receiving the grants; however, in contrast to the granting of restricted stock, no stock will actually be issued under the granting of RSUs until the units vest. Currently, the Company does not grant stock options.
Restricted Stock Unit Awards
A summary of changes in unvested units of restricted stock for the year ended December 31, 2017 are as follows:
|
|
Number of Units
|
Grant Date Fair Value
|
Outstanding at January 1, 2017
|
|
1,029,230
|
$45.38
|
Granted
|
|
460,185
|
49.01
|
Vested
|
|
(396,678)
|
37.55
|
Forfeited
|
|
(56,102)
|
50.90
|
Outstanding at December 31, 2017
|
|
1,036,635
|
$46.69
|
The Company recorded equity-based compensation related to restricted stock and RSUs (collectively “restricted stock awards”) of $16.2 million, $15.9 million, and $14.5 million during the years ended December 31, 2017, 2016 and 2015, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2017, 2016 and 2015, based on market value at the vesting dates was $18.8 million, $26.0 million, and $31.2 million, respectively. The weighted average grant-date fair value of RSUs granted during fiscal year 2017, 2016 and 2015 was $49.01, $55.35 and $51.99, respectively. As of December 31, 2017, unrecognized compensation cost related to unvested RSU totaled $26.1 million and is expected to be recognized over a weighted average period of approximately 2.3 years. In January 2017, we elected to recognize forfeitures of equity-based payments as they occur.
57
Included in the RSU grants for the year ended December 31, 2017 are 166,866 units that have performance-based vesting criteria. As noted above, the performance criteria are tied to the Company’s 2017 financial performance. As of December 31, 2017, the a
ssociated equity-based compensation expense has been recognized for the portion of the award attributable to the 2017 performance criteria.
3. Income Taxes
The Company is subject to future federal, state, and foreign income taxes and has recorded net deferred tax assets on the Consolidated Balance Sheets at December 31, 2017 and 2016. Deferred tax assets and liabilities are determined based on the difference between the financial accounting and tax bases of assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
618
|
|
|
$
|
1,034
|
|
Accrued liabilities
|
|
|
2,571
|
|
|
|
5,747
|
|
Equity-based compensation
|
|
|
3,732
|
|
|
|
5,535
|
|
Capitalized costs
|
|
|
595
|
|
|
|
861
|
|
Accrued sales taxes
|
|
|
257
|
|
|
|
439
|
|
Deferred rent
|
|
|
336
|
|
|
|
939
|
|
State tax credits
|
|
|
5,870
|
|
|
|
4,650
|
|
Foreign subsidiary net operating losses
|
|
|
278
|
|
|
|
212
|
|
Valuation allowance
|
|
|
(4,084
|
)
|
|
|
(4,031
|
)
|
Other
|
|
|
297
|
|
|
|
805
|
|
|
|
|
10,470
|
|
|
|
16,191
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
7,480
|
|
|
|
11,056
|
|
Depreciation
|
|
|
1,182
|
|
|
|
2,321
|
|
|
|
|
8,662
|
|
|
|
13,377
|
|
Net deferred tax assets
|
|
$
|
1,808
|
|
|
$
|
2,814
|
|
The components of income from domestic and foreign operations before income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
177,314
|
|
|
$
|
186,234
|
|
|
$
|
152,040
|
|
Foreign
|
|
|
7,519
|
|
|
|
9,873
|
|
|
|
10,801
|
|
Total
|
|
$
|
184,833
|
|
|
$
|
196,107
|
|
|
$
|
162,841
|
|
The components of the income tax provision for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
53,998
|
|
|
$
|
56,053
|
|
|
$
|
47,195
|
|
State
|
|
|
6,595
|
|
|
|
8,204
|
|
|
|
6,308
|
|
Foreign
|
|
|
6,185
|
|
|
|
5,819
|
|
|
|
4,331
|
|
|
|
|
66,778
|
|
|
|
70,076
|
|
|
|
57,834
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,590
|
|
|
|
2,086
|
|
|
|
1,252
|
|
State
|
|
|
35
|
|
|
|
(268
|
)
|
|
|
(300
|
)
|
Foreign
|
|
|
(51
|
)
|
|
|
(21
|
)
|
|
|
580
|
|
|
|
|
1,574
|
|
|
|
1,797
|
|
|
|
1,532
|
|
Total
|
|
$
|
68,352
|
|
|
$
|
71,873
|
|
|
$
|
59,366
|
|
58
The Company did not have the income tax benefits related to the exercise of stock options for the year ended December 31, 2017 as the remaining outstanding stock options were e
xercised in 2016.
The income tax benefits related to the exercise of stock options were approximately $0.1 million and $2.7 million for the years ended December 31, 2016 and 2015, respectively.
As a result of losses in foreign locations, the Company has net operating loss carry-forwards (“NOLs”) of approximately $1.2 million available to offset future income. Approximately $1.0 million of the NOLs expire in 2018 to 2026 and the remainder does not expire. The Company has established a valuation allowance for substantially all of these NOLs because the ability to utilize them is not more likely than not.
The Company has tax credit carry-forwards of approximately $7.4 million available to offset future state tax. These tax credit carry-forwards expire in 2018 to 2027. These credits represent a deferred tax asset of $5.9 million after consideration of the federal benefit of state tax deductions. A valuation allowance of $3.2 million has been established for these credits because the ability to use them is not more likely than not.
At December 31, 2017 the Company had approximately $49.9 million of undistributed earnings and profits. The Company recorded a provisional estimated transition tax of about $3.3 million in the fourth quarter as a result of the Tax Cuts and Jobs Act, enacted in December 2017. The undistributed earnings and profits are considered previously taxed income and would not be subject to U.S. income taxes upon repatriation of those earnings, in the form of dividends. The undistributed earnings and profits are considered to be permanently reinvested, accordingly no provision for local withholdings taxes have been provided, however, upon repatriation of those earnings, in the form of dividends, the Company could be subject to additional local withholding taxes.
The following is a summary of the items that cause recorded income taxes to differ from taxes computed using the statutory federal income tax rate for the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit
|
|
|
2.3
|
|
|
|
2.7
|
|
|
|
2.5
|
|
State credit carryforwards
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
U.S. federal R&D tax credit
|
|
|
(0.8
|
)
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Tax Reform
|
|
|
1.5
|
|
|
|
-
|
|
|
|
-
|
|
Excess benefit of equity compensation
|
|
|
(1.0
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign operations
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
Tax contingencies
|
|
|
-
|
|
|
|
0.6
|
|
|
|
0.5
|
|
Other permanent differences
|
|
|
0.3
|
|
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
Change in valuation allowance
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
-
|
|
Income taxes
|
|
|
37.0
|
%
|
|
|
36.6
|
%
|
|
|
36.5
|
%
|
59
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act ('the Act'), resulting in significant modifications to existing law. The Company follows the guidance in SEC Sta
ff Accounting Bulletin 118 ('SAB 118'), which provides additional clarification regarding the application of ASC Topic 740 in situation where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to compl
ete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act's enactment date and ending when the Comp
any has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.
In December 2017, the Company recorded a provisional estimate of $3.3 million for the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The provisional amount is based on information currently available, including estimated tax earnings and profits from foreign investments. The Company continues to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries, in order to complete the accounting for the effects of the estimated transition tax. The Company also recorded a provisional write-down to deferred tax assets of $0.7 million related to changes in section 162(m), Internal Revenue Code of 1986, regarding deductions for excessive employee compensation. The Company continues to gather and analyze information, including the definition of an employee contract for stock grants not vested as of the enactment date of the Act. It is the intention of the Company to complete the necessary analysis within the measurement period.
The Act provides for the global intangible low-taxed income (‘GILTI’) provision which requires the Company in its U.S. income tax return, to include foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets.
The FASB Staff provided additional guidance to address the accounting for the effects of the provisions related to the taxation of GILTI, noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year it is incurred. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period.
The Company continues to gather and analyze information related to the state and local impact of tax reform, including the state and local tax impact of the transition tax. The Company intends to complete the necessary analysis within the measurement period.
Accounting for the remaining income tax effects of the Act which impact our tax provision has been completed as of the current year and included in the Company's financial statements as of December 31, 2017. As a result of the Act, the Company recorded a one-time tax benefit of $1.2 million, from the remeasurement of deferred tax assets and liabilities from 35% to 21%.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at January 1,
|
|
$
|
(6,938
|
)
|
|
$
|
(5,789
|
)
|
|
$
|
(4,455
|
)
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during a prior period
|
|
|
(789
|
)
|
|
|
(756
|
)
|
|
|
(1,687
|
)
|
Gross amount of decreases in unrecognized tax benefits as a
result of tax positions taken during a prior period
|
|
|
145
|
|
|
|
270
|
|
|
|
292
|
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the current period
|
|
|
-
|
|
|
|
(791
|
)
|
|
|
-
|
|
Reductions to unrecognized tax benefits as a result of a lapse of
the applicable statute of limitations
|
|
|
163
|
|
|
|
128
|
|
|
|
61
|
|
Unrecognized tax benefits at December 31,
|
|
$
|
(7,419
|
)
|
|
$
|
(6,938
|
)
|
|
$
|
(5,789
|
)
|
The Company’s unrecognized tax benefits totaled $7.4 million and $6.9 million as of December 31, 2017 and 2016, respectively. Included in these amounts are unrecognized tax benefits totaling $5.6 million and $5.1 million as of December 31, 2017 and 2016, respectively, which, if recognized, would affect the effective tax rate.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within its global operations in income tax expense. For the years ended December 31, 2017, 2016 and 2015, the Company recognized $0.3 million, $0.3 million, and $0.2 million, respectively, of expense for the potential payment of interest and penalties. Accrued interest and penalties were $1.7 million and $1.5 million for the years ended December 31, 2017 and 2016. The Company conducts business globally and, as a result, files income tax returns in the United State federal jurisdiction and in many state and foreign jurisdictions. The Company is generally no longer subject to U.S. federal, state, and local, or non-US income tax examinations for the years before 2012. Due to the expiration
60
of statutes of limitations in multiple jurisdictions globally during 2018, the Company anticipates it is reasonably possible t
hat unrecognized tax benefits may decrease by $0.9 million.
4. Shareholders’ Equity
During 2017, 2016 and 2015, the Company purchased 2,695,295, 2,821,488, and 1,721,457 shares of the Company’s common stock for $124.9 million, $158.4 million, and $101.6 million, respectively, through open market transactions as part of a publicly-announced share repurchase program. In February 2018, our Board of Directors authorized the Company to repurchase up to an aggregate of $50 million of the Company’s common stock.
5. Commitments and Contingencies
Leases
Rents charged to expense were $7.1 million, $6.8 million, and $6.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. In 2014, the Company amended its Atlanta headquarters lease to obtain additional space and extend the lease term. As part of such lease agreement, the Company will receive reimbursement of $1.3 million from the landlord in 2018 for leasehold improvements. The entire cash rent obligation is being amortized to expense on a straight line basis over the lease term.
Aggregate future minimum lease payments under noncancellable operating leases as of December 31, 2017 are as follows (in thousands):
Year Ending December 31,
|
|
|
|
|
2018
|
|
$
|
7,308
|
|
2019
|
|
|
5,865
|
|
2020
|
|
|
5,360
|
|
2021
|
|
|
5,277
|
|
2022
|
|
|
5,056
|
|
Thereafter
|
|
|
14,363
|
|
Total minimum payments required
|
|
$
|
43,229
|
|
There are no future minimum lease payments under capital leases as of December 31, 2017.
Legal and Other Matters
From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business, and occasionally legal proceeding not in the ordinary course. Many of the Company’s installations involve products that are critical to the operations of its clients’ businesses. Any failure in a Company product could result in a claim for substantial damages against the Company, regardless of the Company’s responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from product failures or negligent acts or omissions, there can be no assurance that the limitations of liability set forth in its contracts will be enforceable in all instances. The Company is not currently a party to any ordinary course legal proceeding or other legal proceedings the result of which it believes is likely to have a material adverse impact upon its business, financial position, results of operations, or cash flows. The Company expenses legal costs associated with loss contingencies as such legal costs are incurred.
6. Employee Benefit Plan
The Company sponsors the Manhattan Associates 401(k) Plan and Trust (the “401(k) Plan”), a qualified profit sharing plan with a 401(k) feature covering substantially all employees of the Company. Under the 401(k) Plan’s deferred compensation arrangement, eligible employees who elect to participate in the 401(k) Plan may contribute up to 60% of eligible compensation up to $18,000, as defined, to the 401(k) Plan. The Internal Revenue Service sets the eligible compensation limit at $270,000 for 2017. Since 2012, the Company has provided a 50% matching contribution up to 6% of eligible compensation being contributed after the participant’s first year of employment. During the years ended December 31, 2017, 2016 and 2015, the Company made matching contributions to the 401(k) Plan of $4.1 million, $4.0 million, and $4.0 million, respectively.
61
7. Segment Reporting
The Company manages the business by three geographic reportable segments: the Americas, EMEA, and APAC. All segments derive revenue from the sale and implementation of the Company’s supply chain execution and planning solutions. The individual products sold by the segments are similar in nature and are all designed to help companies manage the effectiveness and efficiency of their supply chain. The Company uses the same accounting policies for each reportable segment. The chief executive officer and chief financial officer evaluate performance based on revenue and operating results for each segment.
The Americas segment charges royalty fees to the other segments based on software licenses sold by those reportable segments. The royalties, which totaled $7.0 million, $3.5 million, and $3.3 million in 2017, 2016 and 2015, respectively, are included in cost of revenue for each segment with a corresponding reduction in America’s cost of revenue. The revenues represented below are from external customers only. The geographical-based costs consist of costs of professional services personnel, direct sales and marketing expenses, cost of infrastructure to support the employees and customer base, billing and financial systems, management and general and administrative support. There are certain corporate expenses included in the Americas segment that are not charged to the other segments, including research and development, certain marketing and general and administrative costs that support the global organization, and the amortization of acquired developed technology. Included in the Americas’ costs are all research and development costs including the costs associated with the Company’s India operations.
Amortization expense on intangible assets in 2017, 2016 and 2015 was immaterial.
In accordance with the segment reporting topic of the FASB Codification, the Company has included a summary of financial information by reportable segment. The following table presents the revenues, expenses, and operating income by reportable segment for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
$
|
44,145
|
|
|
$
|
22,875
|
|
|
$
|
5,293
|
|
|
$
|
72,313
|
|
|
$
|
65,351
|
|
|
$
|
9,187
|
|
|
$
|
4,675
|
|
|
$
|
79,213
|
|
Cloud subscriptions
|
|
|
9,274
|
|
|
|
322
|
|
|
|
-
|
|
|
|
9,596
|
|
|
|
5,783
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,783
|
|
Maintenance
|
|
|
116,426
|
|
|
|
18,710
|
|
|
|
7,862
|
|
|
|
142,998
|
|
|
|
111,592
|
|
|
|
15,117
|
|
|
|
7,139
|
|
|
|
133,848
|
|
Services
|
|
|
264,186
|
|
|
|
43,431
|
|
|
|
18,885
|
|
|
|
326,502
|
|
|
|
296,983
|
|
|
|
41,969
|
|
|
|
12,833
|
|
|
|
351,785
|
|
Hardware
|
|
|
43,118
|
|
|
|
11
|
|
|
|
61
|
|
|
|
43,190
|
|
|
|
33,875
|
|
|
|
9
|
|
|
|
44
|
|
|
|
33,928
|
|
Total revenue
|
|
|
477,149
|
|
|
|
85,349
|
|
|
|
32,101
|
|
|
|
594,599
|
|
|
|
513,584
|
|
|
|
66,282
|
|
|
|
24,691
|
|
|
|
604,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
195,152
|
|
|
|
36,124
|
|
|
|
14,457
|
|
|
|
245,733
|
|
|
|
206,687
|
|
|
|
30,711
|
|
|
|
12,481
|
|
|
|
249,879
|
|
Operating expenses
|
|
|
134,167
|
|
|
|
12,761
|
|
|
|
4,312
|
|
|
|
151,240
|
|
|
|
133,637
|
|
|
|
12,983
|
|
|
|
4,661
|
|
|
|
151,281
|
|
Depreciation and amortization
|
|
|
8,324
|
|
|
|
527
|
|
|
|
209
|
|
|
|
9,060
|
|
|
|
8,313
|
|
|
|
528
|
|
|
|
249
|
|
|
|
9,090
|
|
Restructuring charge
|
|
|
2,813
|
|
|
|
108
|
|
|
|
-
|
|
|
|
2,921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total costs and expenses
|
|
|
340,456
|
|
|
|
49,520
|
|
|
|
18,978
|
|
|
|
408,954
|
|
|
|
348,637
|
|
|
|
44,222
|
|
|
|
17,391
|
|
|
|
410,250
|
|
Operating income
|
|
$
|
136,693
|
|
|
$
|
35,829
|
|
|
$
|
13,123
|
|
|
$
|
185,645
|
|
|
$
|
164,947
|
|
|
$
|
22,060
|
|
|
$
|
7,300
|
|
|
$
|
194,307
|
|
62
|
|
Year Ended December 31, 2015
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
$
|
60,690
|
|
|
$
|
9,566
|
|
|
$
|
3,742
|
|
|
$
|
73,998
|
|
Cloud subscriptions
|
|
|
4,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,617
|
|
Maintenance
|
|
|
102,323
|
|
|
|
14,960
|
|
|
|
6,171
|
|
|
|
123,454
|
|
Services
|
|
|
267,434
|
|
|
|
45,516
|
|
|
|
11,837
|
|
|
|
324,787
|
|
Hardware
|
|
|
29,412
|
|
|
|
34
|
|
|
|
69
|
|
|
|
29,515
|
|
Total revenue
|
|
|
464,476
|
|
|
|
70,076
|
|
|
|
21,819
|
|
|
|
556,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
190,190
|
|
|
|
33,483
|
|
|
|
11,755
|
|
|
|
235,428
|
|
Operating expenses
|
|
|
133,511
|
|
|
|
13,781
|
|
|
|
4,441
|
|
|
|
151,733
|
|
Depreciation and amortization
|
|
|
6,952
|
|
|
|
502
|
|
|
|
310
|
|
|
|
7,764
|
|
Restructuring charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total costs and expenses
|
|
|
330,653
|
|
|
|
47,766
|
|
|
|
16,506
|
|
|
|
394,925
|
|
Operating income
|
|
$
|
133,823
|
|
|
$
|
22,310
|
|
|
$
|
5,313
|
|
|
$
|
161,446
|
|
The following table presents the goodwill, long-lived assets, and total assets by reportable segment as of December 31, 2017 and 2016 (in thousands):
|
|
As of December 31, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
Goodwill, net
|
|
$
|
54,766
|
|
|
$
|
5,519
|
|
|
$
|
1,963
|
|
|
$
|
62,248
|
|
|
$
|
54,766
|
|
|
$
|
5,499
|
|
|
$
|
1,963
|
|
|
$
|
62,228
|
|
Long lived assets
|
|
|
19,424
|
|
|
|
2,846
|
|
|
|
527
|
|
|
|
22,797
|
|
|
|
22,488
|
|
|
|
1,923
|
|
|
|
616
|
|
|
|
25,027
|
|
Total assets
|
|
|
271,704
|
|
|
|
32,308
|
|
|
|
10,983
|
|
|
|
314,995
|
|
|
|
260,478
|
|
|
|
27,688
|
|
|
|
8,974
|
|
|
|
297,140
|
|
For the years ended December 31, 2017, 2016 and 2015, we derived revenue from sales to customers outside the United States of approximately $168.3 million, $144.8 million, and $131.3 million, respectively. Our remaining revenue was derived from domestic sales.
License revenues related to our warehouse and non-warehouse product groups for the years ended December 31, 2017, 2016 and 2015, are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Warehouse
|
|
$
|
52,579
|
|
|
$
|
48,311
|
|
|
$
|
50,097
|
|
Non-Warehouse
|
|
|
19,734
|
|
|
|
30,902
|
|
|
|
23,901
|
|
Total software license revenue
|
|
$
|
72,313
|
|
|
$
|
79,213
|
|
|
$
|
73,998
|
|
8. Restructuring Charge
In May 2017, the Company eliminated about 100 positions due to retail sector headwinds and to align our services capacity with demand. The Company recorded a restructuring charge of approximately $2.9 million pretax ($1.8 million after-tax or $0.03 per fully diluted share) in 2017. The charge primarily consists of employee severance, employee transition cost and outplacement services. The charge is classified in “Restructuring charge” in the Company’s Consolidated Statements of Income.
The following table summarizes the segment activity in the restructuring accrual for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Restructuring charge
|
|
$
|
2,813
|
|
|
$
|
108
|
|
|
$
|
-
|
|
|
$
|
2,921
|
|
Cash payments
|
|
|
(2,813
|
)
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
(2,921
|
)
|
Restructuring accrual balance at December 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
9. Subsequent Events
The Company evaluated all subsequent events that occurred after the date of the accompanying financial statements and determined that there were no events or transactions during this subsequent event reporting period which require recognition or disclosure in the Company’s financial statements.
64
10. Quarterly Results of Operations (Unaudited)
Following is the quarterly results of operations of the Company for the years ended December 31, 2017 and 2016. The unaudited quarterly results have been prepared on substantially the same basis as the audited Consolidated Financial Statements.
|
|
Quarter Ended
|
|
|
|
Mar 31, 2016
|
|
|
Jun 30, 2016
|
|
|
Sep 30, 2016
|
|
|
Dec 31, 2016
|
|
|
Mar 31, 2017
|
|
|
Jun 30, 2017
|
|
|
Sep 30, 2017
|
|
|
Dec 31, 2017
|
|
|
|
(In thousands, except per share data)
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
$
|
19,617
|
|
|
$
|
18,882
|
|
|
$
|
20,012
|
|
|
$
|
20,702
|
|
|
$
|
21,277
|
|
|
$
|
20,064
|
|
|
$
|
16,260
|
|
|
$
|
14,712
|
|
Cloud subscriptions
|
|
|
990
|
|
|
|
1,749
|
|
|
|
1,621
|
|
|
|
1,423
|
|
|
|
1,496
|
|
|
|
2,378
|
|
|
|
2,534
|
|
|
|
3,188
|
|
Maintenance
|
|
|
31,757
|
|
|
|
32,841
|
|
|
|
34,424
|
|
|
|
34,826
|
|
|
|
33,376
|
|
|
|
35,959
|
|
|
|
36,338
|
|
|
|
37,325
|
|
Services
|
|
|
88,735
|
|
|
|
91,866
|
|
|
|
89,613
|
|
|
|
81,571
|
|
|
|
79,781
|
|
|
|
85,327
|
|
|
|
84,211
|
|
|
|
77,183
|
|
Hardware
|
|
|
8,761
|
|
|
|
9,554
|
|
|
|
6,543
|
|
|
|
9,070
|
|
|
|
7,559
|
|
|
|
10,413
|
|
|
|
13,540
|
|
|
|
11,678
|
|
Total revenue
|
|
|
149,860
|
|
|
|
154,892
|
|
|
|
152,213
|
|
|
|
147,592
|
|
|
|
143,489
|
|
|
|
154,141
|
|
|
|
152,883
|
|
|
|
144,086
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license
|
|
|
2,322
|
|
|
|
1,361
|
|
|
|
1,706
|
|
|
|
1,429
|
|
|
|
1,352
|
|
|
|
1,438
|
|
|
|
1,316
|
|
|
|
1,377
|
|
Cost of cloud subscriptions, maintenance and services
|
|
|
56,862
|
|
|
|
54,053
|
|
|
|
55,346
|
|
|
|
53,374
|
|
|
|
54,899
|
|
|
|
53,109
|
|
|
|
51,103
|
|
|
|
48,934
|
|
Cost of hardware
|
|
|
5,629
|
|
|
|
7,103
|
|
|
|
4,626
|
|
|
|
6,068
|
|
|
|
5,370
|
|
|
|
7,766
|
|
|
|
10,653
|
|
|
|
8,416
|
|
Research and development
|
|
|
14,706
|
|
|
|
13,458
|
|
|
|
13,389
|
|
|
|
13,183
|
|
|
|
14,225
|
|
|
|
14,102
|
|
|
|
14,747
|
|
|
|
14,630
|
|
Sales and marketing
|
|
|
12,588
|
|
|
|
12,015
|
|
|
|
10,003
|
|
|
|
13,617
|
|
|
|
11,789
|
|
|
|
11,732
|
|
|
|
10,739
|
|
|
|
13,222
|
|
General and administrative
|
|
|
12,448
|
|
|
|
12,368
|
|
|
|
11,225
|
|
|
|
12,281
|
|
|
|
11,872
|
|
|
|
11,387
|
|
|
|
11,031
|
|
|
|
11,764
|
|
Depreciation and amortization
|
|
|
2,206
|
|
|
|
2,266
|
|
|
|
2,334
|
|
|
|
2,284
|
|
|
|
2,262
|
|
|
|
2,326
|
|
|
|
2,275
|
|
|
|
2,197
|
|
Restructuring charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,022
|
|
|
|
(77
|
)
|
|
|
(24
|
)
|
Total costs and expenses
|
|
|
106,761
|
|
|
|
102,624
|
|
|
|
98,629
|
|
|
|
102,236
|
|
|
|
101,769
|
|
|
|
104,882
|
|
|
|
101,787
|
|
|
|
100,516
|
|
Operating income
|
|
|
43,099
|
|
|
|
52,268
|
|
|
|
53,584
|
|
|
|
45,356
|
|
|
|
41,720
|
|
|
|
49,259
|
|
|
|
51,096
|
|
|
|
43,570
|
|
Other income (loss), net
|
|
|
520
|
|
|
|
654
|
|
|
|
210
|
|
|
|
416
|
|
|
|
(371
|
)
|
|
|
(68
|
)
|
|
|
207
|
|
|
|
(580
|
)
|
Income before income taxes
|
|
|
43,619
|
|
|
|
52,922
|
|
|
|
53,794
|
|
|
|
45,772
|
|
|
|
41,349
|
|
|
|
49,191
|
|
|
|
51,303
|
|
|
|
42,990
|
|
Income tax provision
|
|
|
16,139
|
|
|
|
19,581
|
|
|
|
20,298
|
|
|
|
15,855
|
|
|
|
13,125
|
|
|
|
18,047
|
|
|
|
18,704
|
|
|
|
18,476
|
|
Net income
|
|
$
|
27,480
|
|
|
$
|
33,341
|
|
|
$
|
33,496
|
|
|
$
|
29,917
|
|
|
$
|
28,224
|
|
|
$
|
31,144
|
|
|
$
|
32,599
|
|
|
$
|
24,514
|
|
Basic earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.46
|
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.45
|
|
|
$
|
0.47
|
|
|
$
|
0.36
|
|
Diluted earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.46
|
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.45
|
|
|
$
|
0.47
|
|
|
$
|
0.36
|
|
Shares used in computing basic earnings per share
|
|
|
72,630
|
|
|
|
71,880
|
|
|
|
71,403
|
|
|
|
70,742
|
|
|
|
69,973
|
|
|
|
69,227
|
|
|
|
68,928
|
|
|
|
68,485
|
|
Shares used in computing diluted earnings per share
|
|
|
73,020
|
|
|
|
72,228
|
|
|
|
71,743
|
|
|
|
71,148
|
|
|
|
70,247
|
|
|
|
69,421
|
|
|
|
69,135
|
|
|
|
68,791
|
|
65